[Senate Hearing 111-73]
[From the U.S. Government Publishing Office]




                                                         S. Hrg. 111-73
 
  THE IMPACT OF ECONOMIC RECOVERY EFFORTS ON CORPORATE AND COMMERCIAL 
                          REAL ESTATE LENDING

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

                              MAY 28, 2009

                               ----------                              

        Printed for the use of the Congressional Oversight Panel


  THE IMPACT OF ECONOMIC RECOVERY EFFORTS ON CORPORATE AND COMMERCIAL 
                          REAL ESTATE LENDING

                                                         S. Hrg. 111-73

  THE IMPACT OF ECONOMIC RECOVERY EFFORTS ON CORPORATE AND COMMERCIAL 
                          REAL ESTATE LENDING

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 28, 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

                              ----------                              
                                                                   Page
Opening Statement of Hon. Elizabeth Warren, Chair, Congressional 
  Oversight Panel................................................     1
Statement of Richard Neiman, Member, Congressional Oversight 
  Panel..........................................................     1
Statement of Hon. John E. Sununu, Member, Congressional Oversight 
  Panel..........................................................     6
Statement of Damon Silvers, Deputy Chair, Congressional Oversight 
  Panel..........................................................     7
Statement of Hon. Jerry Nadler, U.S. Representative from New York    14
Statement of Hon. Carolyn Maloney, U.S. Representative from New 
  York...........................................................    18
Statement of Til Schuermann, Vice President, Bank Supervision, 
  Federal Reserve Bank of New York...............................    21
Statement of Richard Parkus, Head of CMBS and ABS Synthetics 
  Research, Deutsche Bank Securities, Inc........................    33
Statement of Jeffrey Deboer, Chief Executive Officer, The Real 
  Estate Roundtable..............................................    88
Statement of Kevin Pearson, Executive Vice President, M&T Bank...    96
Statement of Mark Rogus, Senior Vice President and Treasurer, 
  Corning Incorporated...........................................   101

 
  THE IMPACT OF ECONOMIC RECOVERY EFFORTS ON CORPORATE AND COMMERCIAL 
                          REAL ESTATE LENDING

                              ----------                              


                         THURSDAY, MAY 28, 2009

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                      New York, NY.
    The Panel met, pursuant to notice, at 10:09 a.m. in the 
Rosenthal Pavilion at New York University, Elizabeth Warren, 
Chairman of the Panel, presiding.
    Attendance: Professor Elizabeth Warren [presiding], Mr. 
Richard Neiman, Senator John Sununu, Damon Silvers, 
Representative Jerry Nadler, Representative Carolyn Maloney, 
Dr. Til Schuermann, Richard Parkus, Jeffrey DeBoer, Kevin 
Pearson, and Mark Rogus.
    The Chair. The hearing of the Congressional Oversight Panel 
will now come to order. And is this mike turned on? Can we hear 
okay? Good. All right. Not good feedback.
    Welcome to today's hearing, ``The Impact of Economic 
Recovery Efforts on Corporate and Commercial Real Estate 
Lending.''
    My name is Elizabeth Warren, and I am the chair of the 
Congressional Oversight Panel. I would like to begin this 
morning by thanking my colleague Richard Neiman, who is the 
superintendent of banks of the State of New York. He and his 
staff put in extraordinary efforts to help us arrange this 
hearing, and we are very grateful for his time and for his 
expertise in pulling together this hearing.
    I also want to thank Patrick McGreevy of the Congressional 
Oversight Panel staff who, once again, has done a wonderful job 
for us in being able to put one of these field hearings 
together.
    And I particularly want to thank New York University School 
of Law for hosting us here, for giving us this space so we 
could have this hearing.
    So with thanks to everyone, I want to start with 
Superintendent Neiman and ask him to make opening remarks.

 STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Thank you very much, Chair Warren.
    Good morning, and I thank you all for appearing here today 
at this important hearing of the Congressional Oversight Panel 
on corporate and commercial real estate lending.
    I would also like to thank Congresswoman Maloney and 
Congressman Nadler for their participation here today. Although 
I am much more accustomed to being on the other side of the 
witness table when attending hearings with them, I am thrilled 
that they could fit today's hearing into their busy schedules.
    Their roles on the House Financial Services Committee and 
Congresswoman Maloney's role as chair of the Joint Economic 
Committee make them both directly related to the topics we are 
discussing here today, and their attendance emphasizes the 
importance of the issues for New York.
    Finally, I also would like to again thank New York 
University for providing this beautiful venue.
    When we sometimes speak of the financial crisis, it is as 
if it were one event, when really it is a cascade of multiple 
crises that overlap and reinforce a downward trend. This panel 
has been seeking input on these various crises through field 
hearings across the country. In Nevada and Prince George's 
County, Maryland, we focused on the foreclosure crisis. Last 
month in Milwaukee, Wisconsin, we focused on small business 
lending.
    Now we are here in New York to examine the effect of 
continuing market uncertainty on mid-size and large 
corporations, as well as the commercial real estate borrowers. 
The purpose of today's hearing is to assess both credit 
availability and the impact of the recession on borrower 
demand. And to do this, we will explore questions such as are 
banks continuing to lend to these important sectors, and how 
are their underwriting and other credit lending practices 
changing?
    Is the credit contraction driven more by supply or by 
demand? How is the freeze in the securitization market 
affecting credit access, and to what extent can bank lending 
fill that gap? How will the markets adapt? What will be the new 
normal in credit markets? What will they look like? What is the 
impact that the Treasury and the Federal Reserve programs, such 
as TALF, having or are expected to have in restoring stability 
for corporate and commercial lending?
    Can we expect to have a wave of defaults in commercial real 
estate lending? And if so, will it be another tsunami like 
residential subprime? And finally, what will be the ultimate 
impact of a slowdown in commercial lending? What impact will it 
have on our communities? What does this mean for jobs and for 
economic development opportunities?
    These are difficult issues with moving parts, and we are 
fortunate to have a diverse group of leading experts here today 
to offer their testimony. On our first panel, we are going to 
have Til Schuermann, the vice president in risk management of 
the Fed, who will provide us a comparison to past recessions, 
as well as an overview of the exponential growth in non-bank 
credit and the impact of bank lending.
    Richard Parkus from Deutsche Bank's analysts group will 
explore the drivers of default in commercial real estate 
lending, as well as the volume of loans at risk.
    On our second panel, Kevin Pearson, executive vice 
president, M&T Bank, will be offering a lender's perspective on 
credit trends and the unique role that regional banks play in 
this sector.
    Jeffrey DeBoer, the CEO of the Real Estate Roundtable, will 
discuss the impact of the credit contraction and the recession 
on real estate borrowers and developers.
    And then Mark Rogus, senior VP and treasurer of Corning, 
will also provide insight into the impact on large 
corporations, as well as the reduced credit access of the 
impact of their customers and suppliers.
    So I want to thank each of you for your participation this 
morning and look forward to hearing your perspective and 
thoughts on the issues we will be discussing this morning.
    The corporate and commercial real estate lending markets 
are facing serious challenges. However, unlike the subprime 
crisis in residential mortgages, in this case, we have the 
opportunity to anticipate what is coming and address the issues 
before it becomes an even bigger crisis. We have a narrow 
window in which we can take action and avert the worst. Time is 
of the essence.
    Through this hearing, I am hopeful that we will gain a much 
deeper understanding of the complexities and the scope of the 
issues impacting corporate and commercial lending. We all hear 
that commercial real estate is the next shoe to drop, but what 
we want to know here is how big is that shoe and how big a dent 
is it going to make?
    And I am particularly interested in measuring the 
effectiveness of Treasury's programs to date. So, building on 
that assessment, we must begin exploring the additional steps 
Treasury and Congress can take to mitigate the developing 
problem and ensure that these sectors continue to fuel our 
economy.
    So thank you, and I look forward to hearing from both our 
distinguished witnesses.
    [The prepared statement of Mr. Neiman follows:]

    [GRAPHIC] [TIFF OMITTED] T1603A.001
    
    [GRAPHIC] [TIFF OMITTED] T1603A.002
    
    0The Chair. Thank you, Superintendent Neiman.
    Senator Sununu.

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

    Senator Sununu. Thank you, Madam Chair.
    And thank you, Richard, and your staff, for helping to put 
together the hearing today. I know it took a lot of work and a 
lot of cooperation from the staff in Washington working with 
you, and pleased to have that.
    We have got really three terrific panels, beginning with 
Congressman Nadler and Congresswoman Maloney, who I know have 
done a tremendous amount of work on these issues. Not just 
since the initiation of the current financial crisis, but these 
are issues that they are familiar with, that they have worked 
on before because they represent what is still the financial 
capital of the world and what we certainly hope remains the 
financial capital of the world.
    I think this hearing is particularly important because 
while we read about the residential mortgage crisis in the 
newspapers every day, falling asset prices and foreclosures, we 
really don't hear as much about problems and challenges in the 
commercial and industrial and commercial mortgage-backed 
securities markets. It hasn't been quite as visible in part 
because a lot of the problems that people expect to emerge and 
anticipate emerging really haven't been forced to the surface.
    And I think we will hear about some of the reasons for that 
today. We will get a better understanding of the risks that 
exist in the marketplace and, I hope, explore some of the ways 
in which the TARP programs that have been put into place might 
help to deal with those risks and uncertainties.
    I think it is essential that we have strong, accurate, 
clear data and information for the panel to work on in 
preparing its assessments for Congress and the Treasury because 
we can't just work on anecdotal information. Even when stories 
do appear and there is discussion in the mainstream press about 
challenges in the commercial and industrial markets, we can't 
just try to collect a bunch of news stories and assume that 
that really represents the precise state of the market.
    So having witnesses from the Fed, having witnesses from 
industry, having witnesses from the commercial banking sector 
is absolutely important and essential for the panel to be able 
to do its job effectively. As the chair is fond of saying, the 
plural of anecdote is not data. And----
    Senator Sununu [continuing]. If nothing else, I have 
incorporated that into my own lexicon because we have seen time 
and time again, whether we are dealing with the consumer 
markets, credit card markets, small business lending, we need 
to make sure we are all working from accurate information and 
accurate data if we are going to be able to draw a reasonable 
conclusion.
    So, again, I appreciate all the staff work necessary to put 
together a strong field hearing, and I look forward to the 
testimony this morning.
    Thank you, Madam Chair.
    The Chair. Thank you, Senator.
    Mr. Silvers.

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Thank you, Madam Chair.
    Good morning, and like my fellow panelists, I want to 
express my thanks to New York University for providing us with 
this beautiful space, to the staff for their hard work in what 
promises to be a highly informative hearing, and in particular, 
to my fellow panelist Richard Neiman, who put a great deal of 
time and energy into putting this hearing together here in his 
home State.
    We are honored today by the presence of two leaders from 
New York's congressional delegation--Representative Carolyn 
Maloney, the chair of the Joint Economic Committee of Congress, 
and Jerry Nadler, the representative from here in Manhattan, 
who has been a leading voice on behalf of the public interest 
in commercial law in the Congress of the United States.
    This hearing is unusual in the brief history of the 
Congressional Oversight Panel. In each of our past field 
hearings, we have heard from American families, from 
homeowners, from small business people, and community bankers 
who have done much to educate this panel as to the impact of 
the financial crisis and the Emergency Economic Stabilization 
Act, known to most Americans as the financial bailout.
    But today, we hear from an S&P 500 company, one of our 25 
largest banks, the Real Estate Roundtable, and the Federal 
Reserve Bank of New York. Yet this witness list is entirely 
appropriate.
    One key measure of whether our financial system is 
functioning is whether large-scale enterprises, be they firms 
or real estate development projects, can obtain financing on 
reasonable terms in relation to the risks those projects 
represent.
    If such financing is not available, then existing jobs 
disappear, and new ones are never created. Innovation does not 
happen. Urban centers turn into parking lots and vacant lots. 
Investors liquidate and take losses on what should have been 
viable investments, adding to the downward pressure on our 
economy and our capital markets.
    The financial crisis poses two threats of this kind. As my 
colleague Richard Neiman alluded to, the financial crisis is 
not a single thing. It is a complicated set of intertwined 
phenomenon.
    The first type of threat it poses is the threat of a 
general loss of confidence in financial institutions and 
financial markets. We faced an acute threat of this type in 
September and October of last year, and judging by a number of 
measures, such as the persistence of historically high short-
term credit spreads and the prolonged freeze in asset-backed 
securities markets, fear of this type has not entirely gone 
away.
    And this type of generalized fear can lead both to 
skyrocketing credit costs and the simple disappearance of 
liquidity from credit markets such that credit is not available 
at any price. However, thanks in part, I believe, to the 
actions taken under the Emergency Economic Stabilization Act, 
the threat of systemic breakdown has eased significantly.
    The second threat, though, is much more specific. It is the 
threat posed not by a general loss of confidence, but by the 
actual weakness of key large financial institutions. This 
problem is more insidious because, unlike a general credit 
crisis, it can be hidden--hidden by accounting tricks, hiding 
by compliant regulators, hidden even by well-meaning 
policymakers.
    But weak financial institutions in survival mode will not 
provide credit directly and will not participate in asset-
backed securities markets to the extent that our economy needs. 
The possible resulting downward pressure on markets such as 
commercial real estate can lead to further weakening of bank 
balance sheets, resulting in a long-term banking crisis feeding 
economic stagnation, such as occurred in the 1990s in Japan.
    And while we have seen the stress test results and the 
debates associated with those results, in a way, the real 
measure of the health of the banks is are they playing their 
role in the credit system appropriately?
    What makes answering this question such a challenge is 
determining what constitutes appropriate credit provision in 
the context of a burst credit bubble and rapidly declining 
demand for credit. Appropriate credit provision is not the same 
thing as maintaining or reviving a bubble fueled by the 
collapse of underwriting standards.
    The written testimony we have received for this hearing, 
which is very thoughtful, nonetheless presents something of a 
paradox. On the one hand, we have the cautious optimism 
expressed by the written testimony of Mr. Schuermann from the 
Federal Reserve Bank of New York. On the other hand, we have 
somewhat urgent warnings in relation to the commercial real 
estate market coming from the analyst reports of Mr. Parkus of 
Deutsche Bank and, to a lesser degree, from Mr. DeBoer from the 
Real Estate Roundtable.
    And the Treasury Department's most recent bank lending 
survey, conducted in March, shows continuing contractions in 
bank lending, both commercial and industrial and in commercial 
real estate.
    Anecdotally, although as my colleague Senator Sununu says, 
it is not data, we still have anecdotes. I hear from people in 
the real estate business that credit remains simply not 
available for large new projects or for refinancings.
    I also read stories like the account in the New York Times 
recently of the fate of Hartmarx, a significant New York State 
employer and the manufacturer of President Obama's suits. Wells 
Fargo, a major TARP recipient, was reported to be in a mode of 
favoring the certain lower returns and job losses associated 
with liquidation over the less certain higher returns and job 
preservation associated with a sale to a continuing operator.
    I hope that this hearing will sort out these paradoxes and 
help our panel better understand the current state of business 
and commercial real estate credit markets and the role played 
in those markets by TARP recipient institutions, both directly 
and indirectly through the asset-backed securities markets.
    I look forward to our witnesses' testimony.
    [The prepared statement of Mr. Silvers follows:]

