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


                                                        S. Hrg. 111-412
 
                   TARP ACCOUNTABILITY AND OVERSIGHT: 
                  MEASURING THE STRENGTH OF FINANCIAL 
                              INSTITUTIONS 

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

                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 9, 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. Elijah E. Cummings, a U.S. Representative from Maryland.....     3
Hon. Maurice Hinchey, a U.S. Representative from New York........     4

                               Witnesses

Professor Elizabeth Warren, Chair, Congressional Oversight Panel.     5

                       Submissions for the Record

Prepared statement of Representative Carolyn B. Maloney..........    26
Questions submitted by Representative Elijah E. Cummings to 
  Elizabeth Warren...............................................    27
Responses given by Professor Elizabeth Warren to questions 
  submitted by Representative Elijah E. Cummings.................    30
Prepared statement of Representative Kevin Brady.................    31
Prepared statement of Professor Elizabeth Warren.................    32
Prepared statement of Representative Michael C. Burgess, M.D.....    35


                   TARP ACCOUNTABILITY AND OVERSIGHT: 
                  MEASURING THE STRENGTH OF FINANCIAL 
                              INSTITUTIONS

                              ----------                              


                         TUESDAY, JUNE 9, 2009

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m., in Room 
210, Cannon House Office Building, The Honorable Carolyn B. 
Maloney (Chair) presiding.
    Representatives present: Maloney, Hinchey, Cummings, 
Snyder, Brady, and Burgess.
    Senators present: Klobuchar.
    Staff present: Nan Gibson, Colleen Healy, Marc Jarsulic, 
Aaron Rottenstein, Justin Ungson, Andrew Wilson, Rachel 
Greszler, Lyndia Mashburn, Jeff Schlagenhauf, Jeff Wrase, Chris 
Frenze, and Robert O'Quinn.

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

    Chair Maloney. Good morning. I would like to welcome 
Professor Warren, the Chair of the Congressional Oversight 
Panel for the TARP program and I want to thank you for 
testifying today on the COP's new report to Congress just 
released this morning. I also want to compliment you on your 
research and all of your work in support of credit card reform. 
Your testimony and support were very important to the passage 
of the credit cardholders bill of rights. Thank you.
    This is the third in a series of hearings this committee 
has held to examine the degree to which the Troubled Asset 
Relief Program has succeeded in its goals. The COP's June 
report examines the results of the government's stress tests, 
which were designed to evaluate the balance sheets of the 
financial institutions and provide any recommendations for 
further action.
    The results of the stress tests conducted by the Federal 
Reserve have gone a long way toward restoring market 
confidence.
    Huge losses shook confidence in the banking system, because 
it was not clear that some of our largest banks would remain 
solvent.
    The Federal Reserve, Treasury and FDIC have taken steps to 
provide the banks with liquidity for those assets where the 
market evaporated guarantees for their debt issuances and 
capital injections.
    Despite these substantial efforts, concerns remain that a 
deepening recession could threaten the solvency of some banks 
and amplify the financial crisis.
    Confidence is in large measure determined by the current 
and future state of bank balance sheets, so it is important 
that investors and counterparties have a clear picture of 
whether banks have the capital to weather the current downturn. 
It is welcome news that the Obama administration is set to 
announce that some of the Nation's largest banks will soon be 
able to repay billions of TARP funds. However, the Federal 
Reserve has reportedly imposed additional requirements on banks 
that proposed to repay capital they received under TARP.
    Since the stress tests were intended to estimate the 
necessary capital needed to be raised by bank holding 
companies, this raises an important question about what the 
stress test assumed about repayment of TARP funds. Moreover, 
some banks appear reluctant to perform their normal roles as 
providers of credit.
    I was honored to testify before the COP's recent field 
hearing in New York City, examining problems in commercial real 
estate. I am very concerned about the ticking time bomb we face 
in commercial real estate. An estimated 400 billion in 
commercial real estate debt is set too mature this year with 
another 300 billion due in 2010. If commercial real estate 
developers are unable to refinance or otherwise pay those large 
balloon payments, we could expect to see the default rate on 
commercial mortgages climb much higher. That, in turn, would 
translate into potentially crippling bank losses that our 
recovering financial system is still too fragile to withstand, 
even with the news that banks have raised 50 billion in new 
private capital since the release of the stress test results.
    This looming crisis in commercial real estate lending could 
lead to an all too familiar predicament, where banks suffer 
significant losses, major owners of hotels and shopping centers 
are forced into bankruptcy, foreclosed properties push 
commercial real estate prices further downward. And a perfect 
storm of all those forces combine to inhibit our economic 
recovery.
    The testimony we will hear today points out that 
transparency and accountability are critical in a crisis such 
as this.
    To increase transparency and to help restore confidence in 
our financial institution, I have introduced H.R. 1242, the 
TARP Accountability and Disclosure Act. This legislation would 
require the Secretary of Treasury to create a centralized 
database for the existing financial report of TARP recipients 
enhancing our ability to better determine how these funds are 
being used in a near real-time basis. I am very interested in 
hearing your thoughts about how this bill would help you do 
your job to safeguard taxpayer dollars and whether additional 
transparency measures are needed.
    Professor Warren, I am also interested in your views to the 
extent TARP is accomplishing its overall mission of restoring 
financial stability, reinvigorating markets, increasing the 
flowing and availability of credit and reducing foreclosures. 
We look very much forward to your testimony.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 26.]
    Chair Maloney. And I now recognize Mr. Cummings for 5 
minutes.

   OPENING STATEMENT OF THE HONORABLE ELIJAH E. CUMMINGS, A 
                  REPRESENTATIVE FROM MARYLAND

    Representative Cummings. Thank you very much, Madam Chair. 
I also want to thank you Professor Warren for joining us here 
today. The work of Congressional Oversight Panel of the 
Government Accountability Office and Special Inspector General 
continue to provide the Congress with critical evaluations of 
the financial recovery efforts. Congressional Oversight Panel's 
latest monthly report, its seventh, is an impressive assessment 
of the stress tests conducted by Treasury and the Federal 
Reserve on the 19 largest bank holding companies.
    The report observes that the basic methodology and economic 
assumptions underlying the stress tests are reasonable and 
conservative. Though the report goes on to identify logical and 
important criticisms of the tests. The panel's findings that 
concerns me most is it calls for increased transparency. I have 
long been an advocate for the highest levels of accountability 
and visibility in all aspects of the economic recovery. I have 
often said that in order for the Obama administration to help 
us come out of this crisis, the public must have a sense of 
confidence. They must feel that they are a part, they must feel 
they are informed. Time and time again, the public has been 
asked to accept the notion that disability of a global economy 
depended on the injection of unparalleled sums of public funds 
into the private markets.
    Correctly this Congress has asked that in return for our 
acceptance of the public rescue of private firms, the recipient 
companies exercise transparency in their spending and show a 
willingness to be accountable for their use of hard earned 
taxpayer dollars. The Washington Post reported yesterday that 
repeated requests by the largest banks to return TARP funds 
will likely be honored for most, if not all, of the banks that 
have deemed adequately capitalized under the stress test. Now 
we are asked to accept the contention of the banks, and their 
regulators that the stability of the global economy is not 
jeopardized by the withdrawal of the same public funds from 
private firms that were considered so critical to the survival 
of our economy just a few months ago. Accordingly in order to 
accept these claims we again require transparency regarding the 
actions of all the players. The oversight panel's report 
indicates that more openness is still required moving forward. 
The panel notes that while there has been an unprecedented 
level of disclosure of information regarding the stress test, 
it is at the same time impossible for others to replicate the 
same test using different assumptions and scenarios or to apply 
these same assumptions and scenarios to other banks.
    I believe that the credibility of the banking supervisors 
is tarnished if their findings cannot be recreated by observers 
and critics alike. The oversight panel also notes that the 
results of the stress tests have only been released under the 
adverse economic scenario. While having the results of the 
adverse scenario is preferable to having only results under the 
baseline scenario, the credibility of the supervisor is again 
blemished by this limited release of information.
    Further worsening economic conditions such as the increased 
unemployment rate already exceed those assumptions used under 
the stress test adverse scenario. As the stress tests were to 
an extent an exercise in establishing the public confidence in 
these keystone institutions, that public confidence would be 
strengthened by another iteration of the test conducted with 
the acknowledgment that economic conditions have changed and 
that an assessment is required, a reassessment is required.
    This display of transparency and openness would again 
engender confidence in the legitimacy of the process. I am 
encouraged that the banking regulators have found that many of 
the Nation's largest institutions to be in good financial 
health and will be permitting the return of taxpayer dollars to 
the taxpayers. However, I remain concerned about the lack of 
transparency in this process. I look forward to hearing more 
details about the oversight panel's assessment today and I 
thank Professor Warren for her unfailing commitment to 
transparency and all aspects of the bailout process. I thank 
you, Madam Chair. With that, I yield back.
    [Questions submitted by Representative Cummings to 
Elizabeth Warren appear in the Submissions for the Record on 
page 27.]
    [Responses given by Elizabeth Warren to questions submitted 
by Representative Elijah E. Cummings appear in the Submissions 
for the Record on page 30.]
    Chair Maloney. Thank you, the Chair recognizes Mr. Hinchey 
for 5 minutes.

