[Senate Hearing 111-72]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 111-72
 
                 TREASURY SECRETARY TIMOTHY F. GEITHNER 

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                             APRIL 21, 2009

                               ----------                              

        Printed for the use of the Congressional Oversight Panel









                 TREASURY SECRETARY TIMOTHY F. GEITHNER


























                                                         S. Hrg. 111-72

                 TREASURY SECRETARY TIMOTHY F. GEITHNER

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 21, 2009

                               __________

        Printed for the use of the Congressional Oversight Panel

                               ----------
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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                            Sen. John Sununu
                          Rep. Jeb Hensarling
                           Richard H. Neiman
                             Damon Silvers














                            C O N T E N T S

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                                                                   Page
Opening Statement of Elizabeth Warren, Chair, Congressional 
  Oversight Panel................................................     1
Statement of Hon. Jeb Hensarling, Member, Congressional Oversight 
  Panel..........................................................     5
Statement of Damon Silvers, Deputy Chair, Congressional Oversight 
  Panel..........................................................     6
Statement of Hon. John E. Sununu, Member, Congressional Oversight 
  Panel..........................................................    11
Statement of Richard H. Neiman, Member, Congressional Oversight 
  Panel..........................................................    12
Statement of Hon. Timothy F. Geithner, U.S. Secretary of the 
  Treasury.......................................................    16


                 TREASURY SECRETARY TIMOTHY F. GEITHNER

                              ----------                              


                        TUESDAY, APRIL 21, 2009

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to notice, at 10:05 a.m. in Room 
SD-628, Dirksen Senate Office Building, Elizabeth Warren, 
Chairman of the Panel, presiding.
    Attendance: Elizabeth Warren [presiding], Timothy F. 
Geithner, Jeb Hensarling, Richard H. Neiman, Damon Silvers, and 
John E. Sununu.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    The Chair: This hearing is now called to order.
    Mr. Secretary, thank you for coming. We know your time is 
valuable. And with the hope of setting an example, I am going 
to be brief, short on formalities here.
    I also will begin by apologizing for my voice and my 
hacking. I am afraid I am not at the top of my game right now.
    We have spent nearly six months, both at the direction of 
Congress and by our appointments, reviewing the response of two 
administrations to an unprecedented financial crisis. Today, we 
have an opportunity to speak directly to the American people 
about how their $590 billion has been invested in a financial 
system, an investment that eventually must profit them and not 
just people on Wall Street.
    When the financial meltdown began, there was a strong sense 
of fear and uncertainty among the American people, and who can 
blame them? Every month since October more than half a million 
jobs have been lost. The net worth of American families has 
plummeted more than 20 percent in 18 months.
    The sense of fear and uncertainty has not gone away, but it 
has been joined by a new sense of anger and frustration. People 
are angry that even if they have consistently paid their bills 
on time and never missed a payment, their TARP-assisted banks 
are unilaterally raising their interest rates or slashing their 
credit lines.
    People are angry that small businesses are threatened with 
closure because they can't get financing from their TARP-
assisted banks. People are angry that when they read the 
headlines of record foreclosures, even if they aren't 
personally affected, they see their own property worth less, 
and they see their communities declining as a result of the 
foreclosures around them.
    People are angry because they are paying for programs that 
haven't been fully explained and have no apparent benefit for 
their families or for the economy as a whole, but that seem to 
leave enough cash in the system for lavish bonuses or golf 
outings. None of this seems fair.
    I appreciate your repeated statements about your commitment 
to transparency and to accountability, and I appreciate the 
important steps that you have taken in this direction, Mr. 
Secretary. But we both know that more needs to be done. People 
need to understand why you are making the choices that you are 
making.
    People want to see action described in terms that makes 
sense to them. They want to see that taxpayer funds aren't 
being used to shield financial institutions from the 
consequences of their own behavior. They want to see that 
money, taxpayer money, is used to advance the public interest 
and not just the interests of Wall Street.
    They also want to see that their Government is moving to 
reform the regulatory system so that the economy will not veer 
into the ditch again, to see reforms that will prevent the 
financial system from taking huge and reckless risks with other 
people's money in the quest for short-term profits.
    In measuring progress, as well as in assessing the current 
state of the economy and institutions, we shouldn't be afraid 
of facts. There may be initial pain as the market reacts and 
reprices, but the short-term pain is better than the problems 
we face with ongoing uncertainty and mistrust.
    In a crisis, transparency, accountability, and a coherent 
plan with clear goals are essential to maintain the confidence 
of the public and capital markets. Sophisticated metrics to 
measure the success and failure of program initiatives is also 
crucial.
    One final note--Congress formed this panel in large part to 
ask difficult questions and to provide an outside perspective. 
We all share a strong desire to help the economy recover and to 
protect taxpayers. I hope that the reports from this panel have 
been useful to you and to your team at Treasury, and I 
appreciate your offer to have your staff meet with our staff on 
a weekly basis. I hope this is the beginning of an ongoing 
dialogue between the two of us.
    With trillions of dollars of taxpayer money at stake and 
the fate of the American economy in the balance, we need to 
work together to find the most effective strategies for 
restoring confidence, stabilizing our economy, and restoring 
prosperity for all Americans.
    [The prepared statement of Ms. Warren follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Thank you for coming here today.
    Congressman Hensarling.

STATEMENT OF HON. JEB HENSARLING, MEMBER, CONGRESSIONAL OVERSIGHT PANEL

    Mr. Hensarling. Thank you, Madam Chair.
    Mr. Secretary, welcome. We are very happy to see you here. 
We note that this is the first appearance, I believe, of any 
Treasury personnel, much less the Secretary, before the 
Congressional Oversight Panel. We certainly hope it is not your 
last.
    I believe that this panel cannot effectively fulfill its 
congressional role without having unfettered access to Treasury 
personnel, having the receipt of prompt and accurate answers to 
our queries, and ultimately to have yourself and senior members 
of your team appear in public hearings as this.
    And I hope, Mr. Secretary, that you feel that it is 
commensurate with your duties under Section 2--Subsection 2(d) 
of the act that provides for public accountability of your 
actions under the TARP program. I fear that without this level 
of access that the Congressional Oversight Panel could 
potentially evolve into yet another congressional advisory 
committee, unfortunately leaving the task of effective 
oversight perhaps to others.
    Now, as a member of Congress, I voted against the original 
EESA, or as it has become known, the TARP bill. I respect those 
who voted for it. I understand their reasons. I personally, 
though, had a fear that we were looking at $700 billion in 
search of a program. I was concerned that once bailouts began, 
I am not sure how one bails out on the bailout program.
    I was concerned that the program eventually may lead to the 
Federal Government being able to control the behavior of those 
who received the money and lead us to a partial nationalization 
of key sectors of our financial services industry.
    Finally, I was concerned that the program might create a 
level of moral hazard that could create even greater economic 
turmoil down the road. I fear that many of my fears may 
actually prove well founded.
    Nevertheless, TARP is the law of the land. And as a member 
of Congress and as a member of this Congressional Oversight 
Panel, I plan to do everything in my power to ensure that the 
program meets its intended goals and that it has proper 
oversight.
    I look forward to your testimony in which I hope several 
key areas will be touched upon. Number one is a greater 
understanding by this panel and the general public of what the 
overarching strategy is for the program.
    The public and this panel have a right to know how Treasury 
defines success and what the measurements of the success of the 
various initiatives that you are undertaking under EESA are. 
For many, it is difficult to discern success. For many, it is 
difficult to discern cause and effect.
    Next, the public has a right to know what is the approach 
of Treasury with regard to assisting failing companies and 
firms. Is there any firm that is beyond the reach for taxpayer 
bailout assistance?
    What started out as a program to shore up the financial 
system has now been used to aid automakers, which leads to the 
question ``who is next?'' The airline industry? The trucking 
industry? At what point does Starbucks get in line for some 
type of bailout?
    Now besides being on the hook for $700 billion under EESA, 
the taxpayer is facing an incredible amount of increased 
liability, much of it outside of EESA. We have had a $1.13 
trillion stimulus plan, costing the average American household 
$9,810; a $410 billion omnibus plan, costing the average 
American household $3,534.
    Bloomberg has recently stated that the actions of Treasury, 
combined with those of the Federal Reserve--I am sure you have 
seen the reports, Mr. Secretary--that the total taxpayer 
liability under various bailout, economic recovery initiatives 
now totals $12.8 trillion, or over $110,000 per American 
household.
    Now I, for one, don't believe that the ultimate exposure 
will be anywhere near that figure. But for those who maintain 
that the taxpayer will actually make money on this deal, number 
one, I hope you are right. And number two, as history is my 
guide, I severely doubt it.
    I believe that also, given that taxpayer protection is the 
number-one item that you are to consider under your programs, 
there are legitimate questions to be asked about press reports 
that say a number of the TARP recipients are interested in 
repaying the taxpayer, but apparently Treasury is not 
interested in receiving that money.
    In addition, there are serious concerns on whether or not 
the funding is being used as, again, a road to partial 
nationalization as preferred stock is converted to common 
stock. And I hope, Mr. Secretary, that you will address these 
issues in your testimony, since many people have not been 
overly impressed with the management of AIG, much less Fannie 
and Freddie.
    Again, Mr. Secretary, we appreciate you being here. We know 
these are tough times. We know that you are doing what you 
think is best in the Nation's interest, and I look forward to 
hearing your testimony.
    And I yield back, Madam Chair.
    The Chair. Thank you, Congressman.
    Mr. Silvers.

