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


                                                        S. Hrg. 111-111
 
       TARP ACCOUNTABILITY AND OVERSIGHT: ACHIEVING TRANSPARENCY

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



                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 11, 2009

                               __________

          Printed for the use of the Joint Economic Committee




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                        JOINT ECONOMIC COMMITTEE

    [Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]

HOUSE OF REPRESENTATIVES             SENATE
Carolyn B. Maloney, New York, Chair  Charles E. Schumer, New York, Vice 
Maurice D. Hinchey, New York             Chairman
Baron P. Hill, Indiana               Edward M. Kennedy, Massachusetts
Loretta Sanchez, California          Jeff Bingaman, New Mexico
Elijah E. Cummings, Maryland         Amy Klobuchar, Minnesota
Vic Snyder, Arkansas                 Robert P. Casey, Jr., Pennsylvania
Kevin Brady, Texas                   Jim Webb, Virginia
Ron Paul, Texas                      Sam Brownback, Kansas, Ranking 
Michael C. Burgess, M.D., Texas          Minority
John Campbell, California            Jim DeMint, South Carolina
                                     James E. Risch, Idaho
                                     Robert F. Bennett, Utah

                     Nan Gibson, Executive Director
               Jeff Schlagenhauf, Minority Staff Director
          Christopher Frenze, House Republican Staff Director'


                            C O N T E N T S

                              ----------                              

                                Members

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New 
  York...........................................................     1
Hon. Sam Brownback, Ranking Minority, a U.S. Senator from Kansas.     3
Hon. Maurice Hinchey, a U.S. Representative from New York........     5
Hon. Kevin Brady, a U.S. Representative from Texas...............     5
Hon. Amy Klobuchar, a U.S. Senator from Minnesota................     7
Hon. Robert P. Casey, Jr., a U.S. Senator from Pennsylvania......     8
Hon. Michael C. Burgess, M.D., a U.S. Representative from Texas..     9

                               Witnesses

Damon Silvers, Associate General Counsel, AFL-CIO; and Deputy 
  Chair, Congressional Oversight Panel for The Emergency Economic 
  Stabilization Act, Washington, DC..............................     9
Richard H. Neiman, Superintendent of Banks, New York State 
  Banking Department, New York, NY; and Member, Congressional 
  Oversight Panel for The Emergency Economic Stabilization Act, 
  Washington, DC.................................................    12
Nicole Tichon, Tax and Budget Reform Advocate, U.S. Public 
  Interest Research Group, Washington, DC........................    14
Alex J. Pollock, Resident Fellow, American Enterprise Institute 
  for Public Policy Research, Washington, DC.....................    16

                       Submissions for the Record

Prepared statement of Representative Carolyn B. Maloney..........    36
    Letter from Representative Maloney to Ben Bernanke...........    37
    Letter from Joseph E. Stiglitz to Representative Maloney.....    39
Prepared statement of Senator Sam Brownback......................    41
    Article entitled ``Too Big Has Failed''......................    41
Prepared statement of Representative Kevin Brady.................    46
Prepared statement of Michael C. Burgess, M.D....................    47
Prepared statement of Damon Silvers..............................    48
    Supplemental statement on two factual matters................    51
Prepared statement of Richard H. Neiman..........................    51
Prepared statement of Nicole Tichon..............................    53
Prepared statement of Alex J. Pollock............................    75


       TARP ACCOUNTABILITY AND OVERSIGHT: ACHIEVING TRANSPARENCY

                              ----------                              


                       WEDNESDAY, MARCH 11, 2009

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met at 10:34 a.m. in Room 106 of the Dirksen 
Senate Office Building, The Honorable Carolyn B. Maloney 
(Chair) presiding.
    Senators present: Klobuchar, Casey, Brownback, and Risch.
    Representatives present: Maloney, Hinchey, Snyder, Brady, 
Burgess, and Campbell.
    Staff present: Eleni Constantine, Nan Gibson, Colleen 
Healy, Justin Ungson, Andrew Wilson, Chris Frenze, Bob Keleher, 
Lydia Mashburn, Robert O'Quinn, Jeff Schlagenhauf, and Jeff 
Wrase.

OPENING STATEMENT OF THE HONORABLE CAROLYN B. MALONEY, CHAIR, A 
                  REPRESENTATIVE FROM NEW YORK

    Chair Maloney. The meeting will come to order. Thank you 
all for coming today. I really would like to read my opening 
statement.
    I would like to welcome the witnesses, Superintendent 
Richard Neiman, head of New York's Banking Department, Damon 
Silvers, Associate General Counsel of the AFL-CIO; Nicole 
Tichon, Tax and Budget Advocate for USPIRG; and Alex Pollock, 
Resident Fellow at the American Enterprise Institute, to this 
hearing on the Trouble Asset Relief Fund, or TARP.
    Mr. Silvers is Deputy Chair of the TARP Congressional 
Oversight Panel, and Superintendent Neiman is a member of that 
five-member panel. We are very fortunate that they could both 
be with us today. Thank you so much for coming.
    Ms. Tichon is the author of a newly-released independent 
report on the TARP: Failing the Bailout, Lessons for President 
Obama From Bush's Failure on TARP.
    Mr. Pollock, an experienced banker, has written frequently 
on TARP issues. Thank you all for coming.
    The focus of this hearing is on the need for better 
information on the use and beneficiaries of TARP funds. As has 
become alarmingly clear, we have very little idea where the 
money has gone or what good it has done, and not knowing, is 
not acceptable.
    The efforts of the panel and of the independent advocates 
such as PIRG, to get this information, are critically important 
to the ability of this Congress to ensure that taxpayer money 
is used as intended to restore financial stability, so that our 
economy can recover.
    Last week, I wrote to Federal Reserve Chairman Bernanke, 
reiterating a request I had made in a November 2008 Financial 
Services Committee Hearing, for a full accounting of the Fed's 
purchase of assets on which AIG had written credit default 
swaps, insuring the performance of those assets as part of the 
bailout of AIG.
    I requested this information on who the Fed purchased the 
assets from, how much each of them received, and how the prices 
for the assets, collateralized debt securities, credit default 
swaps, and residential mortgage-based securities, were 
determined in a frozen market.
    I attached a letter I had just received from Nobel laureate 
and noted economist, Joseph Stiglitz, also requesting release 
of this information. As he said, the provision of this 
information is absolutely essential to the informed discussion 
of how the TARP is doing in achieving its goals of restoring 
stability to our financial system, getting credit flowing, and 
reducing foreclosure rates.
    So far, I have not received an answer. However, the Wall 
Street Journal seems to have gotten some of the information I 
asked for, from a confidential source. On Saturday, they 
published a list of some of the banks that have reportedly 
received the money, and some information about how much they 
have received.
    Now we have a situation where elected representatives of 
the taxpayers are denied this information, even when it's 
leaked by confidential insiders to major publications.
    This raises serious questions about how decisions on the 
use of TARP funds are being made, and who, exactly, is 
accountable to the American people.
    The reports done by the Congressional Oversight Panel, to 
date, including the most recent on foreclosure mitigation, and 
the report on valuation of Treasury's purchases of preferred 
stock, show that, due to poor design and execution of the Bush 
Administration, we have almost no information about where the 
TARP funds have gone and whether they are making any 
difference.
    The two GAO reports likewise note that the TARP lacks 
adequate systems of tracking and accounting for expenses. We 
are in desperate need of information and data in order to make 
informed decisions.
    Last week, I introduced a bill that will take one step in 
the direction of getting more data. H.R. 1242 would create a 
central government database for the use of TARP review bodies, 
with real-time financial information on TARP recipients, from 
municipal government entities to which these financial 
institutions presently report, putting all of the information 
the government has now, in one place, so it can be effectively 
analyzed and studied.
    My bill will require this data to be translated into a 
standard format that would enable a comparison of information, 
so that trends or totals can easily be seen.
    The fact that this data would be available in real time, 
would enable the oversight bodies to spot misdirection of the 
program, before it's irreversible, so that preventive action 
could be taken.
    We would not be here months after the fact, asking how much 
the government paid who for what; we would have known right 
away and been able to decide whether to let other similar 
purchases go forward or not.
    There are other legislative proposals, as well, that call 
for greater accountability and transparency, such as the bill 
that passed the House in January, H.R. 384. These bills lay 
down in no uncertain terms, the marker that this Congress 
expects better use of the second tranche of TARP funds than was 
made of the first.
    We have to find a better balance between how the TARP is 
being administered and the public's right to know how this 
money is being spent. Transparency and accountability must be 
transformed from slogans into achievable actions.
    I look forward to the testimony.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 36.]
    [Letters from Representative Maloney to Ben Bernanke and 
from Joseph E. Stiglitz to Representative Maloney appear in the 
Submissions for the Record on pages 37 and 39, respectively.]
    Chair Maloney. I recognize my colleague and good friend, 
Ranking Member Senator Brownback.

   OPENING STATEMENT OF THE HONORABLE SAM BROWNBACK, RANKING 
              MINORITY, A U.S. SENATOR FROM KANSAS

    Senator Brownback. Thank you very much, Chairwoman Maloney. 
I appreciate your statement, I appreciate your holding this 
hearing. I think it's really important that we look at these 
issues on transparency and accountability of the TARP.
    It was created as a $700 billion program under the 
Emergency Economic Stabilization Act of 2008. My understanding 
of the Oversight Panel's report, thus far, is that Treasury has 
been less than forthcoming in its explanations of what it has 
accomplished with an allocation of up to $700 billion of 
taxpayer money.
    This is certainly unfortunate. Ordinary taxpayers would 
like to know what the taxes are doing, that are financing 
Treasury's efforts, are being used effectively.
    Taxpayers and financial markets worldwide would also like 
to know that there's a definitive plan to address our ongoing 
financial crisis. When we look at that, I think there's a real 
question of whether there is.
    A constituent of mine is President and CEO of the Federal 
Reserve Bank of Kansas City, Mr. Thomas Hoenig, and he did a 
speech recently that I think should be read by everybody 
interested in this particular problem that we have today.
    It was done over this past weekend. The title of the speech 
is ``Too Big Has Failed.'' It's about the financial system and 
efforts to deal with the financial crisis.
    He delivered this on March 6th, and he said--he identified 
that, quote, ``We have been quick to provide liquidity and 
public capital, but we have not defined a consistent plan.''
    I agree with President Hoenig, and I believe that there is 
a large amount of uncertainty about how we will deal with the 
pressing problems in our financial system.
    This uncertainty is preventing us from moving forward. 
Until there is resolution of uncertainty about how we are going 
to shore up our financial system, there is little reason to 
expect private capital to flow into our financial system.
    Private money is simply waiting on the sidelines until 
there is a resolute signal about who will absorb losses and how 
the banking system will be structured, moving forward.
    President Hoenig identifies that while we prefer not to use 
the term, ``nationalize our major financial institutions,'' we 
are nevertheless drifting into a situation where institutions 
are being nationalized piecemeal, with no resolution of the 
crisis.
    The term, ``nationalization,'' is not well defined. We 
have, by some definitions, already effectively nationalized 
some major financial institutions such as AIG. It seems to me 
that it would be prudent to avoid fascination with the term, 
``nationalization,'' and move to definitive steps to address 
the difficulties of our nation's financial institutions and 
resulting credit crunch, which involves severely interrupted 
credit flows and the negative consequences such as businesses' 
inability to finance payrolls and expansion, and households' 
inability to weather our current severe economic downturn, thus 
the term, ``zombie banks,'' that is floating around so much.
    Rather than arriving at definitive steps to address our 
financial problems, it seems that the Treasury, under past and 
current Administrations, has chosen to adopt half-measures and 
incomplete plans.
    Financial markets are certainly not buying it. Judging by 
stock prices, generally, and stock prices of potentially 
troubled financial institutions, in particular, there is little 
to no confidence in the plans of Treasury and the 
Administration to move us out of our financial malaise.
    Today's hearing is useful in helping to identify both what 
has been done with massive amounts of taxpayer money to address 
our challenges in financial markets, and what is planned by 
Treasury and the Administration, as we move forward.
    My hope is that the Treasury and the Administration will 
come forward with a resolute plan to face up to the 
difficulties in our financial markets.
    We need a plan that offers hope to markets, and not a plan 
that raises more questions and more uncertainty. We also, as 
the Kansas City Fed Chairman pointed out--or Fed President has 
pointed out, has clearly articulated, we need to move 
definitively away from a system of finance subject to the 
threat of ``too big to fail.''
    In his insightful words, he said, ``Too big has failed.'' I 
ask that his speech be placed in the record at the end of my 
comments, and I look forward to the panel's presentation. Thank 
you for the hearing.
    [The prepared statement of Senator Brownback along with the 
report ``Too Big Has Failed'' appear in the Submissions for the 
Record on page 41.]
    Chair Maloney. Thank you for your thoughtful statement. 
Congressman Hinchey, for three minutes, to be followed by 
Congressman Brady for three minutes.

  OPENING STATEMENT OF THE HONORABLE MAURICE HINCHEY, A U.S. 
                  REPRESENTATIVE FROM NEW YORK

    Mr. Hinchey. Well, thank you very much. I'm anxious to hear 
the testimony of all four people here today, because they have 
a very good insight into what is going on here.
    I'm sure that they are going to be focused on the most 
important aspects of it, and I thank you all very much for 
being here with us. We're looking forward to hearing from you.
    The issues that we're concerned about, are how the so-
called TARP bill is being handled, how that money is being 
spent. What is the accountability and the context of that 
spending?
    Who has gotten the money? What have they done with it after 
they received it? Why was it given to them in the first place?
    And with what they did, what were the results? Have they 
achieved anything significantly, as a result of that spending?
    We know that under the Bush Administration, about $380 
billion were provided to the banking institutions, and that was 
done very, very quickly.
    We also know that there are some serious issues with regard 
to the accountability of those funds. All of these things are 
very critical.
    There is an interesting, sort of ironic amount of attention 
being focused on the two percent of the so-called ``earmarks'' 
in the $410 billion budget bill that was passed by the Senate 
yesterday, and a lot of attention being given to that little 
two percent, while very little attention is being given to the 
$700 billion in the TARP bill, the $380 billion that has 
already been spent and given to banks, and the lack of 
accountability with regard to how that $380 billion already has 
been spent. Actually, the number now is higher than $380 
billion.
    So all of these things are very critical issues for the 
economy and the deep and dire economic circumstances with which 
we are dealing and which we are supposed to be solving.
    So, again, I thank you all very much for being here, and 
I'm very interested and very anxious to hear what you can tell 
us about the way in which this situation is being dealt with. 
Thank you very much.
    Chair Maloney. Congressman?

    OPENING STATEMENT OF THE HONORABLE KEVIN BRADY, A U.S. 
                   REPRESENTATIVE FROM TEXAS

    Mr. Brady. Thank you, Madam Chairman, for holding this 
meeting. I am pleased to also welcome the panel of witnesses 
before us.
    But today, I think there is a great level of frustration 
about the TARP program. When President Bush first proposed it 
and the Democrat Congress led the effort to approve it, it was 
believed that the Congressional Oversight Panel would be the 
eyes and ears of this nation and of this Congress.
    Yet, here it is three months after the panel was formed, 
and, to my knowledge, you have no approved budget, no approved 
oversight plan, have yet to hold any public meetings with 
Treasury officials. The basic question of how is our money 
being spent and what are the results, is still unresolved.
    I'm hopeful that you'll address that today, and if there 
are road blocks, if you have a lack of resources, or if there 
is some problem with doing your job, I think it needs to be 
raised. I appreciate having private meetings with Treasury, but 
the truth of the matter is, there's too much secrecy in this 
TARP as it is, and we need transparency and accountability and 
results from the Congressional Oversight Panel on this 
important issue.
    TARP certainly raises a number of very troubling issues, 
but the central one, is why we still do not have a credible, 
effective, and transparent financial rescue plan in place.
    Economists and financial experts agree that nothing else we 
do will matter much, until the issue of how to dispose of toxic 
bank assets is resolved.
    The Treasury proposal unveiled last February 10th, has not 
been well received, because it did not clearly address this 
issue. The Economist Magazine, for example, characterized it as 
``timid, incomplete, short on detail.''
    Over the last several weeks, the financial press had daily 
noted how the lack of specifics, undermines confidence and is 
contributing to more uncertainty and more financial market 
instability.
    As observed by Business Week, following the announcement of 
the Treasury plan, the stock market was down on sketchy 
details, and, last week, the Financial Times noted that since 
the Treasury plan was unveiled, the S&P has declined 20 
percent.
    So the lack of details is hurting, not helping our 
recovery. Despite the fact that a timely economic recovery is 
entirely dependent on an effective and credible plan for 
dealing with the toxic assets, the Administration, so far, has 
failed to provide one.
    The lack of a clear policy framework, raises fears about 
undue political influence and meddling, and is deterring new 
private investment in banks.
    Financial decisions regarding bank lending, investment, and 
capital structure, shouldn't be politicized. Policymakers do 
have an important role to play in setting appropriate ground 
rules, but this should not include micromanaging the banks.
    There's much to criticize in the TARP, as well as other 
financial bailouts, but the key question facing the country, 
is, is the government policy regarding these toxic assets.
    The Administration so far has been focused on other 
priorities, whether it be tax increases or climate change, 
instead of the critical and pressing need for a clear 
resolution to the banking crisis.
    And while the Administration devotes its attention to 
pushing its budget with huge increases in deficit spending and 
federal debt, financial markets and the economy seem daily in 
greater distress.
    However, a financial recovery plan may cost Treasury up to 
a trillion dollars more, this means that Congress should not 
enact costly new deficit spending measures that the country 
cannot afford.
    I am afraid that we have misplaced priorities in the budget 
that is based on rosy economic forecasts that simply cannot 
come true. In fact, in recent days, the new blue chip consensus 
forecasts a 2009 GDP decline of 2.6 percent. That's twice the 
rate that is included in the President's budget. The 
unemployment rate has already hit their estimate for the entire 
year.
    I think we need to focus on the resolution of the banking 
crisis as the best way to establish a reasonable prospect for 
economic growth. That's the key issue before us. Thank you, 
Madam Chairman.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 46.]
    Chair Maloney. Thank you so much. Senator Klobuchar, for 
three minutes?

   OPENING STATEMENT OF THE HONORABLE AMY KLOBUCHAR, A U.S. 
                     SENATOR FROM MINNESOTA

    Senator Klobuchar. Thank you very much, Madam Chair. Thank 
you and thank you to our witnesses for being here. Thank you 
for holding this hearing today to talk about the oversight and 
the transparency of the federal programs that use American 
taxpayer money to stabilize our financial system.
    Since this financial crisis erupted in the Fall of 2008, 
our Government has distributed hundreds of billions of dollars 
to a variety of programs and initiatives that are intended to 
stabilize the banking system, intended to stimulate the credit 
markets to resume lending.
    They are intended to help homeowners prevent foreclosures, 
and they are intended to create jobs in our communities.
    I, for one, believe that we need to do this, so that we 
can't just put our heads in sand and pretend that this is isn't 
happening. But with this decision and with these bold moves, 
comes a responsibility, and that responsibility is to make sure 
that we protect the American taxpayers' money and that we get 
back as much as we can every step of the way.
    And my concern from the very beginning, when we first--when 
this first came up in the Fall, is that there has been too 
little accounting for how this money has been distributed and 
how the taxpayer assistance is being spent.
    I likened it the other day to the Wall Street--driving down 
Wall Street in their Ferraris and the Government sort of 
following behind in a Model T Ford.
    I think we can improve that, and I believe that this 
Administration is devoted to improving that, so that we can 
show exactly--I like the President's idea to put on the 
Internet, where these funds are being spent, the TARP funds.
    I like the idea of showing a timeline to the taxpayers, of 
when and how some of this money is going to be paid back. We 
have one bank in Minnesota, Twin City Federal, that got 
hundreds of millions of dollars, that is now wanting to pay 
that back now.
    There are small banks in our state that I have pointed out 
many times, and credit unions, that either didn't take money, 
but are being really tainted by the brush of some of the other 
banks. I think it's very important for the accountability and 
for the trust of the taxpayers, as we go forward, that we show 
how this money is spent, show if there have been failures--and 
we know there have--and show how we're going to do this going 
forward.
    Because if we do that and we're able to better regulate the 
financial markets and we're able to better show what's going 
on, so the people of this country understand it, then I think 
some of this broad brush that has been struck on so many of our 
banks that really didn't do anything wrong, can be lifted, and 
we're going to be able to get this country on track.
    So I really see this not as much as posturing, but as much 
as accountability for the money, but also getting this 
straight, so that we can move on and allow the economy to start 
working again. Thank you very much. I look forward to hearing 
from you.
    Chair Maloney. Thank you. Senator Casey, for three minutes.

