[Senate Hearing 111-40]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 111-40

 
    PULLING BACK THE TARP: OVERSIGHT OF THE FINANCIAL RESCUE PROGRAM

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

         CONTINUING THE OVERSIGHT OF THE TROUBLED ASSET RELIEF
  PROGRAM AND EXPLORING HOW THE PROGRAM CAN BE MADE MORE EFFECTIVE IN 
             ADDRESSING THE FINANCIAL CRISIS IN OUR NATION

                               __________

                            FEBRUARY 5, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                 Colin McGinnis, Acting Staff Director

              William D. Duhnke, Republican Staff Director

                   Amy Friend, Legislative Assistant

                  Deborah Katz, Legislative Assistant

                   Julie Chon, Legislative Assistant

                  Neal Orringer, Legislative Assistant

                   Lisa Frumin, Legislative Assistant

                   Aaron Klein, Legislative Assistant

                 Jonathan Miller, Legislative Assistant

                  Kate Szostak, Legislative Assistant

                Dean V. Shahinian, Legislative Assistant

                Brian Filipowich, Legislative Assistant

                  Drew Colbert, Legislative Assistant

                  Laura Swanson, Legislative Assistant

                  Didem Nisanci, Legislative Assistant

                 Keith Roachford, Legislative Assistant

                   Mark Powden, Legislative Assistant

                 Jason Rosenberg, Legislative Assistant

                   Jayme Roth, Legislative Assistant

                   Matt Pippin, Legislative Assistant

                Jonathan Davidson, Legislative Assistant

                   Mary Perko, Legislative Assistant

                      Rob Lee, Legislative Fellow

                  Mark F. Oesterle, Republican Counsel

             Andrew Olmem, Republican Legislative Assistant

            Mark Calabria, Republican Legislative Assistant

            Hester Peirce, Republican Legislative Assistant

             Jim Johnson, Republican Legislative Assistant

           Jonathan Graffeo, Republican Legislative Assistant

          William Henderson, Republican Legislative Assistant

          Courtney Geduldig, Republican Legislative Assistant

             Mike Nielsen, Republican Legislative Assistant

             Michael Wong, Republican Legislative Assistant

             Mark Sanchez, Republican Legislative Assistant

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                       THURSDAY, FEBRUARY 5, 2009

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Vitter...............................................     6
    Senator Reed.................................................     7
    Senator Menendez.............................................     8
    Senator Hutchison............................................     9
    Senator Tester...............................................    10
    Senator Bunning..............................................    11
    Senator Bennet...............................................    11
    Senator Warner...............................................    12
    Senator Bayh.................................................    12
    Senator Akaka................................................    13
    Senator Johnson
        Prepared statement.......................................    50
    Senator Brown
        Prepared statement.......................................    50

                               WITNESSES

Gene L. Dodaro, Acting Comptroller General, Government 
  Accountability
  Office.........................................................    14
    Prepared statement...........................................    52
    Response to written questions of:
        Senator Johnson..........................................    79
Neil M. Barofsky, Special Inspector General, Troubled Asset 
  Relief Program.................................................    16
    Prepared statement...........................................    75
    Response to written questions of:
        Senator Johnson..........................................    81
Elizabeth Warren, Chair, Congressional Oversight Panel for the 
  Troubled Asset Relief Program..................................    18
    Prepared statement...........................................    76
    Response to written questions of:
        Senator Johnson..........................................    83

              Additional Material Supplied for the Record

Executive Summary of the Special Inspector General's Report on 
  TARP...........................................................     *

* Retained in Committee files

                                 (iii)


    PULLING BACK THE TARP: OVERSIGHT OF THE FINANCIAL RESCUE PROGRAM

                              ----------                              


                       THURSDAY, FEBRUARY 5, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:05 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    Let me begin by thanking our witnesses and the audience who 
have gathered here today for this very important hearing, 
``Pulling Back the TARP: Oversight of the Financial Rescue 
Program.'' And I want to begin by thanking our witnesses not 
only for their presence here today but the tremendous work that 
they are doing.
    Mr. Dodaro, of course, is now becoming a permanent party in 
this room here, having spent a good part of yesterday with us 
as well. And we thank you for being here today.
    What I will do this morning, I have some opening comments 
to make. I will turn to Senator Shelby for any opening comments 
he will have, and then because of the nature of this subject 
matter, I am going to invite my colleagues for any brief 
opening comments they would like to make as well. Then we will 
get to our witnesses. Obviously, all statements and supporting 
documents and materials that our witnesses and colleagues feel 
are necessary for the record will be included by unanimous 
consent. And without objection, that will be the case. So, with 
that in mind, let me proceed, if I may, and then we will move 
along with the other Members and our witnesses.
    Today the Banking Committee meets to continue our oversight 
of the Troubled Asset Relief Program and explore how the 
program can be made more effective as we work to address the 
financial crisis in our country, and around the world, for that 
matter.
    In creating the TARP program as part of the Emergency 
Economic Stabilization Act of last October, the U.S. Congress 
granted the Treasury extraordinary powers and a staggering sum 
of money to address the economic crisis--$700 billion of 
taxpayer money.
    The TARP program's goals are certainly as relevant today as 
they were then. As prescribed by EESA, the Treasury Department 
is supposed to use the authority for four reasons which we 
outlined at the time of the legislation: one, to protect 
people's home values, college funds, retirement accounts, and 
life savings; two, to preserve homeownership and promote jobs 
and economic growth; three, to maximize the returns to the 
taxpayers for their investment; and, four, to provide some 
measure of public accountability for the exercise of the 
authority as they spend this tremendous amount of money.
    Unfortunately, the previous administration failed to uphold 
the intent of the law in many respects, in my view. Recipients 
of TARP funds were effectively given in too many instances a 
free pass, not helping homeowners and small businesses but, 
rather, choosing to hoard taxpayer funds, acquire other 
companies, and in some instances pay lavish bonuses to 
executives and handsome dividends to shareholders.
    The public is outraged by this behavior, with good cause. 
As the Congressional Oversight Panel, chaired by one of our 
witnesses today, concluded in its report, there were, and I 
quote, ``what appear to be significant gaps in Treasury's 
monitoring of the use of taxpayer money.''
    I want to commend the Panel not only for its commitment to 
ensuring the TARP program achieves the objectives that the 
Congress wrote into the law, but also for its aggressive 
oversight, highlighting areas of weaknesses and the 
improvements Treasury can make.
    But this hearing is not just about the problems of the 
past. With some $350 billion of taxpayer money on the line as 
our economic crisis deepens, it is very much about the future. 
Let me state unequivocally I believe that the TARP program 
remains a critical tool our Government will need to address the 
economic crisis. That is why I supported the release of the 
last batch of the funding a few days ago.
    But for the sake of our economy and the public's confidence 
in our ability to address this crisis, we must see a sharp 
change in the direction of this program under new management. 
If there were ever a program in need of a sign in front of it 
that read ``Under New Management,'' it is this one. Allow me to 
outline the changes that I believe should be made.
    First, Secretary Geithner and the rest of the 
administration's economic team must develop and clearly 
communicate a long-term, comprehensive plan for using TARP 
funds to support the financial system. In short, they must 
provide a framework. Why do we need TARP? And what do we hope 
to achieve with this program? The previous administration's 
piecemeal, lurching interventions in the financial system 
contributed to the confusion, I believe, and the volatility 
that have dragged down consumer and investor confidence. 
Outlining a clear direction and plan as to how the Government 
will use taxpayer money going forward will provide Americans 
with the clarity and assurance they need, in my view, to help 
restore the confidence and optimism absolutely essential to 
long-term economic stability.
    Second, there needs to be greater transparency and taxpayer 
protections to safeguard the use of taxpayer money, including 
stricter limits on executive compensation and bonuses. The 
American people have been subjected to almost weekly news 
accounts, now daily news accounts, about TARP recipients 
spending lavishly, undermining the integrity of the program and 
the institutions it is supposed to rescue. Just last week, we 
heard that Wells Fargo, which received $25 billion in TARP 
funding, planned a series of corporate junkets this month to 
the most extravagant Las Vegas casinos. Fortunately, the bank 
got the message loud and clear that this kind of behavior is an 
insult to every American taxpayer footing the bill, and they 
canceled their plans. And I applaud the Obama Administration 
for moving to impose new and tougher restrictions on executive 
compensation for companies that receive TARP funds.
    In fact, I would say as an aside I intend to offer an 
amendment to our economic recovery package, either later today 
or over the weekend, that would build on the these restrictions 
and prohibit bonuses to the 25 most highly paid employees of 
companies that received TARP funding, authorize the Treasury 
Secretary to limit certain other performance-based bonuses, as 
well as require say on pay votes on executive compensation, and 
exact other safeguards. If a company accepts taxpayer 
assistance, it should not be offering bonuses to top executives 
or rewarding shareholders with cash dividends. One of the 
largest banks in America paid one-half of its TARP funds to 
stockholders in dividends. That is unacceptable. The President 
told the world 2 weeks ago that a new era of responsibility has 
begun. Apparently, our Treasury Secretary will have to deliver 
that message more forcefully to some financial institutions.
    Fourth, Treasury should establish clear guidelines to 
increasing lending. Too many TARP recipients used these funds 
for everything but lending to small businesses or helping move 
families into long-term affordable mortgages. As reported in 
the New York Times, soon after Treasury launched the TARP, an 
executive at JPMorgan Chase seemed to boast of plans to use 
TARP funds to make acquisitions or as a cushion against a 
worsening economy just after receiving $25 billion in Federal 
funding. And according to the Washington Post earlier this 
week, some of the institutions that have received the most 
Federal assistance have cut their lending sharpest. Treasury 
must require recipients of assistance to provide quarterly 
reports, specifying amounts of consumer and commercial loans 
made, details about acquisitions, and the number and type of 
loan modifications made to prevent homeowners from going into 
foreclosure. If financial institutions refuse to abide by any 
of these conditions, they should not be given public funds, 
period.
    Finally, we must apply the same sharp and urgent focus to 
help the homeowners whose plight is at the root cause of this 
crisis. Two years ago almost to the day, on February 7, 2007, 
this Committee met for the first time to discuss the 
foreclosure crisis. We held our first hearing on foreclosures 
on February 7, 2007, and predatory lending.
    At that time, I said, and I quote, ``It is time for 
Congress, the administration, and the lending industry to face 
up to the fact that predatory and irresponsible lending 
practices are creating a major crisis for millions of American 
homeowners at a time when general economic trends are not 
good.''
    I recall my colleague from New Jersey, I think, on that 
very day talking about a tsunami of foreclosures that would 
come. I believe that was on February 7, 2 years ago. Stopping 
foreclosures must be our top priority. Failing to do so will 
have devastating consequences for our economy.
    There are several ways that TARP funds could be used to 
address the foreclosure crisis: by making changes to the Hope 
for Homeowners Program, to the approach advocated by the FDIC 
Chairman, to restructure delinquent mortgages using a 
streamlined process.
    TARP funds need not be the only means of preventing 
foreclosures, but with no silver bullet on the horizon to stop 
the rising tide of foreclosures, TARP funds can and must be 
used to encourage participation in these various programs. 
These improvements to TARP will go a long way, in my view, to 
not only making the program more effective and stabilizing our 
economy, but also bolstering public confidence in the very 
program which we all recognize is critical to our ultimate 
success.
    The Obama Administration has already committed to making 
many, if not all, of these changes, and I look forward to 
continuing the Committee's close and detailed oversight of the 
implementation of this program. Next week, we will hear 
directly from Secretary Geithner about the administration's 
plans for major changes to this program, and I look forward to 
his testimony.
    With today's hearing, I hope that we can better distinguish 
questions about past management of TARP from questions about 
the law itself. What is not in question is the need for our 
President to have the tools at his disposal to restore 
stability to our economy. Ensuring that the TARP is the most 
effective, dynamic instrument it can be remains our goal today. 
I eagerly await hearing from our witnesses as to how we can 
make that possible.
    With that, I turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Chairman Dodd.
    We are here this morning to examine how the Treasury's 
Troubled Asset Relief Program, or TARP, is working. TARP was 
sold to Congress and the American people with great urgency as 
the sure cure for our ailing financial system.
    Last September, you will recall, when Secretary Paulson and 
Chairman Bernanke came to us to ask for TARP authority, they 
urged us to act with all deliberate speed. We were warned that 
if we did not give Treasury $700 billion immediately, the 
financial system would collapse.
    There was no time for thoughtful deliberation, no time to 
examine the origin of the crisis, no time to discuss whether 
TARP actually would solve the problems. We had no time to 
examine. Secretary Paulson and Chairman Bernanke assured us 
that the TARP was the answer to those problems. I had my 
doubts.
    As described, TARP would remove illiquid assets at that 
time from bank balance sheets, restart the flow of private 
capital into the hands of consumers and businesses, and inspire 
confidence in investors. We were promised a methodical and 
transparent approach. I was not convinced then, and I opposed 
the bill. I voted against the TARP because Treasury's warnings 
and promises seemed calculated to induce panic rather than to 
ensure proper stewardship of taxpayer dollars. I recognize--all 
of us do--that we face tremendous challenges. Solutions, 
however, crafted in haste, rarely are effective and, even 
worse, can be counterproductive, as TARP.
    Four months have passed since the TARP legislation was 
enacted. Americans have a right to know, I believe, where their 
money went and whether it is working, which many are doubtful. 
Illiquid assets remain on the bank balance sheets, private 
capital is sitting on the sidelines, and institutions of all 
sorts are looking at the Federal Government as the lender of 
first resort. Investor confidence remains dismal. Deep economic 
problems persist even though Treasury has handed out $350 
billion of taxpayer money and is working its way through the 
second $350 billion installment.
    These outcomes are not exactly consistent with the promises 
that we heard last fall. Not only have the promised results 
eluded us, but TARP money has been used, as Senator Dodd 
mentioned, in a haphazard, opaque, and unanticipated manner. 
Treasury, when it came to Congress last fall, talked about 
purchasing troubled assets through reverse auctions. That plan, 
which had never been fleshed out with practical details, was 
abandoned within 2 weeks of the legislation's passage. Instead, 
Treasury, as you know, injected capital into purportedly 
healthy banks under the Capital Purchase Program. Less than a 
month later, additional assistance was announced for one of the 
same banks under a new TARP program--the Targeted Investment 
Program--an ad hoc approach.
    AIG got help through yet another TARP program called the 
Systematically Significant Failing Institutions Program. Think 
about that. After Congress decided not to give taxpayer money 
to the auto companies, Treasury set up a program especially for 
the auto sector under TARP and the last administration headed 
by President Bush. Each program has eligibility criteria, but 
Treasury seems willing to create a new program for entities 
that fail to meet those criteria. In a troubled market that 
craves predictability, this ad hoc approach is particularly 
harmful, I believe.
    In addition, this disorderly approach makes it much more 
difficult for our witnesses, this Committee, and others to hold 
Treasury accountable for the choices it has made under the 
TARP. Shifting criteria for the receipt of TARP money makes it 
easier for Treasury and the bank regulators to pick winners and 
loser without ever having to explain their choices.
    Why is it, for example, that Citigroup, one of the nine so-
called healthy banks--nobody believed they were healthy, 
though--selected to be the first participant in the Capital 
Purchase Program, needed a second installment of TARP funds 1 
month later? Obviously, the Fed and Treasury did not know what 
they were doing. Oddly, Treasury announced the outlines of the 
program under which the second $20 billion investment was made 
in January after Treasury had already invested the money.
    Similarly, as you know, Bank of America, another recipient 
of aid under the so-called healthy bank program in October, was 
back for another $20 billion last month.
    Perhaps the decisions by Treasury working with the Federal 
Reserve to classify Citibank and Bank of America as healthy 
institutions in October ought to be reviewed. They need to be 
reviewed. Treasury has not yet taken the time, in the GAO's 
words, ``to clearly articulate and communicate a vision for 
TARP.'' But then why should Treasury set forth a strategic plan 
if Congress, our Congress, us, if we are willing to hand over 
hundreds of billions of dollars without regard to whether the 
first installment has had the desired effect?
    All of the witnesses here today have expressed similar 
concerns about the undisciplined and opaque manner in which 
TARP has been administered. The GAO has commented on TARP's 
unclear strategic vision. Mr. Barofsky has noted that the 
manner in which the TARP money has been used remains almost 
entirely opaque. The Congressional Oversight Panel has also 
commented on the confusion over the purpose and effects of the 
TARP.
    I look forward to hearing all of these witnesses and 
concerns here this morning, but the taxpayer deserves better 
than what we are getting.
    Chairman Dodd. Thank you, Senator Shelby, very much.
    I want to recognize the arrival of our colleague, David 
Vitter. David, thank you for joining the Committee. We 
appreciate it very, very much. And Kay Bailey Hutchison was 
here a minute ago. I am sure she is coming back. And we welcome 
her to the Committee as well. We are delighted you have joined 
us to be a part of this Congress in this session.
    With that, let me turn to Senator Johnson.
    Senator Johnson. Mr. Chairman, I will submit my statement 
for the record.
    Chairman Dodd. Good. Senator Vitter.