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Thank you, Madam Chair.
    Good morning, Mr. Secretary, and welcome. Like my fellow 
panelists, I am very pleased that you are able to join us here 
at the Congressional Oversight Panel. And as my colleague Jeb 
Hensarling notes, this hearing does mark the first public 
appearance of a Treasury official before our panel, and we are 
honored by your presence.
    I think every member of the panel recognizes the gigantic 
task that faced the new team at Treasury upon their arrival in 
January and the challenges that the transition represented to 
you, Mr. Secretary, in terms of staffing changes, policy review 
and formulation.
    In that context, this hearing seems to come at the right 
time. Our task this morning is to learn where Treasury thinks 
we stand as a Nation in addressing the financial crisis and, in 
particular, what Treasury's strategy is in relation to the job 
of stabilizing our financial system and reviving the underlying 
economy.
    The Obama administration inherited from the Bush 
administration a number of programs under the Emergency 
Economic Stabilization Act of 2008, the EESA that Jeb referred 
to, and you have announced a number of initiatives of your own. 
We may not be able to cover every aspect of this effort today, 
and we may also not have the opportunity to fully address the 
administration's plans in the area of regulatory reform.
    So let me just commend the administration's announced plans 
for regulatory reform for their general direction and urge the 
Treasury Department to make a close study of this panel's 
regulatory reform report.
    I would like to use what remains of my time to address 
those areas where I think, Mr. Secretary, that your team and 
the Obama administration has made significant progress and then 
to summarize what I see as the fundamental strategic issue 
facing the administration and the Nation. Then I hope to return 
to this set of--the strategic issue in the question period.
    First, the Treasury Department's commitment to address the 
roots of the financial crisis and the fate of American families 
facing home foreclosure is an extremely positive step. The 
program could be more robust, particularly around principal 
reduction. But the basic design is thoughtful. The commitment 
to getting lender and servicer involvement is real, and the 
percentage of income targets--the key number in any such 
program--those targets are the right ones.
    Mr. Secretary, you deserve real credit for your leadership 
in this area, and I am happy to extend it, at least on my own 
behalf, this morning.
    Second, when you came into office, you told our panel you 
were committed to greater transparency. I have been very 
pleased to see that the Treasury Department has turned a corner 
under your guidance. I understand that Treasury has produced 
10,000 documents to the panel staff yesterday in response to a 
letter sent to you on March 24, 2009, asking for materials 
related to AIG.
    This progress is certainly encouraging, and I hope it is 
indicative of a change in the way that the Treasury Department 
plans to handle future requests. In the past, our document 
requests have sadly been answered by prolonged silence. 
Hopefully, you can provide some reassurance today that those 
days are over.
    Third and finally, I view the stress tests and a variety of 
the statements you and your colleagues have made as 
acknowledgments that not all large banks are equally healthy. 
This is a departure from the approach of the prior 
administration, which tried to treat all large banks as though 
they were in the same financial condition, resulting, according 
to our February report, in a $78 billion taxpayer subsidy to 
the banks in the course of the Capital Purchase Program and 
SSFI transactions.
    I commend you on that change. Candor is a good thing, and I 
hope that the stress tests are conducted and the results made 
public in a continuing spirit of candor.
    However, now you and your team face a fundamental strategic 
choice as to how to manage the problem of undercapitalized 
large banks, the so-called ``zombie banks.'' I note that the 
four largest banks in our system control more than 50 percent 
of bank assets.
    In our April report, we looked at the history of bank 
crises in the United States and abroad. We found a pattern that 
started with President Roosevelt and President Hoover's 
Reconstruction Finance Corporation. Successful policy 
approaches to bank crises across time and place seem to all 
have three steps, and the order in which those steps are taken 
is important.
    Step one is to have bank management that can be trusted to 
give an honest accounting of the state of bank balance sheets. 
In this regard, it can be a problem to ask the people who made 
the mess to tell you how big the mess is.
    Step two is to get a realistic measure of the whole in bank 
balance sheets. This can be done by marking to market, and it 
also can be done by a hard valuation of expected cash flows by 
experienced and independent financial professionals. It cannot 
be done by asking the people who invested in the bad assets in 
the first place to tell the Government what those assets are 
worth.
    Step three is to restructure bank finances--and 
``restructure'' is the key word here--in the first instance, by 
requiring investors, particularly stockholders, to bear the 
losses. That is what capitalism is about.
    Exactly who bears the losses and in what proportion must be 
determined carefully, balancing systemic risk considerations 
with taxpayer protection. Only then and only if necessary 
should public funds be involved.
    And finally, with public money has to come a proportionate 
upside for the public. It is the only way to keep the cost to 
the taxpayer my colleague Congressman Hensarling was talking 
about--it is the only way to keep that cost at the end of the 
day at a bearable level.
    I hope in this hearing we can compare this how-to manual 
that history provides us with the Treasury Department's 
thinking and its announced programs. And in conclusion, let me 
express my gratitude to you, Mr. Secretary, for joining us and 
my sympathy to you for taking on, on all of our behalf, the 
giant challenge of repairing the damage a mistaken deregulatory 
philosophy has done to our financial system, our economy, and, 
most of all, to America's working families.
    [The prepared statement of Mr. Silvers follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chair. Thank you, Mr. Silvers.
    Senator Sununu.

    STATEMENT OF HON. JOHN E. SUNUNU, MEMBER, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Senator Sununu. Thank you, Madam Chair.
    Thank you, Secretary Geithner, for being here today.
    And without question, your attendance here is extremely 
important, but it is also extremely valuable. I think you 
understand that, but it is worth emphasizing because it is fair 
to say there has been some reluctance on the part of the 
Treasury staff to appear or to schedule a hearing in public 
with the oversight panel.
    I think the value is that this is the best possible forum 
for you to describe the characteristics, the proposals, the 
ideas behind each of the different programs created under the 
TARP. And of course, it is the best possible way for the 
oversight panel to get clear and accurate information that we 
will act on in preparing our monthly oversight reports.
    I view our role as looking carefully at the structure of 
the different TARP programs, their operation, and their 
performance. Some of these programs are relatively 
straightforward. Some of them are very complex. But our job is 
to look hard at those details, present them clearly to Congress 
and to the public, and the importance of that role is twofold.
    First, we want good information in the hands of the public 
because their confidence in the operation of the programs, 
their confidence in Treasury and in the Government and being 
able to deal with the current financial crisis is going to 
depend on the clarity of that information and, of course, the 
way they interpret that information.
    And then, second, the information that is provided by the 
panel and that is provided by the Treasury with regard to the 
structure and performance and operation of these programs is 
going to affect the way markets behave. Markets will react and 
respond based on whether they think these programs are well 
designed, effective, and whether they think the burden and the 
cost of the program is being shared fairly, as Damon Silvers 
just described.
    And unless that information is provided to the public, our 
markets won't strengthen. They won't operate efficiently. 
Credit won't be available to the families and small businesses 
that we want to see it made available.
    So I think that is a central role of the panel. I think it 
serves the interest of Treasury, and I think it should be 
easier to establish this kind of a forum.
    It is also particularly important because, in my opinion, 
over the last few weeks, as Treasury has put out various 
statements regarding the different programs, you have left more 
questions unanswered than answered. On the stress tests, it is 
unclear what the motivation is behind making information 
public, what information is going to be made public, and how 
does Treasury expect both the general public and the markets to 
react to that.
    On the TALF program, why is it that participation in the 
TALF wasn't as great as Treasury expected? On the new capital 
access program, under what conditions is Treasury and the 
Government going to ask for conversion into common stock? What 
would be the criteria? Will there be objective criteria, or 
will they be subjective criteria?
    And along that same vein, on the prepayment issue that 
Congressman Hensarling brought up, are we going to operate 
under the existing term sheets and conditions under which banks 
originally received funding through the CPP, or is Treasury now 
going to come up with a new list of subjective criteria that 
banks have to meet in order to be allowed to repay taxpayer 
funds?
    Those are significant questions in that they create 
uncertainty in the mind of the public, and they also create a 
good deal of uncertainty in the marketplace. And the 
marketplace won't operate efficiently, the financial markets 
won't operate effectively for consumers or small businesses and 
the other credit services we need unless they feel they are 
getting good, clear, consistent information not just from 
Treasury, but from Congress as well.
    We need more of this interaction, not less. I think it is 
in your interest. I think it will help the panel to do a better 
job, and I look forward to both your testimony and the 
questions today.
    Thank you, Madam Chair.
    The Chair. Thank you, Senator.
    Mr. Neiman.

STATEMENT OF RICHARD H. NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Thank you.
    Good morning, Mr. Secretary. And I am also very pleased 
that you are here today with us to share your perspective.
    This is a unique opportunity not just for our panel, but 
for the American people watching us today. I believe it is 
critically important for us to have this dialogue now, early in 
your term, to facilitate our working relationship going forward 
and to inform the American public about your efforts.
    Speaker Nancy Pelosi asked me to serve on this panel in 
part to be a voice for the States and their residents. I am 
also, as you know, the New York State superintendent of banks, 
and in that capacity, I feel my job is about more than just 
overseeing banks. It is also about helping people in financial 
distress.
    Under New York Governor David Patterson, we have taken 
aggressive actions at the State level in response to the 
crisis, from borrower outreach and increased enforcement to one 
of the most comprehensive legislative actions regarding 
mortgage reform in the country. But the fact is that States 
cannot bring an end to the foreclosure crisis or get us out of 
this recession without a Federal partner.
    However, people across the country aren't sure if the 
Treasury efforts are working, which makes your job even harder 
at the Federal level. I hope to use this hearing to ask you 
some tough questions, but to also give you a chance to 
demonstrate that Treasury's plan can work.
    You may be aware that I placed a blog post on a prominent 
Web site yesterday that asked people to submit questions to 
you. I placed it on the Huffington Post because that blog 
reaches over 10 million readers per month, thus representing a 
good, but imperfect cross-section of American opinion.
    Literally, within hours of the posting, there were hundreds 
of responses that expressed deep concerns and even skepticism 
about the program, many accompanied by deeply personal stories. 
I read these questions on the train ride down to Washington 
last night, and it made me think a lot. It gave me a better 
sense of people's views, but it also made me really wonder why 
aren't people seeing progress in the Treasury's plan?
    Perhaps it is because it is hard to see results in 1, 2, or 
3 months. But perhaps it is because things are not working out 
as well as we would like.
    So it seems to me that what is needed is a better system 
for measuring success that Treasury could provide to inform the 
American taxpayer. For instance, how should we measure whether 
the financial system is stabilizing? Should we be looking at 
credit default spreads or tangible capital ratios or some other 
metrics? How will we know that we are making progress?
    How do we measure if the program has increased the amount 
of bank lending to consumers, to small businesses, to 
corporations? What is the impact of the decline in borrower 
demand versus a tightening of underwriting standards by banks?
    Mr. Secretary, does Treasury have its own metrics for 
determining success in reaching its goals? And if so, can they 
be shared with the American public and be posted on your Web 
site so that all citizens can see how your plan is measuring 
up?
    My worry is that if you do not, one of the most common 
questions I encounter when I hear from people about your plan 
will remain unanswered. One person put it quite bluntly on the 
blog, stating, ``When are those banks going to stop sitting on 
all that money and start lending again?''
    That question is undoubtedly a common question. And yet the 
recent snapshots from Treasury shows banks are making progress 
and attempting to be responsive in meeting credit needs. 
However, additional information is clearly needed to get to the 
bottom of this.
    Metrics would help, and our panel will be issuing a report 
on this question in May that will specifically look at credit 
availability and small business and consumer lending, including 
your programs to restart the securitization market.
    It is my personal view that although disagreement exists 
among some very smart people in this country, including Nobel 
Prize winners on both sides of the issues, you have a plan that 
can work. But it can only work with the support of the American 
people. And to support it, people need to understand it, and 
they need to feel that they can adequately judge it.
    So I see this hearing as an important contribution to an 
inclusive process, and my questions today will reflect comments 
and concerns that I have received from a broad range of 
Americans. I hope today is only the beginning of a more 
collaborative relationship, and I look forward to your remarks.
    Thank you very much.
    [The prepared statement of Mr. Neiman follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chair. Thank you, Mr. Neiman.
    Secretary Geithner, we will enter your formal testimony in 
the record, of course, but we encourage or welcome your oral 
remarks. If you could hold them to 5 minutes so that we could 
go to the questioning, I would appreciate it.

