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


                                                        S. Hrg. 111-420
 
   FINANCIAL REGULATORY REFORM: PROTECTING TAXPAYERS AND THE ECONOMY

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



                                HEARING

                               before the

                        JOINT ECONOMIC COMMITTEE
                     CONGRESS OF THE UNITED STATES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 19, 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               Jeff Bingaman, New Mexico
Loretta Sanchez, California          Amy Klobuchar, Minnesota
Elijah E. Cummings, Maryland         Robert P. Casey, Jr., Pennsylvania
Vic Snyder, Arkansas                 Jim Webb, Virginia
Kevin Brady, Texas                   Mark R. Warner, 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

                 Gail Cohen, Acting Executive Director
               Jeff Schlagenhauf, Minority Staff Director


                            C O N T E N T S

                              ----------                              

                                Members

Hon. Carolyn B. Maloney, Chair, a U.S. Representative from New 
  York...........................................................     1
Hon. Sam Brownback, Ranking Minority Member, a U.S. Senator from 
  Kansas.........................................................     2

                               Witnesses

The Honorable Timothy F. Geithner, Secretary of the Treasury, 
  United States Department of the Treasury.......................     5

                       Submissions for the Record

Prepared statement of Representative Carolyn B. Maloney, Chair...    46
Prepared statement of Secretary Timothy F. Geithner..............    46
Prepared statement of Representative Elijah E. Cummings..........    49
Questions from Representative Michael C. Burgess, M.D. to 
  Secretary Timothy F. Geithner..................................    50
Responses of Secretary Timothy F. Geithner to Questions from 
  Representative Michael C. Burgess, M.D.........................    51


   FINANCIAL REGULATORY REFORM: PROTECTING TAXPAYERS AND THE ECONOMY

                              ----------                              


                      THURSDAY, NOVEMBER 19, 2009

             Congress of the United States,
                          Joint Economic Committee,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:04 a.m., in Room 
210, Cannon House Office Building, The Honorable Carolyn B. 
Maloney (Chair) presiding.
    Representatives present: Maloney, Hinchey, Hill, Sanchez, 
Cummings, Snyder, Brady, Burgess, and Campbell.
    Senators present: Schumer, Klobuchar, Casey, Brownback, and 
DeMint.
    Staff present: Paul Chen, Gail Cohen, Colleen Healy, 
Michael Neal, Andrew Wilson, Rachel Greszler, Lydia Mashburn, 
Brian Robertson, Jeff Schlagenhauf, Ted Boll, and Robert 
O'Quinn.

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

    Chair Maloney. The meeting will come to order.
    It is my pleasure to welcome Secretary Geithner.
    In order to allow enough time for members to have all the 
questions they desire, I am limiting opening statements to the 
Chair and Ranking Member. I ask for unanimous consent to accept 
written statements into the record, and the Chair recognizes 
herself for 5 minutes.
    First of all, I want to again thank Secretary Geithner for 
joining us today. The severe breakdown in our financial system 
under the watch of the previous Administration triggered a 
cascade of events, including a free fall in household wealth, 
paralysis in consumer spending, frozen credit markets, and a 
tailspin in the labor market. A recession grew into a near 
depression. By some measures, what happened to our economy was 
worse than what happened during the Great Depression.
    During the first year of the recession, household wealth 
plunged by 17 percent, more than five times the decline seen 
from 1928 to '29. In addition, stock prices became even more 
volatile than they were at the heart of the Great Depression.
    Yet recently we have seen some recovery. Treasury, the 
Federal Reserve, and the FDIC, along with Congress, took an 
extraordinary series of measures to preserve financial 
stability and restore the proper functioning of the credit 
markets. These initiatives included recapitalizing banks and 
creating a series of new lending facilities at the Fed. They 
have clearly contributed to the recovery of the financial 
system. Interbank lending rates are back to normal after having 
spiked during the crisis, and the S&P 500 is up by over 64 
percent from its March, 2009, low.
    However, Chairman Bernanke noted earlier this week 
constrained bank lending and a weak job market will prevent the 
recovery from being as robust as we would like.
    Treasury has taken actions recently to help spur lending 
and create jobs. Treasury will provide low cost capital to 
community banks and submit a plan to increase small business 
lending and increase lending to small businesses in the hardest 
hit communities.
    But more needs to be done, as Professor Stiglitz testified 
before this committee, and I quote: Where there are perverse 
incentives there are perverse outcomes unless we constrain 
behavior. End quote.
    The regulatory reform that we are considering will do just 
that. It will eliminate the incentives for banks to engage in 
the same risky behavior that led to the financial crisis.
    The House Financial Services Committee under Chairman 
Frank's leadership has recently passed or marked up a number of 
bills related to financial regulatory reform. First, a systemic 
risk regulator that will make sure that no firm is too-big-to-
fail. Second, firms will not be bailed out. They will be taken 
over and shut down in an orderly way. Third, regulatory gaps 
will be plugged. Hedge funds and over-the-counter derivatives 
market will not be allowed to grow unchecked and threaten the 
viability of the financial system, and we will stop fraudulent 
and predatory lending or banking practices by creating a 
Consumer Financial Protection Agency. This agency will help 
spur the demand for credit to the many Americans who are now 
nervous about the financial products available to them. Like 
the Credit Cardholders Bill of Rights that I introduced and 
Treasury supported and Congress passed, it will stop the most 
abusive practices of lenders of credit.
    Although much more needs to be done to help American 
workers and small businesses, reforming the financial system is 
a very crucial step in that process. Restoring trust in our 
financial system will help revive the job market and jump-start 
the flow of credit to the economy.
    Secretary Geithner, again, we thank you for your testimony 
here today; and we look forward to hearing your thoughts on how 
financial regulatory reform will help impact the economy as a 
whole and help working Americans in particular. Thank you for 
being here.
    [The prepared statement of Representative Maloney appears 
in the Submissions for the Record on page 46.]
    I recognize Ranking Member Brownback. We are hopeful that 
the Vice Chair, Mr. Schumer, will also be able to join us.

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

    Senator Brownback. Thank you, Chair Maloney. I appreciate 
that.
    Secretary Geithner, welcome, glad to have you here. You 
have had more experience in the last 2 years in tough 
situations than I think most people would want to have or wish 
on themselves in a lifetime. So you have a lot that you can 
share with us.
    I mentioned to you in the foyer ahead of time the idea on 
the financial regulatory reform that Fed Chairman Hoenig is 
pushing out of Kansas City that we need to put in place too-
big-to-fail policies, that if you are too big that there is a 
way to safely dismember if you are not--if you get there, and 
it is going to be harmful. And I am hopeful that you will look 
favorably on those sorts of proposals as you move this process 
forward, because I think we need some work in this area.
    I am not sure I agree with all of the Administration plan, 
but this is a piece--I think there is broad bipartisan support 
that if a major financial institution gets of a certain size 
that we don't just assume the government is going to bail them 
out, that we tell the marketplace, look, there is a safe way 
and we will dismember this. So that we don't get in the moral 
hazard or them being able to get capital with the assumption 
that the government is going to bail them out. I am glad you 
are here to talk about that.
    You asked when we were in the foyer about the mood in the 
country, and people are really deeply concerned. The debt just 
passed $12 trillion this week. That is getting close to the 
size of the economy in the country. People are really, really 
concerned about that.
    The President just gets back from China, and it is like we 
are going to meet with our bankers, is what it looks like to a 
lot of people. And they don't like that. They don't like that 
setup.
    And then we are looking at adding an entitlement program in 
health insurance, and I know there are different perspectives 
on that. But it is probably a multi-trillion-dollar obligation 
on the Federal Government's part at a time that we are $12 
trillion in debt, and most people think this is fiscal 
insanity. We are hemorrhaging money at the Federal level.
    And then to add that level of entitlement on top of it when 
we are hemorrhaging money and we are already $12 trillion in 
debt and we are going to the Chinese to give us some money, 
people don't think that makes any sense. And you are the guy at 
the top of the financial pyramid, you, with the President, to 
help us make sense of this.
    Now, I think the bill coming out in the Senate scores 
financially neutral to a little favorable, which I am pleased 
to see. But it does that by taking more taxes from the people 
or money from Medicare, which we have proven unsuccessful in 
being able to do in the past. We did a doctor fix in--what--
1997, and every year we fill the hole back up. As people come 
in and they lobby and they say, oh, you can't cut the providers 
this, you can't cut them; and every year it is filled back in.
    So that the idea that you are going to save $400 billion 
out of Medicare, it has not proven doable in the past. And the 
idea that you would raise taxes on the American public when we 
are in this sort of financial condition in the country right 
now doesn't seem rational. It really does seem fiscally insane.
    I know you didn't come up here to talk about that, but that 
is certainly what is on everyone's mind as they look at the 
situation.
    One final thing I want to point to--and the President just 
got back from China. We have to get the Chinese to allow their 
currency to float. I want to show you one chart up here. And 
you know this one better than anybody. But the appreciation of 
other currencies versus the U.S. dollar, and you know that has 
taken place in major European, Japanese currency, the Euro.
    You can see what it has done against the Chinese currency. 
No appreciation. None. They peg their currency to ours at a 
time when our currency has fallen, and you can see reasons for 
why it would fall, that the Chinese currency should clearly be 
going up against that, making our goods more competitive in 
China, theirs less competitive here.
    One of my children is from China. I have a beautiful 
daughter that is in the sixth grade; and she asked me one time 
a couple of years ago, dad, why is everything here made in 
China? And I said, well, it is a long answer. But a big part of 
it is this currency issue, and I think we just have to hammer 
them for us and take aggressive action.
    And this is not just important to the United States. Other 
Asian currencies are hurt by the Chinese pegging their currency 
to ours, and they are hurt big time on this. I know you are 
aware of this. I just think it is time to get the stick out and 
say, okay, we have to do something about this. This is going to 
the wrong direction. And I really hope you can speak to some of 
that as well.
    Thank you very much, Chairwoman.
    Chair Maloney. Thank you for your statement.
    And I would now like to introduce the Secretary----
    Representative Burgess. Madam Chair, just a question, if 
you don't mind. Many of us over here on the minority side, our 
only opportunity, our only opportunity, to talk to one of the 
most important individuals in the Administration is this 
morning. Secretary Geithner, this is his first trip here. We 
appreciate him being here.
    But just as Senator Brownback conveyed the concerns of his 
constituents, we need to have the courtesy of conveying the 
concerns of our constituents. Mine aren't mad--I mean, aren't 
anxious. They are mad. They are mad as hell. We need to be able 
to convey that to----
    Chair Maloney [continuing]. Congressman, the usual 
procedure in prior Congresses was just the Ranking Member, the 
Chair and the Vice Chair were given opening statements. Each of 
us will have as many times as we want to stay for questions to 
give your opinions about--for your constituents or ask 
questions to the Secretary.
    His time is limited, and I feel the American people would 
want to hear what he has to say, and he is the Secretary of the 
Treasury, and to respond to the questions that we have. No 
objection was given to me from your side.
    And I now would like to hear from the Secretary of the 
Treasury. I will not even introduce his very impressive 
background so that we can just hear his words and hear where we 
are moving in the right way for this country and the challenges 
that are before us.
    Mr. Secretary, you are recognized for as much time as you 
would like to consume.

 STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY OF 
     THE TREASURY, UNITED STATES DEPARTMENT OF THE TREASURY

    Secretary Geithner. Thank you, Chairwoman Maloney; and 
thanks to all of you for giving me a chance to come speak to 
you today.
    You asked me to come and talk about financial reform, but I 
am happy to answer questions on any of the broad range of 
economic questions we see facing the country.
    My microphone says it is on.
    I just thank you for having me up here and you asked me to 
talk about financial reform, but I am happy to talk about any 
of the broader concerns on your mind that affect our economic 
future.
    We are in the process now of recovering from the worst 
financial crisis--worst economic crisis in generations. The 
pace of job loss has slowed sharply, but unemployment is still 
unacceptably high and, unfortunately, is still rising. We have 
restored confidence in the stability of the financial system. 
The cost of credit has fallen dramatically and value of 
American savings has risen substantially. The ability of people 
to borrow a mortgage at low interest rates has improved 
dramatically.
    But, as we discussed yesterday at the Forum on Small 
Business Financing, you see the classic credit crunch risk for 
small businesses across the country. Small businesses are 
having a hard time getting the credit they need, the access to 
credit and capital they need to expand and to hire more 
workers.
    Now, I welcome the attention of the committee to this 
important cause of financial reform. Getting this right is 
critically important to the health and performance of the 
American economy. The economic costs of financial crises are 
devastating.
    One of the great strengths of our financial system in the 
past has been the ease with which we are able to fund the ideas 
and ambitions of millions of entrepreneurs. There is no growth, 
no economic growth and no innovation without access to capital 
and credit. But if you let the financial system become too 
fragile and too unstable, if you allow risk to evade the 
safeguards we establish in the system, if you allow firms to 
escape protections for consumers and investors, if you create 
incentives for excessive investments, excessive risk taking, 
excessive investments in real estate, if you allow moral hazard 
to spread, the consequences will be brutal and the damage 
indiscriminate and long lasting.
    This is an enormously complicated endeavor, and we have to 
be very careful to get this right. We need to make sure we 
enact reforms that are strong enough not just to correct the 
deep flaws in our present system but are strong enough to 
prevent severe crisis in the future.
    Now, the comprehensive reforms that are being shaped in the 
House and the Senate now offer the best chance in generations 
to create a more stable system with stronger protections for 
consumers and investors and less risk to the taxpayer. I want 
to outline very briefly the four key elements, four key 
principles for reform that are critical to a strong package of 
legislation. There are different ways to achieve these reforms 
and different views on how best to balance the tradeoffs 
involved, but these basic elements are essential to any strong 
final bill.
    First, financial firms must not be allowed to escape or 
avoid safeguards designed to make sure the system is stable and 
protections for consumers and investors. We can't let firms 
choose their regulator, shift risk where protections are 
weakest, structure their business with a form of financial 
instruments they sell to maximize short-term returns at the 
cost of greater risks to the economy as a whole.
    Firms that provide credit help companies raise capital, 
provide the basic economic functions we call banking, need to 
be overseen as banks and operate on the same strong protections 
we have long put in place for banks.
    We can't allow large institutions, whether investment banks 
like Bear Stearns or Lehman, firms like AIG, large finance 
companies that play critically important roles in our economy, 
from escaping consolidated oversight. We can't allow entities 
to compete with banks in providing mortgages, credit cards, 
other forms of consumer credit to evade protections we put in 
place for consumers.
    From now on, firms that are engaged in the same kind of 
business, performing the same essential economic functions, 
must be subjected fundamentally to the same regulation and 
supervision.
    The second principle of reform is there has to be clear 
accountability with a responsibility matched with clearly 
defined authority. We need to put in place a council for 
coordination, a council that is charged with making sure we 
have a level playing field with strong standards and no 
devastating gaps in coverage.
    But we can't have supervision enforcement or rule writing 
by council or committee. The American people and the Congress 
should know who is responsible for consumer protection, for 
market integrity and investor protection, for traditional bank 
supervision, for the stability of the system as a whole, for 
operating the emergency room when firms fail.
    These are complex, specialized, and very different 
functions. No one entity can do all of them well. We have too 
many agencies, though, doing them now and yet still have large 
gaps in the system without anyone in charge or accountable. 
This is a mess, and we have to clean it up.
    The third principle is that the financial system as a whole 
has to be more capable of absorbing shocks and coping with 
failure. This requires much stronger, more carefully designed 
shock absorbers for financial institutions and for the markets 
where firms come together; and it requires tough constraints on 
risk taking. These shock absorbers in the form of capital, 
liquidity, margin requirements are critical not just to reduce 
the risk of failure by our large institution but to make sure 
that we prevent failures of large firms from spreading like 
wildfire across the economy and around the world, as we saw 
last fall. These constraints have to be applied across the 
institutions that play critical roles in our markets as well as 
to the clearinghouses and markets like derivatives where firms 
come together where risk can concentrate and cause the most 
damage.
    Fourth and final principle, no institution should be 
considered too big to fail. As we saw in Lehman's collapse and 
AIG's failure, the U.S. government came into this crisis, worst 
crisis in generations, without adequate tools to respond 
effectively when the failure of large institutions truly 
threatened the stability of the financial system.
    Now, that is why we have proposed that the government have 
the authority, as we have today for banks and thrifts, to break 
apart or unwind major large, complex financial institutions in 
an orderly way, imposing pain on shareholders, creditors and 
managers but limiting collateral damage to the system and 
sparing the taxpayer.
    This emergency authority, what we call resolution 
authority, has to be designed to facilitate the orderly demise 
of a failing firm, not ensure its survival. And to protect the 
taxpayer from bearing the cost of financial failure by private 
firms, any risk of loss must be recouped from the largest 
institutions in proportion to their size. The financial 
industry, not the taxpayers, need to be on the hook.
    Now, in addition, to further reduce the risk of moral 
hazard, we have proposed to substantially limit the emergency 
authorities of the FDIC and the Fed so that they are only 
available to protect the financial system as a whole, not 
individual failing financial institutions.
    Just let me conclude, Madam Chairwoman, by complimenting 
the leadership role that Chairman Dodd and Chairman Frank are 
playing in crafting strong and comprehensive reform. This is a 
just cause. They are facing enormous resistance, and they 
deserve our strong support.
    We have suffered a devastating loss of confidence in what 
has been a great strategic economic asset of the United States. 
Financial reform is essential to restoring confidence. We have 
to lead the world and enact reform or we are going to lose our 
leadership role.
    Thank you very much.
    [The prepared statement of Timothy F. Geithner appears in 
the Submissions for the Record on page 46.]
    Chair Maloney. I want to thank you for your testimony.
    As you noted, Senator Dodd and Chairman Frank are deeply 
involved in financial reform. Just this week, Chairman Frank 
has been leading markups on financial reform in the Financial 
Services Committee.
    Mr. Secretary, what would you say are the three most potent 
economic indicators, the three things that you can point to to 
the American people to assure them that our economy is on the 
right track?
    Secretary Geithner. Madam Chairwoman, the best broad 
measure of health of our economy is the rate at which we grow. 
And at the end of last year, beginning of this year, the 
economy was shrinking at a rate of about 6 percent of GDP, the 
most rapid rate we have seen in decades. And you saw last 
quarter the economy start to grow again. It grew roughly at the 
rate of 3 percent, the first time we have seen signs of growth 
in more than a year.
    Beginning of this year, we were losing almost three-
quarters of a million of jobs a month; and the pace of loss of 
jobs has slowed dramatically. You have seen the value of 
American savings rise very dramatically, credit markets start 
to open up, the basic pipes of the financial system start to 
open up again.
    But this is a very tough economy still. You see that, of 
course, in this devastatingly high unemployment rate. And it is 
going to take us a while to work through these problems.
    Again, we started with just the worst financial crisis we 
have seen in a long period of time, and it already caused huge 
dramatic damage to confidence. It takes a while for that 
confidence to be restored, but I think you are seeing positive 
signs of stability now and the early signs of growth. You need 
growth to create jobs. You won't have an economy generating 
jobs again until you see growth start to broaden and spread. 
And I think you are seeing the underlying pace of growth in the 
economy, although it is modest, it still is gradually 
strengthening.
    Chair Maloney. Thank you.
    There was a report that came out this week that was rather 
critical of Treasury's actions with AIG counterparty payments 
and the Federal Reserve's actions. And I would like to ask, if 
resolution authority had been in place at that time, do you 
think that there would have been a different outcome than 
paying AIG counterparties par value? And could you walk us 
through the various scenarios that were available to you at 
that time? What would have happened on Main Street in America 
if we had allowed bankruptcy of AIG? Can you paint a picture of 
what it would mean or what the other scenarios that were out 
there and how the actions that the reform legislation that is 
being put in place will make that different in the future?
    Secretary Geithner. I think the best way to point out what 
would have happened if AIG had been allowed to default is to 
look at exactly what happened when Lehman failed. What you saw 
is economic activity around the world come to a stop. For the 
first time in generations, you saw trade stop. You saw 
financial activity stop. You saw the basic savings of Americans 
plummet. You faced for the first time again since the Great 
Depression a generalized run on our financial system. Americans 
across the country were starting to take their money out of 
banks.
    AIG presented exactly the same kind of risk Lehman did. 
But, in some ways, they were greater--because AIG as an 
insurance company, one of the largest in the world, was 
providing a range of insurance products to households across 
the country. And if AIG had defaulted, you would have seen a 
downgrade leading to the liquidation and failure of a set of 
insurance contracts that touched Americans across this country 
and, of course, savers around the world. And the judgment made 
at the time by my predecessor and by the chairman of the 
Federal Reserve Board and by myself was that we had the ability 
to prevent that and that was the necessary and prudent thing to 
do; and in acting that way we were going to save the economy 
from even greater devastation than we saw in the wake of 
Lehman's collapse and, ultimately, that would be more effective 
in containing damage at less ultimate cost to the economy and 
the taxpayer.
    You were right to say we came into this crisis--and this is 
a tragic failure of this country. The United States of America, 
the largest financial system in the world, the reserve asset of 
the entire financial system came into this crisis without 
anything like the basic tools countries need to contain 
financial panics and manage failure.
    Coming into AIG, we had basically duct tape and string. The 
Federal Reserve had already used its basic powers wisely and 
courageously to try to contain the damage of the panic, but 
those tools were not designed to carry the full burden of 
solving financial crises.
    In the AIG context, we did not have what the U.S. put in 
place, the will the Congress enacted a long time ago to make 
sure that when banks and thrifts fail we can manage that 
failure in an orderly way. We had no such ability and no such 
tools for the institutions that dominate our financial system.
    Now, what we have proposed in this reform package are a set 
of tools like we have for banks and thrifts that allow us, as 
you said very well, to manage their failures safely so you 
don't have the taxpayers exposed, the taxpayers at risk, and 
you don't see a huge amount of indiscriminate damage to a bunch 
of firms that were prudently run and prudently managed, 
businesses that didn't borrow too much, families that didn't 
borrow too much. That is a just and necessary thing.
    And a critical part of reform is just to make sure we come 
out of this with that basic authority. If we had that authority 
in place, we would have had much better choices in the AIG 
context.
    We have had a range of other tools to make sure that we 
managed through that crisis without leaving the taxpayer as 
exposed as we were. But, at that time, the choice was to 
prevent default or allow default. Default would have been 
devastating. Preventing default meant that AIG was able to meet 
its obligations, its contractual obligations. Again, not just 
to the financial system as a whole, but to the millions of 
Americans and savers around the world that had bought a basic 
set of insurance products, protections from that company.
    Now, nobody in my job should ever be in the position again 
of having to come into a crisis like this without those basic 
authorities.
    Chair Maloney. Thank you.
    Senator Brownback.
    Senator Brownback. I am going to pass to Congressman Brady.
    Representative Brady. Thank you, Senator Brownback.
    It has been a year since the President was elected. It is 
appropriate for the American people to assess how well this 
Administration's economic policies are working. They are not. 
They have failed.
    Unemployment skyrockets far past White House projections 
and promises. America continues to shed jobs, more than 2.8 
million since the stimulus was enacted. We have had a series of 
embarrassing investigations about all the wild stimulus claims, 
the latest fake jobs from fake congressional districts; and, 
today, the General Accounting Office revealed yet more scandals 
within the stimulus claims in the case of which thousands of 
recipients claimed jobs and they have not yet received money.
    The U.S. has the worst performance in terms of unemployment 
rate among the major developed economies since the stimulus 
bill was enacted, worse than Australia, worse than Canada, 
worse than the European Union, Japan, South Korea, not to 
mention China. The industries that the White House and, 
Secretary, you, promised would have the most job creation, 
manufacturing and construction, have seen by a percentage the 
greatest job losses.
    The deficit is becoming frightening and threatens our 
economic recovery. The budget challenges we face with Medicare 
and Social Security, Fannie and Freddie Mac have been left 
unaddressed. We are reduced to begging China to buy our debt 
and getting lectures from other nations on our financial 
disarray while they discuss replacing the dollar with a more 
stable reserve currency.
    Much of the TARP money is still hidden from taxpayers' 
eyes. Why, in the public's view, Wall Street is still getting 
their bonuses and major businesses and small businesses are 
delaying their key investment decisions as Washington moves on 
uncertain issues: health care reform, cap and trade, burdensome 
new regulations, and a host of new tax increases.
    Mr. Secretary, you are the point man on the economy. The 
buck, in effect, stops with you. For several months, 
conservatives on Capitol Hill have called for you to step down. 
Last night, Congressman Peter DeFazio said there is a, quote, 
growing liberal consensus that Secretary Geithner should be 
removed. Quote, we need a new economic team.
    Conservatives agree that as point person you failed. 
Liberals are growing in that consensus as well. Poll after poll 
shows the public has lost confidence in this President's 
ability to handle the economy for the sake of our jobs. Will 
you step down from your post?
    Secretary Geithner. Congressman, it is a great privilege to 
serve this President, and I am very pleased to have a chance to 
address the range of concerns you gave.
    I agree with almost nothing in what you said, and I think 
almost nothing of what you said represents a fair and accurate 
perception of where this economy is today.
    Now, I think it is important to start--welcome the advice 
that you are providing after you left--you gave this President 
an economy falling off the cliff, values of American savings 
cut almost in half, millions of Americans out of work. Again, 
the worst financial crisis we have seen in generations.
    Representative Brady. Remind me, Mr. Secretary, what post 
were you holding when President Bush left office? Just remind 
me what economic post you were holding.
    Secretary Geithner. I was the president of the Federal 
Reserve Bank in New York. It was a great honor and privilege 
for me to serve at that time.
    Representative Brady. Does the Federal Reserve Bank have 
any oversight over the economy or any input into its 
performance?
    Secretary Geithner. The Federal Reserve established by 
Congress is responsible for trying to make sure that we keep 
inflation low and stable over time.
    Representative Brady. Are you shirking responsibility for 
the design of the bailout or its role in the economy?
    Secretary Geithner. Absolutely. The actions that the 
Congress made possible--too late--but made possible last fall 
were absolutely necessary to breaking the back of this 
financial panic. And without those actions and the actions the 
President put in place with the Congress--support of many 
people in the Congress at the beginning of this year, you would 
have an economy still falling, not growing. You would have had 
job loss still accelerating, not slowing. You would have had 
the value of American savings still falling, not rising. You 
would have had----
    Representative Brady. But that has been changed. That has 
created several quadrillion new jobs; is that right?
    Secretary Geithner [continuing]. Congressman, again, it is 
just a basic fact. A year ago, a year ago, this economy was 
falling at the rate of 6 percent a year. We were losing between 
half a million and three-quarters of a million jobs a month; 
and that process was accelerating, not slowing, until the 
President of the United States came and took office.
    Representative Brady. Mr. Secretary, the public has lost 
all confidence in your ability to do the job. It is reflecting 
on your President.
    Secretary Geithner. Congressman, if you look at----
    Representative Brady. Conservatives agree, liberal 
Democrats agree that it really is time for a fresh start; and I 
would urge you to consider that.
    Chair Maloney. The gentleman's time has expired.
    Secretary Geithner [continuing]. Chairwoman Maloney, may I 
just respond on this?
    If you look at any measure of consumer and investor 
confidence today, if you look at any measure of the strength 
and the stability and health of the American economy, if you 
look at any measure of confidence in the financial system, it 
is substantially stronger today than when the President of the 
United States took office. And that happened not on its own. It 
happened because of a set of tough, difficult choices.
    And this economy did not come into this simply facing the 
worst financial crisis in generations. It came into this with 
almost a decade, certainly 8 years, of basic neglect of basic 
public goods in health care, in education, in public 
infrastructure, in how we use energy. And fixing those problems 
is a central obligation of this Congress and this 
Administration.
    Representative Brady. Tell all of that to the millions of 
Americans who no longer have jobs because of your decision.
    Secretary Geithner. They would have had more jobs, there 
would have been more confidence, more employment in this 
country if we had not let this crisis get to the point that it 
did. And we would have had a stronger fiscal position if we had 
had 8 years of paying for our commitments and not borrowing 
against them.
    Chair Maloney. The gentleman's time has expired.
    Mr. Hinchey is recognized for 5 minutes.
    Representative Brady. You have to take responsibility for 
your decisions.
    Secretary Geithner. I take responsibility for anything that 
I am part of doing. I would be happy to. What I can't take 
responsibility for is for the legacy of the crisis you 
bequeathed----
    Representative Brady. This is your budget, this is your 
bailout, this is your stimulus, this is your act----
    Secretary Geithner [continuing]. I take full responsibility 
for those with great honor and----
    Chair Maloney. The gentleman's time has expired.
    Mr. Hinchey is recognized.
    Representative Hinchey. Mr. Secretary, thank you very much 
for being here; and I very much appreciate much of what you 
said in the context of your testimony.
    In the context of your reaction to the statement that was 
made just a moment ago, it was also pretty solid and secure, 
too.
    It is just amazing to me how there are some people here who 
are trying to pretend--and I think consciously and 
intentionally pretending--that the economic circumstances that 
we are confronting, all of them mysteriously materialized over 
the course of the last 9 months or so, which is totally, 
completely false.
    We know what the situation is here. We have been facing one 
of the most difficult and dangerous economic circumstances in 
the history of this country. Nothing compared to it other than 
the collapse in 1929. And mostly that experience of economic 
decline was based upon the Gramm-Leach-Bliley bill which, among 
other things, repealed the Glass-Steagall Act. And the Glass-
Steagall Act, of course, was something very, very wise which 
was set up in 1933 to deal with the collapse in 1929 and make 
sure it didn't happen again, and it was very successful. It did 
so for a long period of time.
    But then it was repealed. And after it was repealed, we saw 
the gross manipulation of economic circumstances in this 
country, one of the worst--maybe the worst that we have ever 
seen. And all of that has led to the situation that we are 
dealing with.
    In order to attempt to deal with it, your predecessor came 
here and said that we needed $700 billion to just give out to 
the banks. And eventually that was done, even though some of us 
thought that it was being done in a very casual way, not with 
enough oversight, not with enough attention, not with enough 
care and not with enough requirements in the context of 
receiving all of that huge amount of money.
    But that wasn't all. A lot more came out. We are estimating 
now something in the neighborhood of $4.3 trillion in various 
ways were sent out to financial institutions. So all of that 
occurred in a way that really needs to be dealt with now.
    One of the interesting things that you said was there are 
no financial institutions--none of them are too big to fail. 
And I think that that is exactly right. We are introducing 
legislation--as a matter of fact, has been introduced in the 
Senate. We are introducing it in the House today--that would 
just simply say, if it is too big to fail, it is too big to 
exist. And that is something that really needs to be done. It 
needs to be done in the context of responsibility.
    You can't be a financial institution, do whatever you want, 
do it recklessly, carelessly, which is impeding upon all of the 
people across this country and then step forward and say, we 
are too big. You can't do anything to us. We are going to 
continue. That needs to stop.
    There is also initiation of a modern Glass-Steagall Act 
that is also going to be introduced here in this Congress, and 
it is about time that that were put back into play. We need a 
regulation of these economic circumstances here which have been 
so grossly, intentionally, purposefully, consciously, 
manipulated by these financial institutions and which have 
caused the crisis that we are confronting.
    All of that is true, unlike what you just heard a few 
minutes ago. So I would like you, if you wouldn't mind, to tell 
us a little bit more about the idea that none are too big to 
fail and if there is an estimation that it is too big to fail 
it really is too big to exist. And what we should be doing to 
stop the manipulation of financial investment activities, that 
manipulation which began to occur right after the repeal of the 
Glass-Steagall Act and which has continued to occur over the 
course of the last 10 years and which now has no serious 
impediment to begin to occur again. And unless we step forward 
to deal with it, there is a strong likelihood that this economy 
is likely, over the course of the next several years, to 
experience another deep decline.
    Secretary Geithner. Congressman, no financial system can 
work if firms live with the expectation that the government 
will come in and save them from their failures. One of the most 
important things we have to do is to make sure that we prevent 
firms from taking on the level of risk that can threaten the 
system and make sure the system is strong enough to allow them 
to fail and that we contain the devastating panics that can 
come if you allow a system to become too fragile.
    The bill that is working its way through both Houses of 
Congress now provides authority that did not previously exist, 
to limit risk taking, limit the scope and size of institutions 
if they take on too much risk relative to capital and to, as we 
said earlier, to allow them to fail, manage their failure 
without putting the taxpayer at risk of taking on losses.
    That is hard to do right, hard to get right. But it is a 
critical thing to do.
    Now, it is important to recognize that you had actually 
relatively small firms like Bear Stearns and Lehman cause a 
huge amount of damage. So one of the things to make this hard--
it is not just about the large institutions. It is about 
smaller institutions that are so risky, so interconnected, play 
such a critical role in the system, that even their failure, if 
your system is too fragile, can cause a lot of damage. So you 
have to worry about containing risk, and it is more complicated 
than just focusing on size, although size sometimes means more 
risk. But the critical thing is you need to make sure the 
system is strong enough that you can let these firms fail and 
you don't have the taxpayer exposed to bear losses.
    Representative Hinchey. We have seen a lot of banks fail, 
but the banks that have failed are small ones. They failed 
because they weren't prevented from failing. The big ones were 
prevented from failing, and they are the ones that really need 
the attention.
    Secretary Geithner. I agree with you about that. And there 
actually were a lot of large firms that failed. And the firms 
that are surviving are actually substantially smaller and have 
much less leverage, which is very important. We need to make 
sure we sustain that.
    Chair Maloney. Thank you.
    Senator Brownback.
    Senator Brownback. Pass to the Congressman.
    Representative Campbell. Thank you, Senator; and thank you, 
Madam Chair; and thank you, Secretary Geithner.
    As you know, as was alluded to earlier this week, that the 
Inspector General for TARP came out and was quite critical of 
your actions while President of the New York Fed relative to 
AIG. I don't dispute the necessity to stop what would have been 
a precipitous failure of AIG. The question I have is, why did 
you choose to pay all the counterparties a hundred cents on the 
dollar when some of them were even for months offering to 
accept less? It is like you are going to buy a car, the dealer 
offers it to you for a discount, you say no, no, no, I insist 
on paying sticker price. Why did you do that?
    Secretary Geithner. Excellent question and thank you for 
what you said at the beginning, which is recognizing the 
importance of preventing default by that institution.
    I think the clearest way to say this--because it seems 
basically inexplicable and unfair. The clearest way to say it 
is that this institution, like almost any financial institution 
in the world, made thousands, tens of thousands of contractual 
commitments. If you default on those commitments, then you will 
end up defaulting on all commitments and the firm will come 
collapsing down and fail.
    When you make a choice to prevent failure, you are 
basically deciding that you have to have the firm meet its 
contractual commitments. There is no middle choice.