OPENING STATEMENT OF THE HONORABLE ROBERT P. CASEY, Jr., A U.S. 
                   SENATOR FROM PENNSYLVANIA

    Senator Casey. Madam Chair, thank you very much for calling 
this hearing. We appreciate the witnesses. Your testimony is 
going to be very important today, for a number of reasons:
    Principally because there are an awful lot of Americans who 
don't have confidence with what we did in the Emergency 
Economic Stabilization Act, what we've done since then on a 
whole series of oversight initiatives, and the oversight votes 
that were taken in the Congress on the recovery bill. It all 
goes back to concern about what the Treasury was doing in the 
prior Administration, which has led to concerns about where 
we're headed in this Administration. For all those reasons, we 
have to give the American people a clearer sense of where this 
is oversight headed.
    Unless we do that, we will not be able to sustain support 
for any initiative, whether it's what we do with regard to 
banks, or broader efforts to jump-start the economy.
    It is not that we don't have enough legislation or enough 
programs or enough oversight or transparency, it's that we have 
11 different entities required to prepare and submit a total of 
18 different types of reports to six different entities, and 
the complexity causes confusion and concern.
    If we continue along the path that we're on right now, 
we're going to erode confidence that the American people have a 
right to expect in our--not just our financial system,--but in 
our government. We need to display that we can get it right, 
that we can streamline the oversight, that we can have clear 
and identifiable transparency, which is, and that there's one 
place that people can go to for information about how their 
government is spending their money.
    Until we get this right, we're not going to have the 
confidence of the American people; and those of us in 
government need their confidence to sustain these policies over 
time.
    So we have a long way to go, in terms of exploring how the 
Economic Stabilization Act has been implemented, what was right 
or wrong with the law in the original drafting and the 
implementation of the policy.
     Today's hearing will help us, but will not solve all of 
our problems. Until we give the American people a better sense 
of where we're headed, there's still going to be real concern, 
and, frankly, a lack of confidence in what their government is 
doing. Thank you.
    Chair Maloney. Thank you. Congressman Burgess, for three 
minutes.

OPENING STATEMENT OF THE HONORABLE MICHAEL C. BURGESS, M.D., A 
                 U.S. REPRESENTATIVE FROM TEXAS

    Mr. Burgess. Thank you, Madam Chairman. I won't take the 
whole time, but I will submit an opening statement for the 
record. I would just like to point out that Bill Clinton, when 
he took office--and I was no great fan--he talked about 
focusing like a laser beam on the economy.
    I truly believe that we need that type of activity right 
now, and constantly going from one social program to another, 
right now, the economy is the main issue that the American 
people want us to concentrate on.
    I'm grateful to have the members of the Oversight panel 
here today, and I'm anxious to hear what has been happening 
with the funding that was provided last October, and if we are 
asked to provide yet additional funding, what we can look 
forward to.
    Thank you, Madam Chairman. I will submit my statement for 
the record.
    [The prepared statement of Representative Burgess appears 
in the Submissions for the Record on page 47.]
    Chair Maloney. Thank you so much. The Chair recognizes Mr. 
Silvers for five minutes, to be followed by Superintendent 
Neiman, then Ms. Tichon and then Mr. Pollock. Please proceed.

STATEMENT OF MR. DAMON SILVERS, ASSOCIATE GENERAL COUNSEL, AFL-
 CIO; AND DEPUTY CHAIR, CONGRESSIONAL OVERSIGHT PANEL FOR THE 
      EMERGENCY ECONOMIC STABILIZATION ACT, WASHINGTON, DC

    Mr. Silvers. Thank you. Good morning.
    Chair Maloney. Good morning.
    Mr. Silvers. I would like first to express my thanks to 
you, Representative Maloney, for inviting me and my colleague, 
Richard Neiman, to appear today before the Committee.
    I should note at the outset, that my testimony today is 
mine alone, and does not necessarily reflect the views of the 
Congressional Oversight Panel, as a whole, or its staff.
    I'm going to speak briefly about the general role of the 
Panel, and then address the Panel's work in valuing the 
preferred stock purchased by the Treasury under the TARP 
program, which is the vast majority of the expenditures made, 
literally, of taxpayer dollars.
    Superintendent Neiman will address our latest report on the 
mortgage crisis.
    The Congressional Oversight Panel was created as part of 
last year's Emergency Economic Stabilization Act, or EESA.
    The Panel began our work in our first report issued in 
December, by asking ten basic questions about TARP, starting 
with the question, what is Treasury's strategy, and including 
the question, is the public receiving a fair deal in TARP 
transactions?
    This first report had only one substantive recommendation; 
that the public has a right to know how financial institutions 
that have received public money, are using that money, and, 
quote, ``that the Treasury should be responsible for holding 
individual institutions accountable for how the use the 
public's money.''
    While the Treasury Department, under both the current and 
prior Administrations, has committed to the concept of tracking 
the use of TARP money by financial institutions, in principle; 
the specific plans for doing so, have not been released, to 
date.
    The Panel thought that it was not possible to begin to 
answer questions like, ``did the public get a fair deal,'' 
without understanding first, exactly what deal the public did 
get in the transactions completed under TARP last year.
    The Panel retained Duff and Phelps, the world's largest 
independent valuation firm, to assist us in this inquiry 
overseen by Professors William Goetzelman of the Yale School of 
Management, and Deborah Lucas of Northwestern's Kellogg School 
of Management. Professor Lucas is the former Chief Economist of 
the Congressional Budget Office.
    They were joined by Adam Blumenthal, the former Deputy 
Comptroller of New York City.
    In parallel, the Panel engaged a legal team with experience 
in both bank rescues and preferred stock transactions, to 
review the legal terms of the TARP transactions.
    This valuation and legal analysis, had a limited purpose: 
To understand and place before the public, the extent to which 
the TARP transactions had been investments that obtained fair 
value for the taxpayer and the extent to which they were 
subsidies to the recipient banks and their shareholders.
    We did not attempt to answer the question of whether 
subsidies were a good idea or a bad idea; whether the TARP 
transactions created public benefit that made them worthwhile, 
or whether that same public benefit could have been created 
without the subsidy.
    In their 700-page report, Duff and Phelps found that the 
2008 TARP transactions ranged from preferred stock purchases 
that delivered close to full value to the government, in the 
case of the strongest banks at the time, where the discounts 
were five and seven percent in the case of USBanCorp and Wells 
Fargo, to purchases that at the time they were made, delivered 
50 percent or less of their face value to the government in the 
case of the purchase of AIG preferred stock and the second 
purchase of Citigroup preferred stock in November 2008.
    The Panel found that the key structural reason for the 
failure to obtain securities that were worth their purchase 
price on a market-value basis, was the decision to offer the 
same price to all the banks in the initial purchase and the 
apparent decision to only vary the terms of the second Citi 
investment to a small degree, from the terms of the investments 
in, quote, ``healthy banks,'' made under the Capital Purchase 
Program.
    Once the decision was made to offer all banks the same 
terms, in order to attract the participation of relatively 
healthy banks, those terms had to be ones that would be 
attractive to healthy banks, and, thus, would offer a subsidy 
to weaker banks.
    The Duff and Phelps study led to the conclusion that 
through the end of December, the TARP program had involved a 
$78 billion subsidy to all 311 Capital Purchase Program 
recipient banks at the time of the report.
    However, Duff and Phelps found that more than half of the 
subsidy in the program, as a whole, went to two institutions--
AIG and Citigroup.
    This analysis has clear implications for future TARP 
transactions with weak financial institutions. Because we are 
not trying to drain cash from banks, there is no way to protect 
value for taxpayers by charging interest in the form of 
preferred dividends adequate to compensate the taxpayers for 
the very real risk of further losses in the preferred.
    The only way to do so, is to take a large percentage of the 
upside in the form of common stock, warrants for common stock, 
or other equity-linked instruments. In the case of the weakest 
banks, it appears to me that even if the government took 100 
percent of the future upside, we would still not be able to 
receive securities worth the value of the funds we would infuse 
into such weak banks.
    It may still be in the public interest to do such 
transactions, but we should not fool ourselves or the public, 
that we are receiving, in the form of securities, full value 
for the public's money, and the less we ask in terms of common 
equity, the greater the subsidy will be.
    Our valuation report relied entirely on publicly-available 
data. The Panel did make a broad request of the Treasury 
Department, pursuant to our authority under Section 125 of the 
EESA, on December 17th.
    In a letter dated December 24th, the Department declined to 
provide the material we requested, and raised concerns about 
our newly-formed panel's internal controls over confidential 
documents.
    Despite extensive discussions between our staff and the 
Treasury Department, Treasury has only produced a small number 
of the documents the Panel requested.
    To Congressman Brady's question, we have sought, from the 
beginning of our existence as a Panel, to have the Secretary, 
the prior Secretary and the current Secretary, appear before us 
in a public hearing.
    We made a formal request of the prior Secretary, which was 
never responded to formally. We have made a request of the 
current Secretary and that request is being discussed with the 
Department.
    It is of significant and prime importance to us that the 
Secretary appear before us in a public hearing.
    Finally, this matter relates to a matter of concern to this 
Committee. Although it was not the primary purpose of our 
document requests, I had expected that our December request, 
would result in the Panel being informed as to the identities 
of the counterparties to derivative transactions who were made 
whole as a result of the funds provided, both by the Federal 
Reserve Bank of New York and the TARP, to AIG.
    The Panel currently does not know for certain, the identity 
of those counterparties or the amounts they received, although, 
like the Committee, we are aware of press accounts on this 
matter.
    The Congressional Oversight Panel is seeking to expand the 
scope of its analysis of the larger impact of TARP and related 
programs. The Panel is particularly interested in looking at 
transactions under the Term Asset-Backed Securities Loan 
Facility, the TALF, and potential transactions involving 
public/private partnerships.
    The Panel is also working to define its role in relation to 
activities undertaken by the Board of Governors of the Federal 
Reserve, and the Federal Reserve Bank of New York, that are 
linked to actions undertaken by the Treasury Department, 
pursuant to EESA.
    We are honored to have been asked to appear before you and 
to assist the Congress in this matter. I apologize for running 
over, and I thank you for your indulgence.
    [The prepared statement of Damon Silvers appears in the 
Submissions for the Record on page 48.]
    Chair Maloney. Superintendent Neiman?

 STATEMENT OF MR. RICHARD NEIMAN, SUPERINTENDENT OF BANKS, NEW 
   YORK STATE BANKING DEPARTMENT, NEW YORK, NY; AND MEMBER, 
   CONGRESSIONAL OVERSIGHT PANEL FOR THE EMERGENCY ECONOMIC 
               STABILIZATION ACT, WASHINGTON, DC

    Mr. Neiman. Thank you, Chairwoman Maloney and distinguished 
members. I'm Richard Neiman, Superintendent of Banks in New 
York, and a member of the Congressional Oversight Panel.
    I very much appreciate the opportunity to comment on 
Treasury's implementation of the EESA. I think this is a very 
important hearing. I appreciate you including members of our 
Panel.
    As you know, the Panel is charged by statute to provide 
monthly reports to Congress, assessing the effectiveness of the 
Treasury's implementation.
    Damon discussed the five prior reports that we issued, and 
I'll be happy to answer any questions on those. But given my 
limited time this morning, I will focus on the Panel's most 
recent report that was issued last Friday, on foreclosure 
mitigation, which I took a lead role in preparing.
    As the only bank regulatory on the Panel and as one who has 
led his state's foreclosure prevention efforts, I believe I 
bring a unique perspective to this critical issue. I look 
forward, however, to the questions from the Committee on the 
full range of our Panel's responsibilities.
    The Panel's March report highlights the symptoms that gave 
rise to the housing crisis, as well as the major impediments to 
finding a solution.
    The report provides a road map for successful foreclosure 
prevention going forward, so let me just summarize some of the 
major impediments that we highlighted in the report.
    Affordability: The key to any sustainable modification 
program is whether the borrower can afford the monthly 
payments.
    A problem that began with exploding mortgage products that 
may have been inappropriate at inception has now expanded to 
borrowers who are falling behind for many reasons, such as 
illness, divorce, or job loss in the economic downturn.
    Existing modification efforts have not adequately addressed 
the critical impediment of affordability, leading to high rates 
of re-default.
    The voluntary modification efforts often leave the borrower 
with the same or even higher monthly payments, through 
repayment plans or capitalization of amounts past due.
    The Panel is concerned that the commonly-used housing 
payment ratio of 38 percent of the borrower's gross income 
remains too high to be affordable, and is encouraged by 
President Obama's foreclosure plan that targets a 31 percent 
housing ratio.
    Negative equity is another impediment that can occur when 
property values decline or if appraisals are overstated. 
Borrowers in this situation, are unable to refinance and cannot 
sell the home, unless the lender agrees to reduced payoff in a 
short sale.
    Panel data shows a strong correlation between high negative 
equity and default, however, this is not necessarily evidence 
of a causal relationship.
    Further, I should note that the survey data that we relied 
on, received from the federal banking agencies, was limited by 
the lack of current borrower income information, which may have 
underestimated the importance of affordability in this result.
    Securitization: Mortgages that have been securitized are 
subject to the terms of pooling and service agreements that may 
present obstacles to loan modifications. These PSAs often 
contain restrictions on the number of loans within the pool 
that may be modified and the circumstances under which 
modification is permissible.
    As modification and other loss mitigation outcomes may 
impact various tranches of investors, litigation risk does 
exist and is a disincentive for investors to engage in 
modification.
    A safe harbor from litigation for servicers that modify 
loans, as contained in the House bill, would help to overcome 
this impediment.
    Service incentives: The fee arrangements for servicers can 
also create misaligned incentives. In particular, servicers 
need incentives to engage in intervention while borrowers are 
still current, but when default is imminent.
    The Obama plan does address this issue by providing 
incentive payments to services for early outreach, as well as 
pay-for-success incentives to both servicers and borrowers, 
based on performance of the modified loans.
    Other impediments that I have highlighted in my testimony 
go to borrower outreach, capacity of the servicer, the 
resources used by the servicer to handle the millions of 
mortgages that we're dealing with, as well as issues around 
junior mortgages.
    The President's plan addresses many of these critical 
elements, particularly those focused on affordability and 
servicer incentives, and it estimated to help seven to nine 
million homeowners at risk.
    Now, while these projections are encouraging, the Panel has 
additional areas of concern that are not fully addressed. In 
particular, the plan does not include a safe harbor for 
servicers operating under pooling and service agreements, to 
address the potential litigation risk.
    And while the modification aspects of the plan will be 
mandatory for banks receiving TARP funds going forward, the 
level of broader industry acceptance remains unclear.
    We will continue to monitor implementation of the plan and 
advise Congress and the American people accordingly.
    Now, there is one more important recommendation that I 
would like to highlight to this panel that we included in our 
report, and that goes to the adequacy of mortgage loan 
performance data.
    Access to complete information on foreclosures and loans in 
default is currently unavailable, and the reason is simple: 
There is no mortgage loan performance data requirement for the 
industry.
    Congress and the regulators need to have much better data 
available, so they can ensure the smooth and efficient 
functioning of the national housing finance market, and to 
prevent future crises.
    This is why the Panel believes that Congress should create 
a national mortgage loan performance reporting requirement 
applicable to banking institutions and others who service 
mortgage loans, to provide a source of comprehensive 
intelligence about loan performance, loss mitigation efforts, 
and foreclosures.
    This is something that you did when you adopted HMDA with 
respect to new mortgage originations.
    Federal banking or housing regulators should be mandated to 
analyze such data and share the results with the public. We 
cannot solve this financial crisis without dealing with the 
root of the problem the millions of American families who at 
risk of losing their homes to foreclosure.
    I appreciate the opportunity to share my views, and hope 
the dialogue between the panel and this Committee becomes a 
regular occurrence. Events are developing rapidly, and many of 
the tools needed to respond are best accomplished with the 
support of progressive legislation.
    I'd be pleased to provide more details on the Panel's work 
to date, or answer any questions. Thank you.
    [The prepared statement of Richard H. Neiman appears in the 
Submissions for the Record on page 51.]
    Chair Maloney. Thank you so much. Ms. Tichon?

STATEMENT OF MS. NICOLE TICHON, TAX AND BUDGET REFORM ADVOCATE, 
      U.S. PUBLIC INTEREST RESEARCH GROUP, WASHINGTON, DC

    Ms. Tichon. Thank you, Madam Chair Maloney, Committee 
members, and distinguished panelists. Good morning.
    We, too, are very pleased to be part of this critical 
conversation. My name is Nicole Tichon and I am the Tax and 
Budget Reform Advocate for the U.S. Public Interest Research 
Group.
    We serve as a federation of state PIRGs, which are 
nonprofit, nonpartisan, public interest advocacy groups that 
take on powerful interests on behalf of our members.
    Taxpayers have lost a lot of their own investments, their 
pensions, retirement savings, and education savings, and in 
their first mass investment into the banks that failed them, 
they were undersold by $78 billion, according to the 
Congressional Oversight Panel, and, so far, we get 
approximately 67 cents on each dollar they have invested so 
far.
    That gap is likely to get larger, as we learn more and more 
about the truth of the financial health of these companies. 
This hardly inspires confidence that taxpayers will be seeing 
much of a return on their investment, and prompts more 
questions than answers.
    A number of bills and amendments have surfaced in the House 
and Senate, with respect to what was known as the Troubled 
Asset Relief Program, TARP, to get to these answers, but few 
have made it to law.
    This tell us quite a bit about the outstanding concerns 
over these programs. USPIRG's position is very straightforward: 
Congress should take specific action to make transparency and 
accountability requirements law.
    This would give the Treasury Secretary and the 
Administration, a comprehensive tool set to help them manage 
these programs, and also to make sure that the oversight of 
these activities, ensures that they are applied completely and 
consistently across all institutions.
    Transparency and accountability requirements, should not be 
viewed as punitive. This not a ``gotcha'' game. This is the 
future of our economy, and, quite frankly, if CEOs insist that 
they are gaining strength and momentum, then we want to know 
what's working.
    And, on the flip side, if the situation does not improve, 
then Congress and the Administration, should demand to know 
what's not.
    Making these requirements, law, is the most fair way to 
approach this, for both the government and the participants. 
Everyone starts with the same information and the same 
expectations.
    That way, if an institution is not complying, the law can 
require them to return the funds.
    Government leaders and financial institutions should see 
this as an opportunity, if anything else, to restore some of 
the confidence back to the American taxpayers.
    In February of this year, PIRG issued our first quarterly 
report card to track progress on transparency and 
accountability. Since then, there have been varying degrees of 
progress on several line items.
    Some of the key reforms where progress has been made, 
include Treasury's use of online resources to provide 
information and reports, as well as eligibility assessments for 
the public, however, taxpayers and consumers would prefer 
something more dynamic and searchable for contract agreements.
    Treasury has also begun the process of sending monthly 
surveys to the 20 largest fund recipients. USPIRG agrees with 
the general--we agree with GAO that this request for 
information, should be program-wide and not limited to the 
largest recipients only.
    A request by the Special Inspector General for reports on 
the initial disbursement of funds, was made to all of the 
recipients in the first tranche. Taxpayers are very anxious to 
know these results.
    In addition, consumers and taxpayers would like to know 
that the following requirements be included in any new 
accountability and transparency efforts: With respect to 
reporting, we'd like any reporting and oversight activities to 
be consistently applied; to relate--to make sure that they 
relate to the goals and objectives and to the original program 
and that they are posted online.
    Finally, we would like these reports to make every effort 
to equate outcomes to things that help taxpayers and are 
meaningful to them.
    From a strategy and operations perspective, taxpayers would 
like to see the following items addressed: The public is still 
unclear as to the reasons for the initial, seemingly ad hoc 
programs created for the first $350 billion disbursement, and 
would like the public provided with a more detailed explanation 
for the most recent shifts described in the Financial Stability 
Plan.
    The restructuring agreements with Citigroup and AIG, 
demonstrate another change in strategy, and one that may put 
taxpayers at additional risk.
    Finally, we would like to see additional governance 
guidance around internal operations, accountability, 
leadership, strategic planning, and items such as that, which 
would make the banks more accountable for achieving success and 
help us feel more confident that they are not going to repeat 
the mistakes of the past.
    Taxpayers and consumers deserve an open and fair government 
that will not take them nor their investment, lightly. Thank 
you, and I look forward to your questions.
    [The prepared statement of Nicole Tichon appears in the 
Submissions for the Record on page 53.]
    Chair Maloney. Thank you. Mr. Pollock?

