[Senate Hearing 111-52]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 111-52




                               before the

                              COMMITTEE ON
                          UNITED STATES SENATE


                             FIRST SESSION




                           FEBRUARY 10, 2009


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               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

                 Colin McGinnis, Acting Staff Director

              William D. Duhnke, Republican Staff Director

                       Amy Friend, Chief Counsel

                      Aaron Klein, Chief Economist

                Brian Filipowich, Legislative Assistant

                   Dean V. Shahinian, Senior Counsel

               Jonathan Miller, Professional Staff Member

                Julie Chon, Senior International Adviser

                         Deborah Katz, Detailee

                  Mark F. Oesterle, Republican Counsel

                    Andrew Olmem, Republican Counsel

                   Hester Peirce, Republican Counsel

                    Jim Johnson, Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor


                            C O N T E N T S


                       TUESDAY, FEBRUARY 10, 2009


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

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Johnson
        Prepared statement.......................................    68
    Senator Bennett
        Prepared statement.......................................    68


Timothy F. Geithner, Secretary, Department of the Treasury.......     6
    Prepared statement...........................................    69
    Response to written questions of:
        Senator Crapo............................................    75
        Senator Warner...........................................    76




                       TUESDAY, FEBRUARY 10, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 2:36 p.m., in room SD-106, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.


    Chairman Dodd. Now we will go to the subject matter before 
the Committee, and let me again thank our witness, the 
Secretary of the Treasury, who is here today. This was a busy 
day, obviously, with the announcement this morning and your 
participation here this afternoon to discuss what is obviously 
the most critical question that all of us are wrestling with. 
Obviously, the stimulus package is tremendously important as 
well, but the frozen credit markets is really the second shoe 
in all of this, and how we deal with that is essential to all 
of us here.
    Last week, the Senate Banking Committee--and, by the way, 
let me just say to my colleagues, what I would like to do is I 
will make some opening comments, turn to Senator Shelby, and 
then normally I would ask everybody else for any opening 
comments you want to make, but that could take us an hour or an 
hour and a half before hearing from the witness. And so, with 
your indulgence, I will go right to the witness, and then ask 
you during your comments--and I will provide the time. I would 
like to keep us to 5 or 6 minutes per questioning round because 
we have so many members here. But all your comments and 
supporting documents and other things you think are important 
will be included in the record. Consider that done, so you do 
not have to make the request for it to occur.
    Last week, as I said a moment ago, the Senate Banking 
Committee held a hearing about how the Troubled Asset Relief 
Program, or the so-called TARP program, was implemented by the 
previous administration. At that hearing, I stated that if ever 
there were a program in need of a sign in front of it that read 
``Under New Management,'' it was this one. Today we have that 
new management before us to explain a broader mission, what 
their plan is for putting our country back on a sound economic 
footing going forward.
    Just this morning, as I mentioned a moment ago, we heard 
from our new Treasury Secretary, and I am pleased he is before 
us this afternoon to further articulate the administration's 
plan to members of this Committee and through us to the 
American people.
    This moment is unlike any other that we have experienced in 
decades. It is a moment of maximum peril, fraught with fear and 
uncertainty for our economy and our country. Americans are 
desperate for leadership, for clear direction, and a way 
forward as they try to live their lives and provide for their 
    The facts just stare us in the face. They are glaring. 
Roughly 10,000 families receive foreclosure notices each and 
every day in our country and experience the anxiety of possibly 
losing their homes. Another 19,000 to 20,000 of our fellow 
citizens are losing their jobs every single day, the source of 
their livelihoods. Countless more watch their hard-earned 
retirement savings, responsibly invested over a lifetime, 
evaporate in almost an instance.
    Put simply, our economy is withering, and the confidence of 
the American people is at a record low. This past November, the 
American people made a choice. They wanted a fresh new start 
for our Nation and for our economy. This Committee is going to 
play a very important role in addressing this crisis, and I 
have no doubt that history will judge on how we act. This is 
not a time, in my view, to stand in the way of potential 
solutions but, rather to offer ideas, suggestions, constructive 
criticism, as I am sure my colleagues will, on how we can make 
these efforts work better and achieve the results the American 
people want and that I would argue that each and every one of 
in this Committee seeks.
    Today, Mr. Secretary, I hope you will share with us the 
administration's plans to lead our Nation out of this recession 
and begin to replace the fear of this moment with the optimism 
for our collective futures. I believe it begins with 
articulating a clear, comprehensive plan for stabilizing the 
financial system upon which our economy relies, a plan that 
ensures homeowners and consumers are treated not as second-
class citizens but, rather, as the engine of American 
prosperity that they have been throughout out history. 
Homeowners and consumers must no longer be our last 
consideration. They should be our first.
    With the Emergency Economic Stabilization Act, Congress 
provided the Treasury Department with the tools necessary, I 
believe, to address the crisis, and because of the work of this 
Committee, we have identified very clearly where the previous 
administration fell short, far short of what this body clearly 
articulated last October.
    Mr. Secretary, what is needed now is credit, confidence, 
and clarity, the so-called three C's as they have been called. 
The Federal Reserve's recent survey of lenders showed that more 
than half of these lending institutions had tightened lending 
standards even on loans to borrowers with strong credit. 
Meanwhile, foreclosure filings continue to skyrocket.
    Let me pause here for 1 second as well. I met yesterday 
with community bankers in North Carolina. I happened to be 
speaking down there at an event for Jim Hunt. I met with my 
community bankers. I know my colleagues have. And they rightly 
raise the issue that we talk about banks and how banks are 
performing. At the community level, many are doing a very fine 
job. In fact, we had record results on residential mortgages in 
the month of December. At least in Connecticut they did. So 
when we talk about banks, we ought to be careful about the 
pejoratives that we talk about when many at a certain level are 
functioning, doing a good job, and I want at this moment to 
reflect that concern because I think it is a legitimate one.
    Last week, to go further, the Senate passed an amendment 
that I and Senator Mel Martinez, my friend from Florida, and 
others offered to the economic stimulus package that requires 
at least $50 billion of funded provided under the TARP program 
be used to prevent home foreclosures. Let me also commend 
Senator Martinez because he added language there to deal with 
servicers that we also think will make a major contribution 
toward relieving the pressure of the foreclosure crisis.
    I want to commend the Secretary for recognizing the need to 
provide immediate results for homeowners. But the banks also 
need to do their part as well so that families can access the 
credit they need to pay for a home, a car, a college education 
for their children, and businesses can stock inventory and meet 
    In addition to credit comes confidence, the second of these 
words. Rather than increasing confidence in the banking system, 
the piecemeal, lurching interventions of the previous 
administration scared away private sources of capital needed to 
plug the growing hole on bank balance sheets. Estimates of 
credit losses in our banking system have grown from $1 trillion 
in September to as much as $2 trillion today. That needs to 
change, and it will, in my view, with a clearly articulated 
plan for the prudent commitment of these funds and with a focus 
for how these funds, and the recipients of them, on lending and 
on tough new rules prohibiting the kind of spa trips and 
bonuses on the taxpayer dime that have outraged the public in 
recent months. I am also pleased that the U.S. Senate has 
adopted an amendment that we offered to build on the 
administration's new restrictions on executive compensation.
    And, finally, we need clarity for taxpayers and investors 
who want to know where our economy is headed and how our 
Government assistance will be used. For months into this 
program, many taxpayers and investors alike are confused and 
afraid about what the future holds. The public simply has no 
understanding yet of how Government assistance will help, if at 
all, and many are worried that massive Government investments 
will be wasted or misused. This lack of understanding creates a 
vicious cycle, further discouraging consumers and businesses 
from making the kinds of decisions that could get our economy 
moving again, as it must. They are staying on the sidelines 
until they get assurances that it is safe to bank on the U.S. 
    And so, Mr. Secretary, this hearing is an important 
opportunity to expand on the vision you laid out earlier today 
and to reassure the American people that their money is in good 
hands in this administration and for those of us on this side 
of the dais who are responsible for working with you.
    As a young man who had Latin in high school, I am reminded 
that the word ``credit,'' after all, is derived from the Latin 
word ``credere,'' which means ``to believe.'' When I go home to 
Connecticut, my constituents, as I am sure my colleagues here 
will repeat, are asking all of us about asset pricing--they are 
not asking us, rather, about asset pricing techniques or 
structuring bank recapitalization. They are frustrated that 
even as we spend billions of their money, they have yet to see 
the results. They remind me we cannot restore the credibility 
of our financial institutions and put our economy back on track 
until we restore the credibility of the Government's response.
    And so this is a very important opportunity and an 
important moment, maybe the most important those of us ever 
will serve during our tenure in this Congress, to not only 
revive our faltering economy but also the hope and faith of the 
American people. They are depending upon us right now and the 
decisions we make in the coming days. This is our challenge 
today. Americans want the plan to work. My colleagues want it 
to work. I believe all of us do. And I welcome a full and frank 
exchange of ideas with them and with you and members of the 
administration and others. And if on review of the plans we 
need to press for more or different conditions and Government 
funding, we will not hesitate to do so.
    With that, I would turn to the Ranking Member, Senator 
Shelby of Alabama.


    Senator Shelby. Thank you, Mr. Chairman. Secretary 
Geithner, welcome, again, to the Committee. I expect we will 
see a lot of you in this Committee in the next month or year.
    Since the Troubled Asset Relief Program was established by 
Congress last October, the program has failed, Mr. Secretary, 
to mend our ailing financial system, despite having spent 
nearly $350 billion in taxpayers' money. TARP has been marred 
by lack of initial planning and ad hoc implementation and a 
flawed premise. Most troubling has been the lack of candor 
about the administration of TARP by the administration.
    When TARP was under consideration by Congress, the Bush 
administration and the Fed, where Secretary Geithner was then 
President of the New York Fed, told us that the best way to fix 
the financial crisis was to use TARP funds to buy illiquid 
assets from banks. Only a few weeks, as we all know, after 
Congress created TARP, however, the Treasury Department 
abandoned this plan because it suddenly decided that such 
purchases would not be ``the most effective use'' of TARP 
funds. Instead, Treasury decided to use TARP to inject capital 
directly into banks.
    Although Treasury, headed by Secretary Paulson then in the 
Bush administration, said that only ``healthy banks''--healthy 
banks, Mr. Secretary--would receive funds under TARP's Capital 
Purchase Program, we now know that a substantial amount of that 
money went to propping up failing institutions.
    Just weeks after Treasury purchased shares in Citigroup and 
Bank of America, Treasury and the New York Fed, which you were 
head of then, had to inject more than $40 billion more into 
these institutions to rescue them from mounting losses on 
mortgage-backed securities. Yes, and what have taxpayers 
received for their money? Not much.
    The financial system remains badly damaged, and the economy 
has deteriorated sharply as it has become clear that TARP is 
not the magic bullet its supporters, Mr. Secretary, claimed it 
would be. Today the Banking Committee will hear from you and 
your plans for reforming TARP. I hope they are not more of the 
same. I hope you are smarter than that.
    As we examine your plan, I believe we need to make sure 
that it is thoroughly thought through, focused on details, and 
seeks to anticipate unintended consequences, which are out 
there. It should provide, I believe, a clear, comprehensive 
solution for restoring the health of our financial system 
without, Mr. Secretary, insulating market participants from the 
consequences of their actions.
    It should, I believe, also be coordinated with other 
ongoing efforts to resurrect the economy. In particular, Mr. 
Secretary, I believe you should explain how this plan for 
reviving the financial system relates to the stimulus bill now 
moving through Congress, if it relates at all.
    In light of the recent tendency for Treasury and our 
regulators to say one thing and then do another when it comes 
to administering TARP, I expect your statements to this 
Committee about the plans for TARP to match your future 
actions. Otherwise, you will have no credibility before this 
Committee and, more than that, before the American people.
    If circumstances change, I believe you should come back 
before the Committee to explain in detail to this Committee--
and, of course, at the same time, the American people--the 
reasons for the needed changes, if any. Because, Mr. Secretary, 
you were President of the New York Fed during the past 5 years 
and reportedly took an active role in the creation and the 
implementation of TARP, I also hope to hear the explanation for 
both the failures of TARP to date and the oversight lapses that 
helped create the financial crisis in the first place. I have 
said here before that we have got to find out what caused all 
the problem before we try to really fix it. There are a lot of 
opinions out there, but to date, we have not built the record 
for it.
    I believe it is unfortunate that we did not have you, 
Secretary Geithner, before the Committee while you were head of 
the New York Fed to discuss these issues. But where are where 
we are. In our consideration of this latest effort to address 
the financial crisis that you have proposed, I believe the 
Committee should be careful not to repeat our mistakes with 
TARP, not to believe everything blindly. The original TARP 
legislation I believe was not well thought out and was not 
properly considered by Congress. The initial TARP legislation I 
believe was a ridiculous two and a half pages long. Although 
Congress eventually tacked on several hundred additional pages, 
it did not alter in the least the core of the plan crafted by 
the Bush administration, Paulson, and perhaps even you.
    Instead, Congress hastily passed the TARP without taking 
the time to consider the alternatives. This Committee never 
even held a hearing to give critics of the plan a chance to 
share their views, to analyze what was going on. While 
supporters of the plan claimed that our financial markets would 
have collapsed had Congress not quickly passed TARP, recent 
research suggests that the financial crisis dramatically 
worsened as Congress panicked and market participants began to 
realize that the plan was not thought through.
    I believe that this Committee has a responsibility to take 
the time to fully consider, Mr. Secretary, your plan, including 
hearing alternative views. We should not stifle debate on a 
matter of this importance. We should not go down that road 
    Given the complexities of the issues involved, we need to 
hear from experts with diverse viewpoints on the record--of 
course, including you--so that we can learn the strengths and 
the weaknesses of your plan. We should not, Mr. Secretary, 
bless your plan today unless we know it is the right plan. And 
a lot of us are very, very skeptical.
    Since the financial crisis started a year and a half ago, 
Congress has largely been on the sidelines. It has deferred to 
the executive under the Bush administration Secretary and to 
the Federal Reserve to solve this crisis. But you have not 
solved it. The Fed has not solved it, and the former Secretary 
certainly did not.
    Congress and this Committee have important roles to play, 
as Senator Dodd has laid out, in addressing the crisis, 
starting with building a consensus on what caused it and how we 
should fix it. I believe the absence of meaningful 
congressional involvement in crafting the original TARP plan 
will be viewed historically as a critical error that helped 
produce a flawed program and undermined public confidence in 
Washington's ability to tackle the economic challenges facing 
this country. Our economy and the markets would have been 
better served, I believe, had we taken time to make sure that 
the TARP legislation effectively, Mr. Secretary, addressed the 
problems created by the financial crisis. But we did not.
    As we consider your plan today, Secretary Geithner, I hope 
we can learn from our past mistakes with respect to TARP so 
that we can finally craft a solution that will help bring an 
end to the financial crisis. If we do not, we are in deep 
    Thank you.
    Chairman Dodd. Mr. Secretary, welcome. I know this is your 
first hearing as Secretary of the Treasury. We congratulate you 
and thank you for taking on the tremendous responsibility 
associated with this job at this hour and time. I know all of 
us, I suspect all of us are very grateful to you for your 
willingness to do that.
    So, with that, the floor is yours. Any additional 
documentation or supporting material you would like to include 
in the record, we will certainly make that happen.