    Now if you had resolution authority, as the chairman 
alluded to, you would have a better set of--better capacity to 
make sure that----
    Representative Campbell. Let me stop you. Because even in 
the case where one of those parties offers?
    Secretary Geithner [continuing]. Exactly. This is a very 
important thing, and that is why I think it takes a lot of care 
and experienced people to walk through the history of this to 
do it justice.
    There was no creditor at AIG, no counterparty to AIG that 
offered any concession. It was not contingent on everybody else 
providing an equivalent concession. You would never do that. No 
one would do that. And you cannot selectively impose haircuts, 
break your contractual obligations without courting default, 
downgrade, and the basic failure of the firm.
    So it is really like a light switch. Unless you have 
resolution authority, if you decide you prevent default, then 
you prevent default and that firm is able to meet its 
obligations. You can't selectively go and impose haircuts or 
default without courting the big, cascading collapse of the 
firm.
    Representative Campbell. I am not sure I agree. I am not 
sure the Inspector General agrees.
    But let me just go onto the second question so that we 
don't----
    Secretary Geithner. Can I just say there is no--this is a 
very important thing, and it is going to take a lot more time 
and review for people to understand this. But there is no 
credible argument that there was a middle path with the 
existing authorities available to the Treasury and the Fed at 
that time to selectively default on the counterparties firms. 
There is no credible argument to that. But the key thing is to 
make sure we have authority in the future to give us better 
choices.
    Representative Campbell [continuing]. Mr. Secretary, let me 
go on.
    You talked a lot about resolution authority, different 
regulatory things that we have to see that we don't have this 
problem happen again in the future, that we have a way to deal 
with it. And I agree with that. I don't agree with your bill 
which is working its way through financial services, because I 
think you have to find a sweet spot here which is a place where 
you have the necessary tools but you don't go overboard and too 
far to restrict market activity. And I think you have not found 
that sweet spot. In my opinion, you have gone overboard on 
that.
    Let me ask you instead with--because there are a lot of 
risks to the economy out there right now. We know things are 
not good. The stock market seems to like things, but obviously 
employers don't right now. There are a number of risks going 
forward.
    Banks aren't lending. I would argue part of that is because 
they don't trust the Treasury on a number of different 
activities, whether it is taxes or executive comp or various 
other things.
    We have the looming CMBS crisis, which everybody talks 
about and that it is going to be a very negative impact on the 
economy next year, but I am not sure quite what you are doing 
about it.
    There will be a whole bunch of additional mortgage 
foreclosures next year, not just subprime, as you know, but 
also a number of things because of some of the mortgage 
resolution--I don't know, whatever you want to call them--that 
we put in place earlier this year. They are taking a long time 
to work, but they are actually delaying foreclosures. So there 
are a lot of foreclosures that would have happened this year 
that are going to happen next year because they are going 
through that regulatory process to make the foreclosure. But 
they are going to happen.
    We have a huge amount of debt that the Treasury is going to 
be borrowing, which is sucking up more capital that could 
otherwise be available to lend or to invest in businesses.
    We have tax increases on the horizon, huge--I mean, it 
seems like everything that this Administration proposes has a 
tax increase. Plus there are the expiring tax increases at the 
end of next year; and, obviously, we have the looming--the 
unemployment rising all over.
    That is six different threats to a double-dip recession 
going on in the economy next year, and I don't see what 
Treasury or the Administration is doing except making them all 
worse.
    Secretary Geithner. Congressman, I could not agree with you 
more. I think you are right, though, to point out that--and it 
is very important to be able to hear what you said. You are 
acknowledging that there are still lots of things broken in our 
financial system, that there are many challenges ahead for 
parts of our financial system. And you see it in housing, 
commercial real estate. You see it in small business credit. It 
is very good for you to acknowledge that, because I think it 
underscores the basic reality that this is going to take some 
time to fix.
    There is nobody who cares about this more than I do and 
nobody who has not been more honest and open about the scale of 
challenges we still face in this financial system. And it takes 
time to work through these things. But the important thing to 
recognize is that there is today something that did not exist a 
year ago and did not exist 10 months ago, which is there is 
confidence in the stability of the financial system. Mortgage 
interest rates are at historic lows. Treasury is borrowing at 
historic lows. Americans are saving more. We are borrowing 
dramatically less from the rest of the world than we were a 
year ago and 2 years ago. We have companies around the country 
now that can issue debt, can issue capital, can borrow at 
dramatically lower interests rates. None of that was possible a 
year ago.
    And I could not agree with you more, though, that it is 
important for everyone to understand the magnitude of the 
challenges we still face and this is going to take time and 
effort or we are going to face a risk of a weaker recovery 
because a credit crunch could get in the way of job creation.
    Representative Campbell. I guess my point is simply that I 
agree with that. But you have to be doing things to help these 
problems, not either ignore them or do things that make them--
--
    Secretary Geithner. We are ignoring no problem facing the 
country. We also understand it is going to take more effort, 
and I am glad to hear you appreciate that, too.
    Chair Maloney. Thank you.
    Congresswoman Sanchez.
    Representative Sanchez. Thank you, Madam Chair; and thank 
you, Mr. Secretary, for being before us today.
    I have a lot of questions and not enough time, so hopefully 
you will give me concrete, fast answers because I have several 
to go through.
    Do you have any concern about our monetary base tripling in 
the last 4 years and how is this Administration going to deal 
with the inevitable inflation?
    Secretary Geithner. We have established by the Congress an 
independent Fed with a basic obligation to make sure we keep 
prices low and stable over time. The Fed has an exceptional 
record in doing that; and I am completely confident if we 
preserve their independence, make sure they have that 
authority, they will be able to do that.
    If you look at the economy today, though, we have--although 
growth is just starting, unemployment is very high, and 
inflation is very low, and it is actually still decelerating, 
not accelerating. And If you look at broad measures of 
inflation expectations, what consumers think will happen to 
prices in the future, they actually look pretty stable at 
relatively low levels.
    As I said earlier, the Treasury is actually borrowing to 
finance these exceptionally high deficits at the very low 
interest rates. That indicates a lot of confidence among 
Americans and countries around the world in the basic strength 
of the Fed's independence and about the ability of this 
Congress, the ability that we will all have to prove together 
we will have the will to bring these deficits down to a 
sustainable level when this economy recovers. So I would not 
put that concern you referred to as anything like among the 
most pressing concerns facing the country.
    Representative Sanchez. Well, I will just answer to that, 
Mr. Secretary, when the Euro is 1.62 against the dollar, when 
we have lost a lot and we have had a lot of devaluation with 
respect to our dollar with almost every country's currency, I 
know my dollar is worth less today.
    Secretary Geithner. Can I just address that?
    Because, Senator Brownback, you made some very thoughtful 
and I think appropriate comments at the beginning of your 
opening statement about this, and I want to make sure--I know 
we will have a chance to talk about it. But let me just say 
something in response to this now.
    What your chart missed and which is very important is that, 
as this crisis intensified, particularly starting in September 
of last year and into February/March of this year, you saw, as 
the panic intensified, as fear of global depression, financial 
collapse, perhaps global deflation increased around the world, 
you saw not just Americans but countries around the world put 
their savings in treasuries. And you saw the dollar play its 
classic role as safe-haven at that point, and you saw a lot of 
money come into the United States, and that pushed the dollar 
up very substantially. And as growth recovered, as the 
financial system stabilized, as interest rates come down, you 
have seen part of that process reverse.
    And that is a very important thing. It underpins how 
important a role this country plays in the global financial 
system.
    But we all have to understand that we have a deep 
obligation to make sure that we are doing things that sustain 
confidence in this financial system and in how we run our 
country, and that is going to require us working together over 
time to make sure we bring down these large inherited fiscal 
deficits down to a sustainable level over time.
    Representative Sanchez. Mr. Secretary, you are using my 
time up.
    How can you seriously be discussing reform when Wall Street 
is paying out record bonuses and at the same time people, 
including some from the Administration, are proposing a tax 
increase on the public in the form of a trading tax? I think 
that our markets, especially our equities markets, are very 
vulnerable right now. They are very volatile. We are beginning 
just in the last 2 days to see a downswing again. And to 
propose that we establish a trade tax at a time when people are 
still afraid to go into the market I think would just plummet 
the market even more.
    And I really would like you to answer--I know that maybe 35 
executives or something are going to get their compensation 
slashed. And, believe me, I come out of a financial industry. I 
understand--I used to work with Wall Streeters. But I think 
America still feels that it is completely outrageous that Main 
Street is out of jobs and that Wall Street is still getting 
bonuses.
    Secretary Geithner. You are raising two different concerns.
    Representative Sanchez. Correct.
    Secretary Geithner. You are right that Americans are angry 
and frustrated with what they have seen happen to the country 
and the financial system, and they are right to be angry and 
frustrated. And it is very important that, as part of the 
reform of the financial system, we change the structure of 
compensation so it is not generating excess risk taking in the 
future, leaving our financial system as vulnerable as it was 
coming into this.
    Now, I agree with you that I think we have to be very 
careful in talking about imposing taxes on the financial system 
that might undermine this process of recovery that we have seen 
in confidence.
    Representative Sanchez. That is what I am saying. But I 
have heard from the Administration that you would be supportive 
of some taxing of transactions on Wall Street, and I think that 
is completely inappropriate at this time.
    Secretary Geithner. That is not something you have heard 
from the Administration. But I want to make sure you understand 
what we would consider and what thing is important.
    As part of financial reform, in designing the future rules 
of the game for this financial system going forward, we think 
there is a very important principle that exists now for banks 
and thrifts, which is if the taxpayer is ever exposed to the 
risk of loss in the future, that those losses be recovered by a 
fee on the financial industry imposed over time so that 
taxpayers are not exposed to absorb losses made by private 
institutions. That is a basic, fair principle of justice. It is 
a principle we have today for banks and thrifts. And it is a 
necessary, essential thing. But that is about a long-term set 
of reforms, and it is not the type of tax that you described.
    Representative Sanchez. So you would be against that type 
of a per transaction tax?
    Chair Maloney. The gentlewoman's time has expired. The 
gentleman may respond if he----
    Secretary Geithner. As I have said many times before, I 
have not seen a version of that kind of tax that I think would 
work, be effective, and would be appropriate for our country.
    Representative Sanchez. Thank you, Mr. Secretary.
    Chair Maloney [continuing]. Congressman Burgess.
    Representative Burgess. Thank you for the recognition.
    Secretary Geithner, you were referencing in your answer to 
an earlier question about whether the financial catastrophe 
started in September or October of last year. If I understood 
you correctly, you said that this country did not have the 
tools to manage that panic, but the inference that I took from 
that was that there were countries overseas that did have such 
tools.
    Now, I recall a phone call with your predecessor in late 
October of 2008 when it became public that the United States 
was pumping monies into the Central Bank in Europe and other 
places, and I suggested that was not the correct thing to be 
doing. And he said, if the United States is not helping these 
countries then they will collapse.
    So which is it? Were we the savior of those countries that, 
according to the current President, didn't even like us that 
much until he took office? Were we the savior of those banks 
and those countries? Or were we, in fact, incapable of dealing 
with the problem? And was that money, in fact, going to foreign 
banks at that time in October of last year as was widely 
reported in the press?
    Secretary Geithner. Congressman, there is no country that 
came into this crisis with the tools to manage effectively. And 
the basic failure described here was a common failure. One 
thing you saw around the world----
    Representative Burgess. Let me ask you a question then. How 
did George Bush cause those countries to be unprepared for a 
financial crisis? Glass-Steagall has come up this morning. If I 
recall, Glass-Steagall was repealed--that bill was signed by 
Bill Clinton, not George Bush. And I frankly don't understand 
if that is such a good protection--this President has been in 
office for 10 months--where is the signed legislation 
reinstating Glass-Steagall?
    Secretary Geithner [continuing]. I would not support 
reinstating Glass-Steagall, and I actually don't believe that 
the end of Glass-Steagall played a significant role in the 
cause of this crisis.
    Representative Burgess. Let me move on, because my time is 
going to be limited. I do hope we will be able to submit some 
of our questions in writing, because this is a critical 
hearing, and time is limited.
    Chair Maloney. Absolutely.
    Representative Burgess. All right. We have got the TARP. It 
is supposed to expire. Why won't we let it die a natural death, 
rather than letting it painfully linger and absorbing tax 
dollars?
    Secretary Geithner. We are working to put the TARP out of 
its misery, and no one will be happier than I am to see that 
program terminated and unwound. And I want to point out we are 
moving very aggressively to close down and terminate the 
programs that defined TARP at the beginning of the crisis.
    Representative Burgess. Well, it looks like the money is 
going out with little or no oversight.
    Secretary Geithner. That is absolutely not true. The 
Congress established three separate oversight committees.
    Representative Burgess. Your own Special Inspector General 
for the Troubled Asset Relief Program has got several concerns. 
Why not just stop spending on the TARP funds and why not repeal 
the program? We don't need it anymore. The American people 
never liked it. Let us just do away with it.
    Secretary Geithner. Let me just point out the disagreement 
between what your colleague said and I think what most people 
across the country understand and believe, which is that if you 
look at what is happening in housing, if you look at what is 
happening to small businesses, this economy still faces 
tremendous financial challenges.
    Representative Burgess. What is happening to small 
businesses, people are frightened to add jobs because they 
don't know what we are going to do to them in health care. They 
don't know what we are going to do to them in financial 
regulation. They are scared of what we might to with energy 
prices in the future with cap-and-trade. Small business, 
medium-sized business is frightened at jobs right now.
    I can help the President and his panel. He doesn't need 
another program. We don't need another stimulus. We need to 
provide some tax relief, and then get the heck out of the way 
and the American economy will recover as it has always done.
    Secretary Geithner. That broad philosophy helped produce 
the worst financial crisis and the worst recession we had seen 
in generations. We had a pretty good test of that philosophy, 
pretty good test of those policies. That did not serve the 
country very well.
    Representative Burgess. Mr. Geithner, when I came here in 
2003, we were in a jobless recovery. Tax relief was passed in 
May of 2003; and, as a consequence, by July of that year, we 
were adding jobs at a significant rate. It seems to have worked 
fairly well.
    Let me finish up and say I disagree with Mr. Brady. I have 
the greatest respect for him. I don't think that you should be 
fired. I thought you should have never been hired.
    And I objected when the hearings were going on over in the 
Senate. I thought there were too many question marks about 
things that had occurred in the past, and it did not leave the 
American people with a good feeling about the person who was 
going to be responsible for this economic recovery.
    What can you say today--I mean, I will tell you, my 
constituents, they are not just anxious. They are mad. They are 
fighting mad about what has happened in the economy. They are 
fighting mad about the stimulus. They are fighting mad about 
how many jobs we created in Arizona's 9th district. Do you know 
the Member of Congress from Arizona's 9th district? They won't 
have a 9th district until after redistricting next year. They 
only have 8 right now. This kind of nonsense is what the 
American people are seeing, and that is why they are so upset.
    Chair Maloney. The gentleman's time has expired, and the 
Chair would like to ask a question.
    During the Bush Administration, real median income fell by 
over $2,000, or about 4.5 percent, and a very disturbing trend 
in our country is that the gap between the haves and the have-
nots grew by 2 percentage points, and an additional 8.2 million 
Americans are now living in poverty. And do you think that 
these factors contributed to the overleverage of American 
households and ultimately contributed to the financial crisis?
    Secretary Geithner. Chairwoman, we had a decade-long 
increase in inequality in America. It did not start in this 
decade. It really started a long time ago.
    But, in the 1990s, we had a long period with budget 
surpluses, rapid growth in private investment, rapid growth in 
productivity across the American economy, with broad-based 
gains in income for middle-class Americans. That record should 
make one optimistic about this country and what is possible if 
you get the basic policies right.
    But you can see from the state of this economy looking back 
just a year ago what happens when you get those broad judgments 
wrong; and it is--as I said in my opening statement, it is 
unfair and unjust because the people who bear most of the 
burden of those crises are the people that are most vulnerable.
    Chair Maloney. Thank you.
    Mr. Snyder, Congressman Snyder.
    Representative Snyder. Madam Chair, I will let Senator 
Casey go first; and I will take the next round.
    Chair Maloney. Senator.
    Senator Casey. Thank you so much, Madam Chairwoman.
    Secretary Geithner, thank you for being here, And I 
appreciate your public service. I voted for your confirmation, 
and it was the right vote.
    We have got and you have been tasked with the 
responsibility, among others, of dealing with the most adverse 
economic circumstances one could imagine. I won't get into the 
discussion of what you walked into, but suffice it to say 
economically and otherwise you had to deal with a mess.
    The question I have and I think you can hear some it of in 
the questions today. I know you are cognizant of this. When we 
talk to our constituents and when they contact us, it is pretty 
fundamental it is about jobs. And often in Washington we are 
debating things that have an impact on jobs, we hope, in a 
positive way. But, too often, we are not focused enough on that 
essential problem.
    In Pennsylvania, we have at last count about an 8.8 percent 
unemployment rate, very high, a very high number, but not as 
high as many states like Michigan and others that are suffering 
much higher numbers in the double digits. But in our state it 
still adds up to half a million people. We know that the 
foundation of that or the origin of that started with the 
housing market and all of the things that we have discussed 
today.
    I guess I would ask you this fundamental question. If our 
focus has to be, as it is, I believe, the President--President 
Obama's Administration and others are focused on attacking the 
job problem directly, and I think there is broad agreement 
about that, but the more specific question about that comes to 
us in the form of: I run a small business. I cannot get access 
to capital. How do we deal with that literally in the next 6 
months in a better, more targeted way than we have up to date?
    Secretary Geithner. The most important constraint on small 
business getting access to capital is what is happening to 
small banks. Small businesses get about 90 percent of their 
capital from banks. Most of those are small banks; about half 
of them are small banks. And the best way to be responsive to 
that was to make sure they have access to capital.
    Now, we have put in place a series of programs to make it 
possible for small community banks to come and get capital from 
the Treasury. And, as the chairwoman said at the beginning, the 
President announced a new program 3 weeks ago to make it even 
more attractive. And, under this program, if you come and 
provide a plan to increase lending to small businesses, we are 
prepared to provide access to even cheaper capital for a 
temporary period of time. And we think these kind of 
investments would have a good return over time.
    But for that to work, banks have to be prepared to come. 
And banks, as you know, are very reluctant to come, because 
they are worried that they are going to be stigmatized with the 
association with the TARP. And they are worried that, to be 
direct about it, that the Congress is going to change the 
conditions in the future in a way that could disadvantage them. 
So we are trying to figure out a way to make that work, but we 
are going to need some help from the Congress on that front.
    Now, the SBA, the Small Business Administration, because of 
actions put in place in the Recovery Act to temporarily reduce 
guarantee fees and increase the loss-sharing under those 
programs, has already produced a 75 percent increase in SBA 
lending over the months since the Recovery Act was passed. And 
we have proposed, the President has proposed a range of 
measures to increase the limits under those loan limits 
temporarily, other actions that would help make sure we are 
maximizing the potential benefit of that program.
    Now, we are also doing some broader efforts to try to make 
sure that the securities markets that are so important to 
small-business lending, auto financing, some consumer lending 
as well, even commercial real estate, are opening up again. You 
have seen issuance in those markets increase very 
substantially, and the cost of borrowing in those markets has 
come down substantially. But that has to reach the broader 
economy as a whole.
    But you need to work on all those fronts, all those fronts.
    Now, you saw Chairman Bair, yesterday, highlight some new 
guidance the supervisors provided to make sure examiners are 
bringing a balanced approach to looking at risk and exposure to 
commercial real estate. Those things are important. Those 
things are important, too.
    We proposed in the Recovery Act and have proposed to extend 
and expand a range of tax credits for small businesses. Those 
can help, too.
    You need to move on all fronts, and it is going to take a 
sustained effort.
    Senator Casey. Well, I would urge you to consider the 
immediacy of those policies, because I think people's patience 
is fast running out, if it hasn't run out already.
    One more point before we wrap up. I want to thank the 
congressman for allowing me to jump ahead of him in line. That 
doesn't happen often in the Senate, so we like when it happens 
over here.
    Finally, you will be getting a letter, you may already have 
it in your office or you may be seeing it in the next couple 
days, regarding a Pennsylvania program that was put in place in 
the early 1980s, the Homeowners' Emergency Mortgage Assistance 
Program, so-called HEMAP. I would urge you to take a look at 
that as a model for helping on the foreclosure housing problem 
in the midst of, or tying it to, job loss and the adverse 
effects of that.
    Madam Chair, thank you very much.
    Chair Maloney. Thank you very much.
    Senator Brownback.
    Senator Brownback. Thank you, Madam Chairman.
    I would ask, just formally, unanimous consent that Members 
can submit additional questions for the record.
    Chair Maloney. Absolutely.
    Senator Brownback. Thank you very much.
    Secretary, I want to ask a couple of areas, if I can, going 
into the regions that we talked about. First, you are familiar 
with the Kansas City Fed Chairman Hoenig's proposal on his 
solutions to the too-big-to-fail proposals. And, as I 
understand, you are generally supportive of that approach? Are 
you familiar enough to be able to say that?
    Secretary Geithner. Well, I don't--I wouldn't support all 
of the details on that. But I completely agree with the basic 
principle you stated so clearly at the beginning: that you have 
to contain the risk that, if these institutions get too big and 
too risky, they could cause this kind of damage. And you have 
to have the ability to allow them to die and fail without 
causing catastrophic damage.
    And that basic objective is at the center of what Tom 
Hoenig has proposed. And he is a very thoughtful early advocate 
of reforms in this area.
    Senator Brownback. And you generally support that concept?
    Secretary Geithner. Absolutely, 100 percent.
    Senator Brownback. All right. Because we will be developing 
the specifics on this.
    The health-care bill was rolled out in the Senate last 
night. And, any way you slice it or dice it, it is a multi-
trillion-dollar entitlement program, paid for, according to CBO 
scoring, by Medicare cuts, reductions, tax increases, some 
other things.
    I want to say to you that the proposal has a 15 percent 
annual decrease in Medicare cost going to pay for the health 
insurance proposal. The likelihood of that actually happening 
is, say, between slim and none, and slim just left town. I 
don't see that happening, from past practices in Congress.
    So the likelihood is you are going to add to the debt and 
deficit with this proposal, because you are not going to get 
the reforms you are talking about. Plus, on top of that, 
Medicare is not financially sound, according to your own 
Medicare trustees report that you are a part of.
    So I just really think this is a wrong idea at a horrific 
time. And I can't help but think that the international 
community that is after us and particularly you to get the 
fiscal house in order is not particularly excited about, 
``Okay, you are going to do all this, and, yes, this will 
actually happen.'' Now, I really want you to think about that.
    And just, finally, because my time is going to run out, and 
you hold the key on this one, is the Chinese currency. And 
Senator Schumer, Senator Graham have a bipartisan bill pushing 
that this has got to get realigned. And you have seen this 
chart, you know this chart. You were commenting about, ``Well, 
I think the tax cuts and things produced this tough economy.''
    Secretary Geithner. I didn't say that.
    Senator Brownback. Well, maybe I misheard you. But, if I 
could, I have had a number of pretty good economists say to me 
that what happened was we got too highly levered as a country. 
A lot of people--we hit the energy crisis where you get $4 
gasoline. It emptied their wallets for fuel. They didn't have 
money to make the housing payment. The money was coming back 
into the country because it was recycled because of our trade 
imbalances, whether it is on fuel or whether it is on things 
from China. So the money is coming back in, searching for 
places to go, to move to. People get highly levered. They hit a 
bad problem, an energy crisis, and it triggers the whole thing.
    My point in saying all of that is, I think there are other 
bases to look at for why the economy failed, but, clearly, to 
climb out of it, we have to get the currency back, right? 
Particularly against our largest trading partner in China. And 