               STATEMENT OF SENATOR DAVID VITTER

    Senator Vitter. Thank you, Mr. Chairman. Thank you for 
holding this hearing, which is very, very important. It is 
important in at least two categories.
    The first really gets more debate and focus in the public 
square, and it is important in terms of how firms that get this 
money use it, whether they use it properly, whether they abuse 
it in any way, executive pay, bonuses, compensation, meetings 
held in exotic locations--all of those sort of big-headline 
issues. And I do not want trivialize that. It is important that 
we put some parameters to build public confidence in the 
program around that and prohibit certain activity, and also 
ensure that if money is given to institutions to increase 
lending, we have a reasonable expectation that that is going to 
happen. And so that is an important topic of this sort of 
oversight discussion.
    But I think the second category of our discussion is even 
more important, and that is the fact that the program itself 
within Government, within Treasury and elsewhere, really has no 
clear rationale or clearly defined mission. As Senator Shelby 
said, to say it is evolving is to use polite language. It is 
completely ad hoc. It changes day to day. To the casual 
observer, it really seems like decisions are made on the fly 
about giving particular companies particular amounts of money, 
and then after the fact there is a new program with a very 
high-sounding title created to justify that very individual ad 
hoc decision. And Senator Shelby named a number of those 
examples.
    To me, that is the most worrisome. There is no overarching 
strategy or model that we are using with this huge amount of 
taxpayer funds. I would point to two things as the easiest 
proof of that.
    Number one, we are still using the term ``TARP: Troubled 
Asset Relief Program.'' And yet hundreds of billions of dollars 
into it, we have not bought the first troubled asset.
    Number two, the legislation in terms of its specific 
language focused on financial institutions. And yet some of the 
most significant recipients are auto manufacturers.
    Now, look, I know we can construe terms broadly, but those 
are not financial institutions, pure and simple. And so to me, 
the most worrisome aspect of this discussion is that TARP has 
really become just a slush fund to use as any administration, 
first the Bush Administration, now the Obama Administration, 
sees fit on a purely ad hoc basis, and then the high-sounding 
titles and programs are announced the next day to justify the 
very specific decision regarding naming firms and picking 
winners and losers.
    So that is what I in particular want to focus on and 
certainly be a positive part of changing as we move into the 
future. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much. Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Well, thank you, Mr. Chairman. This is a 
vitally important topic, and I thank the witnesses for being 
here, and I would like to just mention three brief points.
    First, when we authorized the TARP program, we were clear 
to try to obtain an interest by the taxpayers by creating 
warrants; that if we are going to bear the risk of these 
investments, then taxpayers should have the benefits in the 
future. I am concerned that the pricing of these warrants has 
not been comparable to what commercial entities and private 
investors are getting, and we have to be, I think, conscious of 
that. If we are going to bear risk, taxpayers are going to bear 
risk, they should be compensated going forward.
    The second point--and it is with respect to compensation, 
which I think President Obama's statement yesterday was right 
on point. But as we go forward, I believe that the Treasury 
Department and these institutions should consider very 
seriously making the bonus pools consist of the troubled assets 
that they were going to ask us to purchase. I have talked to 
individuals and companies who claim that these assets are 
essentially sound, it is just an illiquid market. Well, if they 
are, they could be suitable for bonus purposes, too, and I 
think that is--at least one company has done that, but I think 
many more companies should do that.
    And then a final point as we go forward, particularly with 
respect to troubled assets. The valuation of these assets is 
going to be absolutely critical, so I would like your advice 
going forward as to what mechanism we can put in place to 
ensure the valuations are accurate and appropriate and sound 
because, otherwise, there will be, I think, a great pressure to 
not give accurate evaluations which will benefit the industry 
and disadvantage the taxpayers.
    Again, I look forward to your testimony. Thank you, Mr. 
Chairman.
    Chairman Dodd. Senator Corker.
    Senator Corker. Mr. Chairman, out of respect for the 
witnesses, I would like to listen to them, and then I will ask 
questions. Thank you.
    Chairman Dodd. Thank you very much.
    Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman. I respect the 
witnesses as well, but I also want my constituents to know what 
I am doing here, so I am going to just take a minute or two.
    Let me just say, when Secretary Paulson came before the 
Congress and requested the $700 billion last October, I was 
skeptical, as were so many. But it was very clear to me at the 
time that had we not acted, we would have seen a series of 
banks collapse. And some ideologically believe that that maybe 
is the right way to go in a free market system that, in fact, 
is what is necessary to be able to have the system work out its 
own set of circumstances. I think that would have been even 
more catastrophic than we are today with all the difficulties 
in this program. So I just want to frame it in the context of 
choices at the time.
    Now, my primary concern then, as it is now, was: How does 
this money get to ultimately liquefy the credit crunch? How 
does it get to working families? How does it get to small 
businesses that need the loans to make sure they can continue 
to operate and employ people? How do students afford a college 
education? How do families stay in their homes?
    Now, when Secretary Paulson and the Bush Administration 
assured us repeatedly the rescue money would be used exactly 
for these purposes, many of us, knowing the set of 
circumstances at the time and with those guarantees, agreed to 
move forward. They assured us the money would not be going to 
bonuses and golden parachutes or dividends and private jets 
but, rather, to boost the consumer lending that was so 
desperately needed to restore the economy and to create jobs.
    Unfortunately, many of the results have shown that what was 
represented by the previous administration could not be farther 
from the truth.
    Many institutions have decided to use TARP funding to 
acquire healthy banks, continue dividends to shareholders, pay 
exorbitant bonuses and golden parachutes to their senior 
executives. As the New York State Comptroller reported 
recently, over $18 billion--billion--in bonuses were handed out 
to employees at financial firms in 2008, the sixth highest 
payout--the sixth highest payout in Wall Street history. And I 
understand about keeping talent, but let me tell you, when 
there is no job, you have got a lot of talent. You have got a 
lot of talent flowing all there Washington looking for 
employment and back home in New Jersey where there is a lot of 
talent. And you cannot tell me that it takes $18 billion to 
keep that talent.
    That staggering figure stands in stark contrast to the 
industry's record losses last year which required taxpayer 
funding assistance to forestall and unprecedented meltdown. 
With so many Americans losing their homes, their jobs, and 
their health care, that kind of abuse of taxpayer money is 
offensive and unconscionable.
    Not only have banks refused to increase lending, many have 
actually reduced the amount of loans they offer. According to 
the Federal Reserve, banks decreased lending during the last 
quarter even while the Treasury infused them with hundreds of 
billions of dollars. Even more troubling, banks that received 
taxpayer funds decreased lending by twice as much as those who 
did not receive any funds. And based on this information, it 
seems that one of the following things must be true: either 
Secretary Paulson misled the Congress when he said that the 
purpose of the TARP was to promote banks to lend, or 
implementation of the TARP as we were told it was going to take 
place has been a failure. Either way, the American people are 
not just skeptical about this; they are angry, and they have 
every right to be.
    Finally, I saw the Treasury Department's responses, 
particularly under the previous administration, or lack 
thereof, reveal a level of contempt for transparency and 
accountability. Professor Warren, the Oversight Panel you chair 
is tasked with that critical mission, and it is unacceptable 
for the Treasury Department to be anything less than fully 
cooperative with your investigation. By my count, the Treasury 
failed to adequately respond to 32 questions, including 25 
which they left in blank--in blank, Mr. Chairman.
    Now, I might not be a college professor, but where I come 
from, in my days when I was in school, that student would get 
an F. Bottom line, that is simply unacceptable.
    Now, I applaud the Obama Administration for the reforms 
they are considering and will soon announce. I look forward to 
listening to these witnesses. The banking system is still 
greatly challenged. Credit markets are still largely frozen. If 
we do this right, then we can meet some of the challenges we 
have. But we need transparency and openness in this process. 
Otherwise, there can be no faith, there can be no credibility, 
and at the end of the day, we will not achieve the goals that 
we have.
    Thank you, Mr. Chairman.
    Chairman Dodd. Senator, thank you very, very much.
    Senator Hutchison, I welcomed you to the Committee a few 
moments ago when you stepped out of the room for a second, so I 
will say so again in your presence. We are delighted you have 
joined the Committee. Thank you for joining us, and if you have 
any opening comments, we would be happy to receive them.

           STATEMENT OF SENATOR KAY BAILEY HUTCHISON

    Senator Hutchison. I would love to say a few things. I do 
want to hear the witnesses and I thank you. I am so glad to be 
on this Committee. I have wanted to be on it for a long time, 
but when I came to the Senate, Senator Gramm was on the 
Committee, though banking really is my background, so I am 
really pleased to be on it.
    Let me just say a couple of things. Like so many others, I 
was so taken about the first TARP, taken with the arguments 
that were made by the Secretary of the Treasury, the Federal 
Reserve Board Chairman, that we had a crisis and we had to deal 
with it. The original proposal was that we would basically take 
warrants in the banks for taxpayer upside, which I agree that 
we should do, take the bad assets off, and try to work those 
out so that as many people as possible can work out loans and 
stay solvent.
    That changed in 2 weeks, and then there was another change. 
The impression out in America is, no one is getting credit and 
nobody knows what they are doing because there is no focus. So 
now is the time that we can learn from you what might work, 
what has worked. We already know what hasn't worked. You can 
help us craft the parameters around the next TARP or the one 
after that.
    Let me just say, from my standpoint, having lived through 
the crisis of the 1980s and the Resolution Trust Corporation, 
anything we do with bad assets and the reform of the TARP or 
going forward, we should have a policy against calling 
performing loans. Nothing is more demoralizing to a person than 
to see all of the property around it being sold at fire sale 
prices, as Resolution Trust Corporation did, and then good 
loans be called because the collateral value has gone down. But 
the performing loans were being called. I will filibuster to 
the end of the earth if we don't have something that protects 
people who are making their payments from not being called.
    Thank you, Mr. Chairman, and I appreciate and look forward 
to working with all of you toward a productive future for our 
country.
    Chairman Dodd. Thank you very much, Senator.
    Senator Tester.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Thank you, Mr. Chairman. I, too, want to 
echo what many of our Committee Members have said about 
appreciation for holding this Committee meeting, and thank you, 
Ranking Member Shelby, for being a part of that.
    I want to thank the Members for being here. Oversight of 
this TARP program is critically important, and I listened to my 
Members' opening statements and it continues to frustrate me, 
as it does my constituents, about what has transpired with this 
program, who has gotten the money and where this massive amount 
of dollars have gone.
    I am going to cut right to the chase here. There are four 
or five questions that I really need to get answered. Number 
one, what the large systemic commercial banks and bank holding 
companies are doing with the money.
    Two, what the rural community banks are doing if they get 
access, and if they are not getting access, what is the 
impediment.
    Did the banks have a detailed plan when they initially 
applied for the money?
    And how much of that plan was centered around increasing 
lending, getting the housing crisis problem solved versus bank 
consolidation and shoring up their balance sheets?
    I hope you have had the opportunity to look thoroughly. I 
heard Senator Menendez talk about the fact that the Treasury 
Department had not been opening their books to you with total 
transparency and honesty. I can tell you that from my 
perspective, heads should roll if that policy continues, and I 
would like to know if that is the case in the Obama 
Administration.
    I think things need to be totally transparent in this. 
People have enough heartburn about these dollars from the get-
go that we, quite frankly--well, there is just no room for 
secrets at this point in time. These are taxpayer dollars. 
These are dollars that I think that the folks who supported 
this had intended to go free up the credit market, and it may 
have done some positive things in that vein, but it certainly 
isn't getting to Main Street like was advertised.
    I want to thank you for being here once again. I appreciate 
it and I look forward to your testimony, and hopefully I will 
be here for some questions. Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Bunning, any opening comments?

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Yes, just a short one. Thank you, Mr. 
Chairman. As we all know by now and has been previously stated, 
the previous Treasury Secretary and the Fed Chairman pulled a 
bait-and-switch on us with the original TARP program. Not only 
did they come to Congress and ask for a plan to buy toxic 
assets, but they also rejected in public and in private the 
idea of capital injections into banks. But just after Congress 
approved the plan, Treasury and the Fed changed course, 
undermining what little faith the American people had in the 
plan to begin with.
    Not only is the money being used in ways Congress did not 
intend, but we do not have the transparency that was promised. 
We do not know what caused Treasury and the Fed to change 
course. We do not know how or why they decided to inject funds 
in the original nine banks. We do not know why some banks were 
later given funds but others were rejected. What we do know are 
the outrageous stories about private jets, luxury offices, 
trips to resorts, and multi-million-dollar bonuses for 
management.
    Because of all these and more problems, it is important for 
the witnesses before this Committee to carry out their 
assignments and look into the actions of the Treasury and the 
Fed. I look forward to hearing from them on their findings and 
about what other tools they may need to carry out their 
investigation, and I would like to close by stating, last 
night, by UC, the Senate passed additional powers to you to use 
so that you can get into those Treasury and Fed and the 
transparency that is not here right now. I don't know if 
everybody realized by last night, by UC, we granted this 
Inspector General new powers to do whatever he needs to do, and 
I am proud of the fact that it went through.
    Thank you.
    Chairman Dodd. Thank you very much.
    Senator Bennet.

             STATEMENT OF SENATOR MICHAEL F. BENNET

    Senator Bennet. Thank you, Mr. Chairman. I appreciate it. I 
just have a very short statement. Thank you for holding this 
hearing and thank you to the Ranking Member. Thank you, 
witnesses, for being here today.
    I was a private citizen watching this happen and I can tell 
you what everybody here knows, is that there isn't a family in 
any of our States that doesn't at the end of the month know 
where every single penny has been spent and isn't figuring out 
what they have to cut back on for the coming month. It seems to 
me that that is the least that, when they are going through 
times like that, that is the least they can expect of their 
government and the banks and other institutions that have 
received their funds. I think the work that you are doing is so 
important because it will lead to that accounting, something 
that is long overdue.
    I am grateful for the administration's commitment, Mr. 
Chairman, to this path of transparency and accountability, 
which is job number one, I think, for the American people, and 
then getting the credit markets moving again is the other big 
piece of it.
    Finally, I think we need to make sure we are always 
reminding people that we have to see both the recovery plan 
that we are working on this week and the TARP as part of a 
piece that is an approach that, taken together, will give us 
the chance to get this economy out of the ditch and moving 
again. These are not and can't be considered to be separate 
activities and I think, Mr. Chairman, your amendment is a 
reminder of that, about the use of some of the next TARP money 
to deal with our housing crisis.
    So thank you for being here today and I look forward to 
your testimony.
    Chairman Dodd. Senator, thank you very, very much.
    I guess I will go to Senator Warner. Mark.

              STATEMENT OF SENATOR MARK R. WARNER

    Senator Warner. Thank you, Mr. Chairman and Ranking Member. 
I want to hear the testimony, as well, and get to the 
questions. I am just going to give you a heads up. I am going 
to come back to you on issues around transparency. I am glad to 
see in the Inspector General's report, the first time I have 
ever seen, at least for a few of the institutions, the terms 
and conditions of the investments that were made. I think most 
folks would be amazed to realize that on some of those dividend 
payments, we actually may see some of those dividend payments 
this month coming back. You have got some of the institutions 
here, but we invested in over 300 institutions. I still don't 
know why we don't have a greater transparency of everywhere we 
have invested.
    And I know I share my colleagues' concerns about the 
failure of these institutions that we have invested in in terms 
of opening up the credit flows again, although clearly so many 
of these institutions got so over-leveraged and they are all 
going through this deleverage process right now. I am just 
curious whether in your investigations you have been able to 
find that there was at least some informal understanding that 
when these institutions got their leverage rates down, that 
their flow of credit would go up. So I will come back to that 
in more specificity in my questions.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Bayh.

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Thank you, Mr. Chairman. This is a very 
timely hearing, and the reason for that, ladies and gentlemen, 
is that there are, as I think you are aware, reports 
circulating that the original TARP program might not be enough 
and that perhaps there will be proposals coming before this 
Congress for additional hundreds of billions of dollars.
    Let me be clear. There will be no additional funding for 
this program without airtight assurances that it will be better 
managed. That is the bottom line.
    I am one of those who voted for the original program 
because of the economic crisis that we faced at that time. I 
think that was the right decision. I am also one of those who 
voted against releasing the second tranche because of the way 
the program had been mismanaged. We cannot allow that to 
happen.
    The bitter irony, Mr. Chairman, is we may have succeeded in 
stabilizing the financial markets some, but it has been at the 
cost of losing the public's confidence, and without regaining 
that confidence, there simply will be no additional monies 
provided for this program. The popular perception is that the 
way this has been implemented is it has essentially enabled 
incompetence, malfeasance, the affluent and the well-connected, 
and we have to correct that, and I would suggest doing that by 
essentially three things: Accountability, accountability, and 
accountability.
    Therein lies the purpose for this hearing and the challenge 
going forward, to improve the implementation if we are going to 
regain the public's confidence, and in so doing justify any 
additional public investment. So I think the hearing is 
absolutely timely and critically important.
    Chairman Dodd. Thank you very much, Senator.
    Senator Akaka.

              STATEMENT OF SENATOR DANIEL K. AKAKA

    Senator Akaka. Thank you very much, Mr. Chairman. I want to 
commend you and the Ranking Member for holding this hearing to 
examine TARP. Because of that, this is a very, very important 
hearing for all of us and for our country.
    I want to echo what has been going on and to add my piece 
in this. Typical of the Bush Administration, Congressional 
inquiries, as has been mentioned already, as well, went 
unanswered and implementation of the program proceeded in a 
chaotic, unorganized, and an ad hoc manner. I am afraid the 
Bush Administration overpaid for assets, failed to set specific 
strategic goals and objectives for the program, inconsistently 
administered or withheld assistance, and did not specify 
conditions for use of Federal support, and that is now history.
    The Obama Administration has inherited a difficult set of 
circumstances. Our economic situation has worsened. I look 
forward to working with the witnesses and Members of this 
Committee and the administration to improve the implementation 
of TARP and ensure adequate oversight of the program. There is 
no question we need to help our country and this may be an 
answer if we can do it right, and we want to try to do it with 
examining it at the present time.
    I appreciate the witnesses appearing today and look forward 
to hearing you, and again, thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Let me express our appreciation to our witnesses for your 
patience in listening to our colleagues this morning, but as 
Senator Menendez said, I think, earlier, it is important we 
hear from you, obviously, but our constituents also want to 
know what we believe about this, and so it is also important 
that we have an opportunity to express our concerns. You have 
heard virtual unanimity about the concerns, not total unanimity 
about the idea initially for the program, although I think many 
of us agree it was essential to step forward, but how it is 
being run, as Senator Bayh said, will have an awful lot to do 
as to whether or not we can go forward at all with other ideas 
that are going to be proposed, I am sure, by the Obama 
Administration to continue the efforts to stabilize our 
economic condition.
    So with that, let me begin with Gene Dodaro, who was here 
yesterday for several hours testifying about the reforms of our 
regulatory structure, and we thank you immensely for that 
testimony yesterday. Here today, he is the Acting Comptroller 
General of the U.S. Government Accountability Office.
    Neil Barofsky is the Special Inspector General of the TARP 
program, and we thank you for your service to the country, both 
of you.
    Professor Elizabeth Warren, truth in advertising, is a 
friend of mine. I admire her immensely. She is a professor at 
Harvard Law School and has spoken and written eloquently over 
the years about consumer issues, has been a real advocate on 
behalf of consumers, and Chairs the Congressional Oversight 
Panel for the Troubled Asset Relief Program. We thank you 
immensely, Professor Warren, for being with us, as well.
    So we will begin with you, Gene, and again, we ask you to 
try and keep your remarks to 5 to 8 minutes or so, if you can, 
and then we will get to the questions.

   STATEMENT OF GENE L. DODARO, ACTING COMPTROLLER GENERAL, 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Dodaro. Thank you very much, Mr. Chairman. Good morning 
to you, Senator Shelby, Members of the Committee I am very 
pleased to be here today to discuss GAO's role in helping 
monitor oversight of the TARP program.
    Under the legislation, we are to have ongoing monitoring 
efforts of Treasury's management of the program and report 
every 60 days to the Congress. On December 2, we issued our 
first 60-day report, and in that report we outlined nine 
recommendations to improve the accountability and transparency 
for the program. We issued our second 60-day report last 
Friday, following up to see how Treasury had implemented our 
previous recommendations, and we made some additional 
recommendations there, as well.
    Now, our recommendations to improve the transparency and 
accountability of the program have fallen into three general 
categories. One is monitoring and reporting on the use of the 
Capital Purchase Program money that has been distributed. That 
has been the lion's share of the money that has been allocated 
so far.
    Second was the need for a better communication strategy and 
an articulated approach to what the vision was for the TARP 
program.
    And third is the management infrastructure that Treasury 
has in place to ensure that the program has integrity and that 
they have got the right type of people, procedures, and 
controls in place to manage the vast amount of money that is 
used here. I will touch on each one a little bit more.
    The monitoring and reporting under the Capital Purchase 
Program has been a big concern to us from the beginning. There 
was no set process at the outset to monitor, track, and report 
on the use of that money. We made a recommendation in December 
that Treasury put in place a system, working with the 
regulators, to systematically collect information to ensure the 
use of the Capital Purchase Program allocations were consistent 
with the objectives of the legislation and that the 
requirements for executive compensation and dividend controls 
were effectively implemented.
    Since our recommendation in December, Treasury has 
instituted a monthly survey now that they have originally sent 
out to kind of catch up on the 20 largest institutions that 
have received money and are planning to track the rest of the 
institutions with quarterly call report data.
    Now, we think this is a good step in the right direction, 
but we don't think it is enough. We think that more timely 
information needs to be collected on all institutions that are 
receiving the money to make sure that there is a better 
tracking of the lending practices of all these institutions and 
Treasury has more timely information to provide more 
transparency and to analyze the effects of the program in 
achieving its objectives. So we think it is very important and 
we are going to stay on that issue.
    Now, communication has been a problem plaguing the program 
from the outset. As many of you mentioned in your opening 
statements, the shift from the original plan to purchase 
troubled assets to the Capital Purchase Program wasn't 
explained very well, the rationale for that. We had recommended 
in our December report that Treasury institute a more effective 
communications strategy. They have put more information out 
since then. However, it doesn't fully explain the integrated 
nature of the programs that they have established to date, nor 
does it effectively address the issue of what the additional 
350 billion dollars will be used for.
    So we made a recommendation in our report on Friday that 
they needed to have a clearly articulated vision of the program 
to ensure a more cohesive understanding of what they were 
trying to achieve, how they were going to achieve that, and how 
they were going to report progress.
    Now, in the management infrastructure area, we have touched 
on the hiring needs to make sure Treasury has the adequate 
personnel necessary to manage this. They needed to expedite 
their hiring process. They have made some progress, but there 
is a long way to go there to get the right people and skills in 
place, and a large part of this will be determining what the 
objectives are for the program overall and what their strategy 
is to be able to determine what people that they need and with 
the right skills to manage it effectively.
    Overseeing the contractors that they have hired has been 
another area we have made recommendations to make sure that 
they have trained the people that are going to be overseeing, 
providing oversight over the contractors, and that they move 
more to fixed-price contracts, which better protects the 
government's interest going forward.
    And also, we want to make sure that they have a proper 
internal control structure in place to make sure that the 
government adequately accounts for the dividend payments back 
and the money that has been distributed already so that there 
is a good accountability scheme in place and to mitigate risk 
going forward.
    So we think all these recommendations are very important.
    In closing, I would say we are going to continue our 
efforts, and we will be continuing to report every 60 days. We 
are going to be following up with the Treasury Department to 
make sure that they fully implement our recommendations. Most 
of our recommendations that we made in the December report, 
while progress has been made, have yet to be fully implemented. 
We are going to also continue to work with Mr. Barofsky and Ms. 
Warren to coordinate our efforts to look more specifically at 
aspects of this program in more detail, including the plans 
that are going to be submitted by the automakers here soon. I 
was before this Committee back in December talking about the 
need to have proper controls over that aspect, as well.
    We appreciate the opportunity to be with you today to help 
improve the management of this program and I look forward to 
answering questions at the appropriate point in time.
    Chairman Dodd. Thank you very, very much, again, for your 
testimony. Again, I am always impressed that you do that 
without reading notes. You put a lot of this in your own 
memory, which is very impressive, as well.
    Mr. Barofsky, that is not a challenge to you, by the way.
    [Laughter.]
    Mr. Barofsky. The gauntlet is thrown down, Mr. Chairman.
    Chairman Dodd. No, no. I shouldn't have done that, because 
none of us are doing that up here, either.