    Secretary Geithner. Thank you very much, Chairman Dodd and 
Ranking Member Shelby and Members of the Committee. It is a 
privilege for me to be with you today.
    I laid out today a detailed set of observations, Mr. 
Senator, about what caused this crisis, and I went through a 
series of what I believe are legitimate criticisms about the 
actions of the Government to date which have failed arrest this 
crisis and in some ways may have made it worse. But today what 
I want to do is just to lay out the broad outlines of the basic 
goals and strategies we think are going to be necessary to help 
solve this crisis, and today I am beginning the important 
process of consultation with this Committee and Member of the 
Congress on the types of strategies and policies we think are 
necessary going forward. I take that process very seriously, 
and I look forward to working with you and your colleagues on 
both sides of the aisle so that we can bring the best ideas and 
best strategies and sufficient resources to try to solve this 
    Senators, our economy is facing enormous challenges, and 
our financial system, although parts of it are working well and 
parts of it are strong, our financial system is damaged in very 
important respects. Today the financial system is working 
against recovery, and if we do not act forcefully to try to 
address these challenges in the financial system, then the 
economic recovery act will be less effective and we will be 
living with a deeper, longer recession that is going to cause 
more damage to the lives and hopes of Americans.
    We have seen job losses accelerating, and we have seen 
credit slow in parts of the economy where it is going to most 
critical to recovery. And on top of this, and on top of these 
very deep, troubling financial challenges, economic challenges, 
we have seen a deep loss of faith by the American people in the 
quality of judgments of those who are running our largest 
financial institutions and a deep skepticism about whether the 
Government is using their taxpayer resources wisely and 
carefully in ways that benefit them.
    If we work together, we can change that, and we have to 
change it, because the confidence of the American people and of 
the Congress is going to be absolutely central to any 
successful program to help address these challenges in the 
financial system.
    To get credit flowing again and to restore confidence in 
markets, we have proposed a fundamental reshaping of the 
Government's program to repair the financial system. This 
begins with transparency, accountability, and oversight. We 
propose to establish a new framework of oversight and 
governance that will govern all aspects of our financial 
stability programs. The American people will be able to see 
where their tax dollars are going and the return on the 
Government's investment. They will be able to see whether the 
conditions we place on banks are being met and enforced. They 
will be able to see whether the boards of directors of 
institutions receiving assistance are being responsible and 
careful with taxpayer dollars and how they are compensating 
their senior executives. And they will be able to see how these 
actions are impacting the overall flow of lending and credit in 
our economy.
    We are going to put these new requirements on a Web site 
called FinancialStability.gov that will give the American 
people the transparency they want to see.
    We have already taken some important actions in this 
direction. We have laid out reforms to the process by which 
banks get assistance to make sure there is integrity and 
independence and those judgments are made independent of 
lobbying or political influence. We have taken steps that 
commit to put the detailed terms of the contracts which govern 
our assistance on the Web site so that people can see exactly 
the conditions that come with our assistance. And we have laid 
out some very important conditions and reforms to the entire 
structure of executive compensation not just for institutions 
receiving assistance but so that we bring about a fundamental 
change in the overall compensation structure in our financial 
system so that we never again face a crisis of this magnitude.
    Now, alongside these changes to transparency and oversight, 
we have laid out today three important new programs that are 
going to be designed to get credit flowing again to where it is 
needed most.
    First, as part of this process, we are going to bring 
together the Government agencies with authority over our 
Nation's largest banks and initiate a more consistent, 
realistic, forward-looking assessment about the risks on their 
balance sheets. This is a financial stress test, to use the 
medical analogy. We want to get bank balance sheets cleaner and 
stronger, and we are going to help facilitate this process by 
putting out a new program of capital support for those 
institutions that need it.
    These institutions, again, that need additional capital 
will be able to access a new mechanism that uses money from the 
Treasury as they bridge to private capital. The capital will 
come with conditions to help ensure that every dollar of 
assistance is used to generate a level of lending that is 
greater than what would have been possible in the absence of 
Government support.
    Alongside this capital program, working with the Federal 
Reserve and the FDIC, we are going to establish what we call a 
new Public-Private Investment Fund. This program will be 
designed to provide Government capital and Government financing 
to help leverage private capital, to help get these markets 
that are frozen working again. This fund will be targeted to 
the loans and assets that are now burdening our financial 
system. By providing the financing private markets cannot now 
provide, we hope to help restart these markets for the real 
estate-related assets that are at the center of this crisis. 
Our objective, again, is to use private capital and private 
asset managers to help provide a market mechanism to solve this 
enormously complicated problem of how to value these assets.
    We are exploring a range of different structures for this 
program, and we will seek input from this Committee and from 
your colleagues as we design it going forward.
    The third element of this program, we are working jointly 
with the Federal Reserve to substantially expand an important 
program of support for consumer and business lending. This 
initiative will help kick-start the secondary lending markets 
to bring down borrowing costs in those markets and, again, help 
get credit flowing again.
    In our system, historically almost half of consumer lending 
has been done through a mechanism in which people buy loans, 
put them together and sell them. But because this vital source 
of finance and capital is now frozen, no recovery plan will be 
successful unless it helps restart the securitization markets 
for sound loans made to businesses and consumers.
    This program will be built on a program designed by the 
Federal Reserve that is called the ``Term Asset-Backed 
Securities Lending Facility'' that was announced last November, 
and, again, it will combine capital from the Treasury with 
lending capacity from the Federal Reserve.
    Alongside this, because small businesses play such a 
critical role in our economy, we are going to take some 
additional steps and announce them in the coming weeks to make 
it easier for small businesses to get credit from community 
banks and large banks and to try to make the Small Business 
Administration's programs more effective in this very 
challenging economic environment.
    Now, alongside these steps, we are going to launch a 
comprehensive housing program. The President has asked his 
economic team to come together and put together a comprehensive 
plan that is going to help bring interest rates down, bring 
mortgage payments down, help avoid foreclosures that are 
avoidable, and help avoid the risk that this crisis continues 
to intensify. Again, our focus is going to be in using the full 
resources of the government to help prevent those foreclosures 
that we can prevent, to reduce mortgage interest rates, and 
reduce the avoidable deterioration--reduce the risk that this 
crisis intensifies going forward.
    Now, we are beginning the process today of consulting on 
these broad programs, but I want to emphasize that even as we 
move to try to solve this financial crisis, the President of 
the United States is committed to working with this committee 
to begin the important process of pursuing fundamental reform 
of our financial system. We look forward to working with you 
and your colleagues on how best to do that. We started a 
process with the President's Working Group on Financial Markets 
to ask them to come up with detailed recommendations on the 
things we can do without legislation, but we are going to be 
coming to you with proposals for broad--for the changes that 
are going to require legislation. That is going to be a 
complicated, difficult process. We are going to want to get it 
right. We have a huge obligation to the American people and to 
the world to fundamentally change and address the weaknesses in 
our system that helped contribute to this crisis.
    I want to close by saying that the financial crises we face 
today are more challenging than anything our system has faced 
in the past. It is going to require new programs. It is going 
to require that we do extraordinary things. But we are 
committed to working with you to solve this problem and we need 
to make sure that the American people understand we are going 
to keep at it until we fix it.
    Thank you, and I look forward to your questions. Again, I 
would be happy to respond to any questions that you have raised 
about how we got here, the mistakes that have been made with 
the programs designed so far, and answer any detailed 
questions--any questions you may have about how we go forward.
    Chairman Dodd. Well, thank you, Mr. Secretary. Let me just 
say in response to that, and I obviously disagree about this, 
but I, for one, think it is very important obviously we know 
how we got here and we need to pay attention to that and we are 
going to try and do that in the process as we move forward of 
this committee.
    But let me also suggest to you, at least from my 
perspective, I happen to believe as between the choices of 
spending our time on going back and reviewing how we got here 
and the question of how do we get out of this, I don't have any 
question in my mind which is the more important issue for the 
American people. Clearly, they may want to know how we got 
here, and that is important, but that person who lost their job 
today or their home or will tomorrow wants to know what we are 
going to do to get them back on their feet again. And so from 
my perspective, that is the more important issue for this 
committee and for the administration.
    Obviously, it is going to be very important, Mr. Secretary, 
we have more details than we have received on this. I realize 
you are only into office for 21 days, not even a month yet. 
Twenty-one days ago today, in fact, the President was 
inaugurated as the 44th President of the United States. And so 
I say to my colleagues and friends to be realistic, as well, 
about the ability within 21 days to put together a package here 
that will allow us to move forward, given the problems that we 
are confronting.
    But I think it is going to be very important, Mr. 
Secretary, both in settings such as this and also in more 
informal settings that my colleagues and your staff and others 
be available to sit and work together. I don't expect there 
will be a Congressional hearing every week on the subject 
matter, but I would expect that there be close consultation and 
involvement with members of this committee and their staffs and 
others as we go forward very quickly to develop the details of 
what you are suggesting. And so I would recommend or suggest 
that you are going to hear concerns about the absence of 
specific details in terms of how this is going to work and it 
will be very important we get a sense of cooperation on that.
    I wonder if you might step back, because one of the 
problems I think all of us have recognized is the lack of a 
framework in all of this and the analogies to be drawn as to 
what is your goal. What is the intention? What is the purpose 
of all of this in terms of what we are trying to achieve? We 
are talking in denominations that are daunting, ones that we 
have never talked about ever before. And so the magnitude of 
the request is overwhelming in many ways. Therefore, in the 
absence of connecting the dots between the magnitude of the ask 
and the ability to actually affect those 10,000 people today 
losing their homes, the 20,000 losing their jobs, what is the 
framework, what is the purpose here, and what do you hope to 
attain in terms of those individuals out there or those who 
will face the same considerations or the same problems they are 
    Secretary Geithner. A thoughtful question and the important 
place to start here. We have an enormously complicated 
financial system. It depends not just on banks, but it depends 
on a complicated process of markets. Right now, we have banks 
who are not part of the problem and are likely to be able to be 
part of the solution who are growing and expanding lending, but 
we have parts of our banking system which is pulling back and 
cutting back the supply of loans and credit they provide 
businesses and families across the country.
    In addition to that, this market mechanism that is central 
to the flows of credit is just not functioning, and it is not 
functioning in part because of acute uncertainty about the 
depths and duration of this recession, about the scale of 
losses that will come, and it is not functioning in part 
because there is not enough financing in the markets willing to 
come in and help restart those markets.
    We are going to try to address both those two things. We 
can't do it without very substantial support with a powerful 
economic recovery investment program that is going to help save 
or create substantial jobs, help stimulate private investment. 
That is a necessary, absolutely central condition. We can't 
help fix the financial system without trying to address the 
housing crisis. We need to move on all these three fronts 
together, and with the benefit of hindsight, it is absolutely 
true that one reason why this crisis is so damaging and has 
become so acute is because we did not move soon enough to 
recognize the scale of the risk this country faced and put 
together a comprehensive program.
    And again, without very substantial support from the 
government to help get people back to work and support private 
investment, without a comprehensive housing strategy, and 
without direct substantial sustained commitment to strengthen 
our banking institutions that need assistance, and without 
providing support to these capital markets, we are going to 
live with a deeper, longer recession.
    You are absolutely right that the numbers involved are 
large. But the basic lesson of financial crises is that the 
actions we take have to be commensurate with the scale of the 
problems we face and this is a very complicated, very 
challenging set of problems.
    So our basic judgment is, it is going to be ultimately more 
effective, cheaper for the taxpayer. We are going to have less 
damage to our productive capacity as a country if we move more 
aggressively now with a very substantial program of support.
    Chairman Dodd. Let me quickly, with the time, just a minute 
or so remaining here, but the fourth point is on the 
foreclosure issue. For whatever it is worth, I would have made 
that my first point, because in a way, I happen to believe--I 
don't know whether you do or not, I will ask the question--that 
the failure to address the mortgage, the residential mortgage 
crisis 2 years ago when it first really--although it even 
blossomed before then. Senator Bunning and others actually, I 
think in December or November of 2006, actually had some 
hearings on the residential mortgage issue. We had 2 years ago 
this month, in fact, our first hearings on the residential 
mortgage crisis.
    And to me, while we are talking about capital infusions or 
purchasing toxic instruments or legacy instruments, whatever 
you are calling them here, I understand that. But that person 
on the street, what is going to happen at home? So I am going 
to talk about some $50 billion. The Congress adopted a measure 
that I mentioned that Senator Martinez and I included, among 
other things, of a commitment of some $50 billion out of these 
TARP resources that you have toward mitigating the foreclosure 
crisis. Are you prepared to do that in excess of $50 billion? 
Tell us specifically what you have in mind on the mitigation of 
    Secretary Geithner. Absolutely. We are committed to use a 
substantial part of, at least $50 billion of the resources 
authorized by Congress to support a set of programs, again, to 
help get mortgage payments down where it is appropriate to do 
that, to help people refinance and stay in their homes, and 
again, to try to get broader interest rates down. We are 
committed to do that, and as I said, the President wants to 
outline as quickly--relatively quickly the full, comprehensive 
measures that we think will be important to do that. That will 
be part of it, but we are going to do some other things, too.
    Chairman Dodd. I thank you.
    Senator Shelby.
    Senator Shelby. Thank you.
    Mr. Secretary, just as Secretary Paulson's Treasury when he 
was here came to Congress with a broad concept that had not 
been fleshed out with practical details, it appears here that 
your plan is offering only at this point a conceptual plan, 
with many details yet to be filled in. It is hard to test the 
merits of a plan that is not spelled out, as you well know. As 
economist Simon Johnson said, and I will quote him, ``If the 
headline amounts are vague, or we hear statements such as, `It 
is too early to know,' then the entire approach is not credible 
and we will need to reconvene when the Treasury is properly 
prepared and ready for serious discussion,'' you know, detailed 
    Is there a concrete plan here, and if so, how do we assess 
it? We need to see, this Banking Committee and the American 
people, the operation details, a precise breakdown of funding 
needs, and proposed legislative changes, Mr. Secretary. If all 
you have at this point is the broad outlines of a plan, then 
this committee will need to have another hearing, or several, 
once you are prepared to offer concrete details. Maybe we are 
going to do this. If aggravating economic problems by 
contributing to the marketplace uncertainty about what steps 
the government will take, is this what this is? I hope not.
    Mr. Secretary, what is different about the process that you 
are offering here to devise your plan such that we should have 
confidence that it is well thought out and will be effective? 
An essential detail of any plan should be its cost. Only people 
who are spending other people's money devise a plan without 
having good estimates on how much it will cost and what it will 
do. And will your pledge to provide the committee, Mr. 
Secretary, with a new report discussing in detail this plan--in 
other words, I think we need more information. Where do you 
stand on this.
    Secretary Geithner. Senator----
    Senator Shelby. I see the conceptual idea, but I don't see 
the details yet.
    Secretary Geithner. Senator, you are right that what we did 
today was lay out the broad architecture of the programs we 
think are necessary to help solve this thing. And we are going 
to be very careful to flesh out the details and design of these 
things in ways that protect the taxpayer and get the maximum 
potential benefit for the resources we are going to spend. And 
we are beginning the process of consultation with you today. I 
look forward to it. We will take that very seriously, and we 
will lay out the details for you that meet the tests that you 
will establish, as you said, high conditions for us, high 
standards for us, on a level of detail that allows you to 
evaluate the merits. I am completely committed to that 
completely committed to that.
    Now, can I say something about cost.
    Senator Shelby. Yes, sir.
    Secretary Geithner. OK.
    Senator Shelby. I think cost is important here.
    Secretary Geithner. Absolutely.
    Senator Shelby. You are playing--we are playing, we are 
dealing maybe with trillions of dollars. Go ahead.
    Secretary Geithner. Let me just make a few quick points. I 
am not standing here before you today to ask you to authorize 
more resources. I want to be candid, though, that I think this 
is going to be an expensive problem for the Nation and it is 
going to require substantial resources. But Congress has 
already authorized substantial resources and I think our first 
obligation is to move to use those resources as carefully and 
as effectively as possible. As we develop the details of this 
plan in consultation with you, we will have a better sense 
about what it is going to take to make it work and whether we 
are going to need additional resources and authority. And 
absolutely, we can't come to you and ask you for that unless we 
give you something that you can react to and evaluate on its 
    Senator Shelby. What elements of the Geithner plan can be 
implemented immediately.
    Secretary Geithner. Senator, the resources the Congress has 
already authorized will allow us to move forward and put in 
place each of the key elements of the plan I laid out, 
including a program of capital support for institutions that 
need it, including a strategy to help leverage private capital 
with government financing to help get these markets working 
again, and including the proposals to expand this lending 
facility designed to get markets for consumer and small 
business credit flowing again, and they will also allow us to 
move forward quickly to put in place the key elements of a 
comprehensive housing plan, which will again be designed to 
help bring payments down and reduce avoidable foreclosures, get 
broader interest rates down.
    We have resources to begin those programs, and if we 
believe there is a case for expanding them, modifying them, 
then we will come to you and ask you for additional resources 
and authority to help support that objective.
    Senator Shelby. Is this plan conceptually a 180-degree turn 
from the Paulson plan, or is it kind of the ``son of Paulson''.
    Secretary Geithner. Senator, this plan is fundamentally 
different in broad objectives and direction. If you--can I just 
spend a few minutes in helping explain that.
    Senator Shelby. Sure.
    Secretary Geithner. The path our country has pursued to 
date was too limited in support. It came late, came with too 
little broad trust and confidence, and too little direct 
support to the businesses and consumers and households that are 
most affected by the crisis, people who were careful and 
responsible in their actions but were damaged by the judgments 
of those who did not. And we are going to bring much broader, 
more rigorous standards for transparency and accountability, 
with tougher conditions to protect the taxpayer, and as you 
said, as you have seen, to make sure that the resources we are 
providing are going to support the public good, and we are 
going to bring a forceful approach targeted at strengthening 
banks, getting these credit markets flowing again so that small 
businesses and consumers again see the results of these 
    Now, Senator, you will find elements in this that are 
common to any successful strategy to resolve a financial 
crisis. What we are going to be guided by is what is going to 
work, and as I said, what is going to engender more confidence 
and what is going to help get credit flowing again to the parts 
of the economy that need it most.
    Senator Shelby. Mr. Chairman, let me be real fast. I know 
others want to ask some questions.
    How do we restart the securitization of markets, which you 
think is so important to our financial--how do we bring thrust 
back to that, because securitization worked so well until it 
was abused and misused. How do we do that? Trust is important, 
as Senator Dodd mentioned earlier.
    Secretary Geithner. Senator, let me separate the longer-
term challenge from the immediate. I think over time, we are 
going to have to fundamentally change a whole range of aspects 
of the basic--aspects of our market that make that work and 
which broke down fundamentally in this case and left us so 
vulnerable to this crisis. But our immediate challenge now is 
to try to get financing to help encourage new securitizations 
by lending against the highly rated securities, and our 
judgment is, and I think this is right, that if we do that 
effectively, we can help again get those markets starting to 
open up again.
    Now, just as support of this proposition, if you look at 
the market's response to the initial announcement of the Fed's 
program on which this is based, you saw quite substantial and 
sustained reduction in risk premiums in these markets and you 
are starting to see the initial signs of some opening up now, 
and we want to reinforce that and work with it. But I think 
that is the most promising approach we have seen to meet the 
important objective you laid out, which is to try to get these 
securitization markets working again.
    Senator Shelby. Thank you.
    Chairman Dodd. Thank you very much.
    Senator Johnson.
    Senator Johnson. Secretary Geithner, 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? How will 
the administration's new plan restore the confidence and 
integrity of these institutions.
    Secretary Geithner. Senator, you are right that our system 
is still very damaged, and across the country, you are seeing 
businesses find their credit lines cut and the average American 
is finding a harder time to raise the financing they need to do 
important things like put a kid through college, finance a new 
home, refinance a home. You are absolutely right. We have not 
seen enough impact of this yet, and that is in part because the 
economy is weakening. We are facing an escalating, very 
challenging recession. And that is working against the efforts 
that were made over the course of the fall to help stabilize 
the system.
    I want to underscore something, which is the action the 
Congress took in the fall to authorize the Emergency Economic 
Stabilization Act, that action made it possible for your 
government to take some very important steps to pull the system 
back from the edge of catastrophic failure and that action has 
helped bring a better tone of civility and some improvement to 
our financial system. Without that action, we would be sitting 
here today with a dramatically worse crisis, dramatically 
harder to solve, costing dramatically more resources over time.
    Our best judgment is, again, and I think this is based on 
the lessons not just of this crisis, but the lessons of Japan 
in the 1990s and the lessons of this country in the 1930s, that 
you need to do more up front with a more realistic assessment 
of the scale of risks there and you need to do it in ways that 
are going to get credit flowing again to where it is needed 
    And so just as an example, as I said in my opening remarks, 
we are going to design our programs so that we are supporting 
banks and making sure that assistance generates a level of 
lending that would not have been possible in the absence of 
government support, and we are going to go around banks, too, 
to provide support directly to those markets that your 
colleague, Senator Shelby, said are so important to small 
business lending and consumer lending. If we do those things 
together on a substantial scale, we will have--we will make 
progress over time. It is not going to be even. It will be 
messy at times. But we will make progress, and we are going to 
just have to keep at it, as I said, until we help repair the 
system so that it is working with recovery, not against 
    Senator Johnson. The largest individual coverage bailout to 
date has not been of commercial banks, but an insurance 
company. Given the critical role of insurers in enabling credit 
transactions and to insure against every kind of potential loss 
and the size and complexity of many insurance companies, do you 
believe that we can undertake serious market reform without 
establishing Federal regulation of the insurance industry.
    Secretary Geithner. Senator, it is an excellent question 
and I do believe that as a critical part of the broad reforms 
we are going to need to undertake to make sure a crisis like 
this does not happen again, an important part of that will be 
to reexamine the overall supervisory structure around insurance 
companies, and I think these proposals to have a Federal 
charter have a lot of merit and we will look at them very 
carefully. Again, my personal view is that is likely to be an 
important part of the plan.
    Again, one of the reasons we are here today is that large 
parts of our system were left outside of any meaningful 
oversight, oversight that provided a level of constraint 
commensurate with the risk those institutions faced, and we are 
going to have to fix that.
    Senator Johnson. As you consider such measures to address 
the financial crisis and the broader measures to reform our 
financial system, do you believe that it is important to ensure 
that Federal Home Loan Banks are able to continue to fulfill 
its liquidity function? Do you have any recommendations for 
helping to do so.
    Secretary Geithner. I do believe it is very--I do believe 
the Federal Home Loan Bank system plays an important role in 
our markets. That role is more important today than it has ever 
been. I am in the process of consulting closely with my 
colleagues responsible for these issues so that we can 
carefully examine any reasonable proposal to help make sure 
that they can continue to play that role.
    Senator Johnson. My time is up. Thank you.
    Chairman Dodd. Thank you, Senator.
    Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Mr. Secretary, may I join with Senator Dodd in thanking you 
for your willingness to step into as nasty a briar patch as 
anybody has ever tackled. We are grateful to you for your 
willingness to do that.
    When we voted for the TARP, one of the things that 
attracted me to it was the prospect that by replacing private 
capital with public capital, we were creating a sense of 
stability, maybe even a bottom that would cause the large 
amounts of public capital that exist around the world to say, 
all right, now we could come in. And as I did my best to 
explain my vote to a very angry constituency, I would talk 
about that and I said we are seeing it is already happening 
because Dubai has put $20 billion into Citicorp. Obviously, I 
missed it by a lot of money and a lot of time.
    There is no sign that the private capital that is waiting 
on the sidelines is ready to come in, and we keep putting 
public capital in, the value of which is that it is patient 
capital and is not going anywhere, waiting for the private 
capital to say, all right, now is the time. Warren Buffet may 
have said now is the time. I am not sure he still believes that 
in virtue of where the market is, but we see no signs of 
private capital coming in to say, OK, this is where we are.
    I would like you to address that question. You have an 
enormously complicated machine here with so many moving parts, 
some of which, as you have indicated, have broken down and need 
to be repaired, and others need to be redesigned, all of it 
going on simultaneously. But we are in the business of asking 
unfair questions, so I will ask you the unfair question, when 
do we start to see some of the private capital say, all right. 
By virtue of what is going on, we now can move in the direction 
of taking advantage of the low prices and the opportunities 
that are there.
    Secretary Geithner. Senator, I think you framed it exactly 
right. I think the overwhelming objective has to be to lay a 
set of conditions that will make it compelling for private 
capital and financing to come back in. And you are also right 
that that has not happened yet. It has happened in pockets of 
the market, but it has not happened yet on a broad scale. And 
that is in part because, again, the market is seeing, 
correctly, a deepening recession and they are highly uncertain 
about the depth and duration of that recession and the scale of 
losses to come and where those losses will end up, and that is 
partly why there is such an absence of debt financing available 
to help get these markets going again.
    The definition of a financial crisis is that markets won't 
take risks that were otherwise economic. The government has to 
step in and be willing to take risks for a temporary period of 
time, carefully designed conditions, to solve that problem. 
Again, temporarily on conditions that allow the markets to come 
and replace the government's role as quickly as possible.
    How quickly this happens depends a lot on how quickly we 
move to put in place this broad economic recovery program. That 
is a critical element. And again, I think it depends a lot on 
how aggressive we are to provide financing to these markets 
that are frozen. And I think you need to think about these 
together, working together. If you just did one, you wouldn't 
see enough traction and you would face a longer period of 
uncertainty where the market holds back from taking risk.
    Senator Bennett. You commented about getting interest rates 
down. De facto, they are pretty low, particularly in housing, 
but in other areas, and loans are not being made. When I talk 
to the banks, depending on which bank you talk to, of course, 
some say, we are trying to make loans. People don't want to 
borrow because their businesses aren't such that they don't 
want to take the risk. But others are saying the banks may say 
there is a housing loan available at four-point-whatever it 
reached when it reached its low point. Now it is, what, five-
and-a-quarter or something in that neighborhood. A very 
attractive interest rate, but the standards for making the loan 
are so high by the regulators that the banks say, this is our 
rate but we just won't give it to you.
    Do you have any sense of whether or not your program will 
deal with the question of lowering standards so that people 
whose credit--they have 20 percent down, the traditional level, 
they can make the payment, and so on, that they will, in fact, 
be able to get these loans that on paper, at least, are at very 
attractive rates.
    Secretary Geithner. Senator, you are right in how you 
describe the problem, and you are right that those rates have 
come down, but it is also true that if you look at the 
relationship between the cost of borrowing and the comparable 
maturity Treasury security, those spreads are still unusually 
high. That is true across all types of credit, loans to 
businesses as well as loans to consumers. You can see it in 
auto financing and other things. And that is again because of 
this acute uncertainty about the risks ahead.
    If we are effective in well-designed, powerful support for 
private investment and job creation and we can get financing to 
these markets and help provide a source of capital, continued 
capital for the system, then we can help bring those rates down 
further, and then you will see more people be able to refinance 
their home and take advantage of those lower spreads, more 
businesses able to borrow.
    I do want to point out one thing. This is a very difficult 
balance to strike, but we want to be very careful that 
supervisors of banks around the country are not making it 
harder for strong banks to expand their lending. Very important 
that as we bring more credibility and confidence to our banking 
system, that we are careful that the whole process of care in 
that context does not again make the strong institution less 
likely to lend, and that is a very important thing. It requires 
a careful balance, but we are working closely--or let me say it 
differently. The supervisors are aware of this challenge and 
they are working to try to find the right balance.
    Senator Bennett. Thank you. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. You have an extraordinary set of 
challenges, not one, not two, but multi-dimensional, and we 
recognize that your efforts are pointed at several different 
objectives. One is to get credit moving again, too. But could 
you comment, given the fact that we all recognize that there 
are already extraordinary losses in the marketplace, to what 
extent your program will help minimize these losses--again, 
they are substantial--and then some comments about who will 
absorb these losses.
    Secretary Geithner. Absolutely, Senator. Again, a critical 
part of the uncertainty in markets is again what the scale of 
the losses are and where they will occur across the financial 
system and how large are they relative to the resources of the 
institutions that bear those risks.
    Again, the most important thing we can do is to try to 
reduce the risk that those losses grow substantially beyond 
where they might otherwise get in a moderate recession, and 
that is why, again, you need to have--again, I think the most 
conservative, the most careful, the most prudent course is to 
be very aggressive with all the instruments of policy to try to 
reduce those risks, because if we are successful in limiting 
the depth and duration of the recession, those losses 
ultimately will be lower over time.
    As part of this program, working with the SEC and the 
supervisors, we are going to try to bring more disclosure, 
frankly, so that the markets can find it easier to assess the 
exposures on bank balance sheets. That is a hard thing to do. 
There are still some fundamental sources of uncertainty we 
can't arrest. I think that is an important thing to try to 
bring confidence back.
    At the same time, though, again, we have got to make sure 
the government is willing to provide capital where it is 
necessary and willing to provide financing where the market is 
not willing to provide that financing, and the combination of 
those two things, again, will also help reduce those ultimate 
risk of losses and it will help produce a higher level of 
lending than would otherwise be possible for our system to 
    I just want to say this one last thing quickly. You know, 
we came through a very huge credit boom. Even without that, in 
any recession, demand for credit will slow. What our job is is 
to make sure that it doesn't slow dramatically more than it 
needs to slow so that the programs we are doing are increasing 
the capacity of the system to lend.
    Senator Reed. Thank you, Mr. Secretary. Again, we are going 
to have huge, huge problems just in terms of the dimensions of 
the problem, the size in dollars or Euros, however you measure 
it, and our capacity collectively to respond.
    There is another aspect of this, too, is that these losses 
and these instruments are worldwide. Can you comment briefly 
about what you are doing in concert with other major economic 
    Secretary Geithner. Yes. You are absolutely right. Those 
countries individually face a number of very difficult 
challenges. Some of their problems are dramatically harder than 
ours will be to solve and the credit losses generated by our 
system are spread around the world, and that is a part of what 
is making it hard for them, but it is not the only part of what 
is making it hard for them.
    I believe very strongly that our actions will be more 
effective if we get complementary actions by other countries. 
That is absolutely true on the fiscal side, so that the 
recovery act you move forward to pass today will be much more 
effective if you see more powerful, complementary fiscal 
programs by the other major economies. I very much want to 
encourage that. Already, you are seeing monetary policy around 
the world move with substantial force, which is important. But 
in the financial sector, too, I think it is important there be, 
again, complementary actions to help stabilize and repair and 
get credit flowing. If we don't move together, then the impact 
of our action will be less, and I go to the G-7 for my first 
meeting later this week to help begin that process of 
    Senator Reed. In my remaining minute, the Chairman focused 
on the foreclosure problem. There is a growing analytical study 
showing that because of foreclosures and the excess capacity in 
housing markets, prices are falling way past their normal 
decline and that, in fact, there is an over-correction going on 
in the marketplace which argues very strenuously for decisive 
action, which I hope is forthcoming.
    There is another aspect of this, too. I think initially, 
particularly a year or 2 years ago, this perception that 
individual housing values were declining was not as pronounced, 
so that people, I think, generally were saying, well why should 
someone bail out my neighbor? But I think now, given what we 
are seeing, that these housing declines have sapped the wealth 
of every household, even those who are still working and 
paying. But that just underscores the need and I hope that 
there is the consensus to move aggressively.
    There are a number of things that you can do, reduce 
principal, reduce interest rates, extend terms, but I think the 
message should come through clear from all of us, you have to 
move aggressively, clearly, and to start working.
    Secretary Geithner. Senator, I agree with you and our 
objective is and our hope is that our program meets that test.
    Senator Reed. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Bunning.
    Senator Bunning. Thank you, Mr. Chairman.
    First of all, do you think that our largest banks are 
insolvent? What will you do if your ``stress tests'' of major 
banks revealed some are insolvent.
    Secretary Geithner. Senator, as you can imagine, this is a 
very sensitive subject and I would--it would be irresponsible 
for me today to stand before you and comment ever on the 
financial position of any individual institution in our system.
    Senator Bunning. Haven't you already done that by spending 
money on financial institutions and reinforcing them with TARP 
money and then reinforcing them again.
    Secretary Geithner. Senator, I think I want to start with 
this clear statement that in a system this fragile, in an 
economy this fragile today, it is very important that we act 
effectively to help stabilize our system and to prevent the 
kind of broad-based catastrophic damage we have seen when the 
market or the government is unwilling or unable to prevent that 
kind of failure. So it is very important to me, and I think to 
the overall success of our efforts, that we act carefully and 
wisely to prevent that outcome.
    And, of course, as we do that, again, we have to be very 
careful to help contain the risk to the taxpayer and make sure 
we are doing that with appropriate conditions, and, of course, 
those basic tenets will guide our approach. But it is very 
important to underscore that basic objective.
    Senator Bunning. OK. You have said that we have lacked 
oversight and that is how we got into this mess. You realize in 
1994, Congress acted and gave oversight to the Federal Reserve 
on all mortgages. That is including the banks that lent and the 
mortgage brokers who lent. And so the Federal Reserve since 
1994, and you have accused them of not having good oversight.
    Secretary Geithner. Senator, let me make it clear that a 
substantial part of what caused this crisis was gaps in our 
overall regulatory framework and the exercise of the oversight 
authorities that Congress gave our regulators. I completely 
share that criticism. I think a central part of acting in the 
future will be to reform that broad structure, and you are 
absolutely right that everyone who is part of this system could 
have done more than was done, and I feel a deep personal 
commitment to making sure that we reform this system so we 
never again face a crisis like this. And you are right, it is 
going to require not just reforms to the overall thing, but a 
better use of the authorities Congress gave your existing 
    Senator Bunning. Thank you. Yesterday, your staff told the 
committee that you hope to spend $1 on a bad bank, $1 trillion 
on the Term Asset Backed Security Loan Facility, $100 billion 
on foreclosure prevention, and an unspecific amount on capital 
for banks. That is way more than the $340 billion or so that 
you have left in TARP funds. How much are you going to need for 
the capital programs? How much of the funding for the other 
programs is coming from TARP, the Fed, or somewhere else? How 
much new money will you need from Congress.
    Secretary Geithner. Senator, thank you for giving me a 
chance to address that again. At this point, we do not have a 
judgment about whether and how much additional authority and 
resources we are going to need to solve this. But you have 
given the administration substantial resources. We are going to 
use those carefully. We are trying to make sure they go as far 
as we can.
    But I want to just clarify one thing. These large numbers 
for these two new programs are the amount of financing we 
expect to mobilize together. We believe we can do that with a 
relatively limited use of the authority you authorized under 
the Emergency Economic Stabilization Act. But as I committed to 
your Chairman and the Ranking Member, we will come to you as we 
design these programs and give you our best estimate of what 
they are ultimately going to cost and----
    Senator Bunning. But did you mistakenly tell your committee 
staff yesterday that these numbers were round numbers, or are 
they close, or are they approximate.
    Secretary Geithner. No. I am just making distinction 
between the $1 trillion facility to support business and 
consumer lending and the possibility of--we are going to start 
at $500 billion for this private partnership investment fund. 
It might go up to $1 trillion. Those are about the amount of 
financing provided, not the resources that will require from 
the Emergency Economic Stabilization Act. That is the 
distinction I was trying to make.
    Senator Bunning. OK. Last question----
    Secretary Geithner. That will depend, Senator, just 
quickly, on how exactly the programs are designed and how we 
most effectively minimize the risk and leverage private capital 
and financing.
    Senator Bunning. Last question. Since you were a member of 
the Fed, do you believe we have an independent Federal Reserve.
    Secretary Geithner. Absolutely, and vitally important to 
our country that we preserve that.
    Senator Bunning. Thank you.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Akaka.
    Senator Akaka. Thank you very much, Mr. Chairman.
    Mr. Secretary, one of my concerns has been predatory 
lending institutions. Today, many low-income taxpayers and 
their families have their Earned Income Tax Credit benefits 
unnecessarily diminished through high-cost short-term products, 
such as refund anticipation loans. RALs are a form of predatory 
lending. The fees on the RAL are equivalent to annualized 
interest rates ranging from 50 to 500 percent. These costs are 
excessive, especially when filing electronically.
    In November, Treasury provided Pacific Capital Bank 
Corporation, the corporate parent of Santa Barbara Bank, with 
approximately $180 million in TARP resources. Santa Barbara 
Bank profits tremendously from its costly RAL products and 
charges approximately 40 percent more than its competitors. It 
will be important that TARP resources be used for lending, but 
they must not be used to support predatory lending.
    So my question to you, Mr. Secretary, is what will you do 
to ensure that TARP resources are not used to facilitate 
predatory lending and exploit working families.
    Secretary Geithner. Senator, thank you for raising this 
important issue. I want to just emphasize at the beginning that 
this crisis is partly the result of failures in consumer 
protection. We saw basic failures in underwriting standards and 
supervision ultimately contribute to a deeply damaging systemic 
financial crisis, and that is why it is so important that as we 
work with this committee on broader reforms for our financial 
system, we bring more care and more force and a more carefully 
designed set of regulations to improve the quality of consumer 
protection for all institutions that sell financial products to 
    Now, on the specific question about how to prevent exactly 
this, I would be happy to hear more suggestions from your staff 
and reflect on them, but I think that the best way to get at 
that is through the broader supervisory process so that those 
institutions, those regulators that are responsible for 
enforcing the laws of the land in this area are charged with 
the responsibility of trying to make sure that those practices 
don't not just violate the law or regulations, but don't 
violate our sense of what is appropriate for this country.