 STATEMENT OF HON. TIMOTHY F. GEITHNER, U.S. SECRETARY OF THE 
                            TREASURY

    Secretary Geithner. Thank you, Chairwoman Warren, 
Representative Hensarling, members Neiman and Silvers, and 
Senator Sununu, for the chance to come before you today.
    Those were very thoughtful opening statements, very 
sensible questions and concerns, and I look forward to the 
chance to begin to address those as we continue a process of 
dialogue and engagement.
    And I want to start by applauding the work of the panel to 
date. These are very complicated questions. You have done a 
very nice job in helping to frame the most important questions 
for the American people. I respect and admire what you have 
done, what you are trying to do, and it is a very important 
part of the framework of oversight that Congress set up to 
monitor use of these programs.
    The United States and the world economy are still in the 
midst of a very severe financial crisis, the worst in 
generations. And as you know, no crisis like this has a single 
or simple cause. But to state it simply, countries around the 
world borrowed too much, and allowed the financial system to 
take on irresponsible levels of risk.
    And as in any crisis, the damage has been brutally 
indiscriminate, causing damage on Main Streets across the 
Nation. Ordinary Americans and small businesses who did the 
right thing, who played by the rules, who were prudent and 
careful in their financial decisions, are suffering from the 
actions of those who took on too much debt, took on too much 
risk.
    I want to outline today the steps taken by this 
administration to restore the flow of credit, to help get our 
economy back on track. And I want to start by just saying at 
the time the administration took office, there had already been 
very substantial actions by the Government, using the authority 
provided by the Congress, to help stabilize the financial 
system.
    And those actions were critical, and they were very 
effective in helping avert a systemic financial crisis. But the 
very sharp decline in growth, both here and around the world, 
that continued over the fourth quarter of last year was placing 
additional pressure, acute pressure on the financial system, on 
banks in this country and countries around the world.
    Issuance of securities, which had been a principal source 
of credit to the economy as a whole, had fallen to virtually 
nothing. Lending terms and conditions were tightening. The cost 
of many forms of credit remained extremely high. Banks were 
unable to raise equity.
    Now that was the situation when we came into office. And 
leaving that situation, that challenge, unaddressed would have 
risked, in our judgment, a deeper recession, more damage to the 
productive capacity of the American economy. It would have 
resulted in higher unemployment, more business failures, 
greater damage to our future growth and productivity, and, as a 
result, higher long-term budget deficits.
    Without action to strengthen the capacity of the financial 
system to provide credit, the substantial spending and tax 
incentives in the American Reinvestment and Recovery Act would 
have been less effective, far less effective.
    Now, in response to these challenges, we outlined a broad 
new strategy to repair the financial system and strengthen its 
capacity to support recovery. We started with a series of 
reforms to improve transparency, accountability, and oversight. 
We published the detailed terms of financial assistance 
provided to individual banks. We put in place new protections 
for determining eligibility for assistance. We required 
financial institutions to report monthly on details about what 
is happening to lending activity.
    We outlined new conditions on assistance to protect the 
taxpayer, and the President outlined a set of broad reforms to 
compensation practices to help ensure that taxpayer assistance 
was used to support lending rather than excessive compensation 
for executives.
    Alongside these reforms, we launched a program of 
initiatives to address four challenges that were at the heart 
of this financial crisis, and I want to review briefly each of 
those challenges and our response to those challenges.
    First, falling home prices and rising unemployment were 
making it difficult--are still making it difficult for many 
responsible borrowers to meet their mortgage payments and stay 
in their homes. Rising foreclosures risk contributing to 
further declines in house prices, a further pullback in credit, 
and further job losses.
    So, in response, this administration established a program 
we call the Making Home Affordable Program to help keep 
mortgage interest rates low, to help responsible homeowners 
refinance into affordable mortgages, and to modify at-risk 
loans in order to help millions of Americans lower their 
monthly mortgage payments and stay in their homes.
    Second, concern about future losses has led many banks to 
pull back on lending. So, in response, we outlined a new 
program to ensure that the Nation's major banks have a 
sufficient buffer of capital to provide credit for recovery.
    As part of this effort, the Federal banking agencies, led 
by the Fed, are completing a forward-looking assessment of the 
capital needs of the 19 largest banks in the country to 
determine which banks may need to raise additional capital.
    Those banks that need more capital will have an opportunity 
to raise that capital from the private markets or to request 
capital from the Treasury in the form of a convertible 
preferred security. It is important to recognize a dollar of 
capital generates between $8 and $12 of lending capacity.
    Third, the breakdown of key markets for new securities has 
constrained the ability of even credit-worthy small borrowers--
businesses, families--to get the loans they need. Securities 
markets in our financial system typically account for 40 to 50 
percent of the credit provided to the economy, and the crisis 
caused issuance of new securities to grind to a halt.
    So, as a complement to our program to bring more capital 
into banks, we launched the Consumer and Business Lending 
Initiative, which expanded dramatically a program with the 
Federal Reserve called the Term Asset-Backed Securities Loan 
Facility. And these programs, as you know, provide financing to 
help catalyze issuance of securities backed by student loans, 
credit cards, small business loans, auto loans, corporate and 
commercial real estate loans.
    Treasury has also put in place a program to provide direct 
support to small business loans through SBA supported programs. 
And these programs have had some effect--I will come to this at 
the end--in helping to promote new flows of credit through the 
issuance of securities and to help reduce rates in those 
markets.
    The Chair. Mr. Secretary, could I ask you just to wrap up?
    Secretary Geithner. Yes, but this is very important for me 
to do.
    The Chair. Of course, it is.
    Secretary Geithner. Because you have asked me to lay out 
our broad strategy and progress, and this is my first chance to 
do it. I will take just a few more minutes, but I will leave 
time for questions.
    The fourth key challenge we addressed in our program was 
the challenge reflected in the fact that a range of legacy 
assets--these are mostly real estate-related loans made during 
the height of the boom--remain on the books of major banks, 
limiting their ability to extend credit and to raise new 
equity.
    So, in response, the administration created an innovative 
new program to provide a market for those assets. Under this 
program, private investors, such as pension fund managers, will 
compete for the right to access capital from the Treasury and 
financing from the Federal Reserve and the FDIC to purchase 
these real estate-related loans and securities.
    Private investors will set the purchase price, protecting 
the Government from the risk of paying too much. The Government 
will share in the returns on those investments. Professionals 
will manage the assets, and together, this will help reduce the 
risk of loss to the taxpayer over time.
    Now these four programs are critical. They are designed to 
work together. Each will reinforce the effectiveness of the 
other. We may have to adapt and expand them over time, but they 
represent the foundation of any credible strategy to help 
ensure that this financial system is working for rather than 
against recovery.
    Now, Chairman, I was going to summarize briefly our 
priorities on regulatory reform. I am going to leave that for a 
subsequent discussion. But I want to conclude by talking about 
some of the measurements of effectiveness of these programs.
    The Chair. Mr. Secretary, I appreciate how many pages you 
are turning there. But if we could wrap up, I know we want some 
questions, too?
    Secretary Geithner. So let me just conclude with a few 
observations on the impact of these programs on the 
availability and cost of credit. These are the most important 
measures of the state of the system, and to date, frankly, the 
evidence is mixed.
    Now it is important to note that evaluating the impact of 
these programs is difficult because it is impossible to judge 
how the financial markets, how banks would have operated in the 
absence of these actions. In normal recessions, demand for 
credit falls. In recessions that follow long periods of 
substantial borrowing, demand for credit falls more sharply. 
This is such a moment.
    There is no past experience that provides a good guide as 
to what one could have expected to have occurred in our 
financial markets absent the policy actions that have taken 
place already. Indicators on interbank lending, on corporate 
issuance, and credit spreads suggest some improvement in 
confidence in both the stability of the system and some thawing 
in credit markets over the last several weeks and months.
    Just to cite a few examples. The 3-month LIBOR-OIS spread, 
which is an indicator of the cost of unsecured lending or 
borrowing among banks, has fallen to about 90 basis points from 
a peak of about 365 in October. Nonfinancial corporate bond 
issuance was up sharply in the first quarter of 2009 after 
falling sharply at the end--in the second half of 2008.
    Issuance of asset-backed securities rose in March after 
grinding to a halt in October and November, but it still 
remains at about half the level that occurred in the first half 
of 2008.
    Despite these improvements, and these are material 
improvements, the cost of credit is still very high. Reports on 
bank lending show significant declines in lendings for consumer 
loans, for commercial and industrial loans, although mortgage 
refinancings have picked up considerably.
    Now we are looking carefully at how to improve measurement, 
as you are, of what is happening in credit markets and tie 
those directly to the impact of these programs, and we look 
forward to working with you on how to do that.
    And I just want to end by saying that our central 
objective, our obligation, is to ensure that the financial 
system is stable and it is able to provide the credit necessary 
for economic recovery. But stability itself is not enough. We 
need a financial system that is not deepening or lengthening 
the recession. And once the conditions for recovery are in 
place, we need a financial system that is able to provide 
credit on a scale that a growing economy requires.
    Meeting this obligation requires actions by the Government. 
It requires the Government to take risks. The lesson of 
financial crises throughout history is that early action, 
forceful action, sustained action to repair financial systems 
to promote the flow of credit is essential to limit the damage 
recessions cause and to make it possible to bring recovery 
about at least cost to the taxpayer over time.
    Now we need a financial system to support sustainable 
economic growth, and we need to put in place a comprehensive 
set of regulatory reforms to deter fraud and abuse, to protect 
American families when they buy a home or get a credit card, to 
reward innovation and tie pay to performance, and to end these 
past cycles of boom and bust. This is our commitment, and we 
have a lot to do.
    Thank you for having me here, and I look forward to our 
conversation this morning.
    [The prepared statement of Secretary Geithner follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    The Chair. Good. Thank you, Mr. Secretary.
