[Senate Hearing 111-96]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 111-96

    HERB ALLISON, ASSISTANT SECRETARY OF THE TREASURY FOR FINANCIAL 
                               STABILITY

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

                                HEARING

                               before the

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               ----------                              

             HEARING HELD IN WASHINGTON, DC, JUNE 24, 2009

                               ----------                              

        Printed for the use of the Congressional Oversight Panel




                       Available on the Internet:
   http://www.gpoaccess.gov/congress/house/administration/index.html












                                                         S. Hrg. 111-96

    HERB ALLISON, ASSISTANT SECRETARY OF THE TREASURY FOR FINANCIAL 
                               STABILITY

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

                                HEARING

                               before the
                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JUNE 24, 2009

                               __________

        Printed for the use of the Congressional Oversight Panel




                       Available on the Internet:
   http://www.gpoaccess.gov/congress/house/administration/index.html



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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                          Senator John Sununu
                     Representative Jeb Hersarling
                           Richard H. Neiman
                             Damon Silvers








                            C O N T E N T S

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                                                                   Page
Statement of Opening statement of Elizabeth Warren, Chair, 
  Congressional Oversight Panel..................................     1
Statement of Damon Silvers, Deputy Chair, Congressional Oversight 
  Panel..........................................................     2
Statement of Richard Neiman, Member, Congressional Oversight 
  Panel..........................................................     3
Statement of Hon. Herb Allison, Assistant Secretary of the 
  Treasury for Financial Stability...............................     4

 
    HERB ALLISON, ASSISTANT SECRETARY OF THE TREASURY FOR FINANCIAL 
                               STABILITY

                              ----------                              


                        WEDNESDAY, JUNE 24, 2009

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to notice, at 2:30 p.m., in Room 
SD-538, Senate Dirksen Office Building, Elizabeth Warren, 
Chairman of the Panel, presiding.
    Attendance: Professor Elizabeth Warren [presiding], Mr. 
Richard Neiman, Mr. Damon Silvers, Representative Jeb 
Hensarling.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Chair Warren. This hearing of the Congressional Oversight 
Panel is now called to order.
    Good afternoon. Welcome. Welcome, Mr. Assistant Secretary. 
Congratulations on your recent confirmation. I understand you 
were sworn in yesterday. We are delighted to be your first 
official order of business. We appreciate your coming here 
today to testify. We know there are many demands on your time.
    Last Fall when Congress created the Troubled Asset Relief 
Program in response to the crisis, it gave the Secretary of 
Treasury enormous authority to spend $700 billion under a broad 
goal to restore liquidity and stability to the country's 
financial system. This was unprecedented discretion that rested 
with Secretary of Treasury.
    But Congress also set up highly-flexible oversight, 
including its own congressional oversight panel. To execute our 
responsibilities, we have reviewed the efforts now of two 
Administrations to stabilize the financial system. We have 
issued seven monthly reports as well as a Special Report on 
Regulatory Reform.
    We have covered TARP from many angles: have taxpayers 
received fair value for their investments, has an effective 
foreclosure mitigation program been established, are TARP funds 
being used to make credit available to small businesses, were 
the assumptions in the stress test reasonable?
    We will do our next report on the repayment of TARP funds, 
including the challenges of valuing the warrants that Treasury 
now holds in the institutions that want out of the TARP.
    We have throughout these reports returned time and time 
again to three themes: transparency, accountability, and 
clarity in Treasury's programs. The questions for you today 
will touch on these and a variety of other matters.
    It's now been eight months since the first TARP transaction 
took place. Most people believe the financial system is no 
longer on the edge of an abyss. Some are touting green shoots 
of economic recovery, but those are little consolation to the 
9.4 percent of Americans who were unemployed in May, the 
highest rate since 1983, little consolation to the almost 2.5 
million people whose homes have gone into foreclosure since the 
enactment of TARP legislation last October, to the countless 
individuals who continue to see their credit card rates 
skyrocket, even as their tax dollars are used to keep banks 
afloat.
    These Americans and all Americans want to know that the 
Government has their interests at heart, that Treasury is 
respecting and protecting their investment, that the bail out 
will benefit them and not just those on Wall Street, and I 
think it's fair to say at this point many still have doubts.
    I hope our conversation today will help clarify those 
issues. Thank you again for joining us. We appreciate it.
    I now call on our Vice Chair--I wanted to make sure I had 
the right title. On our Deputy Chair--I knew I didn't have that 
right, although I do think of you in terms of Vice from time to 
time. No. Our Deputy Chair Damon Silvers. Mr. Silvers.