    Senator Akaka. Thank you for that, Mr. Secretary.
    Valuation is critical, since overvaluing the asset results 
in excessive costs to the government and undervaluing 
undermines the intent of the TARP legislation to provide 
financial stability which we are trying to achieve. Ms. 
Elizabeth Warren testified that the Bush administration paid 
$254 billion for assets worth $176 billion. Mr. Secretary, can 
you tell me why the Bush administration paid nearly $80 billion 
more than the assets were worth, and what must be done to 
prevent this from happening again.
    Secretary Geithner. Senator, a very important question and 
I understand the concerns you are raising. The actions 
government have to take to solve financial crises will come 
with costs and risks. It is our obligation and our 
responsibility to try to minimize those costs and those risks. 
And again, as I said in the beginning, our job is to try to 
make sure we are getting the maximum benefit to the overall 
economy and the financial system in the flow of credit at the 
least risk to the taxpayer. That is a simple framework. It is 
hard to execute. But it will mean that there will be cases when 
the government is taking actions where, on terms that are 
vulnerable to the kind of analysis that the report described.
    By definition, in a crisis like this, there are risks the 
market will not take, and so any time the government asks, 
there is a risk that if you tried to value those interventions 
at the level prevailing in a market reflecting this level of 
fear and uncertainty, that there will seem to be a gap. But 
again, the responsibility we have is to design these programs 
so we are getting the maximum possible benefit in restoring the 
flow of credit at least potential risk. But these programs will 
come with risks.
    Senator Akaka. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Martinez.
    Senator Martinez. Thank you, sir, very much.
    Mr. Secretary, thank you for being with us and thank you 
for your service.
    The President has outlined early on his concerns for the 
current economy, that our response needed to be timely, 
targeted, and temporary. I wonder if you could comment for us 
today on the overall game plan of this administration. We just 
less than 3 hours ago voted on a very substantial recovery 
plan, others call it a stimulus plan, $835 billion, give or 
take a few billion. It is going to now become no telling what 
the size of that will ultimately be. You have outlined now 
other expenditures of substantial funds, whether exactly the 
amounts of a trillion or whether that is the total investment 
    My concern is that some of the expenditures may not be 
timely. By that, I mean would spend out in out years. Others 
far more knowledgeable than I raise the specter of potential 
for inflation during a recovery. Would you address all of these 
issues, because I think I, for one, would love to know what the 
big picture game plan is. What are we going to be spending? How 
are we going to be doing it, and in what sequence.
    Secretary Geithner. Senator, the most immediate priority is 
to put in place a powerful program of effective support for job 
creation and private investment so we help arrest this crisis, 
reduce the ultimate depth and duration of this recession and 
get the economy back on track. That is going to require, as I 
said, very forceful action on the financial front as well as 
everything we can do on the housing front.
    Now, these numbers are large, but just to make the 
comparison, again, I think you said this in your opening 
remarks, the numbers in the Recovery Act are different types of 
spending than the investments in loans in the financial 
program. What I think ultimately matters is what the ultimate 
costs and risks to the taxpayer of these financial programs 
are, and there is a very carefully designed process that CBO is 
the arbiter of that OMB contributes to to try to assess those 
costs, and everything we do will be run through the prism of 
trying to judge what the actual costs are to these programs.
    Now, just to underscore something very important in what 
you said, even as we move forward to do these very, very 
substantial, forceful programs of support, it is very important 
that we give the American people the confidence that when 
recovery is firmly established, we have repaired this financial 
system, then we bring our resources and commitments back down 
to a position that is sustainable for our country. That is 
going to be extraordinarily difficult to do because if the 
magnitude of the challenges that we face today.
    But it is absolutely critical to the credibility of our 
efforts that we lay out a path that brings our budget down to a 
more sustainable position over time, and the President will be 
announcing his budget in the coming weeks and you will see in 
that budget his commitment to achieve that objective. And part 
of that, of course, as you have seen him say in public, we are 
going to want to work with the Congress on bringing the broader 
reforms not just to budget process and discipline, but to our 
longer-term commitments in----
    Senator Martinez. Entitlements.
    Secretary Geithner. ----Medicare and Social Security. 
Absolutely critical, very hard to do, but you have to look at 
them together.
    But again, ultimately, it will be harder for us to meet 
those challenges if we don't act forcefully today to try to get 
the economy back on track.
    Senator Martinez. The Term Asset Backed Security Loan 
Facility is something that I think can be of tremendous help to 
many sectors of our economy. One of them that is particularly 
of interest to me is the time-share industry. Believe it or 
not, this is a tremendous employer in the State of Florida, 
where we have tremendously high unemployment and a growing 
unemployment, in addition obviously to the foreclosure crisis. 
I would love to maybe get back into the housing issue if my 
time permits.
    But I wanted to ask you whether you thought that perhaps--
the time-share industry has bundled their mortgages and sold 
them and been part of the same type of securitized facilities 
that have been in place but which today have completely dried 
up. Do you believe that this industry perhaps could be a 
candidate to address themselves to this loan facility so that 
they might gin up again the types of financing that keeps them 
on the road to rehiring folks back to work.
    Secretary Geithner. I would want to look carefully at the 
conditions in that market before I responded fully to you, but 
what we announced today with the Fed is that we are going to 
expand this program to the commercial real estate, to the CMVS 
market, and there is a complementary program already underway 
by the Treasury and the Fed together to help get directly at 
the kind of factors that are helping keep mortgage interest 
rates higher. And again, our hope is the combination of those 
things would be helpful across the broader residential real 
estate, commercial real estate markets. But I would be happy to 
listen to the specific challenges in that area more carefully 
and get back to you, have our staff get back to you with 
whether we think there are any additional things we can do.
    Senator Martinez. Thank you. My time is up. I would love 
for you to at some point address your thoughts on a housing 
recovery package, which I know is part of what you intend to do 
as part of what you outlined today, but I would love to know 
more details on that as we go forward. Thank you very much.
    Chairman Dodd. Let me just say on that point, Senator, that 
this is something that, Mr. Secretary, and Senator Martinez is 
obviously a former Secretary of HUD and has a deep appreciation 
and understanding of the issues, and I would strongly 
recommend--in fact, I will ask you that as this moves forward 
in the coming, literally, day or so, as it is moving forward, 
that those of us up here who have a strong interest in this 
would like to be well informed as to the progress of how this 
is being developed. We always say this, but it helps so much 
more if we are involved in that process than----
    Senator Martinez. The front end.
    Chairman Dodd. ----being told what it is and then have a 
reaction that we could have avoided had we engaged in the kind 
of consultation that will be critical.
    Senator Martinez. Thank you, Mr. Chairman. I agree 
completely. Thank you.
    Chairman Dodd. Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman.
    I want to thank the Secretary for being here today. I 
appreciate your time.
    I want to get back to the coordinated supervisor review 
process and comprehensive ``stress test'' dealing with the, I 
believe it is about 14 banks over the size of $100 billion. 
Would you ever allow those large systemic banks to fail.
    Secretary Geithner. Senator, in my judgment, given the 
challenges we face in this country, it is very important that 
we let the world know, the American people know, that we will 
take whatever action necessary to help prevent the kind of 
failure that would cause systemic damage to our system, and I 
think that is a very important thing to say and it is important 
that our actions meet that test.
    Senator Tester. So what you are saying is that, for the 
most part, those 14 are too big to fail.
    Secretary Geithner. I don't think, Senator, I want to use 
those words, but I do believe deeply, and I think we have had a 
lot of experience over the last 18 months seeing the 
consequences of alternative strategies, that it is important 
for our country that we do what is necessary to help stabilize 
the core of our financial system.
    Senator Tester. OK. Is there any--without being too--I 
mean, even as a percentage, are there some limits on how much 
you would put into one bank? Taxpayer dollars, I am talking 
    Secretary Geithner. Senator, again, I need to be careful in 
responding. I understand what you are asking, but I just want 
to be careful and responsible and candid with you. It is that 
what has to guide everything we do, what is going to produce 
the best benefit in terms of the confidence, stability, 
capacity for lending to support recovery, at least risk to----
    Senator Tester. And I understand that. I guess the crux of 
where I am going is that if, in fact, these folks are too big 
to fail, where is the accountability for them.
    Secretary Geithner. I think it is--you are absolutely right 
that you want to make sure that where the government has to act 
because it is in the interest of the economy as a whole, that 
when you do so with conditions that are commensurate with the 
support we are providing. As a basic principle, conditions 
should escalate with the level of assistance.
    Senator Tester. OK. I want to talk a little bit about 
community banks. We will go to the other end of the spectrum 
for a bit. The Chairman talked about how they have done a 
pretty good job managing their risk overall. What I have heard 
from community banks in my neck of the woods, number one, is 
that the regulators have clamped down on them so they can't 
loan out money, and these banks aren't in trouble. What are 
your thoughts about that.
    Secretary Geithner. I have heard those same reports and I 
think you are right, there is risk that in some parts of the 
country, even banks that are well-run and strong are facing 
pressure to be more conservative going forward, in part because 
we know we are facing this very challenging recession. And as I 
said, it is important to me and I think it is important to the 
supervisors that they be very careful in sending out balanced 
guidance that helps reduce exactly that risk.
    I have talked about this with my supervisory colleagues. 
They have put out some guidance in this area in November and 
they are examining how to make sure that we avoid just the kind 
of problems we are facing. But again, it is important to 
recognize that this economy is slowing and it is requiring 
everyone to reassess what the risks are ahead and what were 
long established normal business relationships.
    Senator Tester. I understand that, but it seems a bit 
unfair, especially with my previous question about the big 
boys, that the community banks who have done a pretty good job 
running themselves are now being clamped by the regulators 
when, in fact, they are very, very close to the people who they 
are lending money to and understand their business model.
    Secretary Geithner. I understand that concern. I have been 
exposed to it.
    Senator Tester. OK.
    Secretary Geithner. I think it is damaging to the overall 
confidence in the evenness of the process and we are going to 
try to bring a more even set of standards across the entire 
    Senator Tester. OK. One of the things I have been critical 
of is TARP funds, and I am not the only one on this committee 
that has, being used for bank consolidation. Last week, Eagle 
Bank, which received $38.2 million from the Treasury 
Department, bought up one of its rivals, Fidelity Trust Bank. 
Number one, do they tell you what they are going to do with 
this money when they apply for it? And number two, is 
consolidation something that you guys approve.
    Secretary Geithner. Thank you for raising this question. It 
is a very important question. In our program, we are proposing 
that for any future assistance under a capital program like 
this, the institutions that receive it have to give us a 
proposal for how they would propose to use that assistance and 
to demonstrate to us that the resources are going to be used to 
expand the level of lending that would have been possible 
without assistance coming to an end. We are going to ask them 
to report monthly on exactly what is happening to lending and 
we are going to put those reports in the public domain so 
people can see them. So our objective, again, is to try to make 
sure that the assistance we are providing comes with conditions 
to make sure it is going to improve the supply of credit to 
where it is needed most in our economy.
    Senator Tester. I understand that, and I am out of time. 
Very quickly, though, I mean, is bank consolidation something 
that you encourage with the TARP dollars? And I understand the 
ground rules you laid about encouraging, but long-term, 
consolidation of the banking industry doesn't give me more 
consumer choice, it gives me less. So----
    Secretary Geithner. Senator, I understand your concern----
    Senator Tester. Yes.
    Secretary Geithner. ----and I share it and I am sensitive 
to it. I think that our financial system is stronger because we 
have this remarkably diverse system of 8,000 to 9,000 banks, 
including community banks across the country, and as you said, 
many of them were not part of the problem and they can be part 
of the solution and they are likely to be able to expand 
because they were more responsible than some of their 
    Senator Tester. All right. Thank you for being here. Thank 
you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Corker.
    Senator Corker. Mr. Chairman, thank you for starting the 
meeting with only opening comments from the two of you. I heard 
a sigh from the American public and from our witness, and I 
hope we continue to have meetings in that way. Thank you.
    Secretary Geithner. The witness did not sigh. I just want 
to clarify the record.
    Chairman Dodd. Maybe just the people in Tennessee sighed, 
    Senator Corker. Thank you so much.
    Mr. Secretary, welcome. We look forward to working with you 
to solve these problems. Last night, I heard the President say 
that today you would outline a very clear and specific plan. 
Obviously, that was not the case. I am not criticizing, but 
obviously today's plan was vague. And I can look at that as a 
glass being half full. That means that hopefully we will have 
the opportunity to work with you to make it into something that 
actually works.
    But I sense there is an internal debate that is taking 
place, and I think actually it is a debate that a lot of people 
are having, and that is, you know, isn't the question really 
not how big the losses are, but who will take them and when? 
And it seems to me that that really is where the focus ought to 
be. There is a way of sort of metering this out, if you will, 
and letting banks take the losses over a couple of years and 
basically be dead men walking. And as you mentioned, the 
financial world is basically working against an economic 
recovery right now, and obviously that is not a good thing. The 
other way of dealing with it would be just to solve the 
problem, OK? So the problem first.
    It is my understanding, you know, I have looked at some of 
these programs that have been laid out, and in some cases it is 
hard to determine whether we are solving a liquidity problem or 
a solvency problem. I strongly believe that it is a solvency 
problem, but I would like for you just to say yes or not. Is it 
solvency or liquidity.
    Secretary Geithner. Senator, the system is short both 
capital and it is short liquidity in funding, and you need to 
treat both those things.
    Senator Corker. And you need to treat both, but the issue 
as it relates to the banks and what they are doing with our 
money and the fact that lending is not taking place is in large 
part a solvency problem, is it not? I mean, on these whole 
loans, these accrual loans, where GAAP accounting does not 
allow them to go ahead and take losses now, they know those 
losses are coming, and so they are basically maintaining our 
capital and in essence creating this environment that is not 
causing them to lend. Is that correct.
    Secretary Geithner. Well, I think you are right that for 
some institutions--and it is very important to differentiate 
across institutions because, again, we have a very diverse 
system. For some institutions, the scale----
    Senator Corker. Let us say our large institutions.
    Secretary Geithner. Well, even among the large 
institutions, they are in very different circumstances. But for 
some institutions, the scale of possible losses ahead are large 
relative to their existing capital base. And it is that 
comparison that matters, and that is why it is important to try 
to give the market more confidence that these institutions are 
going to have the resources necessary to absorb those losses 
even in a rather extreme scenario. And in the absence of that, 
you are right, you are likely to see lending constrained.
    Senator Corker. But isn't the major debate before us today 
whether we go ahead and address the losses now, get our banking 
system on a firm footing, and allow people to invest in common 
shares that they know are going to grow, allow these banks to 
begin making loans? Or we just sort of dole it out over time, 
which obviously takes a little bit less cash today, a little 
bit less owning up, a little bit less transparency, I might 
add. Isn't that really the debate that is before our country 
    Secretary Geithner. I think that is an important choice, 
and my personal view is we need to err on the former side of 
the strategy. And I say that because if you look at the 
experience of other countries dealing with complicated 
financial problems, the crises last longer, it is must acute, 
it is more expensive if you try to hide it and stretch it out. 
And we are going to be very careful to avoid that risk.
    Senator Corker. And I think that is one of the reasons that 
this came after the stimulus vote, and I think that we will be 
talking about additional taxpayer monies. This is a battle that 
has already been fought and lost. I wish that we had been able 
to be totally transparent with the American people about the 
total cost of what it is going to take to deal with this 
economy. And I know that in future hearings we will be dealing 
with that as you come back asking for more money.
    Let me just ask you this: Is TALF becoming yes or no, 
because I have two questions and I want to be brief. Is TALF 
becoming in essence the de facto bad bank.
    Secretary Geithner. No.
    Senator Corker. Not happening.
    Secretary Geithner. No.
    Senator Corker. OK. I wonder if it would be helpful to take 
the $9.7 trillion that a lot of people say has been allocated 
to bailouts--and I realize people can take liberties as to what 
that is. But would it be good for the Treasury to actually look 
at the amount of expended funds today and actually make a 
calculation as to where we are.
    Secretary Geithner. Yes.
    Senator Corker. I have two more questions and I will stop, 
and I know I am fudging a little bit, Mr. Chairman, but I would 
like to understand how we are going to stress test the banks, 
OK? If we are going to send in teams to actually cause the 
banks, especially that have these accrual loans and know that 
losses are coming, to go ahead and get those written down? 
Which is not, by the way, GAAP accounting standards. And, 
second, I would love to know--it is February the 10th. I talked 
to you the other day about this, and I appreciate you taking my 
calls. And I do not want to be known solely for this issue, but 
February 17 is a big day in the auto world. We have no czar, 
and it is February 10. I just wonder if you might share with us 
a little bit as to how that stands.
    Secretary Geithner. OK. Thank you. The answer to your first 
question is we are going to do it carefully, understanding the 
existing accounting regime and existing regulatory capital 
requirements. But the basic process has this basic, simple, 
understandable appeal, and it is part of what banks do and 
supervisors do, which is to look ahead at a range of possible 
scenarios and the losses associated with those and make some 
careful judgments about what is most likely to happen and to 
measure those against, again, the scale of resources the bank 
has that it can generate over time against those losses. That 
is the core of the thing.
    But you are right about GAAP accounting, and we are going 
to be careful to do this, again, within the basic supervisory 
process, knowing that there is a set of accounting and 
regulatory capital requirements that we are going to leave in 
place. Now----
    Senator Corker. I hope you will do it like an investor 
would, because we are investors, and let us go ahead and take 
our medicine and get our country moving again. That is the most 
significant thing we can do as it relates to stimulating the 
    Secretary Geithner. Senator, on autos, as you know, on the 
17th we are going to receive from the critical parts of the 
industry a series of initial restructuring plans. We are going 
to look carefully at those. We have a team of people both at 
the Treasury and organized under the auspices of the National 
Economic Council trying to bring together the resources of the 
Government; two, trying to make sure we are in a position to 
make good judgments about what is going to produce a kind of 
outcome that achieves the extensive restructuring that is going 
to be necessary to leave these companies in a position where 
they are going to be viable businesses without Government 
support over time.
    That is our basic objective. We are going to have to start 
by looking at their plans, and at that basis, we will be in a 
better position to make some recommendations for what we think 
is going to be appropriate and necessary going forward. But I 
feel as strongly as you do that time is not with us, and we 
need to make sure that we are in a position to make good 
judgments going forward.
    Senator Corker. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you.
    Let me just on that point, before I turn to Senator Warner, 
my hope would be, Mr. Secretary--and I gather you have not 
named anyone yet to be this car czar, or whatever title is 
appropriate. My hope is we would be looking, without any 
particular individual in mind, at someone who clearly has the 
background in making things or producing things. It seems to me 
it would be critically important that someone understands that. 
Obviously, someone out of the industry itself who had a long 
history would be ideal, but it need not be from the industry as 
long as it comes from someone, in my view, who really has an 
appreciation of producing a product. It seems to me in looking 
at this issue, we need to examine it from a broader perspective 
than just the financials, which are important, but from a 
broader perspective. So I appreciate my colleague's question in 
that regard.
    Secretary Geithner. Senator, I agree with you about that in 
the sense that we need to make sure we bring not just that 
expertise, but there is a range of other expertise and policy 
interests that are going to be critical to making good 
judgments in this. And you are right that the financial things 
are important, but they are not the only thing that matters to 
making these judgments.
    Chairman Dodd. I appreciate that very much.
    Senator Menendez is back. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, I appreciate you being here. Congratulations 
on your confirmation. I was happy to support you, and I think 
that you have started off on the right track, particularly as 
it relates to the elements of this that are clearly 
transparent, and for accountability, I think those are all good 
steps. But I have to be honest with you. A lot of questions 
still remain unanswered. A lot of details are necessary before 
I can give it my support. And I learned my lesson the last time 
when Secretary Paulson came before this Committee and in 
private entreaties and supported that effort, and I am not 
about to go through that again.
    I will tell you that if to some extent this is like testing 
the canary in the mine to see whether it lives or dies, as far 
as I am concerned, it would be dead already because there is 
not a hell of a lot here to get a sense of.
    So, with that as a caveat, you know, I am looking for a 
plan that ultimately prioritizes Main Street at the end of the 
day. I am looking for a plan that helps put cash in the pockets 
of people who are going to spend it and businesses that are 
going to create jobs. And I am looking for a plan that 
ultimately ensures that we are going to save a lot more people 
in their homes not only because as a societal thing it is good, 
but also in terms of home values and neighborhoods.
    So, you know, right now I do not quite understand what the 
full plan--I got the outlines of it, but I do not quite 
understand what the full plan is, so let me go after two things 
specifically and see if I can get some sense.
    I read in one of the clips today that there was an internal 
debate over what I call conditionality, how much conditions to 
put in this process, and that you won that debate internally 
about what level of conditions should exist.
    One of the areas that I am interested in is what we are 
going to do about lending. You all sent us a statement--this 
was before you were Secretary, but I believe you might have had 
a little something to do with it--that suggested you were going 
to have lending for institutions that are sound, insist that 
lending go above the baseline.
    I would like to get some extent, because without 
conditionality we did not see this happen, and so one is what 
type of conditionality do you envision on the lending issue, 
because we continuously hear about the credit crunch. And the 
second major tranche of questions I have is about, you know, 
this buying of bad assets, however we may do that. I read about 
and I see your statement about a public-private partnership. 
Well, how much of it is going to be public? How much is going 
to be private? How much of it is going to--what is the 
valuation process that you are looking to pursue? Those are two 
areas, I think, that are critical for the type of support I 
would like to give your efforts.
    Secretary Geithner. Thank you, Senator. Let me start with 
lending conditions. We are going to do the following three 
    As a condition for assistance, we are going to ask the 
banks to provide us with a plan for how they are going to use 
the assistance to generate a level of lending that is above 
what would be possible in the absence--with what have been 
possible in the absence of Government support.
    Second, we are going to ask them to report--require them to 
report monthly on what is happening to lending, with a level of 
detail that we will be able to see exactly what is happening, 
again, relative to that initial expectation. And those reports 
are going to be put in the public domain, so you and your 
constituents will be able to see exactly what is happening, not 
just who gets assistance but what happens with that assistance 
and how it affects actual judgments on lending.
    As you know, it is a very hard thing to know what would 
have happened without assistance because, again, we have an 
economy where there was too much credit, credit is shrinking 
necessarily, and as growth slows, demand for credit from 
creditworthy borrowers themselves will also slow. But, again, 
our basic objective is to try and make sure the assistance 
comes with conditions that will increase the amount of lending 
that would have been possible in the absence of Government 
assistance. We are going to require firms to tell us how they 
are going to do that. And we are going to monitor and measure 
what happens in response to that.
    Senator Menendez. How are you going to determine in the 
first instance what would have been? Because potentially--I am 
sure this is not what your goal is, but potentially one loan 
might have been greater than what would have been available 
    Secretary Geithner. I agree. That would not be an adequate 
    Senator Menendez. Right.
    Secretary Geithner. I think that a dollar of capital----
    Senator Menendez. And is it loaned from one bank to the 
other or is it loaned--if I am loaning from one bank to another 
versus loaning into what I want to see, which is, you know, 
businesses in America and consumers in America so that we can 
get this credit growing, is it going to look at not only the 
numbers but the quality, the nature of the loans.
    Secretary Geithner. Senator, you are absolutely right that 
the objective of this program is and should be to try to make 
sure we are getting credit to small businesses and families. 
That is the ultimate test of this program. And what we are 
trying to do is to try to meet that basic test.
    You are also right that it is going to be--it is very hard 
to measure what would have happened in the absence of 
assistance. It is a hard thing to do, but the best way to do 
it, I think, is to have firms commit to how they expect to use 
it and to be able to see a level of reporting that allows you 
to see exactly where it is going. And people will be able to 
look at that and see where it is increasing and where it is 
not. It is hard to know what would have happened in the absence 
of the assistance, but we are going to do our best to try to 
navigate through that complicated area.
    Senator Menendez. Can you talk to us about asset 
    Secretary Geithner. Absolutely. Enormously difficult to 
decide on a mechanism that will give us confidence that the 
values are fair and realistic and that the Government 
understands the risks we are assuming. There are no perfect 
ways to do this. One approach is for the Government to decide. 
One approach is for the Government to use independent model-
based estimates of valuation.
    We are concerned neither of those two approaches would give 
us the level of comfort we need. So instead what we propose to 
do is design a fund that can have private capital come in with 
Government financing alongside the Government's capital and use 
that as a way to help solve this valuation problem. And we 
believe doing it that way will leave us with better protections 
against the risk in making these basic judgments independently 
on our own.
    Now, no process is perfect, and you are right to ask what 
is going to be the mix of risk and return for the Government in 
this area. And one of the reasons why we have laid this out in 
general terms today is because this is enormously complicated 
to get right, and we are going to try to get it right before we 
lay out the details. And on these elements and others, we are 
going to come and consult and explain exactly the kind of 
considerations we are trying to balance and give you our best 
judgment on how we can solve those things.
    Senator Menendez. Well, I look forward to those 
consultations because, you know, I appreciate what you want to 
accomplish. I am cautious about where you are headed. And I 
look forward to the opportunity.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Hutchison.
    Senator Hutchison. Thank you, Mr. Chairman.
    Mr. Secretary, you said early in your testimony that this 
was part of your collaboration, talking to the Committee. So I 
want to tell you a scenario that is important to me and give 
you my input for your collaboration.
    First of all, I think you have gotten from just about 
everyone on this Committee that we put our faith in what was 
told to us about mid-September of last year, and all of us have 
been very disappointed in the outcome because any of us going 
through our States can tell you a story or 10 stories or 100 of 
business people who cannot get loans and people who are out of 
jobs. So I think your goal of bringing in a private 
partnership, taking bad assets off the books to get the banks 
to lend is the right goal. It was also the first goal that was 
brought to us in mid-September of last year. But that goal 
changed about 3 weeks later.
    So I am looking at the problems that you are facing, which 
is how do you value those bad assets and how can there be a 
taxpayer upside with this model. So I go back to the last time 
we had the good bank/bad bank model, which was the Resolution 
Trust Corporation.
    Now, this is what I want to ask you. I lived with many 
people who got taken under by the Resolution Trust Corporation. 
There were bad S&Ls--there is no question about it--that got 
way out of their league. But what happened because there was a 
policy of not trying to work things out, but to get assets off 
the book, shut down those bad actors, and it caused many good 
banks and good people to be taken under with that undertow.
    My question to you is: If there is going to be an attitude 
in your policies of working things out that would be different 
from the Resolution Trust Corporation and one of the key areas 
here is that a performing loan would not be called, if it is 
performing, the Resolution Trust Corporation, because they were 
so anxious to get rid of the bad assets, sold for cents on the 
dollar. Property then throughout the area was devalued, so the 
collateral did not meet the standards of the original loan, and 
loans were called even when they were performing.
    My question to you is: In your policies with a good bank/
bad bank if you can work out the valuation of the assets, and 
an upside for the taxpayer, will you have a policy that will 
allow performing loans to go forward and you will not allow 
performing loans to be called, as long as they are performing.
    Secretary Geithner. Senator, that is an enormously 
thoughtful question. Let me just say a few things in response.
    I do not believe that the S&L crisis is the right prism 
through which to look at what we face today. This crisis is 
much more severe. It is going to be much more complicated to 
solve. The system we have today is much more complicated and 
fragile. And we are not going to get through this by adopting 
the basic approaches that were adopted at that time. Completely 
in some ways a different situation because in some sense that 
architecture of resolution was set up to deal with institutions 
that were being closed. And you are right that people were 
troubled by some of the judgments made in that context. But, 
still, the basic architecture there was to deal with the 
problems the Government faced after they had already taken on 
and assumed a large-scale of assets of those failing 
    In some ways, that is an easier challenge to solve than 
what we are trying to do here. What we are trying to do is to 
get the market working, to help provide some financing for 
those markets, and help that facilitate the process of 
strengthening our institutions to get private capital to come 
in. It is much harder to do.
    Now, on your specific question of how we are going to treat 
performing loans in an economy where expectation of further 
losses may be increasing, difficult question. I would have to 
consult with my counterparts in the supervisory parts how they 
are going to do that. I would be happy to ask them to be 
responsive to how they are making the judgments. But I think it 
is an important balance to strike. In a simple way, governments 
make two types of errors in these things.
    One type of error is to underestimate and ignore and hide 
the full scale of the problems in the hopes we can stretch it 
out over time and grow our way out of it.
    There is another type of error governments make, which is 
to move too aggressively in ways that cause a deeper 
contraction of lending than would otherwise be necessary to 
    Now, just because those two risks exist does not mean we 
are going to get it right if we are careful navigating through 
that, but that is the art of the challenge, and it is an 
enormously difficult, complicated challenge. But you asked a 
very thoughtful question. I am the Secretary of the Treasury, 
not the direct supervisor of these institutions. And what I 
would like to do is to refer that question to the four national 
bank regulators and ask them to come back to you with a 
response to your question.
    Senator Hutchison. That would be very good, and I 
understand that it is more complicated this time, because you 
are not going to have one piece of land that has one loan that 
is still owned by the underlying bank. And I realize that is 
why it is so hard to value the assets. But there will be some 
of that, and it does make a difference in a community, and all 
of those real estate values are part of the whole housing 
problem as well. So I do hope that you will just keep that as a 
policy thought, and I agree with you the regulators' part of 
the problem was the Comptroller did not allow any leeway. And 
it was not just the S&Ls that were having this problem before. 
It took the banks under as well.
    So I hope that in the policy the key is that you want to 
work things out as opposed to wanting to just get rid of things 
to clear the books on the backs of people who are paying, 
performing, and trying to do the right thing.
    Chairman Dodd. Thank you very much. Thank you, Senator.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman.
    I want to come back to this valuation issue, but I have got 
a couple of other questions first. First, one of the things I 
was happy to see, Mr. Secretary, was some of your at least 
outlines of new initiatives around small business, consumer. 
One other area that a number of members of this Committee under 
the leadership of the Chairman sent you a letter on is the area 
around the municipal markets. We have seen enormous spreads in 
that area. We have seen a slowing of projects. The Chairman 
talked about a number of small towns in Connecticut that had 
projects ready to go to market. I know Senator Bennet is going 
to follow up on this question as well.
    If we are really truly looking at already scrubbed, shovel-
ready projects in terms of infrastructure and stimulus 
activities, the municipal market and the slowing there is an 
area where I would hope we would fall into being looked at for 
consideration, whether it is spurring purchases or some level 
of credit enhancement. But if you could speak to that, I would 
appreciate it.
    Secretary Geithner. You are right to point out how 
important this problem is. There has been a little bit of 
improvement recently, but still, municipal authorities are 
facing much higher borrowing costs than they are used to 
facing, and that is because this elaborate structure was set up 
for how muni's finance themselves that relied on, frankly, some 
very fragile architecture. And when the basic funding sources 
for that dried up and when the amount of credit protection that 
was provided no longer proved sufficient, you saw those 
resources fall away, huge, acute damage to the muni markets. 
And there has been a little improvement, not much yet.
    There are a group of people in the Treasury and the Fed 
that are looking at a range of ideas to help address this 
problem. We are open to suggestions. To be honest with you, I 
have not yet seen a good idea which I think would be an 
effective use of resources, again, relative to the costs and 
risks. But we are very pragmatic. You will find me very 
pragmatic, open to suggestions, happy to work with you on any 
    Senator Warner. That is an invitation to those of us who 
have been looking at this issue to share some thoughts.
    Secretary Geithner. It is.
    Senator Warner. Thank you. I want to come back to what 
Senator Menendez and Senator Corker were talking about and add 
my sense that the sooner we bite this bullet, the better in 
terms of trying to get some of these--particularly clean up the 
balance sheets and get these bad assets off.
    I have got two questions that are kind of a little bit 
interrelated. I assume that you feel that as you go in and make 
the stress tests of these banks, you are going to have the 
capabilities to truly assess the financial health of these 
banks, which consequently means you are going to have to go in 
on these major institutions and actually value these bad assets 
in their portfolio, which seems to be, from the outside at 
least, the nexus of a little bit of our problem so far, how do 
you value those bad assets. But isn't the stress test going to 
have to include that valuation process, number one? And I was 
going to try to ask these separately, but I think they are 
interrelated. I am very interested and excited about this 
notion of this public-private initiative that would include 
both the Fed and the FDIC and the Treasury. But I am a little 
bit concerned about where the timing is. If you are going to do 
the stress test first over here and actually value the assets, 
the bad assets, and then once they have gone through the stress 
test, you are going to put those bad assets into this public-
private, or are you going to have the public-private try to 
value the bad assets before the stress test? Help me through 
that, and, again, it comes back to some of these valuation 
    Secretary Geithner. Excellent questions. On the first, the 
supervisors--and this is their responsibility, and this is in 
some sense what they exist to do--are going to, again, bring a 
careful assessment on a more consistent, realistic, forward-
looking basis to look at how these assets may perform across a 
range of alternative scenarios. This is something banks do 
every day. It is something supervisors exist to do in some 
sense. You are right, it is very hard to do--again, not just 
because of how much uncertainty there is about how long this 
recession will last, how deep it will be, but because many of 
these assets have no historical precedent, and past loss rates 
will not be a good guide.
    So it is difficult to do, and you are also right that you 
want these things to go together. They do not need to all 
happen simultaneously for this to work, but you want them to 
move together. So our hope is if we provide financing through 
this facility for consumer and business lending to help restart 
the securitization markets, that will start to help free up 
stuff and bring down risk premia; that these funds be described 
as public-private investment funds will, again, provide a mix 
of financing in private capital, Government capital, to also 
provide some financing for these assets, at the same time----
    Senator Warner. A pricing mechanism, basically.
    Secretary Geithner. Exactly. And at the same time that 
these institutions are moving carefully to try to make sure 
they have the resources and capital necessary to deal with 
their challenges, you want to--they do not need to happen all 
at once for it to work.
    Senator Warner. So you do not require the stress test to 
happen first.
    Secretary Geithner. Well, that process is underway, already 
been underway. You want that to proceed, and you want these 
other things to get some traction because that will help 
improve the overall environment of these markets. And you want 
it to happen as close together as possible, but you do not need 
to have this tight link for any----
    Senator Warner. It is not a prerequisite to finish the 
stress test before you----
    Secretary Geithner. It does not----
    Senator Warner. ----a bank would fall into----
    Secretary Geithner. ----need to be. Again----
    Senator Warner. ----good assets off on the----
    Secretary Geithner. You are trying to make judgments about 
what the scale of losses may be across a range of scenarios 
with those assets. And, you know, of course, people always look 
at what is happening in the market as a measure of that. What 
you are really trying to make is a broader judgment about the 
ultimate credit losses, taking out the kind of special factors 
that are making market prices today not that appropriate a 
measure of ultimate credit losses.
    Senator Warner. I know my time has expired, but one last 
plea. I am happy to see that you are going to put up everything 
on a Web site that is going to be transparent and hopefully 
user friendly going forward. But please, please, also do that 
for the first round for TARP. Too many folks still do not know 
that--at least Virginians feel that we have totally wasted all 
that first $350 billion, do not realize that, I believe, on 
February 15 we are going to be receiving some of the first 
interest payments on some of those investments, and the fact 
that we still do not have an easily understandable site that 
can identify the over 300 institutions we have invested in, how 
those investments are doing, really hurts your credibility in 
terms of a going forward basis.
    Secretary Geithner. Completely agree, and in addition to 
that, again, we are looking very carefully at all the 
recommendations for the oversight bodies, the congressional 
oversight body, the IG, the GAO, to make sure we are taking the 
best of their recommendations, too. But I completely agree with 
you about the problem, and it makes my job much harder.
    Senator Warner. So the going backward--looking back Web 
site, can you give us a timeline when that is going to be----
    Secretary Geithner. We launched the Web site today. We are 
starting. But we are at the beginning----
    Senator Warner. The prospective one or the retroactive?
    Secretary Geithner. Well, one thing we did, I think the 
first day in office, was to commit to put the specific 
contracts that applied that show who got the resources and what 
terms on the Web site, too, and we are going to do that as 
quickly as possible. But we also want to show, as you pointed 
out--and I think you were right to point this out several times 
before, which is that you want to show the American people that 
these investments were in the form of preferred stock. They had 
a coupon dividend payment. That is going to come back to the 
Treasury in quarterly payments, and we will show those as they 
come in, without misleading people that, you know, these 
investments had risk and those flows of dividends and coupon 
are designed to help cover those risks.
    Senator Warner. They have risk, and hopefully we are going 
to, at the end of the day, come out relatively close to whole. 
But a lot of folks in my State think that we have taken that 
money and poured it down a deep hole.
    Chairman Dodd. Thanks, Senator.
    Senator Warner. Thank you, Mr. Chairman.
    Chairman Dodd. Let me endorse the proposal by Senator 
Warner. I think it would be tremendously worthwhile. I do not 
want to overcrowd your capacity to do this, but I think--it 
does not happen tomorrow or the next day, but it would be a 
great source, I think, of potentially some relief to know where 
this has gone. Not that they are going to be happy with the 
results, but at least have some idea where it is. I think it is 
a very good suggestion.
    Before I turn to Senator DeMint--and I am sure Senator 
Bennet will raise this as well, but taking the Troubled Asset 
Program, the TALF program and I do not disagree about 
commercial real estate being a beneficiary of that program. But 
I am a little hard pressed to understand why commercial real 
estate would have access to those funds for a strip mall, and 
yet municipal bonds would not be available for the same kind of 
relief when it comes to a school or a water treatment facility. 
But I will leave you to--just that sort of glares at me in 
terms of the distinction. But let me turn to Senator DeMint.
    Senator DeMint. Thank you, Mr. Chairman, and, Mr. 
Secretary, thank you for taking on this very difficult task. I 
appreciate you being here today. On a day when we passed a $1 
trillion stimulus and you announced another $1 or $2 trillion 
for a financial bailout, the stock market is down nearly 400 
points, so apparently the investors--maybe they will catch on 