   STATEMENT OF NEIL M. BAROFSKY, SPECIAL INSPECTOR GENERAL, 
                 TROUBLED ASSET RELIEF PROGRAM

    Mr. Barofsky. Mr. Chairman, Ranking Member Shelby, Members 
of the Committee, it is an honor to appear before you today and 
deliver to this Committee my initial report to Congress.
    The Troubled Asset Relief Program represents a massive 
investment of taxpayer money. The long-term success of this 
program is not assured. Success or failure will depend on 
whether Treasury has spent the taxpayers' money wisely and 
efficiently.
    Our mission, as stated on the cover of my report, is to 
advance financial stability through transparency, coordinated 
oversight, and robust enforcement.
    As I promised you when I was last before you during my 
confirmation hearing, I have hit the ground running, focusing 
in the past 52 days on the three areas that I just mentioned, 
transparency, coordinated oversight, and enforcement, trying to 
have a maximum impact while still having minimal resources.
    First, transparency. Within days of coming on board, I 
recommended that Treasury post all of its agreements on its 
Internet site. Treasury first agreed to provide many of these 
reports online and I was encouraged last week when Secretary 
Geithner adopted my recommendation in full and will provide 
this basic level of transparency to the American people.
    I have also just initiated a project designed to shed light 
into what has been one of the darkest areas of the TARP, what 
banks have done with the hundreds of billions of taxpayer money 
that they have received. Starting today, we will be sending out 
letters to each TARP recipient asking them to report on how 
they have used the taxpayer money to date and how they plan to 
use money that they have not yet spent. We will also ask them 
to provide in detail how they plan to comply with the executive 
compensation restrictions in their agreements and whether they 
have changed the way they pay senior executives to get around 
those rules.
    As to coordinated oversight, it is my honor to sit here 
today with my co-panelist. It has been a true pleasure 
coordinating oversight of this historic program with them, as 
it has been with the members of the TARP-IG Council, a council 
that I have founded and now chair that includes GAO as well as 
the other Inspectors General who are working with providing 
oversight and working with the regulators who are involved in 
the administration of this program.
    Our oversight efforts have also included leveraging our 
position within the executive branch to make recommendations to 
Treasury before the money goes out the door. To that end, we 
asked for and obtained important oversight language in 
Treasury's agreements with Citigroup, Bank of America, and the 
auto industry deal that put real teeth into the conditions of 
those agreements.
    I also note that for Bank of America and Citigroup, we also 
made the recommendation that they be required to report on 
their use of funds, which was adopted, and the only two 
financial institutions that currently have that requirement. I 
think that the impact of transparency is shown in Citigroup's 
first report under that agreement, which came out this week, 
which indicated in a transparent way that more than $34 billion 
of TARP funds they are saying is going to be committed to 
increased lending, and I think that is a demonstrable impact of 
what transparency can do.
    I am further pleased to inform you that my office this week 
is announcing two additional audits designed to shed light on 
TARP activities. First, we are going to do a case study on the 
process under which Bank of America received $45 billion of 
TARP funds and received guarantees of toxic assets and how it 
came to participate in three separate TARP programs.
    Second, we are starting an audit designed to address 
potential outside influences, such as lobbying, on the TARP 
application process.
    Finally, with respect to criminal law enforcement, my 
office is focused on laying the groundwork for one of our most 
important tasks, the task that we serve alone, serving as the 
cop on the beat for TARP programs. Our hotline and Web site are 
up and running. We have joined the President's Corporate Fraud 
Task Force and started up alliances with the FBI, Department of 
Justice, and several U.S. Attorney's offices. We have already 
opened several criminal matters, and we have teamed up with the 
FTC, providing assistance to them in shutting down a securities 
fraud scam in Tennessee that had reaped millions of dollars.
    In the report that we have provided to you today, we have 
also included our recommendations based on our initial 
observations of the TARP. For example, we recommend that 
Treasury develop a strategy for valuing and managing the assets 
that it has purchased so that we can obtain a better 
understanding of the true value of the taxpayers' investment.
    We also continue to recommend that Treasury enter into 
agreements with strong oversight provisions, both to deter 
noncompliance and to enable us to do our jobs. We have also 
made a series of recommendations with respect to the TALF, a 
program that is still under construction, about ways the 
program can be designed to avoid waste, fraud, and abuse.
    Our report also attempts to provide a detailed description 
of TARP programs in Main Street terms so that more of the 
American taxpayers who are so heavily invested in these 
programs can better understand what is being done with their 
money.
    I look forward to my next report, which will update you on 
Treasury's response to my recommendations, as well as to update 
on the activities of my audit and investigative divisions.
    Mr. Chairman, Ranking Member Shelby, Members of the 
Committee, I want to thank you again for this opportunity to 
appear before you and I look forward to answering any questions 
you may have.
    Chairman Dodd. Well, I thank you very much.
    Let me, before turning to Professor Warren, let me just 
mention, as well, I know we are scheduling hearings obviously 
on this over the coming weeks and months, but I am going to 
recommend that we try to set up some more frequent, even with 
our staffs necessarily, so there is a more ongoing 
relationship, so we don't just wait for public hearings to hear 
things that are happening. I think all of us would like to have 
a more consistent source of information about how this is 
progressing, obviously, almost from day to day or week to week. 
We don't want to overload you. Obviously, you have a job to do. 
We need to figure out how to do that. But I know we are 
demanding certain accountability standards in public, but we 
need to know this information with some regularity. So we will 
try and figure that out, but I want to put you on notice that 
we are going to set up some sort of a system to allow us to do 
that.
    Mr. Barofsky. I look forward to that.
    Chairman Dodd. Thank you.
    Professor Warren.

 STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT 
          PANEL FOR THE TROUBLED ASSET RELIEF PROGRAM

    Ms. Warren. Thank you, Chairman Dodd and Ranking Member 
Shelby, and Members of the Committee. It is a pleasure to be 
here. I am the Chair of the Congressional Oversight Panel, 
established under the Emergency Economic Stabilization Act. 
Because I am going to speak only from notes and not tightly 
scripted, I should emphasize these are my views and have not 
been preapproved by everyone on my Panel.
    I also want to say that while I am here to describe what 
has happened so far, what we have ddiscussed in our reports, 
and tell you where our next reports are headed, I am also here 
to listen. We are, after all, your Panel, and so your advice, 
your thoughts, your criticisms and concerns are important to 
us, so we want to be able to hear that while we are here.
    What we are doing: We also hit the ground running. We were 
established the day before Thanksgiving and in early December 
issued our first report. Our report focused on questions, what 
we thought were the appropriate questions that should be put to 
Treasury about what they were doing with the first $350 billion 
that had been granted to them.
    Our first report had ten areas of questions. We asked first 
of all: What is Treasury's strategy? Is there a framework here, 
or are we engaging in simply ad hoc plans stuck together?
    Is this strategy working to stabilize markets? Is there any 
evidence that shows that?
    Is Treasury doing anything with the money to help reduce 
foreclosures? This is something that was specifically mentioned 
in the statute.
    What have financial institutions done with the taxpayers' 
money that they have received so far?
    Fifth, is the public receiving a fair deal? This is the 
stocks and warrants question in part. As we put in money, we 
are supposed to be getting something back out that at least is 
of roughly equivalent value. Is that happening?
    What is Treasury doing to help the American family? After 
all, that is where this starts and ends.
    Is Treasury imposing reforms on financial institutions that 
are taking taxpayer money?
    How is Treasury deciding which institutions will receive 
the money? What procedures are being used?
    What is the scope of Treasury's statutory authority?
    And, finally, the question that we hope we get to someday: 
Is Treasury looking ahead, creating contingency plans and 
alternatives?
    Our first report went out. Lots of questions. We tried to 
talk about this. We talked about it with Congress. We talked 
about it with the American people. Remember, we are on a 30-day 
reporting requirement, so we turned to our second report, which 
came out at the beginning of January. The second report 
examined Treasury's responses to our questions and their non-
answers. I will just stop at this point by saying we continue 
to ask, and we will ask until we get answers.
    As to our current focus, we have a third report that will 
be due out tomorrow. For this report, we focused more tightly 
on question number five: Is the public receiving a fair deal? 
For this report, we engaged in a much deeper valuation analysis 
of the first transactions that have taken place under the TARP 
program. I will mention just the results to you, and that is 
that at the time of the transaction, for the first set of 
transactions, Treasury substantially overpaid. According to the 
data we have investigated, Treasury put in about $254 billion 
for which it received about $176 billion in value from the 
financial institutions. That is a shortfall of about $78 
billion when measured as of the date of the transaction, not in 
terms of what has happened to the market since then.
    We want to emphasize there may be good policy reasons for 
overpaying, but without a clearly delineated reason, we cannot 
know that. We returned to a theme that we have spoken about 
repeatedly, and that is the need for clear goals, for a clear 
framework, for methods for how we are getting there, and 
measurements to see if that is happening.
    And, fourth, we identified that in March we intend to focus 
much more deeply on the issue of foreclosures. We are deeply 
concerned about the lack of action and the lack of progress to 
date on stemming foreclosures, particularly preventable 
foreclosures. Again, this is an issue addressed directly in the 
statute, and so we think it is particularly important to go 
back to it.
    We are going to emphasize in that report the importance of 
developing reliable data. Our reports proceed from the 
underlying believe that if you do not know what is going on, it 
is very hard to diagnose the problem and develop a good 
strategy to fix it. So there is going to be a lot of emphasis 
on the importance of developing better data about what is 
happening, and then developing meaningful metrics in order to 
measure progress. We are very much of the view that it is not 
enough simply to throw a program out there with a great name. 
We really must have a way to measure whether it is doing any 
good. Americans have had enough false promises in this area.
    I want to just summarize what we have done by saying we are 
deeply committed to the notion that flexibility is good, that 
Congress is sensible in doing work through agencies that have 
some flexibility. But with flexibility goes great 
responsibility. Treasury must articulate clear objectives, 
develop a precise strategy for reaching those goals, utilize 
specific methods to measure progress, and spell these out 
before they spend more money.
    I want to say that it is a particular pleasure to be 
working with the Inspector General and with the GAO. 
Cooperation could not be higher. This has been a wonderful 
opportunity with people and institutions that have different 
strengths and different resources to bring to bear on this 
problem, and it is quite an honor to work with this group, and 
we are glad to do that.
    I also want to say the Panel looks forward to working with 
Congress. We are here at your pleasure, and we will do what we 
can in your name to enhance the accountability and ultimately 
the credibility of this program.
    I am happy to answer any questions if I can.
    Chairman Dodd. Well, thank you very, very much.
    I see my colleague from Ohio, Senator Brown. I know you 
were here earlier. Would you like to make a quick comment at 
all before we----
    Senator Brown. I am fine. I just want to ask some 
questions.
    Chairman Dodd. OK. I will put the clock on for 8 minutes, 
and I will not hold everyone rigidly to that. We do not have a 
full complement of Members here, so we can kind of be a little 
looser about the time constraints.
    First of all, thank you, and I thank all three of you. You 
know, one question I want to just get up front--and I do not 
expect you to have the answer to this, but I would like to get 
the answer soon. I would like to know who the personnel are 
that are running this program and whether or not the people who 
were running it in the previous administration are hanging 
around in this administration. So I would like to know who they 
are, what their backgrounds are, what their expertise is in 
dealing with these kinds of questions that are very complicated 
and difficult. But do they bring the kind of background and 
experience that would raise our confidence level that they know 
how to manage these kinds of issues.
    So I suspect you may not have that today. I do not know if 
you have had a lot of chance to examine that. Have you had a 
chance to look at the personnel?
    Ms. Warren. Well, we know that Mr. Kashkari, who was in 
charge of the TARP program in the previous administration, 
remains in charge of the TARP program. I believe that is true 
still at this point. I think the change in personnel may be 
taking place, but that it is doing so slowly.
    Chairman Dodd. Kashkari I know about, although I do not 
know if he is staying or not. But even going down into the 
ranks of who are the actual people doing the crunching of the 
numbers and so forth, I would like to have a level of 
confidence that people here bring some background and 
experience in this area that are going to be critical as we go 
forward. I do not have to dwell on that point.
    Let me jump to the issue, obviously, you have raised, 
Professor Warren, about the report coming out tomorrow. Your 
testimony this morning here says that Treasury may have pursued 
policy objectives in overpaying for assets, but if so, they did 
not clearly articulate those objectives. And I respect that. 
And I realize the report is coming out tomorrow. I do not want 
to jump ahead of your report, but obviously, you have 
mentioned, I think, the disparity of $78 billion in terms of 
what we paid and what those assets may have been worth. And, 
obviously, I would suspect most of my colleagues here--I think 
my eyebrows went up. I suspect theirs did as well.
    As you look at this, is it at all possible that Treasury 
could have used a different but sound methodology to produce a 
different result? Could you just share with us the methodology 
you used? And is there a possibility there may be a different 
interpretation that would arrive at different numbers?
    Ms. Warren. Senator, I have great confidence in our 
numbers. We used specialists who value companies. This is what 
they do. We engaged a publicly traded company, Duff & Phelps, 
to help us in this process, and this was only after talking 
with other companies as well that do this.
    In addition, we had the benefits of two finance professors 
who were enormously helpful to us--one from Yale and one from 
Northwestern University. Their process was to go through the 
valuation using publicly available data--I want to be clear; we 
were using only publicly available data--but to use multiple 
ways to value the assets.
    As some of you may know, there are some disputes at the 
margin about when Black-Scholes should be used and when it 
should not be. This is why you have academics in the room.
    So the group valued it three different ways. They took the 
primary ways that are thought by anyone to be appropriate ways 
to value assets, this kind of asset, and they valued it three 
different ways, and the three different ways converge, which 
gives us a very high confidence that the valuation we are using 
is on target.
    Now, when you read the whole report, all 700 pages of the 
valuation report, you will see that there is some plus or 
minus. But the plus or minus is very modest, and I stand by 
these numbers. These are good numbers.
    Chairman Dodd. Well, we will want to pursue that. I am sure 
my colleagues may have questions this morning for you, but also 
once the report is out, to pursue that, questioning how that 
could possibly have occurred. One would understand some gap. No 
one is expecting perfection here between the price you pay and 
what you think you are getting. But that is a pretty large 
disparity for the amount of money we are talking about.
    Let me ask the panel member, any one of you, to respond to 
this, but Treasury designed the Capital Purchase Program to 
provide, as you have all pointed out, capital infusions to 
banks that are viable without regard to these infusions. In at 
least two instances, a couple of the largest institutions that 
received TARP funds under the Capital Purchase Program 
subsequently received additional assistance under the Targeted 
Investment Program. The selection process has been completely 
shielded from public scrutiny.
    Do you believe that Treasury and the Federal agencies who 
selected the banks for these infusions have consistently 
applied the Capital Purchase Program criteria, i.e., funding 
only viable, healthy banks? And what are your plans to review 
this selection process? And how do you go from that one to 
immediately institutions that looked like they were in deep 
trouble? Do you want to begin?
    Mr. Dodaro. We plan to work--and we have had discussions 
with Mr. Barofsky's office about this--a coordinated effort to 
look at the decisionmaking process that is in place for the 
Capital Purchase Program going forward. Neil has been very 
effective in coordinating this with the respective Inspectors 
General in the regulatory agencies as well, because the process 
starts with the regulators providing recommendations to the 
Treasury Department, and then Treasury ultimately making the 
decision on the Capital Purchase Program.
    So we are going to be digging deeper into that program to 
ensure the integrity of the process, or at least evaluate the 
integrity of the process and the consistency of the process 
going forward.
    With regard to the Capital Purchase Program versus some of 
these other programs, we point out in our report that some of 
the criteria are similar, and it is not well understood what 
the full range of the differences are between the programs.
    Chairman Dodd. Mr. Barofsky, do you want to comment on 
this?
    Mr. Barofsky. Mr. Chairman, I am launching an audit today 
that precisely addresses your question. We are going to do a 
case study of Bank of America, and the reason why we are doing 
that is precisely for the reasons that you just stated, because 
they participated in three separate programs. And we are going 
to take a good look at the selection process, the 
decisionmaking process from beginning to end on Bank of America 
for each of those three programs.
    So I look forward in our next report or when this audit is 
completed to give you a very detailed and clear explanation of 
the answer to your question.
    Chairman Dodd. Professor Warren, any comment?
    Ms. Warren. Senator, I think it was Senator Shelby who said 
when Citibank is declared a healthy bank and then within a 
matter of weeks is declared at risk of bringing down the whole 
system, we have to have some skepticism about the 
identification of these banks as healthy banks. I think the 
numbers that come out in this valuation report at least raise 
the possibility that the Secretary of Treasury's description of 
this program was not entirely candid, and that we may want to 
consider that there were multiple objectives, only some of 
which, or perhaps none of which, could be described as infusing 
money into healthy banks.
    Chairman Dodd. Well, it is a major point for us because, 
again, as my colleagues have pointed out, on the one hand we 
are told this is going to healthy banks, and a week later you 
find out they are not a healthy institution. You wonder what--
give us the plan, if it is one or the other. We all understand 
things can change, too. We do not expect things to be 
consistent from day to day. But there has to be--this is 
infuriating to watch these decisions be completely conflictive 
of what we are looking at.
    I noticed in going over the reports that there were some 
very common points you all took. It could almost be one report 
in a sense rather than three. And let me just share with you 
the common points that jumped out at us--jumped out at me, 
anyway--and I think you have addressed some of this in your 
opening comments.
    Number one, Treasury has yet to articulate a vision for the 
TARP as a whole, this framework idea. One thing I hear about 
over and over again is: Why are we here? What is the plan? And 
what is your vision of how we go from what we are doing here 
that will get us to the desired results of economic stability 
and back to economic growth and freeing up capital markets and 
the sense that there is not that framework or vision?
    Number two, Treasury's selection process to decide which 
institutions--the subject matter of this last question of mine.
    And, three, there has been no accountability with respect 
to the use by the TARP recipients of the funds they have 
received, no process in place to track whether the funds are 
being used properly.
    All three of you draw those same conclusions.
    You have talked about your coordination, and I appreciate 
that very much, how well you are working together in all of 
this. But whether or not individually or collectively, have 
these concerns been raised specifically to the Treasury at this 
point? And do you have confidence that they will be addressing 
any of these with this new crowd, the new administration?
    Ms. Warren. Well, yes, Senator. We sent a letter with our 
very first report. Our December report was sent directly to 
Treasury--it was a letter from me; I signed it--asking the 
Secretary of Treasury to respond to the questions we had 
raised, and it was precisely that set of questions, I will say 
plus more.
    We received a response on December 30. We have posted that 
response on our Web site. And, quite frankly, Senator, it 
answered only some of the questions, and even of those that 
were answered, some answers were not directly responsive. So we 
do not yet have answers.
    Now, we have sent the letter again. I am nothing if not 
persistent. The letter has gone to the new Secretary of 
Treasury. We recognize it is a time of transition. And so we 
have asked for a response later in February. And we will stay 
after answers to those questions.
    Chairman Dodd. Are you all of a similar mind on this point?
    Mr. Barofsky. Yes, Mr. Chairman. In fact, I think on the 
use of funds question, it is a good example of what we have 
done. We made our recommendation to Treasury. They adopted it 
with respect to some of the financial institutions. And now we 
essentially have taken matters into our own hands in launching 
the survey to bring transparency in the use of funds.
    Chairman Dodd. Let me just say at this point, by the way, I 
think all of us here--I certainly as the Chairman of this 
Committee, I want to know immediately. I do not need to get 
letters. Just tell me when you are not getting answers. We will 
join you in this effort, I promise you, in a strong bipartisan 
fashion to get these answers. This is unacceptable, to put it 
mildly.
    So, again, we can wait for these letters and reports to 
come out, but we want this ongoing, virtually daily 
communication with the work that is being done so we can 
respond much more rapidly than waiting for reports to come out 
or letters to be responded or not responded to.
    Mr. Dodaro.
    Mr. Dodaro. Mr. Chairman, having a continual coordination 
effort like that on a regular basis really makes a lot of 
sense, because there are a lot of developments, and we can 
raise it to your attention if we are having difficulties.
    Now, I might point out that soon after his confirmation, 
Secretary Geithner did ask to meet with all the oversight 
groups, and we had a discussion with him, and we conveyed to 
him our concerns. And he listened carefully. I am an auditor by 
background so I will wait to see what steps are taken going 
forward. But at least he sought our views, which I found 
encouraging. And as we have reported in our report, the 
Treasury has taken some steps, but more steps need to be taken 
in all these areas.
    Also, on your point about the personnel that are in place, 
initially they brought in a lot of career people as detailees 
from other regulatory agencies, some of which I have known in 
the past. So I think they had some credible people in there 
initially. They are replacing them with permanent people now 
going forward, and they are going through that process. But 
they need to make sure it gets completed. And then once the 
overall plan is in place, and the vision, then they have to 
look to see whether they have the full complement of people.
    So that point remains an open issue.
    Chairman Dodd. Well, good. I just want to make sure that 
people have the background and experience to deal with this and 
are not just being plucked out; that they may be a lawyer or 
may be an accountant but, frankly, have never worked in areas 
like this or familiar with these circumstances.
    The last question I have for you--and Senator Vitter made a 
point earlier, and I want to associate myself with his words. 
None of us wants to trivialize this situation, and so the issue 
of executive compensation is not to trivialize it all, but I 
think all of us appreciate that for many of our constituents, 
they have a hard time getting beyond this issue in order to 
understand the deeper questions that are involved in these 
programs. And they just hear that part of the responses, and 
they just react to that. You do not get any further than that. 
It is literally infuriating.
    Again, there are examples of it. I noticed on February 3, 
Citibank published a TARP progress report describing what it is 
doing with TARP funds, and the report states that Citi's 
chairman, chief executive, chief financial officer asked not to 
be paid bonuses. But another 51 members of the senior 
leadership at Citi received ``substantially reduced bonuses.''
    Does the IG have the authority to look at such payments, 
for example, for the purposes of determining whether they are 
consistent with the TARP's recipients' obligations as we 
crafted it originally? And there are other efforts being made 
by the administration in the last 24 hours. As I mentioned 
earlier, I will be proposing something later today as part of 
the stimulus package in the same regard. But I want to know 
whether or not you have the authority to reach in and get that 
information? Or are you just relying on these kinds of public 
statements that are being made?
    Mr. Barofsky. No, Mr. Chairman. We absolutely have that 
authority, and we are launching initiatives in four different 
areas on executive compensation. We have already submitted a 
request, and that response is included in our report to 
Treasury on how they are going to be enforcing compliance with 
those conditions.
    Second, the letter I mentioned is part of an audit effort 
where we are going to be surveying the firms on how they are 
complying, what their plans are for the executive compensation 
rules.
    Third, we are leveraging outside resources. We have teamed 
up with the New York State Attorney General's office in their 
inquiry in looking at bonuses on Wall Street. And we are 
closely coordinating with them, so not just our resources but 
using those outside resources in addressing exactly the type of 
concern that you just addressed, by looking behind these 
reports and getting the information through joint requests and 
joint review of certain data. And at times we will do it on our 
own as well.
    And, finally--and this is sort of also an answer to your 
previous question about where we see it going with the new 
administration. I had a very productive conversation last night 
with the new Chief of Staff for Secretary Geithner about the 
new conditions that have been announced, and we are going to 
sit down and try to assist them in making sure that these 
conditions have teeth. And I had a very good and positive 
dialog, and I do look forward to working with the new 
administration, and I do think that they will be responsive to 
our recommendations.
    Chairman Dodd. Well, I thank you for that. And, again, I 
will turn the questioning over to Senator Shelby, but--and, 
again, I do not want to trivialize compensation issues. I 
realize there is a danger in that. But, again, for millions and 
millions of people in this country, they have a hard time 
getting beyond that question in terms of having confidence that 
this program is working right when they see a failure to 
appreciate their money being used to stabilize the situation 
and then directly or indirectly being used to compensate. So 
that is the reason I raise it.
    Senator Shelby.
    Senator Shelby. Thank you, Chairman Dodd. Thank you for 
your questions, too, for the panel.
    Just an observation, Mr. Barofsky, about you and your role. 
Just a few weeks ago, you came before this Committee. You were 
sworn by Chairman Dodd as to your testimony, and you told us 
that you were going to do everything you could, and this is a 
very important job that you occupy, Special Inspector General 
of this TARP program. A lifetime opportunity of public service 
that very few people ever have to do right. And you might be 
unemployable after you do this.
    [Laughter.]
    Senator Shelby. But you know and I know that these people 
have got to fear you and your office. If they do not fear you, 
they are going to play with you. They are going to deny you 
this, and they are going to deny you that. Senator Dodd wanted 
to know--wants you to tell this Committee what you need at all 
times. If somebody is stifling you, we want to know, because we 
are the oversight Committee of the banking industry, and there 
is a lot of distrust in this everywhere.
    Having said that, the TARP hiring practices are of concern 
to me. I understand that the Treasury Department has hired 
several former employees of the very banks to which it is 
providing capital. Think about it. While there is clearly a 
need for financial expertise in the TARP program, a lot of it 
is not in Wall Street anymore. They failed us. I am concerned, 
especially given the limited life of the TARP program, that 
employees of TARP may be facing significant, Mr. Inspector 
General, conflicts of interest.
    It seems to be an incestuous financial relationship 
situation here, moving from firms to Treasury, you know, to 
TARP, to this and that. And that is very troubling not only to 
a lot of people on this Committee, but to the American people.
    We used to look at Wall Street and say they were the 
smartest people in the world. Now, that has been doubted today 
in a lot of ways.
    So a lot of these people helped bring about this financial 
debacle. It looks to me like people could go elsewhere by 
expertise, you know? I understand that, and I know this is 
something you will look into, and I hope you will.
    Do you like that? Does that bother you at all? I mean, you 
are the people's man now. You are the watchdog, and you have 
got a great opportunity if you do not blink. I pray you will 
not blink.
    Mr. Barofsky. I assure you I will not blink, and obviously 
conflicts of interest is an important area that we are 
reviewing, that we are reviewing with GAO, who has done an 
excellent job in reviewing the policy----
    Senator Shelby. GAO has done a good job. I hope they will 
not blink. They never have up to now. I hope they will not.
    Mr. Barofsky. I do not think they will.
    Mr. Dodaro. Now is not the time to start, Senator.
    Senator Shelby. Absolutely not.
    Mr. Dodaro. And we will not.
    Senator Shelby. One of the stated purposes that we have all 
talked about here of the TARP is to maximize overall returns to 
the taxpayers. Some have even claimed that the TARP will make 
money. I doubt that. Yet the CBO, the Congressional Budget 
Office, recently estimated that the current value of TARP 
activities so far--and this is new--has been a negative $64 
billion at a subsidy rate of 26 percent. In some cases, such as 
the auto bailout, the Congressional Budget Office estimates a 
subsidy rate of 63 percent, meaning that for every $3 the 
taxpayer has put in the car companies, we are expected to get 
back only one dollar. I doubt we will get back anything, but, 
you know--what is your comment on that, Gene?
    Mr. Dodaro. Well, I think the CBO, under the TARP 
legislation, Economic Stabilization Act, is required to use the 
credit reform principles in doing these evaluations, which 
means that they calculate the subsidies in a similar manner to 
loan guarantee programs and other things that the Federal 
Government subsidizes. So we are looking at those numbers. We 
have had discussions with CBO and OMB now, both from a 
budgeting standpoint but we are also--another role that we have 
is we are the financial auditors for the Office of Financial 
Stability. And so we will be looking at how these things are 
tracked and handled in terms of the valuation of the programs 
on the financial statements as well.
    So this is a complicated issue, but we are looking into it 
very carefully.
    Senator Shelby. Professor Warren, do you have a comment?
    Ms. Warren. Well, the numbers that our specialists have 
used in evaluating this suggests----
    Senator Shelby. And who are your specialists? We would like 
to know all this stuff.
    Ms. Warren. Sure. You bet. We hired Duff & Phelps. It is a 
publicly traded company that is in the business of valuing 
companies, and we did it after a competitive bid, and 
probably--I do not know if I am allowed to say. We got them to 
do it at half-price.
    Senator Shelby. Are they in the rating business?
    Ms. Warren. No, they are not in the ratings business.
    Senator Shelby. Thank God.
    Ms. Warren. They are in a different kind of business here.
    Senator Shelby. OK.
    Ms. Warren. They were also aided by Professor William 
Goetzmann and Professor Deborah Lucas. I want to be sure that I 
give them credit.
    Senator Shelby. Absolutely.
    Ms. Warren. Because they put in many hours. They are 
finance professors who helped us out. We did a legal analysis 
at the same time. As appalling as this may sound, there were 
people who actually sat down and read all the terms of the 
transactions and read the terms of comparable transactions that 
were going on in the marketplace so that we could really 
understand how valuable or not valuable the different elements 
of the deals.
    Senator Shelby. OK.
    Ms. Warren. We wanted to understand all aspects, not just a 
headline. As I said, we used three different valuation methods. 
They all hammered until they were all confident that we had a 
good number. What it suggests to us is that the CBO numbers are 
understated.
    Senator Shelby. I believe that.
    Ms. Warren. Yes.
    Senator Shelby. Healthy failing institutions, all of us 
brought some of this up. In an October 14 press release--just a 
few weeks ago--the Treasury Department announced the Capital 
Purchase Program designed to provide capital to so-called 
healthy institutions. The release suggested that nine healthy 
institutions were already participating in the program. Of 
these nine, one no longer exists--Merrill Lynch--and two 
others--Bank of America and Citigroup--are on the brink of 
collapse and may still be and had to be rescued under the TARP 
program. A 33-percent failure rate does not to me exactly 
provide confidence to the market that either Treasury or any of 
the Federal regulators, including the Fed understood the term 
``healthy'' or used that term loosely to get the money in 
there.
    Does that concern you, Gene?
    Mr. Dodaro. I think that has been part of the communication 
problem all along there----
    Senator Shelby. More than communication----
    Mr. Dodaro. Well, in----
    Senator Shelby. ----substance dealt on that, didn't it?
    Mr. Dodaro. Right. Well, they made the initial decision to 
go with the large banks, and then started the Capital Purchase 
Program with a process using the regulators going forward. So I 
agree that it is not consistent entirely in terms of how they 
have explained the program going forward, and so it is 
something that we are looking at and making sure that we can 
understand the differences between these various programs that 
they have eventually evolved to.
    Senator Shelby. Market mechanisms--in making purchases 
under the TARP program, as I understand it, the Treasury 
Secretary was required by statute to use market mechanisms in 
determining the appropriate price of assets for purchase. To 
what extent were market mechanisms used or talked about in 
determining the pricing and terms of purchases under the 
Capital Purchase Program and the auto bailout? In cases where 
Treasury has not used market mechanisms to determine prices, 
what justifications has Treasury offered for ignoring those 
requirements? Professor Warren.
    Ms. Warren. Well, Senator Shelby, I think it is clear that 
Treasury did not use market mechanisms, and I think, frankly, 
if we just read their public announcements, we can tell that.
    Senator Shelby. I think you are absolutely right.
    Ms. Warren. They paid a uniform price. That is they said, 
we are going to pay the same amount--we will give you the same 
number of dollars and the same return regardless of whether or 
not you are a very risky financial institution or you are a 
healthier financial institution. As soon as you decide to do 
that, you have moved away from risk-based pricing.
    Senator Shelby. Isn't that a terrible way to look after the 
taxpayers' money and to make purchases anywhere?
    Ms. Warren. Well, if the goal----
    Senator Shelby. Is it or not?
    Ms. Warren. Senator, Treasury simply did not do what it 
said it was doing.
    Senator Shelby. No, like everybody said here.
    Ms. Warren. I can't say that more clearly.
    Senator Shelby. In other words, they misled the Congress, 
did they not?
    Ms. Warren. Well, they did not do what they said they would 
do.
    Senator Shelby. The Bush Administration, Secretary Paulson, 
Chairman Bernanke, misled the people, the Congress and the 
people of the United States.
    Ms. Warren. They announced one program----
    Senator Shelby. Absolutely.
    Ms. Warren. ----and implemented another.
    Senator Shelby. They said one thing and 2 weeks later did 
another, is that correct?
    Ms. Warren. Senator, it is more than that.
    Senator Shelby. No--OK----
    Ms. Warren. Yes, Senator, they did, but it is more than 
that. It is even in the program that they moved to, in the 
second program, they described that program one way and they 
priced it a different way. They did not price for risk. That is 
what markets do. And when they didn't price for risk, they 
create differences in how great a deal it is to receive this 
government money.
    The best way I can explain it would be as if we had ten 
paintings in front of us and I announced that I was going to 
pay $1 million for each painting, and one was a Picasso and one 
was a Rembrandt and the other seven were not.
    Senator Shelby. Sure. Mr. Barofsky, political influence. 
This is very important here. The American people, as you well 
know right now--you can see it in polls, you can just go home, 
any of us can--they don't trust the TARP program. They don't 
trust what has been going on. They see our banking system in 
shambles, in a sense, not everywhere, but a lot of places.
    Now that the Treasury Department, Mr. Barofsky, has a 
significant financial interest in more than 200 financial 
institutions, we need to be vigilant, I believe, that banks are 
not pressured to lend to politically favored borrowers, either 
side. What steps do you plan to take as the Inspector General 
to ensure that bank lending is insulated from political 
favoritism, because this would just compound the TARP program, 
more so.
    Mr. Barofsky. Two areas. First is one of the audits that we 
are announcing today is designed to detect the impact of 
outside influences--of all outside influences on the 
application process within Treasury.
    As to the second part of your question on what we are going 
to do with external sources, as I mentioned in my opening 
statement, we have set up our hotline and our Web site, 
www.sigtarp.gov, if I can plug that, and we want to encourage 
anyone that is hearing about or knowing about any type of TARP-
related misactivity to let us know. With that information, we 
can then respond.
    Senator Shelby. Senator Dodd, I would just like to ask the 
Inspector General one last question. You have been generous 
with your time here. Do you believe that the TARP money has 
been wisely expended thus far, from what you have seen?
    Mr. Barofsky. Are you asking me?
    Senator Shelby. Yes, sir, I am addressing you.
    Mr. Barofsky. I don't know.
    Senator Shelby. You don't know? You don't know that, and 
you are the Inspector General?
    Mr. Barofsky. I think it is too early to tell whether it 
has been wisely spent.
    Senator Shelby. Do you believe that where a lot of these 
banks have benefited, loaned no money, paid huge bonuses and so 
forth, like Merrill Lynch and others, do you believe that is 
the right message and the right thing for the American people 
at this time of great challenges?
    Mr. Barofsky. Senator Shelby, I think your question asks a 
number of questions. Obviously, I think that any institution--
--
    Senator Shelby. You are not evading the question, are you?
    Mr. Barofsky. No, no. I think any institution that has 
violated the terms of its agreement, obviously that is very 
much a wrong thing. Banks that misuse the funds, that is a 
wrong thing. And I think that is why we are pushing for this 
accountability, not only within the TARP but outside the TARP 
through our survey, and I look forward to being able to report 
back to you and give you an answer to your question after I 
have acquired the necessary data to answer it.
    Senator Shelby. Thank you.
    Chairman Dodd. Senator Reed.
    Senator Reed. Thank you very much, Mr. Chairman.
    Following up on the conversation between Senator Shelby and 
Professor Warren about risk pricing, isn't the mechanism of 
risk pricing on the warrants that are taken or the equities 
taken, is that correct?
    Ms. Warren. Actually, it is both, Senator. The entire 
Healthy Banks Purchase Program was to use exactly the same 
approach and exactly the same pricing straight across for all 
purchases made under it.
    Senator Reed. But essentially the mechanism is the warrant 
that the government takes----
    Ms. Warren. The warrant is the central mechanism, yes, sir.
    Senator Reed. Right, and that goes to a question I want to 
address to Mr. Barofsky. That is, do you concur that these 
warrants were imprecisely priced or inaccurately priced? Are 
you prepared to look at these warrants not only that exist but 
in the future to ensure that they are appropriately priced for 
risk or appropriately priced for return to the taxpayers?
    Mr. Barofsky. As we indicated in our report, I think the 
warrants were uniformly priced by the same methodology, which 
was a 20-day trailing price until the date of approval by the 
TARP for advancement of funds. What we have done in our report 
is we actually have a chart where we set out for every 
financial institution, every warrant, what the strike price is 
of the warrant, what that stock was trading at as of January 
23, the cutoff date of our report, and how far in or out of the 
money each stock is. I think that gives a good snapshot of 
where the taxpayer investment is.
    And finally, to address your question, one of our 
recommendations directly addresses this--and I think it also 
shows how coordinated oversight works, with Professor Warren, 
as she is addressing the issue, as GAO is addressing the issue, 
and our recommendation is that we get a real-time and that 
Treasury needs to do evaluation as of today and an ongoing 
basis evaluating these warrants and the other preferred shares 
so we can have a snapshot of how the investment is doing today 
and so the Treasury can make better investment decisions.
    Senator Reed. Thank you. Professor Warren, this issue of 
compensation keeps coming up and up and up, and I think the 
Chairman was right. It has captured so much of the attention of 
the public that it has to be dealt with. One institution has 
started giving bonuses out in some of these troubled assets.
    I recognize that there is a need to maintain and keep 
talent in these institutions and that for one company to do 
this might lead to a loss of valuable personnel. So that 
suggests to me that across the board, in the context of TARP, 
we might consider doing something that requires at least a 
portion of the bonus to be made up of these troubled assets and 
also maybe mitigate that by allowing people to borrow against 
their rate so that they can pay for household expenses and 
things that are necessary, particularly not the highest 
compensated, but those that depend on bonuses in expensive 
places just to get by. Your thoughts?
    Ms. Warren. Well, I think it is a very creative idea, the 
notion that your own money is on the line and your own future 
rather than just that of the taxpayers. So I think it is 
certainly something worth exploring. Thank you, Senator.
    Senator Reed. I just want to get an idea in terms of your 
focus. You are coordinating your efforts, but could you just 
tell me, starting with Mr. Dodaro, what is the chief point of 
your responsibility and how does it relate to your colleagues, 
and just go right down the line.
    Mr. Dodaro. Yes. First, right after the legislation passed, 
we were the only organization that was really able to get in 
right away until Mr. Barofsky was confirmed and the 
Congressional Oversight Panel was in place. So we took a broad 
view of trying to monitor Treasury's stand-up of the program, 
their initial decisionmaking, how they staffed up and got 
organized and got started in the beginning.
    But we also uniquely have the responsibility to do the 
financial audit of the TARP program and the Office of Financial 
Stability. Now, that involves looking at internal controls, how 
the custodians are going to collect the dividend payments, how 
the money flows in and out. So we have--a primary focus of ours 
is that financial auditing and integrity of the program. We are 
starting to have conversations about where we will decide to 
focus our efforts and provide more in-depth views. The 
legislation really contemplates a lot more detailed oversight 
by the Inspector General's Office and the Congressional 
Oversight Panel role is more from a policy standpoint. So we 
are trying to figure out where we can fill gaps and focus on 
some of these issues.
    Like, for example, in the automobile area, we were early on 
providing some advice to this Committee. We will probably take 
point on that. And we have regular meetings to work out those 
issues. But that is a rough outline of how we are going 
forward.
    Senator Reed. Mr. Barofsky, sort of how you fit in.
    Mr. Barofsky. We focus on where, I think where we can add 
the most value, and the key from our audit perspective is 
coordination because GAO is the gold standard on audit. I hired 
as my chief auditor an alumni of GAO. So we will work closely 
with them in figuring out where we fit and where they fit.
    But our focus is, outside of audit, is sort of where we 
stand alone, as I said in my opening statement, is in 
investigations and criminal investigations and that is going to 
be a large focus of my office because that is the area that we 
occupy alone. We also want to leverage our position as being 
the oversight body that is within the executive branch, and as 
I mentioned earlier, taking the opportunity to try to influence 
from an oversight perspective, making sure the right mechanisms 
are in place before the money goes out the door. Obviously, a 
lot of what happened occurred before I was confirmed and before 
I took the job, but we think that is an area for our focus, as 
well.
    Senator Reed. And when you came before the Committee, I 
asked you about your whistleblower program. Can you just very 
briefly, because time is short, where are you on that?
    Mr. Barofsky. It is posted on our Web site along with our 
hotline and we are committed to protecting whistleblowers.
    Senator Reed. Professor Warren, your role.
    Ms. Warren. I see our role as much more of looking at 
things like the structure overall, whether or not we have a 
framework that is going to work or is it just ad hoc, how 
things are put together.
    Also, when we talk about transparency, we are really asking 
questions about transparency in a very grand sense. That is, it 
is not just transaction-by-transaction. It is when you describe 
a program as Healthy Banks, is it really about healthy banks or 
is it really about something else?
    We also have the capacity to work with outsiders, with 
experts, academics, people in the business world, to get more 
input, more perspectives on what is going on here. For example, 
with the foreclosure initiative, this is really an opportunity 
for us to come in and talk about the kinds of data we need so 
that we can really diagnose what the problem is and the kind of 
metrics that should be used for ascertaining whether or not it 
is doing any good. So we see ourselves as able to maybe take a 
step back from the more detailed work and see if we can be 
helpful in both monitoring, describing, and hectoring about 
larger pieces and how they are moving together.
    Senator Reed. In that context of stepping back, this is a 
much maligned program and with cause, but where do you think 
the credit markets would be today if this program had not been 
passed?
    Ms. Warren. I think this is a really hard question. I am 
not confident, A--that we wouldn't have done something else. It 
is not as if there was only one option, and if we didn't do 
that option, we would all sit around on our hands. We might 
have taken another path. It is possible that the biggest cost 
of the TARP program will turn out to be the road not taken--
what may turn out to be $700 billion and the 3 months not spent 
of getting a clearer focus on what we are trying to accomplish 
and some clear strategic plan for how to put it in place.
    Senator Reed. Let me--I just have 30 seconds.
    Ms. Warren. Please.
    Senator Reed. Mr. Dodaro, do you have a comment?
    Mr. Dodaro. Yes. One of the other roles that we are trying 
to do is to develop a set of indicators that can kind of track 
this over a period of time, Senator. What we have noted is the 
interbank lending rate, in particular, has come down during 
this period of time, although the spreads remain high between 
the corporate bond markets and mortgage markets, and obviously 
the mortgage rates have gone down. The difficulty there is 
isolating TARP's impact compared to the Federal Reserve's 
impact. That is one of our continuing roles, is to try to see 
if we can develop a more sophisticated set of indicators to 
shed as much light as possible, recognizing the difficulties 
inherent in trying to pinpoint TARP specifically.
    Senator Reed. Thank you very much. Thank you.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator.
    Our next Senator is Senator Corker, I believe.
    Senator Corker. Mr. Chairman and Ranking Member, thank you 
for having a very timely hearing. I appreciate it. I think many 
of my colleagues have expressed the frustration that people all 
across my State feel and that I feel and I want to thank each 
of you for the job that you are doing. It is an amazing thing 
to really watch some of the lack of public relations efforts 
that are taking place. And certainly I appreciate the focus 
that you have on making sure that bad things are not occurring.
    And so I agree with all of those things and I certainly 
agree with what Kay Bailey Hutchison said about the fact that 
we have lots of people out here that have great credit that are 
having loans called, and there are lots of reasons for that, 
and we have met with regulators and others and so I want to 
express all those emotions, if you will, that are similar to 
many people on the Committee.
    But then I want to go down a little bit different path. I 
wonder if anybody--I know you all are working, and sometimes we 
in government, we want to make sure we are doing a really good 
job going down this path, but sometimes we really don't look at 
the path we are going down, OK. That is sort of the worst of 
government sometimes.
    I guess I would ask this question. I mean, banks in their 
own self-interest loan money to make money. I mean, that is how 
banks make money. There is a spread involved and that is how 
they have dividends for shareholders. Have any of all stopped 
to just ask sort of the big question, why banks are not lending 
money? And would you answer that? I think much of what we are 
doing in some ways is petty compared to focusing on the 
essential issue of why banks are not loaning money, and 
Professor, it sounds like you might want to answer that.
    Ms. Warren. Yes, Senator, because this was actually a point 
we raised back in our December report and that we have raised 
in our meetings with Treasury. The Treasury at least publicly 
announced that it will lend money to healthy banks, and so the 
presumption is exactly as you said. OK, if the banks are going 
to have to pay us interest on this money and they are really 
healthy, then if they have the extra money, the banks will go 
ahead and lend it out. They have got to lend it out. They can't 
afford to sit on this money. So it was sort of a derivative 
notion, right, this is how the theory will work.
    When it doesn't happen, and the data seem to suggest that 
it doesn't happen, although there is some dispute about that, 
but when it doesn't happen, we think it is really important 
that you back up and say, maybe the problem is different. They 
kept using the analogy----
    Senator Corker. I like all of that, but I have only got 8 
minutes----
    Ms. Warren. I am sorry.
    Senator Corker. ----so why are they not lending? I 
understand all those other things.
    Ms. Warren. Senator, we can't tell. One possibility, they 
could say they are not lending because there aren't good 
lending opportunities. That is certainly an argument that some 
banks have used. Others, because there were no restrictions put 
on the money, can simply say, we are not lending because we can 
figure out a better way to make money with this money. We can 
buy other banks. We can buy different assets. We are not 
lending because we have a better way to use the money you have 
given us, and quite frankly, Senator, if you are underwater, it 
makes no sense to lend when you get this money in. You hang 
onto the money and hope that it is going to see you through the 
rough times.
    Senator Corker. OK. So you sort of hit in your third point, 
and I think there are obviously slightly less lending 
opportunities in an economic recession. I mean, that is just 
sort of A plus B equals C, right?
    Ms. Warren. Right.
    Senator Corker. And I do think that in some cases, there 
are some acquisition opportunities that maybe make more sense. 
But I think the big, the 90 percent issue is that many of these 