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

    Representative Hinchey. Thank you very much. Professor 
Warren, I want to say exactly what my friend Mr. Cummings said 
just a few minutes ago. We very deeply appreciate all of the 
things that you have done. I think that the analysis that you 
have conducted and the recommendations that you are performing 
are very, very helpful, and they are very, very well.
    I wanted to ask you a question about the stress test 
solution and whether you think that that stress test solution 
is going to help aiding banks get through the financial crisis 
and to what extent there are sort of ancillary objectives 
involved in that stress test.
    Chair Maloney. This is opening statement.
    Representative Hinchey. Oh, an opening statement.
    Chair Maloney. That is a good opening statement.
    Representative Hinchey. In the context of the opening 
statement, I just want to emphasize the importance of 
everything that you have done. We are dealing with a very 
serious situation here. And it is one that although there are 
some indications that the circumstances of improving and 
getting better, there are also some underlying circumstances 
that indicate that there is a very strong likelihood that the 
situations not only will not continue to get better, but they 
may, in fact, get a lot worse. And so all of those things are 
critically important to all of us and everybody across this 
country that we represent. And it is also very important for 
the fact that you have been appointed to this particular job. 
The Congress passed this position because we recognize how 
important it was for this kind of analysis. And we also 
recognize how effective you have been already and how effective 
you will continue to be. I just want to keep this very short 
and thank you for everything that you have done.
    Chair Maloney. Thank you, Mr. Brady is recognized for 5 
minutes.
    Representative Brady. Madam Chairwoman, with your 
permission why don't I just enter my remarks for the record?
    Chair Maloney. In the interest of time, thank you.
    [The prepared statement of Representative Brady appears in 
the Submissions for the Record on page 31.]
    Chair Maloney. Mr. Snyder is recognized for 5 minutes.
    Representative Snyder. I will follow Mr. Brady's lead and I 
look forward to hearing from Professor Warren.
    Chair Maloney. We are having trouble hearing from Professor 
Warren. They have fixed the sound. So now I would like to 
introduce Professor Elizabeth Warren. She is the Leo Gottlieb 
Professor of Law at Harvard University. She has written 8 books 
and more than 100 scholarly articles dealing with credit and 
economic stress. Her latest 2 books, The 2 Income Trap and All 
Your Worth were both on national best seller lists. She has 
been principal investigator on studies funded by the National 
Science Foundation and more than a dozen private foundations. 
Warren was the chief advisor to the National Bankruptcy Review 
Commission. She currently serves as a member of the Commission 
on Economic Inclusion established by the FDIC. She also serves 
on the steering committee of the Tobin Project and the National 
Bankruptcy Conference. Thank you so much for your work and we 
look so much forward to your testimony.
    Professor Warren. Thank you.
    Chair Maloney. Excuse me, they are saying we need to break 
because the sound system is not working properly.
    Professor Warren. All right.
    Chair Maloney. And we want to make sure we can understand 
everything that you are saying today.
    Professor Warren. That is fine.
    Chair Maloney. Five-minute break for the sound system.
    [Whereupon, the Committee took a short recess.]
    Chair Maloney. Professor Warren is recognized for as much 
time as she may consume.