tomorrow but do not have a lot of confidence today in what we 
are doing. But a lot of us have had bankers come through our 
office. I will not spend a lot of time on this, but they kind 
of scratch their heads and ask us why we are throwing so much 
money at this thing when there are some small things we could 
do that would actually give them more capital in their balance 
sheet and more liquidity.
    It has been brought up, but we appear to have clamped down 
on the loaning criteria of banks right now. The rules like 
mark-to-market, I have heard from businesses back home that 
banks have been forced to come in and reduce credit lines 
substantially, credit lines that they have had for years, 
because we count the entire credit line against a bank's assets 
even if they are only 10 or 20 percent subscribed.
    The bankers just wonder why we are not willing to consider 
any regulatory changes that would help them help themselves. I 
understand the difficulty here because it is probably easier to 
get $1 trillion out of Congress than it is to get any good 
policy out of Congress. But it is just completely missing from 
the conversation, some things that we might could do that would 
allow from the bottom up some things that would help.
    But we can debate what would work and what would not work. 
I frankly think the specificity of the presentation given the 
amount of money is terribly informal. As a former businessman, 
what we had to do to borrow $10,000 to present how much we 
wanted, how we were going to use it, how we were going to pay 
it back and when, the criteria was much stiffer than it is here 
    But I would like to--as Treasury secretary, you have more 
to deal with than just the TARP funds. I would like to just ask 
a couple of questions and hope for some short answers so I 
could get through this.
    From former staffers at Treasury that I have talked to, 
they explained that we have so much debt as a Nation now that 
these loans are coming due regularly. We often have to borrow 
money in order to pay loans that are coming due, and it is kind 
of churning, and we are playing it fairly close to the vest 
already. We are talking about borrowing another trillion or two 
or three over the next few years.
    Where are we going to get this money? Who is going to lend 
it to us? Are we going to print it or borrow it? And where are 
we going to get it.
    Secretary Geithner. Senator, thank you for raising this. It 
is an incredibly important concern, and as I said earlier 
today, I think it is very important as we work to solve this 
crisis and get the economy back on track, that we also lay out 
to the American people and the world a path that will bring our 
resources and our commitments more into balance, bring our----
    Senator DeMint. I do not want to interrupt, but I have only 
got a couple of minutes. Are we going to borrow it or print it? 
And where will we borrow it from.
    Secretary Geithner. We are going to borrow the resources 
necessary to solve this problem.
    Senator DeMint. Who will buy these notes.
    Secretary Geithner. People in the United States and around 
the world, and, Senator, this is very important to do. I think 
that if we do not do enough now to solve this, then we are 
likely to suffer further loss of confidence in our financial 
management. And that will make it harder for us, I think, to 
try to solve these problems long term.
    So I think that it is important to recognize that the more 
we do to try to get the economy back on track, the more likely 
it is----
    Senator DeMint. I understand your arguments there. I am 
just trying to look at the other side of this. Our debt to GDP 
by the end of next year will probably be twice the European 
nations, and we have always seen them as heavily in debt. We 
could not get in the European Union right now because of our 
debt. And we consider them the socialists.
    But as I look out on a trend line, I cannot see over the 
next 10, or 15, or 20 years any plausible scenario where the 
Federal Government can even service the debt--I mean the 
interest on the debt that we have, given the demographic 
situation of our country of so many moving in retirement, and 
our ability to grow out of this thing is very difficult. How 
can we possibly deal with this much debt.
    Now, let us set the argument aside that we have to do 
something. I mean, we have got a crisis, we do not want to miss 
the opportunity when we have a good crisis. But are you not 
concerned at all that this is going to result in high interest 
rates or higher taxes or inflation? How can we possibly avoid 
    Secretary Geithner. Very concerned. And, remember, let us 
start with where we are starting. We are starting with a $1.2 
trillion deficit.
    Senator DeMint. Right.
    Secretary Geithner. And it is our deep obligation to try to 
make sure as we get this economy back on track that we are 
bringing those deficits down to a sustainable level. And as I 
said earlier, the President's budget will lay out a path to 
bring that deficit down over time to a level that is 
sustainable and has us living within our means again. It is 
going to be incredibly difficult, and it is going to require 
not just the President laying out that proposal, but us 
introducing a set of disciplines on the budget process, and it 
is going to require that we start now to help address these 
longer-term entitlement problems.
    You are absolutely right, I am deeply worried about it. But 
I think that the only way to get there is to act as forcefully 
as we can now to get our economy back on track and our 
financial system repaired and back to the point where it is 
working with the recovery.
    Senator DeMint. But you can produce a model that shows some 
projection of economic growth, some revenue stream to the 
Federal Government, and within that an ability to actually 
service the amount of debt that we have as a Nation? I mean, 
you have produced that model.
    Secretary Geithner. Well, it depends, Senator, on the 
choices the Congress and the administration make in the coming 
weeks and months, because for it to work, you have to be 
prepared, again, to bring our resources and commitments more 
into balance. It does not happen without that. We cannot 
produce it without those hard choices, and that, again, is 
going to require extraordinary difficult challenges, because, 
again, where we are starting is a $1.2 trillion deficit without 
precedent in recent memory. And, again, to bring that down is 
going to be extraordinarily difficult. But that is why the 
economic recovery is designed so that it is providing as much 
support as quickly as possible without adding to those long-
term expenditure paths. And so that will help a little bit, but 
we are going to have to make some difficult choices together.
    Senator DeMint. Well, I would like to know what those 
difficult choices are, because we are prone not to make any 
sacrifices. But I would think the lead you could provide this 
Committee is a chart of your revenue projections given the 
stimulus effect of what we are spending and show how revenues 
to the Government and whatever our spending cuts might be could 
actually pay the interest on this money that we owe over the 
next 5, 10, or 15 years.
    Secretary Geithner. And the President's budget will do 
that. That is what it is designed to do, and it will do that. 
But that is just a start. It requires, of course, working 
closely together with the Congress.
    Senator DeMint. Thank you. My time is up. Thank you, Mr. 
    Chairman Dodd. Thank you very much, Senator. I am just 
recalling as a member of this Committee, not as Chairman of it, 
in 2001, 8 years ago, we actually had a hearing in this 
Committee with the Chairman of the Federal Reserve Bank coming 
before us, warning us because we were actually about to retire 
the national debt. And the issue was what are the negative 
implications--that was the subject of the hearing--of retiring 
the national debt. That was 8 years ago last month. We are now 
looking at a $10 trillion debt 8 years later.
    Senator Bennet, I believe. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for your endurance this afternoon. I just have two 
questions. One is to follow up on the Chairman's point and 
Senator Warner's point on the municipal market, and the 
reason--you said there are not any good ideas yet, but I hope 
we will find some because as I look at it, the underlying 
credits of most of these municipalities and counties is 
actually quite good. So, in my view, the risk to the Federal 
Government is a lot lower than some of the other things we are 
talking about here. And the upside is huge if we could make 
sure that our local municipalities, counties, schools 
districts, and other folks can continue and invest money that 
is not the Federal Government's money in these shovel-ready 
projects that they all have.
    So I hope we can figure out something that we can do here. 
I know that the work that the Fed did, and Treasury, on the 
commercial paper market, for example, was critical to getting 
that moving again, and I think we have got to find a way to get 
these spreads back in line.
    Secretary Geithner. I did not mean to say there were no new 
ideas or good ideas. It is just that in looking at this to 
date--and we are going to have to work harder--I have not seen 
one yet. But we are open to suggestions, and we will look at 
this, and you are right to say it is very important. And there 
may be things we can do that would be very effective.
    Senator Bennet. OK, great. And the second question, which 
is unrelated to that, is this incredibly unenviable job you 
have of trying to figure out how to value these assets, which, 
I mean, I have sort of racked my brains and talked to everybody 
I could find. It is incredibly complicated. One thing that you 
mentioned was the idea of a fund that would have both public 
and private money in it. And it occurs to me that, you know, 
part of what we need to do here is really make a market, and 
maybe the answer is that it is not one fund. Maybe it is more 
than one fund. And the RTC, interestingly, I mean, it may not 
be analogous to the situation we are in today, but eventually 
through the work of regional banks, with private capital 
invested in them, we worked out these issues. And I just wonder 
whether having multiple points of attack rather than one 
central fund could help spur some creativity and sharpen 
everybody's pencil about what the valuation should be.
    Secretary Geithner. I agree with you. Doing it that way has 
some merits, and I think it is likely--I will not say it is 
possible. It is likely that the proposal we shape will have 
that feature.
    Senator Bennet. OK. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    Mr. Geithner, again, with the others here, I appreciate 
your coming before us today. It has already been indicated that 
not a lot of detail has come out today, but it is my 
understanding that in the approach that you have outlined, what 
is being discussed is the FDIC and the Federal Reserve Board 
providing basically debt financing to allow private 
participants to make bids on troubled assets, and that there is 
a lot of speculation, frankly, that the Federal Reserve Board 
would write some kind of a put option to truncate losses, 
allowing those who did purchase these assets to put them back 
at some price or at some point in the market.
    Is that a fair assessment of how Treasury is approaching 
    Secretary Geithner. No, that is not part of this proposal. 
It is true that in a number of specific circumstances to date, 
as an effort to stabilize our system, the Treasury and the 
Federal Reserve and the FDIC have taken steps to help limit 
losses, cap losses on a designated pool of assets in some 
institutions. Those are things you want to do rarely. They are 
hard to do carefully and right. If we think there is a 
compelling case to do that again, then we will consider whether 
to do that again. But this proposal, which is designed to bring 
Government financing in alongside private capital with some 
Government capital, will not have as part of it that type of 
guarantee type----
    Senator Crapo. So there would not be any aspect of a 
Federal guarantee of the asset purchase.
    Secretary Geithner. Not as we envision it in this proposal. 
In fact, part of the virtue of this proposal, again, is to try 
to bring a structure that allows a market mechanism to help 
catalyze market solutions to clean up these legacy assets.
    Senator Crapo. Well, one of the concerns--I guess this may 
address one of the concerns I have, but please help me answer 
this. I am getting back to the valuation issues that a number 
have raised. One of the concerns I have is how will the price 
be determined. Everybody is worried about that. If we have some 
kind of a guarantee or some kind of a put option, then 
obviously there is a question there as to whether the Federal 
Government is basically subsidizing a higher purchase price 
than is appropriate. But with simply the financing that you are 
talking about, do you believe that that would have an impact on 
the purchase price in terms of the Federal Government being 
involved in some way of subsidizing the price.
    Secretary Geithner. Well, I would not think of it quite as 
a subsidy. I think you are absolutely right. In a solution 
where the Government is either purchasing or providing 
insurance or capping losses on a portfolio of assets, then you 
are acutely vulnerable to the risks that the Government is 
taking risks it cannot understand, cannot manage, may get 
wrong, may end up providing a level of subsidy to the 
institution that is not appropriate.
    We are trying to avoid that risk by using this kind of 
structure, and, again, by providing financing alongside private 
capital with private asset managers, we think we are likely to 
put ourselves in a better position to avoid that risk. Very 
important to try to avoid that risk.
    Senator Crapo. I have listened very carefully to your 
answers to three or four different Senators today about 
valuation, and, frankly, I still do not quite understand. Let 
us assume that there is a private entity who is going to get 
some Federal financing in order to purchase the troubled asset. 
Today those private entities are not purchasing the assets 
because they cannot figure out what the price is.
    How is the Federal financing going to assist? How is this 
process of price identification going to work.
    Secretary Geithner. Part of the problem why you do not see 
that happening, you do not see private capital coming to work 
in these markets now, is because of the absence of financing on 
appropriate terms to do that. That is one of the reasons. There 
are other reasons, too, including the sort of deep uncertainty 
people face about what the path of the economy is and what is 
going to happen to those losses. But one of the important 
reasons you do not see that happening now and you see private 
capital holding back is because of the absence of this 
    So we believe there is a very strong case, in the interest 
of protecting the taxpayer from risks and help solving this 
thing more quickly, to try to design something that helps solve 
that problem, again, with this mix of financing.
    Now, in that case, in a sense it is the private investors 
that are making choices about valuation, but they are doing so 
with the knowledge that there is a structure that provides 
longer-term financing, and that changes how you look at the 
kind of return you need to get on these assets. Now, that is a 
structure that is widely present in alternative forms across 
markets. It can be done lots of different ways. But it is not a 
novel structure. The novelty in this idea is that it gets us a 
way we think will better leverage private capital, use our 
resources more carefully, and protect the Government against 
the risk that we end up, again, taking risks we do not 
understand, where we are vulnerable to having substantially 
overpaid for those assets.
    Senator Crapo. So if I understand you correctly, you are 
stating that you believe that the reason there is really not a 
market now for these assets is more a lack of financing as 
opposed to a lack of ability to determine value.
    Secretary Geithner. I think that is central to the process. 
It is not the only thing. These things reinforce each other. 
Your colleague asked me earlier today which this is, about 
capital or about liquidity, and I said it is about both, 
because, again, it is in some sense a broad shortage of capital 
that is constraining the availability of financing, and that is 
feeding on the shortage of capital and, again, making it less 
likely people come in and put capital to work in this.
    So I think our hope is that we can--by providing a source 
of carefully designed capital and financing mobilized this way, 
that we can help arrest that process. But, you know, it is not 
going to provide the decisive, clean, swift solution to this, 
but we think it will help.
    Senator Crapo. Thank you. Let me shift very quickly. I have 
got a lot of questions, but I just have time for maybe one 
more. As you and I have discussed privately, I am one who 
thinks you made the right decision in expanding the reach of 
the Term Asset-Backed Securities Loan Facility to include 
commercial mortgage-backed securities. I am interested in the 
proposal that you outlined today. If I understand it correctly, 
you have dramatically increased the leverage that is going to 
be provided for those funds. Could you tell me how you have 
done that and what you propose to do there.
    Secretary Geithner. We do not intend to necessarily change 
the basic economics of the leverage. The way the proposal was 
initially designed, there was roughly $20 billion of capital 
from the Treasury in support of total financing in the range of 
$200 billion. That was a carefully designed process with a mix 
of hair cuts and other terms that, again, were carefully 
designed to protect the risks both to the Fed and the Treasury. 
So, of course, we are going to look at that carefully along 
with the Fed as we move to expand it both in size and in scope, 
and we will have to revisit that next. But, again, we want to 
have a mix that works from the interest of not just the Federal 
Reserve but the broader taxpayer. But we are not proposing to 
substantially expand the leverage in that now.
    Senator Crapo. All right. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    I would like to turn back to the auto industry for a 
moment, Mr. Secretary. The focus so far from the Government has 
been on the supply side, and I want to urge you to look at the 
demand side, and the stimulus package, Senator Mikulski's tax 
credit should help stimulate--should stimulate demand. Talk to 
us, if you would, how you can, working with the Fed, ensure 
high priority is given to auto financing, both for dealers and 
for ultimate consumers, what we can do together there.
    Secretary Geithner. As you know, the Treasury Department--
well, my predecessor already took some action to help address 
the financing piece of the auto challenge. This Term Asset-
Backed Lending Facility, this consumer lending facility, will 
also help directly get at the markets that are really critical 
for auto finance. They are recognized by the experts as being 
very helpful in that. Those two things will help, too.
    But I think you are right, you want to--you know, as we 
look at and examine the best possible restructuring plan for 
these industries, we also want to look at trying to make sure 
the markets that we are financing are repaired and functioning 
    Senator Brown. With both buyers and dealers in mind.
    Secretary Geithner. I think that is a fair way to say it. 
The challenge, of course, is how to do it. But, again, if you 
do not get the financing right, your other problems are going 
to be harder to solve. And financing is key to the demand side.
    Senator Brown. And talk to me about--as the auto companies 
are working on restructuring, developing restructuring plans, 
as the administration is working on that, talk to me about how 
that comes together, what the timing is. Are you working with 
them now on restructuring plans? Or are they working on a 
separate track from you? And how do we integrate that, and do 
you hold enough money--make enough money available to implement 
the plans that you work out together.
    Secretary Geithner. An important question. At this time, as 
the administration looks through broad policy options, the 
automobile industries, in separate parallel track, are putting 
together their restructuring programs, and we will see those in 
broad outline on the 17th, and that will give us a basis for 
making some initial judgments about whether those plans go far 
enough, and if not, how we are going to make sure that we 
achieve this important objective of helping--if there is a 
strong case for doing so, help the Government facilitate a 
restructuring that will leave them in a position, again, they 
are going to be viable longer term without Government support.
    Senator Brown. Thank you. Let me talk about generally with 
the banks and how Treasury has learned from everything, from 
the excessive executive compensation to dividends to the 
profligate spending on themselves, what Senator Tester talked 
about, the purchase of banks by other banks. It seems to be--
and I appreciate the change in philosophy at Treasury. I 
appreciate the change in folks. I appreciate that Treasury has 
seemed to have learned something. It seems to be dawning on 
large financial institutions themselves that receiving billions 
of dollars in Federal aid means that they should scale back a 
bit on their own perks. But let us take it further to the whole 
issue of kind of the public interest, the broader debt that 
these banks that are getting tens of billions of dollars, the 
broader debt they owe to taxpayers, sort of the wider public 
interest here.
    I understand that there is one major financial institution, 
and perhaps more than one, with tens of billions of dollars of 
taxpayer backing that is continuing to aggressively outsource 
jobs, back-office jobs, call centers, accounting, computer 
programming, IT. How do we address that? You talked in your 
opening statement, one of the first things you said I wrote 
down, ``the financial system is working against recovery,'' and 
you talked about the deep loss of faith. If we are going to 
spend tens of billions of dollars of taxpayers' money in a 
financial institution, they then begin, as we are working on 
the stimulus package, we are here to stimulate the economy and 
grow jobs, they outsource the back-office jobs. How are you 
going to address that to make sure it does not happen? Do you 
make public statements about it? Do we make public statements 
about it? Do you build in conditions in this money that you 
invest in these institutions? What do we do there to stop that.
    Secretary Geithner. To be honest, Senator, I am not sure 
what I can do, what we can do specifically about that problem. 
But what I can say is that we are going to bring much higher 
standards for accountability and transparency to those 
institutions, and the program the President and I laid out last 
week requires a much higher level of transparency by boards of 
directors to how they are managing these broad challenges. And 
that will help, I think, make sure that we do not see the kind 
of judgments made that make it much harder for us to justify 
public support for these institutions. But I think it is just 
important for me to say that I do not believe we can put 
ourselves in the position we are raising the prospect where the 
Government will come in and directly manage at that level of 
detail choices these institutions make. I think if we do that, 
there is a great risk that ultimately we will end up costing 
the taxpayer and the economy much more. It is a careful 
    I understand your concern. I am deeply offended by many of 
the judgments they have made. It makes our job together much, 
much harder. But there is an important offsetting obligation we 
have not to create the prospect that the Government is going to 
come in and make these decisions for institutions that we want 
to remain in private hands and we want private capital come 
replace our investments as soon as possible, because ultimately 
it will be easier for us to solve this if we achieve that basic 
    Senator Brown. That is not a very reassuring thing to 
people who read in the paper that a large financial 
institution, while getting public funds, is saving on employee 
costs by outsourcing back-office jobs instead of paying 
Americans to do those jobs when the unemployment rate is my 
State is approaching 8 percent and across the country is 
approaching something close to that. I do not think your answer 
was cavalier, but I do think that it implies something that I 
do not like to hear, and I hope you will revisit that, and we 
will do all we can to make sure you try to revisit that.
    Secretary Geithner. Nothing cavalier in what I said. I have 
to be honest and candid with you.
    Senator Brown. I appreciate that.
    Secretary Geithner. But the basic objectives that we are 
trying to make sure is that every dollar of assistance we 
provide helps get credit flowing again so this economy gets 
back on track. That is what guides what we do, and we are going 
to try to make sure the assistance is done to meet this broad, 
compelling public interest.
    Senator Brown. I fully understand. Thanks.
    A last real quick point, Mr. Chairman. National City in 
Cleveland, the horse is out of the barn. PNC bought National 
City. I understand the need for secrecy and confidentiality. I 
understand all of that. But the bank no longer exists, and we 
never could get the answers from Treasury and from others about 
what really happened at National City, and I would urge you to 
be more forthcoming with those details to our office, to 
taxpayers in my State, to shareholders and former employees and 
people who lost much of their retirement of National City when 
that bank was bought with TARP funds, and they were not given--
perhaps not given a chance to even apply for TARP funds. So we 
need to know more, and I hope that information will be 
    Secretary Geithner. I understand your concern, and going 
forward we will try to be as careful as possible and responsive 
as possible, and being responsive to those kinds of questions.
    Senator Brown. Thank you, Mr. Secretary.
    Chairman Dodd. Thank you very much, Senator.
    Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman. Let me, if I 
might, try to maybe set out some context for my questions. I 
have listened a couple of hours here, Mr. Secretary, and it 
strikes me that your testimony today is probably 
unprecedented--and I say that very, very respectfully--but just 
listening to what you described describes to me a level of 
government involvement in the financial institution that we 
have maybe never seen before. Probably did not even see it 
during the Great Depression.
    We are describing a level of taxpayer support that also is 
just really unprecedented. Not to pin you down today on 
numbers, but I think you are giving us a fair warning this is 
going to be enormously expensive.
    In that context I would like to ask you a couple of 
questions about the financial institutions and fixing that 
massive problem. Fast forward a year or two or three and 
hopefully we are both doing what we are doing today and this 
has worked. Tell me what we will have in 2 or 3 years from now 
when it has worked. Describe for me what the goal is, what the 
end zone is going to look like.
    Secretary Geithner. The ultimate goal, of course, is that 
the economy itself is back on a path where we are growing at a 
sustainable pace and unemployment has come back down to a level 
where we are using the full productive resources of economy. 
The financials will look dramatically different for many of the 
reasons pointed out by your colleagues there is a very, very 
substantial restructuring going on across our financial system 
and it will not look 3 years from now what it looked like 2 
years from now.
    You have already seen very, very dramatic changes and you 
are going to see more of that going forward. But the test in 
some sense of the effectiveness of these programs will be 
whether we are seeing borrowing costs come back down to a more 
normal levels. And people who are creditworthy and have an idea 
they can finance or a company that they want to build, or an 
investment they want to make, are able to access credit more 
freely on terms that reflect the ultimate risk in those 
programs. That is the right test. Those two things.
    Senator Johanns. You have referenced, though, in a number 
of parts of your testimony, accomplishing a goal of a credit 
market that is securitizing, that is bundling, and that there 
is a marketplace to purchase that.
    And here is what I want to ask you about that. I look at 
that, in what percentage of this problem would relate to real 
estate, mortgage-backed securities.
    Secretary Geithner. Senator, a very substantial portion 
sort of depends on the institutions and the type of real estate 
    Senator Johanns. A lot.
    Secretary Geithner. A substantial portion, but not the 
entire bulk of it.
    Senator Johanns. Yes. Here is what I think it gave us. I 
think it gave us a bubble. It certainly gave us a burst of 
economic activity for a little while. It gave us obscene 
compensation plans, by anybody's definition. It gave us the 
inability to look at that basket of assets and decide what the 
value of it is. It gave us a system where people were buying 
those assets, probably not really knowing what the value of 
that asset was. It brought in a large part to the brink of 
financial collapse. And today, somehow, someway, we have got to 
explain to the American taxpayer why it is worthwhile to invest 
in that to save that system.
    How are you going to stop that.
    Secretary Geithner. Excellent question, and you are 
absolutely right that parts of that system are broken. And 
those basic failures were part of what made this crisis so bad. 
I agree with you about that.
    But the programs rolling out today, we are confident will 
be designed again to help get those markets functioning on a 
more sound foundation. What this program with the Fed, we are 
lending against the highly rated insurances of new 
securitizations going forward that have as their underlying 
loans student loans, auto-finance loans, credit cards, 
receivables. Those markets worked better, those structures were 
more tested, longer lasting. They have more basic confidence 
underlying them.
    But you are right. Real estate was at the heart of this and 
what you saw develop in the securitization markets over time 
helped make this worse, harder to solve and we have got to be 
careful not to sustain or artificially continue or try to 
artificially support those basic markets but I think we are 
being careful not to do that.
    Senator Johanns. One last question, it comes out of the 
document you gave us. And I will just, and I say this as a 
former Cabinet Member, it would be so helpful if you would get 
this to us the night before your testimony. At 11:30 a.m., 
we've got a hearing in the afternoon, this was, it was unfair. 
So I would, just as one member of the committee would 
appreciate a more diligent response.
    But you say a key component that Capital Assistance Program 
is a forward looking comprehensive stress test that requires an 
assessment of whether a major financial institution has the 
capital necessary to continue lending and to absorb the 
potential losses that would result from a more severe decline 
in the economy. And you are going to do this for everybody over 
$100 billion, they will be required to do it.
    How many institutions would be over $100 billion.
    Secretary Geithner. I am not going to get this perfect but 
it is roughly in the scale of twenty-five.
    Senator Johanns. Twenty-five.
    Secretary Geithner. And again, this is a critical part of 
what banks and supervisors have to do. It's an ongoing normal 
process. We are just going to try to bring a little more 
consistency and realism to how it is done.
    Senator Johanns. OK. My last thought on this, and it is 
more a thought than a question. This stress test, when you 
publicize to the world that they lack the capital necessary to 
continue lending in an economy that is maybe beyond what they 
projected, I would think that would cause a very, very serious 
problem for those 25 institutions if not a literally a run on 
the institution. How do you prevent that.
    Secretary Geithner. It is a very difficult, complicated 
process. I think it is important to recognize that the world 
today looks at these institutions with great uncertainty about 
the scale of their losses ahead. They know a lot about what 
their exposures are, and they know they face some risks ahead. 
And our hope is by bringing more clarity to that process with 
some support for capital, you are going to get the markets in a 
better position where that uncertainty is dispelled and they 
have got a firmer foundation to do it.
    Now, again, the markets may be overestimating those risks. 
They may be underestimating, but right now the level of 
uncertainty that exists, itself, is very damaging. And it is 
not something that you can solve by--and you are not suggesting 
this and I do not mean to imply this--by trying to obscure that 
basic underlying problem. Because right now that problem itself 
is putting a huge amount of pressure on these institutions and 
making it much harder for them to do what is necessary to grow 
and expand.
    They are being forced to, some of them, are being forced to 
contract because of that. So arresting that process is 
important but you are absolutely right, it is a very delicate 
careful balance and you need to look at these things together 
with some care and rigor and consistency and realism on the 
supervisory process combined with access to capital, combined 
with these other measures we are going to produce to help 
provide some broader financing to these markets.
    It is going to be a difficult balance, but again, the 
markets today are living with this acute cloud of uncertainty 
about what those basic risks are and that itself is 
contributing to this dangerous dynamic where there is more 
deleveraging, shrinking of balance sheets, that otherwise may 
need to happen.
    Senator Johanns. I could see the frown grow on your face as 
I asked this question, and I understand, but if we do not 
figure this out you are going to need a gigantic amount of 
capital to protect these 25 intuitions. So I just think it is 
something that we have to pay a lot of attention to because it 
puts a mark on them.
    Secretary Geithner. Can I just, before we leave this I just 
wanted to say that, you know these intuitions are all in 
different circumstances and the scale of needs vary across 
institutions. And it is not fair to tar them with the same 
brush. They are different circumstances; we are going to treat 
them with carefully and differently recognizing their relative 
strengths and weaknesses. Again, with the basic objective of 
putting them in the position where they are going to have a 
stronger foundation to get through this thing and I do not 
believe there is any realistic way to get through except by 
trying to do that.
    Senator Johanns. Mr. Chairman, thanks for your patience 
again. I went over.
    Chairman Dodd. No, no. Let me commend my colleague from 
Nebraska. We have new members of this committee who are just 
tremendously valuable and I include my colleague from Nebraska; 
just very, very good, excellent questions.
    And let me underscore the point the Senator made. And I 
think I understand the circumstances in this particular case, 
but I want my colleague to know that over the last 2 years as 
the new Chairman of this committee I insisted that our 
witnesses when they come, we get that testimony ahead of time 
because it is very difficult. Last evening, today because of 
the news particularly this morning, I think we all understand 
some reluctance but I am confident that the Secretary will 
appreciate how important it is for the members up here early. I 
made that point to other witnesses, I appreciate my colleague 
raising it and I'm sure he heard the point.
    And let me say too, before I turn to Senator Merkley, on 
this very last point I think it was a very important exchange 
that just occurred between you, Mr. Secretary, and Senator 
Johanns and that is having the flexibility here. I think part 
of the difficulty; it has been pointed out by members. In the 
first tranche, that kind of one size fits all; were you going 
to buy the assets, were you going to make the equity 
investments? And I think for some that get caught up in this 
either/or situation and I think the point that you made, these 
institutions are not all in the same place.
    And to the extent that we have the flexibility to respond 
with creativity and imagination and yet also understanding the 
facts as they prevail in various cases, I thin is extremely 
important in how we go forward. So it was a very important 
exchange and I appreciate it very, very much. Senator Merkley.
    Senator Merkley. Mr. Secretary, thank you very much for 
your expression of your interest in your dialog with Congress. 
I want to ask questions really related to the mortgage issue. 
We have nearly 50,000 foreclosures a week, a prediction of 2 
million in the coming year. Goldman Sachs has said that we will 
see one in four mortgages be foreclosed on by, I believe, 2014.
    How urgent is addressing the issue of mortgages as compared 
to the lending issues and the consumer demand issues that exist 
as part of this complex problem.
    Secretary Geithner. Urgent, as important, need to move 
together on all those fronts.
    Senator Merkley. Thank you. I certainly, absolutely agree.
    In 1932 through 1934 there was a multi-dimensional plan 
that was put together, not all at once, but eventually put 
together to attack the collapse in the mortgage market. It 
included revamped rules for mortgages. The amortized mortgage 
was invented; the Federal Home Loan Bank System was put 
together. There was a separate institution; I believe the 
initials were HOLC that directly financed mortgages, and more 
than a million of them.
    Is the plan the Administration going to put forward, is it 
going to be as multi-dimensional and sweeping as the set of 
strategies that were used in the Great Depression.
    Secretary Geithner. I think it will be hard to compare 
these things precisely because this is a different set of 
circumstances, even though there are similarities. It is going 
to be different. But again, I think the President believes--and 
I completely share this commitment--that we need to put 
together a comprehensive program that not just addresses the 
foreclosures ahead, not just--well, I don't want to get ahead 
of the President. There's going to be a lot of pieces to this 
    Senator Merkley. Please do. Please go ahead.
    Well, one of the pieces was certainly to address kind of 
the flaws in the mortgages design. We had 3 to 5-year balloon 
mortgages, often they were callable. They were replaced with 
these amortized, fixed-rate 15-year mortgages. Eventually the 
private market expanded that to the 30-year standard we have 
    Currently we have a number of features in our mortgage 
market that I certainly would describe as dysfunctional 
components. One is prepayment penalties that basically 
incentivizes the use of teaser rates because you have people 
trapped into the mortgages. A second is steering payments where 
individuals go to a broker. They are paying that broker, they 
think they have hired that broker, but actually the broker is 
working for the lender and a high proportion of our folks in 
sub-prime lending actually would have qualified for prime 
    A third is the complete collapse of underwriting standards 
even to the degree that we had stated income loans. Are these 
addressing these types of dysfunctional components going to be 
part of the Administration's plan.
    Secretary Geithner. Not at stage one. I think the dominant 
risk that we face today, Senator, is that you are not seeing 
enough lending. You are not seeing enough risk taking. You are 
not seeing enough credit provided to flow to parts of the 
economy, the viable credit where the parts of the economy 
really need those resources, and our first priority has to be 
to try to help stabilize this.
    Make sure people can afford to stay in their homes. We get 
interest rates and mortgage payments down. But you are 
absolutely right that moving forward, as we reform the broader 
financial system, we are going to have to bring a very careful, 
comprehensive look at the quality of constraints we put on 
those financial institutions that make mortgage loans going 
    And there were broad-based systematic failures in lending 
practices, underwriting standards that we are going to have to 
fix going forward. The Federal Reserve and other regulators 
have laid out some changes over the last year or so. We are 
going to be looking at those to see if they went far enough, 
and as part of our broad reform programs we are going to try to 
make you confident and make the American people confident that 
we are going to bring fundamental changes to the basic 
underpinnings of the mortgage market.
    Senator Merkley. Well, thank you for expressing it in terms 
of not in Stage One. I certainly look forward to Stage Two. You 
know we have such a careful, now I see my time is up.
    I will just close with this statement then. We have such a 
careful set of rules regarding conflict of interest for real 
estate brokers, but then when the same homebuyer having been 
carefully protected in a real estate transaction goes to get 
their mortgage it is a lamb to the slaughter. We need to make 
sure that those mortgages provide a foundation for successful 
families. Not a mechanism to strip wealth from families. I look 
forward to working with the Administration and thank you for 
your concerted interest in this area.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Merkley. My staff just told me I had a minute left. 
I saw the red light here and I thought I was a freshman 
    Chairman Dodd. If you have another question go ahead.
    Senator Merkley. I have, the last one here and that is do 
you anticipate that primarily you are in Stage One as you put 
it. You are going to depend upon renegotiation by the lenders 
or will there be direct assistance to buy out those mortgages, 
perhaps the lenders take a haircut and basically restabilize 
families with loans that are not underwater and that are fixed 
for a long-term.
    Secretary Geithner. We are looking at all those things, and 
I know this is frustrating today, and we will consult carefully 
and we have been spending a lot of time looking at all of the 
ideas in those areas and the President will lay out what he 
believes, where we believe the best possible plan is. But I do 
not, today; I cannot tell you exactly what precisely is going 
to make up this program. It would be unfair to him and to the 
    Senator Merkley. Well, certainly my encouragement is that 
we not simply depend upon lenders to renegotiate because of the 
fact that those mortgage packages have been securitized, put in 
tranches, resold.
    It is enormously frustrating. I have a constituent named 
Lisa who asked me to share her story. She is from Hood River. 
She has contacted her lender 14 times. Has never been able to 
get a conversation going about renegotiating her loan. She is 
told that, of course, this servicer that she is reaching does 
not own the loan anymore. For consumers to penetrate that maze 
is very difficult and, of course, for the owners of the loan to 
take any action given that the cash-flows have been securitized 
is very difficult. So it is difficult on both ends and I really 
encourage the Administration to look at it in a much more 
direct way.
    Secretary Geithner. I understand that, and I think you are 
seeing that across the country, too and that is why it is hard 
to solve. But we are on it and we are going to do out best.
    Senator Merkley. Thank you very much.
    Chairman Dodd. Well, that is very important and all of us 
have Lisas in our states. The Senator is absolutely correct. We 
have tried a lot of different ideas here, but penetrating this, 
2 years ago we sat in this committee and tried to even, we 
brought all of the stakeholders together. We have tried on 
numerous occasions and no success so far, that is why I am very 
hopeful and I appreciate your answer that you put that as a 
priority along with the issue of the lender issue. This nine to 
10,000 foreclosures a day and the declining, spiraling down 
evaluation where eight million homes in this country are 
underwater today. And where mortgages exceed the value of homes 
it is just devastating.
    Secretary Geithner. It is devastating.
    Chairman Dodd. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman and thank you Mr. 
Secretary for all of your work. I have two statements and then 
some questions.
    The first statement is I appreciate efforts at 
consultation, getting out input. However, having said that I 
think having a major announcement and a major committee hearing 
today with the complete lack of detail that we have quite 
frankly was a big mistake. And I think it is another version of 
the American people hearing how cataclysmic the crisis is with 
no fleshed out solution and it is a tough problem and the 
solution may take time. I'm not arguing that. I'm just arguing 
how it is presented and I personally do not think in that 
context it is a coincidence that they Stock Market went down 
4.6 percent today, worse since December 1st.
    The second statement is about housing. I am very glad one 
of the four key pillars you outlined is housing. With a lot of 
folks I have been pushing to fix housing first and I think we 
need to that. I agree with the Chairman that that should be 
listed as number one not number four. And I hope that is 
addressed in a very meaningful way, not as just sort of 
political window dressing because mortgages affect a lot of 
voters, but as part of the heart of the problem. That is where 
the problem started. It certainly grown beyond but I think that 
is where the solution can start.
    Obviously, the devil is in the details. So I will wait to 
hear what those details are.
    The first question, I jotted down your phrase. You said 
this approach was ``fundamentally different in broad objectives 
and directions.'' And yet, when I look at the three elements 
sort of under your purview, not counting housing, capital 
assistance is what we have been doing for banks. Public-private 
investment fund is sort of a TARP redo, a new model of the TARP 
concept. And the third element is TALF, to expand that. So to 
me that is continuation more of the same, maybe greater volume, 
but very much more of the same.
    How is that fundamentally different in broad objectives and 
    Secretary Geithner. Senator, let me just respond to your 
first point. I am here to testify today, the same day I laid 
out the broad objectives, principles, and programs that we 
believe are the best path forward to help fix this financial 
crisis. And you are absolutely right that we did not lay out 
today a level of detail to allow you to examine their efficacy 
and we are not claiming here today that we did that, and you 
are absolutely right.
    And we are going to be careful in doing that so that when 
we provide you the details they represent, again, the level of 
care and discipline the choices of this consequence require. 
And I do not want to put my department in the position of 
giving you partial details of things we have not worked out 
ahead of when we do that. I do not think that would be fair.
    And you are right that this is not a highly elaborated, 
detailed set of comprehensive proposals. I have been in office 
for 2 weeks and we wanted to do this in a way that was careful 
and responsible, meeting the imperative of laying out a broad 
program initially in its broad design as we worked with you and 
others to design the basic details. But I understand your 
concerns, but we are not claiming to do other than that.
    And it was judgment call to make about whether that was--we 
had limited control given the time of life of whether that was 
appropriate to do on the same day we were testifying.
    Senator Vitter. And again, just to underscore, I am not 
suggesting you rush something before it is ready. I am 
suggesting you not talk about something for 4 hours before it 
is ready and you have the details.
    Secretary Geithner. I understand that concern too; on the 
other hand, I think it is important that we lay out, again, the 
broad objectives and strategies that we believe will help get 
us through this. And if we wait and we take the approach, we do 
not lay that out ever until we are at the point where we have 
solved every problem and every detail and I think that itself 