    Mr. Secretary, I am going to start the questions this 
morning with accountability, a theme that this panel has talked 
about repeatedly, and clarity in government policy. So here is 
the question I want to start with.
    The auto industry has received taxpayer money, but it has 
been linked to changes in management, changes in business 
practices, breaking labor contracts, and causing bondholders to 
take losses at a minimum. The banks have received 10 times more 
money than the auto industry, and yet they seem to be receiving 
very different treatment.
    So the question I have is why the different treatment, and 
in particular, do you think that the banks are better managed 
than the auto companies were?
    Secretary Geithner. A very important question and 
reasonable question. Let me say a few things in response.
    First of all, everything we are trying to do to get the 
financial system working again is important to the success of 
the restructuring and rehabilitation of our automobile 
industry. It is true for the economy as a whole and the 
industry of the United States, without a financial system that 
is working to provide credit, you are going to see much more 
damage, much more challenge, much greater head winds for 
businesses across the country.
    Second basic point: If you step back, you know, we are five 
quarters into this recession, and we are at least that long 
into a very substantial, dramatic adjustment we saw following 
this unprecedented financial boom. So there has been very, very 
dramatic restructuring already across the financial system.
    If you just look at the largest institutions in the world 
that existed 2 years ago and look at how many exist today, 
there has been a very dramatic restructuring.
    Third point, as your colleague said at the beginning, in 
assessing what was necessary going forward to solve the 
problems that we inherited, we made it clear that where we are 
going to provide capital in the future, we want to target it to 
where it is necessary. We want to do it on a differentiated 
basis. We want to do it with conditions--not unconditionally, 
but with conditions not just to help protect the taxpayer, but 
to try to help ensure that the system emerges stronger, not 
weaker.
    That is a very important principle. And we have said, the 
President has said publicly, that where we provide exceptional 
assistance, because that is necessary to make sure there is 
capital in the system, it will come with conditions to make 
sure there is restructuring, accountability, to make sure these 
firms emerge stronger in the future.
    Now----
    The Chair. So let me just make sure I am understanding you 
to this point. I just want to be sure that I am following here.
    Secretary Geithner. Sure.
    The Chair. Are you saying that the difference in treatment 
between how the banks were treated and how the auto industry 
has been treated is effectively one of timing and that, going 
forward, the banks will be treated with the same kind of 
accountability at a minimum that has been demanded from the 
auto industry?
    Secretary Geithner. Well, I am trying to be candid. They 
are different challenges. They require different solutions. But 
there is less difference than your question suggests.
    Just to cite a couple of examples, if you look at where the 
Government had to act early in substantial force, in some of 
the largest and weakest parts of the system, in that context--
both in the context of Fannie and Freddie and in the context of 
AIG--we were very clear that the conditions in that context 
came with changes in board and management for exactly the 
reasons you said.
    Now there has also been----
    The Chair. I am sorry. I just want to make sure I am 
following. You are saying that there have been changes in 
management at financial institutions----
    Secretary Geithner. Where the Government acted--absolutely.
    The Chair [continuing]. That have received TARP funds?
    Secretary Geithner. Well, as I said, in the context of the 
interventions taken in Fannie and Freddie and AIG, just to cite 
three examples----
    The Chair. I am asking about the financial institutions.
    Secretary Geithner. Well, those are financial institutions.
    The Chair. I am asking about the banks.
    Secretary Geithner. But the principle is important in this 
case. And as I said, the President has said this publicly. I 
have said it publicly. Going forward, where institutions need 
exceptional levels of assistance, we will make sure that 
assistance comes with conditions that provide for the necessary 
degree of accountability to help ensure these firms emerge 
stronger rather than weaker. And that is an important 
principle. We are committed to do it.
    Now what is necessary in each specific case is a judgment 
we are going to have to make, but I think that is a very 
important principle. It is at the core of our program.
    The Chair. Good. Thank you, Mr. Secretary.
    I have a second question on accountability. In the last few 
weeks, banks have been announcing--a few banks--that they have 
quarterly profits. But there has also been a renewed 
acceleration of home mortgage foreclosures and new examples of 
raising fees on customers who have met all of their contract 
terms and raising interest rates, even for consumers paying on 
time.
    So I want to ask, do you think that banks receiving TARP 
funds should be engaging in these practices?
    Secretary Geithner. I just wanted to underscore our 
commitment, the administration's commitment to doing everything 
we can to help mitigate the damage homeowners are facing across 
the country.
    The Chair. I understand.
    Secretary Geithner. Now if you look at the programs we have 
put in place, they are very comprehensive, very aggressive, 
very dramatic programs to make sure that people are getting 
relief where they need it. And just to point out how powerful 
these are already, if you look at the programs we have put in 
place they have made it possible for already hundreds of 
thousands of Americans to refinance and take advantage of lower 
interest rates. That is a core part of our program now.
    And you are right that we are also moving quickly to put in 
place these programs to help prevent foreclosures, and allow 
modifications. And we are making a lot of progress in that 
area.
    As a condition for Government assistance, banks have to 
agree to participate in these loan modification programs, and 
we are going to make sure that they are doing so and that the 
American people are going to see data on performance, on 
modifications, and have a better chance to judge for themselves 
what is happening on the modification front.
    The Chair. Good. I will return to the question about 
changing interest rates, but my time is up.
    Congressman Hensarling.
    Mr. Hensarling. Thank you, Madam Chair.
    Mr. Secretary, as you can tell, all members of this panel 
very much welcome your appearance here today. So let me ask you 
first a process question since, again, this is the first time 
we have had a member of Treasury appear before us in almost six 
months of existence.
    If this panel chose to have a monthly oversight hearing, 
would you make either yourself available or I believe Mr. 
Allison is up for confirmation to head, I believe, the Office 
of Financial Stability? Would either--assuming he is confirmed, 
would you make yourself or him available for such?
    Secretary Geithner. Congressman, I want to--let me say it 
this way, okay, and you can hold me to this. I believe in the 
importance of transparency, accountability, oversight. I think 
it is critical to our credibility, I respect what you are doing 
in this context.
    I will commit to make sure that we have as effective a 
working relationship as possible so that you have the 
information you need and an intensity of interaction with us to 
help you do your jobs. That is in our interest because if you 
can't understand what we are trying to do and have a chance to 
assess it, then it is going to be harder for us to do what we 
want to do, just as you said at the beginning.
    Now we have made it clear we are willing to meet weekly 
with the panel and the panel's staff, and I am prepared to 
examine any proposal, consider any proposal to have more formal 
meetings like this on a more frequent basis. But what I would 
like to do is when I have a confirmed team in place of senior 
officials at the Treasury, come back and we can work out 
something we can commit to, and adhere to.
    What I don't want to do is commit to a frequency of 
interaction at the senior level that I am not going to be able 
to live up to because, as you know, we are doing a lot of 
things, have a lot to do. But if you give me a chance, once we 
have a confirmed team in place, I will----
    Mr. Hensarling. I appreciate that, Mr. Secretary. Do we at 
least have a commitment that this will not be your last 
appearance before this panel?
    Secretary Geithner. Yes.
    Mr. Hensarling. Thank you. Thank you, Mr. Secretary.
    In today's Wall Street Journal--you frequently appear in 
the Wall Street Journal--it doesn't have a quote from you, but 
it characterizes something you said as ``Treasury Secretary 
Timothy Geithner indicated that the health of individual banks 
won't be the sole criterion for whether financial firms will be 
allowed to repay bailout funds.''
    Again, if there are firms that wish to repay taxpayers 
their money, if the taxpayer money is at risk, if their 
relevant regulator certifies that commensurate with safety and 
soundness of the financial institution, they can return that 
capital, if this is an accurate assessment of your position, 
why wouldn't you take the money back?
    Secretary Geithner. In those conditions, we would welcome 
it. It would be very helpful, help differentiate, help show 
progress. It helps underscore the basic point that the 
institutions of our financial system are in very different 
circumstances.
    But I just want to underscore what is really important. And 
I said this at the end of my testimony, but I want to 
underscore it again. My basic obligation and our responsibility 
is to make sure that the system as a whole, as a whole, has the 
ability to provide the credit that recovery requires. And so, 
we need to make a careful judgment about what policies are 
going to best promote that objective.
    Under the laws and conditions established in the Recovery 
Act, the judgment about when institutions can repay is a 
judgment that the Federal banking agencies have to make, and 
they are in the process of looking now at what set of standards 
and principles should guide repayment.
    Ultimately, though, we have to look at two things. One is 
do the institutions themselves have enough capital to be able 
to lend, and does the system as a whole, is it working for the 
American people for recovery? And that is the standard we are 
going to look at.
    But, of course, nothing would make me happier than for 
that----
    Mr. Hensarling. I am sorry, Mr. Secretary. My time is 
limited at the moment. But just to understand then, there will 
be other considerations besides the individual institution's 
financial stability? I am a little confused on what----
    Secretary Geithner. Well, I am not sure I would say it that 
way, and as I said, this is a judgment that I don't make. It is 
a judgment that the Federal banking agencies make under the 
conditions that were established in the Recovery Act. And they 
are in the process now, the Fed and the other agencies, are in 
the process of working through how to make these judgments.
    But again, the critical thing we care about is whether the 
system as a whole is in a position where it has the capacity to 
support the credit the recovery requires. That is the ultimate 
test.
    Mr. Hensarling. Mr. Secretary, my time is running short 
here. One more question, and that is there is great concern 
among many on an apparent plan to convert the preferred stock 
positions in many of the financial institutions to common 
stock, thus having essentially converting Uncle Sam into a 
control shareholder of many of our largest financial 
institutions.
    Is that the plan, and why?
    Secretary Geithner. That risk worries me, too. So let me 
just say a few things about what our objectives are.
    Again, what we want to make sure is that there is the 
capital the system requires and that it is targeted to where it 