you are the guy to do this.
    Secretary Geithner. Senator, can I--I want to respond. Both 
of these----
    Senator Brownback. Please.
    Secretary Geithner [continuing]. Things are very important. 
And I will do it very briefly. Let me just start with health 
care.
    I think as you understand, the biggest long-term fiscal 
problem we have as a country is the rate of growth in health-
care costs. And the most important thing we have to make sure 
we do as we try to improve this basic health-care system is to 
make sure that we are bringing down those long-term costs.
    Now, this bill, in the eyes of CBO, will make a material 
difference, for the first time in decades, in bringing down 
those long-term costs. That is the most important thing we can 
do for the long-term fiscal deficit. Now, this bill meets 
another critical test, which is, over that first 10-year time 
frame, it reduces the deficit; it does not add to the deficit.
    Now, you are absolutely right that that depends, in part, 
on realizing very substantial cost savings in Medicare. And it 
requires the Congress be willing to enact those reforms and 
hold to them. But they are a necessary thing to do. I don't 
think there is any credible argument to say that, at the heart 
of reform, you need to, like, bring down those costs and do 
those savings----
    Senator Brownback. Why not put those back into Medicare, 
then, to save that program? If you are going to make these 
savings in Medicare, which are the heart of funding of this 
proposal, Medicare is not financially solvent, by your own 
Medicare trustees' report.
    Secretary Geithner [continuing]. Again, the biggest threat 
to long-term solvency of Medicare and Medicaid and the biggest 
threat to our long-term fiscal solvency as a country is a 
health-care system that has enormous hidden costs, and those 
costs are rising at an exceptionally high rate of 
unsustainability. And fixing that problem is absolutely 
critical to our economic future.
    Now, you are right to say, you have to do it in a way that 
is fiscally responsible and credible. And what the Congress is 
now doing and what the President proposes is something that is 
critical to that, which is to say, ``We are not going to do new 
things, new, expensive things, long-term commitments, without 
paying for them and without committing to pay for them.'' And 
there is no path to credibility on the fiscal side that doesn't 
start with that basic commitment.
    Now, I wanted to address your point about the exchange rate 
question. You are absolutely right that, to try to make sure we 
have an economy that is growing again globally, in a balanced 
way that is sustainable over time, that doesn't create the same 
kind of risks we saw helping contribute to this crisis, we need 
to see a broad move to more flexible exchange rates across our 
major trading partners. And most of them have already done 
that, and that is helpful.
    But China, as I have said many times, has committed to--
they understand they need to do it. I think they want to do it, 
and I am actually quite confident they will do it. But that is 
only part of trying to make sure that, again, they are changing 
the structure of their economy to one that is less reliant on 
exports, more reliant on domestic consumption and investment. 
And that is starting to happen; that process, though, is going 
to take some time.
    But you are right to emphasize the importance of this. And 
you are right, also, to emphasize that there is a broad 
consensus around the world that that is important to happen. It 
is not just an issue for us and China; it is an issue for every 
economy that competes with China in our markets and around the 
world.
    Chair Maloney. The gentleman's time has expired.
    Congressman Snyder.
    Representative Snyder. Thank you, Secretary Geithner, for 
being here. I appreciate you being here today, and I appreciate 
you being in the position you are in at this very difficult 
time in our Nation's history.
    I wanted to make a brief comment about the 1997 Balanced 
Budget Act. It was one of the first big votes I made. And, as 
you know, it was a bipartisan vote. Newt Gingrich was Speaker; 
Bill Clinton was President. I think the facts show that, in 
fact, it worked amazingly well, and we had budget surpluses in 
fiscal years 1998, 1999, and 2000. And you may remember the 
days when Alan Greenspan was testifying, concerned we were 
going to pay down national debt too rapidly.
    And then we had a change of administrations. We had the 
April 2001 economic plan, which I did not vote for, and the 
$5.6 trillion surpluses as far as the eye can see, for a 
variety of reasons, including the attacks on September 11th. 
But I think that the record of the 1997 act is clear.
    I can only speak for the House bill, but the CBO says that 
it adds 5 years to the trust fund. It does it by, in fact, 
expanding some services to seniors, including gradually closing 
the donut hole. But it does it by trying to get better and more 
efficient: preventing readmissions into hospitals, more 
efficient with pharmacy, better pricing on pharmacy, avoiding 
medical errors. I think there are just a lot of reasons to 
think that we can address the long-term fiscal soundness of 
Medicare.
    I wanted to ask two or three quick questions. First of all, 
with regard to Cuba, in your position, you actually have 
authority to deal with some of the policies we have with regard 
to Cuba.
    Can you assure us today that you have done everything you 
can to maximize the ability of Arkansas farmers to sell 
products to Cuba without laborious financial arrangements? Can 
you assure us that you have done everything you can to allow 
travel by businesspeople, agricultural interests to Cuba 
without some of the convoluted permitting that seems to be 
required?
    Secretary Geithner. I believe we have. You know, as you 
know, we have to obey the laws as passed by this body. And, 
consistent with that constraint, I believe we met that test. 
But I would be happy to spend some time talking to you and your 
staff about whether we have got that balance right.
    Representative Snyder. I would hope that it would not be a 
balance. I would hope you would be doing everything you can to 
maximize sales of agricultural products. It is legal to sell. 
It seems like the financial arrangements ought to not stand in 
the way.
    I wanted to ask, with regard to community banks, one of the 
issues that will go along as this progresses is our local 
bankers--you know, I don't have many Wall Streeters drive by my 
house when I am mowing my lawn. I have a lot of bankers that 
drive by my house and stop in their pickups and say, ``What is 
going on with this?''
    But, as you know, the community banks get jumpy when they 
see these things coming down. At some point, we are going to 
have a final version of a bill, and I hope that it will be 
evaluated very thoroughly by you all about what potential 
impact it could have on smaller banks.
    I was talking to a bank the other day, and they are 
apprehensive. And we talk about novelty products that got the 
financial system worldwide in trouble. A novelty product for a 
community bank may be a Christmas gift card, and yet somehow 
the rules could be written in such a way that it would be 
brought under that.
    What is going to be your process for evaluating the impact 
on community banks as we get down to a final version?
    Secretary Geithner. I completely agree with you that, as we 
fix what was broken in our system, we need to make sure we are 
preserving opportunities for innovation, choice for consumers, 
competition among banks--very important thing to do. And this 
bill recognizes the critical role community banks play in our 
system. You know, it is a great strength of our system that we 
have 8,000 small community banks existing alongside what are 
still some of the largest institutions, most successful 
institutions in the world. We want to preserve that.
    Now, at a core part of our reforms, we are doing one very 
simple important thing, which is to make sure that the large 
institutions are held to tougher standards, higher standards 
than a small community bank. It is sort of the reverse of what 
has happened to date. If you look back at the last 5 years or 
so, you saw big banks hold basically less capital than small 
banks held, and that is untenable. And we need to change that.
    We have also tried to be very careful to make sure that 
taxpayers aren't exposed in the future without putting 
additional burdens on small banks. But, on the consumer side, 
as we design stronger protections for consumers, as well as on 
the basic sense of fairness, more risky firms held to tougher 
standards; smaller, less risky, appropriately not. And, as we 
make sure taxpayers are protected from bearing the costs of 
future financial crisis, we want to do so in a way that doesn't 
burden small community banks.
    Representative Snyder. My last question. I think there is 
bipartisan interest in dealing with our national debt and 
indebtedness. It is just a question of when and how you will go 
about doing it.
    We talk about States having balanced budgets, but, in fact, 
States borrow money all the time for infrastructure projects. 
Governor Huckabee led a bond issue that was approved by the 
voters to dedicate the Federal money coming to the State for 
highways and expedite the building of roads.
    Should we be looking at our infrastructure indebtedness at 
the Federal level differently than we do indebtedness on other 
items? Or is it helpful just to have it all lumped together?
    Secretary Geithner. Well, I think you are absolutely right 
that we have had a long-term degradation in the basic quality 
and adequacy of large parts of our public infrastructure. And 
that, left unaddressed, will hurt growth.
    But we have to figure out a way to fix that without adding 
to what is an unsustainable long-term fiscal position. And that 
is going to require new approaches, more creativity, to try to 
make sure we are getting more leverage for any additional 
taxpayer dollars we put at improving these basic investments in 
public infrastructure.
    So I agree with you that it is a critical problem. And not 
least because of the scale of the needs and the size of our 
long-term fiscal problems, we have to figure out new ways of 
doing it that is going to give more leverage for the taxpayers' 
dollars and do a better job of catalyzing private investment 
alongside the government.
    Representative Snyder. Thank you, Mr. Secretary.
    Thank you, Madam Chair.
    Chair Maloney. Thank you.
    Senator DeMint.
    Senator DeMint. Thank you, Madam Chairman.
    Mr. Secretary, I apologize for being late. Thank you for 
being here today.
    And I will ask a question I know that has been asked in one 
way, but I will try to put it in context.
    As you know, I mean, you are in the trenches trying to deal 
with problems, but, as America looks in on us, there is growing 
concern about the reach of government, the debt, the spending, 
the takeovers. And this is hitting a lot of people square in 
the face. I mean, they are seeing reports now of the stimulus, 
of jobs created in congressional districts that don't exist and 
jobs created where--hundreds were created, when only 20 or 30 
were working there.
    They look at the bailout. I hear about it regularly as I 
travel around the State, as money for TARP that was supposed to 
buy toxic assets that then went to do something else. And there 
is a great concern that this is going to be some kind of a 
permanent slush fund.
    I just came from a hearing on financial reregulation, where 
we are going to start a new consumer product or consumer 
protection agency; and the cap and trade.
    But, anyway, the whole point here is, there is growing 
alarm that the power here in Washington to take over goes much 
beyond the constitutional role of providing a framework of law 
and justice for our free country to operate in.
    And it brings me back to the TARP funds. And it would be a 
great signal to our country if, regardless of how any of us 
felt of whether or not it was used the way it was supposed to 
or whether it was necessary, if Treasury made a definitive plan 
to bring the TARP funds back in, put them back in the general 
fund, and to not continue the program as some kind of permanent 
intervention beyond where we were before, it would give, I 
think, a lot of people relief that, no matter how we felt about 
it in the first place, at least there is an end time.
    But I think, as we have asked the question of you before, 
you have hesitated to say that the plan is to let it come to 
its natural end. There is talk of winding it down, but there is 
also talk of having some kind of permanent TARP type of 
structure.
    And so, as clear as you can be, is the plan of Treasury to 
allow this thing to wind down and finish and not to continue 
it?
    Secretary Geithner. Senator, I just want to start where you 
started, and I will come to your question directly.
    I think you are absolutely right. If you look at how 
Americans feel today, they are deeply worried, not just about 
the level of unemployment, they are deeply worried about our 
long-term fiscal positions. And they are uncertain, frankly, 
whether the Government of the United States is going to be able 
to do an effective job, the Congress is going to be willing to 
pass a set of reforms not just to fix what is clearly broken in 
our economy--in education, health care, public infrastructure, 
how we use energy--but also whether we are going to have the 
will--will we did not have in the past--to bring these fiscal 
positions down to a level that we can afford, go back to living 
within our means.
    And I think you are absolutely right that this crisis, this 
recession caused a huge amount of damage to the basic fabric of 
confidence among businesses and consumers. And we share a 
responsibility together to try to restore that confidence.
    Now, on the TARP, a few very important things. When I came 
in office, we had hundreds of billions of dollars in 
investments outstanding in the U.S. banking system. Today we 
have reduced those by more than a third. We have had $70 
billion come back into the Treasury, go directly to reduce the 
debt. We have had substantial earnings and dividends on those 
investments, proving that the actions taken by my predecessor, 
with the support of the Congress, were good investments by the 
taxpayer.
    We have terminated already and are winding down those early 
emergency programs that were necessary to break the back of the 
panic and stabilize the system. And we are going to--I would 
not ever support providing a permanent capacity for the 
government like what was designed in that TARP authority. We 
are going to terminate it as quickly as we can.
    And we are going to be able to because we have been 
successful in stabilizing this financial system, with very 
little incremental additional cost, we are going to be able to 
put substantial resources directly to reduce the debt. And that 
is the most important thing for people to understand about how 
this program has been working and operating.
    So, when I came into office, the government, under 
President Bush, had been forced to take just extraordinary 
actions to try to stabilize the system. And we have been able 
to unwind and reverse, to a very substantial degree, those 
actions already, as I said, at quite good return for the 
taxpayer. You see it not just in the value of their savings 
increasing and the cost of borrowing to finance a home 
declining, cost of credit to businesses declining, but you see 
it directly in money coming back to the Treasury with pretty 
good return to the taxpayer.
    But we will not support and I will not support any effort 
to permanently extend this authority. And we are winding it 
down, and we will close it as soon as we can, recognizing, of 
course, that small businesses across the country are still 
facing the risk of a pretty acute credit crunch.
    Senator DeMint. Well, as you know----
    Chair Maloney. The gentleman's time has expired. And we 
have been called for a vote, so you will have time for a second 
round, and we won't.
    And I want to recognize Mr. Cummings and Mr. Hill before 
they go to vote. And welcome, Senator Klobuchar, who will 
assume the chair.
    Mr. Cummings.
    Representative Cummings. Thank you very much, Secretary 
Geithner. It is good to see you. And I think, as I have 
listened to some of the criticism from the other side, I join 
Senator Casey. I am glad you are there. And I don't know how 
many people could stand the pressure of what you are dealing 
with and do it in the way that you are doing it.
    At the same time, you hear the frustration, I know. And I 
know that the Obama Administration has done a lot of things to 
keep people in their houses. In my district, we have held two, 
what we call, foreclosure-prevention events. And if you were to 
attend one of them, you would see people literally crying. And 
we are getting ready to do a third one. And we have been able 
to save about, I would say, somewhere between 1,500 to 2,000 
people to keep in their houses.
    This is the question. One of the problems that we have run 
into is--and you are probably well aware of this--the banks 
have not staffed up quickly enough. So that when people even 
try to take advantage of the programs that have been created, 
they are not getting answers, they are not getting anybody on 
the phone, as a matter of fact.
    And that is why, what we have done in our congressional 
district to pull the lenders and the borrowers together, and 
they literally work out the process right there. And I know 
that you, I think, had a meeting some time ago with the bankers 
and said, ``Look, we have to do more with regard to 
foreclosure.''
    I guess--and the number-two problem we are running into is, 
it is one thing when somebody has a job; when they don't have a 
job, that is really a problem. And I am not talking about some 
people who just--I mean, these are people who lost their jobs 
through no fault of their own, and now they are stuck, and so 
they are trying to figure out where they go.
    What are your plans with regard to foreclosure? What is the 
next step? And, you know, what can we do to try to help our 
constituents stay in their houses?
    And, by the way, these are prime loans. I know people will 
say, ``Oh, that is subprime.'' No.
    [The prepared statement of Representative Cummings appears 
in the Submissions for the Record on page 49.]
    Secretary Geithner. Yes. Congressman, I think the type of 
investments you have referred to are very important, and they 
can make a big difference.
    Under these programs now to help some homeowners benefit 
from lower interest payments, we have had now 600,000 
households take advantage of this program. That is about half 
of the 1.2 million Americans that are eligible under these 
programs. That pace of modifications is accelerating.
    You are absolutely right that, for us to reach people who 
are eligible, banks have to put many more resources into their 
servicing operations. And we are working very hard to encourage 
that. And you can see now, every month we release servicer-by-
servicer, bank-by-bank data to show how many banks are reaching 
how many of their eligible customers. And so you can see who is 
lagging, who is leading in that performance. And that is 
helping the people who were behind initially feel the pressure 
to catch up more quickly.
    Representative Cummings. Are you continuing to put pressure 
on these folks?
    Secretary Geithner. Absolutely. And my colleagues at 
Treasury meet with that group of people regularly and try to 
put, again, in the public domain very, very clear metrics of 
how they are doing a better job of meeting the needs of their 
borrowers in this area.
    But, remember, 600,000, about half of eligible. And, under 
these modifications, interest payments come down quite a lot. 
The average monthly savings on those things exceed $500 for a 
typical family. It is like a tax cut on a very significant 
scale, and it is a very important benefit.
    And if you look at that combined with what we did to help 
bring mortgage interest rates down, working closely with the 
Fed and Fannie and Freddie, millions and millions of other 
Americans now are benefitting from lower interest rates. And 
that has helped bring some initial signs of stability in the 
housing market. House prices have now risen, modestly, for 3 or 
4 months. That is because of the impact of these programs to 
try to help stabilize the market. And that is fundamentally 
critical.
    But we have more to do to help people who are facing 
foreclosure. We can't reach all those people because some 
people, as you know, just borrowed too much and are just not 
going to be able to stay in their home. And it would not be 
appropriate for the taxpayer to help them stay in homes they 
can't afford over time.
    Representative Cummings. I am running out of time. Let me 
just ask my last question.
    Mr. Secretary, some have levied criticism at the House 
proposal to reform the derivatives marketplace after 
significant debate on the need for standardized products, 
clearinghouses and exchanges and exemptions for end-users.
    I want to get your opinion on, did the House address the 
main issue of how an unregulated, over-the-counter derivatives 
market led to unprecedented market interconnectedness and true 
systemic instability?
    Secretary Geithner. I believe the House bill did, and it is 
a very strong bill. And the bill that Senator Dodd is proposing 
has also very strong protections to make sure we bring the 
derivatives market under oversight, bring it out from the 
darkness.
    But it is very important, as you said, to make sure that we 
don't have these exceptions undermine those basic protections. 
So we have to make sure they are very tight and very limited 
and don't erode these hugely consequential reforms that will 
bring oversight to derivatives markets for the first time.
    Representative Cummings. Thank you, Madam Chair.
    Chair Maloney. The gentleman's time has expired.
    Congressman Hill.
    And we have roughly 10 minutes remaining on the vote.
    Representative Hill. Thank you, Mr. Secretary. And I, too, 
appreciate your service as our Secretary to our country.
    I will be very brief. I had several questions, but I think 
I will just cut to the one that concerns me the most. And that 
is, how sick is our commercial real estate market? And what 
kind of threat is it to our economy?
    Secretary Geithner. Commercial real estate is very 
difficult, still. And it is going to be difficult for a while 
to come.
    What you had, of course, was just a substantial amount of 
leverage created to finance those properties. And those who 
have to face the need to refinance now face a much tougher 
environment. So it is going to be a difficult period for a long 
period of time.
    One reason why it is so important, just to go back to some 
of the comments made by your colleagues on the other side of 
the aisle, to make sure that we are doing carefully designed, 
sensible things to help to make sure that the banking system 
can manage through that and that we get these security markets, 
so important to commercial real estate and financing, to open 
up further.
    But it is a big challenge, and it is getting worse still, I 
think, to be fair about it. And it is going to take a while to 
work through. I think the economy can manage through that 
challenge, but it is one reason we have to make sure that we 
don't prematurely end programs that are going to be critical to 
the capacity of the economy to manage through it.
    Chair Maloney. Thank you very much. I also want to thank 
you for your service to our country. And I am so proud of the 
job that you are doing. I particularly want to thank you for 
your efforts to help financing of small businesses. And I look 
forward to working with you to create jobs and to further 
strengthen our financial sector and grow our economy.
    We have roughly 7 minutes left, so I am going to have to 
leave, and Senator Klobuchar will be the Chair.
    Thank you so much for your service.
    Senator Klobuchar [presiding]. Good to see you, Secretary 
Geithner.
    Secretary Geithner. Senator, nice to see you.
    Senator Klobuchar. I hear this has been an interesting 
hearing. I had some other ones early on, so I just got here.
    But I wanted to focus on something that I am just hearing a 
lot from the people in Minnesota and, really, around the 
country, and that is small businesses. And I appreciate that a 
jobs summit is coming up at the White House and that the 
President has established this commission.
    But, specifically, this issue of credit for small 
businesses has been raised many times. And I think part of why 
I am hearing more of it now is that a lot of our businesses in 
Minnesota, which has a thriving small-business community, have 
been pretty frugal, and they had some reserves, and they kind 
of made it through the bumps of this year, and now they see 
hope in the economy. They actually are starting to get some 
requests for orders, and things are looking a little better. 
But they simply don't have the credit to stretch it out.
    And I know you were asked about this, but I wanted to delve 
a little more into detail about the work that I have been doing 
with Senator Warner of Virginia. And I think it is a pretty 
good idea, and the idea is to try to use $40 billion in the 
TARP funds to be made available to small banks so that they can 
use those to loan to small businesses. The idea would be that 
the banks would put up about $10 billion themselves so they 
have some skin in the game.
    And what we love about this in Congress, especially in the 
Senate with our 60-vote requirement, is that we don't have to 
vote on anything. And it is not that we wouldn't want to vote 
for it; it is just that it will take too much time. And our 
concern is especially for some of our retailers, as we head 
into this holiday season. That would be very helpful, to give 
them this jump start and to do something that would help with 
credit for our small businesses.
    So I would love to see you comment on this.
    Secretary Geithner. We think it is basically the right 
idea. It has a lot of promise. And we have been working very 
closely with your colleague in trying to figure out a way to 
make it work.
    There is a challenge, though, as I said, which is that, to 
use TARP for this, you need to get--you are working through 
banks. You need to get banks to be willing to come. And banks 
are very reluctant to come participate in these programs, even 
if they are designed to be directly about small-business 
lending. Even if they are designed for the strong and not for 
the weaker institutions, they are exceptionally reluctant, 
because they feel that it is stigmatizing to come and they feel 
that it----
    Senator Klobuchar. Do you have to call it TARP if you give 
them this money?
    Secretary Geithner [continuing]. I would like to call it 
anything but TARP. And that would help. But what you need is a 
framework where--and it really has to come from the Congress--
that leaves them confident that they are not going to have the 
rules of the game changed and they are not going to face a set 
of restrictions that make it, in their view, harder to run 
their institutions.
    And that is the balance. You know, we want to make sure 
that we don't put the taxpayers' money at risk. There are 
protections, that that money is used to expand credit, not for 
other reasons. So the conditions are necessary----
    Senator Klobuchar. No, I mean, we don't have a--I think 
everyone understands that we are not just going to give them a 
blank check. The idea would be that there would be conditions.
    But it just seems--you know, I heard someone say the other 
day that Wall Street got a cold and Main Street got pneumonia. 
And I am one to say, I appreciate the fact the Administration 
wants to put the TARP money into deficit reduction. I voted 
against a number of proposals to do other things with the TARP 
money. But for this, where it is going to be, again, credit 
that I believe will be a good use of that credit, it seems to 
me, to take this portion of the money--and it would only be, 
given how much money was at stake, not as large a portion as we 
have already gotten back----
    Secretary Geithner [continuing]. I agree completely.
    Senator Klobuchar [continuing]. That this could be a good 
use.
    Secretary Geithner. I think it is a good use. And we are 
committed to using resources in the TARP--continue using them 
for this basic purpose. I was just underscoring one piece of 
the challenge.
    I think the other things that Congress is considering on 
the SBA front will be very helpful, too. Those would be a 
helpful complement to what we do directly using TARP with small 
community banks.
    Senator Klobuchar. Uh-huh, very good.
    A second issue which is also interesting, I don't know if 
it has been raised here, is that a group of us would really 
like to see some significant work done on the long-term deficit 
reduction. And, as we look ahead to a vote to lift the cap and 
those kinds of things, we think it is very important that this 
go hand-in-hand with this notion.
    I was on a bill last year that we had--and, again, we are 
open to changes--with Senator Conrad and Senator Gregg to set 
up a commission that would produce some ideas on Social 
Security and other topics of how to bring this down with an up-
and-down vote from the Congress.
    And I wondered if you think that these kinds of ideas would 
be helpful without having you have to embrace a certain 
proposal.
    Secretary Geithner. Without embracing or commenting on the 
specifics of any of those proposals--because, as you know, the 
President is looking carefully at those, and I don't want to 
get ahead of him--I want to state very clearly: We have to find 