will create greater risk of uncertainty. But I understand your 
concern about it and I am sensitive to it too. Very sensitive 
to it.
    Now on the basics, what is different? I am going to go back 
and say what I said at the beginning. To solve an economic 
crisis of this magnitude requires very substantial fiscal force 
alongside monetary policy. It requires aggressive action to 
help stabilize the financials and get credit flowing again. And 
you are right, as I said, and the President believes it 
requires moving aggressively sooner to help arrest this 
dangerous spiral in the housing crisis.
    The fundamental thing that is different is us bringing a 
plan where we are moving together on all of those fronts. That 
has not happened to date for lots of complicated reasons. It 
cannot, we cannot make that mistake going forward. The second 
thing that we are doing, is we are trying to transform the 
level of transparency and oversight in accountability that 
comes with this program. So that everyone has more confidence, 
that we are doing this in ways that are going to meet the basic 
objectives of the program with a level of transparency that 
allows people to watch and oversee how these judgments are 
being made. That is a necessary and important thing to do.
    There are important aspects of the comprehensive solution 
of how to stabilize banks and to go around banks to get these 
credit markets going again, which we believe are essential. Now 
if they share elements of what is necessary in any financial 
crisis to solve a problem, then we are going to do it if we 
think it is effective. And the fact that you see in this 
element, element of some past strategies does not mean it is 
not the right strategy for the country.
    Again, what we are going to try to do is to bring the best 
set of proposals together. They can have the best prospect of 
fixing these problems at the least cost to the taxpayer. It is 
going to be hard to do. People will disagree on whether we got 
that balanced right, but we are going to lay it out to you and 
let you make that judgment too as we move forward.
    Senator Vitter. What is the rough timeframe in which we 
will be discussing the details, number one. And number two, 
will we consider all of this and the relevant details including 
the costs together, rather than being presented the details of 
one part before understanding the broader context.
    Secretary Geithner. A fair point. As I said, we are going 
to lay out the details of the housing strategy relatively 
quickly. You will be able to see that. The proposal to expand 
this Consumer Business Lending Facility built on this term 
asset backed lending facility has an architecture that has 
already been laid out to the market and we are going to propose 
as quickly as possible how we plan to adapt that to meet the 
needs of a larger program. And on these other component pieces 
of it, we are going to move as quickly as we can in parallel 
and lay them out. And we will do so in ways that gives you our 
best judgment about the ultimate costs and risks, but we 
believe we have been given substantial resources and authority 
to be able to begin this program on a very ambitious scale at 
the outset.
    And if we think there is a case to come back and ask for 
resources and authority we will do that, but of course we 
understand that, before we can ask you to make that judgment, 
you need to be in a position where you can look at the details 
of the signs and make your own judgment about whether you think 
we are coming to a reasonable balance.
    Senator Vitter. Well, again, just to underscore, I would 
encourage that when you come to us, because it is clear you 
will at some level for something, that it be with all of this 
fleshed out reasonably and with a global ask rather than sort 
of piecemealing it.
    Secretary Geithner. I agree with you. I think that is a 
sensible approach and we will try to meet that test.
    Chairman Dodd. Let me just challenge the members as well. I 
mean this, obviously process questions are important and I do 
not minimize them. But what I think what is also going to be 
critically important is there be substantive suggestions that 
those of us have to the Treasury and to others who will be 
involved. If we have ideas that we think would be helpful and 
constructive in terms of making this program work--I am being a 
bit presumptuous here, Mr. Secretary--I think my members here, 
both Democrats and Republicans, would like to be a part of the 
process. And so in addition to the process issues that we are 
going to deal with, the timing of everything and so forth, I 
think we would also like to feel as though we had some 
contributions to make to this.
    If we are going to be the ones asked ultimately to support 
what I think you have suggested here today is a substantial 
amount of resources to support this program, that we also need 
to be involved in what John Glenn used to talk about: the 
takeoff, not just the landings. And so I would invite my 
colleagues and hopefully you will be, and your staff, receptive 
to the ideas and suggestions that are made by the members of 
this committee.
    Secretary Geithner. And we are here in that spirit today, 
and again, I did not come before you today to ask this 
committee to support additional resources and authority. I came 
to give you the broad outlines of the proposals we think offer 
the best prospects of fixing this problem. And as I said at the 
beginning you have already provided substantial resources that 
allow us to move and do this. But we are at the beginning of 
this process of conciliation, and we will take that process 
very seriously.
    Chairman Dodd. I thank you. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman, and I want to 
thank you also, Secretary Geithner for being here and your 
patience. I know there are a lot of qualms on both sides of the 
aisle not having the details.
    And my friend from Louisiana said well, if you are not 
going to have the details why come before us? Let me say this, 
previously we had specific proposals sort of rushed out and 
they didn't work. And it is easy to pick holes in them and I 
certainly have, but we are in uncharted waters here. This is 
really tough stuff.
    I think it is fair to say that historically we have never 
seen a moment like this. Even in the Great Depression, you 
know, where we knew what was happening--runs on banks but it 
was not as complicated. So in this situation where, thank God, 
there is not a major institution ready to fail at the moment. 
It is better to get it right than get it quick. And yet, to 
assure people that you are thinking about this and working on 
it and giving so broad brush strokes, and then later fill in 
the details obviously completely before you come to us for 
approval to me makes sense. It is hardly ideal, but neither is 
the situation we are in. We are in a rotten situation where 
nobody knows what to do and I have not heard a lot of people, 
you know there is a lot of criticism and that is legitimate, 
but I have not heard anyone else enunciate a comprehensive 
broad plan that everyone says, ``Eureka! That is it. That is 
going to make it work.'' And that is understandable because we 
are in such tough times.
    So I have a great deal of sympathy for the way you are 
doing this and I think when people learn the details knowing 
the thoughtful nature that you and others in the 
Administration, the President himself is putting into this they 
are going to feel pretty good about it. They are not going to 
feel great because there is no great solution.
    A question that has not been asked, I have managed to come 
up with one. What about protecting the taxpayers? Just give us 
your broad thoughts on this since we are leveraging up to $350 
billion of taxpayer money. That is a huge sum. Turning it into 
over a trillion and maybe $2 trillion with the Feds magnifying 
glass. How can we be sure that the taxpayers are protected in 
spending that money and what steps are being taken to ensure 
the taxpayers enjoy the upside of any recovery.
    I think that is really important to assure people, because 
we are Americans, we are optimistic. Most of us believe we are 
going to have a recovery at some point and we do not want to be 
left holding the bag. We should come first because the 
taxpayers laid it out.
    Secretary Geithner. It is very important to us that we, 
again, design these programs that have the least risk to the 
taxpayer and the most benefit for getting our economy back on 
track. That is the overriding principle that guides everything 
we do.
    I will give you an example of how we try to navigate 
through this. In this lending facility that you described, this 
is designed in a way so that we have independent pricing with 
haircuts or margins that are designed to be conservative in 
normal times so that the overall economics of this work in a 
way that, as conditions normalize, markets' demand for this 
will fade away. It won't be economic to use these facilities. 
Demand will fade. That is the basic structure.
    This comes with a level of capital protection for the 
Federal Reserve and the taxpayer as well as those additional 
protections to make sure that the ultimate risks to us are 
very, very limited. Now, they will not be zero----
    Senator Schumer. And just one other. Obviously. What about 
the return to us, should this all succeed.
    Secretary Geithner. Well, again, these lending programs 
come with a return. The capital investments that we will make 
will be designed to come with an appropriate return to the 
taxpayer and an appropriate share of the overall benefits to 
the companies that get that assistance. Getting that balance 
right is hard to do, but you are absolutely right that the 
assistance we provide should come with not just appropriate 
protections for our risk, but some gain for the taxpayer from 
the benefits we are providing to those institutions.
    Senator Schumer. Right. Well, I hope you will just think of 
ways to do that. I think that is very important. And in the 
past when we have done things like this, RTC, et cetera, at the 
end of the day, the Federal Government has made money, although 
much later, later date.
    All right. My last question, Mr. Chairman, and this one is 
something near and dear, I know, to you, Mr. Chairman, to me, 
to my colleague, friend, and roommate, Senator Durbin, and that 
is bankruptcy. I still fail to see how we can get a real handle 
on the foreclosure situation with sticks as well as carrots. 
Everyone is focused on the carrots and all the carrots alone 
have failed. The only thing that brings that tranche holder who 
doesn't want to come to the table is the fear of bankruptcy.
    Tell us where we are at on that. You didn't mention that 
today. It doesn't have to be in this proposal, in my judgment, 
but I would like to see it move forward in the next month or 
two one way or another. Could you pleas.
    Secretary Geithner. It will be an important part of the 
President's plan. As you know, the President believes that we 
need to bring bankruptcy reform to the mortgage market. You 
have to do that very carefully so we don't make it less likely, 
harder for private capital to come in the future. We are 
working with your colleagues to find the best way to do that, 
the best vehicle to pass that, but I think the President 
believes, I believe that that is an important part of this 
    Again, I just want to emphasize, though, at that same time 
that we want to do it very, very carefully because this is a 
delicate situation, complicated balance, and we want to make 
sure we are not making the process worse as we go forward. But 
it will be part of the President's proposals and we are working 
with you and your colleagues on the best way to work that into 
    Senator Schumer. Thank you.
    Chairman Dodd. Thank you, Senator.
    Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman.
    Mr. Secretary, earlier, Senator Warner talked about 
municipal bonds. I would like to continue that discussion by 
talking about mortgage revenue bonds issued by housing finance 
agencies. Last July, Congress recognized the important role 
that housing finance agencies play in the mortgage market. We 
doubled the bond volume cap and also allowed these agencies to 
use bond proceeds to refinance mortgages for troubled 
homeowners. However, due to the frozen credit markets, housing 
finance agencies have not been able to sell their mortgage 
revenue bonds.
    These mortgage revenue bonds provide affordable mortgages 
for low- and moderate-income families all across our country. I 
have written to you and also Chairman Bernanke suggesting that 
TARP funds be used to purchase the housing finance agency bonds 
or expand other programs to support these securities.
    You did say this morning, Mr. Secretary, that banks have 
not been willing to lend even to qualified borrowers. Housing 
finance agencies are ready and are willing to lend. One thing 
that you could do to help restore credit and support stalled 
housing markets is to use TARP funds to buy the bonds of 
housing finance agencies. Is this a viable suggestion? Is this 
a viable possibility, that you will use TARP funds to do that.
    Secretary Geithner. Senator, I am going to need to look 
more carefully at that proposal before I respond, but I will do 
it and I will make sure we get the right people around the 
table to do it carefully and we will come back to you with a 
thoughtful, considered answer.
    Senator Kohl. All right. Mr. Secretary, the problem we are 
facing is not just or not only having a system in place which 
you are clearly giving the indication that you are prepared to 
do, and are in many ways probably quite capable of doing, to 
ensure that our financial markets go forward in a more orderly 
way in the future. But there is a political problem here, as 
you know. All across the country, the percentage of people who 
have any confidence in the financial industry in our country is 
probably in the single digits.
    Most all people in this country feel that the financial 
industry and the people who have been running our financial 
industry have brought this country to its knees and people in 
this country to their knees, working people all across our 
country who have lost their jobs in many cases, their savings, 
their retirement accounts, and they see this as something that 
has occurred because the financial giants in our country were 
selfish and not concerned about the public good, only concerned 
about themselves, and now we find ourselves in this place.
    Well, here we are today and you are the face. You are the 
person who is now going to represent the financial industry 
going forward. My concern is huge and the question I am asking 
you is, how do you intend to deal with this people problem, not 
just the system problem but a people problem, because I believe 
unless we can restore people's confidence in the people who are 
running our financial industry, whether on Wall Street or in 
banking communities all across our country, you are going to 
have and we are going to have a hard time in finding approval 
for the funds that you may well be asking us to come up with on 
behalf of taxpayers to do what it is you believe needs to be 
    So what are your plans? Are they going to be here with you 
in a month or two or three? Are we going to see these people? 
Are they going to discuss the errors that have been made, make 
necessary apologies, and convince the American people that the 
future is going to be different, or are we simply going to have 
to trust you and your systems.
    Secretary Geithner. Senator, I am not here to represent the 
financial community. I am here as the Secretary of the Treasury 
and my job is to help the President put in place programs that 
are to help meet the public interest in helping solve this 
crisis. And everything we do will be designed to improve 
confidence in the American people that we are going to use 
their resources wisely with much higher standards for 
transparency and accountability, with the kind of tough 
conditions we need to make sure that money goes to generate 
lending, in ways people will be able to measure and monitor, 
and in ways that will give us more confidence and you more 
confidence that the money we are providing is going to help get 
lending going again to parts of the economy that need it most 
and to the people that have been most affected by judgments, 
responsibilities, things that they did not make.
    You know, the tragic thing about this financial crisis is 
the people that were responsible and careful were deeply 
damaged by the actions of those who were not. And we have a 
responsibility to try to address that and mitigate that damage, 
and that is what will guide our overwhelming approach.
    It is going to be hard to do. It is going to involve risk. 
We are not going to get it right in every time. But we need to 
move aggressively to try to do it at the same time we are 
passing economic recovery and helping solve the housing 
problem, and that basic set of principles and values will 
undermine what we do--underpin what we do, and I want to say 
again what I said this morning, which is that support from the 
government to financial institutions is a privilege, not a 
right, and when we provide this support, it is not for the 
benefit of those banks. It is for the benefit of the people 
that depend on those banks, on the communities they serve, the 
business and people that depend on them, and everything we do 
will be designed to make sure that the resources we provide, 
again, have more direct benefits on the people who need credit 
in order to survive.
    But I share your concern. I have heard it across the halls 
of Congress. I have heard it from all your colleagues. I have 
watched it build, and I completely understand that there is a 
deep sense of public skepticism, distrust, and anger about what 
they have seen and the damage they are suffering because of 
that, and that basic recognition is where we have to start, and 
that is why we believe we are going to have to come at this 
with as much fundamental change as possible.
    Senator Kohl. Thank you, Mr. Chairman.
    Chairman Dodd. Senator Kohl, thank you very much.
    Mr. Secretary, let me commend you for your response. I 
think it is a very important answer you just gave to Senator 
Kohl's question.
    I just have a couple of questions and then I will turn to 
Senator Shelby for any closing questions he may have. I know 
Senator Corker apparently has a question or two, as well. We 
will try to wrap this up. You have been very patient over 3 
hours now in front of us.
    One is I just, quoting the President on the economic 
recovery package, and I want to get your views on this quickly, 
if I can, I will quote him. He says, ``We will put people to 
work repairing crumbling roads, bridges, schools, by 
eliminating the backlog of well-planned, worthy, and needed 
infrastructure projects,'' and going on to include investment 
in public transit, as well, and our nation's energy grid as 
part of the investment in the so-called ``green'' 
infrastructure. Why don't you explain the importance of 
investing in infrastructure both in creating jobs, the 
estimated 35,000 with every billion that is invested in 
infrastructure, and increasing prosperity in the future, number 
    And second, the second issue is the Neighborhood 
Stabilization Program, and this was part of the effort and part 
of the stimulus package that has been critically important. One 
of the solutions to the problem is to help communities 
devastated by the foreclosure crisis to take abandoned 
properties off the market and either rehabilitate or demolish 
them, as circumstances warrant. Leaving these properties there 
is a blight. Obviously, it has a huge impact on valuations in 
properties in the neighborhood, as well.
    I think we have now--this program was dropped as part of 
this recent negotiation and I understand obviously there is a 
broader set of questions here, and I am not asking you to 
comment on all of that, but just on the Neighborhood 
Stabilization Program itself as part of the effort here to get 
valuations more stabilized on housing.
    Secretary Geithner. Senator, let me begin where you ended. 
I know that the Secretary of Housing, Shaun Donovan, knows a 
lot about this, knows a lot about how to design sensible 
programs to meet these objectives. We are happy to work with 
you on how best to do that, understand the importance of that.
    I think on infrastructure, you are right to point out that 
infrastructure spending is one of the most powerful things we 
can do to achieve these two basic objectives, which is create 
employment opportunities and try to make the investments that, 
again, help this economy grow at a more rapid pace in the 
future. A critical part of any effective broad program of 
recovery will--should have as its core carefully designed 
infrastructure programs that meet that objective.
    You know, you want to do it carefully. You want to make 
sure you are spending the money wisely. And you want to make 
sure it happens quickly enough to have a substantial impact. 
But it should be and will be, I believe, the core of any 
program that meets these broad objectives of saving or creating 
3.5 to four million jobs.
    Chairman Dodd. Well, I hope that is the case. I am 
concerned that as we go through this process right now, and 
obviously it is a lot of money--no one is arguing that it is 
too small, although some may make that case--but that we may 
have missed an opportunity here not to have more as the 
infrastructure. We have never seen in this nation's history 
economic growth, whether it was the Eisenhower Federal Highway 
System, the Erie Canal, you can go back and the Rural 
Electrification Programs in the 1930s, in 24 months, put two 
million farms, just that one program alone. And I am worried 
that we are really not--we are shortchanging ourselves in this 
    And so while we are going to deal with the immediate 
problem, hopefully, that when you come out of the problem and 
you have in place the infrastructure that allows that economy 
to grow in the 21st century that will not have been there, we 
will have missed the opportunity. They are not shovel-ready in 
every case. They are future-ready. They are science-ready. And 
so I appreciate the fact of shovel-ready and the benefit of 
that, but I feel we are missing those future ready elements 
that are going to be absolutely critical, if you have any quick 
closing comment on that point.
    Secretary Geithner. Well, I believe I understand that 
concern and we will work with you to see if we can, again, meet 
that test. It is a difficult balance of trying to make sure 
these resources go where they can be spent as effectively as 
possible, as quickly as possible, with the maximum long-term 
gain to our capacity to grow, with the least risk that they add 
to unrealistic expectations about future spending. That is the 
balance, but it sounds to me like you have exactly the right 
framework for thinking about it.
    Chairman Dodd. Thank you very much.
    Senator Shelby.
    Senator Shelby. I just want to pick up on a few points. 
One, Senator Dodd brought up with you there, this stimulus 
package. Sure, it has got some good things in it. Jack Welch, 
who is someone that I respect, you know, he had a great career 
as one of our major industrialists, as you well know, at GE, he 
said on television Sunday that this might be important or 
something like this, but that straightening out the banking 
system, bringing trust, making loans to the communities, I mean 
the people in the communities, was 1,000 times more important 
than this stimulus package. Do you disagree with Jack Welch?
    Secretary Geithner. I believe that you have to do both, and 
if you don't do the financial thing well and powerfully and 
effectively, then the stimulus package will be dramatically 
less effective.
    Senator Shelby. Now, you are not telling us you believe--
you have been at the Fed a long time in New York--that the 
stimulus package is going to turn around our economy, are you?
    Secretary Geithner. I believe that without the stimulus 
package, we face a much more damaging, much more devastating 
loss of economic output and jobs, and I think that--but again, 
if you combine a recovery package designed with enough force 
with not just a housing program, but with an effort to get the 
markets back----
    Senator Shelby. Sure, overall----
    Secretary Geithner. ----you will have a much more effective 
    You are right that there is substantial stimulus in 
effectively designed economic financial recovery programs. 
There is effective stimulus in capital and there can be 
effective stimulus in providing financing to these markets to 
help get them working again.
    Senator Shelby. But this economy is not going to grow until 
we tackle and solve and bring confidence in our banking system, 
is it, Mr. Secretary.
    Secretary Geithner. I think that is right. That is exactly 
right. The challenge, of course, is how to do that with a mix 
of transparency and support.
    Senator Shelby. Sure. We know that.
    Sir, let me ask you this, just going back, because I think 
it is important to touch on a few things. You were President of 
the New York Fed for 5 years before you were Secretary. As 
President of the Fed, you were in a money center area for the 
Central Bank. You are also a bank regulator. The Fed regulates 
the holding companies, am I correct.
    Secretary Geithner. That is correct.
    Senator Shelby. ----in addition to that. Most of the big 
money center banks are holding companies, are they not?
    Secretary Geithner. That is correct.
    Senator Shelby. OK.
    Secretary Geithner. They were organized with holding 
    Senator Shelby. Let me give you a little background. In 
2003, 2004, 2005, 2006, I had the great privilege of chairing 
this committee, and Chairman Greenspan would testify here, and 
other bank regulators, too, as to the health of the banking 
system, just like they have under Senator Dodd as chairman, and 
every time, and the record reflects this, basically, the answer 
was--the question is not just by me, but my colleagues on both 
sides of the aisle, including Senator Sarbanes and probably 
Senator Dodd here--what is the health of the banking system? It 
is good. It is good.
    You were a bank regulator up there in New York. Do you 
believe that our regulators--you are part of it, not just you--
have failed the system and the American people? I do. And I 
believe, and Senator Dodd knows, in this committee, we are 
going to have to restructure our regulatory system, working 
with you, Mr. Secretary, and others, to get it right. Do you 
believe that that was the best thing our regulators could do? I 
don't think they knew what was going on in these banks, with 
all due respect to you, too. And I don't want to put it all on 
you, but you were there in the driver's seat.
    Secretary Geithner. Senator, let me just say three things, 
and I have said this before in testimony before this committee 
and others. I believe that there were systematic failures in 
supervision and regulation across our system. Every supervisor 
and regulator that was part of the system could have done more 
to prevent this.
    Second thing, I worked very hard in my capacity at the New 
York Fed and I took a lot of very important initiatives to help 
make this system less vulnerable to the crisis that was likely 
to happen. I did this in markets that were critically 
important, including with these core institutions, and those 
efforts made a substantial difference. Now, they did not 
achieve enough.
    And I want to say just one more thing, because I take 
responsibility, Senator----
    Senator Shelby. Yes, sir. This is important.
    Secretary Geithner. ----that I completely agree that we are 
going to have to look at everything and it is going to require 
comprehensive reform, and the system we came into this crisis 
with was not designed effectively enough, not just to contain 
the risk of crisis, but it did not give your government the 
tools necessary to contain the damage and it is deeply tragic 
that we came into this without that broad authority, and a 
critical part of our agenda will be to bring comprehensive 
reform to the system.
    But absolutely, everyone could have done more. I don't 
think anybody part of the system could not sit here today and 
say that they are anything but deeply troubled by eh failures 
that happened, and although I worked very hard from the first 
day I took office to try to make this system more resilient, 
those efforts, although they were effective and helped mitigate 
the risk of this crisis, they did not achieve enough.
    Senator Shelby. Is it troubling to you, and was it 
troubling to you, that there was AIG and others in the 
derivatives business, so to speak, and they were regulated, as 
they are under the McCarran-Ferguson Act. The Fed had no real 
power over them. I mean, maybe inherent. That was State 
insurance commissioners who looked at the risk. Did the Fed 
really know and understand the derivatives and the risk to the 
system, the systemic risk? And if so, why did they let it 
    Secretary Geithner. There was no one as part of this 
complicated supervisory process we have who had the ability to 
see the broad set of risks across the system, where that risk 
was most concentrated, and as I said in my remarks earlier 
today, there were pockets of the system where you had huge 
amounts of leverage buildup with no meaningful oversight, 
terribly vulnerable to the kind of shock to confidence we have 
seen. That happened outside the banking system, in aspects 
connected to the banking system, but we also saw, of course, 
concentrated risk emerge in the system itself.
    But you are right. Nobody in the system had the adequate 
picture of where those risks were most acute and most damaging.
    Senator Shelby. And we can't go down that road again, can 
    Secretary Geithner. We have to change that. Hard to change, 
but a vitally important thing to do.
    Senator Shelby. My last observation here. It is my 
understanding, Mr. Secretary, and you are the new Secretary, 
that the Federal Reserve, the Treasury, and the FDIC have spent 
$3 trillion and pledged $5.7 trillion more to respond to the 
crisis. If that is correct, $8.7 trillion amounts to nearly 
two-thirds--it was brought up earlier by one of my colleagues--
of the value of everything produced in the U.S. last year. And 
that combined with a trillion dollar stimulus, more or less, 
that would be $9.7 trillion, which would have been enough to 
write a $1,400 check to every person in the world.
    I had seen estimates last year that there--we are looking 
at the future now, not just that--that there were estimates 
that there were $3.5 trillion in bad assets to deal with in our 
banking system. We are probably beyond that number. I hope not.
    Do you believe, as Secretary of the Treasury, unlike the 
TARP deal, that the American people need to know, should know 
the truth of the debt, where this money is being spent, and the 
risk to the future of this whole economy and the debt that we 
are putting on our children and grandchildren.
    Secretary Geithner. Absolutely.
    Senator Shelby. Do you believe that they need to know that.
    Secretary Geithner. Absolutely, and Senator, can I just say 
one thing.
    Senator Shelby. Yes.
    Secretary Geithner. The resources you pointed--the 
commitments you pointed to----
    Senator Shelby. I understand.
    Secretary Geithner. and the resources that the Fed has 
taken, has expended----
    Senator Shelby. Exposure, that is.
    Secretary Geithner. ----these are not resources spent----
    Senator Shelby. But they are----
    Secretary Geithner. No, I don't think that is the right way 
to think about it. They are loans provided against collateral 
with protections for the Fed and the taxpayer and they return 
to help cover those risks. So although the numbers are large, 
this is a huge problem, a hugely complicated financial system, 
and the ultimate risk to the taxpayer is a small fraction of 
that. It is not zero, but it is a small fraction of those 
resources, completely different from----
    Senator Shelby. You are not telling us there is no risk to 
the taxpayer here.
    Secretary Geithner. Absolutely not. I am saying there is 
risk to the taxpayer, but the expenditures and the cost to the 
taxpayer of a dollar of spending or tax cut is completely 
different from a dollar of loans provided by the Fed against 
collateral, and CBO and OMB have a carefully designed process 
with a lot of integrity to try to make realistic estimates of 
what those risks are to the taxpayer in that context. But they 
are a small fraction of a dollar of spending or tax relief.
    Senator Shelby. Would you as the Secretary furnish this 
committee a detailed report of all the debt, where it is, the 
exposures, the guarantees and so forth, so we know what road we 
are traveling down? We know we are in uncharted waters.
    Secretary Geithner. I commit to working with my colleagues 
at--the Chairman of the Fed and my colleagues to try to provide 
as honest and candid a picture as we can. And I think you are 
right, that you want to see a comprehensive picture----
    Senator Shelby. Unvarnished.
    Secretary Geithner. Unvarnished, candid, and realistic.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Dodd. Let me just point out, too, the AIG was 
regulated as a thrift holding company by the OTS, which is a 
separate set of issues, by the way--well, they were some by 
that, but the point--in fact, we are going to have a hearing in 
this committee just on the AIG issue coming up so we can look 
at it, because one of these issues of forum shopping by 
industries looking for regulators that might have been more 
amenable to their interests is a matter of concern to this 
person and to this committee.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman. I will be brief, 
and thank you for being here for 3 hours and 23 minutes.
    I think, actually, what the Secretary committed to earlier 
was not just Senator Shelby, a combination of where we are, but 
also an honest evaluation of where we are in the money, out of 
the money, as to guessing how much is actually gone as it 
relates to its fair value put in. I think you were going to 
also assess where we were as it related to those investments.
    Secretary Geithner. Let me see if I can be careful----
    Senator Corker. Well, some of the TARP money, for instance, 
AIG is probably--that is an investment that is probably toast. 
The automobile situation probably has some valuating down to 
go. I mean, there are a number of things I thought you were 
going to look at and kind of say, OK, we have got $9.7 trillion 
committed, OK. I realize that much of that--most of that--the 
vast majority of that will be coming back. But you were going 
to give some kind of judgment as to where we were in that with 
some of the loans being bad, some of the losses that will be 
taking place on TALF, and that is why we put up collateral, to 
give security to the Fed so they can actually do these things, 
some assessment of where we are as a country with our funding.
    Secretary Geithner. Senator, I just want to be careful that 
I don't misstate it. I think it is important for us to try to 
lay out comprehensively the risk these broad programs entail, 
how we are trying to protect against that risk, and there is, 
again, a separate important process with integrity that CBO and 
OMB go through to try to assess and measure and estimate those 
    What I don't think I can do is come here today and tell you 
exactly today what those investments are worth if we consider 
them today against some observable standard in the market. That 
is probably something that we cannot do. But I think putting 
together a broader picture of what these broad lending 
facilities mean and what these investments mean so people can 
see them together is a reasonable thing and I would like to try 
to be responsive to that.
    Senator Corker. This is not a criticism, this is an 
observation, and I want to start with the glass is half full 
part again and say that I think is correct that Chairman Dodd 
and Senator Schumer pointed out that, in essence, this is an 
opportunity, as Senator Vitter, to work together to try to 
solve this problem, and that is probably a good thing.
    I would also make the observation that we have been here 
for 3 hours and 23 minutes and have no discernible idea as to 
how we are going to solve this problem. It would give me----
    Secretary Geithner. No, Senator. I don't think--I wouldn't 
want to encourage you in that view.
    Senator Corker. Well, we have been here for 3 hours and 23 
minutes and I am highly encouraged toward that view, so--I 
mean, we basically have some platitudes that--and again, I am 
not being critical----
    Secretary Geithner. Well, but you are, Senator. Let me just 
    Senator Corker. Well, I am observing that, in essence, last 
night--I would be critical about this. I think the White House 
and you all could communicate in that last night, the President 
said that you would be very clear and there would be specific 
plans. Today, we lost probably a trillion dollars in the market 
as people look for those very clear and specific plans, and 
instead heard guidelines and some platitudes. I mean, I haven't 
heard today what your commitment is to solving this problem. I 
know some tools that might exist, and they sound like some 
reasonable tools. But I have not heard of this comprehensive 
plan to deal with this problem and that creates uncertainty.
    And by the way, I think it is perfectly OK for a Treasury 
Secretary who has not been here that long not to yet know how 
to solve that problem, but I, just as an observer, sitting here 
for three-and-a-half hours, missing maybe 10 minutes for a 
meeting about Israel, to say that I haven't heard how yet we 
are going to solve this problem.
    Secretary Geithner. Senator, what we laid out today was--
and this is what we planned to do and committed to do--was to 
lay out the broad set of principles, the broad objectives, and 
some new programs that we believe need to be a necessary part 
of the solution to this program. And we will consult with you 
as we design what we think are the detailed design features 
necessary to meet your test of understanding.
    But what I can't do, because it would add to more 
uncertainty, was to give you clarity where we are not confident 
that we have found the best possible mix of measures to protect 
the taxpayer. But we laid out today what we think is a 
necessary part of the solution and people will want to see the 
details and they will want to know and see how it works. But 
what we have done is try to lay out, again, that this is going 
to be hard to solve. It is going to require a comprehensive 
approach and it is going to require a scale of resources and 
actions we are not comfortable--have not seen before, and we 
need to move on all fronts to do that. Now, that----
    Senator Corker. I rest my case.
    Secretary Geithner. That is what we set out to do and that 
is what we laid out today. And again, we will work with you as 
we flesh out the details----
    Senator Corker. And I look forward to that. I rest my case 
on my previous comments.
    Let me ask you this question. Transparency is something 
that I think you have highlighted today, and I greatly 
appreciate that. I think all those comments have been good.
    On February 17, the automobile companies will be putting 
forth their detailed plans as to how they are going to be 
solvent--I am using the wrong word, but their plans as to what 
is going to be in place on March 31. It is going to outline 
their negotiations with the bond holders. It is going to 
outline their negotiations regarding the VEBA accounts. It is 
going to outline their negotiations with the UAW.
    In the name of transparency, I am assuming that you will 
transmit that to us as soon as you receive it.
    Secretary Geithner. Senator, that is my expectation.
    Senator Corker. Well, I look forward to seeing that. I 
might not sleep much on the 16th. That is going to be--have you 
conveyed to them the fact that the terms of the deal as laid 
out is what you expect to see happen.
    Secretary Geithner. Senator, we expect them to lay out 
their best judgment of a restructuring plan that leaves them 
viable in the future without government support. That is the 
basic objective.
    Senator Corker. The basic of the loan agreement.
    Secretary Geithner. Exactly.
    Senator Corker. That has been----
    Secretary Geithner. I think it is pretty clearly laid out 
    Senator Corker. Yes.
    Secretary Geithner. You know, they are going to have their 
views on how best to achieve that and this is going to be the 
beginning of that process, frankly, not the end of that 
    Senator Corker. No, it is not the beginning of the 
    Secretary Geithner. Well----
    Senator Corker. I am sorry. That was supposed to be 
culminated on that day----
    Secretary Geithner. It is the next----
    Senator Corker. ----or they are to file bankruptcy on March 
31. I mean, it is pretty--it is not the beginning.
    Secretary Geithner. I am sorry. It is the next critical 
stage in your process, which you are right, has begun earlier, 
and we are not at the beginning. I correct myself. I apologize 
for saying that.
    Senator Corker. I think that there has not been much 
progress there. Our office has sort of turned out to be sort of 
a switchboard operator with all of the stakeholders, and my 
sense is they still are--and we want these companies to be 
successful and we laid out these concepts so that they would be 
successful and would use this crisis to sort of come together 
and solve this problem.
    My sense is there is not much really happening. I know 
Chrysler, the lenders, many of them have talked with us. They 
are all secured lenders. They feel like their collateral is 
whole even if the company bankrupts. And I do hope that over 
the next 6 days, there is lots of conversation, because I am 
concerned that those benchmarks are not going to be met and I 
truly want these companies to be successful.
    Let me just--one last thing, Mr. Chairman, since we are 
sort of at the end of this anyway. I do look forward to talking 
to you, as I have mentioned, and called you when you were named 
to solve these problems. I do think today has been somewhat 
interesting, but I do think it gives us an opportunity to go 
forward and work together.
    We read an op-ed by a gentleman named Max Holmes talking 
about each of the four major banks establishing a good bank-bad 
bank, not one big aggregator bank, but each of them having a 
bad bank. These four banks would be Bank of America, Citigroup, 
J.P. Morgan, and Wells Fargo. They have got about $8 trillion 
in assets, OK, and 36 percent of the deposits in our country 
are there.
    This scheme that they laid out really was very simplistic, 
and I don't know if you have looked at that. I know they have 
sent papers to Treasury. We obviously have gotten back-up 
information, as we do with most interesting op-eds. Can you 
speak to that, or have you looked at that in any detail.
    Secretary Geithner. Senator, I have not looked at that 
specific proposal, to my recollection, but I will. But I have 
seen a variety of different proposals like that and it is 
possible they are going to be an important part of the 
solution. But I think that at the core, though, you still have 
this basic problem, which is how do you design a structure 
where we can be confident and you can be confident that the 
government is taking risk it understands and that the valuation 
is a problem, an enormously complicated problem to solve to our 
satisfaction in that context.
    So there are all sorts of different structures you can use 
like that with new banks, newly established, dedicated to, but 
you still have to figure out how you solve that core problem. 
Again, what has to guide us is how to try to achieve the most 
benefit in terms of helping these institutions restore 
confidence in their viability with a mix of support from the 
government to do that. And again, we are trying to navigate 
through the complicated shoals of that challenge.
    But we will look at--I have seen proposals like that. I am 
happy to take a careful look at that. I am happy to talk to you 
about it in more detail.
    Senator Corker. Well, listen, thank you, and on the public-
private issue, I absolutely encourage you to figure out a way 
to leverage the private sector. I did notice that the risk was 
going to be a side-by-side risk and would just encourage that 
the risk be, we stand behind and the private equity be out 
front and take the first dollar loss. But we look forward to 
working through these issues with you and thank you very much 
for your testimony.
    Secretary Geithner. I will feel as strongly on that as you 
    Senator Corker. Thank you.
    Chairman Dodd. Mr. Secretary, listen, I want to thank you 
immensely. I am sitting here and just thinking back. This 
committee has been deeply involved in these issues now for 2 
years, some--Senator Shelby may correct me, but I think we have 
had some 82 different hearings or meetings----
    Senator Shelby. Maybe more.
    Chairman Dodd. ----on the subject matter, to the point of 
almost exhaustion, and then, of course, beginning in September 
nonstop virtually from the original proposal that Senator 
Shelby and I were in that room on the night of September 18 
when the Secretary of the Treasury and the Chairman of the 
Federal Reserve Bank told us we had a matter of days to respond 
or watch the, I think the melt-down of the financial system is 
the direct quote, those 13, 14 days to try and respond, 40 days 
before a national election. And then the automobile industry 
hit up here for the month of, I guess it was November, I forget 
now when exactly, November-December. And obviously an election, 
new administration coming in.
    And one of the complaints, and I think a very legitimate 
one, was not so much of what--of course, I don't know, others 
who voted against the whole thing, but for those of us who 
voted for it, that the importance of doing what we did in 
September--now how it was managed and run has been the subject, 
I think, of most of the disagreement--most of it--and obviously 
lurking as one of the major complaints. It didn't seem to be 
consistent moving from one step to the next. It seemed to 
contradict previous moves, creating a lot more uncertainty.
    You have had this job for 14 days. The President has had 
his for twenty-one. We have been through 8 years of watching a 
country go from literally debating whether or not we could 
manage resolving or eliminating the national debt to a $10 
trillion debt in 8 years. And obviously the problems that go 
back with the residential mortgage markets.
    This is the first step today. I know of no case in my years 
here where a Secretary of the Treasury, 14 days from assuming 
office, has appeared before a Banking Committee to respond to a 
situation like this. And obviously, the criticism we don't have 
all the details--had you given us all the details, I suspect 
what I would have heard here is no consultation. You are going 
off once again and haven't thought out this problem. So in a 
sense, I will used darned if you do and darned if you don't, 
because in effect, that is what I am hearing in many ways.
    Now, I appreciate you being here. We have a lot of work to 
do together, and that is what you suggested today. So I take 
this as the first step in a process. And we don't have a lot of 
time, the window is closing and we have got to move. We want to 
be careful, obviously, and your point of doing this carefully 
and deliberately so you are not appearing before this committee 
again being castigated because you moved too quickly without a 
lot of thought involved in what the implications would be at 
great cost to the taxpayer.
    So it is a delicate balance, a difficult question, and to a 
large extent, we don't really know--because we have never been 
here before--where this is going to take us. And no one has 
had--anybody who speaks with absolute certainty about what 
needs to be done ought to be questioned immediately, in my 
    So I thank you for your presence here today, and we will 
have ongoing conversations immediately with you and your office 
as to how we proceed. But I personally want to thank you for 
your efforts.
    Senator Shelby. Mr. Chairman.
    Chairman Dodd. I think the broad framework that you have 
given us here is a good place to begin. It is obviously not the 
end, but it is a good place to begin, and with that, I thank 
you very much. Let me conclude the hearing.
    Senator Shelby. One quick comment. I hope you will not, 
once you flesh out your concept, it will be a TARP II or 
something like it. If it is, you are headed down the wrong road 
    Chairman Dodd. Thank you very much.
    The Committee stands adjourned.
    [Whereupon, at 6:07 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
supplied for the record follow:]