    [GRAPHIC] [TIFF OMITTED] T1603A.064
    
    [GRAPHIC] [TIFF OMITTED] T1603A.065
    
    The Chair. Thank you, Mr. Silvers.

 STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT 
                             PANEL

    The advantage of going last in the opening statements is 
that I have the privilege of agreeing with my colleagues. And I 
cannot let the moment pass without agreeing with Senator Sununu 
about the importance of accurate and detailed information.
    Data are critical not only because we can't design programs 
accurately if we don't know what is going on. It is really the 
case that we can build a meaningful recovery only if we build 
it on reality. So I hope that is an important part of this 
hearing today.
    I also want to agree with Superintendent Neiman and with 
Mr. Silvers about the point about the interconnected economy 
here. This crisis may have begun with subprime mortgage 
lending. What that meant, as people defaulted on their 
mortgages was that banks got into a great deal of trouble and 
started to stumble. They cut back on their lending. That, in 
turn, meant that businesses cut their inventories and their 
employees, which, in turn, meant that there were fewer people 
who could afford to pay their mortgages.
    This is something that economists call an adverse feedback 
loop, thus proving that they deserve tenure. The rest of us 
just call it a vicious cycle. But either way, it means a lot of 
suffering for a lot of people.
    So today, what we are going to talk about is a continuation 
of a series of field hearings we have had, the current state of 
corporate and commercial real estate lending. And what I really 
want to focus on here today is how this slowdown in lending 
affects even those of us who have never owned a business, never 
leased a building, and never made a loan. We all should care 
enormously about the data that we will talk about today and 
what comes out of this hearing.
    [The prepared statement of Ms. Warren follows:]

    [GRAPHIC] [TIFF OMITTED] T1603A.066
    
    I want to start this morning with Congressman Nadler. It is 
a great privilege to welcome you here. I have known Congressman 
Nadler for a very long time and hold his work, particularly in 
the area of family and small business economic security, in the 
highest regard. And so, I ask you if you would make some 
remarks, please, sir.

 STATEMENT OF HON. JERRY NADLER, U.S. REPRESENTATIVE FROM NEW 
                              YORK

    Representative Nadler. Well, thank you very much. And thank 
you for holding this important hearing and for inviting me to 
testify.
    I first want to welcome you to the 8th Congressional 
District, which includes Wall Street, the physical and symbolic 
center of the Nation's financial services industry. The 
district stretches from the Upper West Side of Manhattan 
through downtown into Coney Island and the neighborhoods of 
Southwest Brooklyn. All of these communities have, whether 
directly involved with Wall Street or not, felt the current 
financial crisis acutely.
    I also want to thank, as members of the panel have, NYU Law 
School, not only for arranging these facilities for us this 
morning, but for hosting my son as a student at the law school.
    Today, we are here to look into the real-life impact of the 
crisis and how Federal legislators can do better to guide the 
recovery process, make it more efficient and transparent, and 
maximize its success. Congress created this panel to ensure 
that there would be an independent watchdog able to account for 
$700 billion that Congress made available to stabilize the 
financial system.
    It is critical that we understand whether this money is 
really making it easier for families and businesses to obtain 
credit on fair terms. If financial institutions are saved, but 
families and businesses continue to founder, then the TARP 
legislation will have been a failure. The need for this panel 
and its work are vital.
    I would urge the panel to continue to fulfill its entire 
mandate as set out in Section 124 of the bill that established 
it, which requires that, in addition to monitoring the use of 
the funds made available by Congress, the panel should analyze 
``the current state of the regulatory system and its 
effectiveness at overseeing the participants in the financial 
system and protecting consumers and provide recommendations for 
improvement, including recommendations regarding whether any 
participants in the financial system markets that are currently 
outside the regulatory system should become subject to the 
regulatory system, the rational underlying such recommendation, 
and whether there are any gaps in existing consumer 
protections.''
    These are important questions, and Congress added them to 
your legislative mandate for a reason. The fact is that while 
the TARP funds may have begun to stabilize the financial 
system, a vitally important purpose of the law, it is clear 
that the benefits are not going to all of the players in our 
credit markets.
    As your reports have rightly pointed out, consumers and 
small businesses are not experiencing the kinds of benefits 
that Congress had intended. As was said a moment ago, loan 
credit is still in a contractionary situation. And despite 
Senator Sununu's abjuration about the use of anecdotes, I will 
provide one anecdote from very near here.
    A few weeks ago, I was talking to the executive director of 
the LGBT Center, which is a few blocks from here. The LGBT 
Center is a charitable institution. It is a nonprofit 
institution and gets a considerable amount of funding from 
earmarked funds from State and local governments. And putting 
the controversy over earmarks aside, it gets these funds 
earmarked by name to the LGBT Center on West 13th Street in the 
State budget that passes by April and in the city budget that 
passes by June.
    So it gets $4 million or $5 million a year, something on 
that order of magnitude. And the funds are not available from 
the budgets that are passed in April and June until November or 
December. And they typically take out bridge loans, bridge 
loans against city and State receivables guaranteed by name in 
the budget, and can no longer do so.
    This institution tells me they can no longer get bridge 
loans suddenly for no reason against earmarked funds in the 
city and State budget for a period of six months. That tells me 
something is very wrong with the credit market. It is not real 
estate, but something is very wrong with the credit market when 
a nonprofit institution cannot get a bridge loan against a 
receivable earmarked in the budget by name, guaranteed by law, 
guaranteed within the fiscal year by law, unless the city or 
the State goes bankrupt.
    So we have some work to do on getting the banks to extend 
credit on reasonable terms in reasonable situations. And I hate 
to generalize from that, but that seems a very apropos 
anecdote.
    In some cases, further legislative action has been 
necessary. For example, the recent enactment of the Credit Card 
Accountability, Responsibility, and Disclosure Act of 2009, 
principally sponsored by my colleague sitting to my left, Ms. 
Maloney, was a response to the increasing hardships imposed by 
the credit card industry on borrowers.
    It is unconscionable that the industry should be the 
recipient of billions of funds in taxpayer assistance while at 
the same time making things even harder on consumers. In the 
future, Congress must continue to act if taxpayers are not 
realizing substantive benefit from these expenditures.
    I would also urge this panel to continue to look at the 
effectiveness of foreclosure mitigation efforts and the 
effectiveness of the program from the standpoint of minimizing 
long-term cost to the taxpayers and maximizing the benefits for 
taxpayers--that is a direct quote--as required under Section 
125. It is a great disappointment to me that Congress has so 
far failed to reform the bankruptcy code to allow individual 
debtors to modify mortgages secured by their family homes, just 
as the owners of vacation homes, investment properties, 
factories, and family farms may now do.
    So far, the voluntary system of mortgage modification has 
been a stunning failure. Recently, Congress established a 
number of programs that would use taxpayer funds to help modify 
mortgages. There is no reason why the cost of a bad loan should 
not be apportioned among the parties to a transaction gone bad.
    Nonetheless, since 1978, families have been singled out in 
bankruptcy as the only debtors for whom modification is 
categorically unavailable. Union contracts can be modified. 
Other secure debts can be modified, but not mortgages.
    In view of the aid the banking industry has been receiving, 
from cash to increased deposit insurance to a variety of other 
goodies, I believe it is unacceptable for us to continue to 
allow this anomaly to continue.
    Now I want to talk a bit more broadly. I do not believe 
that the current plan that has been advanced under the TARP 
legislation, I do not believe it will work to get the credit 
flowing. I will associate myself with the criticisms of that 
plan by economists such as Paul Krugman, Joe Stiglitz, Bob 
Kuttner, and James Galbraith, and others who say the plan 
simply will not work.
    To quote from a recent article by Bob Kuttner, ``Instead of 
closing or breaking up failed banks, dividing the losses 
between taxpayers and bondholders, and getting the successful 
banks quickly back to health, the Treasury is propping up the 
incumbent banks. Worse, it is doing so with convoluted schemes 
backed by loans from the Federal Reserve and guarantees against 
losses from the Treasury. The hope is that the speculators will 
bid up the value of toxic securities on banks' books. This 
policy is likely to prolong the agony and leave a still-wounded 
banking system dragging down the real economy.''
    I believe that to be accurate. I don't see how this plan--
unless you assume that the toxic assets are worth a lot more 
than they seem to be, I don't see how this plan can work. What 
we should do instead--and I want to advance two propositions--
is, one, either, as has been urged--I am not going to go into 
it because all of these economists have urged it at great 
length--we should do what the FDIC normally does and as I 
quoted from Bob Kuttner a moment ago. This has been called 
nationalizing the banks, though that is a misnomer. But doing 
what was normally done, we are still doing every day today with 
smaller banks so as to get credit flowing again.
    Alternatively, if we are to insist on continuing on the 
path we are on, I want to suggest one of two alternative paths 
of action in addition to what we are currently doing because I 
believe that doing what we are doing is going to continue with 
weak banks for a long time, not advancing credit, and stymieing 
the economy.
    If we are going to continue doing that, we ought to do 
something in addition. And what we ought to do in addition is 
either one of the two following things. One, take a large 
amount of money, and I am just taking this figure out of the 
air, $100 billion--but that order of magnitude--and form brand-
new banks.
    Or two, announce that the Federal Government is going to 
capitalize brand-new banks, invite the private sector in for 
private investments. There is plenty of available capital now. 
There is a shortage of investment opportunities. The savings 
rate is suddenly sky high after about 30 years when that wasn't 
true.
    Invite in private capital. I would anticipate that the 
private capital might exceed the Government capital by a factor 
of 4 or 5. These banks can then, unburdened by toxic 
securities, lend at a ratio of perhaps 10 or 12 to 1, as they 
normally do. You can get credit flowing in the economy again. I 
have not analyzed the effect that that would have on the 
existing banks, but at least it would get credit flowing again.
    And the Federal Government and the banking system, the 
State banking systems, could give help in setting up those new 
private banks. And after an appropriate period of time, the 
Federal Government could sell its capital for presumably a 
profit, but the economy will not be hamstrung by lack of credit 
because these new banks will not have to worry about the 
problems inhibiting the existing large banks from functioning. 
That is from functioning as sources of credit.
    Alternatively, if that is too radical a suggestion, take a 
very large amount of money--$50 billion, $100 billion--and fund 
existing, fund 100 or 200 existing. I have no idea what those 
numbers should be. It is off the top of my head. But fund 
existing small and regional banks that have not engaged in the 
orgy of speculation and the derivatives and don't have the 
toxic assets on their books, banks that have done the 
traditional boring banking and let them continue to do 
traditional boring banking, but with a larger capital base and 
much greater penetration.
    So that these banks, which are functioning now, which are 
profitable, which are good banks, can become bigger banks with 
an infusion of Federal dollars that can then be sold for a 
profit later. But at least these banks then, without forming 
new banks, would presumably supply a lot of credit to the 
system while you figure out what to do with the Bank of America 
and the Citigroups and the other banks that have these so-
called toxic assets on the books.
    And I think unless we do something along these lines, 
either change our policy along the lines of Krugman and 
Stiglitz, et al., or supplement the policy by forming new banks 
or funding existing smaller banks, you are not going to see 
credit, and we are going to have another Japanese lost decade, 
but it will be called the American lost decade.
    Moving forward, we need to maintain real oversight as our 
plan unfolds and the economy recovers. We need comprehensive 
regulatory reform in order to stave off the next financial 
catastrophe. We need to take away from this experience a lesson 
I had thought the Nation learned in 1929, that sound regulation 
in markets is necessary to maintain stability. That markets are 
fine, but they cannot function on an even keel without proper 
regulation.
    We do know that this crisis is real and immediate. Our 
recovery is directly dependent on the Federal Government's 
expert management and oversight of the TARP and on getting 
credit flowing again, which I do not believe the current plan 
is doing. And this can only be achieved with total transparency 
as we move forward.
    Again, I thank the panel for its crucial work.
    The Chair. Congressman, thank you very much. Lively, as 
always.
    Thank you.
    Representative Nadler. Thank you.
    The Chair. Now I want to welcome Congresswoman Maloney, 
fresh off her victory last week of the passage of the credit 
card holders' bill of rights.
    Congressman Maloney has proven both that she has foresight 
and that she is a fighter. She took on a fight that many 
believed 2 years ago, 3 years ago was completely unwinnable. 
And as I understand it, there was a ceremony in the Rose Garden 
on Friday, signing the bill that she has championed into law.
    So, Congresswoman Maloney, thank you very much for being 
here. Welcome, and we welcome your remarks.