is needed. So the process we put in place that the Fed is 
running now to do an assessment of capital needs in a 
potentially deeper recession is designed to make sure that 
there is more clarity, more transparency on bank balance 
sheets, that those institutions that may need additional 
capital are identified. They have the opportunity to raise 
that.
    Now they will have a variety of different ways where they 
can raise that capital. They will have the choice to raise it 
in the market. They will have the choice to do a range of 
conversions, or they will have the choice to take it from the 
Government. And they will be examining those options in 
cooperation with their Federal regulator over the next few 
weeks.
    The Chair. Thank you, Mr. Secretary.
    Thank you, Congressman.
    Mr. Silvers.
    Mr. Silvers. Mr. Secretary, we have spent a fair amount of 
time this morning on the question of the banks and what happens 
after the stress tests and capital. This panel's statutory 
mandate, as I think has been referenced by a number of my 
fellow panelists, is to oversee the effectiveness of the--in 
part is to oversee the effectiveness of the program from the 
standpoint of minimizing long-term cost to the taxpayers and 
maximizing the benefits for the taxpayers. And I am quoting 
from the statute.
    Now we have a case study, a precedent under the act for 
dealing with a sick bank, and that precedent is Citigroup. 
Citigroup has come to the Treasury for additional funding in 
circumstances that I think everyone recognized as dire in 
November. As a result of that second funding, plus its initial 
funding under the Capital Purchase Program, if you look at 
Citigroup's capital structure on a mark-to-market basis, the 
cash we have put in is the majority of the capital of Citigroup 
today.
    Some would say that we have crossed the nationalization 
line already, and this chart represents that. This chart 
underestimates--this puts it nicely. This chart underestimates 
the extent of public investment in Citigroup and public funds 
at risk because it doesn't account for an asset guarantee of 
$300 billion, of which $270 billion is Government money.
    If you put that in there--it is hard to price. If you put 
that in there, it would shift things very dramatically.
    Now in contrast to capital at risk, public money at risk in 
Citigroup, the upside that we have today in Citigroup--and this 
is all, of course, as a result of transactions before January 
20th. The upside in Citigroup is 7.6 percent, according to our 
staff.
    And again, this underestimates the degree of disparity 
because the warrants that we have in Citigroup are not priced 
at the current common stock price. So the price of Citigroup 
could go up 400 percent, and a lot of our warrants wouldn't 
kick in at all yet.
    And as it has been mentioned before in this conversation, 
we have the downside of ownership. We have a tiny bit of the 
upside of ownership, and we have none of the control of 
ownership.
    Now, obviously, there are going to be some changes here. 
They haven't happened today, but there are going to be some 
changes. Those changes seem to point in two different 
directions at once. They would appear to increase the upside 
from the current 7.6 percent, according to Citigroup's Web 
site, to about 35 percent. Still not commensurate with the 
risk.
    But on the other hand, they would give away our senior 
position, as we move from preferred to common. Unlike, for 
example, Warren Buffett, who holds his senior position as 
preferred and takes his upside as warrants.
    Now, Mr. Secretary, my question to you about this is do you 
believe this is the right way to go? Is this the model for what 
we are going to do for the next sick bank? And secondly, what 
are we going to do about this, all right? Is this the 
appropriate way to treat the taxpayer?
    And I recognize that in certain respects you are making 
changes, and I would hope you would address those in that 
context.
    Secretary Geithner. Mr. Silvers, I am not sure this is 
going to satisfy you, but I want to just say a couple of 
things.
    It is very difficult for me to talk about any individual 
institution ever, given my responsibilities for the system, and 
I think you understand that. And as you said, you are 
describing a state of play that existed on January 20th, I 
believe.
    Mr. Silvers. Well, Mr. Secretary, it exists today as a 
legal matter. This is the state of affairs today.
    Secretary Geithner. It does. But as you said, it is in the 
process of changing. So I guess I want to step back a little 
bit and make some broader points. But of course, you will have 
a chance to judge us by what we do going forward, and this is 
one way to evaluate the tradeoffs and judgments we are making.
    But let me just underscore one important point. We are not 
a private investor. We are the Government of the United States. 
When we act to provide assistance for banks, we don't do it for 
the benefit of those banks.
    The cost benefit returns to the American economy you cannot 
evaluate by looking at the narrow financial terms of that 
particular transaction. You have to look at the action through 
the prism of what motivates it, which is how to make sure we 
have a financial system that is stable, able to lend, and 
support recovery.
    And that is important because, as you know and as you said 
nicely in your opening statement, that is sort of an essential 
precondition for limiting damage for recession and recovery.
    Now, just because you can't look at the economic case for 
how taxpayer dollars are being used and structure the 
conditions through the narrow prism in which the transaction 
itself occupies. You have to look at the transaction in the 
context of the broader benefit it creates relative to the 
alternatives. And this is true for any action we take.
    Mr. Silvers. Mr. Secretary, I have 10 seconds. How does 
protecting Citi's common shareholders at the expense of 
taxpayers benefit our economy?
    Secretary Geithner. Well, let me do it in a slightly 
different way again. But it requires us to go back a little 
bit. If you look at the last 4 months of 2008, you can see 
catastrophic damage caused by judgments about the level of 
failure you can tolerate throughout a financial system. And as 
I said, the damage caused by those actions and judgments were 
brutal, indiscriminate, and catastrophic.
    They affected--as you said, Chair Warren, at the beginning 
of the hearing--they affected the fortunes and lives of 
millions of Americans here and around the world. They helped 
precipitate the deepest loss in economic activity that the 
world has seen in a generation.
    Now, so you have to think about these choices through that 
broader prism, not through the narrow confines of the specific 
investment.
    The Chair. Okay. Thank you.
    Thank you, Mr. Silvers.
    Senator Sununu.
    Senator Sununu. Mr. Secretary, explain the process that 
will be used to determine whether or not Treasury requests the 
conversion of preferred shares under the CPP into common.
    Secretary Geithner. Again, this is something that the 
primary supervisor is in the process of thinking through and 
designing strategy on, but I want to say it simply again. This 
capital assessment they are undertaking will reach a judgment 
about whether and to what extent individual banks could use an 
additional buffer of capital to make sure they can withstand 
deeper losses----
    Senator Sununu. Let me stop you there. You are using 
phrases like ``could use.'' I am sure every bank could use a 
little bit better capital buffer.
    Secretary Geithner. All right. Let me say----
    Senator Sununu. So we need to be specific about whether or 
not it is required and whether there is an objective 
measurement of the requirement.
    Secretary Geithner. Right. So the measurement--and again, 
you are going to see the details of the parameters laid out by 
the Federal Reserve in the coming days that will help you 
decide that. But that will be a defined measure of what 
additional capital, I will use your word, should be required.
    Now banks will have a range of different options for 
meeting that capital requirement. And as the Fed has already 
said directly, what is important is not just the overall level 
of capital, but the quality of capital, including the amount of 
tangible common equity or Tier 1 common equity in the system.
    Banks will have a range of different ways to meet those 
tests. They will be able to work out with their supervisor how 
they are going to meet that test. And as I said, in simple 
terms, their ability is to take--raise more capital from the 
market or take capital from the Government.
    Senator Sununu. So what you describe there is a relatively 
objective process with clear criteria where sort of subjective 
measurements either don't enter in or enter in to a very 
limited degree. In other words, it will be an objective process 
that people can easily understand. Fair enough?
    Secretary Geithner. Well, I won't say there won't be 
judgment in it. But that will be judgment that the supervisors 
work out and judgments carefully informed by other independent 
measures of risk, losses, earnings potential, those things.
    Senator Sununu. I think it is important that it be as 
objective as possible.
    Secretary Geithner. I agree with you.
    Senator Sununu. And I think this also applies to the 
question raised by Congressman Hensarling with regard to 
repayment. You indicated that there would be a relatively 
objective approach based on whether they have met the 
requirements under the regulator. But then you alluded to the 
question that would be asked of is the credit system working? 
Then finally, you said but that is going to be asked at the 
regulatory level.
    But I would suggest it is not really the job of regulators 
at the OCC or OTS or at the State level to make subjective 
determinations about whether our credit system is working and 
whether a particular institution is playing their role in that 
credit system and, therefore, conclude that we are not going to 
let them repay, even though they met all of the objective 
regulatory criteria.
    So I will ask what level of subjectivity is going to come 
into play on the repayment question?
    Secretary Geithner. I actually wasn't trying to reinforce 
your concern or Representative Hensarling's concern. I was just 
trying to state it cleanly, which is that they are going to 
have to make that judgment. That is the way the law is written.
    Senator Sununu. Who is going to have to make it?
    Secretary Geithner. The relevant Federal banking agency 
will have to make that judgment, and they are going to have to 
look at----
    Senator Sununu. You are going to expect and ask the 
regulators to make a subjective judgment about whether or not 
our national system of credit and lending is working?
    Secretary Geithner. No, I don't--I didn't mean to imply it 
that way. They are going to have to make a judgment of whether 
it is tenable, makes sense for that individual institution. I 
was just trying to underscore the fact that the basic objective 
that is guiding what we do is to make sure the system is 
working as a whole.
    But I understand your concern, and everybody wants clarity, 
objectivity. Because they are working through this now, I can't 
tell you today whether they are going to fully meet that test, 
but you will know that relatively soon.
    Senator Sununu. I simply underscore objectivity in this 
regard is absolutely essential. Otherwise, you are going to be 
creating more uncertainty than you intend, and you will be 
potentially doing more harm than good along these same veins, 
agreed?
    Secretary Geithner. Can I say that I agree with that? And 
as I said, we would welcome, okay, capital coming back to the 
Treasury and the taxpayer as a result of the effectiveness of 
these programs.
    Senator Sununu. Excellent. Ah, releasing stress test 
results. You indicated that you were going to release some 
results. Then Treasury pulled back in the sense that you 
haven't been clear about what information you are going to 
release or in what context it will be released.
    First question is why release data publicly at all? It 
certainly isn't typical for bank examiners to release specific 
information about the institutions they examine. So why release 
that information? And to the best that you can describe here, 
what will be released?