  STATEMENT OF MR. ALEX J. POLLOCK, RESIDENT FELLOW, AMERICAN 
ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH, WASHINGTON, DC

    Mr. Pollock. Thank you, Madam Chairman, Ranking Member 
Brownback, Congressman Brady, Members of the Committee.
    The United States and many other countries once again now 
demonstrate the dilemmas of the recurring historical experience 
of using public money to offset the losses of banks in the name 
of economic stability. As I noted in my written testimony, 
debates about this go back at least to 1802.
    In my view, it's imperative to have a clear accounting for 
the financial results of all such bailout operations. As we 
know, government bailouts make the 60 percent of households who 
actually pay federal income taxes, into involuntary investors, 
either investors in bank equity, in distressed assets, or both.
    How can these involuntary investors and their Congressional 
representatives figure out what's happening to the money? 
Senator Casey rightly pointed out the overlapping complex 
reporting we've got, so, first and foremost, I believe we need 
something really simple and powerful.
    This is that all the activities of the TARP program, should 
be isolated in a separate accounting entity, preferably a 
government corporation, one that would be Treasury-guaranteed. 
This entity, in my view, should have to borrow on its own 
balance sheet to finance the investment it makes.
    All investments and other assets, all related borrowings, 
other liabilities, all expenses, and all income, should be 
clearly measured as if TARP were a corporation. This would be 
most straightforward if it were, in fact, a corporation like 
the Reconstruction Finance Corporation of the 1930s was.
    An audited balance sheet and income statement should be 
regularly produced. The bailout operation's retained earnings 
or accumulated losses, will show its results life to date. In 
my view, Congress should require such a regular and disciplined 
accounting by TARP.
    Looking forward, as well as measuring backwards, should 
also be businesslike. Congressman Hinchey mentioned the large 
TARP outlays. It seems clear to me that Congress should 
certainly demand a clear forecast of next year's TARP activity 
and results, before it approves any federal budget.
    The investments the taxpayers are involuntarily making 
might, in the end, have an overall positive return, as asset 
prices recover, as they inevitably will.
    It's my view that if there is a profit in the end, 100 
percent of any such profit should be earmarked as explicit 
dividends to the taxpayer investors. These could be in the form 
of cash or specific tax credits.
    It seems to me that this would be a well deserved 
recompense for the majority of the citizens who bought houses 
they could afford, paid their mortgage loans on time, didn't 
engage in leveraged speculations, paid their taxes, and then 
paid for and took all the risk of the bailout efforts.
    That would represent real accountability to the real 
investors.
    Looking back a good way, it seems to me that a fruitful 
historical comparison can be made between TARP and the 
Reconstruction Finance Corporation, the bank bailout operation 
of the 1930s, which made investments in more than 6,000 banks 
in its day.
    Set up under President Hoover, then expanded by President 
Roosevelt, the Reconstruction Finance Corporation, or RFC, was 
run for most of the time by a forceful and very experienced 
character named Jesse Jones (a successful entrepreneur from 
Texas, and, of course, a Democrat, by definition, in those 
days), whose formal schooling had ended in the eighth grade.
    So, since he never started high school, Madam Chairman, he 
didn't get the chance to be a high school dropout.
    As described in my written testimony, the RFC had a logical 
crisis model. This model is also discussed in Fed President 
Hoenig's speech, Senator Brownback, which you cited. At one 
point, the RFC held capital in about 40 percent of all the 
banks there were, but, in the end, it had no net cost to the 
taxpayers.
    A key lesson of this experience, in my view, is that 
organizations are important, but more important for 
accountability, is who [emphasis added] is running them. In 
addition to making sure TARP has disciplined accounting, I 
think we need to find a modern day Jesse Jones to run our 
bailout operation.
    Thank you very much again for the opportunity to share 
these views.
    [The prepared statement of Alex Pollock appears in the 
Submissions for the Record on page 75.]
    Chair Maloney. Thank you, thanks to all of the panelists 
for your testimony.
    I'd like to ask this to Mr. Silvers and Superintendent 
Neiman. There has been substantial controversy, because $60 
billion federal funds was reportedly used by the Fed to buy 
collateralized debt obligations, or CDOs, that were insured by 
AIG credit default swaps.
    Do you know whether TARP funds were used for these 
purchases, and do you think the government should be covering 
the bets of the CDO buyers this way?
    Mr. Silvers. Madam Chair, I do not know for certain that no 
TARP funds were used. I believe that those purchases occurred, 
using Fed Funds, using Federal Reserve Bank of New York Funds, 
but I am not certain.
    The structure that is being contemplated today for TALF, 
involves a slice of TARP funds supporting a large Fed funding 
structure, and there would be an issue--and it's also an issue 
of kind of the fungibility of money here. The TARP fund were 
provided to the Federal Reserve Bank of New York on behalf of 
AIG and were disbursed from there.
    Again, I believe those were largely used to--based on press 
reports, I believe those were largely used to cover 
counterparty obligations in credit default swaps and other 
derivatives transactions, and not to purchase CDOs, which--the 
purchase of CDOs has a similar effect. That's the extent of my 
knowledge.
    In respect to your question of whether that's a good idea 
or not, here is the--I think there are several issues in play 
here.
    One of them is the question of systemic risk related to 
AIG's inability to meet its obligations broadly in the 
derivatives markets. Based on the size and the scale of their 
derivatives obligation, it seems to me there is a significant 
systemic risk issue embedded in that problem.
    The second question is: What is the best way to deal with 
that? Those expenditures raise a question as to whether--to the 
extent the operations with AIG with counterparties are having 
the effect of propping--of really significantly focusing 
federal funds toward specific counterparties, whether it was 
wiser to do that indirectly through AIG or whether perhaps we 
ought to have looked directly at those counterparties.
    There is no way to answer that question without knowing 
exactly how much money was disbursed on behalf of AIG to 
counterparties, information we don't have despite those press 
reports many of which are inconsistent with each other.
    Chair Maloney. I think you're pointing out the need to get 
this information so we can make informed decisions.
    Superintendent Neiman, would you like to comment on this?
    Mr. Neiman. I would just like to clarify and distinguish 
the program under which those Fed funds were provided to AIG, 
and to distinguish the fact that that was done under the 
systemically significant failing institution program which has 
different and broader objectives than the capital purchase 
plan.
    In a program to assist AIG, we can't lose sight of the fact 
that it was to prevent a disorderly failure of systemic 
institutions as well as the tag-along effect it would have on 
counterparties and other institutions.
    So I think when we come back and look at these programs, we 
do have to keep in mind the objectives of the program.
     Having said that, I think the transparency issues that you 
raise are a separate issue. And I did listen to Mr. Kohn's 
testimony, Vice Chairman Kohn's, and that was something they 
said they would take back to the Federal Reserve.
     As a regulator, I certainly understand the issues around 
confidentiality of individual information, but I think in this 
day and age that is something that all regulators should be 
revisiting.
     I am not going to opine on how they should come out at 
this stage, but it is certainly an issue that regulators are 
revisiting.
    Chair Maloney. Mr. Silvers?
    Mr. Silvers. Yes. My colleague's comments raise an 
additional point that I would like to expand on for a moment, 
if you will indulge me.
    I think it is important for the Committee to be fully aware 
of the, currently the three programs under which the funds have 
been disbursed to financial institutions under TARP, and their 
differences.
    The Capital Purchase Program was the initial TARP Program. 
It was the program under which all of the initial October 
disbursements were made, in the form of purchases of preferred 
stock. And all of the purchases of preferred stock from smaller 
banks have been made under this program. It has only one 
criteria, which may seem a little odd. The criteria is that you 
have to be healthy. You have to not need the money in order to 
get it. Because the purpose of--the stated purpose of the 
program is to provide liquidity to banks who are in a position 
to then pass that liquidity on to the larger economy.
    It is somewhat--it raises questions that money was provided 
under this program in October to banks which very quickly 
became not so healthy. The ones that are obvious are Citigroup 
and Bank of America.
    The second program, as Superintendent Neiman mentioned, is 
the Systemically Significant Failing Institutions Program. Only 
one institution has received money under that Program, and that 
institution is AIG.
    The Panel raised questions in its second report as to why 
other institutions that appeared to fit the definition of a 
``systemically significant failing institution'' were not 
funded under that program when they came back to Treasury 
seeking additional funds.
    Those institutions are Citigroup and Bank of America.
    Citigroup and Bank of America got funding in November of 
2008, and then Bank of America got funding in January of 2009, 
additional funding and guarantees of assets in their 
portfolios.
    In the case of the Citigroup funding in November, it was 
not done under either existing program. It had no programmatic 
home when it was done. At the end of December, the Treasury 
Department created a new program, the Targeted Asset Program, 
whose criteria are, shall we say, more general than either the 
Capital Purchase Program or the Systemically Significant 
Failing Institutions Program.
    The Citigroup transaction was placed in that program after 
the fact, and then the Bank of America transaction in January 
was put in that program.
    I should note that one striking content--one striking 
distinction of the Systemically Significant Failing 
Institutions Program is that, as the Committee has noted in 
this hearing, that the government took 80 percent of the upside 
of AIG as part of that program through obtaining warrants in 
AIG stock.
    The upside that was taken under the CPP Program in Bank of 
America and in Citigroup when they were deeply troubled was no 
greater than the upside taken in healthy institutions under the 
Capital Purchase Program as a percentage of the preferred stock 
purchased in those programs.
    Chair Maloney. Thank you. My time is expired.
     Senator Brownback?
    Senator Brownback. Thank you, Madam Chairwoman.
    I am old enough to remember the pieces of old acts like 
even on The Ed Sullivan Show, and there is one that comes to my 
mind of what we've been doing lately, the one where the guy has 
a stick and he puts a plate on top of it and starts twirling 
the plate, and then he starts another one, starts another one, 
starts another one, and he starts about ten of these, and by 
the time he starts the tenth one the first one is getting ready 
to fall off, so he runs back and he twirls that one again, and 
then the third one, and he's bouncing back and forth, and that 
is what really reminds me of what we've been doing, it seems 
like, since this thing first started falling apart last year.
    It is like we're going from one crisis, lurching to the 
next one, and we've got to do this, got to do that. We rush 
bills through. We don't do proper oversight on it. And at the 
end of the day all the plates come crashing down. And that 
it's--that we're not--we haven't developed something that is a 
sustainable, or set, or consistent, or predictable model for 
the marketplace to look at.
    And at the end of the day it seems like we have driven 
private capital out of the system by this ad hoc system and its 
unpredictability.
    We have got more--if I remember my numbers correctly--we 
have got more private funds sitting on the sideline right now 
than at any time we have had in the past 20 years, and it is 
sitting there. The market is plummeting, and the financial 
institutions are as well, and this was all supposed to be 
stopped by us jumping in and fixing it and doing it, and doing 
it now.
    I really think it is time for us to sit back and get to a 
predictable type of system. And that is what Chairman--the Fed 
Chairman in Kansas City, or president in Kansas City was 
writing about, was he looked at the prior models of what we 
have done when we have had financial institution problems, and 
we've had a fair number of these happen in the history of the 
country and in the history of the world.
    This is not a new type of crisis. It's a big one, and it is 
a bigger one than we have seen in the past, but it is not a new 
type of crisis. And he points to the number of times that we 
have gone in in a pretty aggressive but predictable and clear 
way removed management, put in our management to run a place 
over a period of time, keep the institution running, and then 
deal with the institution at that point in time at a later 
phase, or at a time when it can be sold.
    And he also points out the Japanese model that he believes 
was a failed model, which is kind of what it seems like to me 
we've been following, ``too big to fail,'' we can't let it 
fail, don't let it fail, don't let it fail, but without any 
predictable institutional setting.
    Mr. Pollock, I presume you have read Mr. Hoenig's paper. I 
gather from your testimony you agree with that analysis and do 
you think now is an appropriate time? It's past time in my 
estimation. But to get to some sort of established, stabilized, 
predictable system for these institutions that have been 
heretofore deemed too big to fail?
    Mr. Pollock. Senator, I think that paper makes a lot of 
good points. In it is the summary of the approach of the old 
RFC, which I mentioned in my comments. I would just like to run 
through the four steps, because I think they are quite 
consistent with your comments. These are as described by Jesse 
Jones in his most instructive memoirs: ``Fifty Billion Dollars: 
My Years With The RFC.''
    First, you go into the bank and write the assets to 
economic value. Congressman Campbell, that is not panic market 
value; that is what you are really going to collect on the 
assets. Having done that, you may find the institution is 
insolvent.
    The second point, according to Jesse Jones, is make a 
decision about the management. Now this is happening before you 
are putting any money in, and you either decide you have the 
right people there or you decide they have to be changed. Only 
after those two steps have been taken do you then put in an 
investment. The point of that investment should not be, as Mr. 
Silvers said earlier, to drain cash out of the institution, but 
to bridge the bust.
    And then you look to the private market as soon as possible 
to recapitalize and refloat the organization. I think that is a 
really logical approach.
    It takes a hard-minded director of the program, like Jesse 
Jones was. And it takes, in my judgment, an institutional 
format of a focused institution, which is why I favor the 
government corporation with a head and a board of directors. It 
seems to me the right place for a lot of the discussions about 
who is getting what and why, what is the rationale, would 
logically take place between a rightly constituted board of 
such a bailout corporation and its director.
    I think if we did that, a lot of the points that President 
Hoenig makes could be actually implemented.
    Senator Brownback. Thank you. Thank you, Madam Chairwoman.
    Chair Maloney. Mr. Hinchey.
    Mr. Hinchey. Thank you, Madam Chairman.
    And thank you very much, once again, gentlemen, and Ms. 
Tichon, for the testimony that you have given. We very much 
appreciate it. It is insightful and I think very, very helpful.
    There has been a great deal of skepticism about this 
situation from the very beginning. A number of us here in the 
Congress were skeptical about the plan that was put forth by 
Secretary Paulson originally in the form of this TARP bill, and 
that skepticism for some of us turned into opposition, 
including in the two bills that passed both Houses here 
subsequently.
    And I think, looking back on it, that opposition is now 
very much justified. We still don't know how this money was 
being spent. And furthermore, we have gotten apparently false 
information from the Treasury Department saying that, in terms 
of the money that was given to the banks, that there was a 
return, a complete return on each of those so-called 
``investments.'' But the investments have turned into 
subsidies, and those subsidies have been made clear by 
Professor Warren in statements that she has made, and in the 
response she has given to questions that she has been asked on 
this particular subject. And I think she has done it very well 
and very effectively, and I thank you for being here today and 
talking about the same kind of thing.
    Last month the Congress passed a TARP Reform and 
Accountability Act of 2009, which is in many ways a misnomer of 
the bill. In addition to other amendments, I introduced one 
which was passed in the House, which required that information 
be given as to how much money was given to the banks, where 
that money was given, what the money was used for, and how 
effective that use was.
    Unfortunately, that amendment, although it passed the 
House, was not successful and has not yet come into law. But I 
think we need to continue to engage in that effort in order to 
get that done.
    We need to know where this money is going. And it is 
getting closer and closer to $700 billion, and probably will 
end up even higher than that over the course of time.
    With regard to the falsification of information--which I 
say that because it is apparent falsification of information 
with regard to the return on the so-called ``investments``--it 
seems to me that the Special Inspector General of the Troubled 
Asset Relief Program ought to engage in an investigation as to 
how this money was allocated, what it was used for, and how it 
is only coming back on an average at about 66 percent. In some 
cases I understand that 8 percent is being lost. In other 
cases, more than 50 percent is being lost. It varies from place 
to place.
    So I would wonder what you would think about that, about 
having that investigation initiated and carried out so we can 
begin to figure out what is actually going on here? Mr. 
Silvers?
    Mr. Silvers. Congressman, well first let me say that I have 
no intention of telling the Inspector General, Neil Barofsky, 
what he should or should not investigate. That is his 
determination to make.
    I would like to clarify just for a moment the nature of the 
Panel's finding which you referred to. I should say that 
Superintendent Neiman and I are here in Elizabeth Warren's 
absence. We do not speak for her, but we hope that we have some 
commonality of views.
    The nature of what we found, Congressman, was that the 
market value of these securities on the day purchased was 
substantially less than the purchase price paid for them, in 
some instances. And in some instances only a small degree less.
    There is the possibility--in fact perhaps with some of the 
more secure banks the distinct likelihood that taxpayers will 
be made whole, that money will come back.
    There is also the distinct possibility that, that it will 
turn out that it will not be possible for the money to be 
repaid without further infusions of government funding. In 
fact, if you look at the first set of transactions in October 
money was provided to Citigroup and to Bank of America, and 
both of those institutions returned and had to get more money.
    It is hard not to look at those circumstances and conclude 
that the value of the initial infusions into those banks had 
declined between October, the first transaction, and the second 
transactions in November and January.
    The terms of the transactions--and this is in my written 
testimony--the terms of the transactions, the legal terms, are 
what Treasury said they would be. That was what our legal 
analysis found.
    But the issue is that an independent valuation did not find 
that the economics matched the face value on the date of the 
transaction. And let me just give you one example of the sort 
of numbers that drive this sort of thing.
    Today the market rate for preferred stock in Citigroup is 
around 20 percent. If you purchased preferred stock today, the 
implicit rate of return--or the implicit coupon on that is 
around 20 percent. The November Citigroup infusion paid a 
coupon rate of I think it was either 8 or 9--I'm afraid I'm 
slipping on that--but it was substantially below the market 
rate. That means that in terms of the cash--in terms of the 
interest rate we are receiving on that preferred stock, which 
is really what a preferred stock dividend is, it's interest 
rate--the interest rate is not comparable to what the markets 
require for compensate--to compensate for the possibility that 
we might not receive those interest payments in the future 
should that particular bank weaken further.
    That's the nature of the problem. And like I said, I 
can't--I can't, I can't offer you an opinion as to whether 
that's a problem that is deserving of the attention of the 
Inspector General or not. But we did not find--our report does 
not find that the terms of the bonds were not what they were 
represented--the terms of the preferred stock, I'm sorry--our 
report does not find that the terms of the preferred stock were 
different from what they were stated to be by the Treasury 
Department.
    We found that the economics appear to have been different 
than what they said.
    Chair Maloney. The gentleman's time has expired. 
Congressman Brady for five minutes.
    Mr. Brady. All right. Thank you, Madam Chairwoman----
    Chair Maloney. And we are going to be called for a vote 
shortly.
    Mr. Brady. Right, Madam Chairman. Thank you so much. 
Appreciate all the testimony from the panel. Very helpful.
    Mr. Pollock, I should note Jesse Jones comes from Houston, 
the region that I live. Amazing man. Not so certain there are 
any Jesse Joneses left in the financial world. Some Jessie 
James, perhaps, left in the financial world-- [Laughter.]
    But I'm not sure about the Jones. I appreciate the comment 
by Mr. Silvers and Superintendent Neiman about the need for 
direct Treasury oversight. I wish our last Secretary would have 
met with you. I am hopeful, and would urge the new Treasury 
Secretary to do the same, in a public forum where you can 
really be the eyes and ears for this Congress.
    Let me ask you this: The public is asking, how is my money 
being spent and what is the result? The financial markets are 
basically asking, where's the plan? Where is the clear plan for 
dealing with toxic assets?
    Congressional Oversight Panel began with the first 
question: What is the strategy? So the question still ought to 
be: What is the strategy? Can anyone on this panel explain 
exactly what is the Administration's plan for dealing with 
toxic assets? Because the whole world wants to know.
    Mr. Neiman. You know the question comes down to building 
confidence. I think there are two critical efforts to restoring 
confidence in our markets. That is, one, having investors 
believe that the capital numbers that banks report are real 
numbers.
    And as those toxic assets remain on those large banks, that 
will always be an issue. The President's and Secretary's plan 
to develop a private and public trust to acquire those assets 
where the government is alongside the private investors is a 
sound and reasonable plan which we are all, as you are, 
awaiting the details of how that will be implemented.
    Mr. Brady. And I agree with you, but that is the problem. 
That outline has been around now for a month. The market is 
getting worse by the day, everyone--each hour and day we wait 
for those details, because as you said it is so critical. 
Shouldn't coming up with a clear plan be the top priority of 
the Administration? Does anyone disagree with that?
    Yes, sir.
    Mr. Silvers. Congressman, I think that (a) I think it would 
be inappropriate--the panel has not received, in our view, an 
answer to your question from the current Administration, which 
is our question. We have not received a detailed strategy.
    Mr. Brady. And you have made that request?
    Mr. Silvers. We have made that request.
    Now in fairness to the Administration, they are--the 
Treasury Department is clearly enormously challenged both in 
terms of the people they have in place, in terms of the events 
that they are trying to manage in the larger markets and 
internationally.
    The panel is not in my view, of the view that the Treasury 
Department is remiss in not having communicated with us to 
date.
    But I would like to make an observation about strategic 
considerations here, and I think it goes to what you said about 
things are--conditions appear to be deteriorating. Now from day 
to day all sorts of different things happen and stock markets--
I think to a certain extent stock markets are over--there is an 
over-reliance on stock markets as the measure of what is going 
on here. Credit markets are probably much, much more important. 
It is just harder to get good data on many of the credit 
markets.
    But here is my strategic observation: I believe it is hard 
not to look at what occurred in the initial months of TARP and 
not conclude that the strategic thinking at that time was that 
we faced fundamentally a liquidity problem and a problem of 
market irrationality, and that----
    Mr. Brady. Sure. And, Mr. Silvers, I agree with you on all 
that, and I am sort of running out of time and I still have 
another question for the panel. I think the point is that 
things are changing; it is difficult to stay ahead of it, as it 
has been from day one; but my point is still every day it gets 
worse. Every day it is more confusing. A clear, detailed, 
workable plan both for the markets and for panels like you I 
think would be very helpful.
    Can I ask this very quickly, because I have 33 seconds 
left--30, 29-- [Laughter.]
    Mr. Brady [continuing]. TARP I, first half, $300 billion, 
second half another $350 billion. The President's budget has 
the equivalent of $700 billion for another TARP effort. Do you 
think that will be the cap? Does anyone on the panel believe 
that that will be the cap of more investment in this effort? Or 
will it likely go beyond that? And I will yield.
    Mr. Silvers. Sir, Nouriel Roubini, who has done what most 
people acknowledge to be the deepest empirical academic work in 
this area, estimates that the hole in U.S. bank equity is $1.8 
trillion, and the hole in U.S. non-bank financial equity is 
$1.8 trillion. There is no way I think to look at those numbers 
and not conclude that there is a reasonable chance more money 
will be needed.
    Mr. Brady. Mr. Pollock.
    Mr. Pollock. I think whatever the number is, Congressman, 
that Congress should not be about approving a budget until a 
good estimate of the TARP number going forward is delivered to 
you all.
    Mr. Brady.
     Okay. Thank you very much.
    Chair Maloney. Senator Klobuchar.
    Senator Klobuchar. Thank you very much, Madam Chairman. 
Thank you all.
     I have five minutes, Mr. Silvers, so I will let you finish 
your point. You were talking--I found it very helpful as you 
looked at this historically, and you were making a point about 
when you look back at the original TARP funds that were 
directed at this liquidity problem, and why don't you complete 
that thought.