banks know because of GAAP accounting on their accrual loans 
they haven't taken losses that they know are coming and they 
are holding on to this liquidity because they know the losses 
are coming. And second, banks are having great difficulty 
leveraging. They are having difficulty selling commercial 
paper, and so with the money they have, they are having 
difficulty making loans.
    So it seems to me that the major issue we ought to be 
talking about in these hearings with the information that you 
have is how do we solve that problem, OK, and it seems to me 
with the next 350 that is coming down the pike, there is a 
debate that is going on at the administration. I think I know 
the views of the two people that are mostly at the table, but 
it seems to me that this hearing would actually be 
constructive--not that it isn't on some of these other issues--
but it seems like the 90 percent issue would be what is the 
issue, and if it is the fact that these banks really in many 
cases know they are insolvent, OK, we would make better use of 
our time figuring out and helping in this hearing direct what 
is getting ready to happen. Would that be a fair assessment?
    Ms. Warren. Yes, Senator.
    Senator Corker. So since you guys have been up under the 
hood, OK, my fear is actually--I just want to digress for 1 
second. You talk about the funds being used properly. Unless we 
are marking the bills as they go over, and I know they are not, 
I know the money is--the money is fungible. We don't know what 
is TARP money and what is not TARP money. So to say our TARP 
funds are being used wisely or unwisely is kind of silly. I 
mean, the bank has money and ours is a portion of that, and to 
say that some of it that is going to be used for signs on 
stadiums is not TARP money, all that is kind of a silly and 
useless conversation.
    I am actually far more concerned about--I don't think we 
ought to have outside influences. I agree with that and I thank 
you for making sure that doesn't happen. I am a whole lot more 
concerned about inside influences, just to be candid, where 
forced acquisitions take place if we get money. I mean, those 
things actually, big picture-wise, concern me almost more.
    But let us get back to this issue. I think people are not 
loaning money because they know they are getting ready to be 
insolvent or they are having tremendous difficulty raising 
leverage money, which they do through commercial paper and 
other ways, to lend money. Do you agree or disagree with me?
    Ms. Warren. Yes, Senator, I think that is important.
    Senator Corker. If that is the case, what do we, in your 
opinion, what do we do about that? I mean, that is a pretty 
major issue, and it seems to me that--and I question these 
valuations because you are only valuing the warrants, right?
    Ms. Warren. No, no. We value the whole package.
    Senator Corker. The preferred stock, you have got all 
marked to par.
    Ms. Warren. Yes.
    Senator Corker. So if it is all at par, then the investment 
is----
    Ms. Warren. It is not, Senator.
    Senator Corker. OK. Well, I guess I would go back to, 
again, what do we do? I mean, these banks know they are worth a 
whole lot less, OK, internally. They know they are going to 
have losses. What is it we do at this time? Do we make them all 
insolvent and recapitalize again? Do we seize them? What is it 
we do to solve this problem versus working on the little bitty 
issues around that are very important to all of us and drive a 
lot of emotion, but really don't get us where we need to go 
with the money that is being expended? What do we do now?
    Ms. Warren. Well, Senator, I think we start by telling the 
truth, and that means if we have financial institutions who 
have liabilities up here and the value of their assets is down 
here, that until the day comes that we find a way to bring 
those things together, whether we have to write off----
    Senator Corker. OK. So GAAP accounting doesn't allow that 
to take place, it is really kind of strange, on accrual loans. 
So do we make a change so that we devalue them immediately and 
say we lose our top 50 banks immediately? I mean, really----
    Ms. Warren. Senator, the point is we have got to 
acknowledge if there is a gap, we have to acknowledge what that 
gap is and then we are just going to have to make some 
decisions about how much American taxpayer money is going to go 
into that to try to fill that in so that the value that is held 
in these banks, whether it comes from outside-held assets or 
whether it comes from the American taxpayer, makes it up to the 
point that it matches their liabilities. That is the question 
in front of you.
    Senator Corker. And so in public with some of the folks at 
the White House that are debating this listening, what you 
would say is the notion, then, of just putting money in and 
letting the banks sort of meter out their losses over time and 
in essence be dead men walking is not a good solution----
    Ms. Warren. Well----
    Senator Corker. ----is that what you are saying?
    Ms. Warren. I think there are enormous risks and enormous 
costs to doing this slowly over time because I do believe 
markets are smart. They see it coming.
    Senator Corker. And that is why the common shares of these 
banks are so low, is it not? I mean, people who are investing 
in these banks understand that these losses are coming, is that 
correct?
    Ms. Warren. I think that is right, Senator.
    Senator Corker. OK. Listen, I know my time is up. Mr. 
Chairman, this is a great hearing and all of the emotions that 
the American people are feeling about what they are saying, I 
think are very well founded.
    I do think that we can get in trouble sometimes by trying 
to make a program that we are working on better instead of just 
facing the facts--and by the way, I say this with no criticism 
to anybody, OK. I candidly have not heard anyone yet come up 
with a solution that all of us think is workable, because if we 
follow the Professor's path, which I, by the way, happen to 
agree with, I also understand we are talking about trillions of 
dollars--trillions--and that is what concerns me so much about 
this stimulus package right now.
    I don't mean to be political. If we are going to borrow a 
trillion dollars, then I know and you know and they know and 
the banks know and everybody that is involved in this knows 
that there is still another trillion minimum coming, and 
probably a whole lot more than that in losses. And so I hope 
that at some point we will have the ability to affect what is 
getting ready to happen in TARP. I hope this discussion that we 
are all having will help with that. I think this hearing is 
helpful, but I hope that we also will pursue this central 
course, and I don't know that I fully have the answer yet.
    Chairman Dodd. I thank you, Senator, for it. You have been 
obviously a valued Member of the Committee. In fact, I agree 
with your assessment, by the way, on why banks are not lending. 
I think that is absolutely the case. There may be other 
reasons, but the major reason is they know what is coming. Look 
in the commercial real estate area alone. You have got a bill 
due in 1 year of $400 billion, the second year maybe $800 
billion, just in commercial real estate coming down the pike. 
And so you are just hedging against these obligations which are 
emerging, and so a little unwilling to step up at this point 
and lend when you know you may have obligations coming along 
you are going to have to meet. So I think your point on that is 
very well taken.
    I think the value we are getting at here with these 
individuals, who all have wonderful ideas and thoughts on where 
to go from here, but the value of the Inspector General, the 
GAO, and the Congressional Oversight Board is to make sure, in 
my view, that the program is accountable and working well. I am 
interested in your ideas of how we--we are willing to listen to 
anybody who has got an idea on how best to get us out of this. 
So I think Senator Corker's questions here are very 
appropriate.
    But it is also the substance of what I am trying to make 
sure we do here is that we have a program that is running well, 
that what has been missing is not your responsibility, and that 
is to frame this program in a way that people can understand. 
And as Senator Bennet said earlier and others have said along 
the way, these are integrated efforts. We have a tendency to 
deal with these like stovepipes. You deal with the TARP program 
and then the stimulus program and then something else as if 
somehow they were unrelated activities all designed to move us 
in a direction.
    And so I appreciate my colleague's point. He is absolutely 
correct, by the way. If the estimates are correct, we are 
looking at a gap of some $2 trillion over the next several 
years. Does an $800 billion stimulus package get us close to 
filling that gap that is emerging? Obviously, it is quite short 
of that. What are the tolerance levels, the tipping points, 
because we all have to make decisions up here and produce 
necessary votes to get us to the point that we will hopefully 
have a package in place that will assist us to get to that 
stabilization.
    Senator Shelby. Mr. Chairman, could I say one thing?
    Chairman Dodd. Yes, just let me finish and then I will turn 
to my colleague. And that is the notion, as well, and the 
danger of overselling a lot of these ideas. I think the 
President has it right in that what we are trying to do here, 
we would like to make it better tomorrow, but if we can stop 
making it worse tomorrow, that is a major achievement at this 
point. The further deterioration is what is at stake 
immediately, in my view, and that our hope is obviously by 
doing that that we begin to turn this around and move in the 
right direction.
    But I am worried that we are overselling this whole program 
as a way that somehow miraculously with the adoption of a 
stimulus package and the adoption of a TARP program, that all 
of a sudden, things are going to turn around. They are not. 
They are not. We have got a long way to go. And the one thing 
we hope to be able to do is to begin to stop the further 
deterioration, and that is the best maybe we can hope for with 
a lot of this at this juncture, and then start talking, as 
well, about what we need to be doing, exactly to Senator 
Corker's point, what do we need to do to get this moving in the 
right direction. And my intention and hope is here, obviously, 
we will do as many formal, informal discussions, hearings, and 
others to listen to people who can help us sort that out and 
make ideas and thoughts and recommendations to the 
administration.
    But I think there is a danger here that we are debating the 
September debate. People want to go back and debate whether or 
not we did the right thing or the wrong thing by supporting the 
TARP program. I don't know, maybe history will tell us the 
answer to that question. There were those of us here who made 
the decision. In the absence of anything else, we thought this 
was the right thing to do. When the Chairman of the Federal 
Reserve Bank, the Secretary of the Treasury, and economists 
across the spectrum say, you have got a matter of days to react 
to a meltdown of the financial system in this country that will 
have global implications, some of us decided to step up and 
give it a chance, 40 days before a national election with all 
of the implications that made that decision what it was, and I 
happen to believe it was the right thing to do.
    I am deeply furious about how it has been managed, but I 
think it was the right thing to do. My friend, and he is a 
wonderful friend of mine, sitting next to me here, had a 
different point of view on that. I respect that. But at some 
point here, we have got to go forward. We can't go back and 
redebate September all the time. We have got to decide where we 
go from here and how we make this work well, and that is what 
we hope to get to.
    I didn't mean to digress, and obviously Senator Menendez 
and Senator Warner have questions. Senator Shelby, quickly.
    Senator Shelby. A few observations. First of all, I have a 
lot of respect for Senator Dodd. I chaired this Committee and 
worked with him. I can tell you I think that the TARP program 
was induced by panic. I do not believe that the Fed knew then 
and Treasury knew then, do not know now, what they were doing. 
Look at the mistakes they have made. And I believe that this 
Committee, Mr. Chairman, has to go back and see what went 
wrong. If we do not go back to see what went wrong--sure, we 
have got to go forward. We are wasting our time holding these 
hearings. We have got to break down what went wrong, because we 
will repeat it again and we are about to repeat it on this 
stimulus bill, and we will repeat it again on another financial 
deal if we do not put it all together. And I was going to pick 
up on what Professor Warren said. I think sometimes we are in 
denial, even banks that are insolvent. Are they too big to 
fail? As Dr. Volcker said yesterday, some of them might be too 
big to exist. Who knows?
    But the American people can stand the truth. They can stand 
the truth. It is brutal and challenging, but we should not deny 
that to the American people. And we should not keep banks, the 
Fed should not keep banks operating that are insolvent and will 
not make, or car companies that are insolvent and will not make 
it.
    Thank you, Mr. Chairman.
    Chairman Dodd. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. You know, just 
listening to this line of questioning and discussion, I also 
think that even if all of the status that we have talked about 
of where the banks are at is the case for argument's sake, at 
the end of the day that will not put--we will not get anybody 
to work, even if we were to make a governmental decision to 
infuse money, or if we were to allow them to fold. And at the 
end of the day, we are only going to get people to work in this 
economy if we create the jobs and the opportunities for them to 
go to work.
    So I think that we could study that ad infinitum, and I am 
for studying it, for sure. But right now, when you are losing 
2.4 million jobs last year, when you are losing--you know, you 
are poised to lose millions more, to sit back, if you happen to 
be like us who happen to be employed, maybe you do not feel the 
pain. But the reality is that there are millions of people in 
this country and millions more poised to lose their jobs. And 
to suggest that we largely sit back and do nothing is not a 
course. I think we need solutions that call for bold action, 
that give us a chance to succeed. And we are in unprecedented 
times, and so, therefore, some of those challenges along the 
way are by devising--putting all the best minds together, the 
best ability of what we move forward on. And that is what I 
think the debate is that presently is before the Senate.
    But let me just say, I was troubled to see how your report 
revealed that the Treasury Department under Secretary Paulson 
overpaid for the equity it received in the banks by $78 
billion. And my question is: Do you believe that Treasury's 
methodology was geared more toward, you know, productive 
implementation of the TARP or propping up the banks at that 
moment in time? Or what do you think their methodology was? You 
know, $78 billion is not a small figure to have a difference 
on.
    Ms. Warren. When Treasury decided that it was going to use 
the same terms for all banks and not engage in risk-based 
pricing--which is what the market would do; it would say for 
some banks the terms have to be different because there is more 
risk associated with those banks--then that built into the 
system that there would be larger subsidizations and no 
subsidizations for some of the banks. And so it was structural 
from the beginning.
    Treasury may have had other reasons for wanting to do 
that--the ease of implementation, speed--but that is the 
effect. I cannot speak to their psychology, but I can certainly 
speak to the plans that they implemented and what the direct 
consequences of those plans were. I have to assume Treasury 
understood that at the moment that they structured the program.
    Senator Menendez. Now, when we talk about lending, if, in 
fact, you have largely the absence of conditionality, if one of 
your goals is to liquefy the credit crunch and lending is one 
of your goals, in the absence of conditionality you are not 
necessarily going to get lending.
    Ms. Warren. No.
    Senator Menendez. And I think that is one of our big 
challenges here.
    Now, there are payments that are coming in, aren't there, 
Mr. Barofsky? I think you put in your report $271 million, and 
February is a big month of payments on interest or dividends, 
are they not?
    Mr. Barofsky. That is correct. February 15.
    Senator Menendez. Do we have a projection of what that 
number will be?
    Mr. Barofsky. We do not include it in our report. I am sure 
we can get you that information.
    Senator Menendez. Mr. Dodaro, do you have any sense of what 
that number will be?
    Mr. Dodaro. Not yet. The dividend payments are 5 percent, 
and a lot of the payments under the initial Capital Purchase 
Program are still being made, so that the money, the original 
$250 billion under the Capital Purchase Program has not all 
been spent yet with the banks. That started going out at the 
end of October, and the next set of payments were made in the 
early December timeframe, and they continue to be made now.
    Senator Menendez. Well, I would like to get a sense of what 
is being paid back.
    Mr. Dodaro. Sure.
    Senator Menendez. Because as we talk about what is going 
out, I also want to get a sense of what is coming back in 
payments as well.
    Let me ask you, yesterday Treasury announced new 
restrictions on executive compensation. Former Secretary 
Paulson voiced concern that such restrictions are 
counterproductive because they will deter institutions from 
seeking the assistance they need and potentially drive them to 
choose failure over intervention.
    Do we really believe that that is a realistic concern, that 
the need for these bonuses are such that an institution would 
choose to fail versus not be able to pay out the bonus?
    Ms. Warren. Senator, I work in the bankruptcy world much of 
the time in my academic work, and it is pretty much the case, 
the data show, that the CEOs lose their jobs when companies 
fail.
    Senator Bennet. Say that again, ma'am?
    Ms. Warren. CEOs lose their jobs when companies fail. And 
worse yet, they do not get jobs in other companies. They do not 
get to lead them. The data just show that. That is a cost. And 
that is a cost of driving your business into failure.
    So the notion always was that that had a nice disciplining 
effect on making you take care of your company and trying to 
keep it out of failure. I understand there are market forces 
that are larger sometimes than any individual CEO. But I want 
to make two points.
    There are still some very healthy banks out there. There 
are some banks who did not get involved in these practices. 
Every time the banks that engaged in very risky practices are 
bailed out, every time their CEOs are rewarded, it works 
against all those people who took smaller rewards in order to 
engage in safer practices and keep their institutions safe.
    I am a strong believer in supporting those who took the 
prudent steps, and I think we best support them by saying that 
the others have to pay the price.
    Senator Menendez. Thank you.
    Mr. Barofsky, let me ask you, we had a hearing here about 
Madoff's massive scheme and about the SEC's process for 
handling tips, or lack thereof, even though there were early 
warning signs. A couple of things.
    One, what mechanism do you have to make sure that credible 
and actionable tips are followed through swiftly and 
thoroughly? That is my first question.
    Second, is part of your charge going to look at the type of 
lending that takes place? Because in pursuit of those of us who 
supported this and thought that lending would be used also to 
liquefy the credit market and get to, you know, small and mid-
sized businesses as well that ultimately employed people in 
this country. You know, if you just lend from bank to bank, at 
the end of the day we do not get a sense of what lending takes 
place in terms of what is the essence of the lending that will 
take place. There is that part of it.
    Then, third, you list on page 8 fraud vulnerabilities as 
one of your early recommendations. And I am wondering what has 
been the response from the Federal Reserve on that $20 billion 
of TARP funds that is being used with them.
    Then, finally--these are all questions to you. Finally, 
your mission, as you define it on page 13, is to advance 
economic stability through transparency, coordinated oversight, 
and robust enforcement; therefore, being a voice for and 
protecting the interests of those who funded the TARP program, 
i.e., the American taxpayers.
    You go on to say how you are going to do that, and you say, 
``But one of those elements is by robust criminal and civil 
enforcement against those either inside or outside of the 
Government who waste, steal, or abuse TARP funds.''
    I hope that that section that you would herald that very 
loudly so people are forewarned of decisions that they might 
make in the marketplace. One of our problems has been that 
regulators have been asleep at the switch. And so if you do not 
act as the cop on the beat and you do not take actions that 
send a very clear message to the marketplace, then people 
unfortunately, left to their human devices, will have excesses. 
And those excesses often can fall in those categories that you 
listed in your report.
    I hope you are going to take a very strong message that is 
clearly going to be part of what you will consider actionable 
items under your turf. So can you respond to those elements?
    Mr. Barofsky. Certainly, and I think that enforcement 
drives some of the things that we have done early on, and 
insisting and recommending that Treasury include certification 
reporting requirements on conditions. One of the reasons why we 
insist so strongly on that is that it sends a message that the 
senior executive who has to sign that certification upon 
criminal penalty has to make sure that the information on that 
certification is correct. And we will certainly be monitoring 
that, and those that lie to Treasury, whether it is to try to 
trick Treasury into making investments that otherwise it would 
not or lying on their certifications to avoid conforming with 
their contractual requirements, we are going to be on top of 
that.
    And one of the ways we are going to be on top of that, 
getting back to your first point, is through our hotline and 
our whistleblower process. And we are still in the process of 
developing our policies and procedures, but it is going to be 
what we are already talking about, it will address just those 
concerns that you raise. We are going to have every 
whistleblower, every hotline tip is going to be--we have 
actually hired someone already, one of the few people we have 
on board, whose job is going to be to monitor the hotline. And 
I do not mean just be answering the phones, but someone at a 
senior level who is going to be reviewing all of the 
complaints, all of the tips that we receive.
    That person is then going to put these together, and we are 
going to have senior staff meetings where we are going to 
review these complaints as they come in and determine which 
ones we need to follow up on. So we plan on taking that very 
seriously, and we certainly do not want to avoid--we certainly 
do want to avoid missing a good, and credible tip.
    Senator Menendez. And on the fraud question I asked you 
that is in your report, has the Federal Reserve responded to 
you in terms of your recommendation?
    Mr. Barofsky. Yes. When we first addressed this issue in 
early January--and what we did is worked off the term sheet in 
an initial briefing--we thought that the mechanisms that they 
had in place were insufficient. It was basically relying on 
rating agencies and investor due diligence. And we pointed out 
to both the Federal Reserve and to Treasury that we thought 
that that was not a good model based on history--how 
historically those institutions, those private players had 
failed. And the response has been positive. Before our report 
came out, obviously, we shared our recommendations with both 
the Federal Reserve and with Treasury. And we had a very 
productive meeting at the Federal Reserve, and they have 
indicated to us that they are considering additional fraud 
prevention measures that are in the process of being formed.
    This is a program that has not yet been completed, and we 
were very encouraged that they are on the right path. They are 
considering our recommendations, both as we advanced them in 
early January and that are here today in our report. And we 
will continue to work with them to give our advice on how they 
can best tailor this program to limit the possibilities of 
waste, fraud, and abuse. You cannot eliminate it, but we do 
hope to continue to work with them to find the right way to 
limit it.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Bunning.
    Senator Bunning. Thank you very much, Mr. Chairman.
    I just want to step back for a second. The current 
Secretary of the Treasury had a seat at the table when all of 
this original TARP was designed, and now next week--at least 
that is what I hear. Next week he is going to come back with a 
detailed plan on how we are going to spend the next $350 
billion. And his Chief of Staff that he hired--and he had to 
get a waiver from the ethics rules of the Obama Administration 
to hire him because he was the chief lobbyist for Goldman 
Sachs. Now, in the total TARP monies, there was $10 billion 
that went to Goldman Sachs.
    My question to you is: The American people are screaming 
because they think that the TARP money was designed for one 
reason--to relieve the credit crunch--and it was being used 
completely to take care of friends and others on Wall Street.
    How do we dispel that notion with the American people when, 
in fact, the bait and switch took place? How? Please, Mr. 
Inspector General, tell me how we dispel that conception of the 
American people. I can tell you, my phones in my office rang 
off the hook, 25,000 calls. I have not gotten 25,000 calls 
since I have been in the Senate, but they questioned me and my 
sanity if I voted for that. Two hundred calls were the other 
way. They said it is essential, we need it--25,000 to 200.
    Now, explain to me how I am going to have to believe what 
is being said next week by the new Secretary of the Treasury in 
his expenditure of the additional $350 billion.
    Mr. Barofsky. Senator, first of all, just in response to 
your opening statement, I want to thank you and the Chairman 
and the Ranking Member for cosponsoring the bill that you 
referenced in your opening statement. I am very encouraged to 
hear that it was passed last night. I look forward to it being 
passed in the House as well, so I want to thank you for your 
support on that.
    Senator Bunning. We tried to get it passed, you know, a 
month ago.
    Mr. Barofsky. I remember, and I appreciate those efforts.
    In response to your question, as an Inspector General, it 
is not my job to believe what I am told. It is to test what we 
are told. And to answer your question, what we are doing, what 
GAO is doing, what other Inspectors General are doing, and 
which we are coordinating through our Inspector General TARP-IG 
Counsel, are audits. We are going to be testing the questions 
of the application process. The FDIC-IG has initiated the first 
audit on what is going on in that regulator. The Federal 
Reserve is doing an audit to test that regulator's application 
process. GAO is sampling. Treasury IG is doing a case study. We 
are going to be doing a case study--all with one common theme 
of all these different audits, which we are going to coordinate 
and hopefully do a capping report----
    Senator Bunning. I do not want to interrupt, but I have to 
interrupt to say to you that you have the ability to inspect 
those IGs. You have the ability to inspect the Fed's IGs and 
make sure that you are getting to the right heart of the point. 
You know, they may not be exactly--since they were part of the 
problem and the switch, they may not be giving you all the 
information that you should be getting. So your job is even 
more important than all of those other IGs' because you have 
got to make sure that the money that the American people are 
giving to be spent, $700 billion, is being used in a fashion 
that is believable--believable for the American people and 
accurate.
    Mr. Barofsky. And, Senator, I want to stress the respect I 
have for those Inspectors General. They have been incredibly 
helpful in staffing up my office. And with that said--one of 
the things that we are going to be doing--what we anticipate 
doing is a capping report where we do look at the different 
methodologies, we do look at these issues. And as I said, we 
are also going to be doing our own audits. So I think that part 
of it is coordinating and leveraging the resources of the other 
audit agencies, all going to the basic fundamental question 
which I think is--and I do not want to characterize it, but I 
think it is your question, which is: Were similar banks all 
treated the same? Was this process fair?
    Senator Bunning. I can read from your page 3, you are 
pleased to inform my office--``I am pleased to inform you that 
my office is announcing the first four audits''--one was on the 
Bank of America that received $45 billion in TARP funds and 
guarantees relating to more than $100 billion in troubled 
assets. That is certainly not a healthy financial institution.
    And so I am worried about your audits. If they are going to 
be as accurate as you say they are, how in the world that you 
did not go to the Bank of America and say, ``By the way, you 
guys are short. You are not only short, but it is in black and 
white you are short. You are short $65 billion in the red.''
    Mr. Barofsky. Senator, obviously----
    Senator Bunning. What about the other three audits that are 
mentioned in the--who were the other three that you audited?
    Mr. Barofsky. Well, Senator, just to address that question, 
you know, we are just commencing this audit. We have not done 
an audit of Bank of America or a review of the Bank of America 
transaction. That is the responsibility of Treasury as they 
determine which investments to make.
    Our role does not kick in in that area. It is not the role 
of an Inspector General. We are----
    Senator Bunning. Well, if they got TARP money, it does.
    Mr. Barofsky. Yes, and that is where we come in, and that 
is why we are initiating this audit, is to take a look at this 
precise issue.
    Senator Bunning. Well, you also mentioned three other 
audits that you have initiated. Would you share that with the 
Committee?
    Mr. Barofsky. Certainly, Senator. As I mentioned in my 
opening statement, one is on the use of funds, and that is the 
survey letter we put out so we can report back on how financial 
institutions are using the TARP funds.
    Second is on executive compensation where we are reviewing 
both the institutions' chairman as well as internally at the 
TARP management, how they are setting up their processes and 
procedures to ensure compliance.
    Third, as you mentioned, was the Bank of America audit, the 
case study on what happened there, addressing the questions 
that you rightfully raise and correctly raise.
    And then the fourth audit is on outside influences to see 
and determine and test whether outside influences had a role in 
the application process. I think that also addresses your 
question, Senator.
    Senator Bunning. I urge you, I urge you as strongly as I 
can as a member sitting on this Committee to not be bashful, 
because the American people do not want you to be bashful. They 
want you to get to the bottom of why we are not loosening the 
credit reins in this country after spending $700 billion of 
their dollars. And they are not interested in return on 
capital. They are interested in why my son or my daughter or my 
grandkids cannot go to a bank and get a 30-year mortgage by 
putting 25 percent down.
    Mr. Barofsky. I assure you I will not, Senator, and I do 
not think there are too many people at 1500 Pennsylvania Avenue 
right now who would describe me as ``bashful.'' And I look 
forward----
    Senator Bunning. Well, I urge you to use all your power and 
the additional ability now, as soon as the House passes that 
bill.
    Mr. Barofsky. I absolutely will, Senator.
    Senator Bunning. Thank you very much, Mr. Chairman.
    Mr. Barofsky. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman. This has been a 
very informative hearing, and most of the ground has already 
been covered. Let me take your comment that we need to be 
looking forward and Senator Shelby's comment that we need to 
understand what has gone on and kind of put them together and 
ask a question that our witnesses may not be able to respond 
to, but that we need to pay attention to.
    Like Chairman Dodd, I supported the TARP initially, very 
strongly. And we helped frame the agreement that gave the 
Secretary of the Treasury virtually full authority to do 
whatever he wanted to do.
    Now, we did put in that agreement the creation of an IG and 
a trigger point where the Secretary of the Treasury had to come 
back to the Congress. Neither one of those things was in the 
original proposal from Treasury. They just wanted $700 billion, 
no questions asked, no oversight, all the rest of it. And we 
created the kinds of institutions that your presence here today 
represent.
    Now, I approved the idea that the Secretary of the Treasury 
should have complete authority to do whatever it was he felt he 
had to do, that the Congress should not micromanage. But there 
was no question in anybody's mind that we were told it would be 
used to acquire toxic assets. And as I did my own back-of-the-
envelope calculation, there were $14 trillion, roughly, face 
value of mortgages in the country; $700 billion represents 5 
percent of $14 trillion. And I thought, OK, if we can take off 
the market 5 percent of the $14 trillion--we cannot be exactly 
sure that we are doing it, but it follows that you would take 
off the most toxic, the top 5 percent that were absolutely 
worthless, and that would give you a degree of confidence in 
the 95 percent that remained. And that is where we started, and 
that is not where the first $350 billion went. The decision was 
made in Treasury, no, we are going to go to capital investment, 
warrants, direct infusions, and so on.
    We gave the Secretary full authority to do that because we 
recognized that he and the people working for him were the ones 
on the ground, and we would not micromanage or second-guess it. 
Now, we are beginning to second-guess it and say, no, it was a 
mistake, and the full $350 billion that he had before he had to 
come back to the Congress should have gone toward acquiring 
toxic assets or not. And as I hear what you are saying here 
today, you cannot make that judgment as to whether that was a 
right call or a wrong call. And I am not asking you to.
    But all of you are examining Treasury, examining the 
process by which this whole thing has rolled forward, and now 
moving from the history to the looking forward, can you give us 
an outsider's view of the tidiness, if you will, of the 
decisionmaking process, of the structure that was put in place 
that would examine the alternatives and say we should not go 
ahead with the toxic asset acquisition, we should move ahead.
    In your opinion, was this a tidy kind of decisionmaking 
process, carefully structured, or was there such an ad hoc 
nature about it that we need to be concerned looking forward as 
to how the present Treasury might move?
    Now, I know that is not something that yields itself to an 
audit. It is not something that yields itself to numbers. But 
you have been wallowing in this for long enough now that I 
think you may have a sense, and if you do, I would appreciate 
it if you would share it with us.
    Ms. Warren. Senator, I want to say in terms of the design 
of the TARP program at a time of emergency, the concept of 
flexibility and giving a lot of flexibility to the Secretary of 
Treasury was a very reasonable and thoughtful approach. I 
understand. When there is an emergency, the last thing you want 
to do is be standing there telling the firefighter, ``I think 
you ought to be moving over here instead of over there.''
    But what has happened is flexibility without 
responsibility, without responsibility for transparency, 
without requirements that one might have assumed the Treasury 
would engage in, has given us a circumstance where I have been 
working with this now for 3 months and I cannot begin to answer 
you. It is an opaque process at best.
    You saw what happened. We asked very specific questions. We 
asked more general questions, and we got no answers to many of 
the questions we asked. I cannot even say systemically we did 
not get them in one area or another. We just got no answers.
    The question now is whether or not we have a Treasury that 
is going to be more transparent, more responsive, is going to 
bring to Congress and to the American people a statement of its 
diagnosis of the problem, its plan for a structure for how to 
go forward, and its metrics by which it can be measured and be 
found either succeeding or failing. But that is just the moment 
where we find ourselves now.
    I certainly did not mean to suggest earlier that Congress 
had made a mistake earlier. It is that you made the assumption 
that Treasury was going to behave differently from the way they 
have behaved.
    Senator Bennett. That raises the obvious question. Can we 
believe what we get told next time? Of course, one of the 
answers will be, yes, this is a different Treasury, this is a 
different administration, and I buy that.
    But at the same time, I would like to have, and I think the 
people whose money is involved need to have, some kind of clear 
understanding as to what is happening to the toxic assets, 
because if we were going to reduce them by 5 percent with $700 
billion, we have only spent $350 billion, so that takes you 
down to 2.5 percent. And of the $350 billion, probably the 
majority did not go to acquiring the toxic assets. That means 
instead of looking at a recession where 5 percent of the toxic 
assets or mortgages have been removed from the system, we are 
going--we are in a recession, we are not going--we are in a 
recession where less than 1 percent of the toxic assets have 
been removed from the system.
    Ms. Warren. Senator, I would say it this way. I think we 
are way past ``Trust me.'' I am an empiricist. Show me what you 
have done and I will tell you whether or not I think it 
addresses the problem. I don't think we are going to be called 
on to trust anyone. I think we are either going to get a 
structure or we are not going to get a structure. We are either 
going to get some serious plans that explain to us how this is 
going to work and how this is going to help the economy, what 
it is going to do particularly about foreclosures, or we won't.
    I can only say I share your deep concern that this is where 
the problem started, and if the solution doesn't start there, 
then in my view, it is not a solution. It will be transparent 
and we will have the right mechanisms in place to monitor that 
or we won't.
    Frankly, Senator, I just don't think we are at trust 
anymore. I want to see the mechanisms. I want to see what they 
are putting in place. I want to see the structure.
    Senator Bennett. My time is up, but assuming you are the 
Acting Chairman----
    Senator Shelby [presiding]. Well, I am not the Chairman. We 
are Republicans over here.
    [Laughter.]
    Senator Bennett. All right. I will just make----
    Senator Shelby. I will assume the----
    Senator Bennett. Yes. I will just make this observation. 
If, in fact, we do not have the kind of transparency that you 
are talking about, our constituents will not permit us to put 
up the money. It won't just be the 25,000 calls to Senator 
Bunning that hit the Congress. It will be 25,000 calls to 
Chairman Dodd, et cetera, et cetera, et cetera, and the 
political support for putting up the money will not be there. 
Those of us who decided we were going to take the political 
risk of voting for this the first time will be faced with a 
constituency that will say, you fooled me once, OK, but don't 
fool me twice, and I hope the administration understands that.
    I listened to the first presentation on TARP. I took it on 
face value. I supported it and expected that when the $700 
billion was expended, the level of toxic assets in the system 
would have been reduced by 5 percent. It is now very clear that 
will not happen and I have a very hard time explaining to my 
constituents why that hasn't happened when I had every 
assurance that it would.
    Thank you, Mr. Chairman.
    Chairman Dodd [presiding]. Thank you, Senator, very much.
    Senator Shelby.
    Senator Shelby. I will just take a minute. I have a few 
observations I want to reiterate. One, I want people to know 
again that I opposed the TARP program. I knew it was flawed 
then. We all know it now. I don't believe it was administered 
well. I think the Secretary of the Treasury, Paulson there, who 
we put more power in than any Treasury Secretary since 
Alexander Hamilton, but he didn't, in my judgment and the 
judgment of the American people, acquit himself in the manner 
of Alexander Hamilton by a long way.
    Did he not know? Did the people not know around him? Was 
the structure different? He put the structure together with his 
friends. Was it a lack of judgment? Diligence on buying 
insolvent banks and so forth? I don't know.
    But I agree with Professor Warren here. She has touched on 
something. I think it is very important, trust. Trust in the 
banking system, especially Wall Street banks right now, it 
doesn't exist. Now, we have a lot, as she said, we have a lot 
of healthy, well-run, well-managed banks in this country. 
Should we punish them? No. She is absolutely right.
    But to try to justify, I think, and this is my own opinion, 
speaking for myself, that the TARP program is a great program, 
was a great conceptualized program, that is nonsense. I don't 
believe that the Congress should try to fool the American 
people. Trust is important. People don't have that trust today, 
and they shouldn't.
    Mr. Barofsky, you can help, and gosh, I pray you will. I 
pray you are going to have a spine and it is going to grow and 
that you will not let somebody say no to you. As I said 
earlier, you have got a great opportunity to serve this 
country. As I said earlier, you will probably be unemployable 
later, but that is OK.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator Shelby.
    Let me say, obviously there was a division and a debate 
that went on, and 75 of our colleagues--no one enjoyed, I can 
tell you flat out, no one welcomed the debate in September. It 
was a tragic time in our Nation's history, that it had come to 
that. Had the administration 2 years ago taken on the issue of 
the residential mortgage market more seriously, and they 
obviously didn't, we wouldn't have been in that situation in 
September, in my view. This was not a natural disaster that 
occurred. It was one created through malfeasance, misfeasance, 
neglect, and a failure to recognize the problems in front of 
us.
    But unlike my friend from Alabama, not that we enjoyed the 
moment--there was no celebration with that vote at all--but the 
issue was, did we step up and try and do something in the face 
of people across the spectrum recommending this action to try 
and get our credit markets moving?
    There is a legitimate debate about how well the program has 
been managed, and history will determine whether or not the 
decision we made in September and October was the right one to 
help us get moving in that direction. There are those of us who 
voted for it, reluctantly, with great regret. We tried, what, 
in 13 days what we could do to manage a program that went from 
a three-and-a-half-page bill at 1:30 in the morning of 
September 19 or 20 to an 82-page bill that laid out the ideas 
that I incorporated in my opening statements, and then to try 
to pull something together that would give flexibility and 
authority to deal with the problem, simultaneously demanding 
accountability and other measures, including warrants and the 
like to taxpayers.
    We also included, of course, the provision that you had to 
come back for the second half of that money, and I am glad we 
did or we might be looking at a situation today where all 700 
might have been mismanaged, in my view.
    The question is now, can we manage this tranche well? We 
have got a new crowd in town making commitments to do so. The 
debate will go on for years to come as to whether or not people 
thought the vote in September or October was right or wrong, 
but I happen to believe that it was the right course of action 
to follow at that point. My only hope is here that this will be 
better managed, it will get our capital markets moving, that 
with this good, well-crafted stimulus program here to put 
people back to work, along with other steps, we can stop the 
erosion that is occurring in our economy and understand that we 
need to do some other things to get us moving in the right 
direction.
    A very important part of that is framing this program, 
letting the American people know what is going on, how it is 
working, minimize the kind of mistakes that were made and 
infuriate people, as we have talked about, and I am confident 
that can happen. We are going to have Secretary Geithner before 
this Committee next week to talk about exactly what they intend 
to be doing. We will have you back here, either formally or 
informally, in the weeks ahead to determine how well that is 
working to go forward.
    But it is important that we also do what we can to inject 
some confidence and optimism in our constituents. We are not to 
be Pollyannas and to give false hopes where hopes don't exist, 
but we also don't need to spend all of our time talking about 
everything that is wrong, either. We need to be talking about 
what we can do right to get this right. We are an optimistic 
people and a confident people, but obviously that confidence 
and optimism has been damaged badly. There will be no economic 
recovery without confidence and optimism coming back. I don't 
know how to calibrate that. I don't know what mathematical 
formula gives you that. But I promise you can design all the 
plans and all the formulas you want, but if national leadership 
does not engender some confidence and optimism that we are 
heading in the right direction, trying to get this right, then 
all of those plans will amount to nothing.
    And so it is important both as Members, as a Committee, as 
a Congress, as a people that we try and take steps necessary to 
move us in that direction. They are not going to be perfect. 
There will be mistakes made along the way. If we exaggerate the 
mistakes at the expense of the things we are doing right, the 
predictable confidence will be eroded. I am not suggesting we 
deny them, but we need to keep them in perspective if we are 
going to succeed as a people and a generation.
    This will be a time written about for decades and decades 
to come, decisions we are making every single day here to get 
this country back on its feet again. It is our generation. It 
is our moment. It is our watch as a people, both public and 
private citizens, to try and get this correct. So we bear a 
responsibility on this Committee and charged with the 
jurisdiction over many of these issues and we are going to do 
our very best to get it right, to listen to people like 
yourselves and others to help us make those decisions. But I am 
determined, as well, to see to it that we engender that 
confidence and optimism. It is absolutely critical that we need 
to have as a country.
    And so I thank all three of you and the staffs that work 
with you for the jobs that you are doing, but I am also 
confident that we are going to come out of this. Other 
generations have faced far more serious problems in many ways 
than the ones we are confronting, as serious as this is. But if 
we remind ourselves what other generations have done during 
moments of crisis, I think we will succeed. I am confident of 
that. I thank you for being here this morning.
    The Committee stands adjourned.
    [Whereupon, at 12:45 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR TIM JOHNSON
    Thank you Chairman Dodd for holding this hearing. There is no doubt 
in my mind the necessity of continued oversight of the implementation 
of the Treasury Financial Rescue Program and the use of billions of 
dollars of taxpayer funds.
    I voted against the $700 billion Wall Street bailout, in part 
because I felt there weren't enough taxpayer protections in place. To 
date we have seen little transparency, accountability or responsibility 
from companies receiving funds. This entire situation is deeply 
frustrating especially as we now find ourselves with no good options 
and facing the prospect that our economy could get worse before it gets 
better.
    I can only hope that the promised improvements in the TARP program 
by the new Administration will help to stabilize the situation. The 
Treasury needs to refocus on those Americans that are in the process of 
losing their homes or could in the future, and create an environment 
where financial institutions receiving assistance can resume 
appropriate lending to small businesses, farmers, and others. This will 
be key to our Nation's recovery effort.
                                 ______
                                 