STATEMENT OF HON. CAROLYN MALONEY, U.S. REPRESENTATIVE FROM NEW 
                              YORK

    Representative Maloney. Well, thank you, Chairwoman Warren, 
for your leadership not only on this oversight panel, but you 
were a voice in the wilderness for many years on the need for 
credit card reform. I read your papers with great interest. 
They inspired me in my work, and you were talking about these 
abuses long before the Federal Reserve issued, in response to 
my legislation, a report calling them abusive, deceptive, anti-
competitive, and totally unfair.
    So it was a long battle, but Professor Warren, you were one 
of the first voices and a great leader in it. And if anyone 
should have been in the Rose Garden on Friday, it should have 
been you, Professor Warren. But I am sure you were probably 
working on this new need to move our economy forward.
    I am very proud of the work of the Superintendent of the 
great State of New York Neiman for holding this hearing and 
inviting me to speak today on this topic of great importance. 
Your leadership in so many areas, not only on this board, but 
with our whole financial system, has been terrific.
    And all of the members, I join my colleague Jerry Nadler in 
thanking NYU for what they do for our communities and our 
students. My daughter joins his son as a proud graduate of NYU 
Law School and is now practicing law.
    And I just want to begin on how very important this is, and 
I agree with Mr. Sununu, you shouldn't have anecdotes. You 
should have the scientific data. But I must tell you that in 
the district that I represent, some of the most respected 
businessmen of great accomplishment, of great standing in the 
business community, they are all telling me that the access to 
commercial credit is absolutely frozen, that you cannot get it 
anywhere and that it is a crisis condition.
    The amount of concern that I am feeling from the 
stakeholders in this area is equivalent to the anti-terrorism 
risk insurance proposal that we needed to get our economy 
moving in New York. Jerry and I fight every day in response to 
9/11. But of all the programs that the Government provided, the 
most important in terms of getting our economy moving was the 
Government support, which gladly they have never had to tap 
into, of the anti-terrorism risk insurance program.
    We could not even build a hot dog stand until that program 
was put in place. And what I am hearing from the industry is 
that if something is not done, that there will be a total 
collapse in this area with loss of jobs that Mr. Silvers so 
adequately expressed in his opening statement.
    The problems that lenders and borrowers are facing in the 
commercial real estate market have been overshadowed by the 
persistent crisis we have been grappling with in residential 
mortgages. But we are coming to an absolute critical juncture 
as many commercial real estate mortgage loans, issued at the 
height of the real estate bubble, are coming due for 
refinancing.
    As we all know, a well-functioning commercial real estate 
market depends on the ability of mortgage holders to refinance 
because commercial real estate or CRE loans are often not self-
amortizing, that is paying off the principal during their term. 
They are subject to large balloon payments at the close of the 
payment period. Refinancing is critical to meeting these 
obligations, as tenant rent payments are often not sufficient 
to cover the payment.
    However, in this highly constrained credit market that we 
now live in, even borrowers with performing CRE loans who have 
equity in their properties report to me that they are having 
trouble getting refinancing. It is simply not there. Then there 
are the many borrowers whose commercial mortgages are 
underwater because the property simply isn't worth today what 
they paid for it a few years ago.
    To be sure, data on the commercial real estate market offer 
a mixed picture. According to figures released by the Federal 
Reserve, 66 percent of domestic banks reported falling consumer 
demand for CRE loans, a trend that started in the third quarter 
of 2006.
    But these statistics do not tell the whole story. At the 
same time that banks are reporting falling demand, more banks 
have reported tightening credit standards on commercial real 
estate loan applications. In the past three months alone, two-
thirds of banks say their CRE loan standards have tightened.
    Surely stringent credit requirements have had an effect on 
suppressing demand, most notably by dampening enthusiasm for 
investing in commercial property in the first place. The 
commercial real estate time bomb is ticking. An estimated $400 
billion in commercial real estate debt is set to mature this 
year, with another $300 billion due in 2010.
    If mortgagers are unable to refinance or otherwise pay 
these large balloon payments, we could expect to see the 
default rate climb much higher than the current 6.4 percent 
reported by commercial banks in the first quarter of this year. 
That, in turn, translates into potentially crippling bank 
losses that our recovering financial system is still too 
fragile to withstand, even with the news that banks have raised 
or announced some $50 billion in new private capital since the 
release of the stress test results.
    Doing nothing is not an option because this looming crisis 
in commercial real estate lending could lead to an all-too-
familiar predicament, where banks suffer significant losses, 
major owners of hotels and shopping centers are forced into 
bankruptcy, foreclosed properties push commercial real estate 
prices further downward, and a perfect storm of all these 
forces combine to inhibit prospects for a sustained economic 
recovery and result in greater job loss.
    In response, the Federal Reserve last week announced that 
it would extend the TALF, the Term Asset-Backed Securities Loan 
Facility, to include both new and legacy commercial mortgage-
backed securities. They are putting up, I understand, roughly 
$100 billion for these loans, and they urge--my constituents 
urge that it be for at least a 5-year period that you can get 
this because most of their commitments are 3, 5, 7, 10 years, 
and 3 years is simply not enough.
    I think the timing is very interesting. You have organized 
this important hearing, and right before it, they have 
announced the access to the TALF program. So I congratulate you 
for being on top of a pressing issue in our country.
    I do want to say that the regulations have not come out, 
which has many people mystified as how they apply, how they can 
move it into their business model. In other words, the Fed will 
issue loans secured by both existing loans as well as new ones. 
In expanding the eligible collateral for TALF loans, the Fed 
said this step was intended not only to restart the secondary 
market in commercial-backed securities, but indirectly to 
encourage CMBS originations, including refinancing.
    The soon-to-be-launched public-private investment program 
will also provide an additional source of demand for legacy 
commercial mortgage-backed securities. I applaud these efforts 
by the Federal Reserve and the Treasury, but at the same time, 
we need to be very cautious of a potential problem first noted 
by the special inspector general for the TARP program.
    He has pointed out that if private parties are allowed to 
buy legacy assets through the PPIP program and then sell them 
to TALF, taxpayer exposure to losses will be increased with no 
corresponding increase in taxpayers' share of profit. I believe 
that the Treasury and Federal Reserve should guard against this 
possibility in order to preserve the integrity of both the TALF 
program and the PPIP program and to safeguard taxpayer dollars.
    With that in mind, I would say that the effects of TALF and 
PPIP on the commercial mortgage-backed securities market should 
be monitored very closely. We need to see if these programs 
help to restart this important market. If they do not, we may 
need to consider additional measures to aid the commercial real 
estate market.
    I thank you for this opportunity. I would like to just 
respond to some issues raised. On the FDIC insured banks, the 
Financial Services Committee on which I serve is now reviewing 
legislation to expand that program to non-bank entities so that 
there is a reasonable way to confront these crises, as we have 
been able to do with FDIC-insured banks.
    I would also urge you to have a similar hearing on housing 
and the housing market. That is likewise frozen. And as long as 
real estate is in a downward spiral, we will not recover. As 
almost every economist has said, if we do not get a hold on the 
downward fall of real estate values, we will not dig our way 
out of this recession. And we have come forward with various 
proposals, but we have not really taken the necessary steps to 
move forward.
    I also know from all of the reports that credit is still 
not moving into the communities in a way that it should. I have 
even had leaders from the private sector come and say, similar 
to what my colleague said, why doesn't the Government just put 
a bank out there someplace with strong underwriting 
requirements where we can get access to capital? It is still 
not flowing.
    And many ideas have come forward that any additional money 
be required to go into the communities and providing jobs and 
providing it, but a hearing I would request on real estate and 
also the access to capital, which my constituents in reports 
are showing is still not available.
    I want to thank you very much for your efforts here today. 
I believe your body is Government at its best, looking at 
problems, trying to anticipate them and provide appropriate 
leadership to Congress, being a voice for change and what we 
should be--pointing out what needs to be done. And we thank you 
very much, and I am honored to have this opportunity to speak 
before you today.
    Thank you.
    The Chair. Thank you very much, Congresswoman. Thank you 
very much, Congressman. We appreciate your being here today.
    Thank you.
    Mr. Schuermann and Mr. Parkus, if you could take your 
seats, please?
    Dr. Schuermann, Mr. Parkus, you have both been introduced 
earlier by Superintendent Neiman. We also have your written 
statements, which will become part of the official record. You 
are going to see a little timer. To the extent you can, we 
would like to hold the oral part to 5 minutes each so that we 
have more time for questions and more time for interaction.
    I understand you are going to be presenting data, though, 
and we are not going to shortchange that. So thank you very 
much.
    Dr. Schuermann, would you like to start.