    Mr. Silvers. Thank you, Senator.
    What I was saying was it is hard not to look at what 
happened in the fall and winter and not conclude that the 
strategy was to buy time to allow liquidity to return and 
rationality to return to the markets.
    Senator Klobuchar. Right.
    Mr. Silvers. The fundamental assumption was that financial 
institutions really were healthy, and that the purpose of the 
capital infusions was to provide sort of a semi-federal 
guarantee, mostly for psychological purposes, and I think if 
you go back and look at statements made during that period 
during September and October by the Bush Administration you 
would I think pick up that thread.
    Senator Klobuchar. Um-hmm.
    Mr. Silvers. While that may be true of some institutions, I 
believe that there is no way to conclude at this point anything 
other than that time is not on our side in respect to this 
problem; that the phenomenon of undercapitalized and crippled 
financial institutions in a financial sector which is now 
extraordinarily concentrated, there are more than 50 percent of 
the deposits are in four institutions in this country, that 
that is exerting a profound downward pressure on our economy; 
and that if we allow that to continue that it will not right 
itself automatically.
    And I am very interested in, and intend to read, both 
Chairman Hoenig's speech and at least something about Jesse 
Jones, because I think that the notion that we need decisive 
action here to reverse a downward cycle seems to me to be hard 
to deny at this point.
    Senator Klobuchar. So what do you think needs to be done, 
then, Mr. Silvers? I mean, you can see that the Administration 
now is looking at these institutions. They're giving these 
stress tests to try to figure out which ones need the help, 
which ones don't. I believe that there are some banks and 
credit unions, and I know that they don't have that 50 percent 
of the market you're talking about, but on the other 50 percent 
side there are some that are healthier than others.
    And one of my concerns is that the longer this goes on 
without a clear definition of how we are going to help those 
institutions that are clearly having issues and we know what we 
are doing with some of them now, that it is bringing down some 
of these other institutions in the market.
    And that balance I find very hard. Because I know even a 
few months ago some of them were doing better than they are 
now, and not necessarily because of the bad deals they made but 
because of the way the stock market is doing.
    Mr. Silvers. I think that--and here again I emphasize this 
is just me; I am not speaking for the Panel--I believe that the 
basic outline that my co-panelist Alex Pollock referred to 
historically, which is to determine what the true health of the 
balance sheets of financial institutions are, which is not the 
same thing as what the mark-to-market is, and it is also not 
the same thing as what the par value is, right? It tends to be 
something in between, to (a) determine that.
    And then (b) to determine--and I think it would not be a 
bad idea, to the extent we are investing the kind of capital--
public money we are investing in many of these institutions--to 
make some assessment of the management. And then to figure out 
what a plan is for bringing the institutions we need to bring 
back to life, and to do so at the least cost to the taxpayer. 
The key issue is bringing institutions back to life.
    With respect to smaller institutions, it must be--let me 
just observe that it must be enormously frustrating to be the 
CEO, or the director, or a stockholder of a smaller financial 
institution and to have an application pending before the 
capital purchase program in which your health, your 
survivability is going to be passed on by regulators. And to 
look in your newspaper and read about the rather extraordinary 
series of circumstances in which clearly unhealthy institutions 
receive money under the same terms. That must really get you.
    Senator Klobuchar. Yes. I know some of them. It is 
frustrating.
    Mr. Silvers. And--anyway.
    Senator Klobuchar. And again, I thank you for your 
testimony here. I guess my other piece I wanted to ask both of 
you is just what more information you need to do your 
oversight, because that is what you are supposed to be doing, 
and we want that piece to work. Because as Senator Casey was 
saying, I think this trust that you get out of having the 
oversight, I don't think the American people are 
unsophisticated here. I think they know that some of this is 
not going well, and they know that some of the institutions are 
hanging in there and that they want to get that lending going.
    So what do you need to do your job?
    Mr. Neiman. I would like to respond to that, and also to 
just pick up on one of the comments that Damon talked about. We 
can never lose sight of the fact, with all the focus on the 
balance sheets and the capital of our institutions in this 
country, we cannot lose sight of another critical factor: and 
that is restoring confidence in the securitization market that 
has shut down, and that has played such a critical role in 
funding consumer and other lending in this country.
    And until that market is restored, banks will never be able 
to make up for the lending that has been withdrawn as a result 
of that market.
    So back to your question on what else can we do? Data. 
Being able to assess both the use of those funds, how those 
funds were used, as well as the impact that those funds are 
having both on that institution, both on the financial industry 
as a whole, and then on the economy and the capital markets.
    I do not think we have at this stage the proper metrics to 
be able to evaluate the effectiveness of the plan. I know the 
Treasury has talked about both transparency and accountability. 
They just started issuing their monthly snapshot with 
quantitative and qualitative analysis, which we are now 
assessing that I think will be very helpful. And we also will 
be in a position to assess whether there should be more 
information.
    I commend Chairwoman Maloney on her bill that is going to 
create more debate and discussion as to what else is needed. 
Are there more technological means for banks and government and 
the Oversight Panel to gather data in order to assess the 
effectiveness of the program?
    Mr. Pollock. Madam Chairman, could I just make a quick 
comment----
    Chair Maloney. Sure.
    Mr. Pollock.--on what to do? I would recommend three 
points:
    One, get rid of so-called ``fair value'' or ``mark-to-
market'' accounting for banks, which is driving the banking 
system in a downward, negative spiral.
    Two----
    Chair Maloney. We have a hearing on that tomorrow, and we 
are looking at flexibility in that program.
    Mr. Pollock. I have submitted written testimony for that 
hearing, and I hope you will take a look at it.
    Chair Maloney. I will.
    Mr. Pollock. Two, get rid of toxic assets. What is the 
definition of a ``toxic asset''? It is an asset whose price you 
do not like. Every asset is a good asset at some----
    Chair Maloney. But the question is how do you get rid of 
it?
    Mr. Pollock. You get rid of it by getting it to the right 
price. And then you can do the Jesse Jones plan.
    And three, I believe the Government of the United States 
should be systematically encouraging the creation of new banks 
to engage the new capital, which is on the sideline, to provide 
new credit. These would be banks which are not burdened down, 
weighed down by the mistakes of the past. The opposite is 
happening: the regulatory bodies are discouraging the creation 
of new banks. We need to turn that completely around and have a 
national program for bringing new banks and new private capital 
into the market.
    Thank you.
    Senator Klobuchar. Thank you.
    Chair Maloney. But couldn't we just use our regional banks 
and our community banks that are healthy and don't have the 
toxics? Is there really a need to create a new bank when there 
are many healthy banks that are out there that could provide 
the services?
    Mr. Pollock. They should do whatever they can. But in my 
view, we should have investors willing to put new capital--and 
some of these might be quite large--into banks coming into the 
market at a time when spreads on credit spreads are wide, and 
credit standards are high. It is the ideal time to start anew 
and we ought to be encouraging that.
    Chair Maloney. Thank you.
     Mr. Campbell for five minutes.
    Mr. Campbell. Thank you, Madam Chair.
    Mr. Silvers, I first want to ask, you said something that 
was news to me, and maybe I just have not been listening, but 
you said 50 percent of all deposits? Are you talking about all 
deposits in all regulated institutions, thrifts, credit unions, 
whatever, are in four institutions? No?
    Mr. Silvers. It's FDIC-insured deposits.
    Mr. Campbell. So 50 percent of all FDIC-insured deposits 
are in four institutions?
    Mr. Silvers. Yes.
    Mr. Campbell. So in other words, if there is a deposit 
which is greater than the FDIC insurance, then it is not 
included in that?
    Mr. Silvers. No, I believe that number covers all deposits, 
not insured deposits, but in FDIC-insured institutions.
    Mr. Campbell. In FDIC-insured institutions. And those four 
institutions are?
    Mr. Silvers. They are J.P. Morgan Chase, Citigroup, Bank of 
America, and Wells Fargo.
    Mr. Campbell. Okay. The next question I have, which is for 
all of you, is something Mr. Silvers brought up that I think is 
a good point, and you said three. I'll say there's basically 
kind of two different pools of money here within the TARP.
    One has been to those, call them healthy banks, or call 
them institutions which are not insolvent, or not currently 
insolvent, or not expected to be significantly insolvent, or 
whatever, from which I think there is at least an expectation, 
if not a likelihood, that the money will eventually be repaid 
to the taxpayer perhaps with some investment earnings.
    Then there is this money that has been put essentially for 
system risk, that has been put in an institution not 
necessarily--to an insolvent institution, not necessarily to 
invest in that institution as much as it is to cover that 
institution's obligations to other institutions that create a 
systemic risk.
    It would seem to me that the expectation for the taxpayer 
to get that money back has to be very low. If you even take the 
healthy parts of let's say an AIG, the traditional insurance, 
for them to earn that kind of money back, same with a Fannie or 
a Freddie, or whatever, over time would take a tremendous 
amount. Am I wrong on that?
    And this is a question to anybody on the panel. Am I wrong 
on that? And if I am not wrong, then should we be treating 
these two things in terms of disclosure completely differently?
    Mr. Pollock. I would say your comments are very much on 
target, Congressman.
    Mr. Neiman. I think it raises the issue as to what the 
public benefit is with respect to those systemic investments. 
And it is broader than just a return on those individual 
investments.
    The impact it has on our financial system is so critical to 
the overall economy--and I think when we talk about the 
valuation report, the value at the time of those investments, 
we cannot lose sight of the fact that there was a specific 
strategy not to distinguish the risk factors in those nine 
institutions in which those original nine CPP investments were 
made.
    It was so critical at the time. We talk about going back in 
history to the 1930s, so I do not think we can forget what the 
time was like in October the crisis that we feared and the need 
to get this money in quickly to stabilize the market. The big 
question that so many economists are struggling with is what 
would have happened had we not made those investments on those 
standardized terms? Recognizing that some of those banks were 
healthier than other banks.
    Mr. Campbell. You know what, Mr. Neiman, at this point I am 
not trying to argue whether it is the right thing to do, was 
the right thing to do, or will be the right thing to do again 
in the future. We are looking at oversight here today, and we 
will have other times for that.
    So what I am trying to figure is, if we have a different 
expectation for that money, what is it? I mean, if we do not 
necessarily expect to get a return, what do we expect? And how 
do we measure whether we are getting the expectation out of 
that?
    Mr. Silvers. May I respond?
    Mr. Campbell. Please.
    Mr. Silvers. I think that, (a), any time you talk about 
spending government money to prevent a systemic crisis, as my 
colleague, Richard Neiman says, you are seeking to achieve a 
broader public good.
    I think we as a Panel are trying to figure out a method for 
trying to assess whether that was done. It is very difficult. 
It is very difficult to assess that question because there are 
so many different factors in play.
    However, I think there are a couple of metrics one can 
use--a couple of questions one can pose about those types of 
expenditures. And I say ``expenditures'' acknowledging that we 
are getting something for them, right? We are getting in the 
case of AIG, we have some of the Fed's money in the form of a 
loan; some of that is still a loan. There is preferred stock 
that the TARP received. There are warrants. It is not that we 
are getting nothing.
    But the question that we need to ask is: One, is the 
strategy an effective strategy for achieving the goal of 
systemic stabilization?
    Two, to the extent that we are talking about institutions 
that we believe, one of the goals in relation to is to bring 
them back to life--not necessarily clear whether that is the 
case with AIG, but it would appear to be the case with the very 
large banks that we were just discussing a moment ago--is the 
strategy we are adopting going to bring them back to life? Or 
is it going to lead them to be perpetually under-capitalized?
    The third question is the question of whether we are doing 
so in a cost-effective manner? Is the way in which we are doing 
the intervention effectively the cheapest way of doing it from 
the taxpayer's perspective?
    Those questions seem to me to be the questions to pose 
about the AIG matter, which is the only TARP expenditure that 
has explicitly been justified as a systemic-risk intervention.
    Mr. Campbell. So far.
    Mr. Silvers. So far. It is also I believe the way to think 
about plans going forward, and proposals for dealing with the 
zombie bank problem. Because there clearly today are two kinds 
of risks in play.
    One is the risk, the continuing risk of a systemic freeze, 
which was very much present in October and September.
    The other risk is the risk of sort of frozen financial 
institutions that are now very large and macro economically 
significant pulling our economy downward. And I think all of 
us, certainly in my day job I hear about this all the time, all 
of us are hearing out in the real economy that that's what's 
happened.
    Chair Maloney. Thank you. The gentleman's time has expired. 
Congressman Burgess.
    Mr. Burgess. Thank you. Thank you, Madam Chairwoman.
    Mr. Silvers, let me if I could just continue on what you 
were discussing about plans going forward, and I realize that 
your role is oversight on the Oversight Board, but are you 
satisfied that the Administration is doing everything that it 
can do? Are you satisfied the United States Congress is doing 
everything it can do to get us through this crisis?
    Mr. Silvers. My, Congressman, that is some question.
    Mr. Burgess. Well then I can just narrow it down. And you 
heard my complaint at the beginning. President Clinton--and I 
was no great admirer of President Clinton, I will stipulate 
that up front--but he came to office at a time of perhaps more 
modest economic crisis, and said: ``I am going to focus like a 
laser beam on the economy.''
    Mr. Silvers. Yes.
    Mr. Burgess. Do we need that kind of focus on our economic 
recovery? We are facing a crisis perhaps as great as Pearl 
Harbor--Warren Buffett made that analogy--certainly as great as 
9/11 that President Bush faced early in his office--do we need 
to be focusing on that greater? And our former colleague Rahm 
Emanuel, the White House Chief of Staff, who says, ``you don't 
want a good crisis to go to waste.'' Are they seeing this as an 
opportunity to be doing other aspects of social evolution, 
societal evolution in health care, and carbon tax, and all of 
these things that they want to do, are they taking their eye 
off the ball and trying to do too much? And should we just get 
back to basics and try to fix the economy?
    Mr. Silvers. Congressman, it is very helpful for you to 
clarify where the focus of your question is. I believe that, 
(a) from what I can tell in both this Administration and in the 
last Administration, and in Congress, that an awful lot of 
people are working extremely hard and are trying their very 
best to have a laser-like focus, as you describe.
    I have great respect both for the current team in the 
Administration and for the prior Administration's team that 
worked on this.
    I think that when you talk about a laser-like focus on the 
economy, I think we have to recognize that the financial 
sector, which is of course the focus of this hearing, is not 
the economy. It is extremely important. And if it does not 
function properly, it makes it very hard for the real economy 
to function, but it is not the whole picture.
    And that some of the issues that you mentioned, that I 
understand that you may feel are extraneous, are--in my view at 
least--are fundamental to whether we will be able to have a 
healthy long-term economy.
    Mr. Burgess. Let me just--I do not want to interrupt there, 
but ``extraneous'' was probably not a word that I would use--
but still, we are pushing full-speed ahead in my other 
Committee on Energy and Commerce for the carbon tax, we call it 
Cap and Trade, but it is in its simplest form going to be a 
carbon tax; we are pushing full-speed ahead with creating what 
is going to be called a Public Option Plan in health insurance. 
The reality is, it is a vast expansion of Medicare and 
Medicaid-type structure.
    And is it appropriate to be doing those things this spring 
while so many American families are hurting and our job losses 
are mounting? And even in a State like Texas where we have been 
blessed with a fairly stable economy, we are feeling it 
significantly back home, is it appropriate to be doing those 
things?
    Or is it more like Mr. Emanuel said, look, everything is in 
crisis so no one is going to notice that we tax carbon, that we 
socialize medicine, that we do all of these other things that 
we have wanted to do for some time?
    Mr. Silvers. Congressman, I do not believe it will be 
possible, say, to revive the banking system unless the stimulus 
effort works. From what I can see, the stimulus effort, despite 
what everyone says about it, is underpowered; that in relation 
to the downward force on our economy, there is not enough 
Keynesian stimulus being applied.
    In relation to issues like energy and health care, they 
seem, to me at least, to be fundamental to whether or not we 
get the long-term future of our economy correct; and that the 
problems in those areas have contributed substantially to why 
we are in the mess we are in today.
    Mr. Burgess. But those are long-term issues, and we have 
got a serious short-term crisis in the months and weeks ahead.
    Mr. Silvers. Congressman, my view is that they are 
intertwined.
    Mr. Burgess. Let me just--yes, sir. Please.
    Mr. Neiman. I was going to comment on long-term versus 
short-term in the financial sector. Because of the singular 
focus on solving the banking crisis, we have to address the 
regulatory reform and restructuring at the same time.
    To the extent that that is viewed as long-term, it is 
critical. It does present challenges. It is like putting out 
the fire at the same time you are rebuilding the fire 
department----
    Mr. Burgess. Right, or the front porch. Let me just ask, 
before I lose my time, Ms. Tichon, are you satisfied with the 
level of oversight that your--is your group satisfied with the 
caliber and level of oversight that is being provided currently 
on the TARP funding?
    Mr. Neiman. Well, the----
    Mr. Burgess. I was asking Ms. Tichon.
    Mr. Neiman. Oh, I'm sorry.
    Ms. Tichon. Well as we said in our testimony, there are a 
number of improvements that we would like to see with respect 
to the program.
    I think that, you know, thinking about what is going to 
restore some of the confidence back into the American people 
that we know--well not ``we,'' but that the government knows 
what it is doing, I think opening up the process from beginning 
to end so that we know exactly what is the criteria, and why 
are certain banks and institutions getting this money, what is 
their strategy, what is their business plan going forward, how 
are they going to achieve the goals that were set by the 
original EESA?
    So from our perspective, we have a list of specific reports 
and specific line items that we would like to see reported on 
from anyone who is receiving these funds that we are not seeing 
so far.
    So we have been promised, or we have seen, you know, some 
guidelines and some recommendations around a monthly report for 
the top 20 recipients. We have seen reporting going forward. 
However, I think we need to look at it from the beginning to 
the end, where we are looking at transparency on the financial 
health of the banks or the institutions straight through the 
execution of their program.
    Mr. Burgess. Are you going to make those available to the 
Committee?
    Ms. Tichon. Yes. We have, actually. Within my written 
testimony we have created a list of not only recommendations 
that we would like to see within any sort of TARP reform 
legislation going forward; we will be publishing a quarterly 
report card that will say: Here are the list of reforms. And 
then rating for a consistency, completeness, useability 
standpoint where we fall on those particular items.
    So we are very interested in this, and very interested in 
communicating it back to the American people.
    Mr. Burgess. Thank you. Thank you for your involvement.
    Chair Maloney. Thank you so much. Votes have been called, 
so the last question will be asked by Congressman Snyder from 
Arkansas. It really has been very instructive. You have given 
us a number of really constructive recommendations.
    Mr. Snyder. Thank you, Madam Chair. I am sorry I missed the 
discussion. I was actually at our Armed Services Committee 
hearing in which we were having a discussion about how the 
world financial crisis affects our national security, which is 
going on simultaneously.
    I am new to this Committee, so I take advantage of it to 
try to figure out things I don't understand, and this is not 
exactly related to the topic of the hearing today, but two 
questions, and then you can comment on them any way you want, 
and then we have to go.
    When we talk about toxic assets, I have a banker back home 
who says whether you are dealing with accounting rules, or 
whatever you are doing, what you are terming toxic assets, I 
have some things that would probably fall in that category but 
they are performing. The people are going to continue to pay on 
those. They don't want to be messed with. I don't want to be 
messed with. They are performing loans.
    Where do those fit into this discussion?
    My second question is on executive pay. I wasn't very 
excited about the executive pay limitation that was put onto 
the stimulus bill. I don't think there was enough discussion 
about it. But again, if we have small banks that are doing 
reasonably well around the country, and their traditional way 
of doing business has been they'll have employees that have a 
base pay of $130,000, $150,000, you know, $160,000 with some 
kind of an incentive, if a bank, even if it participates in one 
of these programs, continues to make a profit, are we making a 
mistake by not allowing some kind of incentive pay perhaps up 
to 5 or 10 percent of whatever the profit is for that year of a 
bank?
    Otherwise, it changes the way a bank executive is given 
pay. Any comments you have on those two questions, and I'm 
done.
    Mr. Pollock. Congressman, I would say on your first point, 
the fundamental question is what principal and interest are we 
going to collect?
    If we are going to collect all the interest and all the 
principal, then that is a good asset. We are trapped, I said a 
little bit before you got here, unfortunately in a so-called 
fair value or mark-to-market accounting system----
    Mr. Snyder. Well that is the essence of the question, 
because if it is a performing loan to the end of time then it 
does not matter what it is valued at today, does it?
    Mr. Pollock. No. And one of the recommendations I made 
previously was we need to get rid of this so-called fair-value 
accounting and replace it with something based on the money we 
are actually going to collect as valuation.
    On your comments on compensation, I fully agree with them. 
There are about 7,000 banks and 1,000 thrifts in the country. 
Some people project 400 or 500 may fail over this cycle, but 
that means 7,500 will not fail.
    Mr. Snyder. Right.
    Mr. Pollock. And they need to keep managing their business. 
Any investors, including the government as investors, should be 
looking at the business as to what will make it successful, 
including compensation.
    Mr. Neiman. I think you have raised a topic that probably 
deserves a panel all to itself. The issue of the impact that 
fair-value accounting has on bank capital where you have 
performing loans I think this is one that is hard to explain 
and really deserves much thorough revisiting by all, both at 
the accounting side, but particularly at the bank regulatory 
side.
    Chair Maloney. Mr. Silvers.
    Mr. Silvers. Just two points in relation to your question 
from our Panel's reports. In our Regulatory Reform Panel when 
we looked at executive compensation and financial institutions, 
the points that we made were that, more than the amounts 
involved, what mattered was the structure and the incentives 
created.
    Were they short term, or long term?
    Was there an equal exposure to the down side as to the up 
side?
    In relation to accounting, as I said earlier, perhaps 
before you came in, I think that the appropriate accounting 
here is to look not at par value, and not perhaps at markets 
that have liquidity problems and are in other ways maybe not 
representative of fair value, but to have a really thoughtful 
kind of auditing, an independent auditing of the assets of 
troubled banks.
    But there are a couple of caveats here:
    One of them is that a loan may be performing today. That 
may describe say an Alt A mortgage, right, that has not reset, 
but it may be extremely clear that in some very short period of 
time it will not be, or at least as a body it will not be.
    Secondly, I am convinced personally that the way our banks 
are accounting for mortgage assets has created a set of 
incentives not to restructure the loans; that there are 
circumstances in which banks are able to carry the loans at par 
or close to par, including not holding--not making them 
available for sale, that enable them to carry them at a value 
which is actually above their foreclosure value, even as the 
loan is not performing. And that if they were to restructure--
but that that loan is headed for foreclosure. And if they were 
to restructure it, they would have to mark it down.
    Now I am not expert enough to be able to do this at a more 
precise level than I just did, but we ought to be creating 
incentives for rational behavior, meaning for restructuring 
mortgage loans rather than foreclosing on them.
    Chair Maloney. We are----
    Mr. Snyder. Thank you, Madam Chair.
    Chair Maloney [continuing]. Thank you so much. You have 
given us so much to think about. We are having a hearing 
literally tomorrow on mark-to-market, and looking at ways to 
make it more flexible and to reflect the value.
    Senator Risch, we welcome you. He has indicated he does not 
have a question. We have been called for a vote, so this is 
adjourned so we can vote.
    Thank you very much for coming. It was very informative. 
Thank you.
    [Whereupon, at 12:19 p.m., Wednesday, March 11, 2009, the 
hearing was adjourned.]
                       SUBMISSIONS FOR THE RECORD