    Secretary Geithner. Well, again, it's awkward because of 
the timing of this hearing. But those are questions that the 
Fed and their counterparts are working through right now. But I 
want to underscore again that I do believe it is valuable, and 
this is the core of the objective of this process that we 
worked out with the Fed, to bring more transparency, more 
disclosure to potential losses on bank balance sheets.
    Without that, it is harder for banks to raise capital. 
Without that, they are going to live with a deeper cloud of 
uncertainty over their financial health than they need to. 
Transparency will be helpful in resolving that, and they are in 
the process of working through now what is going to be 
sensible.
    But I agree with your concerns. I understand your concerns 
about this. But they are careful, thoughtful, pragmatic people, 
and they will get it right.
    The Chair. Thank you, Mr. Secretary.
    Thank you, Senator.
    Mr. Neiman.
    Mr. Neiman. Thank you.
    I would like to come back to the foreclosure efforts and 
give you a little more opportunity to expand on those. I agree 
and we all have focused on the fact that housing created this 
problem and has to be solved if we are going to get out of it.
    As you know, our March report focused on foreclosure 
efforts. It looked at the drivers to delinquency, the 
interaction between affordability and negative equity, and set 
out a lot of the impediments to a successful mitigation 
program. We also made an initial assessment of your program 
that was announced on March 4th and how it addressed many, but 
not all of the impediments that we identified.
    In my role in leading the State's Foreclosure Prevention 
Task Force, in talking to a lot of housing counselors, what we 
are hearing back is there is still a sense of uncertainty as to 
when and the timing around servicers and lenders signing on to 
those programs. Can you give me and the panel a sense of the 
degree of industry participation that you expect and a sense of 
the timing?
    Secretary Geithner. We are moving very quickly. I think 
Treasury is now--I think that the majority of servicers in the 
country have signed onto the new standards, and we are moving 
quickly to put that in place and lay out the additional details 
in public.
    But I think it is going to take a little time for us to be 
able to judge what is actually happening. You know, this 
program provides very substantial economic incentives for 
participation and for modifications. And that was based on a 
set of judgments that we made about what was going to be 
necessary. But we won't know really until we see the pattern of 
modifications going forward, and until we see how those work 
for a time, we won't know how successful they are in helping 
economically viable homeowners remain in their home.
    But we are moving, and I think reasonably quickly, given 
the pressure and challenges we are facing.
    Mr. Neiman. Do you see any other potential impediments that 
will need to be addressed or the program tweaked or changed?
    Secretary Geithner. We can't tell now. But it is a very 
complicated program, as you know, and it is a complicated set 
of incentives we are trying to change. But we are going to be 
pragmatic about this. Where we see problems and opportunities, 
we will adapt the program.
    It is a challenge because, as many of your colleagues said, 
you want clarity quickly. You want people to hold to those 
basic lines. But if there are things around design or practical 
impediments to better participation, we will try to fix those.
    Mr. Neiman. Being last on the questioners, there is never 
confidence of whether it will come around to me again. So I do 
want to bring us back to regulatory reform, which you did not 
get a chance to in your opening, particularly from the role of 
the States and the role that States play in consumer 
protection.
    As you know, Secretary Paulson's blueprint in establishing 
a regulatory framework eliminated the role of the States in 
consumer protection and safety and sound supervision. I would 
like to get your thinking as to where do the drivers for 
consumer protection fall out in your regulatory proposal?
    Secretary Geithner. We are going to be outlining in the 
next couple of weeks a set of detailed proposals for how to 
change the basic framework of consumer protection in the credit 
area in particular, both on credit cards, on mortgages, and 
other credit products. And you will see, following that, we 
will lay out the broader changes to the oversight framework 
that we think are necessary to make these new rules of the game 
work.
    I would expect States to have an important role going 
forward still, but the precise nature of that role you will see 
laid out in the suggestions we make about what should happen at 
the Federal level.
    I just want to say, though, that I want to just say it 
starkly: We had systematic failures in consumer protection. 
They caused enormous damage not just to the people who were 
taken advantage of, but to the stability of the entire 
financial system. And it is going to require very, very 
substantial changes to fix that.
    Mr. Neiman. Great. All right. Thank you very much. My time 
has expired.
    The Chair. Actually, it hasn't.
    Mr. Neiman. Oh, okay.
    The Chair. But you are welcome to----
    Mr. Neiman. Fifty seconds left, I think I will pass. Thank 
you.
    The Chair. Okay, that is fine. Thank you.
    Actually, Mr. Secretary, I want to go back to the point 
about foreclosures, and I must ask is an amendment to the 
bankruptcy laws to deal with underwater mortgages a central 
element of your foreclosure mitigation plan?
    Secretary Geithner. As you know, the President has 
supported and we are supportive of changes, the carefully 
designed changes to the bankruptcy plan. We think you can do it 
in a way that would help reduce these problems. That process is 
now working through the Congress. We are working closely, of 
course, as part of that process.
    The Chair. If----
    Secretary Geithner. It is a difficult balance to get right, 
as you know. But the President is supportive of this, and we 
are--and we would like to work to see if we can find a good 
balance.
    The Chair. If those changes are not made, what happens in 
States like Nevada, Arizona, California, Florida, Illinois, 
where the number of underwater mortgages is high, where we know 
that this is related not only to the initial foreclosure but to 
redefault when we try to do workouts. Are there any other 
proposals for dealing with underwater mortgages when they are a 
great deal underwater?
    Secretary Geithner. Well, let me just say two things in 
that context. One is the President has proposed and there is a 
lot of support in Congress for substantial changes to the Hope 
for Homeowners Program. And that program is designed to be 
somewhat more responsive to that set of specific challenges.
    But the President's program also does provide meaningful 
payment relief to families that have very high loan-to-value 
ratios.
    The Chair. Right.
    Secretary Geithner. And does provide very substantial 
incentives for those payments to come down through reductions 
in interest and principal payments.
    But our program is not going to solve all of these 
problems. It is designed to target those homeowners that were 
relatively responsible in the amount of debt they took on, but 
you will have to look at them in the context of the full range 
of other programs that Congress has authorized and the 
President is proposing to help mitigate the damage caused by 
the recession across the American economy.
    The Chair. Thank you.
    I want to ask one other question as long as we are talking 
about structure here. In our most recent report, we talked 
about three ways to deal with troubled institutions--
liquidation, reorganization, or subsidization. And in the 
report, we discussed the fact that Treasury seems mostly 
focused on subsidization and that----
    Secretary Geithner. Treasury present or Treasury past?
    The Chair. Well, I will let you address that question. And 
so, the question is, because I think that is the right way to 
put it, the extent to which all of the tools in the toolbox are 
on the table and the circumstances under which liquidation of 
failing financial institutions or reorganization in place of 
failing banks would be considered. Could you address that?
    Secretary Geithner. That is a very sensitive, very 
important question. Again, what we have to do is we have to 
balance the critical objective of making sure our system is 
working better. That requires that the core institutions in our 
country, the largest institutions in our country are able to 
fund and meet their commitments. That is a central part of this 
process.
    It requires that they have enough capital even to withstand 
a deeper downturn. And it requires that they have a board and 
management and that will earn the confidence of markets, not 
just their primary supervisor in the Government.
    Now we want to protect the taxpayer. We want to achieve 
these things at least cost to taxpayers as a whole. But again, 
the system requires, the recovery requires, the economy 
requires small businesses, families across the country, they 
depend on it and require a better functioning financial system. 
And so, we will look at all actions we think are necessary 
against those two basic objectives.
    One is get the system working better. Protect the taxpayer. 
Do that at least cost to the taxpayer. And what will be 
necessary will be different in particular cases. It is going to 
require adaptation and evolution. But those are the objectives 
we are going to balance.
    And it is very hard, Chairwoman Warren, to tell you today 
what exact mix of conditions will require. What I can tell you 
for sure is----
    The Chair. Fair enough, Mr. Secretary. I will stop with 
``all actions.'' You had me at ``all actions.'' Let me----
    Secretary Geithner. I don't want to mislead you, okay? 
Because, again, we have got a very careful balance, and I think 
anybody who lived through--like we all did, lived through the 
second half of last year, particularly the fourth quarter of 
last year, should be somewhat chastened and somewhat careful 
and cautious in thinking about how we get that balance right.
    And our action will be shaped by that experience, not just 
by the core of the obligation we have, to try to make sure we 
are using the taxpayers' money wisely with appropriate 
conditions so that the system emerges stronger.
    The Chair. Well, I think the question, though, started with 
the focus on are all the tools on the table--liquidation, 
reorganization, and subsidization? Am I hearing you say yes?
    Secretary Geithner. Well, we will take all sensible actions 
that are consistent with those obligations we have to the 
American people. And again, the determination about what is 
least costly and most effective will require a careful balance 
in these areas.
    But Chairwoman, we will be careful and pragmatic and as 
effective as we can in reducing the ultimate cost to the 
taxpayer, trying to get the system back to recovering at least 
risk to the overall economy, at greatest benefit to the economy 
as a whole.
    The Chair. I must set a better example and stop with my 
time.
    So, Congressman Hensarling.
    Mr. Hensarling. Thank you, Madam Chair.
    Mr. Secretary, I take some comfort in your testimony that 
we share a number of goals. I would take a little less comfort 
that there are policies in place to necessarily achieve some of 
those goals.
    With respect to both taxpayer protection and preventing the 
nationalization of key segments of our financial services 
industry, let me revisit again the plan of the conversion of 
preferred stock to common. At the end of the day, the financial 
institution after that conversion has no new capital in a 
practical definition. It has no new capital. So it is a 
bookkeeping entry.
    And yet, what has happened, is the taxpayer clearly is at 
greater risk, and I would assume you would agree with the 
position of common stock, than the taxpayer was with the 
preferred stock.
    And then, in addition, you have got a much stronger 
mechanism for Government control of that institution when we 
are already seeing the prospect of essentially the President of 
the United States hiring and firing CEOs of Fortune 500 
companies, determining compensation levels, the prospect of 