a way to give the American people confidence that we are going 
to have a framework that brings these deficits down, to build 
consensus on the types of changes that are going to make that 
possible.
    It is going to require a sustained effort over a long 
period of time. It is going to have to begin as soon as we have 
growth under way. And the proposals you referred to are one 
way, potentially a promising way, to do that. But I don't want 
to get ahead of the President in commenting on any of the 
specific proposals.
    Senator Klobuchar. All right. Thank you very much.
    We are having now a--Dr. Burgess, we will let you go. 
Please, ask your questions.
    Representative Burgess. I am putting in jeopardy my vote on 
the previous question on the rule for the Wild and Scenic River 
Act. So I am willing to do that because I do think this hearing 
is so important.
    Now, Mr. Secretary, you told me in response to a question 
that you would be agreeable to letting TARP die a natural 
death. You told Senator DeMint that it would die as soon as it 
can.
    Now, those two statements may not be the same thing, 
because we all remember, when we passed that big bill--I voted 
against it, just for the record--but when we passed that big 
bill in Congress last year, Section 120, subparagraph (a) 
called for the termination of TARP on December 31, 2009. My 
background as a physician would say that is a natural death. 
Subparagraph (b) allowed for an extension, which then would get 
into the realm of ``as soon as I can.''
    Will you tell us today which of those two versions of 
reality we should expect? There is a bill out. Senator Thune 
has introduced it on the Senate side. It is on the House side, 
H.R. 4110, which would repeal Section B, the extension of EESA. 
Would you be in support of that?
    Secretary Geithner. I would not be in support of that bill. 
But I am completely supportive of the basic proposition that we 
need to bring this program to an end as quickly as we can.
    But I want to underscore one very important thing. If you 
look back at almost any crisis experienced by a major economy, 
including the United States in the 1930s, Japan in the 1990s--
it is true in many other cases--the basic, consistent, most 
costly mistake governments made was to prematurely walk back, 
unwind, reverse at a time when growth was weak, leaving the 
financial system very damaged.
    And the reason why that is so important not to do is 
because, if you do that, it is going to be more expensive to 
solve it. And what my obligation is----
    Representative Burgess. And I would just point out, not 
everyone agrees with that philosophy.
    Secretary Geithner [continuing]. I don't think--I think 
there are two things it is hard to find people to disagree 
with.
    One is that, if you look at our system today, there is 
still a lot of damage and a lot of risk of constraints on 
credit, constraining job growth. And I think almost everyone 
would agree, if you look back at how countries have mismanaged 
these things in the past, a typical mistake has been to create 
a premature cliff and end to things before you have growth, led 
by private demand, firmly established.
    Representative Burgess. Well, Mr. Secretary, my time is 
short. No one believes right now that TARP is doing the job 
that it was set out to do. The money, the oversight--Inspector 
General Barofsky has 70 people under his employ for a $700 
billion bill. I mean, that is a dangerous ratio as far as the 
oversight, as far as I am concerned.
    We are asking people, we are begging people to steal money 
from TARP. The only way to prevent that, if we are not going to 
beef up the oversight side, the only way to prevent that is to 
end the program and incorporate it in some other structure if 
we must. But this program needs to be ended because the 
American people see this as a slush fund that is just going to 
continue.
    Secretary Geithner. What would that structure be?
    Representative Burgess. If I can just add one other thing, 
I would submit to you, it is not the fear that there is going 
to be another hiccup to the economy. It is the fear of what 
Congress is going to do that is chilling the job market right 
now.
    This health-care bill scares people to death. An 8 percent 
payroll tax that is going to be levied on every small business 
across the country, that is frightening to people. Our cap-and-
trade bill, which is still in limbo right now, but 
nevertheless, people look over their shoulder and say, ``Well, 
what will I do if I am paying three times or four times the 
amount for gasoline and diesel when I try to run my business in 
a few years?'' And people are looking at the financial 
protection bill and wondering, ``How in the world am I going to 
be able to have access to capital? How in the world am I going 
to be able to depend upon any sort of stability in the 
financial market in the future when you are changing all the 
rules constantly?''
    Secretary Geithner. Congressman----
    Representative Burgess. If we would just get out of the 
way, I firmly believe that the resolve of the American people 
is enough to solve this. I have lived through up-and-down 
cycles in my life. I have seen some terrible things happen to 
the economy back home in Texas, when the savings and loans 
melted down. I don't recall anyone from the Treasury Department 
or the FDIC coming with a big bag of cash and saying, ``Can I 
help you through these tough times?''
    Secretary Geithner [continuing]. Oh, to the contrary----
    Representative Burgess. No, we were required to get through 
it ourselves.
    Secretary Geithner [continuing]. To the contrary----
    Representative Burgess. We cut spending. My business drew 
in its resources and kept going through that time. We didn't 
depend upon the government for help at that time.
    Secretary Geithner [continuing]. Congressman, I don't want 
to slow your momentum, but I want to try to tell you what I 
agree with you on because I think it is important. Always good 
to try to find agreement.
    You are absolutely right, businesses hate uncertainty. And 
they face a lot of uncertainty today, not just about the 
strength of the economy and not just because of the basic 
damage done to the confidence by the crisis, but they face 
uncertainty about how these broad reforms moving through 
Congress are going to come out.
    And it is one good reason to try to make sure that we bring 
clarity on what those rules are going to be as quickly as 
possible. It would not be good to business confidence to 
stretch and draw these things out.
    And I also agree----
    Representative Burgess. So you are on record as being 
opposed to dithering?
    Secretary Geithner [continuing]. No. I am in support of 
Congress deciding and acting and bringing some clarity about 
what the shape of reforms are going to be. And I think if you 
stretch it out indefinitely, you will be adding to the problem.
    Another thing I agree with you on: This is a very resilient 
economy, enormously resilient economy. Huge amounts of strength 
and innovation in our economy. And we should all be optimistic 
and confident that, if the government does what it has to do, 
which is to put out fires, fix crises, make sure that basic 
public goods governments provide in education and 
infrastructure are done better for the future, this will be a 
very strong, resilient economy with the gains more broadly 
shared, like we saw in the 1990s.
    Now, the S&L crisis was incredibly expensive for this 
country. It cost the taxpayers 2 to 3 percent of GDP. It was 
not a crisis solved by the market. It was a crisis where the 
taxpayer was put on the hook for enormous losses and risks. And 
we are doing a very good job of limiting the taxpayers' 
exposure to risk in this, as I said in pointing out to you that 
we have $70 billion of taxpayers' money come back since I took 
office, at more than $12 billion in dividends and warrants.
    Representative Burgess. How many people on your staff are 
involved in oversight of the TARP funds?
    Secretary Geithner. Oh, good, thank you for bringing up 
oversight. When Congress passed the TARP, it put in place three 
separate, new, additional oversight bodies looking over, 
appropriately, every judgment we make: the congressional 
oversight panel, the GAO, and a special inspector general----
    Representative Burgess. We have had the congressional 
oversight panel in here. To be perfectly frank with you, I 
can't see that they have been doing their job.
    Secretary Geithner [continuing]. Monthly--they all report 
monthly. Again, they look over--and this is the great strength 
of our country. They look over every decision we make. We put 
every action we make in the public domain so the taxpayer can 
see it for themselves and they have a way to judge the basic 
return for the taxpayer. And that is very important.
    And these oversight panels--just one fact that is, sort of, 
helpful. The number of people involved in oversight panels 
exceeds by a significant multiple, a significant fraction, the 
number of people that are involved in the Treasury in 
implementing the unwinding and dismantling and termination of 
this program.
    But that basic oversight is very important. I am committed 
to it. We have actually embraced the vast bulk of the 
suggestions they have made. And I think that is an important 
thing to do, because transparency is very important. And the 
American people can see, since I took office, what was not 
possible before; they can look at every contract we have made 
and look at the details and see what impact that has had on 
judgments by those institutions.
    Representative Burgess. Mr. Secretary, end TARP by the 
start of the new year. The American people do want to see that 
program concluded.
    I will yield back. Thank you for your consideration.
    [Questions from Michael C. Burgess, M.D. to Timothy F. 
Geithner appear in the Submissions for the Record on page 50.]
    [Responses of Timothy F. Geithner to Questions from 
Representative Michael C. Burgess, M.D. appear in the 
Submissions for the Record on page 51.]
    Senator Klobuchar. Thank you very much, Dr. Burgess.
    Just a quick follow-up here, Secretary Geithner. I know you 
were looking for consensus there, but I do want to point out 
this notion that this whole economic collapse was caused by 
some kind of uncertainty about a health-care bill. In fact----
    Secretary Geithner. Well, absolutely not. I totally 
disagree.
    Senator Klobuchar [continuing]. Yeah, it started--no, I 
want to take on some of the things he said. I mean, it started, 
as you know, over, what, a year ago or before that. The seeds 
were planted with the mortgage crisis and some very bad 
decisions, I think, that have been made.
    But I was just thinking, as I listened to this, having gone 
to all the unemployment hearings here, the sector where we have 
actually seen some increases in this country is in health care. 
And so I was sort of thinking to myself, if this is so much 
uncertainty in an area, maybe this--have you seen the 
increases? And I don't think there is any relationship, except 
to say that to say that this whole economy tanked because of 
uncertainty over a health-care bill seems absurd.
    And could you please respond?
    Secretary Geithner. Well, of course. Of course. I 
completely agree.
    And, again, I think it is important for people to 
understand that this is not just, again, the deepest recession 
in generations and the worst financial crisis we have seen, but 
we have an economy where, over time, suffering deeply from not 
just the basic hidden costs of the health-care system, but 
inadequate education system, terrible incentives for how we use 
energy, and a deep erosion in the basic quality of public 
infrastructure.
    So this was not just a typical recession caused by a boom 
in real estate; it was a recession made substantially worse by 
this financial crisis but on top of some long-term neglect in 
things governments have to do well. And fixing those things is 
important to reestablishing confidence, demonstrating to the 
American people we can make the government better at doing 
these things. And that will be important to how fast we grow in 
the future and how broadly based these gains in growth are 
shared.
    Senator Klobuchar. Thank you very much.
    Senator Brownback.
    Senator Brownback. Thank you very much.
    Thank you, Secretary.
    I want to back up here to something that Senator Klobuchar 
made a point of. There is a commission coming together on 
entitlement reform. I have been putting in a bill for a dozen 
years on a BRAC-type process to review all of the Federal 
Government. Right now we do that on military bases. And, to my 
knowledge, it is the only successful way we have ever found to 
end anything.
    You have a commission, try to set it up as fair as 
possible. It makes recommendations on things to eliminate to 
the President. It does that as a package; it may be 200 
military bases. The President has to chop off on it. It goes to 
Congress, one vote up or down, deal or no deal. And that is the 
only way I have found, anytime, anything around here we have 
been able to end anything, is that process. So it is not 
amendable; it is a required vote.
    We really need to do something like this for the totality 
of government, particularly for entitlement programs, if we 
have any hope of being able to get these things structured. You 
guys will be key in deciding whether to go forward with this 
process, Senator Klobuchar and others.
    And it isn't going to be fun, by any means, because now, 
instead of military bases, you are talking about things that 
may be delivering services to individuals that you are looking 
at and saying, ``This is something we just can't do.'' I would 
highly urge you looking at that as, in my estimation, the only 
successful model.
    The second one--and I have made this point to you twice 
before. I just want to get it out. We have had four votes now, 
since 2006, to waive the Medicare physician reimbursement cuts. 
Each time those have been passed--they have been proposed by 
Republicans and Democrats. Each year, the provider community 
comes up and says, you know, ``We can't take these cuts. We are 
no longer going to provide these health-care services.'' I 
voted for them all but once. That is the reality. And if you 
are going to make these big Medicare savings on it, which I 
think are completely smoke and mirrors, that is the track 
record here. And you can decide what you want to do with that, 
but I just don't see it happening.
    The final thing I would like to ask and get as specific, if 
I can, on it. You have noted on the currency issue--and I want 
to just double back to this one final time. You believe that 
the Chinese are going to allow their currency to float--I 
presume some; they are probably not just going to put it on an 
open float--is what you have stated here.
    When do you think they--or what time frame do you think 
they will start to allow it to float? And if they don't, what 
sort of tools are you willing to use to force it?
    Secretary Geithner. Senator, I think that is a judgment, we 
have to recognize, that they have to make. They have made it 
clear many times in the past in public statements that they are 
committed to moving to a more flexible exchange rate over time. 
I think they recognize that is important to them, and I think 
they recognize it is important to the world.
    But that is the necessary condition, is the basic 
understanding and recognition that it is necessary not just for 
them but for the global economy as a whole.
    Senator Brownback. When? What time frame? And do you have 
tools you are prepared to use?
    Secretary Geithner. I don't have a--I don't know yet when 
they are likely to move----
    Senator Brownback. I mean, are we--next year?
    Secretary Geithner [continuing]. And I don't want to 
speculate, I think, as you can understand, what the world could 
do to be persuasive about that. Not appropriate for me to 
speculate on that.
    Senator Brownback. It seems like they are going to, kind 
of, drag this along for a long period of time if you are not 
willing to push them.
    Secretary Geithner. Possible, but unlikely. And it is--I 
just say the obvious, that when you talk about exchange rates, 
exchange rates are sort of like icebergs. Most of what has to 
happen happens below the surface.
    And I assure you--and I assure you the President believes 
this strongly--we have a strong obligation to making sure we 
are aggressively pursuing our interests as a country, our 
economic interests, and trying to make sure that we see in our 
major trading partners policies that are going to open their 
markets further, shift sources of future growth to domestic 
demand, and make sure you have a set of broader policy 
arrangements that help facilitate that. It is very important to 
us. We take that very seriously.
    Senator Brownback. Thank you.
    Senator Klobuchar. Before I shift over here to Senator 
Schumer, I just want to ask you one quick question here in the 
second round about the credit-rating agencies. I was one of the 
first cosponsors of Jack Reed's bill, the RATE Act, to try to 
make some sense out of this. I think this was a major failure. 
And we did a forum on this in Minnesota with a number of 
business people, and I know there are hazards each and every 
way.
    And I just wonder what you think of that provision; if you 
have had a chance to look at Senator Dodd's regulatory reform 
provisions in this area?
    But it seems to me that, if people are getting paid to rate 
these companies, that they should be able to do it in an 
unbiased way and we shouldn't be having corruption of this 
system.
    Secretary Geithner. I agree with you. It is a centerpiece 
of reform. I think we are very supportive of that provision of 
the bill and the broad bill that Senator Dodd has helped craft. 
There is a similar set of provisions that has come out of the 
House Financial Services Committee in this area, and it is an 
important thing to do.
    And part of it, as you referred to, is trying to make sure 
there is no conflict of interest produced by the basic way 
rating agencies are paid.
    Senator Klobuchar. Very good. Thank you.
    Senator Schumer.
    Senator Schumer. Thank you. Thank you, Madam Chair.
    Senator Klobuchar. Hold it down.
    Senator Schumer. Oh.
    Senator Klobuchar. You have to be patient, Senator Schumer.
    Senator Schumer. Patient? I say to myself, patience is a 
virtue, many times each day.
    Senator Klobuchar. Very good.
    Senator Schumer. Thank you, Madam Chair. And I appreciate 
everybody being here and waiting for me to get over. We had the 
markup in Judiciary of the shield law, which I know you are a 
cosponsor of.
    Senator Klobuchar. That is right.
    Senator Schumer. So thank you.
    And, Secretary Geithner, thank you for being here. I know 
what a difficult job this is. And these are tough times. You 
know, people criticize, and that is legitimate. But you 
inherited a really difficult situation, an extremely difficult 
situation. When you have an economy in bad shape, interest 
rates at about 0 to 1 percent, a deficit that is skyrocketing, 
the tools that are left are small.
    I don't want to add to your problems, except I feel 
passionately about this issue and have for a long time, which 
is currency. Five years ago, Senator Graham and I started 
talking about the Chinese manipulating their currency. At that 
point, everyone thought, ``Oh, no, they shouldn't even let 
their currency float.'' New York Times, Wall Street Journal 
criticized us for even mentioning it.
    And now it has become clear that, not only is the currency 
manipulation unfair to our manufacturers, our country, but, as 
has been written just this week in a very stunning op-ed piece 
in The New York Times by Niall Ferguson, Chinese currency 
manipulation was one of the major causes of the global economic 
downturn.
    Today, there are certainly hundreds of thousands, and maybe 
even more, Americans who are out of work because the Chinese 
are unfair and manipulate their currency. And they are 
mercantilist, in my opinion. They want to accumulate their 
wealth and reserves. And they basically, while they 
occasionally give verbiage, they give the back of their hand to 
the world economy, even though they gain from it.
    And, frankly, I am tired of us just shrugging our shoulders 
and walking away. The world economy is at stake here, nothing 
less. You cannot have China have 9 percent growth and a huge 
balance of trade surplus and peg its currency. And, to me, it 
is probably the most important thing we can do with the 
Chinese. I know there are lots of other things on the plate, 
but nothing is more important than this.
    And, if they continue to do this, there will be many more 
people out of work in America and in other countries. It is 
infuriating, infuriating. And we have the tools, but we don't 
use them.
    And so, here is what I would like to ask you, because, in 
January, ``President Obama, backed by conclusions of a broad 
range of economists, believes China is manipulating currency.'' 
Here is what you said. I am quoting you. This was your written 
response to questions during your confirmation process.
    Quote, ``President Obama, backed by conclusions of a broad 
range of economists, believes that China is manipulating its 
currency.'' You actually used the word ``manipulation'' two 
times in your answers. It is nothing astounding. It would be 
one of the great lies to say China is not manipulating its 
currency, sort of 1984-ish.
    And yet, in the two currency reports issued by Treasury 
since you have been confirmed, in neither one did the 
Administration determine that China is manipulating its 
currency.
    Given that the yuan has not appreciated at all this year--
you look at the charts. When they let it appreciate, I will 
tell you, I think that the legislation that Senator Graham and 
I posed played an effect. Everyone will deny it, but it played 
an effect. That is the only thing that they will respond to.
    But you now say they don't manipulate the currency. What 
has changed? Why did they manipulate it in January and not 
manipulate it today, when the situation is worse today?
    Secretary Geithner. Senator, you were right 5 years ago to 
draw attention to this, and you are right that it is critically 
important----
    Senator Schumer. By the way, I was called a protectionist.
    Secretary Geithner [continuing]. Not by me.
    Senator Schumer. No, not by you, for sure. I mean, even 
though a tenet of free trade and Bretton Woods is you let the 
currency float. All these high-minded editorial boards who love 
to just say, ``We are so much smarter than politicians,'' were 
wrong.
    Secretary Geithner. And I think you are absolutely right 
there, too. And you have seen, I think, the recognition of that 
reality. A broad shift to more flexible exchange rates happened 
across the vast bulk of our major trading partners. And China 
did, as you know, did allow the currency to appreciate about 20 
percent over a period of time, until the crisis where they 
stopped the appreciation.
    And, I think as you also recognize, over the last several 
months things have changed a bit. Over the last several months, 
you have seen countries across the region, as confidence has 
returned, you have seen countries across the region, in China 
and elsewhere, starting to intervene again to lean against the 
upward pressure in their currencies.
    And it makes it harder for the system to work, it makes it 
harder for the overall financial system to work if you have a 
large country like that tying its currency directly to the 
dollar. And I think that is going to have to change, and I 
think it will change over time. And my own sense is it is not 
going to actually take that much time.
    But what has changed recently, again, as you point out, is 
that, after a long period where intervention had stopped, it 
started to increase again as----
    Senator Schumer. Sorry to interrupt you. It hadn't stopped. 
It had been modified. They still didn't let the currency freely 
float, but they----
    Secretary Geithner [continuing]. True. But the currency----
    Senator Schumer [continuing]. They were still manipulating 
it, but they let it rise.
    Secretary Geithner [continuing]. Right. But the scale of 
intervention declined dramatically in the peak of the crisis. 
It has started to increase again, again, not just in China, but 
in countries around the world. And it is related, of course--it 
is harder for those countries to move if the biggest economy--
among the biggest economies in the region is not moving as 
well.
    Senator Schumer. Do you have any hope based on the 
President's meetings in China? I mean, maybe----
    Secretary Geithner. Again, my----
    Senator Schumer [continuing]. Should we just sit here 
again----
    Secretary Geithner [continuing]. Absolutely not.
    Senator Schumer [continuing]. And watch people be thrown 
out of work?
    Secretary Geithner. No, absolutely not.
    Senator Schumer. Watch the world economy system tie itself 
into a pretzel because the most prosperous country of them all 
is saying, ``We want to be more prosperous at everybody's 
expense''?
    Secretary Geithner. Senator, I agree with you. And I think, 
if you look at what China is doing and you look at what they 
are saying, I think they recognize that it is not just 
important to us and to their trading partners, but it is 
important to them that they move over time. I mean, just think 
of it this way ----
    Senator Schumer. Haven't they gotten worse in the last 
year? Yes or no?
    Secretary Geithner. Well, no, the--again, I think, just on 
context--but, Senator, I agree with both the importance of the 
issue and commend you for your leadership in drawing attention 
to it.
    But one thing is important to point out, which is that 
China has taken very aggressive actions to stimulate domestic 
demand, demand for our products, over this period of time. So 
our exports to China are actually growing at a pretty healthy 
rate because of that broad thrust of policies they have put in 
place.
    Senator Schumer. If the currency were allowed to float, 
wouldn't they grow at a much greater rate?
    Secretary Geithner. They would.
    Senator Schumer. I would just urge you to figure out some 
things that can be done here. I don't think--I am not happy, 
but I don't think any Americans who follow this are happy with 
the present pace.
    And, frankly, what came out of China on this issue was 
terribly disappointing. Now, maybe there is something I don't 
know. I hope and pray there is. But we have to keep pressure. 
And Senator Graham and I are going to try to do some things 
legislatively.
    Sorry. Thank you, Madam Chair. Thank you. I apologize for 
going on for a while. Let the record show I feel terrible.
    Senator Klobuchar. No, that is okay. We like your 
impatience in this situation, Senator Schumer.
    Secretary Geithner. Let the record show I was not asking 
you to be patient.
    Senator Klobuchar. I was just talking to Senator Brownback, 
and I think that Senator Schumer's thoughts are shared on a 
bipartisan basis up here.
    I also just wanted to--I believe that Chair Maloney is 
returning here. Is this correct? No. Okay, false. But she has 
been busy voting down there.
    But I wanted to just conclude that the reason that we are 
able to get to this next step, which I think is incredibly 
important, to focus on this financial regulation, I don't think 
anyone wants to go back to their home districts and say, 
``Well, this really bad thing happened to our country. It 
wasn't really your fault, but it happened. And then we haven't 
done anything to make sure that it won't happen again.'' That 
just can't happen.
    So I appreciate your focus on financial regulation. I think 
that our economy, while it is nowhere near where anyone wants 
it to be, has stabilized to a point where we now can focus on 
that financial regulation. And we have had that time to look 
back at what went wrong and what we need to do. So I appreciate 
your work in that area.
    We know some of that TARP money is coming back. And I, for 
one, can say that I am glad you are focused on--the 
Administration is focused on putting it back into deficit 
reduction.
    At the same time, as I mentioned, if we could squeeze out 
some money here for credit for these small businesses, who were 
not the recipients of some of this big money. And while Wall 
Street is starting to do better and the GDP is going up and 
there are all kinds of good signs here and there, Main Street 
is still suffering. And so, I would just urge you, as quickly 
as possible, and urge the President to work on these areas.
    So, just in conclusion, from what I have heard from this 
last hour on this panel, the focus on financial regulation is 
something we need to do and must do as soon as possible; focus 
on small business and jobs; and then doing something about the 
deficit reduction, as well as this Chinese currency issue.
    Because I think that people want to believe again. There is 
some optimism out there. There is some optimism, as you noted, 
Secretary Geithner, in this country. But we cannot stop what we 
are doing, in terms of job promotion.
    And I am, for one, glad that we are focused on health care 
right now. It is something that has long been sitting there. 
People talk about it in every political speech. Nothing has 
been done. But it is time, after this is completed and while it 
is being completed, to focus, laser focus, on jobs in this 
country and getting our economic ship in shape. And I think you 
know that.
    So we look forward to working with you on this in the 
future. Thank you very much.
    Secretary Geithner. Thank you very much.
    Senator Klobuchar. With that, this hearing is adjourned.
    [Whereupon, at 12:10 p.m., the committee was adjourned.]
                       SUBMISSIONS FOR THE RECORD