     Prepared Statement of Representative Carolyn B. Maloney, Chair
    The focus of this hearing is on the need for better information on 
the use and beneficiaries of TARP funds. As has become alarmingly 
clear, we have very little idea where the money has gone or what good 
it has done. Not knowing is not acceptable. The efforts of the Panel 
and of independent advocates such as PIRG to get this information are 
critically important to the ability of this Congress to ensure that 
taxpayer money is used as intended--to restore financial stability so 
that our economy can recover.
    Last week, I wrote to Fed Reserve Chairman Bernanke, reiterating a 
request I had made in November 2008 for a full accounting of the Fed's 
purchase of assets on which AIG had written credit default swaps 
insuring the performance of those assets as part of the bailout of AIG. 
I requested information on who the Fed purchased the assets from, how 
much each of them received, and how the prices for the assets--
collateralized debt obligations, credit default swaps, and residential 
mortgage backed securities--were determined in a frozen market. I 
attached a letter I had just received from Nobel laureate and noted 
economist Joseph Stiglitz, also requesting release of this information. 
As he said, the provision of this information is essential to informed 
discussion of how the TARP is doing in achieving its goals of restoring 
stability to our financial system, getting credit flowing, and reducing 
foreclosure rates.
    So far I have not received an answer.
    However, the Wall Street Journal seems to have gotten some of the 
information I asked for from a confidential source. On Saturday they 
published a list of some of the banks that have reportedly received the 
money and some information about how much they have received. Now we 
have a situation where elected representatives of the taxpayers are 
denied this information even when it is leaked by confidential insiders 
to the Wall Street press. It raises serious questions about how 
decisions on the use of TARP funds are being made and who exactly is 
accountable to the American people.
    The reports done by the Congressional Oversight Panel to date--
including the most recent report on foreclosure mitigation and the 
report on valuation of Treasury's purchases of preferred stock--show 
that, due to poor design and execution by the Bush administration, we 
have almost no information about where the TARP funds have gone and 
whether they are making any difference. The two GAO reports likewise 
note that the TARP lacks adequate systems of tracking and accounting 
for expenses. Advocates from PIRG to Mr. Pollock seem to agree. We are 
in desperate need of data.
    Last week, I introduced a bill that will take one step in the 
direction of getting more data. H.R. 1242 would create a central 
government data base for the use of the TARP oversight entities with 
real time financial information on TARP recipients from the multiple 
government entities to which these financial institutions presently 
report such data. My bill would require this data to be translated into 
a standard format that would enable compilation and comparison of the 
information so that trends or totals can be easily seen. The fact that 
this data would be available in real time would enable the oversight 
bodies to spot misdirection of the program before it is irreversible, 
so that preventive action could be taken. We would not be here months 
after the fact asking how much the government paid who for what. We 
would have known right away and been able to decide whether to let 
other similar purchases go forward or not.
    There are other legislative proposals as well that call for greater 
accountability and transparency, such as the bill that passed the House 
in January, H.R. 384. These bills lay down in no uncertain terms the 
marker: this Congress expects better use of the second tranche of TARP 
funds than was made of the first.
    We have to find a better balance between how the TARP is being 
administered and the public's right to know how their money is being 
spent. Transparency and accountability must be transformed from slogans 
to achievable actions.
    I look forward to the testimony. 

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     Prepared Statement of Senator Sam Brownback, Ranking Minority
    I wish to thank Chairwoman Maloney for arranging today's hearing 
and thank members of the panel for their testimonies.
    Today's hearing looks at achieving transparency and accountability 
in the Troubled Asset Relief Program, known as TARP. TARP was created 
as a $700 billion program under the Emergency Economic Stabilization 
Act of 2008.
    My understanding of the oversight panel's reports thus far is that 
Treasury has been less than forthcoming in its explanations of what it 
has accomplished with an allocation of up to $700 billion of taxpayer 
dollars. This is unfortunate, because ordinary taxpayers would like to 
know that the taxes that are financing Treasury's efforts are being 
used effectively. Taxpayers and financial markets worldwide would also 
like to know that there is a definitive plan to address our ongoing 
financial crisis.
    When I try to understand the difficulties presented by our current 
financial circumstances, I look to experts from my constituency. 
Fortunately, I can tap into the wisdom of the President and CEO of the 
Federal Reserve Bank of Kansas City, Mr. Thomas Hoenig.
    In a recent speech about our financial system and efforts to deal 
with the financial crisis, delivered on March 6 of this year, President 
Hoenig identified that: ``We have been quick to provide liquidity and 
public capital, but we have not defined a consistent plan . . .'' I 
agree with President Hoenig, and believe that there is a large amount 
of uncertainty about how we will deal with the pressing problems in our 
financial system. This uncertainty is preventing us from moving 
forward. Until there is resolution of uncertainty about how we are 
going to shore up our financial system, there is little reason to 
expect private capital to flow into our financial system. Private money 
is simply waiting on the sidelines until there is a resolute signal 
about who will absorb losses, and how the banking system will be 
structured moving forward.
    President Hoenig identified that, while we would prefer not to 
``nationalize'' our major financial institutions, we are ``nevertheless 
drifting into a situation where institutions are being nationalized 
piecemeal with no resolution of the crisis.''
    The term ``nationalization'' is not well defined. We have, by some 
definitions, already effectively nationalized some major financial 
institutions, such as AIG. It seems to me that it would be prudent to 
avoid fascination with the term nationalization and move to definitive 
steps to address the difficulties in our Nation's financial 
institutions and the resulting ``credit crunch,'' which involves 
severely interrupted credit flows and the negative consequences such as 
businesses' inability to finance payrolls and expansion, and 
households' inability to weather our current severe economic downturn.
    Rather than arriving at definitive steps to address our financial 
problems, it seems that the Treasury, under past and current 
administrations, has chosen to adopt half-measures and incomplete 
plans. Financial markets are certainly not buying it. Judging by stock 
prices generally, and stock prices of potentially troubled financial 
institutions in particular, there is little to no confidence in the 
plans of Treasury and the Administration to move us out of our 
financial malaise.
    Today's hearing is useful in helping to identify both what has been 
done with massive amounts of taxpayer money to address our challenges 
in financial markets and what is planned by Treasury and the 
Administration as we move forward.
    My hope is that Treasury and the Administration will come forward 
with a resolute plan to face up to the difficulties in our financial 
markets. We need a plan that offers hope to markets, and not a plan 
that raises more questions and more uncertainty. We also, as Kansas 
City Fed President Hoenig has clearly articulated, need to move 
definitively away from a system of finance subject to the threat of 
``too big to fail.'' In President Hoenig's insightful words, ``Too Big 
Has Failed.''
                                 ______
                                 
                           Too Big Has Failed

 (By Thomas M. Hoenig, President and Chief Executive Officer, Federal 
                      Reserve Bank of Kansas City)