    Thank you Chairman Dodd for holding this hearing today. I am 
pleased we continue oversight of the Financial Rescue Program and how 
it is using billions of dollars of taxpayer funds.
    To date we have seen little transparency, accountability, or 
responsibility from companies receiving funds, and implementation of 
TARP by the Treasury Department has been haphazard, fragmented, and 
inconsistent. This entire situation is deeply frustrating. Not only is 
the American public outraged, we now find ourselves with no good 
options and facing the prospect that our economy could get worse before 
it gets better.
    I have joined many of my colleagues in critizing the previous 
administration's handling of the TARP program. Secretary Geithner, I 
look forward to your testimony and I look forward to hearing more about 
the Adminstration's plan to stabilize the financial system and unfreeze 
the credit markets. It is clear that a new plan for TARP is desperately 

    Last fall, the gears of credit and financial markets were grinding 
to a halt. We heard in private meetings with the treasury secretary and 
the chairman of the Federal Reserve that unless we stepped in very, 
very quickly and in a massive way these markets would completely seize 
up and largely fail within a matter of days not weeks. The impact of 
this would be catastrophic to our economy. Regardless of whether the 
problem was the result of Wall Street greed or mismanagement in the 
banking industry, one thing was certain; without action to free up the 
credit markets, the effects would be severely felt on Main Street. I 
heard from Utahns involved in all spectrums of our economy--from high 
tech to ranchers--that said they were feeling the pain associated with 
a freeze in our credit markets. If things did not change and change 
quickly, their businesses, which depended on credit to finance growth, 
pay suppliers and meet payroll, would be crippled--possibly beyond 
    The Fed and Treasury had a $700 billion dollar plan and told 
Congress that a failure to act quickly to pass it would result in 
devastation to the economy far in excess of the $700 billion dollar 
price tag. The thought of government intervention was difficult for me 
to stomach, but with the entire economy facing a serious emergency, I 
decided that bold government action was urgent in this situation. While 
many of the leading economists and financial market experts differed on 
ideas of how the administration and Congress should address the 
problem, one thing was nearly unanimous; something had to be done 
    The core concept of the financial stabilization bill that we passed 
was to empower the Treasury Department to either purchase some of these 
distressed securities from financial institutions through a reverse-
auction process or make capital injections directly into our distressed 
financial institutions. Taxpayer funds were to be used as investments 
acting as ``patient capital'' in these illiquid markets. Many experts 
predicted that the government, and therefore the taxpayers, would 
eventually make a profit on the resale of the securities when the 
markets return to functioning properly. Protecting the taxpayer and 
returning the full $700 billion (or at least a large part of it) back 
to the government was central to my support of the original TARP 
program. As part of the effort to do that, I supported the decision to 
limit the first outlay of $350 billion, with the second $350 billion to 
be made available only after a report of progress of the program was 
made to Congress.
    In my view, the progress report that accompanied the request for 
the second $350 billion was inadequate--we still don't know exactly 
what happened to that money. Accordingly, I voted against the second 
$350 billion disbursement or drawdown of TARP funds. We were not given 
the necessary assurances that additional TARP funds would be used in 
ways that would continue to protect the taxpayer and had some 
likelihood of recoupment.
    What I want to hear from you today, Mr. Secretary, is how will the 
taxpayer, who provided the second $350 billion as well as the first, be 
ultimately protected. The Senate just passed a so-called ``stimulus 
bill'' with a price tag of nearly a trillion dollars of taxpayer funds. 
Some projections, including one produced by the nonpartisan 
Congressional Budget Office, show that while the bill will provide some 
short term stimulus, the long run economic consequences could actually 
be negative. I recognize that there are many short term risks and 
problems in our markets and economy; however, I am just as concerned 
that the government's intervention in the markets could have severe 
long term consequences and costs. The taxpayer exposure could well be 
in the trillions and comes at a time when private investors may be far 
less likely to buy treasury bonds than they are now.
    The problem is uncertainty and an ensuing lack of confidence: 
uncertainty in the value of bank assets, uncertainty in the credit 
worthiness of borrowers, and uncertainty in our economic future and 
growth. Private capital is sitting on the sidelines because of this 
uncertainty. How do we end the uncertainty and bring such capital back 
into the marketplace? Our record up to this point is not very good. 
While I believe that the original TARP was somewhat successful in 
avoiding a complete credit meltdown, the way it has been implemented 
and the discussions related to how TARP II will be implemented have 
increased uncertainty, rather than diminished it.
    So, Mr. Secretary, again, I hope you can provide us with some 
assurances today that the billions of dollars that taxpayers are being 
asked to commit will be protected; first, through a structure that 
offers and even encourages a quick repayment mechanism, and second, by 
means of a plan that provides certainty and encourages private capital 
to re-enter the marketplace. Our goal can no longer be a short term 
fix; we must have a program that allows the market to function as 
freely as possible now and in the future. Thank you.
                 Secretary, Department of the Treasury
                           February 10, 2009