 STATEMENT OF PROFESSOR ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Professor Warren. Thank you. Thank you Chairwoman Maloney, 
thank you Representative Brady, Representative Cummings, 
Representative Hinchey, Representative Snyder, I appreciate the 
invitation to be here today on behalf of the Congressional 
Oversight Panel and to be as helpful to you as I can.
    I should start by saying I am not scripted. So since I 
don't have a preapproved script, you should take my comments as 
my comments alone and not necessarily reflecting those of the 
panel. I will do my best to represent the reports, but 
otherwise you are hearing from me.
    I want to say about the Congressional Oversight Panel, we 
are the smallest of the oversight units here, particularly 
compared with the Special Inspector General. What we try to do 
is a fact-based analysis of the operations under the Troubled 
Asset Relief Program and the impact of that program. We are 
really trying hard to see what the effectiveness is and to make 
recommendations that might make it more effective.
    We return to the same themes that we started with our very 
first report about transparency, accountability and clarity 
throughout the system. And they appear again in the report that 
we issued today. So I thought I would start with just a brief 
overview of that report, and then very quickly a little dance 
through our earlier reports to remind you what they have been 
about and to be here then for whatever questions you might 
have.
    You may remember that back in early February Treasury and 
the Federal Reserve announced SCAP, yet another acronym, this 
time to assess the ability of the 19 largest bank holding 
companies to remain well capitalized, even under adverse 
circumstances. The results were reported just recently. And so 
for our June oversight report, we examined the stress test, we 
went back and took a hard look at the stress test. We have been 
working on it now for over a month since the program was 
initially announced. And here is sort of our headline findings. 
I know that you have had a chance it look at the report, but I 
want to make sure it is out there as part of our conversation. 
We looked first at the model for calculating the report, we 
looked at the economic assumptions in it. We looked at the 
question about replicability, how robust is this test. We 
looked at the limitations of the data that are used in this 
stress test and we make some recommendations going forward as 
to the transparency to the test and appropriate circumstances 
perhaps for repeating the stress test.
    So let me start by giving you I think some very good news 
about the stress test and that is it is always good to believe 
things that you are told, but it is also good to verify them 
independently. So we were very concerned about just the model 
of the stress test. You know, there is a lot of dispute in the 
economic world and academic world about how stress tests have 
been used and whether they have been very effective. So we 
asked two independent experts, Professor Eric Talley and 
Professor Johan Walden. People who are known internationally to 
take a look at the model that Treasury used and the way 
Treasury constructed its model and give us an idea of what they 
thought about it. And they came back and said it was a very 
conservative model, conservative meaning a dependable model, a 
good model for stress testing. They gave it a lot of support. 
We got a long and detailed report from them and we have put it 
into our report as part of appendix one and very much 
integrated it into our work. They identify limits from the 
stress test as we then do in our report.
    The first of them is the question about the worse case 
scenario. Part of the point of a stress test, as any family 
that sits around and runs a stress test, is trying to figure 
out what happens. You have to think what are your worst 
economic assumptions? That you will be laid off or your credit 
card interest rates may go up? You may be in default on your 
mortgage? What is it you need to worry about here? Well the 
stress test said for 2009 that the key economic assumptions 
under the worst case scenario would be an 8.9 percent 
unemployment rate. We are now at 9.4 percent for the month of 
May.
    Now, the projection made back in February seemed like a 
reasonable projection at the time; unemployment obviously rose 
more quickly than we had anticipated. The average for the year 
to this point counting the earlier months when it was lower is 
8.5 percent, which means we have not actually broken through 
the worst case scenario, but let's face it, the numbers are bad 
and they are headed in the wrong direction. So this is a real 
concern, the worst case scenario right here in 2009 is, in 
fact, not the worst case. We are going to see worse numbers 
than that.
    The second concern is the limited time horizon. Modeling is 
always tricky. It is like the weather the further out you try 
to go, the more possibility there is error, the more 
possibility you may not be accurate. On the other hand, 
particularly if you have reason to know there are things you 
should be concerned about in the future, you could ignore that 
future time only at your peril. The point of a stress test is 
to tell us about the financial health of these institutions and 
whether or not they will be able to survive going forward. Our 
concerns do not stop with December of 2010. But the stress test 
does, the period of time. That is particularly worrisome 
because of the state of the commercial real estate mortgages.
    They are on a longer period for when they will come up to 
be refinanced so that numbers--we were supplied numbers by 
representatives from Deutsche Bank, they are in our report on 
an annual basis--the numbers for 2011, 2012, 2013 were deeply 
worrisome. And the question about the adequacy of the capital 
reserve requirements looking at potential losses in the future, 
it really does say the stress test would be stronger and more 
meaningful if they reached across a longer period of time and 
dealt with this issue.
    The third problem that we are concerned about is the 
inability to replicate the tests. I am afraid I am going to 
expose once again my academic background, I do a lot of 
empirical work. One of the most important things that you want 
to do in any model is establish that it is robust. And what we 
mean by robust is just if something changed slightly, if you 
altered the time period a little bit, the GDP contraction or 
growth shifted just slightly, you get relatively similar 
results. Different results but in the same ball park. If you 
do, then you have a lot of confidence that the test is 
measuring something real, that is that it is robust.
    The problem is you can't rerun those tests unless you have 
enough details about them. And so we have pressed very hard on 
the Fed, who is, really the custodian of this test for more 
information, not about specific banks, but about the operation, 
how exactly, down at a gritty level, how these mathematical 
formulas work, how the pieces link into each other. We have not 
been able to get that information. And without that 
information, others, outsiders are not able to push on the 
stress test in the same way.
    And then finally we would be remiss if we failed to note, 
this is self reported information, it is not independently 
verified information, and it is overseen by the same regulators 
that we have had in place throughout the process, and this 
raises questions about confidence overall.
    So that brings us to our recommendations here. We recommend 
that the stress test should be repeated under more difficult 
economic circumstances and over a longer time period for 
obvious reasons, it is a way to test it to see how it works. We 
recommend the test should continue as long as the banks 
continue to hold large amounts of toxic assets. This is a risky 
situation and an appropriate time to repeat these tests. We 
recommend that banks be required to run internal stress tests 
between official reporting periods and share those results with 
their regulators.
    In other words, I want to make it clear here, while we have 
concerns about the stress test, we think there are ways to 
strengthen it and we embrace the stress test. We think that the 
stress test was a good move by Treasury and the Fed and that it 
has brought us important information indeed. As I push for more 
transparency because that is the second big category of 
recommendation, more transparency, more accountability in the 
system, Treasury should release more details of their 
methodology and the results and publicly track the status of 
the macroeconomic assumptions, this is just an important part 
of doing this.
    We want the analysts to be able to run these tests 
independently. I really want to put this on a spectrum though. 
We had trouble when we first started the Congressional 
Oversight Panel back in November, and in December that we had a 
Treasury Department that was not forthcoming with information. 
That has changed. The Treasury Department has been forthcoming. 
They have given us far more information. And I don't just mean 
the Congressional Oversight Panel, they have made available 
information under the stress test, an unprecedented amount of 
data. This is very unusual for the Federal Reserve to make the 
results of tests like this available other than simply to make 
announcements at the end as the FDIC does when an institution 
has been placed on a watch list or closed. We simply are asking 
for more. We think the tests were a good idea, but we would get 
more effectiveness from them if we had these changes, if we 
made them stronger.
    One last recommendation I want to mention here. We also 
want to point out that as much as we think capital adequacy 
reserves are important, the capital tests are important. It is 
important that banks should not be forced into 
counterproductive fire sales, which is when they sell under 
enormous pressure in order to try to raise enough cash. So we 
very much see the importance of flexibility in dealing with the 
institutions that are not able to meet the capital reserve 
requirements that are only close, and we want to repose some 
confidence with our regulators in this area. So those are the 
recommendations coming out of the June report, which was just 
issued this morning, hot off the presses.
    I will just give you a quick summary of our early reports 
just to remind you of the kind of things we have talked about 
and I am glad to talk about any of these reports. Our December 
and January reports pose 10 primary questions to the Treasury 
Department about their goals and their methods to stabilize the 
markets and to reduce foreclosures. I think it is fair to say 
that Secretary Paulson's answers were often non-responsive, 
that they were incomplete and in some cases elusive.
    Additional information on bank accountability, 
transparency, asset valuation, foreclosures and strategy must 
be provided. We have been pushing on that from the beginning.
    The February report evaluated the securities that Treasury 
had received in exchange for the infusion of cash under the 
initial healthy banks program, the capital infusion program and 
then ultimately the support for AIG, and whether or not what 
the taxpayer received in response was fairly valued. Secretary 
Paulson in his response to our inquiry about this in December 
responded by saying all of those transactions had taken place, 
in his words, at or near par, which means for every hundred 
dollars put in, that the American taxpayer received $100 worth 
of stock and warrants. We did an independent valuation and 
discovered that for every $100 put in on average, we received 
$66 in stock and warrants. So this was an important report on 
valuation.
    I should say that we were very much arguing in this report 
that had we known that we were creating these subsidies the 
program would likely have been structured differently from the 
beginning. There have not been additional infusions under that 
program since February.
    The third, the March report examined the foreclosure crisis 
with particular focus on the impediments to the mortgage 
mitigation and why it is we are not able to stop the 
foreclosure, and what we can do to help the foreclosure. This 
report came out only a few days after the administration's 
foreclosure mitigation program was announced. We had 
established some criteria for evaluating that and we talk in 
that report about some ways in which we think the 
administration program was good, but some ways in which it very 
much needed to be strengthened.
    In our April report, we highlighted the benefits and 
problems of basic approaches to dealing with financial 
institutions in trouble. We had experts in to talk with us 
about how Japan dealt with its banks when they were in 
financial crisis, experts from Sweden, we had someone who had 
been part of the RTC here in the United States when the savings 
and loans collapsed and someone who was a specialist on the 
Great Depression. That was in our hearing. In addition to that, 
we did lots of other studies about other times and other 
circumstances. We came away from that saying that successful 
efforts to deal with failing financial institutions had always 
been marked by transparency, assertiveness in dealing with the 
financial institutions demanding greater accountability from 
the financial institutions and clarity in the programs, what it 
is that the government was about and what it trying to do.
    Our May report, the last report before this one, considered 
the state of small business and consumer lending and whether 
the TALF program was well designed to attract new capital. We 
concluded that there are serious problems in the small business 
lending area. We thought it was a much more mixed picture in 
terms of consumer lending. With small business lending our 
conclusion was that the TALF program was not likely to make a 
big difference in the availability of credit for small and mid-
sized businesses. Once again, as I think has been the case with 
each of our reports, we concluded that increased transparency, 
accountability and a clearly delineated plan are what will be 
essential for getting us out of the economic crisis. That is a 
description of our current report and just a thumb novel our 
earlier reports. And I am glad to help if I can with any 
questions.
    [The prepared statement of Elizabeth Warren appears in the 
Submissions for the Record on page 32.]
    Chair Maloney. Thank you very much for your testimony, 
Professor Warren.
    One of your principle recommendations is to repeat the 
stress test so long as banks continue to hold large amounts of 
toxic assets. Yet the stress tests take bank accounting value 
as their starting point and explicitly avoid marking certain 
toxic assets to market. So my question to you is, do you think 
that an effort should be made to recognize the losses on these 
toxic assets.
    Professor Warren. Well, Congresswoman, you know, that is 
the ultimate and everything is related to everything. And if we 
don't have confidence in the books and what it is that the 
financial institutions hold out publicly to be their worth, 
what their assets are worth and what their liabilities are 
worth, it undermines not only confidence in the whole system, 
it really does mean that we are continuing to run risks. Mark 
to market is not the only way to develop some confidence in the 
value of the assets held by the financial institutions. But 
there is no doubt that any stress test and frankly any analysis 
of the current health of these financial institutions and how 
they trade on Wall Street depends on some confidence that these 
assets are correctly valued.
    So let me simply emphasize the importance of transparency, 
I will leave it to the accountants to continue to argue on the 
right way to get that. But to say without it we can not rebuild 
our financial system, we cannot build it on clouds. We have to 
build it on reality. And reality is what those assets are 
really worth.
    Chair Maloney. So do you think that bank lending will be 
affected if they continue to carry the unrecognized losses on 
their books?
    Professor Warren. Well, to the extent that every time the 
banks raise capital they are concerned about these losses and 
they hold that capital against the future losses, they hold it 
in reserve, those are dollars that are not available for 
lending. It is just that straightforward. If the banks are not 
in a stronger financial position, they will not lend.
    Chair Maloney. Risk at some banks were hidden in off 
balance sheet vehicles, only to be brought back on to bank 
balance sheets as these vehicles experienced losses. Do you 
think the stress tests have been successful in identifying 
where off balance sheet problems my arise over the next 2 
years?
    Professor Warren. Well, I want to say something 
complimentary here. The good news is the stress test was 
designed to bring the off balance sheet vehicles back and 
include them. I think that the stress test, without that would 
have been a non starter if we are going to continue to hide 
risks off the balance sheet. So that is the good news, they 
were brought back in. I hope that everything has been included, 
but I have to say, these are self-reported numbers. I have no 
personal access and my panel has no access to any additional 
information or any data, that is just outside what we are able 
to see.
    Chair Maloney. And today it has been announced that major 
institutions will be repaying their TARP money, that they are 
capitalized and ready to repay the government. How will the 
repaid TARP money be used? Will it be recycled in new lending 
or will it go back to the Treasury? What will be the use of 
this returned TARP money?
    Professor Warren. I believe based on what Secretary 
Geithner has said that the money will be held at least to be 
available to be re-spent. I think that the statute is at best 
ambiguous on whether this money can be recycled or whether this 
money must be returned to /the Treasury. And given the 
ambiguity, the Treasury Department certainly at least has 
grounds for interpreting it the way they want to interpret it. 
So I think that is what they are going to do with the money 
unless Congress tells them something differently.
    Chair Maloney. Thank you. My time has expired. Mr. Brady is 
recognized for 5 minutes.
    Representative Brady. Thank you, Madam Chairman. Professor 
Warren recently Neil Barofsky, the Special Inspector General 
for the bailout dollars issued a disturbing report that it 
identifies many key weaknesses in the design and implementation 
of government bailout. He made several recommendations and 
called on the Treasury Department to adopt them: that all the 
TARP recipients simply to account for the use of their TARP 
funds; that they set up internal controls to comply with such 
accounting; and report periodically to Treasury on the results 
with appropriate sworn certifications. Do you support those 
recommendations?
    Professor Warren. Yes, Congressman, I do. Although I really 
want to point out much of this falls on the smaller financial 
institutions and very responsible financial institutions whose 
horses never left the barn and that the problem we have is that 
we are doing this 6 months after the fact. If we had set this 
program up last October to say you only get the money when you 
describe in advance what you plan to do with it and give us 
metrics for how we will measure that, we would be in a very 
different position today. Today we are in the position of 
asking after the fact how did you spend the money that you 
received. And quite frankly given the fungibility of money that 
is a pretty tough one to have much accountability for.
    Representative Brady. I appreciate that, but it seems to me 
the American public it was not like we lent the bank $5 and 
said keep track of it. We lent them billions of dollars with 
the understanding they would be used in key ways. It seems to 
me banks and financial institutions that can track your credit 
card to the dime, anywhere in the world, can track these 
dollars at any point they wish. It seems to me odd to have the 
Congressional Oversight Panel, which is supposed to be our eyes 
and ears, not joining in every call to make sure these dollars 
are used transparently and with clarity.
    I also question just how effective the panel has been. Over 
the past 6 months of your existence, how many hearings have you 
held with the Treasury Department as a witness? I understand it 
is only one.
    Professor Warren. We have had--we have been able to get 
Secretary Geithner in to testify once. We asked Secretary 
Paulson repeatedly. We have asked Secretary Geithner 
repeatedly. I remind you that Congress did not give us subpoena 
power. We only have the capacity to invite.
    Representative Brady. So you asked Secretary Paulson in the 
first month of the panel's existence?
    Professor Warren. Well, I believe we asked him repeatedly. 
We asked him in our first month and second month and third 
month.
    Representative Brady. So you have had one hearing with 
someone from Treasury who is running and implementing Treasury 
of the TARP.
    Professor Warren. We have----
    Representative Brady. My understanding is once. And then 
how many hearings have you had recipients of the TARP funds?
    Professor Warren [continuing]. Well, we have had various 
field hearings where we've----
    Representative Brady. Just abnormal congressional hearing 
with them as witnesses.
    Professor Warren [continuing]. Right.
    Representative Brady. To try to determine how they used the 
TARP funds, what was the effectiveness of it, all the things we 
tasked you to do.
    Professor Warren. Right. I believe that would be our 
Milwaukee hearing, and our Prince George's County hearing.
    Representative Brady. Excuse me, you had the major banks as 
witnesses at those hearings?
    Professor Warren. Actually I will say once again, we have 
invited the major financial institutions to come. Without 
subpoena we have no way to insist on that. Yes, we have had 
financial institutions and yes we have had TARP recipients, but 
we have not been able to get everyone that we invited. We do 
not have subpoena power, Congressman.
    Representative Brady. With all due respect, I do not know 
how this panel could be fulfilling its responsibility having 
one hearing with Treasury and the answer is none with the banks 
and financial institutions as witnesses. It just seems to me, 
we tasked you with a great deal of responsibility. And so far 
it has been--this is not a reflection on you, but it has been 
very disappointing. There has been very little value that the 
panel has brought to this issue or even insight on how these 
bailout dollars have been used.
    The information is, for the most part, been redundant 
except for the February report which I applaud. I think the 
panel failed to bring transparency and clarity to TARP, and I 
think the result is and exemplified by there being no public 
confidence in how the payout dollar is being used. There is no 
feeling that bailouts are being done transparently and 
accountability and there is no congressional support, which is 
why, again, I think they are going through extraordinary 
lengths to not ask for any more dollars because there is no 
more public support or congressional support for this.
    I frankly believe at this point given the reports that we 
have seen again with little value, that the panel needs to be 
abolished and reconstituted in a form that will actually create 
real insight, real analysis of a program that has only grown 
larger now that the repayment of the financial dollars begins 
to be a revolving slush fund for use of the original TARP 
dollars, Madam Chairman.
    Chair Maloney. I want to thank the gentleman for his 
statements and concern about transparency. And to welcome him 
to cosponsor with me a bill 1242, the TARP Accountability and 
Disclosure Act. And this bill would require the Secretary of 
the Treasury to create a centralized database for the existing 
financial report of TARP recipients enhancing our ability to 
better understand how these dollars are being spent.
    As the professor pointed out, she has no subpoena power. So 
if she requests this information, it is not necessarily coming 
forward. But this is this is an opportunity for us to require 
by law that this information be made available for Members of 
Congress on both sides of the aisle and for others to study and 
to understand. So I think this would be a step in the right 
direction, and I would also like to invite Professor Warren to 
look at this legislation and get back to us with your 
recommendations on how we might move forward with it.
    Representative Brady. Madam Chairman, if I may, I would 
support that.
    Chair Maloney. Great.
    Representative Brady. I did just hear the professor say it 
is too late to hold those institutions accountable for the 
dollars, that is a burden on smaller institutions, I think that 
is a great approach.
    Chair Maloney. I think it is important to understand what 
happened so that we have better policy going forward and 
possibly the Research and Accountability Disclosure Act could 
be expanded to other information in the financial system so 
that we could possibly better prevent such actions in the 
future. I welcome your support. Thank you so very much. Mr. 
Cummings.
    Representative Cummings. I join you too, Madam Chair, I 
agree. The last thing I want to do is abolish oversight, that 
is the thing we need most and the American people watching 
this, I hope that they understand that this Congress is 
concerned about oversight. And I can understand Mr. Brady's 
point, effective and efficient oversight. But the fact is we 
have got to make sure that we do what needs to be done. And on 
that note, Professor Warren, I want to thank you for what you 
have done. I think you have done an outstanding job. I 
understand that there are certain limitations, but I want to go 
to something else. You talked a little bit about foreclosures, 
I think that was in the March report.
    Professor Warren. Yes.
    Representative Cummings. This weekend something interesting 
happened in the 7th congressional district in Maryland 40 miles 
away from here. We held a foreclosure prevention meeting where 
1,000 people who were losing their homes came in to Morgan 
State University, I sponsored it. And an interesting thing 
happened, we were able to--I would venture to guess out of the 
1,000 people, we were able to help at least, say, 4 or 500 at 
least to modify their mortgages. They had an opportunity to 
literally sit down, professor, with 19 banks, or mortgage 
companies, service companies. And in doing my exit interviews, 
we discovered that the banks were reducing mortgage payments by 
anywhere between $300 per month and 1,100 per month.
    And I am trying to figure out, you know, in talking to the 
banking people, I was a little bit surprised that they were so 
anxious to make those modifications. To be frank with you, I 
was shocked, I thought we would help some people, but not that 
many. And I am just wondering, in light of that kind of thing 
we are going to do it again in another 3 months, because we 
have to help people stay in their homes.
    Is there a new approach with these kinds of things? Have 
you seen anything from, say, these mortgage lending folks 
whereby as to how they deal with these kinds of--when they 
modify a loan, whether they are dealing with that in a 
different way on their books? Are you following me?
    Professor Warren. I think so, Congressman. And the answer 
is, this is one where we kept thinking the mortgage 
modifications would occur because they made sense economically. 
Yeah, it hurts to take the hit, you are not going to get 
payment of $120,000 at 19 percent of interest over time, some 
of these crazy mortgages, that it was better to cut down, take 
less, but keep the homeowner in place. Good from the homeowners 
point of view, but also for the mortgage company, a back to 
performing loan albeit a lower level, but a steady payment that 
is going to occur.
    We thought they would occur and frankly they just didn't in 
the numbers that we expected. And that is why the 
administration tried different claims. You may remember back 
earlier under the previous administration there were these 
voluntary plans. The key seems to be the sort of thing that you 