    Two years ago, we started seeing a problem in a specialized area of 
financial markets that many people had never heard of, known as the 
subprime mortgage market. At that time, most policymakers thought the 
problems would be self-contained and have limited impact on the broader 
economy. Today, we know differently. We are in the midst of a very 
serious financial crisis, and our economy is under significant stress.
    Over the past year, the Federal government and financial policy 
makers have enacted numerous programs and committed trillions of 
dollars of public funds to address the crisis. And still the problems 
remain. We have yet to restore confidence and transparency to the 
financial markets, leaving lenders and investors wary of making new 
commitments.
    The outcome so far, while disappointing, is perhaps not surprising.
    We have been slow to face up to the fundamental problems in our 
financial system and reluctant to take decisive action with respect to 
failing institutions. We are slowly beginning to deal with the overhang 
of problem assets and management weaknesses in some of our largest 
firms that this crisis is revealing. We have been quick to provide 
liquidity and public capital, but we have not defined a consistent plan 
and not addressed basic shortcomings and, in some cases, the insolvent 
position of these institutions.
    We understandably would prefer not to ``nationalize'' these 
businesses, but in reacting as we are, we nevertheless are drifting 
into a situation where institutions are being nationalized piecemeal 
with no resolution of the crisis.
    With conditions deteriorating around us, I will offer my views on 
how we might yet deal with the current state of affairs. I'll start 
with a brief overview of the policy actions we have been pursuing, but 
I will also provide perspective on the actions we have taken and the 
outcomes we have experienced in previous financial crises. Finally, I 
will suggest what lessons we might take from these previous crises and 
apply to working our way out of the current crisis.
    In suggesting alternative solutions, I acknowledge it is no simple 
matter to solve. People say ``it can't be done'' when speaking of 
allowing large institutions to fail. But I don't think that those who 
managed the Reconstruction Finance Corporation, the Resolution Trust 
Corporation, the Swedish financial crisis or any other financial crisis 
were handed a blueprint that carried a guarantee of success. I don't 
accept that we have lost our ability to solve a new problem, especially 
when it looks like a familiar problem.
                  current policy actions and problems
    Much has been written about how we got into our current situation, 
most notably the breakdowns in our mortgage finance system, weak or 
neglected risk management practices, and highly leveraged and 
interconnected firms and financial markets. Because this has been well-
documented, today I will focus on the policy responses we have tried so 
far and where they appear to be falling short.
    A wide range of policy steps has been taken to support financial 
institutions and improve the flow of credit to businesses and 
households. In the interest of time, I will go over the list quickly.
    As a means of providing liquidity to the financial system and the 
economy, the Federal Reserve has reduced the targeted federal funds 
rate in a series of steps from 5.25 percent at mid-year 2007 to the 
present 0 to 25 basis-point range. In addition, the Federal Reserve has 
instituted a wide range of new lending programs and, through its 
emergency lending powers, has extended this lending beyond depository 
institutions.
    The Treasury Department, the Federal Reserve and other regulators 
have also arranged bailouts and mergers for large struggling or 
insolvent institutions, including Fannie Mae and Freddie Mac, Bear 
Stearns, WaMu, Wachovia, AIG, Countrywide, and Merrill Lynch. But other 
firms, such as Lehman Brothers, have been allowed to fail.
    The Treasury has invested public funds, buying preferred stock in 
more than 400 financial institutions through the TARP program. TARP 
money has also been used to fund government guarantees of more than 
$400 billion of securities held by major financial institutions, such 
as CitiGroup and Bank of America. In addition, the Federal Reserve and 
the Treasury Department have committed more than $170 billion to bail 
out the troubled insurance company AIG.
    Other actions have included increased deposit insurance limits and 
guarantees for bank debt instruments and money market mutual funds.
    The most recent step is the Treasury financial stability plan, 
which provides for a new round of TARP spending and controls, 
assistance for struggling homeowners, and a plan for a government/
private sector partnership to buy up bad assets held by financial 
institutions and others.
    The sequence of these actions, unfortunately, has added to market 
uncertainty. Investors are understandably watching to see which 
institutions will receive public money and survive as wards of the 
state.
    Any financial crisis leaves a stream of losses embedded among the 
various participants, and these losses must ultimately be borne by 
someone. To start the resolution process, management responsible for 
the problems must be replaced and the losses identified and taken. 
Until these kinds of actions are taken, there is little chance to 
restore market confidence and get credit markets flowing. It is not a 
question of avoiding these losses, but one of how soon we will take 
them and get on to the process of recovery. Economist Allan Meltzer may 
have expressed this point best when he said that ``capitalism without 
failure is like religion without sin.''
          what might we learn from previous financial crises?
    Many of the policy actions I just described provide support to the 
largest financial institutions, those that are frequently referred to 
as ``too big to fail.'' A rationale for such actions is that the 
failure of a large institution would have a systemic impact on the 
economy. It is emphasized that markets have become more complex, and 
institutions--both bank and nonbank entities--are now larger and 
connected more closely through a complicated set of relationships. 
Often, they point to the negative impact on the economy caused by last 
year's failure of Lehman Brothers.
    History, however, may show us another experience. When examining 
previous financial crises, in other countries as well as in the United 
States, large institutions have been allowed to fail. Banking 
authorities have been successful in placing new and more responsible 
managers and directors in charge and then reprivatizing them. There is 
also evidence suggesting that countries that have tried to avoid taking 
such steps have been much slower to recover, and the ultimate cost to 
taxpayers has been larger.
    There are several examples that illustrate these points and show 
what has worked in previous crises and what hasn't. A comparison that 
many are starting to draw now is with what happened in Japan and 
Sweden.
    Japan took a very gradual and delayed approach in addressing the 
problems in its banks. A series of limited steps spread out over a 
number of years were taken to slowly remove bad assets from the banks, 
and Japan put off efforts to address an even more fundamental problem--
a critical shortage of capital in these banks. As a result, the banks 
were left in the position of having to focus on past problems with 
little resources available to help finance any economic recovery.
    In contrast, Sweden took decisive steps to identify losses in its 
major financial institutions and insisted that solvent institutions 
restore capital and clean up their balance sheets. The Swedish 
government did provide loans to solvent institutions, but only if they 
also raised private capital.
    Sweden dealt firmly with insolvent institutions, including 
operating two of the largest banks under governmental oversight with 
the goal of bringing in private capital within a reasonable amount of 
time. To deal with the bad assets in these banks, Sweden created well-
capitalized asset management corporations or what we might call ``bad 
banks.'' This step allowed the problem assets to be dealt with 
separately and systematically, while other banking operations continued 
under a transparent and focused framework.
    The end result of this approach was to restore confidence in the 
Swedish banking system in a timely manner and limit the amount of 
taxpayer losses. Sweden, which experienced a real estate decline more 
severe than that in the United States, was able to resolve its banking 
problems at a long term net cost of less than 2 percent of GDP.
    We can also learn a great deal from how the United States has dealt 
with previous crises. There has been a lot written attempting to draw 
parallels with the Great Depression. The main way that we dealt with 
struggling banks at that time was through the Reconstruction Finance 
Corporation.
    Without going into great detail about the RFC, I will note the four 
principles that Jesse Jones, the head of the RFC, employed in 
restructuring banks. The first step was to write down a bank's bad 
assets to realistic economic values. Next, the RFC would judge the 
character and capacity of bank management and make any needed and 
appropriate changes. The third step was to inject equity in the form of 
preferred stock, but this step did not occur until realistic asset 
values and capable management were in place. The final step was 
receiving the dividends and eventually recovering the par value of the 
stock as a bank returned to profitability and full private ownership.
    At one point in 1933, the RFC held capital in more than 40 percent 
of all banks, representing one-third of total bank capital according to 
some estimates, but because of the four principles of Jesse Jones, this 
was all carried out without any net cost to the government or to 
taxpayers.
    If we compare the TARP program to the RFC, TARP began without a 
clear set of principles and has proceeded with what seems to be an ad 
hoc and less-than-transparent approach in the case of banks judged 
``too big to fail.'' In both the RFC and Swedish experiences, triage 
was first used to set priorities and determine what institutions should 
be addressed immediately. TARP treated the largest institutions as one. 
As we move forward from here, therefore, we would be wise to have a 
systematic set of principles and a detailed plan to guide us.
    Another example we need to be aware of relates to the thrift 
problems of the 1980s. Because the thrift insurance fund was inadequate 
to avoid the losses embedded in thrift balance sheets, an attempt was 
made to cover over the losses with net worth certificates and expanded 
powers that were supposed to allow thrifts to grow out of their 
problems. A notable fraction of the thrift industry was insolvent, but 
continued to operate as so-called ``zombie'' or ``living dead'' 
thrifts. As you may recall, this attempt to postpone closing insolvent 
thrifts did not end well, but instead added greatly to the eventual 
losses and led to greater real estate problems.
    A final example--our approach to large bank problems in the 1980s 
and early 1990s--shows that we have taken some steps to deal with 
banking organizations that are considered ``too big to fail'' or very 
important on a regional level.
    The most prominent example is Continental Illinois' failure in 
1984. Continental was the seventh-largest bank in the country, the 
largest domestic commercial and industrial lender, and the bank that 
popularized the phrase ``too big to fail.'' Questions about 
Continental's soundness led to a run by large foreign depositors in May 
of 1984.
    But looking back, Continental actually was allowed to fail. 
Although the FDIC put together an open bank assistance plan and 
injected capital in the form of preferred stock, it also brought in new 
management at the top level, and shareholders, who were the bank's 
owners, lost their entire investment. The FDIC also separated the 
problem assets from the bank, which left a clean bank to be 
restructured and eventually sold. To liquidate the bad assets, the FDIC 
hired specialists to oversee the different categories of loans and 
entered into a service agreement with Continental that provided 
incentive compensation for its staff to help with the liquidation 
process.
    A lesson to be drawn from Continental is that even large banks can 
be dealt with in a manner that imposes market discipline on management 
and stockholders, while controlling taxpayer losses. The FDIC's asset 
disposition model in Continental, which used incentive fees and 
contracts with outside specialists, also proved to be an effective and 
workable model. This model was employed again in the failure of Bank of 
New England in 1991, the failures of nearly all of the large banking 
organizations in Texas in the 1980s, and also for the Resolution Trust 
Corporation, which was set up to liquidate failed thrifts.
                      resolving the current crisis
    Turning to the current crisis, there are several lessons we can 
draw from these past experiences.

      First, the losses in the financial system won't go away--
they will only fester and increase while impeding our chances for a 
recovery.
      Second, we must take a consistent, timely, and specific 
approach to major institutions and their problems if we are to reduce 
market uncertainty and bring in private investors and market funding.
      Third, if institutions--no matter what their size--have 
lost market confidenceand can't survive on their own, we must be 
willing to write down their losses, bring in capable management, sell 
off and reorganize misaligned activities and businesses, and begin the 
process of restoring them to private ownership.