STATEMENT OF TIL SCHUERMANN, VICE PRESIDENT, BANK SUPERVISION, 
                FEDERAL RESERVE BANK OF NEW YORK

    Dr. Schuermann. Yes, thank you.
    Members of the panel, thank you for giving me the 
opportunity to discuss with you some of the recent trends in 
commercial lending and especially the role banks have played 
and are playing in the provision of credit to this important 
sector.
    My name is Til Schuermann. I am a vice president of the 
Federal Reserve Bank of New York. I wish to preface my remarks 
by noting that they do not reflect the official views of the 
Federal Reserve Bank of New York or any other component of the 
Federal Reserve System.
    In early 2007, just before the crisis hit, U.S. commercial 
banks had $10 trillion of assets on their balance sheets. About 
60 percent was composed of what we may think of as traditional 
banking assets in the form of loans and leases. And of that, 
about $1.2 trillion, or 20 percent, was in the form of 
commercial and industrial or C&I lending, and about $1.4 
trillion, or 24 percent, in commercial real estate or CRE 
lending, the topic of today's hearing.
    Meanwhile, the sum total of assets in other important non-
bank intermediaries, such as finance companies, the Government-
sponsored enterprises, investment banks, and importantly, 
issuers of securitized non-mortgage assets, such as auto loans, 
credit card receivables, student and small business loans, was 
over $16 trillion. So when one adds provision through corporate 
bonds and commercial paper, one realizes that--how is that?
    The Chair. That is better.
    Dr. Schuermann. Good. So when one adds credit provision 
through corporate bonds and commercial paper, one realizes that 
commercial banks have provided only about 20 percent of total 
U.S. lending since the early '90s. In the four decades prior, 
banks' share was closer to 40 percent. So the rise of market-
based instead of bank-based credit provision in the last 20 
years has been substantial and important.
    But banks play a critical role as shock absorbers to the 
financial system. So when times are good, borrowers and 
investors, so those that need and those that supply funds, seem 
content to move outside the safety net of the regulated banking 
system.
    So when a shock hits, however, those investors return to 
the safety of banks. And firms, in turn, draw down their loan 
commitments they have in place for a rainy day. So credit 
assets, such as auto loans, small business loans, credit card 
receivables, and some commercial real estate, that once were 
easily securitized and moved off of bank balance sheets into 
the capital markets now remain on bank balance sheets and, 
therefore, use up scarce lending capacity.
    So, in short, banks intermediate when the markets don't or 
can't. And what we see is a flight to banks. And at the same 
time, there is a limit to how much banks can reintermediate in 
place of markets, and that limit is typically dictated by 
capital.
    Capital is a constraint on banks' balance sheets, meaning 
their lending capacity, even in good times. We impose minimum 
capital standards on banks as a buffer against unexpected 
losses. Where banks extend credit, regulators and market 
participants expect that they will have ample capital standing 
behind those commitments.
    But during the crisis, banks have been confronted with a 
perfect storm as those very same assets moving onto bank 
balance sheets, as well as loans and securities already on 
banks' portfolios, face increased risk of credit deterioration 
and losses, especially if we experience a prolonged and a deep 
recession.
    So banks have been playing this role of shock absorber in 
times of capital market disruption for decades. In this way, 
they helped the markets weather the storm in the fall of 1998, 
following Russia's sovereign bond default and the demise of the 
hedge fund LTCM. And during the darks days of September and 
October 2008, just 10 years later, banks faced an unprecedented 
demand on their balance sheet capacity. So that by the end of 
2008, bank balance sheets had swelled to over $12 trillion from 
$10 trillion just at the dawn of the crisis.
    There are, however, some important differences from 1998 
and especially so for C&I and CRE lending. Aside from the 
obvious and the immediate, which is that the financial crisis 
is just far more severe than the turmoil experienced in the 
fall--in the few months in the early fall of 1998, we are now 
in the midst of what many consider to be the worst recession 
since World War II.
    We want banks to expand credit, but not at the expense of 
credit quality. And indeed, lending patterns follow the trends 
of the overall economy so that during recessionary times when 
demand for credit naturally declines, so does bank lending.
    It may take some time for bank lending to rebound to pre-
recession levels. In the last two recessions, both of which 
were milder and shorter than the current one, it took at least 
5 years to restore C&I lending to pre-recession levels. And so, 
the charts that accompany my statement and that I have up here 
on the easel demonstrate this pattern quite vividly.
    So the first chart, the top one, shows weekly C&I lending 
since 1985 and with the recession periods shaded in. You notice 
the current one isn't quite--we don't know when it is going to 
end. Lending peaks as one enters the recession and then 
declines, continuing to decline even after macroeconomic growth 
resumes.
    The second chart below indexes the very same data to 100 at 
the beginning of the respective recessions and follows lending 
for 5 years, or about 250 weeks. So, in contrast to the 
previous two recessions, the current recession actually saw an 
increase in bank C&I balances during the fall of 2008. So just 
into the recession.
    So this reflected the onboarding of off-balance sheet 
assets by banks, as well as the drawing down of loan 
commitments by firms with a latter effect being especially 
strong from mid-September to late October of 2008, where you 
see that spike just going up quite dramatically.
    So this ballooning of bank balance sheets exactly reflects 
the reintermediation we expect during a time of financial 
turmoil. But it was not until early 2009, one year into the 
current recession, that we started to see the more typical 
recessionary pattern of balance sheet decline.
    But if the two previous recessions are any guide, and to be 
sure, they were milder and shorter than the current one, we may 
well experience a period of more modest lending at banks before 
credit demand picks up. And this decline will likely be due to 
a combination of bank capital constraints and reduced market 
demand for banks loans.
    Now capital injections from both private investors and the 
Government very likely helped significantly in enabling banks 
to play this important shock absorber role during the current 
crisis. So not only were banks faced with a sudden and 
unprecedented demand for balance sheet room, but they were 
beginning to experience heavy write-downs on loans already made 
with a prospect of still further write-downs to come.
    The additional capital raised by the banking system in the 
course of 2008 and, more recently, in 2009 has given banks a 
buffer against future losses, as well as lending headroom that 
is badly needed in light of the drawdown of commitments that 
banks have experienced.
    The result of the recently completed bank stress test has 
greatly reduced the uncertainty about just how much capital is 
needed for the largest banks to weather this storm and to 
continue to play their credit reintermediation role while 
capital markets slowly open up again.
    Now the disruption of non-bank lending and investment 
within the last 18 months has hit commercial real estate 
especially hard. Commercial banks have typically provided less 
than half of the credit consumed by this market. Commercial 
mortgage-backed securities, or CMBS, make up about a quarter of 
CRE lending and with the rest coming from life insurers, 
thrifts, GSEs, and other financial institutions.
    CMBS issuance has plummeted from over $300 billion in 2007 
to well under $50 billion in 2008. Banks have picked up some of 
the slack. So here, too, just like in C&I lending, banks are 
reintermediating credit where the capital markets have shut.
    Now banks cannot pick up all the slack. Reinvigorating the 
capital markets to intermediate between the supply and demand 
for credit is clearly very important. The Federal Reserve's 
Term Asset-Backed Securities Loan Facility, or TALF, is 
designed to help with this process by providing financing for 
the securitization of consumer assets. So, for example, auto 
loans, credit cards, student loans, and small business 
administration loans, as well as some CMBS. And as a result, 
spreads on consumer asset securitizations have already started 
to narrow.
    Now, to be sure, this, like other Government programs, is 
not meant to replace private markets, but rather, TALF and 
similar programs are designed to help restart markets by 
providing some price transparency.
    Bankers are starting to see some green shoots. The Federal 
Reserve's Senior Loan Officer Opinion Survey suggests that 
while the supply of credit remains tight, the extent of 
tightening has abated in recent quarters. One closely watched 
indicator of banks' appetite of extending credit is the net 
percent of loan officers reporting tightening standards for 
approving new loans.
    After more than a year and a half of steady tightening, the 
net percent of loan officers reporting tightening standards for 
loans to large- and medium-sized firms reached an unprecedented 
peak of 84 percent in the fourth quarter of 2008. Since then, 
however, the tightening has fallen for two consecutive quarters 
down to 40 percent in April.
    The tightening in standards for approving CRE loans has 
also abated, though not as dramatically. The net fraction of 
lenders reporting tightening standards for CRE dropped from a 
peak of 87 percent in the fourth quarter of 2008 to 66 percent 
in 2009.
    The Chair. Dr. Schuermann, can we bring it to an end? I 
just want to make sure we have time for questions.
    Dr. Schuermann. Sorry, I shall. Yes.
    The Chair. And we are at about double our time here.
    Dr. Schuermann. Twenty seconds, and I will be done.
    The Chair. You bet.
    Dr. Schuermann. Thank you.
    So the supply of commercial credit remains tight, but just 
as clearly, the extent of tightening is abating. But the same 
cannot be said for loan demand. The same survey reports that 
the net fraction of loan officers reporting weaker demand in 
April 2007 was 60 percent for C&I and 66 percent for CRE.
    So, in sum, while green shoots may be sprouting in bank 
lending for commercial purposes, real estate or otherwise, it 
is really premature to start planning for the harvest. The 
combination of acute stresses in financial markets together 
with stresses on bank balance sheets in the middle of the worst 
recession in a generation should caution us from believing that 
recovery is just around the corner.
    Thank you, and I apologize for going over my time.
    [The prepared statement of Dr. Schuermann follows:]

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    The Chair. No, not at all. Thank you, Dr. Schuermann.
    Mr. Parkus.
    Pull the mike close. It is not as sensitive. There you go. 
It is on.

 STATEMENT OF RICHARD PARKUS, HEAD OF CMBS AND ABS SYNTHETICS 
            RESEARCH, DEUTSCHE BANK SECURITIES, INC.

    Mr. Parkus. Chairwoman Warren----
    The Chair. Could you pull it a little closer?
    Mr. Parkus. Sure.
    The Chair. I know it is a nuisance, but----
    Mr. Parkus. Oh, okay.
    The Chair. Thank you.
    Mr. Parkus. Madam Chairwoman and distinguished members of 
the panel, my name is Richard Parkus. I am a research analyst 
working at Deutsche Bank Securities here in New York. I have 
been employed by Deutsche Bank since 1998, and my specialty is 
in providing coverage for the securitization markets, including 
the commercial mortgage-backed securities market.
    It is a privilege for me to testify at this important 
hearing to explore the current state of commercial and 
industrial lending and to discuss the effectiveness of 
Government efforts to restart credit markets.
    My testimony today will focus on three research reports 
that I recently published. The first report, published on April 
23rd of this year, titled, ``The Future Refinancing Crisis in 
Commercial Real Estate,'' addresses what we believe will be a 
widespread refinancing problem for commercial mortgages over 
the coming decade.
    The other two reports, both published in May of this year, 
provide our views on the likely efficacy of the TALF programs, 
both for legacy CMBS and for new issue CMBS. All three of these 
reports have been provided to the panel as my written 
submission.
    Before addressing my research, I must note that the views I 
express here today are my own and do not necessarily represent 
those of Deutsche Bank or any of its staff members.
    It will be useful to begin with a few words about the size 
and structure of the commercial real estate debt market. The 
total market is approximately $3.4 trillion in size, with the 
CMBS market making up about 25 percent, banks and thrifts about 
50 percent, and insurance companies 10 percent.
    Commercial mortgages are non-recourse loans secured by 
income-producing properties--offices, shopping centers, hotels, 
et cetera. Most commercial mortgages have 3- to 10-year terms. 
At maturity, the loan balance is typically between 85 and 100 
percent of the initial balance, depending on whether or not the 
loan amortizes.
    Thus, at maturity, the borrowers must repay an amount which 
is not much below the initial loan amount. In the vast majority 
of cases, borrowers do this by refinancing. That is, by taking 
out a new loan that is large enough to allow them to pay off 
the old loan.
    In cases where the value of the property has declined 
significantly since the loan was originated, the borrower may 
not be able to qualify for a new loan large enough to cover the 
maturing loan. In such circumstances, the end result is often 
maturity default, where the lender forecloses on the loan and 
liquidates the property.
    Now to the future refinancing problems in commercial 
mortgages. As in most other credit markets, underwriting 
standards weakened significantly in commercial real estate debt 
markets from 2005 through 2007. Weakening underwriting 
standards, combined with widespread availability of cheap 
financing and high leverage, helped drive commercial real 
estate prices up nearly 60 percent between 2004 and the 
market's peak in mid 2007.
    As the credit crisis took hold and intensified during 2008 
and 2009, underwriting standards tightened dramatically. The 
allowable leverage plummeted, and the cost of credit, i.e., 
credit spreads, skyrocketed.
    The combination of these three factors alone has, in our 
view, caused commercial real estate values to fall by at least 
25 to 35 percent from their peak levels in 2007. In addition to 
this, declining rents and rising vacancy rates have pushed 
commercial real estate values down a further 10 to 15 percent. 
Thus, values have now fallen by 35 to 45 percent and may well 
fall further, particularly in certain markets.
    As a result, many commercial mortgages, particularly those 
originated during the 2005-2007 timeframe, will simply not 
qualify at maturity to refinance into a mortgage sufficiently 
large to pay off the existing mortgage. The lender will then be 
faced either with foreclosing on the loan and liquidating the 
property or granting the borrower a maturity extension.
    The question is what proportion of loans are likely to face 
this situation when they mature? Is this a small problem, or is 
this a large problem?
    Our research studies this question purely within the CMBS 
market because that is the only segment of the commercial real 
estate debt market where there exists a wealth of data for 
virtually every loan. Our conclusion is that this is likely to 
be a big problem, a very big problem.
    We believe that within CMBS, as many as two-thirds of the 
outstanding commercial mortgages may face problems refinancing 
at maturity over the coming decade. In dollar terms, as much as 
$400 billion of commercial mortgages in CMBS securitizations 
may have refinancing issues.
    Recall now that CMBS is only 25 percent of the commercial 
real estate debt market. There is, in addition, more than $1 
trillion of commercial mortgages in bank portfolios, and this 
excludes almost $600 billion of construction loans, by far the 
riskiest category of ``commercial'' mortgage debt, as well as 
$200 billion of multi-family loans, another risky category.
    In our view, even the core commercial mortgages in bank 
portfolios are likely to be at least as risky as those in CMBS 
and possibly much riskier. If one simply extrapolates the scale 
of the potential problem in CMBS to commercial mortgages in 
bank portfolios, the conclusions are daunting.
    Of the $1.3 trillion of commercial mortgages in CMBS and 
bank portfolios maturing over the next 5 years, more than $800 
billion may well have trouble refinancing. Moreover, in our 
view, the granting of maturity extensions by lenders is 
unlikely to provide a solution to this problem.
    We strongly support the efforts of the Fed and Treasury 
with respect to both TALF for legacy CMBS and TALF for new 
issue CMBS programs and believe that they are likely to help 
improve the liquidity in and functioning of commercial real 
estate finance markets. We stress, however, that neither 
program is likely to significantly impact the future 
refinancing problems outlined above.
    These refinancing problems are the result of loans failing 
to qualify for refinancing due to massive price declines and a 
paradigm shift in the underwriting standards. They are not the 
result of illiquid and poorly functioning credit markets.
    I thank you again for this opportunity to share my 
admittedly less than rosy assessment, and I am happy to take 
any questions.
    [The prepared statement of Mr. Parkus follows:]