were doing and that is finding a way to get the homeowners and 
the mortgage lenders, somebody who really has the authority to 
make changes and get them in one place at one time.
    In the hearings we have held, the field hearings we have 
held about this, the research that we have done, over and over 
we hear about those who are trying to modify who can't get 
anybody on the phone.
    Representative Cummings. Right, right.
    Professor Warren. They can not get anybody to respond. 
Every time they call again, they have to start anew with 
someone. They get told one thing by one person and something 
else by someone different. This notion of bringing people 
together whether it is physically bringing them together or 
finding someone who can get them together on the telephone 
seems to be the most promising avenue that we have. So I 
applaud you on behalf of the 4 to 500 families who will be 
better off, the lenders who will be better off under these 
circumstances and hope that we can--we are looking for ways to 
scale that up and make sure it happens across the country.
    Representative Cummings. Let me ask you this: In light of 
the government's injection of billions of dollars in working 
capital and other assistance into the auto industry, should 
there have been a stress test run on Chrysler and GM?
    Professor Warren. It is an interesting question. Obviously, 
as part of this reorganization of these two entities, part of 
what confirmation of a Chapter 11 plan will entail is something 
called feasibility, that is this plan is going to work and this 
company is expected to survive going forward. In a case of 
large Chapter 11s, this is not because the government is 
involved, this is just in general. There are a lot of ways that 
that occurs, a lot of ways that those tests are conducted. And 
in effect, the industries, the companies and their creditors 
have been running variations on stress tests for a long time 
now with financially troubled institutions. I would be 
surprised if there is not some variation on it in the case of 
the auto companies.
    Representative Cummings. Thank you very much.
    Chair Maloney. Thank you very much. Congressman Burgess for 
5 minutes.
    Representative Burgess. I think, just based on the number 
of dollars that have gone to the automobile companies and GMAC, 
I think participating in the stress test is something we should 
do.
    Let me ask you this: Congressman Brady may have actually 
asked this already, so I apologize if my being late requires 
you to answer it twice, but it is so important that people need 
to hear it. Has your panel disclosed to the American people 
whether or not TARP is working?
    Professor Warren. Well, we can't disclose what isn't known. 
We have disclosed as much as we can. We have addressed this in 
our various reports. The Secretary of the Treasury says there 
are some positive indicators and there are some negative 
indicators still in the economy. And that is the best we can 
do. We can see changes, we try to document those and we try to 
point out where there continue to be weaknesses. This isn't 
resolved yet, Congressman, I am sorry, it is just not. We are 
still in mid crisis, and there are both up arrows and down 
arrows.
    Representative Burgess. Let me ask you this: We had the 
Special Inspector General here before this committee a few 
weeks ago. Special Inspector General Barofsky testified that 
there were almost 20 criminal investigations underway in 
connection with the TARP facility for the financial sector. And 
his report said that these investigations involved possible 
public corruption, corporate stock and tax fraud, insider 
trading and mortgage fraud. In an NPR interview, he stated that 
one of the probes involves bank officials who were allegedly 
cooking the books in order to qualify for TARP money. So is 
your committee aware of this issue and have you got any 
additional information about these?
    Professor Warren. We work very closely with the Special 
Inspector General. I should make clear if there was any 
misunderstanding when I spoke with Congressman Brady, we 
support the special Inspector General's efforts. We are very 
pleased the Special Inspector General has asked for the TARP 
recipients to account for the money they have received. I 
testified about this before and expressed our support. My only 
point is it is hard to do that after the fact--it is different 
from what it would have been if we had asked at the beginning 
in terms of being able to account for where the money has gone.
    But yes, we work with the Special Inspector General, we 
might meet with him on a weekly or more often basis. I was on 
the phone with him yesterday morning. So we are aware of their 
activities. We support their activities. And we try to 
coordinate with their activities and be helpful in all ways 
that we can.
    Representative Burgess. Is there any aspect of that that 
has been a surprise to you?
    Professor Warren. Well, it is always a surprise when in the 
sense of perhaps a better word would be disappointment when we 
discover that there are people who have abused public trust. 
But that is why we are here to do oversight, that is why we 
have a Special Inspector General, that is why we have a 
Congressional Oversight Panel. We are here to have, in effect, 
two functions, to call it out when we see it and as a result, 
to try to act as a deterrent so there will be less of it.
    Representative Burgess. Do you think you are better able to 
anticipate some of the problems that might occur in the future 
from what you have learned from past experiences?
    Professor Warren. Absolutely.
    Representative Burgess. And are you employing those 
procedures today?
    Professor Warren. We do and we change not just with every 
monthly report, we evolve. We are a small panel, we are a small 
group, and we adjust. You know, Treasury itself has changed 
over the past 7 months, the nature of the economic crisis has 
changed over the last 7 months. And we have changed both as we 
have learned and as new problems have presented themselves. We 
have tried to be as responsive as we can, and as nimble as we 
can to try to deal with the problems as they arise.
    Representative Burgess. In the brief time I have, remaining 
the issue of stock warrants has come of from time to time and 
the concern is some banks were forced to accept TARP funds and 
provide a stock warrants to the government and for these banks 
to buy back the warrants they would have to pay a price that 
actually would reflect a very high interest rate on funds held 
for only a few months. Regarding some of the banks allegedly 
did not need the funds in the first place, what do we do about 
this fact and the illiquidity of the warrants as these banks 
try to restore themselves to their pre TARP status?
    Professor Warren. Good. Let me just say as briefly as I can 
three things about this. The first one is the valuation of the 
warrants takes place in the shadow of our February valuation of 
the stock and warrant transactions for the initial infusion of 
$350 billion into the banks. I think that is important because 
it is a very public reminder to Treasury and to the financial 
institutions that there are ways to value this, there are 
valuation experts. And while there may be some differences, we 
can review these transactions and we have made it clear that we 
will review these transactions. So I think that is the first 
thing to remember about the warrants.
    The second thing I want to say is that this is the subject 
of our July report. We are already working on valuation over 
the warrants and some of the issues involved in that. And so we 
will have a report on that approximately 30 days from today.
    The third is to say you raise, however, in this the point 
that there is a larger issue than simply the dollars and the 
valuation of the warrant and that is the profound policy 
questions about the representations that were made at the 
beginning for the financial institutions as they entered this 
program and what is fair under the circumstances, as well as 
what is right for the economy.
    I hope that that is something we will also be able to 
address in our report, but I certainly see the issue, 
Congressman and I think that is the starting place for having a 
thoughtful conversation on it.
    Representative Burgess. If I may, what are some of the 
barriers to being able to do that?
    Professor Warren. I am sorry?
    Chair Maloney. The gentleman's time has expired but you may 
answer that very quickly.
    Professor Warren. I am sorry I don't understand the 
question.
    Representative Burgess. The barriers on your last point you 
said you do want to be able to evaluate those fairly, what are 
some of the barriers that might occur that would prevent that 
or make that more difficult?
    Professor Warren. There are five people on this panel and 
what issues they want to take on will depend, you have to have 
at least three people who want to talk about that set of 
issues. So I hope that this is an issue that we will be able to 
address, but I simply can't commit my fellow panelists on that.
    Chair Maloney. The gentleman's time has expired.
    Representative Burgess. I think that is important, I hope 
you will follow up. Thank you.
    Chair Maloney. Mr. Hinchey for 5 minutes.
    Representative Hinchey. Thank you very much, Madam 
Chairman. And Professor, thank you once again for everything 
you are doing, you are inspirational. And frankly, I wish that 
we had given you more power, including subpoena power because I 
think that you would have used that effectively in the context 
of the circumstances that you and we are dealing with. I think 
it is pretty clear that the economic circumstances that this 
country is facing, the dire circumstances, near-depression 
circumstances were caused by the manipulation of investment 
practices some years ago. The falsification of information and 
context of those investment practices.
    Now we have some continuing falsification of information, 
one which you cited specifically not long ago in the context of 
your remarks with regard to getting back 66 percent, rather 
than 100 percent of the money that is being put in. And also, 
the full accountability of $700 billion which was not issued by 
the Congress as a grant to anybody, to just use in whatever way 
they want and keep, but as a kind of a loan. A no interest 
loan, but a loan which was to be used to bail out the banking 
circumstances, but as the bailout occurred, the repay back of 
that money to the people of this country.
    So what do you think we should be doing in order to achieve 
those objectives? Do you think that we need some specific laws, 
and rules, and regulations put in? Do you think that it would 
be wise to give you some additional power to engage in the 
efforts that you are using?
    And also there is one other thing that I want to ask you in 
the context of this, and that is the repeal of the Glass-
Steagall Act, was one of the main reasons why we had this 
manipulation of investments and the lack of accountability. I 
know that that Glass-Steagall Act had been manipulated prior to 
its elimination back in 1999, but the elimination of that 
Glass-Steagall Act was intentional, and purposeful, and it was 
designed to allow the manipulation of these investment 
practices to go forward and more aggressive in completely 
unaccountable ways.
    So I would appreciate it, I know you probably thought about 
it, should we be putting back into effect a modern version of 
Glass-Steagall Act, which would cause the separation of 
investment and openness of investment and honesty of investment 
and accountability?
    Professor Warren. So, Congressman, let me see if I can do 
all three of these questions; very thoughtful. The first one, 
it is obvious. If you want us to do more work, we are your 
congressional oversight panel. We are here at your pleasure. 
And if you want us to do more work through hearings, and you 
want us to be able to have more Treasury officials appear in 
front of us, Federal Reserve officials appear in front of us, 
bankers appear in front of us, we can't do that without 
subpoena power. This is how you have designed your panel.
    On the other hand, I should say there is still plenty we 
can do even without our subpoena power. We were able to write a 
report that exposed misrepresentation about the value of 
transactions that were occurring under TARP, and I think that 
has been very valuable. We have also been able to evaluate and 
deal with other parts of the program. And there have been real 
changes at Treasury. Treasury is not operating in the same way 
it was operating before. So I think there is a real effect out 
there.
    Let me turn to your question about Glass-Steagall. I want 
to make a point about Glass-Steagall. In my view, Glass-
Steagall was about systemic risk regulation. They just didn't 
use the fancy words back then. But the real point was to say 
they understood after the Depression--or in the Depression, 
that we had gone through these boom-and-bust cycles every 10 to 
15 years, and that the banks were part of it. The banks were 
big risk takers. They got out there and they rolled the dice. 
And as long as they made money, their investors got rich. And 
when they went down, they took everyone down with them. They 
took down all their depositors, and they also took down a lot 
of local communities when they did it.
    The basic understanding behind Glass-Steagall was, look, we 
can't keep doing that. That is not going to work for us. You 
really do not just hurt yourself. You are not like the one 
little business, the hardware store that goes out of business, 
or even the manufacturer that goes out of business. You are 
taking a lot down with you when you do this as a financial 
institution.
    So the premise behind Glass-Steagall was we will create 
this wall, and, frankly, we will have boring banks. We will 
have banks that are run very much like public utilities. They 
will make only modest profits, but they will be absolutely 
rock-solid secure. And the risk-taking will be taken somewhere 
else where we don't have to worry about it. So if the fancy 
investment houses want to go out and take those risks, that is 
fine, but they won't take anyone down but themselves.
    Of course, what happened is not only did we find our--not 
we--did the financial institutions find ways to get around 
Glass-Steagall, and we weakened Glass-Steagall, the markets 
matured, they changed, so that dividing along a bank-nonbank 
line, as we had in Glass-Steagall, we believe now is not the 
most effective way to do it.
    Every time we talk now about systemic risk regulation, we 
are addressing precisely the same question that was addressed 
during the Depression: How do we find a way to have a certain 
kind of financial institution that can hold deposits, that can 
be safe, that can be secure, that we can put our paychecks in, 
that we can write checks on and know that money can be 
transmitted across the country or around the world, and how do 
we separate that from something that is risky and, frankly, 
either can be allowed to fail without any government 
intervention and without having taxpayer involvement? How can 
we accomplish that? And there is a lot of conversation around 
that right now.
    We have some recommendations in our own regulatory reform 
report, which I erroneously omitted in going through our 
monthly reports. We also did a regulatory reform report at your 
request.
    So I think that is the issue, Congressman. It is systemic 
risk regulation, for which Glass-Steagall had kept us safe for 
more than 50 years. In a changed world we are going to have to 
have a new version of it
    Chair Maloney. Thank you very, very much.
    Congressman Snyder.
    Representative Snyder. Thank you, Madam Chair.
    Professor Warren, I need to make a comment. As you know, my 
wife and I have 6-month-old, today, triplet boys, plus a 3-
year-old. And 3 months ago my wife went on leave from her job 
as a Methodist minister, which meant we went from being a two-
income family to a one-income family. I tell you what; your 
book made a whole lot more sense to me the last couple of 
months. I appreciate all the work you have done on the 
financial pressures on American families.
    I wanted to ask, on page 36 of the report you say, ``The 
most direct way for a BHC to increase its capital base is to 
earn net income from its normal banking business and add that 
income to its capital accounts.'' And then the report goes on 
to say, ``They are not going to be able to earn their way out 
of it as you look ahead.''
    My question is: Can the opposite occur? By that, I mean I 
am not sure what normal banking business is, frankly, anymore. 
It seems to me that sometimes normal banking business is almost 
predatory, as you see computer programs that are designed to 
prioritize the processing of debits and checks in such a way 
that it will drive people into more overdrafts, which is 
essentially loaning money at exorbitant rates. You know what I 
am talking about.
    The Chairwoman here has done wonderful work on dealing with 
credit cards, and we hope--I think there is clearly predatory 
behavior there. I think Congress is very interested in looking 
at what we consider normal banking business now compared to 
perhaps what it was in the past and what it ought to be.
    Can we go the other way in which we would lower the income 
of banks in such a way as we get rid of some of these predatory 
practices that could put some in jeopardy, too, as they have 
been putting too much of their business income from things that 
they ought to really not be doing?
    Professor Warren. We talk a lot about the transformation of 
the banking world and the investment world from the Wall Street 
perspective, but the real transformation has occurred at the 
household level. Consumer lending just does not look like it 
did 30 years ago. The whole business model has changed.
    You know, the notion that we carry in our heads that some 
lender looked at you and evaluated whether or not you would be 
able to repay this, added a little bit on an interest rate for 
risk and is making money by screening customers, it simply 
isn't true anymore. We have shifted over to a model where those 
who sell these financial instruments--let us just take credit 
cards, for example--will identify two or three main things that 
you can see: the nominal interest rate, which is often not the 
true cost; the free gift; and the warm and fuzzy relationship 
with the financial institution. And then the business model is 
to pump up revenues and profits with all the things hidden in 
the fine print.
    According to the Wall Street Journal, the typical credit 
card contract, just to focus there, has gone from a page and a 
half long in 1980 to more than 30 pages today. And that extra 
30 pages is not put there to help families.
    So I think it is important in this crisis because you 
really get down to the heart of what it means to have a working 
financial system.
    The way I see this, this problem started one household at a 
time; one lousy mortgage, one overwrought credit card, one bad 
loan at a time down at the household level. So much was 
promised in the way of profits that those loans were 
aggregated. They were then put into trusts. They were then sold 
on up the loan so that the riskiness at the household level 
became magnified across the American economy and ultimately 
throughout the world economy.
    If we go back to a world where the basic consumer financial 
products are just steady, and they are just plain vanilla, they 
are ones that have a level playing field. Nobody should be 
protected from making mistakes. You go to the mall and spend 
$2,000 that you really can't afford, you should have to pay 
that. If you buy a house with five bedrooms and a spa bath that 
you really can't afford, you really should have to pay for that 
or lose that house.
    But ordinary people who have done ordinary transactions 
deserve just some ordinary instruments to be able to do that. 
If that is the case, that will not only help us at the family 
level, it will completely reform what our financial 
institutions look like and ultimately give us a far more secure 
financial system.
    Representative Snyder. In the short run, a bank who has 
been making their income off of taking advantage of families, 
they may hurt in the short run, but in the long run, we as a 
country, our economy and our whole credit markets will come out 
better.
    Professor Warren. Absolutely, Congressman Snyder. I can't 
say it better than that because that is the answer.
    Representative Snyder. Thank you.
    Thank you, Madam Chair.
    Chair Maloney. Senator Klobuchar.
    Senator Klobuchar. Madam Chairman, thank you for holding 
this hearing today. Thank you for your leadership.
    And thank you, Ms. Warren, for what you are doing.
    I have always believed that we need to restore stability in 
our financial markets, and you have been a leader with that. 
And to do that, we have to get the best possible results for 
the American taxpayers at the lowest cost, and, to me, this 
means transparency and accountability. And that is your focus.
    I believe when you look at the past, previous to this 
administration, there was not that kind of accountability and 
transparency. We did not have that. And while there is a lot of 
criticisms we can lob now--and we are in a transition period--
when you look at what got us into this mess in the first place, 
loopholes that were allowed to be open, and there is blame on 
both sides for that; the leverage that the SEC allowed back in 
I think it was 2004; and just a bunch of things that went 
wrong, from Bernie Madoff on, that shouldn't have happened. And 
so that is why I appreciate what you are trying to do here. In 
a way, you are starting from scratch.
    We are trying to get here, instead of a short-term view of 
our economy and our business markets, we are trying to get a 
long-term view on trying to encourage responsible behavior.
    So I wanted to first start with these stress tests. I can 
say that the announcement of them caused a lot of stress in our 
State. We have a lot of banks. In the end, I think they fared 
well and worked hard. And we also have some small community 
banks that are doing well.
    Do you foresee a need to continue to do these stress tests? 
At the time when they were first announced, I was very 
concerned that the stress tests themselves had an effect on the 
stocks of banks that actually hadn't gotten into messes because 
people were fearful that all the banks were going to be 
nationalized, and there was all that kind of talk. I think it 
has evened out now with the results of these stress tests, with 
the fact that some of the capital has been raised. But could 
you talk about that in terms of going forward?
    Number one, do you see this as a good sign that--I think it 
was the estimates are how much money, the billions of dollars 
that have been raised since the announcement of a stress test 
II. How do you see them working going forward?
    Professor Warren. Yes. We embrace the stress test, Senator. 
I know they made everyone nervous at the beginning, but the 
consequence ultimately was to put more information into the 
marketplace, information that had more reliability than the 
rumors that were circulating. As you said, when everyone is 
worried that, oh, my gosh, all the banks may fail; they may all 
be nationalized; they may have a terrible crisis, this has a 
terrible effect not just on a market, but across the country. 
What financial institutions are going to lend to small 
businesses under those circumstances? What medium-sized 
businesses are going to expand their inventories if they think 
that is where the economy is headed?
    Poor information puts us in a position of trading in scare 
rumors. So I am a strong believer that the more information we 
can get out there, and the more reliable that information is, 
there will be some bumps at the beginning, but not only will 
there be readjustment, we begin to rebuild on a solid 
foundation.
    So, my view, and I believe our panel's view, on stress test 
unanimously here is, yes, we like them. We think they could be 
stronger, and we think they should be used in more ways and 
more often.
    Senator Klobuchar. Okay. One of the other things that you 
have talked about before is this idea of systemic risk; how a 
few actors can do some bad things, and suddenly the whole 
system starts going under. So we are looking right now at 
reforms for regulating the market, and we want to do it in a 
prudent way, and we want to do it quickly. What do you think we 
should be doing?
    Professor Warren. Well, I am going to start with how to 
frame the issue, because that is the one that concerns me the 
most. The really tricky part in this one is to identify what it 
is that puts us at risk. Is it size, is it concentration, is it 
the kind of industry you work in?
    We have had big companies fail. Enron failed. It was huge. 
Worldcom failed. It was huge. And those businesses were 
liquidated, and they were liquidated in a very short period of 
time. Very serious consequences, for example, in the case of 
Enron, on employees who were laid off. I am not saying it is 
not done without pain. But I don't know if you know this: Enron 
was making the argument shortly before it was forced into 
bankruptcy that it would cause systemic failure; that it was 
out there in the power industry; that it was such an important 
player in that industry. And, of course, that wasn't true at 
all. We said, this is the problem. This is where you are 
financially. And we are going to have to liquidate you.
    So what I want to emphasize here is the importance as we 
look at it about identifying what the risk is before we just 
head off and say, okay, so if there is going to be--make sure 
we know what the problem is before we go to the solution.
    And, if I could--I know I am over your time--but if I could 
work in one other point, and that is to go back to where you 
started just now, and that is at the household level, at the 
family level. We not only increased risk for large institutions 
and for our biggest banks, we did it for American households. 
American households now stand at owing 130 percent of their 
annual income in total debt. That is a staggering number. We 
have been hitting numbers that are unprecedented. We have never 
even been close to these numbers at any point in our history.
    When we reform financial products and put some basic safety 
in so that families are themselves more economically stable, 
and we are not introducing into the stream of financial 
commerce these high-risk, high-profit instruments, we turn the 
risk down in the system overall, and, frankly, we can deal with 
systemic risk with a lighter touch.
    Those who are worried about the heavy hand of government on 
systemic risk at the back end would be well to observe that 
modest changes at the front end could mean that we require less 
intervention and less supervision overall. If we make this 
system solid from the beginning, it will be solid throughout.
    Senator Klobuchar. Thank you very much. I am looking 
forward to learning more about--I know the proposal for a 
financial commission to help consumers with these products. I 
think it is a very interesting idea.
    Thank you.
    Professor Warren. Thank you, Senator.
    Chair Maloney. I want to thank you, Professor Warren, for 
your extraordinary leadership. You are truly a star.
    We have many competing hearings taking place on financial 
regulation, health care reform, and energy. We are going to be 
presenting our additional questions to you in writing.
    We thank you for your time, your dedication, your 
commitment to public service, and your really incredible 
influence that you have had on financial reform.
    Thank you very much.
    Professor Warren. Thank you.
    Representative Burgess. Madam Chairman, may I ask unanimous 
consent that my opening statement be inserted in the record?
    Chair Maloney. Absolutely.
    [The prepared statement of Representative Burgess appears 
in the Submissions for the Record on page 35.]
    Chair Maloney. I would like to say that everyone has an 
opportunity to submit their questions.
    The meeting is adjourned.
    [Whereupon, at 11:25 a.m., the joint committee was 
adjourned.]
                       SUBMISSIONS FOR THE RECORD