    How can we do this today in an era where we have to deal with 
systemic issues rising not only from very large banks, but also from 
many other segments of the marketplace? I would be the first to 
acknowledge that some things have changed in our financial markets, but 
financial crises continue to occur for the same reasons as always--
over-optimism, excessive debt and leverage ratios, and misguided 
incentives and perspectives--and our solutions must continue to address 
these basic problems.
    The process we use for failing banks--albeit far from perfect in 
dealing with ``too big to fail'' banks--provides some first insight 
into the principles we should establish in dealing with financial 
institutions of any type.
    Our bank resolution framework focuses on timely action to protect 
depositors and other claimants, while limiting spillover effects to the 
economy. Insured depositors at failed banks typically gain full and 
immediate access to their friends, while uninsured depositors often 
receive quick, partial payouts based on expected recoveries.
    To provide for a continuation of essential banking services, the 
FDIC may choose from a variety of options, including purchase and 
assumption transactions, deposit transfers or payouts, bridge banks, 
conservatorships, and open bank assistance. These options focus on 
transferring important banking functions over to sound banking 
organizations with capable management, while putting shareholders at 
failed banks first in line to absorb losses.
    Other important features in resolving failing banks include an 
established priority for handling claimants, prompt corrective action, 
and least-cost resolution provisions to protect the deposit insurance 
fund and, ultimately, taxpayers and to also bring as much market 
discipline to the process as possible.
    I would argue for constructing a defined resolution program for 
``too big to fail'' banks and bank holding companies, and nonbank 
financial institutions. It is especially necessary in cases where the 
normal bankruptcy process may be too slow or disruptive to financial 
market activities and relationships. The program and resolution process 
should be implemented on a consistent, transparent and equitable basis 
whether we are resolving small banks, large banks or other complex 
financial entities.
    How should we structure this resolution process? While a number of 
details would need to be worked out, let me provide a broad outline of 
how it might be done.
    First, public authorities would be directed to declare any 
financial institution insolvent whenever its capital level falls too 
low to support its ongoing operations and the claims against it, or 
whenever the market loses confidence in the fine and refuses to provide 
funding and capital. This directive should be clearly stated and 
consistently adhered to for all financial institutions that are part of 
the intermediation process or payments system. We must also recognize 
up front that the FDIC's resources and other financial industry support 
funds may not always be sufficient for this task and that Treasury 
money may also be needed.
    Next, public authorities should use receivership, conservatorship 
or ``bridge bank'' powers to take over the failing institution and 
continue its operations under new management. Following what we have 
done with banks, a receiver would then take out all or a portion of the 
bad assets and either sell the remaining operations to one or more 
sound financial institutions or arrange for the operations to continue 
on a bridge basis under new management and professional oversight. In 
the case of larger institutions with complex operations, such bridge 
operations would need to continue until a plan can be carried out for 
cleaning up and restructuring the firm and then reprivatizing it.
    Shareholders would be forced to bear the full risk of the positions 
they have taken and suffer the resulting losses. The newly restructured 
institution would continue the essential services and operations of the 
failing firm.
    All existing obligations would be addressed and dealt with 
according to whatever priority is set up for handling claims. This 
could go so far as providing 100 percent guarantees to all liabilities, 
or, alternatively, it could include resolving short-term claims 
expeditiously and, in the case of uninsured claims, giving access to 
maturing funds with the potential for haircuts depending on expected 
recoveries, any collateral protection and likely market impact.
    There is legitimate concern for addressing these issues when 
institutions have significant foreign operations. However, if all 
liabilities are guaranteed, for example, and the institution is in 
receivership, such international complexities could be addressed 
satisfactorily.
    One other point in resolving ``too big to fail'' institutions is 
that public authorities should take care not to worsen our exposure to 
such institutions going forward. In fact, for failed institutions that 
have proven to be too big or too complex to manage well, steps must be 
taken to break up their operations and sell them off in more manageable 
pieces. We must also look for other ways to limit the creation and 
growth of firms that might be considered ``too big to fail.''
    In this regard, our recent experience with ad hoc solutions to 
large failing firms has led to even more concentrated financial markets 
as only the largest institutions are likely to have the available 
resources for the type of hasty takeovers that have occurred. Another 
drawback is that these organizations do not have the time for necessary 
``due diligence'' assessments and, as we have seen, may encounter 
serious acquisition problems. Under a more orderly resolution process, 
public authorities would have the time to be more selective and bring 
in a wider group of bidders, and they would be able to offer all or 
portions of institutions that have been restored to sound conditions.
                          concluding thoughts
    While hardly painless and with much complexity itself, this 
approach to addressing ``too big to fail'' strikes me as constructive 
and as having a proven track record. Moreover, the current path is 
beset by ad hoc decision making and the potential for much political 
interference, including efforts to force problem institutions to lend 
if they accept public funds; operate under other imposed controls; and 
limit management pay, bonuses and severance.
    If an institution's management has failed the test of the 
marketplace, these managers should be replaced. They should not be 
given public funds and then micro-managed, as we are now doing under 
TARP, with a set of political strings attached.
    Many are now beginning to criticize the idea of public authorities 
taking over large institutions on the grounds that we would be 
``nationalizing'' our financial system. I believe that this is a 
misnomer, as we are taking a temporary step that is aimed at cleaning 
up a limited number of failed institutions and returning them to 
private ownership as soon as possible. This is something that the 
banking agencies have done many times before with smaller institutions 
and, in selected cases, with very large institutions. In many ways, it 
is also similar to what is typically done in a bankruptcy court, but 
with an emphasis on ensuring a continuity of services. In contrast, 
what we have been doing so far is every bit a process that results in a 
protracted nationalization of ``too big to fail'' institutions.
    The issue that we should be most concerned about is what approach 
will produce consistent and equitable outcomes and will get us back on 
the path to recovery in the quickest manner and at reasonable cost. 
While it may take us some time to clean up and reprivatize a large 
institution in today's environment--and I do not intend to 
underestimate the difficulties that would be encountered--the 
alternative of leaving an institution to continue its operations with a 
failed management team in place is certain to be more costly and far 
less likely to produce a desirable outcome.
    In a similar fashion, some are now claiming that public authorities 
do not have the expertise and capacity to take over and run a ``too big 
to fail'' institution. They contend that such takeovers would destroy a 
firm's inherent value, give talented employees a reason to leave, cause 
further financial panic and require many years for the restructuring 
process. We should ask, though, why would anyone assume we are better 
off leaving an institution under the control of failing managers, 
dealing with the large volume of ``toxic'' assets they created and 
coping with a raft of politically imposed controls that would be placed 
on their operations?
    In contrast, a firm resolution process could be placed under the 
oversight of independent regulatory agencies whenever possible and 
ideally would be funded through a combination of Treasury and financial 
industry funds.
    Furthermore, the experience of the banking agencies in dealing with 
significant failures indicates that financial regulators are capable of 
bringing in qualified management and specialized expertise to restore 
failing institutions to sound health. This rebuilding process thus 
provides a means of restoring value to an institution, while creating 
the type of stable environment necessary to maintain and attract 
talented employees. Regulatory agencies also have a proven track record 
in handling large volumes of problem assets--a record that helps to 
ensure that resolutions are handled in a way that best protects public 
funds.
    Finally, I would argue that creating a framework that can handle 
the failure of institutions of any size will restore an important 
element of market discipline to our financial system, limit moral 
hazard concerns, and assure the fairness of treatment from the smallest 
to the largest organizations that that is the hallmark of our economic 
system.
                               __________
        Prepared Statement of Kevin Brady, Sr. House Republican
              banking sector cleanup must be top priority
    I'm pleased to welcome the panel of witnesses before us today. TARP 
certainly raises a number of very troubling issues, but the central one 
is why we still do not have a credible, effective, and transparent 
financial rescue plan in place.
    Economists and financial experts agree that nothing else we do will 
matter much until the issue of how to dispose of toxic bank assets is 
resolved. The Treasury proposal unveiled last February 10th has not 
been well received because it did not clearly address this issue. The 
Economist magazine, for example, characterized it as ``timid, 
incomplete, and short on detail.''
    Over the last several weeks the financial press has daily noted how 
the lack of specifics undermines confidence and contributes to more 
uncertainty and financial market instability. As observed by Business 
Week, following the announcement of the Treasury plan, ``the stock 
market [was] down on sketchy details.'' Last week the Financial Times 
noted that since the Treasury plan was unveiled, the S&P had declined 
20 percent.
    Despite the fact that a timely economic recovery is entirely 
dependent on an effective and credible plan for dealing with banks' 
toxic assets, the administration has failed to provide one. The lack of 
a clear policy framework raises fears about undue political influence 
and meddling and is deterring new private investment in banks. 
Financial decisions regarding bank lending, investment, and capital 
structure should not be politicized. Policymakers do have an important 
role to play in setting appropriate ground rules, but this should not 
include micromanaging the banks.
    There is much to criticize in the TARP as well as other financial 
bailouts. But the key question facing the country is government policy 
regarding the toxic assets of the banking system. The administration 
seems to be focused on other priorities instead of the critical and 
pressing need for a clear resolution of the banking crisis. While the 
administration devotes its attention to pushing its budget with huge 
increases in deficit spending and federal debt, the financial markets 
and the economy sink into greater distress. However, a financial 
recovery plan may cost the Treasury up to a trillion dollars more. This 
means that Congress should not enact costly new deficit spending 
measures that the country cannot afford.
    The misplaced priorities in the budget are one aspect of this 
problem, while the optimistic economic assumptions underlying the 
budget policies are another. Last week Secretary Geithner responded to 
my questions about the latter by assuring me that the economic 
assumptions were realistic, but they are not. For example, the new Blue 
Chip Consensus forecasts a 2009 GDP decline of 2.6 percent, relative to 
the 1.2 percent decline in the President's budget. The unemployment 
rate has already reached the level projected by the administration for 
the entire year. The unrealistic assumptions in the budget mean that 
deficit spending will be closer to $2 trillion in 2009. No wonder The 
Economist called the assumptions in the administration's budget 
``deeply flawed'' in an article entitled, ``Wishful, and dangerous, 
thinking.'' The Congress should not carelessly enact policies based on 
such an unsound foundation.
    The administration needs to focus on the resolution of the banking 
crisis as the best way to reestablish a reasonable prospect for 
economic growth. This is the key issue in economic policy right now. 
The longer the administration fiddles with half-measures, the longer 
the economy will burn.
                               __________
             Prepared Statement of Michael C. Burgess, M.D.
    Anxiety is a simple word to describe what Americans are feeling 
when we hear about the situation our banks are in today, but 
frustration and anger are more appropriate words to describe the way 
American's feel about the government's lack of response to the banking 
crisis.
    The first Congressional Oversight Panel report came out in December 
2008 and started with the question, ``what is Treasury's strategy?'' 
Unfortunately, the fifth Panel report, due in early April, could 
plausibly start out with the same exact question. We need a significant 
and clear plan to come out of the Troubled Asset Relief Program, and we 
need it now.
    I am glad we have members of the Congressional Oversight Panel here 
today because I want to tell them that serious damage continues to 
occur in our banks with the word ``insolvency'' lurking throughout each 
firm. Since January 16, 2009, Bank of America is down 56%; Citigroup 
down 70%; PNC 51%; Suntrust 53%; and US Bank down 52%, this year alone. 
These are losses that have occurred with TARP money, yet, I have not 
heard any tough questions about these losses coming out of the 
Congressional Oversight Panel. The January report talked about 
accountability, the February report talked about evaluating 
acquisitions, the March report focused on home foreclosures. Right now 
we need the TARP to operate like emergency financial trauma specialists 
in order to address the banking crisis but they cannot operate without 
a focused and clear plan. Where's the plan?
    Everyone is talking about confidence, confidence, confidence in our 
banks and between our banks, but clearly our banking institutions are 
not buying what the government is selling them. They are not willing to 
free the credit markets because they are either insolvent themselves or 
they are operating under a fiduciary responsibility to respect the 
money invested by their shareholders and cannot risk losing money by 
making more bad investments. They don't see a bottom to this economic 
trough and until they see a bottom, or see a plan to turn this around, 
we will not begin to see a freeing up of the credit markets.
    According to Committee Memos, $197 billion has been used to 
purchase preferred stock in 496 banks under the TARP Capital Purchase 
Program as of March 5th. I would like to ask the panel members here 
today, ``How much more money is Treasury going to invest in these banks 
without asking for some control? Do we know? Do we even have the 
ability to find out? Is there a limit, or a ballpark window, say 
between one and two trillion dollars?''
    With that, I yield back the balance of my time.
                               __________
                 Prepared Statement of Damon A. Silvers
    Good morning. I am Damon Silvers, and I am the Deputy Chair of the 
Congressional Oversight Panel. I am also Associate General Counsel of 
the AFL-CIO. I would like to express my thanks to the Chair, 
Representative Maloney, for inviting me to appear today before the 
Committee. I should note at the outset that my testimony today is mine 
alone, and does not necessarily reflect the views of the Congressional 
Oversight Panel as a whole, its staff, or its Chair, Professor 
Elizabeth Warren.
    I am going to speak briefly about the general role of the 
Congressional Oversight Panel, and then address the Panel's work in 
valuing the preferred stock purchased by the Treasury Department under 
the TARP. My fellow Panel member Richard Neiman will focus his 
testimony on our most recent report on the mortgage crisis.
    The Congressional Oversight Panel was created as part of the TARP 
in last year's Emergency Economic Stabilization Act (``EESA''). The job 
of the Panel is to ``review the current state of the financial markets 
and the financial regulatory system'' and report to Congress every 30 
days. The Panel has submitted reports to Congress on December 10, 
January 9, and February 6, and March 6, and is beginning now to prepare 
its fifth report for early April. The Panel also submitted a special 
report on regulatory reform to Congress, as required by the 
legislation, at the end of January.
    The Oversight Panel is one of three organizations to which the TARP 
legislation gives oversight responsibilities: the Panel, the Special 
Inspector General, and the GAO. The Special Inspector General for the 
TARP has a broad responsibility, and matching authority, to audit and 
investigate any part of the Program. GAO is given an even more detailed 
set of instructions for ``ongoing oversight of the activities and 
performance of the TARP,'' as well as responsibility for an annual 
audit of the TARP's financial statements. Panel staff meets regularly 
with IG staff and with GAO staff assigned to TARP in an effort to see 
that we are coordinated and that the results of our efforts are more 
than the sum of our parts. The Oversight Panel sees our role in this 
landscape as oriented toward broad policy considerations. In the 
Emergency Economic Stabilization Act, Congress specifically asked that 
the Oversight Panel conduct oversight on: the use of Treasury authority 
under the TARP; the Program's effect on the financial markets, 
financial institutions, and market transparency; the effectiveness of 
foreclosure mitigation efforts; and the TARP's effectiveness in 
minimizing long-term costs and maximizing long-term benefits for the 
nation's taxpayers. Our ultimate question is whether the TARP is 
operating to benefit the American family and the American economy.
    The Panel began our work in our first report issued in December by 
asking ten basic questions about TARP--starting with the question, 
``what is Treasury's strategy?,'' and including the question, ``(i)s 
the public receiving a fair deal?'' This first report had one 
substantive recommendation--that ``the public has a right to know how 
financial institutions that have received public money are using that 
money'' and ``that Treasury should be responsible for holding 
individual institutions accountable for how they use the public's 
money.'' While the Treasury Department has committed to the concept of 
tracking the use of TARP money in principle, the specific plans for 
doing so have not been released.
    In asking these questions, we were influenced by statements by then 
Treasury Secretary Henry Paulsen at the time of the first nine major 
TARP transactions that ``(t)his is an investment, not an expenditure, 
and there is no reason to expect this program will cost taxpayers 
anything.''\1\
---------------------------------------------------------------------------
    \1\ U.S. Department of the Treasury, Statement by Secretary Henry 
M. Paulson, Jr. on Capital Purchase Program (Oct. 20, 2008) (online at 
www.treas.gov/press/releases/hp1223.htm).
---------------------------------------------------------------------------
    The Panel recognized in asking these questions that they raised 
complex issues, and that the answers would be multilayered. However, we 
thought it was not possible to begin to answer questions like ``did the 
public get a fair deal,'' without understanding exactly what deal the 
public did get in the transactions completed under TARP last year.
    The Panel sought the advice of leading valuation experts, and 
concluded that the way to ask the question ``what did the public get'' 
was to ask what was the value of the preferred stock purchased by the 
Treasury on the date it was purchased, based on the prices of related 
securities and based on transactions undertaken by the TARP recipient 
institutions with private parties. The Panel did a search for valuation 
firms that had minimal conflicts and the requisite expertise and 
resources to undertake this task, and we retained Duff and Phelps, the 
world's largest specialty valuation firm. Duff and Phelps were 
supervised by a team of experts consisting of Adam M. Blumenthal, 
Managing Partner in Blue Wolf Capital Management and the former Deputy 
Comptroller of New York City, William N. Goetzmann, the Edwin J. 
Beinecke Professor of Finance and Management Studies and the Director 
of the International Center for Finance at the Yale School of 
Management, and Deborah J. Lucas, Donald C. Clarke HSBC Professor of 
Consumer Finance at the Kellogg School of Management at Northwestern 
University and the former Chief Economist of the Congressional Budget 
Office.
    In parallel, the Panel engaged a legal team with experience in both 
bank rescues and preferred stock transactions to review the legal terms 
of the TARP transactions. The Panel sought to compare those terms with 
the terms obtained by private parties during the same period, the terms 
typically obtained by private parties making preferred stock 
investments, and the terms obtained by the British government during 
its parallel efforts to support its banking system during the last 
quarter of 2008. The legal effort was led by Catherina Celosse, an 
attorney formerly with the firm of Davis Polk and Wardwell, with 
experience representing the Indonesian government during the Indonesian 
bank crisis, and Timothy Massad, a senior partner at Cravath, Swaine 
and Moore who took a leave to assist the Panel on a pro bono basis.
    The valuation and legal analysis had a limited purpose--to 
understand and place before the public the extent to which the TARP 
transactions had been investments that obtained fair value for the 
taxpayer, and the extent to which they were subsidies to the recipient 
banks and their shareholders. We did not attempt to answer the question 
of whether subsidies were a good idea or a bad idea--whether the TARP 
transactions created public benefit that made them worthwhile, or 
whether that same public benefit could have been created without the 
subsidy. The Panel continues to do work in the area of trying to 
formulate ways of answering these much more complicated and vitally 
important questions.
    Duff and Phelps used three methods of valuing the preferred stock--
(1) a discounted cash flow methods, where the likely payments over time 
are discounted at a rate reflecting the risks of not receiving those 
payments derived from market yields, (2) a discounted cash flow 
analysis where the likely payments over time are discounted based on 
survival probabilities derived from Credit Default Swap spreads, and 
(3) a contingent claims method, that treated the preferred stock as a 
claim against the assets of the TARP firms, a claim whose value is 
determined by the volatility of those assets, much as the price of an 
option does. Duff and Phelps then looked for the convergence of the 
values derived from each method to set a valuation range for each 
security.
    Duff and Phelps looked at each of the ten initial major TARP 
investments separately, and the 700 plus page report they provided the 
Panel contains a detailed analysis of the market conditions associated 
with each major recipient bank at the time of the transaction. Duff and 
Phelps also examined each feature of the preferred stock designed by 
Treasury, including the impact of several options embedded within the 
terms of the security.
    Duff and Phelps found that the 2008 TARP transactions ranged from 
preferred stock purchases that delivered close to full value to the 
government in the case of the strongest banks at the time (5% and 7% 
discounts in the case of U.S. Bancorp and Wells Fargo), to purchases 
that at the time they were made delivered less than 50% or less of 
their face value to the government in the case of the purchase of AIG 
preferred stock and the second purchase of Citigroup preferred stock in 
November 2008.
    I should emphasize here that the Panel's findings reflected the 
value of the preferred stock Treasury purchased on the date the 
transactions were announced. We have not attempted to value these 
securities on an ongoing basis, but it seems very likely that they have 
declined in value since then, and in the case of Citigroup and Bank of 
America, declined precipitously.
    Duff and Phelps found that by comparison, private parties received 
somewhat better deals. Mitsubishi obtained essentially 88-94% of face 
value for its investment in Morgan Stanley, compared to 58% for the 
Treasury Department's investment in the same firm. Warren Buffett, not 
surprisingly, was able to get above market value (108-112%) for his 
investment in Goldman Sachs, while Treasury's investment in Goldman 
Sachs was worth 75% of what Treasury paid for it on the transaction 
date.
    The Panel found that the key structural reason for the failure to 
obtain securities that were worth their purchase price on a market 
value basis was the decision to offer the same price to all the banks 
in the initial purchase, and the apparent decision to only vary the 
terms of the second Citigroup investment to a small degree from the 
terms of the investments in ``healthy banks'' made under the Capital 
Purchase Program. Once the decision was made to offer all banks the 
same terms, in order to attract the participation of relatively healthy 
banks, those terms had to be ones that would be attractive to healthy 
banks. Offering the same terms to much weaker institutions like 
Citigroup and AIG ensured that those firms would receive a substantial 
subsidy.
    Duff and Phelps extrapolated from its findings with respect to the 
nine largest transactions, and extended the same total subsidy rate to 
the smaller transactions under the Capital Purchase Program. Using this 
methodology, the Panel estimated that in total through the end of 
December the TARP program had involved an $78 billion subsidy to all 
311 Capital Purchase Program recipient banks at the time of the report. 
However, Duff and Phelps found that more than half of the subsidy in 
the program as a whole went to two institutions--AIG and Citigroup.
    This analysis has clear implications for future TARP transactions 
with weak financial institutions. Currently, the preferred stock of 
weak banks like Citigroup is trading at prices that imply a market 
interest rate in excess of 20%. Since the purpose of TARP is to 
strengthen financial institutions, and not to drain cash from them, 
there is no way to protect value for taxpayers by charging interest in 
the form of preferred dividends adequate to compensate taxpayers for 
the very real risk of further losses in the preferred. The only way to 
do so is to take a larger percentage of the upside in the form of 
common stock, warrants for common stock or other equity linked 
instruments. In the case of the weakest banks, it appears to me that 
even if the government took 100% of the future upside we would still 
not be able to receive securities worth the value of the funds we would 
infuse into such weak banks. It may still be in the public interest to 
do such transactions, but we should not fool ourselves or the public 
that we are receiving in the form of securities full value for the 
public's money. And the less we ask in terms of common equity, the 
greater the subsidy will be.
    The legal review found that Treasury modeled its term sheet for 
Capital Purchase Plan transactions on the deal documents used by Warren 
Buffett in his investment in Goldman Sachs. We found that the terms 
were consistent across the Capital Purchase Plan transactions. However, 
the Panel's legal analysis found that the terms obtained by the 
Treasury were in places both more and less advantageous than the 
Buffett terms, and than the terms typically found in preferred stock 
deals. There were however a number of major areas where the terms 
obtained by the Treasury were not as favorable to the government as 
terms obtained by the British government in the course of their bank 
rescue efforts.
    Our valuation report relied entirely on publicly available data. 
The Panel did make a broad document request of the Treasury Department 
pursuant to our authority under Section 125 of the EESA on December 17, 
2008. Our purpose was to obtain any non-public information that 
Treasury possessed that would go to issues of valuation, in addition to 
contributing to our general ability to oversee the TARP program. In a 
letter dated December 24, 2008, the Treasury Department declined to 
provide the material we requested, and raised concerns about our newly 
formed Panel's internal controls over confidential documents. Despite 
extensive discussions between our staff and the Treasury Department, 
Treasury has only produced a small number of the documents the Panel 
requested. The Panel ultimately concluded it was unlikely, in view of 
TARP recipients' legal obligations to disclose material financial 
information to the public, that the accuracy of the valuation report 
would be affected by the Treasury Department's failure to produce the 
requested documents.
    This matter relates to a matter of concern to this Committee. 
Although it was not the primary purpose of our document request, I had 
expected that the request would result in the Panel being informed as 
to the identities of the counterparties to derivative transactions who 
were made whole as a result of the funds provided both by the Federal 
Reserve Bank of New York and the TARP to AIG. The Panel currently does 
not know the identity of those counterparties or the amounts they 
received. We are aware of press accounts of this matter, which have not 
been consistent with respect to issues such as how much money Goldman, 
Sachs, a direct recipient under TARP's Capital Purchase Program, 
received indirectly through the AIG TARP transaction.
    The Congressional Oversight Panel is seeking to expand the scope of 
its analysis of the larger impact of TARP and related programs. The 
Panel is particularly interested in looking at transactions under the 
Term Asset Backed Securities Loan Facility (TALF) and potential 
transactions involving public-private partnerships. The Panel is also 
working to define its role in relation to activities undertaken by the 
Board of Governors of the Federal Reserve that are linked to actions 
undertaken by the Treasury Department pursuant to the EESA. Thank you.
                                 ______
                                 
             Supplemental statement on two factual matters:
    In the Hearing, Chairwoman Carolyn Maloney asked if TARP funds were 
used to purchase collateralized debt obligations (CDO's) insured by AIG 
credit default swaps. I have confirmed my tentative statement in the 
hearing that these purchases were funded by the Federal Reserve System, 
and were not directly funded by TARP.
    Secondly, there was some discussion in the hearing about the 
percentage of U.S. bank deposits held by the four largest banks. During 
the hearing, I stated that ``4 banks that hold more than 50% of insured 
deposits.'' The information I was referencing was actually the portion 
of the deposits at Citigroup, Bank of America, Wells Fargo and JP 
Morgan compared to the total deposits at the top 50 largest U.S. 
commercial banks. It did not include insured deposits at institutions 
that were not commercial banks, such as savings and loans, or smaller 
commercial banks.
    It is very difficult to determine what the actual percent of U.S. 
deposits that are held at these four banks. Looking at the banking 
profile from the FDIC, the total domestic deposits of FDIC insured 
institutions at the end of December 2008 was $7,505,354,000,000 of 
which $3,991,272,000,000 was in insured commercial banks. The 
$7,505,354,000,000 includes commercial banks and savings institutions 
as well as thrifts and FDIC-insured state banks. The total insured 
deposits at the end of December was $4,759,995.
    On 12/31/08, the 4 largest BHCs had the following domestic 
deposits:


------------------------------------------------------------------------
                                                        % of deposits at
            Institution               Deposits* ($)         insured
                                                          institutions
------------------------------------------------------------------------
BofA:.............................        792,272,230              10.56
Citi:.............................        289,818,000               3.86
JPM:..............................        721,976,000               9.62
Wells:............................        742,900,000               9.90
------------------------------------------------------------------------
    TOTAL.........................      2,546,966,230              33.94
------------------------------------------------------------------------
*In thousands

    This is about 1/3 of domestic deposits.
    However, these four institutions appear to have more than 50 
percent of the assets of U.S. banks. Martin Wolf had a piece in the 
Financial Times on March 3, 2009 citing Fed data that showed that Bank 
of American, Citi, JP Morgan and Wells Fargo have more than 60% of U.S. 
Commercial Bank Assets (http://www.ft.com/cms/s/0/f24fc392-082a-11de-
8a33-0000779fd2ac.html).
    In terms of the discussion we had at the hearing, the data quoted 
by Martin Wolf would be the best measure of the relative importance of 
the four largest banks to the U.S. banking system.
                               __________
                Prepared Statement of Richard H. Neiman
    Chairwoman Maloney, Vice Chairman Schumer, and distinguished 
members of the Committee: I am Richard H. Neiman, the Superintendent of 
Banks for the State of New York. I am also a member of the 
Congressional Oversight Panel, and I appreciate this opportunity to 
comment on the ongoing evaluation of the Treasury Department's 
implementation of the Emergency Economic Stability Act (EESA). I should 
note that the views expressed in this testimony are my own, and do not 
necessarily reflect the opinion of the Panel or any other members.
                       overview of panel reports
    The Panel is charged by statute to provide monthly reports to 
Congress assessing the effectiveness of the Treasury's implementation 
of the Troubled Asset Relief Program (TARP), including foreclosure 
mitigation efforts.
    The Panel's first report was issued in December, and set out a 
framework for future inquiry through a set of ten tough but fair 
questions. These questions cover fundamental issues, including: is the 
strategy working to stabilize markets and reduce foreclosures? What 
have banks done with the money? And is the public receiving a fair 
deal? The regular monthly reports have explored these issues in more 
depth, in addition to a Special Report on regulatory reform issued in 
January.
    Given the limited time for prepared remarks, I will focus on the 
Panel's most recent report on foreclosure mitigation which I took a 
lead role in preparing. As the only bank regulator on the Panel and as 
one who has led his state's foreclosure prevention efforts, I believe I 
bring a unique perspective to this critical issue. I look forward, 
however, to questions from the Committee on the full range of the 
Panel's responsibilities.
                 panel report on foreclosure mitigation
    The Panel's March report highlights the symptoms that gave rise to 
the housing crisis, as well as major impediments to a solution. The 
report provides a roadmap for successful foreclosure prevention going 
forward. Let me summarize the major impediments.

        1. Affordability. The key to any sustainable modification 
        program is whether the borrower can afford the monthly 
        payments. A problem that began with exploding mortgage products 
        that may have been inappropriate at inception has now expanded 
        to borrowers who are falling behind for many reasons, such as 
        illness, divorce, or job loss in the economic downturn. 
        Existing modification plans have not adequately addressed this 
        critical impediment of affordability, leading to high rates of 
        re-default. Voluntary modification efforts often leave the 
        borrower with the same or higher monthly payments through 
        repayment plans or the capitalization of amounts past due. The 
        Panel is concerned that the commonly used housing payment ratio 
        of 38% of the borrower's gross income remains too high to be 
        affordable, and is encouraged that the President's Homeowner 
        Affordability and Stability Plan targets a 31% housing ratio.
        2. Negative equity. Negative equity can occur when property 
        values decline or if appraisals were inflated. Borrowers in 
        this situation are unable to refinance, and cannot sell the 
        home unless the lender agrees to a reduced payoff in a short 
        sale. Panel data shows a strong correlation between high 
        negative equity and default; however, this is not necessarily 
        evidence of a causal relationship. Further, the survey data 
        received from the federal banking regulators was limited by the 
        lack of current borrower income information which may under-
        estimate the importance of affordability in this result.
        3. Securitization contracts. Mortgages that have been 
        securitized are subject to the terms of pooling and servicing 
        agreements (PSAs) that may present obstacles to loan 
        modifications. These PSAs often contain restrictions on the 
        number of loans within the pool that may be modified and the 
        circumstances in which modification is permissible. As 
        modification and other loss mitigation outcomes may impact the 
        various tranches of investors differently, litigation risk may 
        be a disincentive for servicers to engage in modification. A 
        safe harbor from litigation for servicers that modify loans, as 
        outlined in the Helping Families Save Their Homes Act of 2009, 
        would help to overcome this impediment.
        4. Servicer incentives. The fee arrangements for servicers can 
        also create misaligned incentives. In particular, servicers 
        need incentives to engage in intervention while borrowers are 
        still current but when default is imminent, to preserve the 
        borrower's credit history and retain a fuller range of workout 
        options. The President's Homeowner Affordability and Stability 
        Plan does address this issue by providing incentive payments to 
        servicer for early outreach, as well as ``pay for success'' 
        incentives to both servicers and borrowers based on performance 
        of the modified loan.
        5. Borrower outreach and servicer capacity. The Panel's report 
        documents the lack of servicer capacity to reach borrowers at-
        risk. There is a clear distinction between the regular work of 
        servicers in payment processing and collections, which is 
        largely automated, and loan modification efforts, which are 
        labor-intensive and involve highly trained staff. Servicing 
        firms are set up for payment processing, but many are not as 
        well-equipped to handle the volume of individual modification 
        cases.
        6. Junior mortgages. Multiple mortgages on the same property 
        also complicate the foreclosure prevention effort. In the case 
        of a refinance or of a modification that involves an increase 
        in the loan amount, the second lien holder must consent to 
        subordination or the first lien holder loses priority. Some 
        junior lien holders are charging high fees to subordinate or 
        extinguish their liens. The President's Plan provides fee 
        incentives to first lien holders to extinguish subordinate 
        liens in the course of modifying the primary mortgage, but more 
        needs to be done to ensure all mortgage payments are 
        stabilized.