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    The Chair. Good. Thank you very much, Mr. Parkus. I 
appreciate it.
    If we can, I am just going to move to the questions 
quickly. And as much as you can keep your questions short--this 
is always hard--we appreciate it, just so everyone gets a 
chance to ask as much as we can.
    I would like to start with a question about the stress 
test. We are working on this now for our report. It has 
certainly been in the news.
    One of the issues that I am concerned about and hope you 
might speak to, given the kind of data you are talking about in 
particular, Mr. Parkus, but also you, Dr. Schuermann, is the 
question of the length of time that should be in the stress 
test projections. We are trying to understand the riskiness and 
effect in the banking system right now, and that is not only 
for the purposes of understanding our own exposure, but also 
for purposes of trying to attract new capital.
    But no one thinks that at the end of 2010, the game stops. 
The notion is it is going to go forward. So in light of the 
data you are talking about, do you have concerns about whether 
the stress test has appropriately captured the period of 
greatest risk?
    Mr. Parkus.
    Mr. Parkus. Chairwoman Warren, I have to admit I am not--I 
do not have expertise in the details of the stress test. I do, 
however, understand the timeframe for the stress test was, I 
believe, 3 years. And that, if that is the case, that would, in 
my view, be fairly short, as many of the mortgages that we are 
looking at do not mature for quite a while, and losses in 
commercial real estate and defaults often tend to be very what 
we refer to as ``back-ended.'' They tend to occur well into the 
life of the mortgage.
    The Chair. Right. Actually, let me just ask you this on a 
data question as we do this. I was reading--your reports are 
very good, but often the data are cumulative. I take it, 
though, that you have them on year-by-year maturity dates?
    Mr. Parkus. I do.
    The Chair. So that it is possible, in effect, to model out 
what the wave looks like.
    Mr. Parkus. Exactly. We do that in a very precise way.
    The Chair. And might we be able to have access to some of 
those data if we have further conversations about it?
    Mr. Parkus. Absolutely.
    The Chair. That could be very helpful, I think, on this 
very question.
    Dr. Schuermann, would you like to add anything?
    Dr. Schuermann. Sure. The stress test scenario was a 2-year 
scenario through the end of 2010. But my colleague is correct 
in saying that there is an implicit third year because we 
thought about--part of the stress test looked at provisions for 
loan losses or expected loan losses for the following year. So, 
in that sense, it is taking into account sort of a longer 
horizon than just 2 years.
    The Chair. Do you have concerns, in light of Mr. Parkus' 
data, that we may be stress testing the wrong end of the curve 
or at least not the most worrisome end of the curve?
    Dr. Schuermann. While I am not an expert in commercial real 
estate, some of the poor underwriting occurred late--much like 
in other parts of the real estate business, occurred late in 
the recent cycle. So that would be in '04, '05, '06.
    So typical maturities for these loans are 5 years. So that 
still takes us into, a bulk into the tail end of the period 
that the stress test took into account. For sure, there are 
going to be some of the losses that will occur after this 
horizon, but I think I feel comfortable that a sizable portion 
of the commercial real estate exposure was, in fact, taken into 
account in the stress test.
    The Chair. Well, Mr. Parkus's data may help us with that.
    Dr. Schuermann. Indeed.
    The Chair. Yes.
    Could I ask a question about your testimony? Another data 
based question, if you will indulge me. You write in your 
testimony that one closely watched indicator of banks' appetite 
for extending credit is the net percent of loan officers 
reporting tightening standards for approving new loans.
    After more than a year and a half of steady tightening, the 
net percent of loan officers reporting tightening standards for 
loans reached an unprecedented peak of 84 percent in the fourth 
quarter of 2008. You noted since then, however, the net percent 
for tightening has fallen for two consecutive quarters to 40 
percent.
    What I don't understand is exactly how this is calculated. 
So each time, you ask a loan officer are you loosening, staying 
the same, or tightening? If everyone has tightened, 84 percent 
have tightened, and then let us just say most of them stay the 
same and 40 percent, whether it is 40 percent of the 84 or some 
overlapping or the ones who didn't tighten last time tightened, 
that doesn't seem to me that things are getting better.
    It only seems to me that things are getting better when we 
have reports of loosening standards. And I am not seeing that. 
I am seeing your--you seem to be celebrating the fact that 
there are fewer who are tightening, but if they have left it 
just as tight as it was in the preceding quarter, I am not 
quite understanding how that improved things. Perhaps you could 
enlighten me?
    Dr. Schuermann. So I actually am not, by any means, an 
expert on this survey. I don't know exactly how those nuances 
are calculated.
    The pattern, though, that we are seeing is, in essence, 
fairly typical of recessions is that there is the sort of peak 
tightening and then slow loosening well into the recession. It 
takes a while before reduced tightening. It takes a while 
before actual loosening happens. But the trend is certainly 
there that loosening, I don't know if it is just around the 
corner, but----
    The Chair. Well, I am not seeing anything in your testimony 
about loosening yet. So if you have more data on that----
    Dr. Schuermann. There is no loosening yet.
    The Chair [continuing]. That could be valuable. Good.
    Senator Sununu. Thank you.
    Senator Sununu. Thank you.
    If there is a silver lining, maybe it isn't that things are 
getting worse, but that they are worsening at a slower rate.
    The Chair. Because they are already so bad?
    Senator Sununu. When we look at the relative growth of C&I, 
you have got two previous recessions, 2001 and the '90-'91 
recession. In those past recessions, how much of that decline 
was driven by the constriction of supply, the tightening 
standards, and how much of it was demand driven?
    Dr. Schuermann. You know, this is one of the most difficult 
questions any economist faces in doing empirical work is trying 
to tease apart because what you see is prices moving and 
quantities moving. What you don't see is, is that due to supply 
shifts or demand shift?
    So I don't know the answer to that question, but what is 
clear is that both play a very important role.
    Senator Sununu. I think it is fair to say that the initial 
objectives of the TARP, and the CPP in particular, was to 
establish some basic level of stability in the financial 
markets as a precursor for more normal operation. And I think 
that some credit has to be given to the CPP for, again, 
stabilizing the situation, especially in November and December 
of last year.
    But now we are trying to understand whether and when the 
markets begin to operate more normally, and I appreciate that 
you can't tell how much of that is supply driven and how much 
of it is demand driven. But what metrics would you look at as 
good criteria for determining whether our credit markets, and 
C&I in particular, are operating more normally?
    Dr. Schuermann. So there are several metrics that are at 
our disposal. Pricing is a very important one. Pricing for 
commercial lending in the form of corporate bonds, commercial 
paper--corporate bonds simply being long-term, commercial paper 
being short-term borrowing--and also securitizations, 
securitization of a variety of assets.
    I am looking at the pricing that that commands in the 
market. The latter, we are certainly seeing already a decline 
in the pricing, a tightening of those spreads. Even after just 
the announcement of TALF, there was a tightening of spreads, 
which continued after the first couple of deals were completed. 
So I would look to the market's data for pricing and spreads, 
as well as quantity data in terms of issuance and C&I lending 
in banks.
    Senator Sununu. Mr. Parkus, I guess this is in your first 
report, and I don't know if it is an appendix, page 20, some of 
the latter parts of the report, you list out all of these 
deals, deal by deal, and you show an equity deficiency loss 
through 2012 and then the lifetime loss.
    Now some of the deals--I think this is a vintage 2007, I am 
not going to be too specific here. But there are deals that 
show an equity deficiency of 32 percent, 31 percent, 37 
percent. Pretty significant numbers. And lifetime losses for 
those specific deals of 21 percent, 18 percent, 23 percent. 
Those are huge numbers, from my perspective, looking at 
potential loss of a vintage 2007 deal.
    When you put this out, when you released this report, was 
this perceived to be new information, relatively new 
information or a new analysis? And I am curious to know how the 
particular holders of this paper reacted and how markets, more 
broadly, reacted?
    Mr. Parkus. Senator Sununu, yes. The analysis was 
considered to be a new look at a problem that everybody sort of 
had in the back of their mind. However, there are so many 
problems to confront today in commercial real estate, the 
problems of refinancing are easy to brush to the side.
    Senator Sununu. Did many people try to argue that, well, 
you didn't understand this deal?
    Mr. Parkus. No.
    Senator Sununu. You didn't really look carefully enough?
    Mr. Parkus. No, no.
    Senator Sununu. This is actually a good deal. It is not 
going to be 28 percent, but it is really 2 percent?
    Mr. Parkus. No. The interesting thing about the feedback 
was that, and I have heard from several hundred people in 
every--mortgage brokers, every type of individual investor, 
people involved in commercial real estate markets. I have not 
heard one comment of disagreement with the basic findings.
    I should mention that all this report does is in a very 
quantitative and highly parameterized way simply look at how 
many loans may not--under a very reasonable set of assumptions 
look like they will not qualify for refinancing.
    Senator Sununu. I have one last question.
    The Chair. Senator, can we be really short?
    Senator Sununu. Yes. You talk a lot about the fixed-rate 
CMBS and the floating-rate CMBS, but you also show debt held by 
insurance companies and banks and thrifts. I know you didn't do 
a detailed analysis, but the comparative underwriting standards 
for those deals as well do you think are similar to the ones 
that you did look at in detail?
    Mr. Parkus. Yes and no. Insurance company portfolios are 
comprised of much higher quality on average loans. They tend to 
be long-term fixed-rate loans, and for the most part, we 
believe that the problems will be much--at a much lower scale 
for loans originated by insurance companies.
    Bank portfolios are a different story. In our view, for a 
variety of reasons that I could get into, we view core 
commercial real estate--and this is quite apart from the 
construction loans and the multi-family loans that are broken 
out--core commercial real estate, in our view, is at least as 
risky and, in our view, probably significantly riskier.
    Senator Sununu. Thank you.
    The Chair. Thank you.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    Mr. Parkus, I would like to follow up on that because I am 
fascinated by your testimony and your reports, where you 
indicate that commercial mortgages held in bank portfolios may 
be riskier and more likely to underperform than commercial real 
estate mortgages held by CMBS. Because, to me, that is 
counterintuitive to the extent that you would expect that 
origination and hold would have a tighter underwriting standard 
than an originate-to-distribute model. Could you expand on 
that?
    Mr. Parkus. Sure. Mr. Neiman, let me just explain that this 
is highly conjecture. We don't know exactly what is in bank 
portfolios, and this is one of the problems. In CMBS, we know 
exactly what is there. We know every loan characteristic. It is 
perfectly transparent.
    In bank portfolios, we are going on, unfortunately, 
anecdotal evidence. But some of the principal characteristics 
that we are basing our views on are the following. First of 
all, loans in bank portfolios, and there is significant 
difference, differentiation across banks in this. But loans 
tend to be much shorter maturities than in CMBS.
    CMBS loans tend to be 10-year, fixed-rate loans for the 
bulk of the industry. What that means is that most of these 
loans don't mature until '15, '16, '17. You can see that in the 
graph in the report. There is some maturity, there are some 5-
year loans, and those are maturing over the next few years.
    The point about this is that the loans--the shorter the 
maturity of the loan, the greater the risk of the loan because 
the loan was originated, most of these loans were originated at 
the peak of the market, and the shorter the maturity, the more 
they will be coming up for refinancing at the trough of the 
market.
    If you had a 30-year loan, we probably would have no 
problems here, even if they were IO loans. The horizon is so 
long. So the maturity term profile is very important.
    The second is that bank lending tends to be much more 
skewed towards transitional types of properties, properties 
where in-place cash flows are currently low relative to 
projected future cash flows. A property, which is--say, a 
property, a new office building, which is purchased and being 
renovated, currently, the rent levels are low. The expectation 
is within a year or two after the renovation is complete, you 
re-lease at higher rent levels.
    In many cases, the size of the loan is based on the 
projected future--the projected higher future cash flows. That 
is a major problem. If we looked at sort of transitional loans 
in CMBS, that is the floating-rate sector, relatively small 
sector, but a major sector nonetheless. Almost everything we 
are seeing now come up for refinancing is defaulting, almost 
everything at this point.
    Mr. Neiman. That was very helpful.
    You mentioned the expansion of the TALF to impact the 
maturity default issue in terms of addressing liquidity, but 
not credit. I would like you both to kind of comment on how 
expansion of the TALF to include CMBS particularly, legacy 
CMBS, will have on the impact of credit availability in these 
markets and particularly on the CRE likely default and 
refinancing issues.
    Mr. Parkus. Well, TALF for legacy securities will and has 
already driven credit spreads in dramatically. With existing 
what we view as relatively risk-free AAAs or very low risk AAA 
securities out there, if you can imagine AAA securities with 
very low risk offering 18 percent yields, it is hard to get an 
investor interested in buying new loans when he can just buy an 
existing risk-free AAA bond at two or three times the yields.
    So getting those yields down sort of takes away the 
alternative very juicy opportunities. That is the importance of 
legacy TALF, at least in my view. Of course, it has the 
advantage of helping out, of getting pricing to more rational 
levels. Right now, there is a tremendous liquidity premium in 
the market.
    TALF for new issue is important for getting new credit. We 
believe that these are very important and likely to be 
successful programs in helping to get mortgage credit flowing, 
flowing to loans that qualify. This is the key issue.
    This is why the amount of origination may not be a great 
metric for is the market working? The market works. I would say 
the market is not working when mortgage credit is going to 
loans that don't qualify. That was what got us into this 
problem in the first place.
    And that is why, in my view, we don't want to see 
underwriting standards easing. We want to see them extremely 
tight for the foreseeable future. And I believe that that is 
where they will remain.
    Mr. Neiman. Thank you.
    I also hope that you will both stay for the next panel to 
hear the dialogue, and we may want to follow up with you on 
issues with this panel and on the next panel.
    Thank you.
    The Chair. Good. Thank you.
    Thank you.
    Mr. Silvers.
    Mr. Silvers. I would like to turn to commercial and 
industrial lending for a moment. Dr. Schuermann, your testimony 
focused on the shift from institutional forms of credit to 
market-based forms of credit. Could you please explain how 
that--to what extent that has occurred in the commercial and 
industrial market?
    And obviously, there has always been a public bond market 
for large issuers, but for those issuers that are not able to 
access that market, to what extent has that shift occurred in 
that type of commercial and industrial lending?
    Dr. Schuermann. All right. Now that is a very good 
question. The shifting from bank-based lending to market-based 
lending for C&I has been much longer in forming and much more 
extensive through the growth of the capital markets, commercial 
paper issuance and corporate bond issuance.
    But another form of this intermediation actually is the 
selling of loans that the banks do into the capital markets. So 
bundling up of loans and selling them. That actually increased 
more than fourfold from the mid '90s until about 2007 and, for 
the first time, declined last year. So that is important in 
part because even the degree to which banks' regular 
intermediation activity is part of the credit provision process 
for C&I lending, they also counted on being able to offload 
some of these risks from their balance sheet to create 
additional room by putting them into the capital markets in the 
form of direct loan sales.
    Mr. Silvers. What percentage of bank C&I lending was then 
subsequently resold during the run-up to the crisis? Do you 
know?
    Dr. Schuermann. Oh, gosh. That is a good question. I don't 
have that, but I can get that for you.
    Mr. Silvers. All right, and then--but my further question 
is if you are a business in the market for a commercial and 
industrial credit and you are not of the scale to access the 
bond markets or the commercial paper markets, which is even a 
larger-scale enterprise, has there really been, even in the 
most recent years, an alternative to bank financing and to what 
degree?
    Dr. Schuermann. Well, there has been finance companies that 
have been there, and that market actually has grown.
    Mr. Silvers. So what portion would you say they would be of 
that market?
    Dr. Schuermann. I don't have that. But again, that I can 
get for you.
    Mr. Silvers. What I am trying to get at is would you agree 
that really commercial banks have remained the primary source 
of credit for that portion of the C&I market that can't access 
the public capital markets.
    Dr. Schuermann. They are certainly a very important source 
of credit for that small business and middle market, the 
privately held firms that don't have sort of a natural other 
access to either market, aside from the finance companies.
    Mr. Silvers. And in a way that is, say, quite different 
from what has happened in mortgages and credit cards and so 
forth, where there has been a move, a very heavy move away from 
bank financing into credit cards?
    Dr. Schuermann. Yes, I think that is definitely fair to 
say. Yes.
    Mr. Silvers. Okay. That is very helpful. Thank you.
    Mr. Parkus, I was very struck by the conclusion of your 
testimony, where you said that really this is not a liquidity 
problem, that the problems in commercial real estate finance 
are not a liquidity problem fundamentally, but fundamentally, 
essentially a question of value.
    Am I paraphrasing you----
    Mr. Parkus. That is right, Mr. Silvers.
    Mr. Silvers. A, it struck me they are parallel to the 
problems we face in the residential mortgage market, where 
there is definitely a value issue embedded in everything. But 
what I wanted to put to sort of get your thoughts on is what--
is there a solution to the problem that a lot of people lent a 
lot of money on essentially unrealistic assumptions? Is there a 
solution here other than the fact that those people are going 
to take a haircut?
    Mr. Parkus. Not in my view. There are no easy solutions to 
this. There is no way to--there are very large losses embedded 
in the system, and those losses can either be--we can either 
confront those quickly, which I think would be by far the best 
approach. Or we can let them remain and stagnate in portfolios.
    Mr. Silvers. The stagnation option would, in your view, 
would come from a kind of an extending and figuring out ways to 
extend the time horizons here?
    Mr. Parkus. Yes, precisely.
    Mr. Silvers. You would view that as a stagnations choice?
    Mr. Parkus. That is right.
    Mr. Silvers. What is the--I think our charge, as I think we 
were reminded by our congressional witnesses earlier, our 
charge is heavily oriented toward the interaction of the 
financial crisis with the real economy, with jobs, with 
incomes, and so forth. It strikes me in listening to your 
testimony that there are kind of several different interwoven 
problems in your data--that your data highlights.
    And I don't mean problems with your data. I mean the 
problems that your data highlight. One problem is the lack of 
financing--one problem is this haircut problem, that there are 
a lot of loans out there that can't be refinanced for good 
reason, right?
    Mr. Parkus. Right.
    Mr. Silvers. Another problem is that there appears to be, 
as a result of all these things, no financing available for 
existing projects, in part because of the crowding out problem 
you alluded to.
    What should we be focused on here? Meaning, should we be 
expending public resources to try to rescue the existing sort 
of investors and so forth? Should we be expending public 
resources to try to get new projects started, assuming proper 
underwriting terms? Do you follow my----
    Mr. Parkus. Yes, I do. I would say that certainly the TALF 
programs are perfectly suited to getting credit up and running.
    I should be clear that there really are two sources of 
problems here. There are currently poorly functioning credit 
markets, particularly in commercial real estate, that is 
operating now and preventing many loans that do qualify, that 
do qualify for a mortgage under the tighter underwriting 
standards from getting credit. Those problems will and should 
be addressed by the existing TALF programs.
    Quite apart from this and what I am addressing in my 
research is sort of a problem which is already in the system. 
It is not--these results do not rely on poorly functioning 
credit markets. These are problems that we have inherited that 
are in the system already.
    Did I address your question?
    Mr. Silvers. Yes, I am well over, and I thank you both.
    The Chair. Thank you very much.
    Thank you, Dr. Schuermann. Thank you, Mr. Parkus.
    Both witnesses are excused. We hope we will be able to talk 
with you later and have some more questions about data. If you 
are able to stay for another half hour, it would give us the 
option if we have more questions as we go with the next panel.
    Thank you very much. We appreciate your time.
    If I could have Mr. DeBoer, Mr. Pearson, and Mr. Rogus, 
please?
    Thank you, gentlemen.
    As with the earlier panel, your written statement will 
become part of the official record. So I will ask you to hold 
your remarks, if you could, to 5 minutes. And I am going to be 
a bit more aggressive about time just so that we will all have 
time to ask questions.
    Is it ``Mr. De-Bore'' or ``Mr. De-Beer''?
    Mr. DeBoer. ``De-Bore.''
    The Chair. DeBoer. Okay. Mr. DeBoer, could you begin, 
please?
    Mr. DeBoer. Sure.
    The Chair. Thank you.