    Chairman Dodd, Ranking Member Shelby, and Members of the Committee: 
thank you for inviting me to be here today.
    This morning, as the Senate continues its work on an economic 
recovery plan to help create jobs and lay a foundation for stronger 
economic future, I announced our Administration's plan to restart the 
flow of credit, strengthen our financial system, and provide critical 
aid for homeowners and for small businesses.
    Right now, job losses are accelerating and credit has slowed to a 
trickle. On top of the financial and economic challenges we face there 
is another--a lack of faith.
    The American people have lost faith in the leaders of our financial 
institutions, and are skeptical that their government has--to this 
point--used taxpayers' money in ways that will benefit them. Together 
we can change this.
    To get credit flowing again, to restore confidence in our markets, 
and restore the faith of the American people, we have proposed a 
fundamental reshaping of the government's program to repair the 
financial system.
    It all begins with transparency. We propose to establish a new 
framework of oversight and governance of all aspects of our Financial 
Stability Plan. The American people will be able to see where their tax 
dollars are going and the return on their government's investment. They 
will be able to see whether the conditions placed on banks and 
institutions are being met and enforced. They will be able to see 
whether boards of directors are being responsible with taxpayer dollars 
and how they're compensating their executives. And they will be able to 
see how these actions are impacting the overall flow of lending and the 
cost of borrowing.
    These new requirements, which will be available on a new Web site 
FinancialStability.gov, will give the American people the transparency 
they deserve.
    Second, we are going to bring together the government agencies with 
authority over our Nation's major banks and initiate a more consistent, 
realistic, and forward looking assessment about the risk on balance 
sheets. We're calling it a financial ``stress test.'' We want banks' 
balance sheets cleaner, and stronger. And we are going to help this 
process by providing a new program of capital support for those 
institutions that need it.
    Institutions that need additional capital will be able to access a 
new funding mechanism that uses money from the Treasury as a bridge to 
private capital. The capital will come with conditions to help ensure 
that every dollar of assistance is used to generate a level of lending 
greater than what would have been possible in the absence of government 
    Third, together with the Fed, the FDIC, and the private sector, we 
propose the establishment of a Public-Private Investment Fund. This 
program will provide government capital and government financing to 
help leverage private capital and get private markets working again. 
This fund will be targeted to the legacy loans and assets that are now 
burdening many financial institutions.
    By providing the financing the private markets cannot now provide, 
this will help start a market for the real estate-related assets that 
are at the center of this crisis. Our objective is to use private 
capital and private asset managers to help provide a market mechanism 
for valuing the assets. We are exploring a range of different 
structures for this program, and will seek input from this Committee as 
we design it.
    Fourth, working jointly with the Federal Reserve, we are prepared 
to commit up to a trillion dollars to support a Consumer and Business 
Lending Initiative. This initiative will kick start the secondary 
lending markets, to bring down borrowing costs, and to help get credit 
flowing again.
    In our financial system, 40 percent of consumer lending has 
historically been available because people buy loans, put them together 
and sell them. Because this vital source of lending has frozen up, no 
financial recovery plan will be successful unless it helps restart 
securitization markets for sound loans made to consumers and 
businesses--large and small.
    This lending program will be built on the Federal Reserve's Term 
Asset Backed Securities Loan Facility, announced last November, with 
capital from the Treasury and financing from the Federal Reserve.
    And because small businesses are so important to our economy, we're 
going to take additional steps to make it easier for them to get credit 
from community banks and large banks.
    Fifth, we will launch a comprehensive housing program. Just as the 
name of this Committee makes a link between banking and housing, so 
must our efforts to strengthen the financial system.
    The President has asked his economic team to come together with a 
comprehensive plan to address the housing crisis. We will announce the 
details of this plan in the next few weeks.
    Our focus will be on using the full resources of the government to 
help prevent avoidable foreclosures and to reduce mortgage interest 
rates. We will do this with a substantial commitment of resources 
already authorized by the Congress under the Emergency Economic 
Stabilization Act. We welcome the ideas and input of this Committee in 
this important effort.
    And finally, President Obama is committed to moving quickly to 
reform our entire system of financial regulation so that we never again 
face a crisis of this severity. And, again, that effort can only 
succeed with the collaboration and support of this Committee and other 
Members of Congress.
    Let me close by saying that our challenges in this financial crisis 
are more complex than any our financial system has ever faced, 
requiring new programs and persistent attention to solve. But the 
President, the Treasury, and the entire Administration are committed to 
working with you to see it through because we know how directly the 
future of our economy depends on it.
    Thank you, and with that, I'd be happy to take your questions.