     Prepared Statement of Representative Carolyn B. Maloney, Chair
    Good morning. I want to welcome Prof. Warren, the Chair of the 
Congressional Oversight Panel (COP) for the Troubled Asset Relief 
Program (TARP), and thank you for testifying today on the COP's new 
report to Congress, just released this morning.
    This is the third in a series of hearings this committee has held 
to examine the degree to which the Troubled Asset Relief Program has 
succeeded in its goals. The COP's June report examines the results of 
the government ``stress tests,'' which were designed to evaluate the 
balance sheets of financial institutions and provides recommendations 
for further actions.
    The results of the stress tests conducted by the Federal Reserve 
have gone a long way toward restoring market confidence.
    Huge losses shook confidence in the banking system, because it was 
not clear that some of our largest banks would remain solvent.
    The Federal Reserve, Treasury and FDIC have taken steps to provide 
the banks with liquidity for those assets where the market had 
evaporated, guarantees for their debt issuances, and capital 
injections.
    Despite these substantial efforts, concerns remain that a deepening 
recession could threaten the solvency of some banks and amplify the 
financial crisis.
    Confidence is in large measure determined by the current and future 
state of bank balance sheets, so it's important that investors and 
counterparties have a clear picture of whether banks have the capital 
to weather the current downturn.
    It is welcome news that the Obama Administration is set to announce 
that some of the nation's largest banks will soon be able to repay 
billions of TARP funds.
    However, the Federal Reserve has reportedly imposed additional 
requirements on banks that propose to repay capital they received under 
TARP. Since the stress tests were intended to estimate the necessary 
capital needed to be raised by bank holding companies, this raises an 
important question about what the stress tests assumed about repayment 
of TARP funds.
    Moreover, some banks appear reluctant to perform their normal roles 
as providers of credit.
    I was honored to testify before the COP's recent field hearing in 
New York City examining problems in commercial real estate.
    I am very concerned about the ticking time bomb we face in 
commercial real estate lending. An estimated $400 billion in commercial 
real estate debt is set to mature this year with another $300 billion 
due in 2010.
    If commercial real estate developers are unable to refinance or 
otherwise pay those large balloon payments, we could expect to see the 
default rate on commercial mortgages climb much higher.
    That in turn would translate into potentially crippling bank losses 
that our recovering financial system is still too fragile to withstand, 
even with the news that banks have raised or announced some $50 billion 
in new private capital since the release of the stress test results.
    This looming crisis in commercial real estate lending could lead to 
an all-too-familiar predicament, where banks suffer significant losses, 
major owners of hotels and shopping centers are forced into bankruptcy, 
foreclosed properties push commercial real estate prices further 
downward, and a perfect storm of all these forces combine to inhibit 
our economic recovery.
    The testimony we will hear today points out that transparency and 
accountability are critical in a crisis such as this.
    To increase transparency and to help restore confidence in our 
financial institutions, I have introduced H.R. 1242, the TARP 
Accountability and Disclosure Act.
    This legislation would require the Secretary of Treasury to create 
a centralized database for the existing financial report of TARP 
recipients, enhancing our ability to better determine how these funds 
are being used in a near real-time basis.
    I am interested to hear your thoughts about how this bill would 
help you do your job to help safeguard taxpayer dollars, and whether 
additional transparency measures are needed.
    Prof. Warren, I am also very interested in your views about the 
extent to which TARP is accomplishing its overall mission of restoring 
financial stability, reinvigorating markets, increasing the flow and 
availability of credit, and reducing foreclosures.
    I look forward to your testimony. 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
Responses Given by Professor Elizabeth Warren to Questions Submitted by 
                   Representative Elijah E. Cummings
 1. Treasury's cooperation has improved greatly since the Panel first 
        began its work in late 2008. Treasury officials have testified 
        before the Panel on nine different occasions, and Secretary 
        Geithner is scheduled to testify again before the Panel in late 
        June.