 Prepared Statement of Carolyn Maloney, Chair, Joint Economic Committee
    Good morning. I want to welcome Secretary Geithner, and thank him 
for his testimony here today.
    The severe breakdown in our financial system under the watch of the 
previous Administration triggered a cascade of events, including a 
freefall in household wealth, paralysis in consumer spending, frozen 
credit markets, and a tailspin in the labor market. A recession grew 
into a near depression.
    By some measures, what happened to our economy was worse than what 
happened during the Great Depression. During the first year of the 
recession, household wealth plunged by 17 percent, more than 5 times 
the decline seen from 1928 to 1929. In addition, stock prices became 
even more volatile than they were at the heart of the Great Depression.
    Treasury, the Federal Reserve and the FDIC, along with Congress 
took an extraordinary series of measures to preserve financial 
stability and restore the proper functioning of credit markets. These 
initiatives included recapitalizing banks and creating a series of new 
lending facilities at the Fed. They have clearly contributed to the 
recovery of the financial system. Interbank lending rates are back to 
normal after having spiked during the crisis and the S&P 500 is up by 
over 64 percent from its March 2009 low.
    However, as Chairman Ben Bernanke noted earlier this week, 
constrained bank lending and a weak job market will prevent the 
recovery from being as robust as we would hope.
    Treasury has taken actions recently to help spur lending and create 
jobs. Treasury will provide lower-cost capital to community banks that 
submit a plan to increase small business lending and increase lending 
to small businesses in the hardest-hit communities.
    But, more needs to be done. As Professor Stiglitz testified at a 
JEC hearing this spring ``Where there are perverse incentives, there 
are perverse outcomes--unless we constrain behavior.'' The regulatory 
reform that we are considering will do just that--it will eliminate the 
incentives for banks to engage in the same risky behavior that led to 
the financial crisis.
    The House Financial Services Committee under Chairman Frank's 
leadership has already passed or marked up a number of bills related to 
financial regulatory reform. First, a systemic risk regulator will make 
sure that no firm is too big to fail. Second, firms will not be bailed 
out--they will be taken over and shut down in an orderly way. Third, 
regulatory gaps will be plugged. Hedge funds and the over-the-counter 
derivatives market will not be allowed to grow unchecked and threaten 
the viability of the financial system. Finally, we will stop fraudulent 
and predatory lending or banking practices by creating a Consumer 
Financial Protection Agency. This agency will help spur the demand for 
credit to the many Americans who are now nervous about the financial 
products available to them. Like the Credit Card Holder's Bill of 
Rights that I introduced and Congress passed, it will stop the most 
abusive practices of lenders of credit.
    Although much more needs to be done to help American workers and 
small businesses, reforming the financial system is a crucial step in 
this process. Restoring trust in our financial system will help revive 
the job market and jumpstart the flow of credit in the economy.
    Secretary Geithner, we thank you for your testimony here today, and 
I look forward to hearing your thoughts on how financial regulatory 
reform will impact the economy as a whole, and help working Americans 
in particular.
                               __________
  Prepared Statement of Timothy F. Geithner, Secretary of the Treasury
    Chairwoman Maloney, Vice Chairman Schumer, I am pleased to appear 
before the Joint Economic Committee today. The House and the Senate are 
both making rapid progress toward the goal of comprehensive financial 
reform, and I appreciate the opportunity to talk about why that reform 
effort is so essential for the health of our economy and what, in our 
view, is necessary to make the effort successful.
    The United States is in the process of recovering from the worst 
financial and economic crisis in generations. After an extended and 
painful contraction, we saw solid annualized GDP growth of 3.5 percent 
last quarter. We expect continued growth in the fourth quarter and 
ahead in 2010.
    But as we press forward towards recovery, there is still much work 
to do--not only to ensure that many more Americans see the tangible 
benefits of recovery, but also to help ensure that Americans are never 
again forced to suffer the consequences of a preventable economic 
collapse.
    In the years leading up to the crisis, our financial regulatory 
regime permitted an excessive build-up of risk, both inside and outside 
the traditional banking system. The shock absorbers critical to 
preserving stability--capital, margin, and liquidity cushions in 
particular--were inadequate. Outdated, ineffective regulation left our 
system too weak to withstand the failure of major financial 
institutions.
    Firms took huge risks with borrowed funds and little of their own 
capital at stake. They funded long-term, illiquid assets with cheap, 
short-term debt. This risky behavior migrated from the regulated and 
partially regulated parts of our financial system to the almost 
entirely unregulated parts, making it difficult for us to control or 
even gauge its dimensions.
    The result was a financial system vulnerable to bubbles, panic and 
collapse.
    And unfortunately, the regulatory regime that failed so terribly 
leading up to the financial crisis is precisely the regulatory regime 
we have today. That is why recovery alone is not enough. To ensure the 
vitality, the strength and the stability of our economy going forward, 
we must bring our system of financial regulation into the twenty-first 
century. We need comprehensive financial reform.
    To achieve financial reform, the Administration has advanced a 
broad set of proposals. We have worked closely--and continue to work 
closely--with Chairman Frank, Chairman Dodd and members of their 
respective committees and other important legislators, including many 
on this Committee, to craft strong financial reform legislation that we 
hope will be enacted as soon as possible.
    Given the range and complexity of the issues with which we are 
dealing and the critical stage at which our work has now arrived, it is 
important to step back for a moment and remind ourselves of the central 
objective of reform--and the key principles that, in the 
Administration's judgment, are essential to achieving that objective.
    The central objective of reform is to establish a safer, more 
stable financial system that can deliver the benefits of market-driven 
financial innovation even as it guards against the dangers of market-
driven excess. It is to ensure that the financial system functions in a 
way that creates opportunity and reduces risk. It is to provide 
stronger protections for consumers, investors, and taxpayers.
    In our view, there are at least four key principles that we must 
follow in order to achieve that objective. These are not meant to be 
exhaustive. But we do believe they are essential.
    First, firms must not be able to escape or avoid regulation by 
choosing one legal form over another. Firms engaged in the same kind of 
business, performing the same essential economic functions, must be 
subject to fundamentally the same regulation and supervision.
    Today, bank holding companies are subject to one supervisory 
regime, thrift holding companies to another, investment bank holding 
companies to yet another. Without changing its core business, a firm 
can change--or avoid altogether--regulation at the holding company 
level simply by switching its legal form.
    The fact that investment banks like Bear Stearns or Lehman Brothers 
or other large firms like AIG could escape meaningful consolidated 
federal supervision simply by virtue of their legal form should be 
considered unthinkable from now on. The largest, most interconnected 
firms must be subject to one uniform, consistent set of standards, 
regardless of charter.
    Similar inconsistencies plague the market for consumer lending. 
Banks and non-banks operate in the same market and compete for the same 
customers. But they play with a different rulebook. Non-banks like 
mortgage brokers, consumer credit companies and payday lenders escape 
federal supervision almost entirely. The inconsistent regulatory regime 
sparked a race to the bottom in the mortgage lending market, and the 
consequences are tragic and well known.
    The second principle of reform is that there must be clear 
regulatory accountability. The principle is particularly important with 
respect to oversight of the largest, most interconnected firms.
    The regulation of the largest, most interconnected firms requires 
tremendous institutional capacity, clear lines of authority and single-
point accountability. This is no place for regulation by council or by 
committee. The stakes are simply too high to allow diffuse authorities 
and responsibilities to weaken accountability.
    In addition, an essential element of accountability is that rule-
writing and enforcement authority must not be divided. Separating rule-
writing from enforcement deprives the rule-writer of vital, hands-on 
information--and gives both the rule-writer and the supervisor an 
excuse for failure. A rule-writer that is also a supervisor and 
enforcer, on the other hand, is unmistakably accountable for success--
or failure.
    Today, responsibility for consumer financial protection is divided 
among numerous regulators, none of whom regard consumer protection as 
their top priority. To ensure more responsive and more effective rule 
writing and enforcement, we have proposed the creation of the Consumer 
Financial Protection Agency (CFPA). Consolidating the consumer 
protection authority of the Fed and other prudential regulators, the 
CFPA would be fully accountable for setting and enforcing rules of the 
road for the benefit of responsible consumers.
    The third principle is that the financial system as a whole must be 
more capable of absorbing shocks and coping with failures.
    One of the most salient lessons of the recent crisis is that 
financial firms are deeply intertwined, linked by a complex web of 
contractual and reputational connections. These inter-firm connections 
allow financial distress to spread contagion across the system. The 
risk of such contagion means that capital, liquidity and margin 
requirements must be increased, system-wide--and set with a view to 
ensuring the stability of the financial system as a whole, not just the 
solvency of individual institutions.
    In addition, there must in the future be a greater focus on the 
quality of capital, and an effort to design capital requirements that 
are more forward-looking and reduce pro-cyclicality. While the buffers 
need to be increased system-wide, the largest firms should face still 
higher prudential requirements. They should be forced to internalize 
the cost of the risks they impose on the financial system, and to 
strengthen their ability to withstand shocks and downturns.
    While strengthening prudential standards for firms is one element 
of making the system as a whole more resilient and risk-absorptive, it 
is not alone sufficient.
    To strengthen the system overall, the Administration has called for 
measures to strengthen financial markets and the financial market 
infrastructure. For example, we have proposed to strengthen supervision 
and regulation of critical payment, clearing, and settlement systems 
and to regulate comprehensively the derivatives markets.
    We should never again face a situation--so devastating in the case 
of AIG--where a virtually unregulated major player in the derivatives 
market can impose risks on the entire system.
    The fourth and final principle is that no financial institution 
should be considered ``Too Big to Fail.''
    During the recent crisis, in order to preserve the stability of the 
financial system, protect the savings of Americans and prevent a far 
more devastating economic collapse, the government was forced to 
provide financial support to individual institutions in extremis. Those 
interventions were necessary, but they must not--and do not--set a 
precedent.
    Institutions and investors must be responsible for their decisions. 
No financial system can operate efficiently if financial institutions 
and investors assume that the government will protect them from the 
consequences of failure. And as the President said two months ago in 
New York, ``Those on Wall Street cannot resume taking risks without 
regard for consequences, and expect that next time, American taxpayers 
will be there to break their fall.''
    Part of the answer is simply making the financial system more 
resilient--as just discussed--by strengthening supervision, eliminating 
loopholes, building up capital and liquidity buffers, and increasing 
transparency in key markets. In most circumstances, those precautions 
will be enough. And for that reason, bankruptcy will remain the 
dominant means of dealing with the failure of a non-bank financial 
firm.
    But as Lehman's collapse showed quite starkly last year, the U.S. 
government does not have the tools to respond effectively when failure 
of large, non-bank financial institutions truly threatens the stability 
of the system at large.
    That is why the Administration has proposed that the government 
have the authority--as we have today for banks and thrifts--to break 
apart or unwind major non-bank financial firms in an orderly way, 
imposing pain on shareholders, creditors, and managers, but limiting 
collateral damage to the system and sparing the taxpayers.
    The proposed resolution authority would not authorize the 
government to provide open-bank assistance to any failing firm. In 
other words, the authority would facilitate the orderly demise of a 
failing firm, not ensure its survival.
    Moreover, if there are losses to the government in connection with 
the resolution, the losses will be recouped from the largest financial 
institutions in proportion to their size. The financial industry--not 
taxpayers--will be on the hook.
    We must be sure we have the necessary tools to cushion the broader 
financial system against potential shocks, in times of severe stress. 
Otherwise, in a financial panic, credit to our economy, to small 
businesses and homeowners could grind to a halt. To make sure the tools 
we have are effective but narrowly tailored to achieving financial 
stability goals, we have proposed to modify the emergency authorities 
of the FDIC and the Federal Reserve. Their authorities should be 
subject to appropriate checks and balances and should be available only 
to protect the financial system as a whole, not individual 
institutions.
    Should new financial crises occur, despite our best efforts to 
prevent them, these tools are essential to preserve the government's 
ability to respond in an effective, responsible way.
    Let me close by saying this: In today's markets, capital moves at 
speeds unimaginable when our current regulatory framework was created. 
Financial instruments that were mere novelties a few decades ago have 
grown to play a critical role in our financial system. Whatever 
statutory framework we erect today will, undoubtedly, encounter new, 
unfamiliar institutions, instruments and markets.
    But if we put in place a set of financial reforms that prioritizes 
consistency, accountability, and resilience, and responsibility; if we 
fight to close gaps, eliminate loopholes, empower regulators and hold 
them accountable, raise standards, and give the government the tools it 
needs to manage crises while ensuring that no one is insulated from the 
consequences of their actions; if we do those things, we will be able 
to say that we have met our obligation to the next generation.
    Finally, let me thank again the members of this committee. And let 
me thank again those members of the House Financial Services Committee 
and the Senate Banking Committee for the good work that you are all 
doing to advance this important legislation.
    Thank you.
                               __________
        Prepared Statement of Representative Elijah E. Cummings
    Thank you, Madam Chair for convening this important hearing on the 
financial regulatory reform proposals currently working their way 
through Congress.
    I am honored to be part of a Congress that has answered the call to 
reform both the health care system and financial sector, so that 
Americans are both physically and fiscally healthier.
    Thank you also to Secretary Geithner for appearing before the 
Committee. You lend a unique perspective, and I appreciate the work you 
and the entire Obama Administration have done during these 
unprecedented economic conditions.
    While we as policy makers may become mired in the substantive 
details of the regulatory reform proposals--whether over end-user 
exemptions on over-the-counter derivatives or the required levels of 
Tier One capital at banks--we cannot lose sight of the ultimate 
objective--creating an America that is safer for our constituents.
    It must be safer to retire, safer to innovate, and safer to buy a 
home.
    That is why I remain troubled and discouraged by constant stories 
of reckless and abusive practices by Wall Street firms.
    This decision to prey on hardworking Americans--whether in mortgage 
lending, credit cards, or bank overdraft ``protection''--must be 
prosecuted and not allowed to happen again.
    Chair Maloney has been an outspoken advocate for improving consumer 
protections, and I applaud her for it.
    Unfortunately, some of the worst abuses were done not only to 
individual consumers, but also to the entire American people.
    We held a hearing on Tuesday in the Oversight committee--during 
which staggering details were revealed about how Bank of America 
officials got advice from both their in-house and outside lawyers 
saying they probably couldn't get out their deal to acquire Merrill 
Lynch.
    Still they went to the government during a time of great financial 
unrest and threatened to walk away from the deal, knowing the U.S. 
economy could ill-afford the collapse of another major financial firm.
    $20 billion dollars in government money later, they decided to keep 
Merrill Lynch after all. And the lawyer who gave advice they didn't 
want to hear--he was conveniently fired--``downsizing'' they said.
    In closing Madam Chair, with the thorough and honest discussion 
that I know today's hearing will be, the regulatory reform process can 
prevent future abuses against both consumers and the economy as a 
whole--and accomplish that goal I stated--making America safer for our 
constituents.
    With that, I yield back.
    [GRAPHIC] [TIFF OMITTED] 55621.001
    