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Thank you, Madam Chair. Your title at least 
is, I think, clear.
    Good afternoon. It is a real honor and a pleasure to 
welcome this morning Herb Allison, the new Assistant Treasury 
Secretary for the Office of Financial Stability.
    Mr. Allison is a distinguished American business leader 
with a track record of thoughtful stewardship of major 
financial institutions and real leadership in engaging with the 
tough issues facing American business, real leadership I have 
witnessed firsthand on many occasions.
    He brings to the Treasury Department a demonstrated 
commitment to transparency and accountability and again it's 
just a real pleasure to be with you, Mr. Allison.
    Like your predecessors, you face, I think, three 
fundamental challenges. The first challenge is to use the 
powers granted by Congress to facilitate the revival of a 
sustainable financial system and not simply to prop up or 
bailout specific financial institutions or, even worse, 
specific groups of investors at the public's expense.
    A sustainable financial system is one which channels 
savings to productive investment in a prudent manner, 
contributing to economic recovery and not retarding it.
    Unfortunately, as we, I think, have learned, financial 
metrics can always be manipulated. The real stress test that we 
are engaged in today is whether we see a revival of prudent 
lending by our financial institutions, lending that contributes 
to economic recovery.
    The second and related challenge is the challenge of 
ensuring that the funds granted by Congress to stabilize the 
financial system are managed in a manner that protects the 
financial interests of the public and is not a regressive 
wealth transfer from the public at large and our government to 
investors and executives of financial institutions.
    The third challenge is to actually address the underlying 
sources of our financial and economic crisis in the continuing 
and accelerating foreclosure crisis.
    These three challenges have been present from the moment 
Congress passed the Emergency Economic Stabilization Act and 
they are with us today in issues as diverse as the structure of 
the PPIP, the repurchase of warrants, and the oversight of 
executive compensation.
    Mr. Allison, your testimony correctly notes that there has 
been some improvement in financial market conditions since the 
inception of the TARP. However, as our Chair remarked, there is 
a broad perception in our country that key decisions in 
relation to TARP may have been made as if protecting the banks, 
their investors and even their executives was an end in itself, 
that the Government and the public purse was a means to that 
end rather than the public interest being the end.
    While in some cases that perception may be unfair, I 
believe it is not completely unfounded and now you, Mr. 
Allison, and your team will have the opportunity to change it. 
Your immediate appearance before this panel following your 
confirmation is most appreciated, and I am sure that you will 
bring the skills and the commitment that you have brought to 
your career in business to this important challenge on behalf 
of the American public.
    I am sure I speak for the panel, which is not often, when I 
say we very much look forward to working with you.
    Chair Warren. Thank you, Mr. Silvers.
    Superintendent Neiman.

 STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Good afternoon, Assistant Secretary Allison. I 
am very pleased to have you here with us today to share your 
perspectives on the future of the Troubled Asset Relief Program 
and to discuss how you will leverage your expertise and 
experience to ensure its success.
    It is critical for us to be having this dialogue now at the 
very start of your term and in fact your first day, and I 
congratulate you on that.
    Therefore, the panel members have agreed to make 
abbreviated opening statements to reserve more time for 
questions.
    The purpose of today is for us and the American public to 
hear from you. Congress, this panel, and the public will 
benefit from a fuller presentation of your vision for achieving 
financial stability.
    You are bringing a uniquely-relevant experience from your 
management at Fannie Mae and TIAA-CREF and your many years at 
Merrill. You are bringing as well a very fresh perspective at 
the most appropriate time.
    I watched your confirmation hearing with particular 
interest and I was very encouraged by the importance you placed 
on transparency, especially your threefold pledge that 
``Congress and the American people will know what we are doing 
with their money, why we are doing it, and how it is making a 
difference in our economy,'' and it should be no surprise that 
we all plan on holding you to this.
    I intend to use much of my allotted time to focus on the 
mortgage modification program. As you know, I lead a task force 
within our state of New York to prevent unnecessary 
foreclosures and took the lead on our panel's March report on 
foreclosure prevention.
    There are also further avenues in state-federal cooperation 
that are needed now more than ever, both in the mortgage area 
but also in protecting consumers and in stabilizing our 
financial system.
    I hope that you will never hesitate to suggest new ideas or 
find ways to improve, even if that means stepping on a few toes 
to get that result. I realize that we can only scratch the 
surface in our brief time here this afternoon, but I believe 
these hearings are vital and must be a regular occurrence.
    I thank you for your appearance today and I look forward to 
a lively discussion.
    Chair Warren. Thank you, Superintendent Neiman.
    We're going to begin. We're going to start with your 
statement, Mr. Allison. We have allocated up to 10 minutes, if 
you need it, but anything that we wish to put into the written 
record is also available and we will hold the record open for 
you to have a formal statement there, as well, if you would 
like.
    The Chair recognizes Assistant Secretary Allison.