                        Financial Stability Plan

The Financial Stability Plan: Deploying Our Full Arsenal To Attack the 
        Credit Crisis on All Fronts
    Today, our nation faces the most severe financial crisis since the 
Great Depression. It is a crisis of confidence, of capital, of credit, 
and of consumer and business demand. Rather than providing the credit 
that allows new ideas to flourish into new jobs, or families to afford 
homes and autos, we have seen banks and other sources of credit freeze 
up--contributing to and potentially accelerating what already threatens 
to be a serious recession. Restarting our economy and job creation 
requires both jumpstarting economic demand for goods and services 
through our American Recovery and Reinvestment Act and simultaneously 
ensuring through our new Financial Stability Plan that businesses with 
good ideas have the credit to grow and expand, and working families can 
get the affordable loans they need to meet their economic needs and 
power an economic recovery.
    To address the financial crisis, the Financial Stability Plan is 
designed to attack our credit crisis on all fronts with our full 
arsenal of financial tools and the resources commensurate to the depth 
of the problem. To be successful, we must address the uncertainty, 
troubled assets and capital constraints of our financial institutions 
as well as the frozen secondary markets that have been the source of 40 
percent of our lending for everything from small business loans to auto 
    To protect taxpayers and ensure that every dollar is directed 
toward lending and economic revitalization, the Financial Stability 
Plan will institute a new era of accountability, transparency and 
conditions on the financial institutions receiving funds. To ensure 
that we are responding to this crisis as one government, Secretary 
Timothy Geithner--working in collaboration and joined by Federal 
Reserve Chairman Ben Bernanke, FDIC Chair Sheila Bair, Office of Thrift 
Supervision Director John Reich and Comptroller of the Currency John 
Dugan--is bringing the full force and full range of financial tools 
available to cleaning up lingering problems in our banking system, 
opening up credit and beginning the process of financial recovery.
Financial Stability Trust
    A key aspect of the Financial Stability Plan is an effort to 
strengthen our financial institutions so that they have the ability to 
support recovery. This Financial Stability Trust includes:

    a. A Comprehensive Stress Test: A Forward Looking Assessment of 
What Banks Need To Keep Lending Even Through a Severe Economic 
Downturn: Today, uncertainty about the real value of distressed assets 
and the ability of borrowers to repay loans as well as uncertainty as 
to whether some financial institutions have the capital required to 
weather a continued decline in the economy have caused both a dramatic 
slowdown in lending and a decline in the confidence required for the 
private sector to make much needed equity investments in our major 
financial institutions. The Financial Stability Plan will seek to 
respond to these challenges with:

    Increased Transparency and Disclosure: Increased 
        transparency will facilitate a more effective use of market 
        discipline in financial markets. The Treasury Department will 
        work with federal bank supervisors and the Securities and 
        Exchange Commission and accounting standard setters in their 
        efforts to improve public disclosure by banks. This effort will 
        include efforts to improve the disclosure of the exposures on 
        bank balance sheets. In conducting these exercises, supervisors 
        recognize the need not to adopt an overly conservative posture 
        or take steps that could inappropriately constrain lending.

    Coordinated, Accurate, and Realistic Assessment: All 
        relevant financial regulators--the Federal Reserve, FDIC, OCC, 
        and OTS--will work together in a coordinated way to bring more 
        consistent, realistic and forward looking assessment of 
        exposures on the balance sheet of financial institutions.

    Forward Looking Assessment-Stress Test: A key component of 
        the Capital Assistance Program is a forward looking 
        comprehensive ``stress test'' that requires an assessment of 
        whether major financial institutions have the capital necessary 
        to continue lending and to absorb the potential losses that 
        could result from a more severe decline in the economy than 

    Requirement for $100 Billion-Plus Banks: All banking 
        institutions with assets in excess of $100 billion will be 
        required to participate in the coordinated supervisory review 
        process and comprehensive stress test.

    b. Capital Assistance Program: While banks will be encouraged to 
access private markets to raise any additional capital needed to 
establish this buffer, a financial institution that has undergone a 
comprehensive ``stress test'' will have access to a Treasury provided 
``capital buffer'' to help absorb losses and meet capital adequacy 
ratios--and also serve as a bridge to receiving increased private 
capital. While most banks have strong capital positions, the Financial 
Stability Trust will provide a capital buffer that will: Operate as a 
form of ``contingent equity'' to ensure firms the capital strength to 
preserve or increase lending in a worse than expected economic 
downturn. Firms will receive a preferred security investment from 
Treasury in convertible securities that they can convert into common 
equity if needed to maintain capital ratios to preserve lending in a 
worse-than-expected economic environment. This convertible preferred 
security will carry a dividend to be specified later and a conversion 
price set at a modest discount from the prevailing level of the 
institution's stock price as of February 9, 2009. Banking institutions 
with consolidated assets below $100 billion will also be eligible to 
obtain capital from the CAP after a supervisory review.

    c. Financial Stability Trust: Any capital investments made by 
Treasury under the CAP will be placed in a separate entity--the 
Financial Stability Trust--set up to manage the government's 
investments in U.S. financial institutions.
Public-Private Investment Fund
    One aspect of a full arsenal approach is the need to provide 
greater means for financial institutions to cleanse their balance 
sheets of what are often referred to as ``legacy'' assets. Many 
proposals designed to achieve this are complicated both by their sole 
reliance on public purchasing and the difficulties in pricing assets. 
Working together in partnership with the FDIC and the Federal Reserve, 
the Treasury Department will initiate a Public-Private Investment Fund 
that takes a new approach.

    Public-Private Capital: This new program will be designed 
        with a public-private financing component, which could involve 
        putting public or private capital side-by-side and using public 
        financing to leverage private capital. on an initial scale of 
        up to $500 billion, with the potential to expand up to $1 

    Private Sector Pricing of Assets: Because the new program 
        is designed to bring private sector equity contributions to 
        make large-scale asset purchases, it not only minimizes public 
        capital and maximizes private capital: it allows private sector 
        buyers to determine the price for current troubled and 
        previously illiquid assets.
Consumer and Business Lending Initiative--Up to $1 Trillion
    Addressing our credit crisis on all fronts means going beyond 
simply dealing with banks. While the intricacies of secondary markets 
and securitization--the bundling together and selling of loans--may be 
complex, they account for almost half of the credit going to Main 
Street as well as Wall Street. When banks making loans for small 
businesses, commercial real estate or autos are able to bundle and sell 
those loans into a vibrant and liquid secondary market, it instantly 
recycles money back to financial institutions to make additional loans 
to other worthy borrowers. When those markets freeze up, the impact on 
lending for consumers and businesses--small and large--can be 
devastating. Unable to sell loans into secondary markets, lenders 
freeze up, leading those seeking credit like car loans to face 
exorbitant rates. Between 2006 and 2008, there was a net $1.2 trillion 
decline in securitized lending (outside of the GSEs) in these markets. 
That is why a core component of the Financial Stability Plan is:

    A Bold Expansion Up to $1 Trillion: This joint initiative 
        with the Federal Reserve builds off, broadens and expands the 
        resources of the previously announced but not yet implemented 
        Term Asset-Backed Securities Loan Facility. The Consumer and 
        Business Lending Initiative will support the purchase of loans 
        by providing the financing to private investors to help 
        unfreeze and lower interest rates for auto, small business, 
        credit card and other consumer and business credit. Previously, 
        Treasury was to use $20 billion to leverage $200 billion of 
        lending from the Federal Reserve. The Financial Stability Plan 
        will dramatically increase the size by using $100 billion to 
        leverage up to $1 trillion and kick start lending by focusing 
        on new loans.

    Protecting Taxpayer Resources by Limiting Purchases to 
        Newly Packaged AAA Loans: Because these are the highest quality 
        portion of any security--the first ones to be paid--we will be 
        able to best protect against taxpayer losses and efficiently 
        leverage taxpayer money to support a large flow of credit to 
        these sectors.

    Expand Reach--Including Commercial Real Estate: The 
        Consumer and Business Lending Initiative will expand the 
        initial reach of the Term Asset-Backed Securities Loan Facility 
        to now include commercial mortgage-backed securities (CMBS). In 
        addition, the Treasury will continue to consult with the 
        Federal Reserve regarding possible further expansion of the 
        TALF program to include other asset classes, such as non-Agency 
        residential mortgage-backed securities (RMBS) and assets 
        collateralized by corporate debt.
New Era of Transparency, Accountability, Monitoring, and Conditions
    A major and legitimate source of public frustration and even anger 
with the initial deployment of the first $350 billion of EESA funds was 
a lack of accountability or transparency as to whether assistance was 
being provided solely for the public interest and a stronger economy, 
rather than the private gain of shareholders, bondholders, or 
executives. Going forward, the Financial Stability Plan will call for 
greater transparency, accountability and conditionality with tougher 
standards for firms receiving exceptional assistance. These will be the 
new standards going forward and are not retroactive. These stronger 
monitoring conditions were informed by recommendations made by formal 
oversight groups--the Congressional Oversight Panel, the Special 
Inspector General, and the Government Accountability Office--as well as 
Congressional committees charged with oversight of the banking system.

    a. Requiring Firms To Show How Assistance From Financial Stability 
Plan Will Expand Lending: The core of the new monitoring requirement is 
to require recipients of exceptional assistance or capital buffer 
assistance to show how every dollar of capital they receive is enabling 
them to preserve or generate new lending compared to what would have 
been possible without government capital assistance.

    Intended Use of Government Funds: All recipients of 
        assistance must submit a plan for how they intend to use that 
        capital to preserve and strengthen their lending capacity. This 
        report will be submitted during the application process, and 
        the Treasury Department will make these reports public upon 
        completion of the capital investment in the firm.

    The Impact on Lending Requirement: Firms must detail in 
        monthly reports submitted to the Treasury Department their 
        lending broken out by category, showing how many new loans they 
        provided to businesses and consumers and how many asset-backed 
        and mortgage-backed securities they purchased, accompanied by a 
        description of the lending environment in the communities and 
        markets they serve. This report will also include a comparison 
        to their most rigorous estimate of what their lending would 
        have been in the absence of government support. For public 
        companies, similar reports will be filed on an 8K simultaneous 
        with the filing of their 10-Q or 10-K reports. Additionally, 
        the Treasury Department will--in collaboration with banking 
        agencies--publish and regularly update key metrics showing the 
        impact of the Financial Stability Plan on credit markets. These 
        reports will be put on the Treasury FinancialStability.gov Web 
        site so that they can be subject to scrutiny by outside and 
        independent experts.

    Taxpayers' Right to Know: All information disclosed or 
        reported to Treasury by recipients of capital assistance will 
        be posted on FinancialStability.gov because taxpayers have the 
        right to know whether these programs are succeeding in creating 
        and preserving lending and financial stability.

    b. Committing Recipients to Mortgage Foreclosure Mitigation: All 
recipients of capital investments under the new initiatives announced 
today will be required to commit to participate in mortgage foreclosure 
mitigation programs consistent with guidelines Treasury will release on 
industry standard best practices.

    c. Restricting Dividends, Stock Repurchases and Acquisitions: 
Limiting common dividends, stock repurchases and acquisitions provides 
assurance to taxpayers that all of the capital invested by the 
government under the Financial Stability Trust will go to improving 
banks' capital bases and promoting lending. All banks that receive new 
capital assistance will be:

    Restricted from Paying Quarterly Common Dividend Payments 
        in Excess Of $0.01 Until the Government Investment Is Repaid: 
        Banks that receive exceptional assistance can only pay $0.01 
        quarterly. That presumption will be the same for firms that 
        receive generally available capital unless the Treasury 
        Department and their primary regulator approve more based on 
        their assessment that it is consistent with reaching their 
        capital planning objectives.

    Restricted from Repurchasing Shares: All banks that receive 
        capital assistance are restricted from repurchasing any 
        privately held shares, subject to approval by the Treasury 
        Department and their primary regulator, until the government's 
        investment is repaid.

    Restricted from Pursuing Acquisitions: All banks that 
        receive capital assistance are restricted from pursuing cash 
        acquisitions of healthy firms until the government investment 
        is repaid. Exceptions will be made for explicit supervisor-
        approved restructuring plans.

    d. Limiting Executive Compensation: Firms will be required to 
comply with the senior executive compensation restrictions announced 
February 4, including those pertaining to a $500,000 in total annual 
compensation cap plus restricted stock payable when the government is 
getting paid back, ``say on pay'' shareholder votes, and new disclosure 
and accountability requirements applicable to luxury purchases.

    e. Prohibiting Political Interference in Investment Decisions: The 
Treasury Department has announced measures to ensure that lobbyists do 
not influence applications for, or disbursements of, Financial 
Stability Plan funds, and will certify that each investment decision is 
based only on investment criteria and the facts of the case.

    f. Posting Contracts and Investment Information on the Web: The 
Treasury Department will post all contracts under the Financial 
Stability Plan on FinancialStability.gov within 5 to 10 business days 
of their completion. Whenever Treasury makes a capital investment under 
these new initiatives, it will make public the value of the investment, 
the quantity and strike price of warrants received, the schedule of 
required payments to the government and when government is being paid 
back. The terms of pricing of these investments will be compared to 
terms and pricing of recent market transactions during the period the 
investment was made, if available.
Housing Support and Foreclosure Prevention
    There is bipartisan agreement today that stemming foreclosures and 
restructuring troubled mortgages will help slow the downward spiral 
harming financial institutions and the real American economy. Many 
Congressional leaders, housing advocates, and ordinary citizens have 
been disappointed that the Troubled Asset Relief Program was not aimed 
at ending the foreclosure crisis. We will soon be announcing a 
comprehensive plan that builds on the work of Congressional leaders and 
the FDIC. Among other things, our plan will:

    Drive Down Overall Mortgage Rates: The Treasury Department 
        and the Federal Reserve remain committed to expand as necessary 
        the current effort by the Federal Reserve to help drive down 
        mortgage rates--freeing up funds for working families--through 
        continuation of its efforts to spend as much as $600 billion 
        for purchasing of GSE mortgage-backed securities and GSE debt.

    Commit $50 Billion to Prevent Avoidable Foreclosures of 
        owner-occupied middle class homes by helping to reduce monthly 
        payments in line with prudent underwriting and long-term loan 

    Help Bring Order and Consistency to the various efforts to 
        address the foreclosure crisis by establishing loan 
        modification guidelines and standards for government and 
        private programs.

    Require All Financial Stability Plan Recipients to 
        Participate in Foreclosure Mitigation Plans consistent with 
        Treasury guidance.

    Build Flexibility into Hope for Homeowners and the FHA to 
        enable loan modifications for a greater number of distressed 
Small Business and Community Lending Initiative
    Few aspects of our current financial crisis have created more 
justifiable resentment than the specter of hard-working entrepreneurs 
and small business owners seeing their companies hurt and even bankrupt 
because of a squeeze on credit they played no role in creating. 
Currently, the increased capital constraints of banks, the inability to 
sell SBA loans on the secondary market and a weakening economy have 
combined to dramatically reduce SBA lending at the very time our 
economy cannot afford to deny credit to any entrepreneur with the 
potential to create jobs and expand markets. Further adding to this 
frustration is the sense that community banks--which still engage in 
relationship lending that serves their local communities--have been 
overlooked not just during this crisis, but over the last several 
    Over the next several days, President Obama, the Treasury 
Department and the SBA will announce the launch of a Small Business and 
Community Bank Lending Initiative: This effort will seek to arrest the 
precipitous decline in SBA lending--down 57 percent last quarter from 
the same quarter a year earlier for the flagship 7(a) loans through:

    Use of the Consumer and Business Lending Initiative to 
        finance the purchase of AAA-rated SBA loans to unfreeze 
        secondary markets for small business loans.

    Increasing the Guarantee for SBA Loans to 90 percent: The 
        Administration is seeking to pass in the American Recovery and 
        Reinvestment Act an increase in the guarantee of SBA loans from 
        as low as 75 percent to as high as 90 percent.

    Reducing Fees for SBA 7(a) and 504 Lending and Provide 
        Funds for Both Oversight and Speedier and Less Burdensome 
        Processing of Loan Applications.

                    FROM TIMOTHY F. GEITHNER

Q.1. I want to follow up on our exchange about how your public-
private partnership investment proposal will work and how it 
would value troubled assets. You suggested that the 
Administration intends to provide longer-term financing that 
has been absent during the credit crisis, and the presence of 
stable financing could allow investors to accept lower returns 
in exchange for greater leverage, which magnifies returns. 
Could you please provide additional information regarding how 
the private sector pricing of assets will function, what assets 
will qualify for Federal financing, and what steps the 
government plans to take to attract the necessary level of 
private sector participation?

A.1. Despite the progress that has been made over the past 
several months, the financial system is still working against 
economic recovery. One major reason is the problem of ``legacy 
assets''--both real estate loans held directly on the books of 
banks (``legacy loans'') and securities backed by loan 
portfolios (``legacy securities''). The excessive discounts 
embedded in these legacy asset prices are now straining the 
capital of U.S. financial institutions, limiting their ability 
to lend and increasing the cost of credit throughout the 
financial system. The lack of clarity about the value of these 
legacy assets has also made it difficult for some financial 
institutions to raise new private capital on their own.
    To address the challenge of legacy assets, the Department 
of the Treasury--in conjunction with the Federal Deposit 
Insurance Corporation (FDIC) and the Federal Reserve--has 
announced the Public-Private Investment Program (PPIP) as part 
of its efforts to repair balance sheets throughout our 
financial system and ensure that credit is available to the 
households and businesses, large and small, that will help 
drive us toward recovery. Private sector investors competing 
with one another will establish the price of the loans and 
securities purchased under the PPIP.
    The Legacy Loans Program provides FDIC debt and Treasury 
equity co-investment to attract private capital to purchase 
eligible legacy loans from participating banks. By lifting 
private demand, the program will facilitate market-priced sales 
of troubled assets, which will help to cleanse bank balance 
sheets and reduce the uncertainty associated with these assets. 
A broad array of investors is expected to participate in the 
Legacy Loans Program. The participation of individual 
investors, pension plans, insurance companies and other long-
term investors is particularly encouraged.
    The Legacy Securities Program is designed to draw private 
capital into the markets for securities tied to residential and 
commercial real estate and consumer credit by providing 
matching equity capital under PPIP and debt financing from the 
Federal Reserve and Treasury under the Term Asset-Backed 
Securities Loan Facility (TALF). Treasury will initially 
approve up to five asset managers with a demonstrated track 
record of purchasing legacy assets who will have a period of 
time to raise private capital to target the designated asset 
classes. Treasury funds will be invested one-for-one on a fully 
side-by-side basis with these investors. Private sector 
investors competing with one another will help to establish the 
price of these assets and should reduce the uncertainty 
surrounding financial institutions holding these securities, 
potentially enabling them to raise new private capital.
    Since TARP funds will be invested alongside private 
capital, the taxpayer has the opportunity to participate in the 
asset's upside alongside with the private investors. Further, 
private market participants dong with the government stand to 
lose their entire investments in a downside scenario. This 
approach is superior to the alternatives of either hoping for 
banks to gradually work these assets off their books or of the 
government purchasing the assets directly as it provides a 
market discipline to the process.

Q.2. In what ways will your stress test for major banks be 
different than the CAMEL system that financial regulators use 
in determining a financial institution's underlying condition?

A.2. CAMEL ratings and the stress test are handled by the bank 
supervisory agencies: the Federal Reserve, Office of the 
Comptroller of the Currency, Office of Thrift Supervision, and 
the Federal Deposit Insurance Corporation. However, the 
forward-looking stress test is not a part of typical 
supervisory review, which is the process that informs CAMEL 
ratings. This exercise is a specia1, forward-looking assessment 
to evaluate the capital needs of major U.S. banking 
institutions under a more challenging economic environment. It 
is an extraordinary examination developed to help address some 
of the challenges of the current environment and ensure that 
banks have sufficient capital to lend and contribute to 
economic recovery.

Q.3. As we have discussed, I support expanding the reach of the 
Federal Reserve Board's Term Asset-Backed Securities Loan 
Facility (TALF) to include commercial mortgage backed 
securities. Would you please expand upon when you think the 
roll-out of TALF for commercial mortgage backed securities will 
take place?

A.3. As you know, the Treasury and Federal Reserve have 
publicly stated that commercial mortgage-backed securities 
(CMBS) will be eligible for the Term Asset-Backed Securities 
Loan Facility (TALF). We are working to ensure that this asset 
class is added to the list of eligible collateral for TALF 
funding in a timely manner. Treasury and Federal Reserve staff 
are currently working through some of the terms with which 
borrowers can pledge CMBS at the TALF. Of course, borrowers 
will need to meet certain eligibility criteria that will 
protect taxpayer money. The amount TALF is willing to lend 
against a given amount of collateral, will reflect the 
riskiness of the CMBS assets provided as collateral, while 
lending rates on the TALF loan will provide additional 
protection against potential losses.
    In short, we are working as quickly as possible to make 
sure that CMBS is included in TALF, while keeping in mind that 
the lending terms must protect taxpayer money. We will provide 
you with further guidance as soon as our analysis is complete.

                    FROM TIMOTHY F. GEITHNER

Q.1. Mr. Secretary, our Virginia Housing Finance Agency, which, 
like its counterparts across the country, plays a critical role 
in providing affordable home loans to first-time homebuyers in 
our state, is unable to issue tax-exempt Housing Bonds on which 
its lending programs largely depend. All HFAs are facing 
similar constraints. I think you would agree that we cannot 
afford to have state HFAs sidelined now, because, through no 
fault of their own, they cannot issue Housing Bonds. We need 
them now more than ever.
    I understand the Treasury is looking seriously at a variety 
of ways to intervene to support the Housing Bond market and 
state HFAs, including through TARP. What are you considering 
and when can we expect to see details?

A.1. Treasury appreciates the critical role state HFAs play in 
extending affordable and sustainable mortgage loans to lower-
income borrowers, and we are aware of the challenges HFAs face 
in the current market. We are considering a range of policy 
responses to support the HFAs in carrying out their mission, 
and will work with Fannie Mae and Freddie Mac to support HFAs 
in serving homebuyers. In analyzing the potential options, we 
will consider our TARP authorities under the Emergency Economic 
Stabilization Act as well as our GSE authorities under the 
Housing and Economic Recovery Act. While we are not yet 
prepared to provide details, Treasury staff would be happy to 
work with members of your staff as we develop the program.