STATEMENT OF JEFFREY DEBOER, CHIEF EXECUTIVE OFFICER, THE REAL 
                       ESTATE ROUNDTABLE

    Mr. DeBoer. Thank you, and good morning.
    My name is Jeff DeBoer, and I am president and CEO of the 
Real Estate Roundtable. We are headquartered in Washington, 
D.C.
    I am here today to continue to sound the alarm bell. In our 
view, the current financial system, the banking system, simply 
doesn't have enough capacity to meet the growing demand for 
commercial real estate debt, and that is why there needs to be 
this reconnection between the loan originating market and the 
secondary market.
    Albeit this reconnection needs to be under new terms, where 
there is stronger underwriting, where real values are 
recognized, and where there is additional equity. But the 
process needs to be moving forward.
    The commercial real estate industry today is in deep stress 
for two reasons. First of all, from a macroeconomic point of 
view, unemployment is obviously high and going higher. 
Consumers aren't spending, and people aren't traveling either 
for business reasons or personal reasons. That causes net 
operating income on properties to drop substantially, and it is 
causing property values to drop substantially.
    But secondly, and perhaps more importantly, as we have 
heard and it is no secret now, that the credit markets are 
essentially closed for refinancing existing real estate debt or 
securing new debt on properties. This lack of a functioning 
credit market is putting further downward pressure on property 
values and is causing many commercial property owners to face 
what we call maturity default on their loans.
    This has and will continue to create great problems for the 
banking industry, for the system as a whole, and for the 
economy as a whole. And that is why this hearing today is very 
well conceived, and I congratulate you for doing that.
    The size of the problem today is large, and it is getting 
larger, and it needs to be addressed. The commercial real 
estate market is valued at approximately $6.5 trillion. It is 
supported by about $3.4 trillion of debt. As we have heard from 
the previous panel, this debt is typically 10 years or less in 
maturity. Therefore, it is constantly maturing every year. Just 
like the flowers hopefully bloom in the spring, debt matures 
and hopefully gets refinanced.
    We have heard already from Congresswoman Maloney that the 
size, we estimate somewhere between $300 billion and $500 
billion of loans, both CMBS and non-CMBS loans that mature this 
year, the amount of maturities will explode in the next few 
years, reaching about $2.6 trillion, we believe, between 2010 
and 2012.
    We know that the sources of--the primary sources of this 
credit are banks and CMBS. About 83 percent of all financing 
comes from that, and we know that both of those sources are 
essentially shut down. The bottom line is we have a liquidity 
crisis here that affects even well-positioned, strong assets, 
which have good debt coverage are in a very difficult, if not 
impossible, situation to get refinanced.
    Some people say why should we care? We care because that in 
addition to dropping values, the lack of available financing 
causes values to drop even further artificially. This, in turn, 
reduces revenues for local governments that depend on healthy 
real estate markets to provide the funds for education, road 
construction, law enforcement, energy planning, and other 
things that we all like to have in our communities.
    It sometimes surprises people when I report that local 
governments, on average, require about 50 to 70 percent or get 
about 50 to 70 percent of their local budget money from 
commercial real estate property values and transaction taxes.
    Artificially low values also mean fewer transactions. 
Commercial property transactions on a year-over-year basis are 
down about 80 percent. That means fewer jobs at the local 
level. It means fewer construction jobs. It means fewer 
retrofitting jobs. And it means fewer opportunities for 
building owners to become more energy efficient and have green 
jobs.
    Importantly, a growing number of Americans have a stake in 
commercial real property because of their investments in 
pension plans, 401(k) plans, and direct investments in R-E-I-
Ts, REITs in the public marketplace. So, as goes commercial 
real estate, so goes jobs, so goes retirement, and so forth.
    We like the TALF. We think it will help reconnect the 
originating market, as has been described. I won't go into many 
details there, maybe in questions. We also like the PPIP. We 
think that it will be particularly helpful for legacy assets.
    But I do want to underscore one thing that was touched on 
by Mr. Parkus.
    The Chair. If we can wrap up?
    Mr. DeBoer. Very quickly, equity is going to be important. 
In addition to these programs that you have, we need to find a 
new equity source. It is not within your purview to look at it, 
but there are restrictions that currently apply only to foreign 
investment in U.S. equity, real estate. These need to be 
reviewed by Congress. That is where the equity could come from. 
That is how we can possibly get out of this program.
    Thank you very much.
    [The prepared statement of Mr. DeBoer follows:]

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    The Chair. Thank you.
    Mr. Pearson.

 STATEMENT OF KEVIN PEARSON, EXECUTIVE VICE PRESIDENT, M&T BANK

    Mr. Pearson. Good morning, Madam Chair and panel.
    I appreciate the opportunity to----
    The Chair. Could you pull that a little closer?
    Mr. Pearson. Yes. I appreciate the opportunity to speak 
with you today.
    For those of you that are not aware, M&T Bank is a regional 
bank headquartered in Buffalo. We conduct our business 
primarily through our main subsidiary, M&T Bank. We have branch 
operations that span from New York, Pennsylvania, Maryland, 
Virginia, Delaware, New Jersey, West Virginia, and the District 
of Columbia.
    Jumping right into our commercial lending activities, since 
that is the purpose of today, you should think of M&T Bank as a 
bank providing the whole spectrum of commercial products and 
services to middle-market companies, small business, real 
estate developer/operators. We have some specialties within the 
bank where we focus on Government banking, as well as 
healthcare. Broadly speaking, this has been our focus, as well 
as our retail side, for many, many years.
    Just to shift to our loan activity, because this is 
something that I am sure you would be interested in. Comparing 
the first quarter of 2008 to the first quarter of 2009, our 
commercial balances increased by 4.9 percent. Specific to the 
New York metro area, our balances grew by 6 percent.
    I would like to comment on the overall lending environment. 
As we look out today, we recognize that this is a time when 
consumer and business spending and investment is being scaled 
back due to the ongoing U.S. recession. We are seeing 
diminished demand for commercial facilities across the entire 
footprint of the bank. This decrease is consistent with some of 
the findings that were referenced earlier.
    While we have seen a drop in demand, we recognize that a 
significant number of commercial borrowers have been unable to 
find financing because of the pullback, if not outright 
shuttering, of many sources of non-bank credit. Collectively, 
we could refer to them as the ``shadow banking system.''
    The growth in the secondary market has been significant. As 
a frame of reference, in '78, commercial banks and thrifts held 
71 percent of all private, nongovernmental U.S. loans. With the 
advent of new forms of credit delivery, particularly those tied 
to the capital markets and loan securitization, the banking 
system's share of outstanding private sector credit has 
declined steadily, falling to less than 40 percent at year end 
2008.
    Retrenchment of the securitized lending markets, 
particularly in terms of commercial real estate financing, is 
causing some borrower demand to gravitate back toward bank 
balance sheets. However, many of these loan requests are 
transactional in nature and do not fit well within the 
traditional relationship-oriented focus of M&T's community bank 
model.
    As for lending standards, we continue to approach our 
lending activities in the same manner that we have conducted 
them in recent years. This entails building long-term mutually 
beneficial relationships with borrowers located generally 
within our geographic footprint, lending to credit-worthy 
businesses and people with whom we have banking relationships, 
and limiting nonrelationship-based activity in markets where we 
have no branches.
    M&T has not significantly tightened lending standards over 
the past 18 months, nor did we generally loosen our standards 
in the run-up to the current economic disruption. As an 
example, M&T is a long-time lender to the New York City 
commercial real estate market, with a long institutional memory 
of the late 1980s real estate crash.
    As such, we maintained our disciplined underwriting 
assumptions throughout the expansion and subsequent decline in 
New York City real estate activity. These assumptions focus on 
conservative cash flow, rental growth, and cap rate 
assumptions, and the use of recourse where appropriate.
    With respect to the Treasury's Capital Purchase Program, 
M&T received the minimum amount available to us, which was 6 
percent of our risk-weighted assets, or $600 million. These 
funds are being used to support lending within our geographic 
footprint.
    As a result of the Provident acquisition announced in the 
last week, M&T has assumed an additional $151.5 million in CPP 
funds. Since receiving the funds, M&T has continued to 
originate, refinance, and renew commercial loans within our 
market footprint. Although, as mentioned above, we have been 
seeing signs of weakening loan demand, consistent with what 
other banks have reported, our plan remains to use the funds 
received under the CPP to support lending activities consistent 
with our previously described traditional community banking 
model.
    Thank you.
    [The prepared statement of Mr. Pearson follows:]

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    The Chair. Thank you very much, Mr. Pearson.
    Mr. Rogus.