some of my colleagues in Congress telling Detroit what kind of 
automobiles they need to produce to become profitable.
    Many of us don't want to go down that road, and I am having 
a lot of trouble here seeing the upside to any strategy for the 
conversion. So could you further elaborate on what you would be 
trying to achieve? And again, going to Senator Sununu's point, 
what is the most objective criteria that can be applied to that 
decision-making process?
    Secretary Geithner. Congressman, they are thoughtful 
questions. And as you can see from the diversity of views on 
your panel, there are very different views about how we balance 
these different objectives and constraints.
    I am concerned about the potential damage you do to 
franchise value and expectations across the financial system. 
If you have this expectation of creeping, long-term Government 
involvement, Government ownership, I agree with you that can 
cause damage. We have seen one compelling example of that 
today, and that is something that troubles me.
    On the other hand, it is important that we get a better 
capitalized financial system. And you are right that a 
conversion itself doesn't add to the overall level of 
regulatory capital. It does change the composition in ways that 
actually could be helpful to a bunch of the objectives that 
firms face.
    So let me just underscore this basic principle. At the 
conclusion of this process that the Fed is undertaking to 
assess the potential, the capital needs of banks going forward, 
where there is a need for additional capital, total capital and 
common capital, then those banks will have a series of options 
for how they meet that need. And they will work out with their 
primary supervisors what is the best mix of those options.
    And they will be balancing lots of different 
considerations, including the ones you described in that 
context, but I can't tell you today exactly where they are 
going to come in that context. That is a process they are going 
to have to undertake, and it is going to require a fair amount 
of care and effort.
    And they will make different choices, I suspect. Different 
firms will make different choices, and they will have different 
judgments about what they want to do to the composition of 
capital.
    Mr. Hensarling. Related to that, Mr. Secretary, let me 
segue into AIG since, clearly, it is easier to invest in these 
companies than it is to divest. We have now had, I believe, 
four different infusions of taxpayer capital--two by the Fed, 
two by Treasury under TARP. I believe we are at roughly $180 
billion of taxpayer liability exposure and counting.
    I believe the Federal Reserve Chairman recently testified 
before the House Financial Services Committee that had he had 
the ability to place AIG into receivership late last year, he 
would have done it. One can question whether or not he had the 
ability to do that, as Chairman of the Federal Reserve. But I 
assume either you or he, as the taxpayer representative, owning 
80 percent of AIG, certainly you have the ability to do that 
today.
    What is the exit strategy from AIG?
    Secretary Geithner. The United States Government came into 
this financial crisis without a legal framework that allowed it 
to intervene and manage more effectively the risk posed by 
institutions like AIG. It was a tragic failure of the country.
    A lot of the trauma we faced in the course of the fall was 
the result of that basic failure. We still do not have that 
authority today.
    Mr. Hensarling. Not as majority shareholder?
    Secretary Geithner. No. We do not now have the ability nor 
the tools that were designed in the wake of the financial 
crises of the last decades that were given to the FDIC for 
individual banks and thrifts to allow the Government to 
intervene more quickly, earlier and more effectively to protect 
against the damage posed by weakness of these institutions.
    And we would like to work with Congress to legislate 
authority over the coming weeks and months. But even with that 
authority, we would face very difficult judgments again, 
because in that context you are dealing with the potential 
risks to financial stability more generally, to other 
institutions, to insurance companies around the United States 
from the potential failure of a large firm like that.
    But that imperative of getting better authority in place is 
a centerpiece of what the President is trying to work with 
Congress to achieve now.
    The Chair. Thank you.
    Thank you, Congressman.
    Mr. Silvers.
    Mr. Silvers. Mr. Secretary, before I come to my question, 
let me just say that I very much welcome and appreciate your 
comments about the value of transparency earlier in response to 
Senator Sununu's question. I appreciate your comments about the 
centrality of consumer protection, and I very much support and 
agree with the notion that there needs to be a broader 
resolution authority.
    Now I want to return to the theme of my first questions, 
but now turning to the public-private investment partnerships. 
I take at face value the representation that these partnerships 
are not designed to be a covert method of subsidizing the 
banks, that they are designed to get fair prices for the assets 
that are being purchased.
    My concern, which I wish you to address, is that again, as 
in the case of Citigroup, there seems to be a profound and 
inexplicable imbalance between public risk and public capital, 
taxpayer money, and private capital and private gain. And it 
ranges from--in the investment partnerships from the legacy 
securities program option one, where we have the fantastic 
amount of 33 percent of the capital coming from the private 
sector and 50 percent of the gain going to the private sector.
    To add its far extreme, option two is only 25 percent 
private capital. And over in the legacy loans program, where 
there may be the greatest risk because loans have been less 
marked down than securities, the amount of private capital is 7 
percent, but the gain to the private sector is 50 percent. And 
even that 7 percent of private capital could be obtained 
through the TALF at taxpayer risk.
    Now I just don't get it, Mr. Secretary, how this represents 
protecting the taxpayer. And I would like you to explain why it 
does.
    Secretary Geithner. Mr. Silvers, this is an important 
question, and the virtue of these programs is they are going to 
come with a level of transparency to allow everybody to 
evaluate what the economics are for the investor in the 
Government. And as you see the terms of these things refined in 
public, you will have a better basis for making that 
assessment.
    Now, very important to underscore again, you can't measure 
the returns to the taxpayer through this narrow prism. It 
doesn't provide a full measure of it. And you are counting as 
capital--I haven't had a chance to look at these carefully. You 
were counting as capital in the left-hand panels of your 
charts, the financing the Government is providing at a price 
against a bunch of collateral with haircuts against that 
collateral.
    And that is not capital in the same sense that you are 
looking at----
    Mr. Silvers. Can I just stop you there?
    Secretary Geithner. That is financing against collateral at 
a price.
    Mr. Silvers. But can I stop you there?
    Secretary Geithner. Yes.
    Mr. Silvers. What I am measuring here is money at risk, 
right? If it turns out----
    Secretary Geithner. But the----
    Mr. Silvers. Mr. Secretary, if it turns out that the assets 
that these partnerships buy are not worth the price paid--not 
because of anything terrible, but because of just risk, all 
right? And if we eat through the equity in those partnerships, 
is it not the case that the FDIC and the Fed are on the hook?
    Secretary Geithner. Absolutely. This is secured lending 
against collateral at an interest rate with pricing designed to 
help protect the Fed and the FDIC from that risk. But what I am 
saying is you are equating capital, which is fully at risk, 
with financing against collateral.
    Now really the critical thing, as you know from our 
previous conversations, is compared to what? And the 
alternative programs that many have advocated for dealing with 
these legacy assets----
    Mr. Silvers. Well----
    Secretary Geithner. It is important to let me finish this. 
The alternative programs have the Government taking on all the 
risk, taking on all the risk and mispricing the assets, taking 
all the downside risk and having all that protection.
    Now they would get in return all the potential upside in 
this case. But that tradeoff is a bad tradeoff for the 
Government because the Government is highly unlikely to be in a 
position to be able to get the valuation right and will be at 
great risk for overpaying for those assets and having a much 
worse risk reward.
    Mr. Silvers. All right. Let me stop you right there. What I 
don't get--and I practice law, and you have been in banking--is 
a deal where----
    Secretary Geithner. Actually--I have never actually been in 
banking. I have only been in public service.
    Mr. Silvers. Well, a long time ago. A long time.
    Secretary Geithner. Actually never.
    Mr. Silvers. Investment banking I meant.
    Secretary Geithner. Never investment banking. Spent my 
entire life in public service in the Treasury and at the 
Federal Reserve.
    Mr. Silvers. Well, all right. Very well then.
    Secretary Geithner. But I would be happy to----
    Mr. Silvers. But 7 percent on the one hand, 50 percent on 
the other. What prevents us from hiring the very same bond 
managers that we are going to hire, work for the public, and 
get 100 percent of the gain for the public? I don't understand 
what the 7 percent--what is so important about the 7 percent--
--
    Secretary Geithner. Let me try----
    Mr. Silvers [continuing]. That we give them 50 percent of 
the upside.
    Secretary Geithner. Let me try and do it simply again. The 
left panels of your chart are not an accurate description of 
the risks to the taxpayer in the financing they have at risk. I 
would be happy to try and give you a better alternative measure 
of it, but it will require that you do a full assessment----
    Mr. Silvers. Is it mistaken in the legacy loan program that 
the private capital is 7 percent max?
    Secretary Geithner. It is--just to say you are mixing 
capital with financing in a way that doesn't do justice to the 
economics of it. But the critical thing again is----
    Mr. Silvers. Mr. Secretary, I asked you a different 
question. Is it not 7 percent?
    Secretary Geithner. It is not the right--you are mixing two 
different types of economic risk.
    Mr. Silvers. I think I understand 7 percent and 50 percent, 
and I don't----
    Secretary Geithner. Again, I am not trying to be--it is 
just a----
    Mr. Silvers. My time has expired.
    The Chair. Gentlemen?
    Secretary Geithner. It is not an accurate representation. 
But can I answer this one question about the----
    The Chair. Ten seconds.
    Secretary Geithner. Okay. Mr. Silvers, in the alternative 
model where the Government sets the price for the assets, 
regardless of who manages, who it hires to manage, the 
Government will be at acute risk of overpaying, providing the 
subsidy you want to avoid, and having a tradeoff where the 
taxpayer is taking on at the outset a much greater share of the 
losses across the financial system.
    That is what we are trying to avoid because we don't 
believe that is in the best interest of the taxpayer.
    The Chair. All right. Mr. Silvers, will you continue?
    Mr. Silvers. No, we are done.
    The Chair. Senator Sununu.
    Senator Sununu. Thank you, Madam Chair.
    Mr. Secretary, just for the record, I would never mistake 
you for an investment banker. [Laughter.]
    Secretary Geithner. I don't think he meant that as a 
compliment, but I will take that as a compliment.
    The Chair. I am not sure that makes me feel better.
    Senator Sununu. In the first 3 weeks of April, there were 
two TALF auctions. The first one I would describe as modestly 
successful, the second one as marginally successful. I think I 
am being very generous in using that description. The first one 
yielded, I think, $4.7 billion in financing, the second one 
$1.7 billion in financing.
    To what do you attribute the relative lack of interest, and 
has Treasury, in working with the Federal Reserve Bank of New 