    These are the principal impediments to successful avoidance of 
foreclosure. The President's Plan addresses many of these critical 
elements, particularly affordability and servicer incentives, and is 
estimated to help 7 to 9 million homeowners at risk.
    While these projections are encouraging, the Panel has additional 
areas of concern that are not fully addressed. In particular, the Plan 
does not include a safe harbor for servicers operating under pooling 
and servicing agreements to address the potential litigation risk. And 
while the modification aspects of the Plan will be mandatory for banks 
receiving TARP funds going forward, the level of broader industry 
acceptance remains unclear.
    The more detailed guidelines on the President's Plan were just 
released on March 4, and the Panel will continue to monitor 
implementation and advise Congress and the American people accordingly.
        need for expanded data on foreclosure and delinquencies
    One important recommendation to Congress in the report goes to the 
adequacy of mortgage loan performance data. Access to complete 
information on foreclosures and loans in default is unavailable and the 
reason is simple: there is no mortgage loan performance data reporting 
requirement for the industry. Congress and the regulators need to have 
much better data available so they can ensure the smooth and efficient 
functioning of the national housing finance market and prevent future 
crises.
    That is why the Panel believes that Congress should create a 
national mortgage loan performance reporting requirement applicable to 
banking institutions and others who service mortgage loans, to provide 
a source of comprehensive intelligence about loan performance, loss 
mitigation efforts and foreclosure. Federal banking or housing 
regulators should be mandated to analyze such data and share the 
results with the public. A similar reporting requirement exists for new 
mortgage loan originations under the Home Mortgage Disclosure Act. 
Because lenders already report delinquency and foreclosure data to 
credit reporting bureaus, it would be feasible to create a tailored 
performance data standard that could be put into operation swiftly.
                               conclusion
    We cannot solve the financial crisis without dealing with the root 
of the problem: the millions of American families who are at risk of 
losing their homes to foreclosure. I appreciate the opportunity to 
share my views, and hope that dialogue between the Panel and this 
Committee becomes a regular occurrence. Events are developing rapidly, 
and many of the tools needed to respond are best accomplished with the 
support of progressive legislation. I would be pleased to provide more 
details on the Panel's work to date or answer any questions. Thank you.
                               __________
                  Prepared Statement of Nicole Tichon
    Madam Chair Maloney, Vice Chair Schumer, Committee Members and 
distinguished panelists.
    Good morning. My name is Nicole Tichon and I am the Tax and Budget 
Reform Advocate for the U.S. Public Interest Research Group. We serve 
as the federation of state PIRGs, which are non-profit, non-partisan 
public interest advocacy groups that take on powerful interests on 
behalf of our members.
    We are pleased to be part of this critical conversation. We look 
forward to the Committee and other interested parties to restore 
confidence to the taxpayers who have already invested so much in what 
is now collectively known as the Financial Stability Plan, which we've 
been referring to as TARP, and the public thinks of as ``the Wall 
Street bailout.''
                      summary and recommendations
    In February, U.S. PIRG released its first Report Card on the 
transparency and accountability of the TARP program. The implementation 
at that point was failing by most measures. U.S. PIRG's position is 
that TARP accountability, oversight and transparency should be 
addressed and mandated by law. Congress should give the Administration 
as many tools as possible to manage TARP and related programs. U.S. 
PIRG calls for more specific, consistently applied and frequent 
reporting. This reporting should account for the use of the funds and 
how the activities associated with their use meet the goals and 
objectives of the program. This information should be made public and 
easily accessed. These requirements should be retroactive, including a 
full accounting for the first disbursement of funds. In addition, 
provisions to protect the taxpayer and subject recipients to the same 
operational requirements as those imposed in the auto industry bailout 
should also be instituted to make banks more accountable to their 
investors.
                               discussion
    Leading economists and my fellow panelists have offered many policy 
recommendations on how to restore stability to the economy and provided 
potential strategies for assisting banks and financial companies. We'll 
respectfully yield that territory to them. U.S. PIRG seeks a 
consistent, transparent and accountable implementation of the Financial 
Stability Plan from the standpoint of taxpayers who have watched 
billions of dollars poured into what appears to be a failing and 
flailing system.
    Taxpayers have lost their own investments - their pensions, 
retirement savings and education savings. And in their first mass 
investment into the banks that failed them, they were undersold by $78 
billion according to the Congressional Oversight Panel, and so far 
would get approximately 67 cents on each dollar invested.\1\ That gap 
is likely to get larger as we learn more about the truth of the 
financial health of these companies. This hardly inspires confidence 
that taxpayers will be seeing much of a return on their investment. Our 
goal is to make sure that any program--especially one of this 
magnitude--has a clear strategy and is transparent to those paying for 
it.
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    \1\ http://www.guardian.co.uk/commentisfree/2009/mar/06/useconomy-
useconomicgrowth
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    One of the questions posed by the Congressional Oversight Panel to 
both the former and current Treasury Secretary gets to the heart of 
this matter: ``What is Treasury doing to help the American family?'' 
Taxpayers--real people who are feeling the impact of the stalled 
economy--deserve answers. We hope that the new Administration will 
provide them.
                            the report card
    U.S. PIRG released a report in February, ``Failed Bailout: Lessons 
for Obama from Bush's Failures on TARP'' (attached) to try to piece 
together what little was known about the then misnamed Troubled Asset 
Relief Program (TARP), recommend changes to make the program more 
accountable and transparent, and then develop a simple set of 
benchmarks to assess progress. The information used to make the 
assessment was based on a wide range of reports and accounts. In the 
absence of reporting the only information available about the TARP 
spending or recipients were from news stories. The U.S. PIRG report 
told the story of just how little we knew about the first disbursement 
of funds. For the first quarter of fiscal year 2009 (the fourth quarter 
of calendar 2008), the Report Card revealed failing grades on 
transparency, oversight and accountability.
    Our aim is to continue to publish a very simple quarterly Report 
Card to show progress on the reforms we've recommended. The Report Card 
assesses the implementation of the reform in terms of completeness, 
consistent application across programs and its usability or 
accessibility.
    Since issuing our first Report Card last month, there have been 
varying degrees of progress on several line items. We will provide a 
full assessment in our next Report Card at the end of the quarter. Some 
of the reforms where progress has been made include:

      Posting the fund recipients, amounts and contracts on the 
Treasury website is a good first step. U.S. PIRG would like this 
information to be made more accessible as the files are large and 
difficult to navigate. The summary tables are in the form of static 
pdfs, which is not as useful as a dynamic searchable online database 
would be. In this era of Google, people rightly expect that government 
will provide navigation tools to find needles in a haystack of data.
      Treasury has begun process of sending monthly surveys to 
the 20 largest fund recipients. U.S. PIRG agrees with the Government 
Accounting Office that this request for information should be program-
wide, not limited to the largest recipients only.
      The Special Inspector General has sent a request to all 
TARP recipients asking what was done with the first disbursement. U.S. 
PIRG is anxious to see the results.
      The Financial Stability Plan (FSP)\2\ proposes increased 
transparency and disclosure around bank balance sheets. U.S. PIRG is 
interested in additional details as to how this process will work 
across financial regulators and the agencies.
---------------------------------------------------------------------------
    \2\ http:/lfinancialstability.gov/docs/fact-sheet.pdf
---------------------------------------------------------------------------
      The FSP proposes specific reporting requirements around 
plans for the use of funds and monthly reports on lending. It is not 
clear to U.S. PIRG whether or not these requirements only apply to 
those who receive ``exceptional assistance'' and how ``exceptional 
assistance'' is defined.
      The FSP established a website (FinancialStabilitv.gov) 
that posts information about the new programs and promises to also post 
any reports from the recipients of capital assistance.
      The FSP proposes ``strong oversight requirements'' and 
``robust data'' to evaluate the success of the Administration's 
foreclosure mitigation program.\3\
---------------------------------------------------------------------------
    \3\ http://financialstabilitv.gov/docs/fact-sheet.pdf
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      The American Recovery and Reinvestment Act of 2009 (Pub. 
Law No. 111-5) includes the strongest language we've seen on limiting 
executive incentive pay. U.S. PIRG would like to know how this will be 
reconciled in conjunction with the FSP's previously-announced executive 
compensation language and what the Treasury Secretary's plan is for 
implementing the new law.

    In addition, PIRG recommends that the following requirements be 
included in any new accountability and transparency efforts:

      In general, the new conditions around reporting, 
transparency and executive compensation should be retroactive.
      Monthly reports should not just focus on lending--but on 
ALL activities associated with the use of the funds, and should extend 
to all participants, not just the top 20.
      Reporting requirements should be extended to the Federal 
Reserve disbursements--which are projected to be $3.8 trillion.\4\
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    \4\ http://www.washingtonpost.com/wp-dyn/content/graphic/2009/02/
24/GR2009022401373.html
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      In terms of a clear strategy, PIRG is still unclear as to 
the reasons for the initial ad hoc programs created after the first 
$350 billion disbursement and would like the public provided with a 
more detailed explanation for the most recent shifts described in the 
FSP. The restructuring of the agreements with Citigroup and A.I.G. 
demonstrates another change in strategy, and one that may put taxpayers 
at additional risk.\5\
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    \5\ http://online.wsj.com/article./
SB123629999083146775.html#articleTabs=article
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      The information currently offered around the contracts is 
hard to access.\6\ It is hard to find pertinent information. Again, 
establishment of a publicly available online, searchable database would 
be much more useful.
---------------------------------------------------------------------------
    \6\ http://www.treas.gov/initiatives/eesa/agreements/02272009/
1st%20Enterprise%20Bank.pdf (example)
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      Additional governance guidance around internal 
operations, accountability, leadership, and strategic planning would 
make the banks more accountable for achieving success.
      Metrics should be communicated by Treasury to Congress 
and the public to demonstrate that the stated goals or strategies (once 
clearly ' established) are working and that the programs contribute to 
stabilizing the economy.

    It is our hope that in the coming weeks, the reports requested by 
Special Inspector General requested will shed light on what so far has 
been a very murky and expensive program.
                              what's next
    U.S. PIRG's position is very straightforward. We support the 
enactment of reform legislation. A strong law providing for oversight, 
accountability and transparency is the best tool that Congress can 
offer as help to the Administration--and to the program participants. 
If we have clarity, then everyone starts with the same information and 
expectations. Our Report Card includes these recommendations for 
reform.
    Several bills have been introduced that address some of U.S. PIRG's 
recommendations. While U.S. PIRG does not necessarily endorse all of 
these bills in their entirety, there are provisions within them that 
reflect the recommendations of our Report.
    For example, the House of Representatives passed a comprehensive 
TARP Reform and Accountability Act of 2009 reform bill (HR 384), 
earlier this year. We urge the Senate to pass a similar comprehensive 
package.
    Key provisions of this and other legislation to provide for greater 
transparency, such as two bills introduced by Chair Maloney (HR 1095, 
on reporting and governance, and HR 1242, to set up an electronic 
database), include:

      Quarterly reporting that is accessible to the public for 
all TARP recipients (HR 384, Rep. Frank)
      Reporting on all activities--with specific requirements 
around relating activities to the original goals of the EESA 
(stabilization of economy, lending, consumer credit) (HR 1095, Rep. 
Maloney; S 195, Sen. Dorgan)
      Retroactive reporting on the first disbursement (HR 384)
      An online, searchable database of reports provided by 
recipients (HR 1242, Rep. Maloney)
      An online aggregation of data from other agencies to get 
the most holistic picture of the impact of TARP funds (HR 1242, Rep. 
Maloney)
      Governance guidelines (HR 1095, Rep. Maloney)
      Additional reporting/collection of data with a full 
description of collateral or other interests to ensure that taxpayers 
are repaid to the maximum extent possible (S 195, Sen. Dorgan)
      Subjecting all firms receiving assistance to the same 
conditions as the automotive industry; failure to comply resulting in a 
return of the funds (S 195, Sen. Dorgan)
      Requiring the Federal Reserve to report on its financial 
assistance (S 513, Sen. Sanders)

    A number of other bills and amendments have surfaced in the House 
and Senate with respect to TARP, many directly responding to the public 
concern over certain corporate expenditures, such as Rep. Cummings' 
bill (HR 846). All of these TARP-related bills and amendments reflect 
the fact that your constituents want to be heard.
    U.S. PIRG encourages Congress to take specific action in making 
reporting, transparency and accountability requirements law so that 
Congress, taxpayers, researchers and the public can see who is getting 
bailout money, where it is going and whether the programs are working. 
We urge Congress to give the Treasury Secretary and the Administration 
a comprehensive tool set to help them manage these programs. And make 
sure that the oversight of these activities ensures that they are 
applied completely and consistently across all of the institutions 
benefiting from this enormous taxpayer investment. Thank you and I am 
happy to answer any questions.
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                               __________
                 Prepared Statement of Alex J. Pollock
    Madam Chairman, Ranking Member Brownback, Vice Chairman Schumer, 
Senior House Republican Member Brady, and members of the Committee, 
thank you for the opportunity to be here today. I am Alex Pollock, a 
resident fellow at the American Enterprise Institute, and these are my 
personal views. Before joining AEI in 2004, I spent 35 years in 
banking, including 12 years as President and CEO of the Federal Home 
Loan Bank of Chicago. I am a director of three financial services 
companies.
    My testimony considers the context in which to understand banking 
bailouts, the clear accounting for them we should demand, and relevant 
lessons from Jesse Jones and the Reconstruction Finance Corporation.
                    the context of banking bailouts
    The United States and many other countries once again demonstrate 
the dilemmas of the recurring historical experience of using public 
money to offset the losses of banks in the name of economic and social 
stability. Debates about this go back at least to 1802, when Henry 
Thornton (in The Nature and Effects of the Paper Credit of Great 
Britain) clearly discussed the ``moral hazard'' and the ``systemic 
risk,'' as we now call them, involved in financial rescues.
    At the end of the last big U.S. depository institution bust, in 
1989-1992, Americans seemed relieved to have the government present the 
bill for the cost of its deposit guarantees to the taxpayers. As the 
RTC liquidated the failed thrifts, and helped investors and commercial 
banks by selling them cheap assets, the thrift depositors were 
protected with funds from the Resolution Funding Corporation (Refcorp). 
Refcorp sold 30- and 40-year non-callable bonds on the Treasury's 
credit, with some coupons of over 9%, to raise money. These borrowings 
are still outstanding, so we are still paying on the bailout of 20 
years ago.
    The Japanese in the 1990s, and many other countries before and 
since, have had similar bailouts. Why should this keep happening?
    Because there is an unresolvable conflict in financial systems 
between the political desire to have deposits for the public which are 
riskless, combined with a banking business which is inherently risky. 
Anything levered 12 or 15 or more to 1 is very risky. So we observe 
that banking is subject to recurring losses of capital which turn out 
to be much greater than anyone imagined possible--just like now.
    The combination of riskless funding with a risky business is in 
fact impossible: the risk simply moves to the government guarantor. 
Governments are periodically put in the position of transferring losses 
from the banks to the public, and money from the public to the banks--
as once again today.
    clear accounting for the financial results of bailout operations
    Government bailout operations make the 60% of households who 
actually pay federal income taxes into involuntary investors: either 
investors in bank equity, investors in distressed assets, or both. How 
can we, the involuntary investors and their Congressional 
representatives, figure out what is happening with the money?
    First, all the activities of the TARP program should be isolated in 
a separate accounting entity, preferably a Treasury-guaranteed 
government corporation. This entity should have to borrow on its own 
balance sheet to finance its investments or expenses in excess of 
income.
    All investments and other assets, all related borrowings and other 
liabilities, all expenses, and all income should be clearly measured as 
if TARP were a corporation. This would be most straightforward if it 
were in fact a corporation--like the Reconstruction Finance Corporation 
was.
    An audited balance sheet and income statement should be regularly 
produced. This would allow the operators of the bailout program, the 
administration, the Congress in its oversight responsibilities, and 
most importantly, the taxpayers as investors, to judge its performance 
over time. Its retained earnings or accumulated losses would show its 
results life to date.
    In my view, the Congress should require such a regular and 
disciplined accounting.
    Looking forward, as well as measuring backwards, should be 
businesslike, with regular budgets and forecasts. For as long as TARP 
represents such large outlays, the Congress should certainly demand a 
clear forecast of the next year's TARP activity and results before it 
approves any federal budget.
    The investments the taxpayers are involuntarily making might have 
an overall positive return in the long run, when asset prices recover. 
With yield on the preferred stock investments being made, and the 
possible future upside of warrants and common stock, the TARP program 
might in the end make a profit. Or it might break even, or make a loss, 
or a big loss--we need to know which one it is.
    It is my view that if there is a profit in the end, 100% of any 
such profit should be earmarked as explicit dividends to the taxpayer-
investors. These dividends might be in the form of cash or specific tax 
credits. This would be a well-deserved recompense to the majority of 
citizens who bought houses they could afford, paid their mortgage loans 
on time, did not engage in leveraged speculations, paid their taxes, 
and then paid for and took all the risk of the bailout efforts.
    Prudence, moderation and virtue are their own reward, yes, but if 
the bailout should make money in the end, let's declare dividends for 
the investors.
                          lessons from the rfc
    A fruitful historical comparison might be made between TARP and the 
Reconstruction Finance Corporation (RFC)--specifically the RFC of the 
1930s financial crisis (not the war finance RFC of the 1940s). The RFC 
was one of the most important and powerful agencies created to cope 
with the greatest U.S. financial crisis ever; it made investments in 
more than 6,000 banks in its day.
    Set up under President Hoover, and expanded by President Roosevelt, 
the RFC was run for most of the time by a forceful and very experienced 
character named Jesse Jones, a successful entrepreneur from Texas (a 
Democrat by definition in those days), whose formal schooling had ended 
in the eighth grade.
    The basic pattern of RFC bailout equity investing was described by 
Jones in his instructive memoirs, Fifty Billion Dollars: My Thirteen 
Years With the RFC. There were, he wrote, four principal steps:

        1. Write down the bad assets to realistic economic values, and 
        consequently write off book equity.
        2. Make a judgment about the character and capacity of 
        management and make any appropriate management changes.
        3. Based on realistic asset values and capable management, have 
        the RFC buy new equity in the bank in the form of redeemable, 
        dividend-paying preferred stock.
        4. Receive dividends and ultimately the par value of the 
        preferred stock back, as the bank returns to profitability and 
        recapitalizes in the private market over time.

    This summarizes a sensible and tough-minded program, easier said 
than done well, but a logical crisis model. Note a key difference 
between the equity investments of TARP and Jones' rule #1: first the 
write-downs, only then the recapitalization. This strikes me as the 
right order.
    As the President of the Kansas City Federal Reserve Bank, Tom 
Hoenig, pointed out in a recent speech, ``Too Big Has Failed,'' the RFC 
at one point held capital in about 40% of all banks, but in the end had 
no net cost to the taxpayers.
    A final thought: organizations are important, but more important is 
who is running them. In addition to making sure TARP has disciplined 
accounting, we need to find another Jesse Jones to run the bailout 
operation.
    Thank you again for the opportunity to share these views.
  

                                  
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