 STATEMENT OF MARK ROGUS, SENIOR VICE PRESIDENT AND TREASURER, 
                      CORNING INCORPORATED

    Mr. Rogus. Thank you, Madam Chairwoman.
    And thank you to the panel for inviting me. It is my 
privilege to speak to you today.
    My name is Mark Rogus. I am the senior vice president and 
treasurer at Corning. I joined Corning in 1996, following a 10-
year career as a banker at Wachovia Bank. In my current role, I 
have a wide array of responsibilities, including all of the 
capital market activities for the company, cash management, 
trade credit, investments, i.e., the defined benefit programs, 
as well as our global insurance activities.
    Corning Incorporated is a 157-year-old company. We are 
headquartered in western New York State in the town of Corning. 
Our stock is publicly traded on the New York Stock Exchange, 
and we enjoy at market cap of about $22 billion. We have about 
24,000 employees globally and a very large presence in the 
State with about 5,000 employees here just in New York.
    I want to remark that I did provide slides to the panel, 
and I will send my script that I have written sort of on the 
fly to the panel as well so it can be entered as testimony.
    The Chair. Thank you.
    Mr. Rogus. Corning is an innovation-driven technology 
company. We operate in five operating segments with two 
significant joint ventures--Dow Corning, located in Michigan, 
and Samsung Corning Precision, located in Korea. We are a world 
leader in glass and ceramic keystone components that enable 
high-technology systems in multiple markets.
    Our business strategy is enabled by our focus on research 
and development activities, which, in turn, relies on the 
enforcement of a robust set of patent protection legislation in 
order to maintain our market position in a fiercely competitive 
global technology marketplace. On average, we invest about 10 
percent of our revenues every year in research, development, 
and engineering.
    We have a very rich corporate history. We have delivered 
many innovations over our 157 years, ranging from the glass 
envelope that we worked with Thomas Edison on to encapsulate 
his electric filament to the invention of optical fiber, which 
is the backbone today of our telecommunication systems and 
broadband deployment globally.
    The committee asked me today to come and speak to you about 
how has the financial crisis affected our capital needs and 
whether the availability of credit has changed for Corning over 
the last 12 months and if there is an impact that has resulted 
from these changes on our business plans or capital planning.
    In my slides, I have categorized four generic areas that 
treasurers use to support their liquidity requirements. Against 
the four buckets of capital, Corning entered into the recent 
financial crisis with significant existing cash balances 
totaling $3.5 billion at the end of December of 2007.
    By the end of 2008, this balance had contracted to $2.8 
billion, due largely to continued investment in capital 
expansion overseas and domestically and through shareholder 
distributions in the form of dividends and share repurchases.
    These cash deposits are supplemented by our internally 
generated cash flow from our wholly owned businesses, as well 
as dividends from our 50 percent-owned joint ventures that I 
mentioned previously.
    Second, we do take advantage of a short-term unsecured 
trade credit provided through our trading partners and used in 
our normal working capital cycle.
    Third, we maintain access to committed and uncommitted 
credit lines from our banks. For Corning, that total is 
slightly more than $1.1 billion. It is important to note that 
these credit lines were put in place before the credit crisis 
began and, I hope, will mature after the credit crisis ends.
    These credit arrangements are also augmented by our access 
to the public capital markets, and we use the public capital 
markets for event-driven or opportunistic long-term financing.
    So despite the financial crisis that appeared on the radar 
in mid 2007 and persists today, Corning has been able to meet 
all of its capital needs, and we have not altered any of our 
capital structure decision-making or our business plans as a 
result of the crisis.
    As context for my response, though, I would note that we 
designed our current capital structure based on the lessons 
that we learned recovering from the tech crisis earlier in the 
decade. We lowered our tolerance for financial risk and 
specifically took actions to reduce our use of leverage and 
increase our cash balances.
    While we were not foresightful enough to know that this 
economic crisis would hit us, our strategy has served us well.
    We have successfully avoided a number of specific issues 
that have resulted through this particular crisis. Our 
surveillance of our counterparties, however, remains very high, 
both the bank counterparties and insurance counterparties. We 
continue to monitor very closely their actions and, frankly, 
have relied less on banks, preferring to use the public capital 
markets for our credit capacity.
    I do want to note one item that is of concern to Corning, 
albeit indirectly, that is a direct result of the recent credit 
crisis.
    The Chair. Mr. Rogus, if I could just ask you to wrap up? 
We are over time now.
    Mr. Rogus. Yes. So through our joint venture, Dow Corning, 
they invested about $1 billion in student loan auction rate 
securities. Through the good work of the attorney general in 
New York State, the Securities Exchange Commission, the 
Commonwealth of Massachusetts, a consent decree was reached 
that requires broker dealers to make efforts to provide an 
orderly secondary market for trading these securities.
    Based upon the lack of progress, I would put forth that we 
need further action to stimulate secondary market auctions to 
increase liquidity to institutional holders of these 
securities. This will significantly impact Dow Corning's 
ability to continue to invest and pay dividends to its 
shareholders.
    Thank you.
    The Chair. Thank you, Mr. Rogus.
    Mr. Pearson, it sounds like, from your description, that 
you are part of the new avant-garde group known as ``boring 
bankers.'' Would that be fair?
    Mr. Pearson. If you were an employee of M&T Bank, you would 
know we are not avant-garde. There is nothing that has changed 
in terms of how we have approached business, though some are 
trying to model after us.
    The Chair. Fair enough. So that is why I wanted to ask you 
in particular about your assessment of TALF and its effect on 
restarting, or stimulating perhaps would be the right word, 
commercial lending. Could you give us your views on that?
    Mr. Pearson. I am not--M&T Bank does not have any conduit 
or securitization apparatus. So we have----
    The Chair. That is what makes your opinion important on 
this.
    Mr. Pearson. We have watched from afar through the years, 
and particularly the last several years, of loans making their 
way through the system that we would never have underwritten. 
Those what I would define as riskier loans don't exist at M&T 
Bank.
    The way that I see the TALF today is that it is a good 
first step, but I think that we have a long way to go. The fact 
that the AAA securities could effectively be pledged as 
collateral for liquidity, that is the program that is on the 
table today, simply frees up liquidity for a segment of the 
CMBS world, those AAA holders.
    There are the other, if you will, tranches in the capital 
stack all the way down to the B note and equity holders, where 
much of the problem in the CMBS world is. From my vantage 
point, bringing that group into the program will help to bring 
capital back into the system. The TALF, as it is designed or 
described today, I think, is a good step. But I am not sure 
that that solves the problem.
    The Chair. And do you think--if I can just follow up a 
little bit, do you think that is a need for an expanded 
Government program, or that is really going to take recovery of 
the markets for people to want to venture into B territory?
    Mr. Pearson. I assumed that a question along these lines 
would come up today, and I have been thinking about this and 
consulting with some of my colleagues. And what I would say is 
that the first thing that needs to be accomplished is that we 
bring confidence back into the system.
    We have many customers who have a lot of money sitting on 
the sidelines, and they are going to sit on the sidelines until 
they have confidence that the system, in fact, will start to 
work again. So I think confidence has to be the first thing 
that we restore.
    Beyond that, unfortunately, I hesitate responding because I 
am not expert enough in that area.
    The Chair. Fair enough. Thank you.
    Actually, if I could just turn to you on it, Mr. DeBoer? 
You mentioned at the conclusion of your testimony that you 
support the TALF, but I am sure you also heard Mr. Parkus's 
note. 25 percent of commercial financing is through the TALF. 
And I wonder if you might speak to the experience we have had 
with three rounds of TALF. Is the need here for greater 
funding, greater support through the current vehicle or through 
a richer variety of programs to stimulate or support lending in 
the commercial area?
    Mr. DeBoer. Right. Well, first of all, the TALF, in and of 
itself, is not the total solution. It is just--it is a first 
step, and it is a first step because it helps price discovery. 
Right now, there is no price discovery on the AAAs to speak of.
    If people don't know what the values are of AAAs, they 
don't know what the values of the rest of the capital stack are 
to price off it. So if you can restart and light the fuse on 
the AAAs and get price discovery, the theory is that you can 
then price the rest of the capital stack off of the AAAs, which 
currently have no price.
    And as we have seen in the ABS market, we have seen spreads 
come down substantially in the asset-backed securities market, 
which is the only thing so far that the TALF has been used for. 
We have seen spreads come down. We have seen additional 
financing in the ABS market, even outside of the TALF. There 
have been non-TALF deals done in the ABS market where, prior to 
TALF coming to being, there was none over the previous, I 
think, 18 months. So that is significant in and of itself.
    Should there be a richer variety or mixture of securities 
in the TALF? We do support the legacy securities to be in 
there. We think that Mr. Parkus identified all the proper 
reasons why that is a good idea.
    The Chair. Thank you.
    Mr. DeBoer. Yes.
    The Chair. Thank you.
    Senator Sununu.
    Senator Sununu. Mr. DeBoer, one of the other things you 
mentioned in your testimony was the recent expansion in the 
number of credit rating agencies allowed to participate in the 
TALF. I think it went from three to five. Why is that 
important, and what impact do you think it might have, both on 
the program and in the broader context of competition in the 
credit rating agency market?
    Mr. DeBoer. Yes. Well, we think competition among the 
rating agencies is a good thing, and so expanding from three to 
five, we think, is a positive move just because more out there 
means more competition and more transparency. We think that is 
a very positive thing.
    I would put a little add-on to that point as well. We also 
are very supportive of what the SEC has done recently and 
continues to do in terms credit rating agency reform to make 
more transparency to try and address the conflict of interest 
situations that may or may not be out there.
    But again, this may go to my colleague's point about 
confidence in the market. Investors need to feel that these 
securities are what they say they are, and so that goes to the 
basis of can we depend on what the credit rating agencies are 
saying and telling investors? So all of this hangs together, I 
think, in a well thought out plan.
    Senator Sununu. Thank you very much.
    I am going to defer to my other colleagues, given our time 
constraint.
    The Chair. Thank you, Senator.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    I would like to follow up with Mr. DeBoer and hope to get 
time for both a C&I question and a commercial real estate 
question. You know, I have analogized the commercial real 
estate problem to many of the same contributing factors to the 
subprime crisis--weak underwriting standards by lenders, cheap 
financing, large role for securitization process, overinflated 
appraisals, overinflated rent rolls equivalent to overstated 
income, limited equity, an assumption that real estate values 
are going to increase and you will be able to refinance in the 
future.
    In fact, the only distinction was raised in a discussion I 
had with a very large New York real estate developer. He said, 
well, there is one big distinction, and that is that the 
borrowers in these cases were not taken advantage of. They were 
sophisticated and knew exactly what they were doing.
    One, do you agree with those comparisons? And maybe even 
though if they are the same contributing factors, what does 
that say about the solutions? We heard from Mr. Parkus simply 
the extension of the maturity date is not the appropriate 
approach. Are there others that we should be considering?
    Mr. DeBoer. First of all, I don't disagree with what you 
are saying, particularly as it relates to '05, '06, '07 vintage 
loans. Poor underwriting, low equity, overly optimistic 
projections on performance. Having said that--and I also agree 
these are sophisticated borrowers.
    Having said that, what has happened now, just like in the 
subprime market where it spread beyond those types of 
borrowers, this now is a contagion that affects all borrowers 
in all parts of the country regardless of whether their assets 
are performing, whether there is strong debt coverage when you 
come for renewal or not. And that is the problem that we are 
talking about.
    Going forward, as I mentioned, I think these changes in the 
credit rating agency world and the underwriting world are 
significant. The TALF applies to newly issued AAAs. We assume 
that a newly issued AAA will have stronger underwriting 
criteria. The industry certainly wants that. We want strong 
underwriting, good equity, good policy. As we go forward, this 
will be a positive thing.
    The problem is getting from today's world, where there is 
no credit because there was too much credit, to getting and 
translating to a world where there is adequate and appropriate 
credit for transactions that need that credit. And it is that 
bridge that the TALF hopefully will provide and get us to that 
area of that response, sir.
    Mr. Neiman. Mr. Pearson, from a bank's perspective, do you 
have any particular views?
    Mr. Pearson. I will start by saying that I agree with your 
assessment that the '05 to '07 vintages in the CMBS world very 
analogous to the subprime issues on the residential side. Just 
to give you a data point, we had a difficult time growing our 
real estate portfolio in the New York City market during that 
period of time because it didn't make sense, whether it was 
pricing, valuations, cap rates.
    I might also offer up that those sophisticated borrowers 
that you are referring to may have actually cashed out all of 
their equity with the CMBS financing. So they may today not 
have any real dollars at risk. There are quite a number of 
examples in this marketplace that are in the press that we 
could point to.
    My view, going back to some of the comments from Mr. 
Parkus, is that while we do have some maturity risk, as has 
been pointed out, we also have the ability to sit down with our 
borrowers and talk through how we will sovle the problems. This 
is a benefit banks have and how M&T approaches maturity risk.
    The ability to work with borrowers does not exist in the 