        Overall, the federal regulatory bodies have cooperated with our 
        efforts. In the 19 public hearings we have held, we have heard 
        testimony from a number of regulatory bodies, including the 
        Board of Governors of the Federal Reserve, the Federal Reserve 
        Bank of New York, the Federal Deposit Insurance Corporation 
        (FDIC), and the Government Accountability Office (GAO). We also 
        communicate with SIGTARP and GAO on a regular basis and 
        coordinate our efforts to provide for more effective oversight.

        In addition to holding hearings in Washington, D.C., the Panel 
        also travels to areas of the country that have been hard hit by 
        the financial crisis and hears the perspectives of state and 
        local regulatory officials. The Panel recently traveled to 
        Arizona to hear from small businesses about their ability to 
        access credit. Oversight of this topic is a crucial role of our 
        panel, as Secretary Geithner recently designated small business 
        credit as one of the primary focuses of TARP. We heard 
        testimony from the FDIC regional director, the Small Business 
        Administration district director, owners of local small 
        businesses, and officials from two of the state's largest 
        locally-based small business lenders. All were very cooperative 
        and helpful in the Panel's efforts in collecting data and input 
        for our upcoming May report on small business lending.

2a. Markets function best when investors have access to reliable and 
        accurate information. As you note, investors responded 
        positively to the stress tests as the share prices of many 
        banks went up. While it is difficult to predict how investors 
        would respond to repeated stress tests, providing investors, 
        and taxpayers for that matter, with reliable and accurate 
        information as to the health of a financial institution should 
        be more of a concern than the effect such information could 
        have on the institution's stock price. Treasury made its first 
        infusions of TARP capital less than two years ago and investors 
        must have access to the best information available in order to 
        restore confidence to our financial markets. I would have more 
        concerns if the stress tests were not repeated.

        It is also important to realize that although the 2009 stress 
        tests provided valuable information on America's 19 largest 
        bank holding companies, many smaller banks continue to face 
        financial strain and have never been subjected to stress 
        testing. In particular, troubled commercial real estate assets 
        are a serious concern for many smaller institutions. Regulators 
        should extend the stress tests in some form to these banks as 
        well.

2b. I have said repeatedly the public should have access to greater 
        detail about the stress tests, including the inputs and models 
        used and the results found under a variety of economic 
        assumptions. Transparency and accountability will help to 
        restore market functions and earn the confidence of the 
        American people.