     Responses of Secretary Timothy F. Geithner to Questions from 
                Representative Michael C. Burgess, M.D.
    Question 1. What actions have been undertaken by Treasury thus far 
as it relates to TARP? How many suspected accounting fraud cases have 
there been? Securities fraud? Insider trading? Mortgage servicer 
misconduct? Mortgage fraud? Public corruption? False statements? Tax 
investigations?

    Answer. Section 121 of the ``Emergency Economic Stability Act of 
2008'' (``EESA'') established the Office of the Special Inspector 
General for the Troubled Asset Relief Program (``SIGTARP''). SIGTARP 
has the duty, among other things, to conduct, supervise and coordinate 
audits and investigations of the purchase, management and sale of 
assets under the Troubled Asset Relief Program (``TARP''), and to 
report to Congress on a quarterly basis the results of such audits and 
investigations. As its most recent quarterly report states, through 
December 31, 2009, SIGTARP has opened 86 and has 77 ongoing criminal 
and civil investigations, including investigations of suspected TARP 
fraud, accounting fraud, securities fraud, insider trading, mortgage 
servicer misconduct, public corruption, false statements, obstruction 
of justice and tax-related investigations. SIGTARP's investigative 
activities generally remain confidential.

    Question 2. According to SIGTARP, there were little, if no, efforts 
made by Treasury to reduce AIG counterparty payments at 100% of face 
value, including to some foreign institutions. Is this correct? If not, 
when were the efforts made and for how much?

    Answer. On January 27, 2010, the House Committee on Oversight and 
Government Reform held a hearing that addressed the government's role 
in negotiations with AIG's counterparties.\1\ As part of that hearing, 
I, former Treasury Secretary Henry Paulson, and others provided 
extensive testimony on the subject. Although I provide an answer to 
your question below, I also refer you to the testimony from that 
hearing, at which Mr. Paulson stated: ``I was not involved in any of 
the decisions made with respect to [counterparty] payments . . . . 
Those matters were handled by the Federal Reserve Bank of New York and 
the Federal Reserve Board. They sought to make appropriate decisions on 
those matters, and I am confident that this review will show that they 
did.'' \2\
---------------------------------------------------------------------------
    \1\ House Committee on Oversight and Government, Hearing, ``The 
Federal Bailout of AIG,'' Jan. 27, 2010, transcripts and webcast of 
hearing available at http://oversight.house.gov/
index.php?option=com_content&task=view&id=4756&Itemid=2.
    \2\ Id.
---------------------------------------------------------------------------
    Since the Federal Reserve Bank of New York (FRBNY) established a 
credit line for AIG in September 2008, the government's sole purpose in 
supporting AIG has been to contain the financial panic and limit its 
impact on the economy, while protecting U.S. taxpayers.
    The government did not act to protect the financial interests of 
individual institutions, or to help foreign banks. The government acted 
because the consequences of AIG failing at that time, in those 
circumstances, could have been catastrophic for our economy and for 
American families and businesses. Those same principles applied to the 
government's involvement in counterparty negotiations related to Maiden 
Lane III LLC.
       the decision to support aig and counterparty negotiations
    In the fall of 2008, a near-complete collapse of our financial 
system was a realistic possibility. Americans were starting to question 
the safety of their money in the nation's banks, and a growing sense of 
panic was producing the classic signs of a generalized run. Peoples' 
trust and confidence in the stability of major institutions, such as 
AIG, and the capacity of the government to contain the damage was 
vanishing. Lehman Brothers filed for bankruptcy just a few days after 
AIG alerted Federal authorities that its problems had become acute. In 
the wake of Lehman's failure major institutions such as Washington 
Mutual and Wachovia experienced debilitating deposit withdrawals, 
eventually collapsed, and were acquired by competitors.
    Money market funds also suffered a broad run, threatening what was 
considered one of the safest investments for Americans and severely 
disrupting the commercial paper market, a vital source of funding for 
many businesses. In this chaotic environment, the Federal Reserve and 
Treasury concluded that AIG's failure could be catastrophic. At the 
time, the failure of a large, global, highly-rated financial 
institution that had written hundreds of billion dollars of insurance 
on a range of financial instruments could have tipped an already weak 
and fragile financial system and economy into the abyss.
    The company's failure would directly threaten the savings of 
millions of Americans to whom it had provided financial protection 
through investment contracts and products that protect participants in 
401(k) retirement plans. AIG was one of the largest life and property/
casualty insurance providers in the United States. The withdrawal of 
such a major underwriter at the time risked creating a void for 
millions of households and businesses for basic insurance protection. 
And doubts about the value of AIG life insurance products could have 
generated doubts about similar products provided by other life 
insurance companies, feeding the panic that was crippling the economy.
    There was no effective existing mechanism to contain the damage of 
an AIG failure. There was no legal tool comparable to the Federal 
Deposit Insurance Corporation's authority to manage the orderly wind-
down of a troubled bank. In particular, the government did not have the 
ability to quickly separate the stable underlying insurance businesses 
from the complex and dangerous financial activities carried out 
primarily by the parent holding company. Experts suggested that 
achieving that separation would take several years. Bankruptcy was not 
a viable option.
    If the AIG parent holding company had filed for bankruptcy 
protection, it would have resulted in immediate default on over $100 
billion of debt and trillions of dollars of derivatives. Further, the 
bankruptcy filing would have caused insurance regulators in the United 
States and around the world to take over AIG's insurance subsidiaries, 
potentially disrupting households' and businesses' access to basic 
insurance. And since many of the insurance products that AIG sold were 
a form of long-term savings, the seizure by local regulators of AIG's 
insurance subsidiaries could have delayed Americans' access to their 
savings, potentially triggering a run on other institutions.
    The Federal Reserve, under the law, had no role in supervising or 
regulating AIG. Instead, the company was subject to a patchwork of 
regulators, none of whom was adequately aware of the risks that AIG had 
assumed, and none of whom had the tools to address the company's 
funding needs or to provide for its orderly resolution. However, 
Congress gave the Federal Reserve authority to provide liquidity to the 
financial system in times of severe stress, and it acted to fulfill 
that responsibility with respect to AIG.
    Aware that the Federal Reserve was the only institution capable of 
acting, and convinced that the failure of AIG could be catastrophic for 
a financial system already in free fall, the Federal Reserve and 
Treasury determined that it was in the best interests of the United 
States to support AIG in order to slow the panic and prevent further 
damage to our economy.
    On the afternoon of September 16, 2008, the Federal Reserve 
extended AIG an $85 billion line of credit, secured by a substantial 
proportion of the assets of AIG. In designing the intervention, the 
government made sure that there were appropriately tough conditions 
that put the burden of failure on AIG's existing equity holders and 
management and started the process of designing a comprehensive 
restructuring plan. Taxpayers received an approximately 80 percent 
ownership stake in what was still the world's largest insurance 
company, thereby substantially diluting existing shareholders. The 
government also required AIG's CEO to step down and immediately began 
the process of changing the Board of Directors.
    From the beginning, it was clear that AIG needed a durable 
restructuring of its balance sheet and operations. Although the 
government faced escalating and unprecedented challenges on many fronts 
of the financial storm in September and October, it continued to work 
to address AIG's challenges. Falling asset prices generated both 
substantial losses on the company's balance sheet and increases in 
required payments to AIG's counterparties under the terms of its credit 
protection contracts. The insurance companies also experienced 
significant cash outflows related to a securities lending program, as 
the value of residential mortgage-backed securities they had purchased 
and loaned against cash collateral continued to fall. These factors 
undermined market confidence in AIG and put its investment-grade credit 
rating again at risk.
    Understanding the counterparty negotiations addressed by your 
question requires an understanding of the role of the rating agencies 
in AIG's businesses. Avoiding further downgrades of AIG's credit rating 
was absolutely essential to sustaining the firm's viability and 
protecting the taxpayers' investment.
    Under credit protection contracts that AIG had written and the 
terms of various funding arrangements, AIG was required to make 
additional payments to its counterparties if its credit rating was 
downgraded. A downgrade (to below a certain level) also constituted an 
event of default or termination under many contracts. In addition, 
rating downgrades of the AIG parent holding company would have 
significantly undermined confidence in its insurance subsidiaries. 
People do not buy insurance products from firms they do not believe 
have the financial capacity to make good on those commitments over the 
long term--firms that they do not believe will pay out a life insurance 
policy or compensate a business if a factory burns down. Credit ratings 
are central to how people judge that viability.
    On November 10, 2008, the Federal Reserve and Treasury jointly 
announced a package of actions designed to address the vulnerabilities 
in AIG's balance sheet that threatened its viability and the stability 
of its credit ratings. In part, the FRBNY helped establish and fund two 
new companies to purchase troubled assets that AIG had either acquired 
or insured, and to manage those assets for the benefit of the taxpayer. 
Purchasing those assets removed significant exposure from AIG's balance 
sheet and helped insulate the company from further liquidity drains, 
thereby preventing the company from being downgraded and failing. One 
company, Maiden Lane II LLC, purchased assets from AIG's insurance 
subsidiaries. The other company, Maiden Lane III LLC (ML III), 
purchased securities insured by AIG's Financial Products subsidiary and 
owned by third parties.