              PREPARED STATEMENT OF SENATOR SHERROD BROWN
    Thank You Mr. Chairman.
    First, I want to thank Mr. Dodaro, Mr. Barofsky, and Professor 
Warren for their willingness to take on the enormous task we have asked 
of them and for testifying today. When Congress passed the Emergency 
Economic Stabilization Act we were facing a global financial crisis 
that was hitting every community in our country. Despite these efforts, 
the economic crisis has gotten worse, not better. And businesses 
continue to struggle to get the credit they need to expand, or in many 
cases simply to stay afloat.
    In Ohio, 90 percent of charitable foundations report that their 
assets have declined, and 60 percent expect to give less money than 
they did last year. Goodyear's new world headquarters project in east 
Akron has stalled due to the recent credit freeze. A steel mill in 
Scioto County was scuttled because investors were hit with the economic 
downturn coupled with the drying up of available credit. This week in 
Bowerston, L.J. Smith, Inc.--a stairs manufacturer--announced 27 Ohio 
workers would be laid off. The C.O.O. of the company told the local 
television news that he looked forward to ``a time when the housing 
industry returns to more normal conditions and we will have a demand to 
hire more employees.'' Lancaster let go five firefighters because of 
the city's financial problems. More than 100 employees of the city of 
Columbus learned last week that they were among the first round of 
layoffs.
    Sadly, I could go on and on. Greed is the self-serving desire for 
the pursuit of money. Some may think that in business greed is good.
    Government, however is charged with improving the lives and welfare 
of the people. Government creates the system by which businesses can 
succeed. And it assists businesses in times of need. But addiction to 
greed has created a culture which does not reflect reality. Addictions 
are behaviors engaged in despite harmful consequences to the 
individual's health.
    Wall Street greed has reached unhealthy levels. Midas' food became 
gold and he nearly starved to death as a result. Wall Street has 
forgotten Main Street.
    As the economy falters and jobs are disappearing, we are hearing 
story after story about billions of dollars spent on bonuses and 
million dollar restrooms. If banks are going to turn to taxpayers for 
their survival, then they had better expect to answer to the taxpayers. 
And the taxpayers will not stand for super-sized bonuses for outsized 
failures. We must be accountable to them. We must spend their money 
wisely. We must partner with them to restart our economy.
    We have to get our credit markets in order. We have to put America 
back to work. And we are about to put more money into the relief 
effort.
    Almost 3 months ago, National City Bank, one of the largest banks 
in the country, was forced by the administration into a fire sale to 
PNC Bank. For more than 160 years, National City had been an important 
asset to Ohio. By the end of last year, it became an asset of PNC. That 
sale is being financed by the taxpayers, but the taxpayers are being 
stiffed when it comes to getting answers. I don't fault PNC, but I do 
fault the previous administration. While it is important that banks 
receive the funds they need to survive, this program will not be 
administered without the watchful eye of Congress.
    Ohio families deserve to know where every one of their tax dollars 
is spent, and that it is spent wisely. Oversight of the stabilization 
funds is critical to the effective and efficient use of the taxpayers' 
dollar. I'm hopeful that we will learn from these reports so we can 
ensure that the tough decisions we've made to try to fix the credit 
markets will be carried out in an efficient and effective manner.
    I'm concerned that one of the findings of the recent GAO report is 
that Treasury has yet to articulate a vision for the stabilization 
effort as a whole and that all the programs must work together. I'd 
like to reiterate that these funds should not and cannot be a tool for 
banks to buy up healthy banks. We must ensure that every available 
dollar goes to shoring up our banking system so we can get our economy 
moving again. I understand it is not an easy task.
    Congress created a multi-billion dollar program and charged 
Treasury with the implementation; during a time of transition from one 
administration to the next. But we have to do better.
    I am concerned that the Congressional Oversight Panel is still 
unclear what banks are doing with taxpayer money.
    Transparency is important. Establishing formal guidelines is 
important. Setting controls on contracting is important. Oversight is 
important.
    But first we need the Treasury to have a clear vision and we need 
to know exactly what banks are doing with taxpayer dollars. We must 
always return to why we created the stabilization fund in the first 
place; to purchase assets and equity from financial institutions in 
order to strengthen the financial sector. We did this so working 
families could get or keep their jobs, to get and keep their homes, to 
get or keep their hope for the future.
    We did this so Goodyear and that steel mill in Scioto County could 
get the financing they need and that the housing market would stabilize 
so Bowerston could keep making stairs for new homes.
    I look forward to hearing today's testimony.
    Thank you Mr. Chairman.