  STATEMENT OF HON. HERB ALLISON, ASSISTANT SECRETARY OF THE 
                TREASURY FOR FINANCIAL STABILITY

    Mr. Allison. Thank you very much, Chair Warren, and Deputy 
Chair Silvers, and Superintendent Neiman.
    I want to thank you for the opportunity to introduce myself 
and to discuss Treasury's efforts to repair the nation's 
financial system, so that it works for rather than against 
recovery.
    Last October, Congress established the Troubled Assets 
Relief Program, or TARP, and gave Treasury the necessary tools 
to help break a downward spiral in our financial system that 
was causing tremendous harm not only to financial firms of all 
sizes but also to ordinary families and businesses across the 
country.
    Our mandate is twofold: stabilize the system while 
protecting the financial interests of the taxpayer. Although 
our work is far from finished, Treasury has accomplished a 
great deal in a short time.
    It has invested nearly $200 billion in 633 financial 
institutions through the Capital Purchase Program or CPP. It's 
helped to restart the securitization markets which are vital to 
enabling consumers and businesses to borrow. It's helped begin 
the difficult but necessary process of remaking our nation's 
auto industry, which is at the heart of our industrial base, 
and it's helped tens of thousands of Americans stay in their 
homes by securing modifications of their loans at risk, to 
lower their monthly mortgage payments and make mortgages more 
affordable.
    To manage these complex efforts, Treasury has built the 
Office of Financial Stability from the ground up. Last October 
the OFS staff was zero. As of Monday, it numbered 166. There 
are tentative signs that the financial system is beginning to 
stabilize and that our efforts have made an important 
contribution.
    Key indicators of credit market risk, while still elevated, 
have dropped substantially. More than 30 firms have repaid $70 
billion in CPP investments. In addition, the taxpayer has 
received an estimated $5 billion in dividend payments from CPP 
investments.
    There are also some signs that the economy is beginning to 
mend. Consumer confidence rose to its highest level in eight 
months in May. Housing starts rose at an annual rate of 17 
percent in May, and house purchases have begun to pick up in 
some parts of the country.
    But our financial system and our economy remain vulnerable, 
with unemployment still rising, house prices falling and 
pressure on commercial real estate continuing to build. That is 
why we must remain vigilant. We must press ahead with our 
financial stabilization and our economic recovery efforts.
    At the same time that Congress established the TARP, it 
established the Congressional Oversight Panel, an independent 
group drawn from both major political parties, Congress, the 
states, and public interest groups, to ensure that in every 
step we take we keep firmly in mind the best interests of the 
American people.
    I applaud the panel for its work to date and look forward 
to a continued strong relationship.
    Let me briefly describe my own background and offer a few 
thoughts that will guide me in my new assignment.
    I believe that my views on finance, management and 
governance, which have not always been stylish, square with 
what the crisis has taught us is necessary for a financial 
system that's both stable and innovative.
    I began my career as an officer in the U.S. Navy, spending 
four years on active duty, including a year in Vietnam. After 
business school, I joined Merrill Lynch and spent 28 years 
there, leaving as president in 1999.
    I learned from my experiences at Merrill that the long-term 
success of financial institutions depends on sound corporate 
governance, including independent checks and balances, tight 
control over risk, and executive compensation geared to long-
term performance on behalf of clients as well as shareholders. 
I believe that I contributed to strengthening Merrill's 
governance practices in the 1990s.
    Since leaving that firm a decade ago, I've led two other 
major financial institutions through transitions that were 
necessary to their long-term success. In 2002, I became 
chairman and CEO of TIAA-CREF, a leading provider of retirement 
and asset management services.
    We adapted the company to changing markets, created 
independent risk management, and doubled the company's capital 
so we could withstand a harsh investment climate. As a result, 
TIAA-CREF is now one of very few financial companies that carry 
AAA ratings, and during my tenure TIAA-CREF became the first 
company in the Fortune 100 to allow its stakeholders an 
advisory role on executive compensation.
    Last September I was named CEO of the Federal National 
Mortgage Association or Fannie Mae, as that company was placed 
into government conservatorship. The work of OFS, which I now 
head, is essential to President Obama's and Secretary 
Geithner's plans for recovery.
    Our economy declined sharply last year in substantial 
measure because credit stopped flowing. Without access to 
credit, small businesses cannot buy their new equipment and raw 
materials and inventory that they need to expand. Larger 
businesses cannot make the continuous adjustments required to 
function in a changing global marketplace.
    In overseeing the office, I will keep in mind that ending 
the financial crisis isn't about helping banks. It's about 
alleviating the real hardships that Americans face every day. I 
will strive to be a prudent investor on behalf of the American 
people, to protect the taxpayers who've entrusted us with so 
much of their money.
    In pursuing the goal of being a prudent investor for the 
public, my top priorities will be the following.
    First, I will carefully review the controls over taxpayers' 
money, giving special attention to complying with laws and 
directives, managing risks, and conducting internal audits. In 
doing so, I will work closely with your panel and all other 
oversight bodies.
    Second, I will strive to maximize the effectiveness of 
financial stability programs, restoring soundness to financial 
institutions and liquidity to our markets.
    Finally, I will emphasize transparency and interaction with 
Congress, so that, as Mr. Neiman mentioned before, the American 
people will know what we're doing with their money, why we're 
doing it, and how it's helping the financial system, the 
economy, and their lives.
    I look forward to your questions and your suggestions.
    Thank you very much, Chair Warren.
    [The prepared statement of Mr. Allison follows:] 