CMBS world. I was speaking with a client who is very active in 
the CMBS world, and he has a $6 million loan, 50 percent loan 
to value, cash flowing property, needs it extended. It is 
coming to maturity in a month.
    He can get through to the master servicer, but the special 
servicer will not return his call.
    Mr. Neiman: Sounds familiar.
    Mr. Pearson Right? So----
    The Chair. Sounds like lots of people with subprime 
mortgages.
    Mr. Pearson. Yes, exactly. It is very similar. So when we 
talk about this refinance risk, I think that it is very, very 
important that the banking system, if you will, be looked at on 
a more granular basis to try to understand a particular bank's 
lending philosophy before we decide that we are going to 
experience the 50 to 70 percent losses on our mortgages.
    The Chair. Thank you very much, Mr. Pearson.
    Mr. Silvers.
    Mr. Silvers. That was a really helpful exchange.
    The Chair. Yes.
    Mr. Silvers. And I want to follow up on it a little bit 
because before Mr. Neiman took my question, I was--I really 
wanted--Mr. Parkus's comments in response to my questions 
pained me because I am concerned about what happens if we 
restructure what appears from his charts to be these underwater 
real estate loans, how people get hit.
    I want to ask both Mr. Pearson and Mr. DeBoer to talk about 
are the solutions--are there solutions here, rather than have 
the whole range of institutions that have invested in these 
properties get hammered, particularly on the equity side? Do 
you agree with Mr. Parkus's comment that drawing out the time 
horizon is not helpful?
    But, B, are there solutions of the type that Mr. Pearson 
was beginning to talk about, involving making renegotiation, 
rational renegotiation easier here? We have been very 
frustrated about this in the residential real estate area, 
where the same set of problems exist. But to each of you.
    Mr. Pearson. I will just address your couple of questions. 
First of all, I would tell you that the banks, broadly 
speaking, do have an ability to renegotiate loans or extend 
loans. Perhaps adding a 5 year option to a maturing deal. What 
we are going to look at the underlying cash flows of the 
property. We may run into valuation problems on some loans 
because the comps that the appraisers are going to use might 
depress the values.
    We need to look at each deal in its entirety, and make a 
prudent lending decision, which is what everybody expects us to 
be doing. Mr. Silvers, you were probably not as pained as I was 
when Mr. Parkus made his comments because while I agree the 
banking system has maturing risk, I think it is very dangerous 
to use a broad brush when talking about losses that may be 
realized across the banking system.
    I am not suggesting that we won't experience pain. We are 
caught in the down draft, and even if we have good 
underwritings, more than likely there will be some problems. So 
I really believe it is blocking and tackling that is required 
and the banking system can do that. The CMBS market is strapped 
and stretched right now, and they cannot do that.
    Mr. Silvers. Would that suggest that policymakers maybe 
ought to try to focus on seeing if the CMBS market can--if 
something can be done in the CMBS market to make it easier to 
act like the banks?
    Mr. Pearson. To the extent that some involvement and 
support could be there without undermining or changing the 
contractual arrangements that exist that are critical to a 
functioning economy and commercial real estate world, I think 
that is something that should probably be looked at.
    Mr. Silvers. Mr. DeBoer.
    Mr. DeBoer. Great question. The short answer is, yes, 
policymakers should do something, and they can do something. 
The CMBS loans are almost entirely held in a REMIC structure, 
the real estate mortgage investment conduit structure. The 
reason that you cannot get a special servicer to sit down and 
talk is because the rules basically don't allow them to 
renegotiate these loans that are held in a REMIC until there is 
an imminent default coming up.
    So somebody who is sitting there looking at a loan that is 
going to roll in 2012 can't go now and renegotiate it. Even if 
they want to put in additional equity, even if they have a cash 
flowing property, they can't do it.
    And so, we have been talking to the Treasury Department 
about allowing some rule modification to give more flexibility 
to the investors, to the borrower, and to the special servicer 
to renegotiate these loans up front where a positive result can 
occur for all people.
    Now, obviously, the issue about changing contractual 
relationships and affecting senior bondholders vis-a-vis junior 
bondholders is very, very important. But sometimes they all 
want to do this, but the rules simply don't allow them. So, 
yes, you can.
    As far as looking at existing problems, the TALF is a 
forward-looking issue, and that is what we should be focusing 
on from a policy perspective, not in a sense bailing anyone 
out, but in a sense bailing out the credit markets to make it 
work and allow it to work. That is what we are looking at.
    And just one other comment. But securitization, in and of 
itself, is not a bad thing. In fact, it is a very good thing. 
It will allow more credit in an expanding economy that we have 
that needs this credit. The problem is that the underwriting 
and some of the criteria to do securitizations was not as tight 
as it possibly should be.
    But we shouldn't get in a mindset where securitization, per 
se, is a bad thing. It is a good thing if it is done in the 
right ways.
    The Chair. Mr. DeBoer, thank you very much.
    If you will bear with us, we are going to do one more round 
of questions in deference to our host. Superintendent Neiman is 
going to take 5 more minutes for questions, and then we will 
call this hearing to a close.
    Thank you.
    Superintendent Neiman.
    Mr. Neiman. I appreciate that very much because I think we 
are very fortunate to have a large corporate lender, a large 
regional bank here, and it would be a shame to leave without 
understanding what the new bank funding market in the future is 
going to look like and understand what the current restraints 
are.
    And I think, Mr. Rogus, when you and I talked in advance, 
there were some concerns over the bank funding market in the 
future, whether it would entail more restrictive terms, whether 
lines would be lower than they are today. I think you expressed 
some concerns over even the lines that you have.
    Today's Times has a story of a survey of small business 
companies who claim that in applying to--over 1,500 surveyed 
said when they have applied to small banks for loans in the 
past, they were three times more likely to get credit than 
those who applied to larger banks.
    So I would like to get a sense from you and Mr. Pearson are 
those concerns real, and in the future, will there be 
differences in both the availability in terms of credit, as 
well as from a corporate sense in terms of funding from capital 
markets versus the banking market?
    Mr. Pearson. Do you want to go first?
    Mr. Rogus. Sure. So it is a great question. I do believe 
that the fundamental changes that have occurred in bank lending 
practices will persist after this credit crisis is over.
    My colleague's remarks from the Fed on the deceleration of 
the tightening of credit spreads has not resulted in a 
loosening of credit standards. They may have stabilized, but 
they have stabilized at a level that is, in my opinion, in a 
large corporate context, punitive. And it forces treasurers in 
my position to seek other avenues of capital. That is a fact.
    So as I sit in my seat today thinking about the future is 
to rely less on the banking infrastructure to provide that 
level of capital to a large company and to simply get the 
capital and put it on my balance sheet in the form of cash.
    It is not clear to me that credit lines for large, 
multinational corporates will continue to serve a valid purpose 
in the future. Or said differently, I think treasurers will 
take a much more conservative stance on that point.
    Mr. Pearson. To add to that, the way that I think about 
this is that there is a break point probably in terms of the 
borrowing needs of the particular company. And perhaps it is by 
the time you move up into the couple of hundred million dollars 
of borrowing and more that looking for alternative sources is 
going to become more critical.
    I think it is very important that everybody be aware that 
smaller companies than Corning, a company who might borrow $100 
million to $200 million would suggest that they are having more 
difficulty with credit is that a bank like ours, who has the 
ability to underwrite--meaning commit, say, $100 million with 
the idea of selling it down and bringing in participants--we 
are not able today to take on that underwriting risk because we 
are not comfortable that we have banks or investors that will 
come into that particular syndication.
    So today I would tell you that on the $50 million and less, 
I think there is a little bit more freeing up of underwriting, 
if you will. We have looked at a couple in the last week where 
we would be willing to take a little bit of underwriting risk.
    But I really believe that it is that company that has 
borrowing needs from the $100 million to $200 million where the 
banking system needs to focus its efforts and get the system 
working again to provide credit. And I am sure that my 
colleague to the right knows that one of the things that is 
critical for banks to lend is that we have deposits.
    And the difficulty that we have is to expect the banks just 
to lend when we have very limited deposits coming from a large 
borrower. That means we have to turn to other sources of 
funding, whether it is gathering deposits or other term or 
overnight funding. So I think that we have got some work, some 
challenges in this particular respect for things to free up.
    But banks like ours, you know, we are continuing to be out 
there. Now we are partnering up. We are going to another large 
bank who will underwrite $50 million, we will underwrite $50 
million. We come together to solve the company's problems.
    Mr. Rogus. The only thing I might add to your comments is I 
agree there is a bifurcation in the market. Large corporates, I 
think, will probably tend to steer to the capital markets. 
Small or middle-market businesses, which we rely on in some 
part in our supply chain, will, in fact, need the banking 
system to regain its footing. This is one of the larger risks; 
that treasurer's can't see what is happening down in the supply 
chain; where our suppliers are actually getting their credit, 
and whether the credit standards are tightening or loosening?
    My other comment my panel colleague's remark about 
securitization--as a potential investor in these securitized 
bank loans. I think that you will see large pension funds shift 
to quality and move away from these risky asset classes. 
Treasurers will not invest in assets that have historically 
been liquid and reasonably priced and get caught holding 
illiquid securities in when their pension are cash funds.
    And so, sales of syndicated loans once were an interesting 
investment because they provided some modicum of a incremental 
yield. I suspect large corporate investors won't be buying 
those instruments anymore.
    Mr. Pearson. One last comment?
    The Chair. Yes, go ahead, Mr. Pearson.
    Mr. Pearson. Just to draw a distinction for everybody that 
as you are gathering information and drawing your conclusions, 
it is very important to understand that the super regionals or 
regional banks like ours really never were the large credit 
providers to the Cornings. It would have been Citi, Chase, the 
five largest banks in the country, where they could underwrite 
$500 million at a shot.
    So I think it is important that the focus be in the area 
where the problem is as opposed to expecting the regional banks 
to have done something that we never did and, frankly, never 
should in terms of taking that type ofexposure.
    The Chair. Thank you, Mr. Pearson.
    And reflecting our panel's engagement, Mr. Silvers has 
asked for indulgence to ask just one more question, and then we 
truly will adjourn.
    Mr. Silvers.
    Mr. Silvers. Yes, Mr. Rogus, you actually began to touch on 
my question, which was I appreciate even more than I did before 
I came here the thoughtfulness with which your enterprise is 
run. But the question of supplier and customer access to credit 
for enterprises smaller scale than yours is one that I would 
hope you would talk about more broadly with respect to 
enterprises less fortunate than yours in certain respects.
    I would also invite Mr. Pearson to elaborate on the comment 
he just ended with, which strikes me as intertwined with this, 
which is where is the problem here in the banking system in C&I 
lending and how might policymakers think about fixing it?
    Mr. Rogus. So from my vantage point, I think the risk to 
large employers like Corning, given the evolution of the supply 
chain, is those elements where our transparency is limited. So 
while we might have 10,000, individual suppliers that we draw 
from, our ability to surveil those 10,000 suppliers is almost 
negligible.
    What we do spend a lot of attention, though, is on looking 
at the super regional banks and their willingness to lend. And 
what we see generally has been positive. We haven't had any of 
our suppliers come to us. And typically, they would. They would 
come to us and ask us to be the bank.
    They would say we are not getting lending from our local 
banks. Can you please give us extended terms, allow us to not--
give us the money ahead of time. Give us an advance. Do 
something like that.
    The good news is we are not seeing that, at least in our 
experience.
    Mr. Pearson. How--if I have got your question right, how to 
break the logjam that exists perhaps certainly on the larger 
companies in the whole country. The difficulty is that the 
investor pool that, A, Citibank or the large banks would draw 
from, they could be banks. They could be other equity funds or 
equity-sponsored funds. It would be buying paper, et cetera. 
That has dried up because of those entities having problems 
elsewhere.
    So it may not just be somebody saying, well, we are going 
to tighten things up and affect Corning or others. It is a 
broad liquidity issue or problems they are facing elsewhere.
    And also I will say this in jest, probably the pricing even 
for some of the best companies out there got down to a level 
that for a bank just to have loan exposure with no ancillary 
business made it very hard to meet our profitability returns. 
What I will say is that as far as the C&I, the basic middle-
market companies out there, I think it is important to continue 
having these kinds of conversations with bankers because what I 
will tell you, interestingly enough, we are competing for 
deals.
    So I can't think of one company that has left the bank. 
That there are credit problems, perhaps people left, but we are 
keeping our customers. And as for new prospects, we are 
bringing them in, but there is competition.
    So I think that it is important that all of this 
information kind of be corrected and interpreted correctly as 
best as possible.
    Mr. Silvers. Thank you.
    The Chair. Good. Thank you very much.
    Thank you, Mr. Rogus. Thank you, Mr. Pearson. Thank you, 
Mr. DeBoer. Appreciate your being here today.
    Appreciate your staying, Mr. Parkus and Dr. Schuermann.
    Thank you all for being here, and this meeting of the 
Congressional Oversight Panel, is now adjourned.
    [Whereupon, at 12:23 p.m., the hearing was adjourned.]

                                  
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