York that is, I think, managing these auctions, recommended or 
undertaken any changes in their structure?
    Secretary Geithner. Let me just say one thing about the 
facts. Actually, my sense is that it was relatively good for an 
early program. The amount of issuance of securities that came 
in those first two auctions is about five times the level, 
substantially above the level in the previous 5 months, and you 
have already seen a material reduction in the price of credit 
raised in auto receivables, et cetera. So I actually think that 
it is pretty good in terms of impact initially, but it is early 
days.
    The principal explanation that people say in the markets 
about why participation was lower than expected is concern 
about the conditions that come with the assistance in the 
program, the range of different conditions, uncertainty about 
whether they may change in the future, and that underscores an 
important point.
    If we are going to get out of this crisis at less cost, 
ultimate risk to the taxpayer, we need the markets to be taking 
risk again. We went for a long period where they took too much 
risk. The risk now is they take too little. For them to be 
willing to take risk alongside the Government, they need to 
have some confidence in the rules of the game going forward, 
and that is going to be an important challenge we face together 
working with the Congress as we clarify these conditions.
    Senator Sununu. Well, let us try to clarify because there 
are members of Congress now talking about applying the 
executive compensation limits to the public-private investment 
partnerships. Damon Silvers raises some concerns about the 
structure of those, but this is separate from that.
    This is an issue of changing the rules after the fact or 
changing the rules in a way that would discourage 
participation. What is the administration and the Treasury 
Department's position on applying rules for compensation or 
other rules to the public-private investment partnerships?
    Secretary Geithner. We are in the process now of 
concluding, completing a draft of a rule for applying those 
conditions. We are going to apply the law. We are going to put 
out in the public domain for comment a draft rule. That will 
give everyone the chance you here on the Hill are----
    Senator Sununu. When will that be put out?
    Secretary Geithner. It will hopefully be written in the 
next couple of weeks, relatively quickly. We are moving----
    Senator Sununu. You are soliciting people to request 
participation as one of the lead partners or investors at the 
same time. Correct?
    Secretary Geithner. Yes. You can't feel more strongly than 
me about the need for clarity early. But we need to go through 
a process to put out a draft rule for comments, solicit 
comment. But our obligation is to apply the law, and we are 
going to do so in a way that is consistent with the 
requirements of the law and does as good a job as we can at 
making these programs work.
    Senator Sununu. So there will be a rule forthcoming, and 
what is the Treasury's position on application of the executive 
compensation limits that are in law today to those 
partnerships?
    Secretary Geithner. Well, you will see in the rule how we 
propose to strike that balance. But it is my judgment that 
those compensation restrictions do not need to apply to the 
programs you referred to.
    Senator Sununu. The insurance guarantee programs. The 
insurance guarantees have been provided or portfolio insurance 
has been provided to Citigroup and to Bank of America. I 
believe at the end of March, there was an assessment done--the 
value of the portfolio, losses incurred in the portfolio.
    Will there be a public disclosure of that assessment, and 
what can you tell us about the relative value of those 
portfolios relative to the book values that were insured?
    Secretary Geithner. Senator, I am not sure I know the 
answer to that, but let me--I would be happy to talk to my 
colleagues at the Fed and have them report separately on that 
question.
    My sense is, though, that the results of the stress test 
will give you some indication, give the market some indication 
about that question. But I should talk to my colleagues at the 
Fed and the banking supervisors and ask them to respond to your 
question directly.
    Senator Sununu. Thank you, Madam Chair.
    Thank you, Mr. Secretary.
    The Chair. Thank you.
    And our last round of questions here, Mr. Neiman.
    Mr. Neiman. Thank you.
    The greatest criticism that we read about and where there 
seems to be the greatest debate is over the viability of the 
Treasury's plan, particularly the program to purchase troubled 
assets. And it is around the assumption in the plan that the 
critics would assert that the values of those assets do 
represent the fundamental values. And the underlying assumption 
in your plan is that they do reflect a significant liquidity 
discount.
    My question really goes around to understanding the 
interplay between the credit and the liquidity as the drivers 
of those asset prices because this really does underline the 
assumptions and the viability of that plan.
    Secretary Geithner. That's an extraordinarily difficult, 
complicated question. Hard to know. You are right that the 
price of any security in the markets reflects not just a view 
of credit losses over time, but it reflects a judgment of 
illiquidity and a whole set of other risk premia that are about 
uncertainty.
    It is very hard to decompose those things. But the markets 
where you can tell--where you can say with complete confidence 
today that these markets are not working in part because of the 
absence of financing available to those markets.
    So just to use the simple example, if you had to sell your 
house tomorrow in a market where no one could get a mortgage, 
and you had to sell tomorrow or the next week or 2 weeks, the 
value of your house would be substantially less than what you 
think it might be worth if you were able to hold it over time 
or choose the timing, and there was a market for mortgages 
available.
    So to help get these markets started again, it is necessary 
for there to be an alternative source of financing 
appropriately priced from the Government for a temporary period 
of time. And that will help establish a market and help 
separate out what is about credit losses, what is about 
liquidity risk premia.
    And underlying your question is a thing that is uncertain, 
which is, is this going to prove attractive enough for it to 
actually work? Or is it going to be less valuable to potential 
investors and banks on both sides of the equation?
    And as Mr. Silvers's charts indicate, there is a wide 
divergence of views at the moment about whether the financing 
is going to be provided in a way that is too attractive or not 
attractive enough.
    Mr. Neiman. And the private-public partnership, what is the 
basis for why you think that is the mechanism to identify the 
appropriate pricing?
    Secretary Geithner. Again, it is better than the 
alternatives. In that context, people with money at risk will 
make the judgments about what the risk is and what the values 
are. And they have to compete for the right to put up that 
capital. They are going to hire professional asset managers to 
do it. In our judgment, that is a better model than having the 
Government itself come in and independently try to value these 
things.
    This is an, as you know, enormously complicated set of 
problems. The assets are enormously complicated. There is no 
precedent for what we are going through in this context, and 
the amount of uncertainty that you see in markets today is a 
reflection of that. So we just made the judgment that it is 
better for the taxpayer to use the incentive of an investor 
that is going to put capital at risk to help solve that 
valuation pricing problem.
    Mr. Neiman. I would like to come back to your opening 
remarks where you talked about recognizing that 40 percent of 
consumer lending has historically come from the secondary 
markets and securitization. And this is the key point for us 
all to remember, how so much of consumer and small business 
lending is supported by the capital markets, and the TALF is 
designed to unfreeze those markets.
    How should we be evaluating bank lending levels in light of 
the role of the security market and securitization, 
particularly in recycling capital?
    Secretary Geithner. Very hard to do. You know, you can't 
expect banks to be able to fully compensate for the reduction 
in securitization activity, it is not tenable in a short period 
of time. That is why we are trying to move on both those 
channels of credit flows, make sure banks are able to provide 
enough credit and try to get these markets for securities 
working again.
    But it is hard to know what the new system is going to look 
like in that context. And what we are trying to do is, again, 
make sure that the assistance we provide is priced so that as 
conditions normalize, demand for Government financing, for 
exceptional support will fade and--as you already see happening 
across some of the Fed's facilities.
    Mr. Neiman. So in terms of my original questioning around 
metrics and even on the front page of the Wall Street Journal 
yesterday in terms of the diversity in interpreting this data, 
have you given more thought as to more appropriate metrics or 
greater clarity?
    Secretary Geithner. I think the best thing is to be simple 
about it, and the best thing to do is to ask what is happening 
to bank lending by category of type of credit exposure like our 
new reports require? What is happening to the issuance of 
securities, asset-backed securities and other securities, and 
what is happening to the price of both bank lending and 
securities issuance?
    Those three things capture what you need to do to measure 
it. Now it still doesn't tell you fully what is happening to 
demand for credit from economically viable borrowers, but that 
is a good place to start.
    One more thing, the Fed's senior loan officer lending 
survey is another good qualitative measure of terms and 
conditions and that, if you look at it, showed it rising to 
very, very adverse peaks and starting to gradually improve. 
Those are four examples of things you can look at.
    Mr. Neiman. And even though my time is out, I would like to 
reclaim my 40 seconds that I had put away in my first round.
    The Chair. Forty seconds, you are using it up. Go.
    Mr. Neiman. What I would like to do is in recognition of 
the fact that I have received hundreds of emails, both to my 
personal email and to the COP Web site as well as to the 
posting, I would like to categorize them, provide them to your 
staff----
    Secretary Geithner. Send them to us.
    Mr. Neiman [continuing]. And work on answers that we can 
respond and post publicly. So I appreciate that.
    The Chair. Thank you.
    Thank you, Mr. Secretary. I understand that you need to 
leave to meet with the President and that we are going to end 
now.
    We are going to hold the record open for 1 week so that 
panelists may submit additional questions in writing so that 
you will have the opportunity to respond on the record.
    I just want to say that I am very sorry that you had to 
turn through the pages on regulatory reform. It is a critically 
important issue, and I am sorry that our time is so constrained 
that we couldn't spend more time on it, particularly both the 
long time and the nearer term on regulatory reform, which I 
hope is going to address the consumer issues and in particular 
the question about repricing interest rates for small 
businesses and consumers who are paying their bills on time.
    Also to address the systemic issues, very important. I 
think it is clear we have lots of questions. So I hope we will 
make this a regular meeting.
    Thank you.
    Secretary Geithner. Thank you for having me. A pleasure 
talking to you all. Excellent questions, as I said. Very 
thoughtful concerns. And we are trying to balance a lot of 
different considerations, and I know you will do what we do, 
which is look at these programs against the alternatives.
    The Chair. Yes. Thank you.
    Secretary Geithner. You can't judge anything except against 
the alternatives, and I know you will help us do that.
    The Chair. Thank you, Mr. Secretary.
    This hearing is adjourned.
    [Whereupon, at 11:37 a.m., the hearing was adjourned.] 

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