[GRAPHIC] [TIFF OMITTED] 55621.002


    The counterparty negotiations were conducted in connection with the 
formation and funding of ML III. Before the Federal Reserve became 
involved with AIG, the company had entered into credit default swap 
(CDS) contracts with various third parties to protect the value of 
certain risky securities, called multi-sector CDOs, in exchange for 
periodic premium payments. The value of these securities was tied to 
pools of other assets, mostly subprime mortgages. The contracts 
required AIG to provide its counterparties collateral as the market 
value of the underlying CDOs, the credit rating of the assets behind 
the CDO, or AIG's credit rating declined. As the financial crisis 
intensified, each of these events occurred. As of November 5, 2008, AIG 
had already posted approximately $37 billion in collateral against 
these exposures in accordance with the terms of the contracts, and 
these collateral calls contributed significantly to the $25 billion in 
losses that AIG reported for the third quarter of 2008.
    To remove the persistent threat that these contracts posed to AIG's 
continuing viability, ML III purchased the underlying CDOs from the 
counterparties at their then fair market value. The counterparties 
received $27 billion in payment from ML III, retained approximately $35 
billion in collateral previously provided by AIG, transferred the CDOs 
to ML III, and terminated the CDS contracts. Thus, the counterparties 
essentially received the ``par'' value of $62 billion, consistent with 
the terms of their insurance contracts with AIG. ML III's purchase was 
funded by a $24 billion loan from the FRBNY and $5 billion equity 
contribution by AIG.
    In designing and implementing this transaction the FRBNY's 
objective was, as it always is, to protect the taxpayer. The FRBNY made 
judgments about these transactions carefully with the advice of outside 
counsel and financial experts. As they had done when establishing the 
lending facility in September, the FRBNY and its advisors reviewed a 
range of materials, including details regarding AIG's exposure to each 
counterparty under the CDS contracts.
    However, the FRBNY faced significant constraints. The CDS contracts 
entitled the counterparties to full or par value. The FRBNY could not 
credibly threaten not to pay without being willing to follow through on 
that threat and put AIG into bankruptcy. At the time, the government 
was working desperately to rebuild confidence in the financial system. 
Any suggestion that it might let AIG fail would have worked against 
that vital aim. The FRBNY could not risk a protracted negotiation. 
AIG's financial position was deteriorating rapidly, and the prospect of 
a further ratings downgrade was imminent. AIG was scheduled to report a 
$25 billion loss for the third quarter on November 10, and the ratings 
agencies had informed AIG that, absent a parallel announcement of 
solutions to its liquidity and capital problems, they would downgrade 
the company yet again.
    Such a downgrade would have led to AIG's failure and triggered the 
same catastrophic consequences the government had been trying to avoid 
since September 2008. Moreover, a bankruptcy would have entitled the 
counterparties to terminate the CDS contracts and keep the collateral 
that AIG had previously posted, as well as the underlying CDOs that AIG 
had insured.
    The Special Inspector General for the Troubled Asset Relief Program 
(SIGTARP) has suggested that the FRBNY should have used its regulatory 
authority, or some other means, to coerce AIG's counterparties to 
accept concessions.\3\ This was not a viable option for several 
reasons. First, if the FRBNY had tried to force counterparties to 
accept less than they were legally entitled to, market participants 
would have lost confidence in AIG leading to the company's failure. 
Once a company refuses to meet its full obligations to a customer, 
other customers will quickly find other places to do business. Second, 
the counterparties could have refused to grant such concessions, kept 
the collateral they had already received, kept the CDO securities that 
AIG had insured, and sued AIG for breach of contract. This would have 
increased the taxpayer's potential exposure and precluded them from 
benefiting from any recovery in the value of the CDOs, which has in 
fact happened.
---------------------------------------------------------------------------
    \3\ Factors Affecting Efforts to Limit Payments to AIG 
Counterparties, Nov. 17, 2009, available at http://www.sigtarp.gov/
reports/audit/2009/
Factors_Affecting_Efforts_to_Limit_Payments_to_AIG_Counterparties.pdf.
---------------------------------------------------------------------------
    Third, if the FRBNY had attempted to use its regulatory authority 
to coerce or extract concessions from AIG's counterparties, that 
attempt would likely have led to a further downgrade of AIG's ratings, 
precisely the result that all of the government's actions were intended 
to avoid. An ``investment grade'' credit rating is the rating agencies' 
judgment that creditors will likely be repaid in accordance with the 
terms of their contracts, not according to a hypothetical government-
coerced discount. If the FRBNY had attempted to force counterparties to 
accept less than they were legally entitled to, then AIG would not have 
met the ratings agencies' standards for ``investment grade'' status, 
and it would likely have lost its ``investment grade'' rating.
    Such a downgrade could have led to the company's collapse, 
threatened government efforts to rebuild confidence in the financial 
system, and meant a deeper recession, more financial turmoil, and a 
much higher cost for American taxpayers. In addition, the SIGTARP has 
stated that Treasury and the Federal Reserve ``were fully prepared to 
use their leverage as regulators to compel the nine largest financial 
institutions (including some of AIG's counterparties) to accept TARP 
funding.'' The SIGTARP suggests that the government should have 
similarly compelled concessions from AIG's counterparties. First, I 
disagree with the SIGTARP's characterization of the government's 
discussions with the initial recipients of TARP funds. Second, the 
circumstances and authority in that situation were fundamentally 
different from what existed in the ML III transaction.
    Congress granted the Federal Reserve and, through EESA, Treasury 
with the responsibility to ensure the safety and soundness of the 
financial system. In the Federal Reserve's case, that authority was 
limited to providing liquidity and regulating bank holding companies. 
In Treasury's case, it was limited to purchasing or guaranteeing 
assets. Consistent with that responsibility and authority, in the midst 
of the financial crisis the government encouraged nine banks to accept 
additional capital. They were not forced to forfeit contractual rights 
for the benefit of another financial institution.
    The latter would have been an abuse of the authority granted by 
Congress, violated private parties' contractual rights, and undermined 
confidence in the government's strategy to stabilize the U.S. financial 
system.
    Operating with these constraints, the FRBNY and AIG initiated 
discussions with the major counterparties about whether they would be 
prepared to accept concessions on the prices of the securities. The 
FRBNY knew that the likelihood of success of such a negotiation was 
modest, especially given the imminent deadline and the bargaining 
constraints under which it was operating. Not unexpectedly, the FRBNY 
discovered that most firms would not, under any condition, provide such 
a concession. One counterparty (UBS) said that it was willing, but only 
if every other counterparty would agree to equal concessions on their 
prices.
    In the end, the prices paid for the securities were their fair 
market value, and because the counterparties retained the collateral 
they had previously received from AIG, they all received an aggregate 
amount equal to par value of their securities. In return, the insurance 
contracts were terminated, and ML III kept the securities.
    I strongly believe that the strategy that the Federal Reserve 
pursued in establishing ML III will generate a better outcome than any 
alternative. In particular, attempting to coerce concessions risked 
making the U.S. taxpayer significantly worse off.
            aig today and outlook for government investments
    Since ML III purchased the CDOs, they have generated significant 
cash flows that have been used to pay down the FRBNY's loan by more 
than 25 percent. The Federal Reserve and Treasury expect ML III to pay 
the FRBNY back in full and to generate a substantial profit for U.S. 
taxpayers. The FRBNY is not only the senior creditor to ML III. It also 
has a right to two-thirds of any profits from the portfolio, once its 
loan has been repaid. Moreover, because ML III can hold the CDOs to 
maturity, it is largely immune from trading prices and liquidity needs, 
and is therefore in a better position to maximize the value of the 
portfolio.
    However, the government's return on ML III should be considered in 
the context of the overall return on its support for AIG. On the one 
hand, the Federal Reserve will likely earn a positive return on its 
financial support of AIG, including the FRBNY Credit Facility, its 
loans to Maiden Lane II and Maiden Lane III, and its preferred 
interests in AIA Aurora LLC and ALICO Holdings LLC. On the other hand, 
it is unlikely that Treasury will fully recover the direct costs of its 
capital investments in AIG. In June 2009, the Congressional Budget 
Office estimated that Treasury would lose $35 billion of its $70 
billion total commitment to AIG, including undrawn funds in the equity 
facility. And the 2011 Budget reflected an expected loss of $48 billion 
on that commitment.\4\
---------------------------------------------------------------------------
    \4\ Congressional Budget Office, The Troubled Asset Relief Program: 
Report on Transactions Through June 17, 2009, Jun. 2009, 2, available 
at http://www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf.
---------------------------------------------------------------------------
    Today, on the basis of a range of measures, Treasury believes that 
losses on its investments in AIG are likely to be lower. If market 
conditions continue to improve and AIG's businesses perform well, the 
actual recovery on Treasury's preferred stock could be significantly 
higher. The Congressional Budget Office recently estimated that losses 
on all Treasury investments in AIG would be $9 billion.\5\
---------------------------------------------------------------------------
    \5\ Congressional Budget Office, The Budget and Economic Outlook: 
Fiscal Years 2010-2020, Jan. 2010, at 13, available at http://
www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf.
---------------------------------------------------------------------------
    The President has put forward a concrete plan to recover every 
penny that Treasury committed to stabilize our financial system, 
including Treasury investments in AIG. The President's proposed 
Financial Crisis Responsibility Fee would be imposed on large financial 
institutions to recoup all losses from TARP investments.
                need for comprehensive financial reform
    In addition, the President's proposals and the legislation working 
its way through Congress to reform our financial system address the 
shortcomings in regulation and authority that forced the government to 
support AIG. Those proposals and legislation would provide the 
government with the ability to limit risk-taking for institutions that 
threaten the overall stability of the financial system and economy. The 
government needs this ability not just for banks, but also for 
institutions like AIG. The proposals and legislation also provide the 
government with the authority to resolve failing major financial 
institutions like AIG in an orderly manner, with losses absorbed not by 
taxpayers but by equity holders, unsecured creditors and, if necessary, 
other large financial institutions. I look forward to continuing to 
work with Congress to help pass legislation that provides this 
necessary authority.

    Question 3. What is your understanding of why TARP was implemented?

    Answer. In mid-September 2008, we were in the midst of one of the 
worst periods in our financial history. The economy was contracting 
sharply. Fear of a possible depression froze markets and spurred 
businesses to lay off workers and pull back from investment and 
lending. Immediate, strong action was needed to avoid a complete 
collapse of the financial system. The Treasury, Federal Reserve, 
Federal Deposit Insurance Corporation, and other U.S. government bodies 
undertook an array of unprecedented steps to avert a collapse and the 
dangers posed to consumers, businesses, and the broader economy. 
However, additional resources and authorities were needed to help 
address the severe conditions our nation faced. Recognizing the need to 
take difficult but necessary action to confront a financial system on 
the verge of collapse, Congress enacted EESA and granted the Treasury 
Department authority to restore liquidity and stability to the U.S. 
financial system by purchasing and guaranteeing troubled assets in a 
wide range of financial institutions.

    a. How many troubled assets have you bought?

    The 2011 budget reflects that $546.4 billion has been planned for 
particular TARP programs. Of that amount, $484.73 billion has been 
committed to specific institutions under signed contracts. $379.20 
billion has been paid out by Treasury under those contracts.

    b. Why have homeowner support programs only gotten $27.1 billion 
whereas the Automotive Industry Support Programs gotten $81.1 billion?

    The Administration is committed to taking the steps necessary to 
stabilize our housing market, including providing support for mortgage 
affordability across the market. The homeowner support program, to 
which you refer, the Home Affordable Modification Program (HAMP), is 
only one part of this effort. Treasury has committed up to $50 billion 
of TARP funds to HAMP. Under this program, Treasury provides incentives 
for mortgage servicers, borrowers and investors to modify loans that 
are delinquent or at imminent risk of default to an affordable monthly 
payment equal to no more than 31 percent of a borrower's gross monthly 
income. As of our most recent Making Home Affordable Public Report 
(covering modification activity through the end of January 2010), 
nearly 1 million homeowners are in active trial and permanent 
modifications. Over 116,000 homeowners are in permanent modifications. 
In addition, over 76,000 homeowners are in pending permanent 
modifications awaiting only final approval from homeowners, for a total 
of nearly 200,000 homeowners in permanent or pending permanent 
modifications. The program's central focus at this point is converting 
borrowers into permanent modifications where they qualify.
    The Administration has taken a number of additional steps to 
stabilize the housing market and support mortgage affordability. The 
continued support for Fannie Mae and Freddie Mac and the Treasury's 
Mortgage Backed Securities (``MBS'') purchase program, along with MBS 
purchases by the Fed, have helped to keep interest rates at historic 
lows. More than 3 million Americans took advantage of these lower rates 
in 2009 to save money through refinancing. For example, on a median 
house purchase of $200,000, a one-percent reduction in interest rates 
on a purchase or refinance, saves the family over $120 per month for 
the thirty-year life of the loan--real help for America's homeowners. 
We are also working to provide increased access to financing for state 
and local housing finance agencies, which provide sustainable 
homeownership and rental resources in all 50 states, for working 
Americans. In addition, the first-time homebuyer tax credit has helped 
hundreds of thousands of responsible Americans purchase a home. As of 
the end of December 2009, an estimated $1.8 million returns have 
acclaimed the first-time homebuyer tax credit and about $12.5 billion 
in credits have been claimed.
    The American Recovery and Reinvestment Act (``ARRA'') also 
supported the housing market by creating an innovative Treasury Tax 
Credit Exchange Program (``TCEP'') and providing gap financing through 
the HUD Tax Credit Assistance Program (``TCAP''). In combination, these 
programs are estimated to provide over $5 billion in support for 
affordable rental housing.
    ARRA also provided $2 billion in support for the Neighborhood 
Stabilization Program, which is designed to rebuild value in areas 
hardest hit by foreclosures, in addition to $4 billion provided for the 
program in the Housing and Economic Recovery Act.
    With respect to the automotive industry programs, outright failure 
of GM and Chrysler would likely have led to uncontrolled liquidations 
in the automotive industry. The repercussions of such liquidations 
could have included immediate and long-term damage to the U.S. 
manufacturing/industrial base, a significant increase in unemployment 
with direct harm to those both directly and indirectly related to the 
auto sector, and further damage to our financial system, as automobile 
financing accounts for a material portion of overall financial 
activity. Therefore, the previous Administration provided initial 
assistance late last year to the automotive companies pursuant to TARP.
    When the Obama Administration took office, it required the 
companies to develop long-term reorganization and viability plans 
before Treasury would provide additional assistance. The government 
provided the minimum capital necessary to these companies to facilitate 
their restructurings. The new companies are now leaner and more 
efficient and poised to help further the ongoing economic recovery and 
the competitiveness of the American automotive industry.

    Question 4. The debt is over $12 trillion dollars and, in fiscal 
year 2009, the year TARP was funded, the Federal Government paid for 
approximately 46% of its expenditures by issuing new debt. How can we 
lower the debt and continue to expend the nearly $200 billion 
unobligated funds in TARP?

    Answer. Due to improved market conditions and effective performance 
in the management and use of TARP authority, the projected cost to the 
taxpayer is now significantly lower than earlier anticipated. We now 
estimate that the cost to taxpayers and the deficit will be about $224 
billion lower than the estimate of $341 billion projected in the 
Midsession Review in August. However, as part of our commitment to 
ensuring that taxpayers do not face the costs of the extraordinary 
efforts taken to stabilize the financial system, the Administration 
proposed the Financial Crisis Responsibility Fee on January 14, 2010. 
This fee--which fulfills the President's commitment to submit a plan to 
recoup TARP losses three years early--would be levied on the 
liabilities of financial institutions with over $50 billion in assets, 
and is expected to raise $117 billion over about 12 years, and $90 
billion over the next 10 years.
    Our proposed fee fulfills the requirement of Section 134 of EESA--
ensuring that taxpayers are paid back in full--while also providing a 
deterrent against excessive leverage among the largest financial firms. 
In the coming weeks, we will be developing further details concerning 
the Financial Crisis Responsibility Fee, and we look forward to working 
with Congress and members of this Panel in designing it to most 
effectively recover the costs of TARP.
  

                                  
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