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chair Warren. Thank you. I appreciate it, Mr. Allison.
    So I'm going to jump right in then with the first question 
that's right, I think, on target with what you were just 
talking about. I'm very glad to hear you talk about 
transparency and accountability. That's what I'm hearing very 
much in this.
    Could you just be a little more specific at this point and 
let me, if I can, direct you in the direction of where do you 
see the areas where the most improvement might be needed and 
perhaps you could furnish us with an example or two of plans 
you have that are going to improve transparency or improve 
accountability?
    Mr. Allison. Thank you for the question, Chair Warren.
    I think there are several areas where we can continue 
improving on our disclosure, especially through 
financialstability.gov, the Treasury's website.
    We have been making progress in providing more reporting on 
the lending activities of banks. As you know, we were 
publishing a monthly snapshot on the top 21 banks. We've now 
expanded our monthly reporting to include all of the CPP 
recipients, and we'll be working with those banks to try to 
expand the types of disclosure that we're making about their 
lending practices.
    Secondly, on the very important area of the Making Home 
Affordable Program, which consists of efforts to allow more 
homeowners to refinance their mortgages or to modify the terms 
of their mortgages, we are going--we're looking at ways right 
now of expanding that reporting and I think you'll see in the 
coming weeks and few months a much more expanded reporting on 
that very important activity.
    So that's just two examples of where we think we will be 
able to, as we develop the systems, provide more disclosure, 
more transparency to the American public.
    Chair Warren. If I could follow up on that just because 
it's one that we worked on very recently, we had a lot of 
conversations over the past probably two months with Treasury 
over the stress tests and at the end of the day continue to 
have some questions about how the stress tests were structured 
and about some of the reporting from the stress tests.
    In fact, I think if you look at our report that came out 
last week, or two weeks ago now, you'll see in it we call on 
Treasury to reveal more information from the stress tests and 
in fact to consider re-running the stress tests under more 
adverse circumstances and considering a longer period of time 
for them.
    Could you comment on that since this clearly involves both 
transparency and accountability?
    Mr. Allison. Yeah. I'll be happy to. As you know, Treasury 
was involved at the beginning in the broad conceptualization of 
the Stress Test Program. We are not a banking regulator, as you 
know, and it's the banking regulators who, especially the 
Federal Reserve, who oversaw the stress test analysis, and we 
have seen that, as a result of that process, I believe, as well 
as other financial stability actions that have been taken, that 
we've seen an increase in the stock prices of those banks. 
We've seen them increase their own capital. We've seen the 
spreads or the indications of risk in the banking system come 
down since then.
    So I think there are encouraging signs that the banking 
industry has been strengthening itself substantially, 
especially the larger banks where there's more systemic risk, 
over the last several months.
    Chair Warren. I have to say, Mr. Allison, though, I'm a 
little unnerved by part of the answer.
    If one offered a very gentle stress test and the 
consequence were that the stock market responded positively to 
the good news that emerged from that, surely you wouldn't say 
that that changed any underlying reality.
    The question would remain what is the health of the 
financial institutions and to know that, I would assume that we 
would try difficult, that is stressful, stress tests for these 
institutions.
    So I'm going to push the question back again to say given 
some of the concerns that were raised in our most recent report 
about the stress tests and about ways in which they had not 
accounted even under the most adverse circumstances for some of 
the negative economic news that we have now and that the time 
period that they cover does not reach our particular concerns 
about what we fear will be the problems in the commercial 
mortgage market in 2011, 2012 and 2013.
    In order to be more transparent, in order to have greater 
accountability for these banks, why not run the stress tests 
again under more difficult circumstances?
    Mr. Allison. Well, as you will see, Chair Warren, in the 
Regulatory Reform Recommendations of the Obama Administration, 