3a. Unemployment remains a national concern. In each of the first three 
        months of 2010, the unemployment rate has been 9.7 percent. The 
        unemployment rate assumed for all of 2010 under the stress 
        tests' ``more adverse'' scenario was 10.3 percent. Forecasting 
        is a difficult game. It is impossible to predict with exact 
        certainty what the actual unemployment rate will be for 2010, 
        however, given that many small- and medium-sized banks are 
        suffering severe commercial real estate losses this year, 
        Treasury and the Federal Reserve should consider re-employing 
        the tests with more rigorous assumptions, including a higher 
        unemployment rate than was assumed under the ``more adverse'' 
        economic scenario.

3b. Yes. As you noted, commercial real estate is a serious concern that 
        could undermine an already weakened financial system. It would 
        be very beneficial to run the tests out for three to four years 
        and to incorporate variables such as changes to the commercial 
        real estate market.

4.  Yes, such tests would be useful. The more rigorous the stress test, 
        the better the understanding that regulators will have on the 
        resiliency of financial institutions in different economic 
        scenarios.

5.  As I noted above, the Panel has expressed serious concerns that 
        only 19 bank holding companies have undergone stress testing. 
        America is home to thousands of small- and medium-sized banks 
        that play a critical role in the financial system, most 
        especially in the small business and commercial real estate 
        markets. The Panel recognizes that it may not be possible to 
        stress test every bank in the country and that the stress tests 
        may need to be modified to account for the differences between 
        a large Wall Street bank and a small community bank. Even so, a 
        stress test that considers only 19 banks cannot possibly 
        provide a complete picture of the American financial system.
                               __________
    Prepared Statement of Representative Kevin Brady, Senior House 
                               Republican
    It is a pleasure to join in welcoming Chairwoman Warren before the 
Committee this morning.
    With nearly $3 trillion at risk and the lack of transparency that 
veils the Troubled Asset Relief Program (TARP) and its costs, we need 
as much oversight as possible to protect the taxpayers. The stress 
tests of the 19 largest banks did appear to clarify a number of issues 
with respect to their financial position, even if some aspects of the 
stress tests raise questions.
    For example, some of the economic assumptions used in the stress 
tests are not very severe, even under the adverse scenario presented. 
The assumption of an unemployment rate of 8.9 percent in 2009 and 10.3 
percent in 2010 is not pessimistic, but instead appears to be fairly 
optimistic given that the unemployment rate has already reached 9.4 
percent and is expected to go significantly higher. The stress tests' 
application of relatively high potential losses on loans and securities 
investments does offset the insufficiently adverse economic assumptions 
to some extent.
    Given the huge amounts of money and credit injected into the 
economy by the Federal Reserve, it is reasonable to expect some 
economic recovery by next year. However, the unprecedented size and 
scope of the actions undertaken by the federal government to deal with 
the financial crisis do pose risks to the government's financial health 
and to a sustained economic recovery.
    For instance, huge federal deficits and mounting debt under 
Administration policies will continue into the foreseeable future, 
undermining the financial position of the U.S. government. As the 
Financial Times noted of a recent U.S. Treasury auction, ``the issue of 
bond supply came into sharp focus . . . as the Treasury auctioned $101 
billion of new notes--part of an expected $2,000 billion of new 
issuance in the financial year to fund the U.S. budget deficit.'' The 
article goes on to discuss how the ``surge in yields also sent the 
fixed U.S. 30-year mortgage rate above 5 percent--prompting speculation 
that the Fed might increase its Treasury buy-backs.''
    As the OECD has noted, governments worldwide are projected to issue 
about $12 trillion in debt this year, adding to upward pressure on 
interest rates. The very real threat that these massive government 
debts may be monetized raises the specter of future inflation and 
increases the potential for long-term interest rates to move even 
higher. Higher long-term interest rates are already increasing mortgage 
rates and making home refinancing and home purchases more expensive and 
difficult. The danger is that the government's fiscal irresponsibility 
will force up interest rates and undermine the prospects for economic 
recovery, a recovery on which a return to financial stability depends. 
If higher interest rates further depress the housing market and 
mortgage investments, losses on mortgage loans and investments will 
only worsen, raising the cost of TARP.
    Deterioration in financial conditions would increase the costs of 
TARP, but there are other potential costs of this program that result 
from its faulty design. Recently, Neil Barofsky, Special Inspector 
General of TARP (SIGTARP), issued a disturbing report that identifies 
many key weaknesses in the design and implementation of the government 
bailouts that could greatly increase their cost. For example, according 
to the report, the Treasury Department has ``indicated that it will not 
adopt SIGTARP's recommendations that all TARP recipients account for 
the use of TARP funds; set up internal controls to comply with such 
accounting; and report periodically to Treasury on the results, with 
appropriate sworn certifications.''
    Regarding the Public-Private Investment Program (PPIP) unveiled by 
Secretary Geithner, the SIGTARP report notes, ``Many aspects of PPIP 
could make it inherently vulnerable to fraud, waste, and abuse.'' 
Vulnerabilities include the huge size of the program along with 
conflicts of interest, collusion, and money laundering. With regard to 
money laundering, the report notes that it would be unacceptable if 
TARP or related funds ``were used to leverage the profits of drug 
cartels or organized crime groups.'' With regard to another component 
of the bailouts, the report said, ``Treasury should require additional 
anti-fraud and credit protection provisions specific to all MBS, before 
participating in an expanded TALF, including minimum underwriting 
standards and other fraud prevention measures.''
    I have repeatedly called on Secretary Geithner to adopt these 
SIGTARP recommendations to protect the trillions of taxpayer dollars at 
risk in TARP. The question remains: Why does the Treasury refuse to 
adopt these recommendations to prevent waste, fraud, and abuse in TARP? 
The government's extensive intervention in the economy has gone way too 
far even allowing for a financial crisis, but the least we can expect 
is that taxpayer money not be misappropriated or stolen. Treasury 
should act quickly to implement the SIGTARP recommendations.
                               __________
Prepared Statement of Professor Elizabeth Warren, Chair, Congressional 
                            Oversight Panel
    Thank you, Chairman Maloney, Vice Chairman Schumer, Ranking Member 
Brownback, Representative Brady, and members of the Joint Economic 
Committee for inviting me to testify regarding oversight of the 
Troubled Asset Relief Program (TARP). We share a desire to bring 
accountability and transparency to the TARP program, and I am pleased 
to assist your efforts in any way I can.
    From the outset I would like to stress that although I am Chair of 
the Congressional Oversight Panel, I do not have a pre-approved script. 
The views I express today are my own and do not necessarily represent 
those of each member of the panel.
    The Congressional Oversight Panel was created in last year's 
Emergency Economic Stabilization Act. 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. We have 
released seven oversight reports, as well as a special report on 
regulatory reform required by the legislation.
    The Oversight Panel is one of three organizations to which the TARP 
legislation gives oversight responsibilities. My staff and I work 
closely with GAO and the Special Inspector General to ensure that all 
our oversight efforts complement, not duplicate, one another. We all 
want to make the whole of our work greater than the sum of its parts.
    The Oversight Panel is the smallest of the three organizations. We 
see our contribution as fact-based analysis designed to raise issues 
about the operation and direction of the TARP and about the broader 
effort to restore stability to the economic system. In the Emergency 
Economic Stabilization Act, Congress specifically asked that the 
Oversight Panel conduct oversight on: the use of Treasury's authority 
under 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. If we believe the 
answer is no, we will ask ``why not,'' and try to suggest alternatives.
    Today marks the release of the Panel's seventh report, entitled 
``Stress Testing and Shoring Up Bank Capital,'' and I would like to 
begin by reviewing our report.
    Across the country, many American families have taken a hard look 
at their finances. They have considered how they would manage if the 
economy took a turn for the worse, if someone were laid off, if their 
homes plummeted in value, or if the retirement funds they had been 
counting on shrunk even more. If circumstances get worse, how would 
they make ends meet? These families have examined their resources to 
figure out if they could weather more difficult times--and what they 
could do now to be better prepared. In much the same spirit, federal 
banking regulators recently undertook ``stress tests'' to examine the 
ability of banks to ride out the financial storm, particularly if the 
economy gets worse.
    Treasury recognized the importance of understanding banks' ability 
to remain well capitalized if the recession proved worse than expected. 
Thus, Treasury and the Federal Reserve announced the Supervisory 
Capital Assessment Program (SCAP) to conduct reviews or ``stress 
tests'' of the nineteen largest bank holding companies. Together these 
nineteen companies hold two-thirds of domestic bank holding company 
assets. As described by Treasury, the program is intended to ensure the 
continued ability of U.S. financial institutions to lend to 
creditworthy borrowers in the event of a weaker-than-expected economic 
environment and larger-than-estimated losses.
    Understanding the recently completed stress tests helps shed light 
on the assumptions Treasury makes as it uses its authority under EESA. 
As Treasury uses the results of these tests to determine what 
additional assistance it might provide to financial institutions, the 
tests also help determine the effectiveness of the TARP in minimizing 
long-term costs to the taxpayers and maximizing taxpayer benefits, thus 
responding to another key mandate of the Panel.
    As part of their regular responsibilities, bank examiners determine 
whether the banks they supervise have adequate capital to see them 
through economic reversals. Typically, these bank supervisory 
examination results are kept strictly confidential. The stress tests 
built on the existing regulatory capital requirements, but because the 
stress tests were undertaken in order to restore confidence in the 
banking system, they included an unprecedented release of information.
    The stress tests were conducted using two scenarios: one test based 
upon a consensus set of economic projections and another test using 
projections based on more adverse economic conditions. The only results 
that have been released are those based on the adverse scenario. These 
test results revealed that nine of the nineteen banks tested already 
hold sufficient capital to operate through 2010 under the projected 
adverse scenario; those banks will not be required to raise additional 
capital. Ten of the nineteen banks were found to need additional 
capital totaling nearly $75 billion in order to weather a more adverse 
economic scenario. Those banks that need additional capital must 
present a plan to Treasury by June 8, 2009, outlining their plans to 
raise additional capital. All additional capital required under the 
stress tests must be raised by November 9, 2009, six months after the 
announcement of the stress test results. Some bank holding companies 
have already successfully raised billions in additional capital.
    Like the case of the family conducting its own stress test of 
personal finances, the usefulness of the bank stress test results 
depends upon the methods used and the assumptions that went into 
conducting the examinations. To help assess the stress tests, the panel 
engaged two internationally renowned experts in risk analysis, 
Professor Eric Talley and Professor Johan Walden, to review the stress 
test methodology.
    Based on the available information, the professors found that the 
Federal Reserve used a conservative and reasonable model to test the 
banks, and that the model provides helpful information about the 
possible risks faced by bank holding companies and a constructive way 
to address those risks.
    The professors also raised some serious concerns. They noted that 
there remain unanswered questions about the details of the stress 
tests. Without this information, it is not possible for anyone to 
replicate the tests to determine how robust they are or to vary the 
assumptions to see whether different projections might yield very 
different results. There are key questions surrounding how the 
calculations were tailored for each institution and questions about the 
quality of the self-reported data. It is also important to note that 
the stress test scenarios made projections only through 2010. While 
this time frame avoids the greater uncertainty associated with any 
projection further in the future, it may fail to capture substantial 
risks further out on the horizon. Based on testimony by an analyst from 
Deutsche Bank at the Panel's May field hearing in New York City, the 
projected rise in the defaults of commercial real estate loans after 
2010 raises concerns.
    In evaluating the useful information provided by the stress tests, 
as well as the remaining questions, the Panel offers several 
recommendations for consideration moving forward:

      The employment numbers for 2009 have already exceeded the 
harshest scenario considered so far, suggesting that the stress tests 
should be repeated.
      Stress testing should also be repeated so long as banks 
continue to hold large amounts of toxic assets on their books.
      Between formal tests conducted by the regulators, banks 
should be required to run internal stress tests and should share the 
results with regulators.
      Regulators should have the ability to use stress tests in 
the future when they believe that doing so would help to promote a 
healthy banking system.