                  PREPARED STATEMENT OF GENE L. DODARO
                      Acting Comptroller General,
                    Government Accountability Office
                            February 5, 2009















































                                 ______
                                 
                 PREPARED STATEMENT OF NEIL M. BAROFSKY
                       Special Inspector General,
                     Troubled Asset Relief Program
                            February 5, 2009

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee, 
it is an honor to appear before you today and to deliver to this 
Committee my Initial Report to Congress.
    The Troubled Asset Relief Program represents a massive and 
unprecedented investment of taxpayer money designed to stabilize the 
financial industry and promote economic recovery. The long-term success 
of the program is not assured; success--or failure--will depend on 
whether the Department of the Treasury has spent, and will spend in the 
future, that massive investment wisely and efficiently to attain the 
program's goals. I believe it is my Office's mission to report on the 
activities of the program and make recommendations that can facilitate, 
through effective oversight, the success of the program. Indeed, our 
mission statement, which is printed on the cover of our Report, is: 
``Advancing financial stability through transparency, coordinated 
oversight, and robust enforcement.'' (See, Executive Summary of the 
Special Inspector General's Report on TARP retained in Committee 
files.)
    During my confirmation hearing back in November, I promised the 
Committee that my Office would hit the ground running and provide 
oversight of TARP from day one. In the 52 days since I took my oath of 
office, we have focused on areas referenced in our mission statement 
and where we could have a maximum impact, even during the period that 
we have minimal staff: areas such as facilitating transparency in the 
operation of TARP and ensuring that appropriate oversight provisions 
are built into TARP agreements and programs.
    In order to promote better transparency, for example, within a few 
days of coming on board, we formally recommended that Treasury post all 
TARP agreements, whether with recipients of TARP funds or with its 
vendors, on the Treasury Web site. Treasury first agreed to post some 
of the agreements on the web, and we were pleased to see that last week 
Secretary Geithner adopted our recommendation in full.
    We also asked for and obtained oversight language in the large TARP 
transactions that were recently closed. Among other things, the auto 
industry agreements and the Citigroup agreements contain not only 
explicit acknowledgment of my Office's oversight over the contracts, 
but also require that, for many of the significant conditions imposed 
by the agreements, the recipient be required to establish an internal 
control to comply with that condition, that they be required to report 
on their compliance, and that they certify, under penalty, that the 
reporting was accurate. Indeed, the Citigroup and Bank of America 
agreements contain a provision, at my Office's request, that the banks 
account for their use of the TARP funds. Collectively, these 
agreements--representing transactions of more than $70 billion of TARP 
investments--are a significant step forward from an oversight 
perspective as compared to earlier agreements.
    My Office has also begun to look at what has been, to date, the 
most significant failing from a transparency standpoint--understanding 
the process and criteria Treasury used to decide who would receive TARP 
funds and what the recipients have done with the hundreds of billions 
of dollars that have been invested. This week, we received approval 
from OMB to send letter requests to each of the TARP recipients asking 
them to report on how they have used TARP funds and how they plan to 
use the funds that they have received but not yet spent. We will also 
ask TARP fund recipients to provide details on their plans to comply 
with applicable executive compensation restrictions and whether they 
have altered their compensation structure in response to these rules. 
We believe that this important project will shed light on the darkest 
areas of TARP.
    As to coordinated oversight, it is my honor to sit here today with 
my co-panelists, Acting Comptroller General Gene Dodaro and Professor 
Elizabeth Warren, Chair of the Congressional Oversight Panel. It has 
been a pleasure coordinating oversight efforts with them and others to 
provide maximum oversight coverage while avoiding unnecessary or 
duplicative burdens on those charged with managing TARP. I have also 
founded and chair the TARP-IG Council, which has, as its members, Mr. 
Dodaro and the Inspectors General of the other agencies involved in 
aspects of the administration of TARP programs. Through these 
coordinating efforts, we are establishing protocols and sharing ideas 
for comprehensive audits.
    I am pleased to inform you that my office this week is announcing 
its first four audit initiatives. In addition to the two audits I just 
mentioned, we are beginning an audit of the process under which Bank of 
America received $45 billion of TARP funds and guarantees relating to 
more than a $100 billion in troubled assets and another audit designed 
to address potential outside influences, such as lobbyists, on the TARP 
application process.
    Finally, with respect to robust enforcement, my Office has been 
actively building relationships and laying the groundwork for one of 
our most important tasks--the task that we serve alone--being the cop 
on the beat for TARP programs. Our Hotline, (877) SIG-2009, and Web 
site, www.SIGTARP.gov, are up and running. We have joined the 
President's Corporate Fraud Task Force, and have initiated coordinated 
planning efforts with the FBI, the Criminal Division of the Department 
of Justice, and several U.S. Attorney's offices to best utilize our 
collective investigative resources. We have already opened several 
criminal investigations, and we have teamed up with the SEC, providing 
assistance to them in shutting down a securities fraud scam in 
Tennessee that had reaped millions in ill gotten gains by illegally 
trading on the TARP name. We have also coordinated our executive 
compensation oversight efforts with the New York State Attorney 
General.
    As I mentioned earlier, today we deliver our first report, which 
contains recommendations based on our initial observations of TARP. For 
example, we recommend that Treasury initiate a process and strategy for 
valuing and managing the assets that it has purchased, so that we can 
obtain a better understanding of the true value of the portfolio of 
assets in which the American people have already invested almost $300 
billion. We also continue to recommend that Treasury enter into 
agreements with strong oversight provisions, both to deter non-
compliance and to enable us to do our jobs. We have made a series of 
recommendations with respect to the Term Asset-Backed Securities Loan 
Facility (TALF), a program that is still in its planning stages, about 
ways that the program can be designed to avoid waste, fraud and abuse. 
Our report also attempts, in the interests of greater transparency, to 
provide a detailed description of the TARP programs in Main Street 
terms, so that more of the American taxpayers who are so heavily 
invested in these programs can better understand what is being done 
with their money. I look forward in my next Report to updating you on 
Treasury's response to my recommendations and the status of our Audit 
and Investigation Divisions' activities.
    I am proud of the start we have had and truly look forward to 
fulfilling the mission that Congress has set out for us. Mr. Chairman, 
Ranking Member Shelby, and Members of the Committee, I want to thank 
you again for this opportunity to appear before you, and I would be 
pleased to respond to any questions that you may have.
                                 ______
                                 
                 PREPARED STATEMENT OF ELIZABETH WARREN
              Chair, Congressional Oversight Panel for the
                     Troubled Asset Relief Program
                            February 5, 2009

    Thank you Chairman Dodd, Ranking Member Shelby, and Members of the 
Committee for inviting me here today to testify on Oversight of the 
Financial Rescue Program.
    My name is Elizabeth Warren, and I am chair of the Congressional 
Oversight Panel. The Congressional Oversight Panel was created as part 
of the Emergency Economic Stabilization Act of 2008 and is charged with 
reviewing the state of the financial markets and regulatory system and 
submitting regular reports to Congress. Our reports are to include 
oversight of the Treasury Secretary`s use of contracting authority and 
program administration; the impact of TARP purchases on financial 
markets and financial institutions; transparency; and the effectiveness 
of foreclosure mitigation efforts and whether the program has minimized 
long-term costs and maximized benefits to taxpayers.
     Although I am chair of the Panel, I would like to note that my 
testimony today reflects my own views and not necessarily those of the 
entire panel.
    I appreciate the opportunity to testify regarding the Panel's 
findings as well as my recommendations to improve administration of 
TARP. I am also here to listen to your comments and oversight 
suggestions. As the head of a congressional entity charged with 
oversight of the TARP program, your thoughts are especially important 
to me.
    Since its inception, the TARP program has raised questions 
regarding its goals, methods, and program operations. It is not just 
Congress and the oversight bodies asking the questions, but also the 
public. The American people want to know what's going on and they 
deserve answers.
    The Congressional Oversight Panel is determined to find answers to 
these and many other questions. Our first report, issued on December 
10, 2008, identified a series of ten primary questions regarding 
Treasury's goals and methods. These questions must be answered in order 
for TARP to be successful:

  1.  What is Treasury's strategy?

  2.  Is the strategy working to stabilize markets?

  3.  Is the strategy helping to reduce foreclosures?

  4.  What have financial institutions done with the taxpayer's money 
        received so far?

  5.  Is the public receiving a fair deal?

  6.  What is Treasury doing to help the American family?

  7.  Is Treasury imposing reforms on financial institutions that are 
        taking taxpayer money?

  8.  How is Treasury deciding which institutions receive the money?

  9.  What is the scope of Treasury's statutory authority?

  10.  Is Treasury looking ahead?

    As a follow up, I sent a letter to then-Treasury Secretary Paulson 
requesting responses to these questions, along with specific subsidiary 
questions. I ask to have that letter entered into the Record. An 
analysis of Treasury's response provided the basis for the Panel's 
second report, issued on January 9, 2009. Unfortunately, many of 
Treasury's answers were non-responsive or incomplete. The report found 
that Treasury particularly needs to provide more information on bank 
accountability as well as transparency and asset valuation. They also 
need to provide additional information on foreclosures and articulate a 
clear strategy, otherwise they are spending billions of dollars on an 
ad hoc basis.
    Congress provided substantial flexibility in the use of funds so 
Treasury could react to the fluid and changing nature of the financial 
markets; yet, with these powers goes a deeper responsibility to explain 
the reasons for the uses made of them. Both Congress and the American 
people need to understand Treasury's conception of the problems in the 
economy and its comprehensive strategy to address those problems. Our 
money-and our economy-are on the line, and we all have a stake in the 
outcome.
    The Panel remains committed to our ongoing oversight role. While we 
recognize that Treasury is in the midst of a transition of personnel 
and policies, we believe that our initial questions and areas of 
concern continue to be important.
    On January 28, 2009, I sent a letter to newly sworn-in Treasury 
Secretary Timothy Geithner requesting more complete answers to the 
questions on TARP strategy and implementation that we had sent to his 
predecessor. I have not yet received a response, but I am encouraged by 
many recently announced initiatives, including efforts to improve 
transparency, clarify strategy, protect taxpayers, and address 
executive compensation. We will, of course, share his responses with 
you and with the public as we continue to monitor the details and 
implementation of the new initiatives.
    As part of our continuing mission to get answers about TARP, the 
Congressional Oversight Panel examined whether Treasury's injections of 
cash into financial institutions have resulted in a fair deal for 
taxpayers. The findings are in our February report, which will formally 
be submitted to Congress tomorrow. Despite the assurances of then-
Secretary Paulson, who said that the transactions were at par-that is, 
for every $100 injected into the banks the taxpayer received stocks and 
warrants from the banks worth about $100--the valuation study concludes 
that Treasury paid substantially more for the assets it purchased under 
the TARP than their then-current market value. Extrapolating the 
results of the ten transactions analyzed to all purchases made in 2008 
under TARP, Treasury paid $254 billion, for which it received assets 
worth approximately $176 billion, a shortfall of $78 billion.
    At various points Treasury has articulated policy objectives which 
could result in a program involved in paying substantially more for 
investments than they appear to have been worth at the time of the 
transaction. Because Treasury has failed to delineate a clear reason 
for such an overpayment, however, the panel is unable to determine 
whether these objectives have been met or whether they justified the 
large subsidy that was created. Once again, Treasury needs clear goals, 
methods, and measurements.
    I am deeply concerned with the lack of progress by Treasury on 
foreclosure mitigation. The Emergency Economic Stabilization Act of 
2008 aimed to stabilize the economy both through direct support of 
financial institutions and through encouraging foreclosure mitigation 
efforts. These two endeavors are intertwined. The credit crisis was 
triggered by a mortgage foreclosure crisis. While stabilizing the 
housing market will not solve the economic crisis, the economic crisis 
cannot be solved without first stabilizing the housing market.
    The Panel intends to focus on foreclosure mitigation in our next 
report. Through an examination of existing foreclosure mitigation 
efforts, our report will consider key areas including: the need for 
more detailed and comprehensive information about mortgage loan 
performance and loss mitigation; the primary drivers in loan default, 
including affordability, negative equity, and fraud; impediments to 
successful foreclosure mitigation; and existing foreclosure programs 
and alternative approaches. Dealing with the foreclosure crisis will 
help stabilize families and the economy.
    As I have noted throughout my testimony with regard to TARP, you 
can't manage what you can't measure--a philosophy that applies equally 
well to foreclosure mitigation. A notable dearth of comprehensive or 
even adequate information on loan performance and loss mitigation makes 
progress on this point challenging. Developing sound metrics will be a 
key component for progress in addressing the foreclosure crisis.
    I am aware that the Chairman and many Committee Members have voiced 
similar concerns with foreclosure prevention and loss mitigation, and I 
look forward to working closely with you as we issue our upcoming 
report.
    What have we learned thus far? In the rush to do something, it 
isn't always justified or wise simply to do anything. Especially with a 
program of this magnitude and importance, it is critical for Treasury 
to articulate clear objectives, develop a precise strategy for reaching 
those goals, and utilize specific methods to measure progress. Despite 
the rush to expand both the size and scope of TARP, Treasury must 
delineate these fundamental points which should have been spelled out 
at the very beginning of the program. Treasury must also expand its 
current focus to incorporate its foreclosure mandate.
    Thank you for the opportunity to testify today. I appreciate the 
chance to discuss the Congressional Oversight Panel's findings thus 
far, as well as my recommendations to improve the administration of 
TARP. I am especially pleased to be able to testify along with Special 
Inspector General Barofsky and Acting Comptroller General Dodaro. They 
have been excellent allies in the effort to provide comprehensive 
oversight of a large, complex program, and I believe it is noteworthy 
that our organizations have identified similar major concerns. I look 
forward to our continued cooperation, as well as working with this 
Committee to bring accountability to the TARP program.
    That concludes my testimony. I will be pleased to answer your 
questions.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
                      FROM GENE L. DODARO

Q.1. In your opinion, what has been the most successful aspect 
of the current TARP program? What has been the least successful 
aspect of the program? Are there certain areas or institutions 
you believe the Treasury should direct the second half of the 
TARP money?

A.1. In our oversight work, we have reported the difficulty of 
measuring the effect of TARP's activities and whether various 
aspects of TARP have been successful. For example, developments 
in the credit markets have generally been mixed since our 
January 2009 report. Some indicators revealed that the cost of 
credit has increased in interbank and corporate bond markets 
and decreased in mortgage markets, while perceptions of risk 
(as measured by premiums over Treasury securities) have 
declined in interbank and mortgage markets and risen in 
corporate debt markets. In addition, although Federal Reserve 
survey data suggest that lending standards remained tight, the 
largest Capital Purchase Program recipients extended almost 
$245 billion in new loans to consumers and businesses in both 
December 2008 and January 2009, according to the Treasury's new 
loan survey. However, attributing any of thesechanges directly 
to TARP continues to be problematic because of the range of 
actions that have been and are being taken to address the 
Current crisis.
    The least successful aspect of the program has been 
Treasury's reluctance to impose appropriate conditions on TARP 
recipients or to at least explain why it chose the limited 
conditions that it did impose. In our December 2008 and January 
2009 reports we made specific recommendations addressing 
Treasury's reluctance to require that institutions receiving 
Capital Purchase Program funds also provide information on how 
those funds are being used and have affected their lending. 
Fortunately, we have seen some progress in addressing our 
recommendations; Treasury has implemented a survey to collect 
such data. For example, it recently expanded monthly surveys of 
the largest institutions' lending activity to cover all Capital 
Purchase Program participants, as GAO recommended. These 
surveys should provide additional important information about 
how the capital investments are impacting participants' lending 
activities and capital levels; Actions such as these should 
help address at least some of the concerns expressed by the 
public and Congress regarding how taxpayer funds are being 
used.
    GAO is not in a position to make policy decisions such as 
how Treasury should use the second half of the TARP funds. 
However, as Treasury makes those policy decisions, we believe 
it would be prudent that Treasury also consider how to make 
sure those decisions are adequately communicated and 
transparent. Furthermore, similar to the recommendation we made 
related to the Capital Purchase Program and use of funds, 
Treasury could also consider methods to show how the use of the 
remaining funds will contribute to bringing stability to 
financial markets.

Q.2. The purpose of TARP was to restore the confidence and 
integrity of financial institutions. Four months later, there 
is still little confidence in financial institutions. What went 
wrong? What should be done with the last $350 billion to 
restore the confidence and integrity of these institutions?

A.2. The level of confidence in U.S. financial institutions 
stems from many issues--not all of which can be attributed to 
TARP. However, we have repeatedly reported Treasury's failure 
to adequately communicate to the public and Congress the 
rationale for Treasury's choices on how to use TARP funds, 
which we believe has contributed to the sense of frustration 
with the federal government's actions as well as the lack of 
confidence in financial institutions.
    In February 2009, Treasury announced its broad strategy for 
using the remaining TARP funds and provided the details for its 
major components in the following weeks. Specifically, Treasury 
announced the Financial Stability Plan, which outlined a 
comprehensive set of measures to help address the financial 
crisis and restore confidence in our financial markets, and a 
Homeowner Affordability and Stability Plan to mitigate 
foreclosures and preserve homeownership. While articulating its 
plan was an important first step, Treasury continues to 
struggle with developing an effective overall communication 
strategy that is integrated into TARP operations. Without such 
a strategy, Treasury may face challenges, should it need 
additional funding for the program. Therefore, in our March 
2009 report, we have recommended that Treasury develop a 
communication strategy that includes building an understanding 
of and support for the various components of the program. 
Specific actions could include hiring a communications officer, 
integrating communications into TARP operations, scheduling 
regular and ongoing contact with congressional committees and 
members, holding town hall meetings with the public across the 
country, establishing a counsel of advisors, and leveraging 
available technology.

Q.3. Is there anything that needs immediate congressional 
action to improve the transparency and accountability of the 
TARP program?

A.3. On May 20, 2009, the President signed Public Law 111-22, 
the Helping Families Save Their Homes Act of 2009. We 
appreciate the Banking Committee's efforts in helping to enact 
this important legislation which enhances GAO's ability to 
bring accountability and transparency to the TARP program. We 
will keep the Committee up to date in connection with our 
continuing oversight of the TARP program.

Q.4. The President and the Secretary of the Treasury announced 
new executive compensation rules yesterday. Do they go far 
enough? Is there more we should do to address the executive 
compensation issue?

A.4. Recent actions are a step in the right direction. The 
American Recovery and Reinvestment Act of 2009, or ARRA, was 
signed into law on February 17, 2009, and includes several 
restrictions on executive compensation and corporate governance 
that apply to recipients of funds under the Troubled Asset 
Relief Program, some of which are consistent with Treasury's 
guidelines. The executive compensation standards include 
restrictions on payment of golden parachutes; limitations on 
payment or accrual of bonuses, retention awards or incentive 
compensation; and limitations on tax deductions for 
compensation paid to certain executive officers. The new law 
also requires that the compensation of certain employees be 
limited to exclude incentives to take unnecessary and excessive 
risks that threaten the value of the institution. ARRA also 
requires recovery of any bonus, retention award or incentive 
compensation paid to certain employees if the compensation is 
based on materially inaccurate criteria. Certain corporate 
governance measures must be put into place, including a 
company-wide policy on excessive or luxury expenditures, and 
TARP recipients must also establish a Board Compensation 
Committee. In addition, TARP recipients must provide for a non-
binding shareholder vote on executive compensation. The 
Securities and Exchange Commission has issued guidance on this 
new requirement. Finally, the chief executive officer and the 
chief compliance officer of each recipient must provide a 
written certification that the institution has complied with 
all the executive compensation requirements in ARRA. Treasury 
is directed to issue regulations to implement the new executive 
compensation provisions.
                                ------                                


        RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
                     FROM NEIL M. BAROFSKY

Q.1. In your opinion what has been the most successful aspect 
of the current TARP program? What has been the least successful 
aspect of the program? Are there certain areas or institutions 
you believe the Treasury should direct the second half of the 
TARP money?

A.1. With respect to successful or unsuccessful aspects of 
TARP, TARP funds are being used, or have been announced to be 
used, in connection with 12 separate programs, most of which 
have not yet been implemented or have just begun. In light of 
how new most of those programs are, it is probably premature to 
project which will be the most or least successful of them. 
Moreover, determining success or failure depends in large part 
on how one measures success and might be very different if the 
focus is on whether avoiding bank failures is a key goal (an 
area that has seen some success at least thus far) or whether 
increased lending is the aim (where the jury is still out) or 
whether avoiding mortgage foreclosures or dealing with 
``toxic'' assets should be the focus (which are just starting 
to be addressed by Treasury).
    One way in which SIGTARP is examining these issues is to 
find out what TARP recipients are actually doing with the TARP 
funds. SIGTARP has surveyed 364 TARP recipients that had 
received TARP funds through January 31, 2009, and has asked 
them to describe their use or planned use of TARP funds. The 
results are being analyzed now and a preliminary report should 
be available later this spring.
    With respect to the second half of the funds, Treasury has 
announced, as of March 31, 2009, the parameters of how $590.4 
billion of the $700 billion of TARP funds will be spent. This 
includes, among other things, a commitment of TARP funds to a 
mortgage modification program and public-private partnerships 
to address the ``toxic'' assets. SIGTARP has already provided 
Treasury with significant recommendations concerning these 
programs and will be following their progress closely.

Q.2. The purpose of TARP was to restore the confidence and 
integrity of financial institutions. Four months later, there 
is still little confidence in financial institutions. What went 
wrong? What should be done with the last $350 Billion to 
restore the confidence and integrity of these institutions?

A.2. A lack of confidence can result from a lack of 
accountability and transparency; here, if the public does not 
know how TARP recipients are using taxpayer funds, it is not 
terribly surprising that the public could lose confidence in 
the program itself. Within two weeks of coming on board, I 
recommended to Treasury that all subsequent TARP programs 
require TARP recipients to account for their use of TARP funds. 
With the exception of the Citigroup and Bank of America 
transactions, Treasury has steadfastly refused to adopt this 
recommendation.
    It is this failing that caused SIGTARP to engage in its own 
use of funds survey, described above. While SIGTARP is in the 
very early stages of assessing the results of a survey it 
recently made of the first 364 TARP recipients concerning the 
use of TARP funds, our initial reading of the responses 
suggests the importance of those funds toward helping some 
banks strengthen their capital base by providing a foundation 
for lending activities; retiring debt, purchasing mortgage 
backed securities, increasing credit lines, making loans, etc. 
Some indicated that without the funds they would not have been 
able to fund as many loans as they had recently made or that 
future lending could have been curtailed. While we need to 
fully evaluate all of the responses before giving a detailed 
analysis of the results, early indications are that the funds 
had a significant impact on TARP recipients. Perhaps these 
results will serve to begin to restore the lost confidence.

Q.3. Is there anything that needs immediate congressional 
action to improve the transparency and accountability of the 
TARP program?

A.3. Treasury itself, of course, has certain disclosure 
requirements as set forth in the Emergency Economic 
Stabilization Act of 2008. SIGTARP, for its part, is committed 
to promoting transparency and accountability in the TARP 
program, both by recommending that Treasury be as transparent 
as possible and by undertaking audits and disclosing data 
itself as necessary and appropriate. At this point, I believe 
that SIGTARP has all of the tools and authorities it needs to 
fulfill this important task.

Q.4. The President and the Secretary of the Treasury announced 
new executive compensation rules yesterday. Do they go far 
enough? Is there more we should do to address the executive 
compensation issue?

A.4. Subsequent to the announcement referenced in the question, 
the Congress significantly amended the statutory framework on 
this issue with the passage of the American Recovery and 
Reinvestment Act (``ARRA''), which replaced EESA's executive 
compensation provision. We have been told by Treasury that a 
regulation effecting ARRA's provisions will be forthcoming 
shortly. SIGTARP will examine that regulation once it is 
available and make recommendations as appropriate.
                                ------                                


        RESPONSE TO WRITTEN QUESTIONS OF SENATOR JOHNSON
                     FROM ELIZABETH WARREN

Q.1. In your opinion, what has been the most successful aspect 
of the current TARP program? What has been the least successful 
aspect of the program? Are there certain areas or institutions 
you believe the Treasury should direct the second half of the 
TARP money?

A.1. In a crisis, transparency, accountability, and a coherent 
plan with dearly delineated goals are essential to maintain the 
confidence of the public and the public and capital markets. 
Sophisticated metrics to measure the success and failure of 
program initiatives are critical. In the Panel's first report, 
we asked: ``What specific metrics can Treasury cite to show the 
effects of the $250 billion spent thus far on financial 
markets, on credit availability, or, most importantly, on the 
economy?'' Five months after that first report, the question of 
metrics remains paramount: how can we know if Treasury's 
strategy is having a tangible effect? What metrics exist to 
allow such a determination to be made? Treasury has taken steps 
to increase its reporting, but much more needs to be done in 
order to judge decisions made to date and to guide future 
actions.
    In the Panel's February report, ``Valuing Treasury's 
Acquisitions,'' we asked the question: Is the Public Receiving 
a Fair Deal? After reviewing the top ten TARP transactions, the 
report found every time Treasury spent $100, it took back 
assets that were worth, on average, $66.
    Treasury has already committed $590 billion of the $700 
billion under TARP for current and existing programs. Treasury 
has actually spent a little over $300 billion. Our May report 
will focus on the question of small business and consumer 
lending. Has TARP helped increase lending to consumers and 
small businesses? Answering this question is essential to 
figuring out how Treasury should direct the flow of TARP funds 
going forward. Once our study is complete, I will be more than 
happy to provide you with the results.

Q.2. The purpose of TARP was to restore the confidence and 
integrity of financial institutions. Four months later, there 
is still little confidence in financial institutions. What went 
wrong? What should be done with the last $350 billion to 
restore confidence and integrity of those institutions?

A.2. In assessing what went wrong and what should be done under 
TARP, Treasury must do a better job of implementing four 
critical elements: transparency, assertiveness, accountability, 
and clarity. This is a must in restoring confidence and 
integrity. With respect to transparency, Treasury must take 
swift action to ensure the integrity of bank accounting, 
particularly with respect to the ability of regulators and 
investors to ascertain the value of bank assets and hence 
assess bank solvency. With respect to assertiveness, Treasury 
must take aggressive action to address failing financial 
institutions by (1) taking early aggressive action to improve 
capital ratios of banks that can be rescued, and (2) shutting 
down those banks that are irreparably insolvent. With respect 
to accountability, Treasury must hold management accountable by 
replacing--and, in cases of criminal conduct, prosecuting--
failed managers. Finally, with respect to clarity, Treasury 
must be forthright with measurement and reporting of all forms 
of assistance being provided and clearly explained criteria 
that explains how public funds are being used.

Q.3. Is there anything that needs immediate congressional 
action to improve the transparency and accountability of the 
TARP program?

A.3. At the moment, we are not asking for any additional 
authority.

Q.4. The President and the Secretary of the Treasury announced 
new executive compensation rules yesterday. Do they go far 
enough? Is there more we should do to address the executive 
compensation issue?

A.4. Treasury's guidelines were a good start, but more can be 
done. Transparency, accountability, and a clear articulation of 
what the goals are is crucial. On the issue of holding 
management accountable has not been clear. While action was 
taken with respect to the management of some of the auto 
companies that have received TARP funds, Treasury has been 
resistant to take similar action with respect to the management 
of banks that have received TARP funds. Treasury must 
articulate its strategy and it must be clear. To date, this has 
not been the case.

Q.5. There is pressure to move quickly and reform our financial 
regulatory structure. What areas should we address in the near 
future and which areas should we set aside until we realize the 
full cost of the economic fallout we are currently 
experiencing?

A.5. The Panel issued its report on regulatory reform in 
January. The sooner all of these issues are addressed, the 
better. Ultimately, the Congress will determine a course of 
action and the timing of such action. In providing an 
assessment, the Panel's January report specifically points to 
three areas of regulation that could have prevented the current 
economic crisis: basic consumer protection rules, supervision 
of credit rating agencies, and regulation of companies that are 
``too big to fail.'' Our report outlines eight areas how ``we 
can do better'' in order to prevent future crises.

  1.  Better regulation of the way loans are made to consumers;

  2.  Serious regulation of credit rating agencies;

  3.  Better management in dealing with ``too-big-to-fail'' 
        companies;

  4.  Identifying and regulating financial institutions that 
        pose systemic risk;

  5.  Increasing supervision of derivatives and off-balance 
        sheet entities that have created a shadow financial 
        system;

  6.  Changing executive pay structures to discourage excessive 
        risk-taking;

  7.  Working with other countries to establish basic rules 
        that will apply to companies doing business around the 
        globe;

  8.  Planning now for the next crisis.

Q.6. In the Congressional Oversight Panel's regulatory reform 
report you outline the need for a systemic risk regulator and 
other regulatory reforms. Much of the interest in the 
possibility of establishing a systemic risk regulator is in 
response to the collapse of AIG, an insurance company. Why were 
no recommendations made regarding the need to modernize the 
regulation of insurance?

A.6. The Panel's regulatory report provides a balanced 
discussion regarding insurance regulation and cites the 
numerous studies that have examined the issue. The Panel could 
not agree upon a consensus recommendation, so one was not 
included.
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