    The Federal Reserve should be commended for releasing an 
unprecedented amount of bank supervisory information, but additional 
transparency would be helpful both to assess the strength of the banks 
and to restore confidence in the banking system. The Panel recommends 
that the Fed release more information on the results of the tests, 
including results under the baseline scenario. The Fed should also 
release more details about the test methodology so that analysts can 
replicate the tests under different economic assumptions or apply the 
tests to other financial institutions. Transparency will also be 
critical as financial institutions seek to repay their TARP loans, both 
to assess the strength of these institutions and to assure that the 
process by which these loans are repaid is fair.
    Finally, the Panel cautions that banks should not be forced into 
counterproductive ``fire sales'' of assets that will ultimately require 
the investment of even more taxpayer money. The need for strengthening 
the banks through capital increases must be tempered by sufficient 
flexibility to permit the banks to realize full value for their assets.
    I would like to briefly mention the Panel's other reports, which 
cover a wide range of important topics.
    In December, we issued our very first report, identifying a series 
of ten primary questions regarding Treasury's goals and methods. These 
questions must be answered in order for Treasury to be successful:

      What is Treasury's strategy?
      Is the strategy working to stabilize markets?
      Is the strategy helping to reduce foreclosures?
      What have the financial institutions done with the 
taxpayers' money received so far?
      Is the public receiving a fair deal?
      What is Treasury doing to help the American family?
      Is Treasury imposing reforms on financial institutions 
that are taking taxpayer money?
      How is Treasury deciding which institutions receive the 
money?
      What is the scope of Treasury's authority?
      Is Treasury looking ahead?

    These questions were posed to then-Treasury Secretary Paulson in a 
letter. They were further expanded with subsidiary questions seeking 
additional information.
    In January, the Secretary's response provided the basis for our 
report. An analysis of the response revealed that many answers were 
non-responsive or incomplete. It was disappointing that the answers 
were, and in some cases continue to be, elusive, given that the 
questions are basic and should have been answered when initially 
framing the program. It was disconcerting, to say the least, having 
hundreds of billions of dollars spent seemingly without a plan. The 
report found that, in particular, Treasury needed to provide additional 
information on bank accountability, transparency, asset valuation, 
foreclosures, and strategy.
    In February, the Panel returned to the central question of whether 
the public was receiving a ``fair deal'' when Treasury used TARP funds 
to make capital infusions into financial institutions. We worked with 
recognized independent experts to develop multiple valuation models to 
determine whether the securities Treasury received had a fair market 
value equal to the dollar amount of the infusions. With minimal 
variation, the models all demonstrated that Treasury made its infusions 
at a substantial discount. Treasury received securities that were worth 
substantially less than the amounts it had paid in return. In all, 
Treasury overpaid by an estimated $78 billion. For each $100 Treasury 
invested in these financial institutions, it received on average stock 
and warrants worth only about $66 at the time of the transaction. While 
there may have been good reasons to subsidize the banks last fall, it 
is critical that Treasury be clear in explaining its goals in these 
transactions. It will be especially important going forward to have 
independent valuations and transparency as many financial institutions 
intend to repay TARP funds and buy back their warrants. Treasury will 
be making many important policy choices as it negotiates the sale of 
these warrants, including timing, procedures, terms, and pricing for 
the redemption by banks. We will take up these issues in our July 
report.
    In March, the Panel examined the foreclosure crisis, as directed in 
the statute. In considering mortgage foreclosure mitigation, we gave 
particular consideration to impediments to mitigation efforts. We 
offered a checklist of items to evaluate the likely effectiveness of 
any proposal to halt the cascade of mortgage foreclosures.

      Will the plan result in modifications that create 
affordable monthly payments?
      Does the plan deal with negative equity?
      Does the plan address junior mortgages?
      Does the plan overcome obstacles in existing pooling and 
servicing agreements that may prevent modifications?
      Does the plan counteract mortgage servicer incentives not 
to engage in modifications?
      Does the plan provide adequate outreach to homeowners?
      Can the plan be scaled up quickly to deal with millions 
of mortgages?
      Will the plan have widespread participation by servicers 
and lenders?

    We were pleased to see that the Administration's Homeowner 
Affordability and Stability Plan addressed many of these issues, 
although the Panel noted serious concern with areas left unaddressed in 
the original plan, including lack of a safe harbor for mortgage 
servicers that results in impediments to restructuring mortgages, 
incomplete consideration of second mortgages, unclear enforcement, and 
a failure to address seriously underwater mortgages. It is encouraging 
to see that the initiative is evolving to deal with some of these 
concerns. The Panel plans follow up work over the coming months to 
measure progress in foreclosure mitigation.
    In April the Panel further analyzed the evolving strategy of 
Treasury. We focused on lessons from the previous financial crises, 
both foreign and domestic, to help inform our analysis of the current 
situation. The report examined four case studies of particular 
relevance: the Japanese ``Lost Decade'' of the 1990s; the Swedish 
experience with bank nationalization in the 1990s; the establishment of 
the Resolution Trust Corporation (RTC) in response to the American 
Savings and Loan collapse in the late 1980s; and the actions taken to 
stabilize the financial and housing sectors during the Great 
Depression. The report highlighted the benefits and problems of several 
basic approaches to dealing with failing banks--liquidation, 
reorganization, or subsidization--based on these historic examples. The 
review highlighted that each successful resolution of a financial 
crisis involved four key elements: transparency, assertiveness, 
accountability, and clarity.
    In May the Panel considered the state of small business and 
consumer lending and provided an assessment of the Term Asset-Backed 
Securities Loan Facility (TALF). The TALF is intended to support more 
lending by financing credit through asset-backed securities. These are 
securities that represent interests in pools of loans made to small 
businesses and households. Our primary question was whether the TALF 
program is well-designed to attract new capital. The program allows the 
investors to reap a substantial portion of the potential profits, but 
leaves taxpayers to absorb a large portion of potential losses. Even 
with this asymmetry, there was a slow initial uptake to the program. 
More recent subscriptions have shown greater participation. 
Unfortunately, other factors may mean that even a well-designed program 
could have difficulties helping market participants meet the credit 
needs of small businesses and households. Families are awash in debt 
and in the process of deleveraging. Stagnant wages and rising 
unemployment further constrain the ability of households to manage 
ever-larger debt loads, suggesting that strategies to increase consumer 
lending may be counterproductive for American families--and ultimately 
for the economy. TALF is unlikely to have a meaningful impact on small 
businesses, as asset-backed securities have never been a significant 
source of small business funding. The report raises questions about 
whether taxpayer support for small business lending should be 
concentrated elsewhere, such as increased availability of SBA loans.
    What have we learned thus far? In a crisis, transparency, 
accountability and a coherent plan with clearly delineated goals are 
necessary to maintain public confidence and the confidence of the 
capital markets. Sophisticated metrics to measure the success and 
failure of program initiatives are also critical. Assuring that the 
TARP reflects these elements underlies all of our oversight efforts.
    Thank you again for the opportunity to explain the work of the 
Congressional Oversight Panel. I look forward to answering your 
questions.
                               __________
     Prepared Statement of Representative Michael C. Burgess, M.D.
    Since the downward spiral of our financial markets, the federal 
government has intervened on behalf of financial institutions by giving 
them nearly a trillion dollars of taxpayer money. In the Congressional 
Oversight Panel's most recent report issued on April 7, 2009, the 
report showed that the Treasury has spent or committed $590.4 billion 
of TARP funds but the total value of all direct spending, loans and 
guarantees provided to date in conjunction with the TARP now exceeds $4 
trillion dollars.
    As Ms. Warren's written testimony shows, the Department of 
Treasury--and the U.S. taxpayer--didn't get much value for this 
astronomical spending (and borrowing). When the Treasury used TARP 
funds to make capital infusions into financial institutions, the 
American taxpayer received in exchange securities in these companies. 
Ms. Warren states that the Treasury OVERPAID by an estimate of $78 
billion dollars. Considering the stress tests of our financial 
institutions show these same financial institutions will quote-unquote 
``NEED'' another $75 billion in taxpayer money, perhaps someone 
somewhere should have been paying more attention to where all this 
money is going to.
    But no one seems to be. The Treasury Department has had exactly one 
oversight meeting as it relates to the spending of TARP money and ZERO 
meetings with the financial institutions who have received TARP money. 
Zero, even though $590.4 billion dollars has been given out.
    All this borrowing is more problematic because of the large amount 
of debt.
    Money borrowed to shore-up these financial institutions merely 
freezes the opportunity for credit markets to invest in other areas of 
the marketplace, such as healthcare or transportation. Most importantly 
it freezes the ability of the U.S. government to use a billion dollars 
a month in interest payment in debt to invest in real solutions for 
Americans real problems such as the loss of jobs, which we have already 
held multiple hearings on.
    In 1933, Irving Fisher (who may have been one of the greatest 
American economists) stated that excess debt controls nearly all 
economic variables. I agree with him.
    Furthermore, we can not borrow our way out of excess debt. We will 
have to pay for it.
    America will recover and our financial structure will survive. But 
the operative factor may be the one thing no one wants to say or hear. 
It may just take time. Until that time, I reject the notion we should 
give another dollar of the hard-earned money of our taxpayers to these 
financial institutions unless we know a job will be created--or debt 
will be paid for.
  

                                  
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