there is a provision for an ongoing form of stress testing. 
Treasury agrees that over time, especially for the larger 
banks, there should be periodic stress testing by the 
regulators, and I'm fairly confident that that's going to be 
taking place over time.
    As you know, these are dynamic conditions in the economy. I 
do think, though, that we've seen that the regulators did 
develop a stress test based on an economy worse than today. 
They looked at the reserves that might be required over the 
next several years, the provisions for loan losses, and we have 
seen in recent months that there have been some improvements, 
as well, in the yield curve so that banks have been able to 
build capital internally as well as attract capital from the 
outside.
    But I do think, and I would agree with you, that there's a 
need for ongoing stress testing, especially of the larger 
banks.
    Chair Warren. That's very helpful. Thank you.
    Mr. Allison. Thank you.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Thank you. Mr. Allison, I want to pick up on 
this same thread a bit.
    One of the aspects of the stress test that remains a puzzle 
to me, and I want to ask you to volunteer your thoughts on, is 
that the result that came out in terms of capital shortfall 
across the 19 banks was, if you took the date of year-end '08, 
it was 185 billion, but if you took into account projections of 
bank earnings, it was a significantly smaller number, 74 
billion.
    There's been a lot of attention paid to the difference 
between those two numbers and whether that difference is 
warranted. I want to focus on a different set of numbers and my 
puzzlement about the relationship between the stress test and 
this set of numbers and that set of numbers is the set of 
analyses that have come out of the variety of sources--the IMF, 
several Nobel Prize-winning academics, Professor Roubini, who 
seems to enjoy a certain amount of reputation as an oracle, 
that estimate bank losses or bank shortfalls, different 
studies, at anywhere from $600 billion to $2 trillion in the 
U.S. sector.
    Given that the 19 banks that were the subject of the stress 
test constitute a significant majority of bank assets, I don't 
understand this set of facts and I would like to ask you to 
offer your understanding.
    Mr. Allison. Well, I believe, Mr. Silvers, that there are a 
wide range of estimates of what the bank losses could be under 
various scenarios. I believe that those are widely known, that 
they were available to those who were examining the strength of 
the banks today.
    As I said, this is a dynamic situation. We see signs that 
the financial system is improving. We see signs that the banks 
have been strengthening their capital bases. They will be 
earning, we expect, profits in the next few years and I think, 
given all those factors, the regulators arrived at reasonable 
judgments about the likely range of scenarios with which they 
were dealing.
    Mr. Silvers. If I may follow up on this?
    Mr. Allison. Yes.
    Mr. Silvers. There was a range of outside estimates 
prevalent at the time the stress tests were released and they 
were of an order of magnitude larger than what Treasury came up 
with.
    If this is not an apples and oranges discussion 
analytically, then somebody is wrong, or do you disagree?
    Mr. Allison. Well, let me just say that Treasury did not 
come up with the stress test results. It was the regulators. We 
have great confidence in the regulators. They know the banks. 
They receive a great deal of information about the banks. They 
had many conversations with banking executives as this process 
went ahead. So I have confidence, as I know the Treasury does, 
in the capability of the regulators, in their knowledge of the 
banks that they oversee.
    Mr. Silvers. Given the fact that you started yesterday, I'm 
willing to take it at that, but I think this is a very 
important conundrum and it links to my next question for you.
    Because if in fact we have banks that actually are under-
capitalized, one possible consequence of that, at least in 
historical and comparative perspective as found in our April 
Oversight Report, would be financial institutions which, while 
not literally banging on your door in the middle of the night, 
are yet unable to fulfill their role as providers of credit to 
our real economy.
    In that respect, both Treasury data and our hearings on the 
supply of credit in a variety of sectors are cause for concern 
in my opinion, that we are not seeing that revival of lending 
from the banking sector that we need to see, and by that I do 
not mean a return to the practices of the bubble of 2006. I 
mean prudent lending to viable enterprises and projects.
    I would urge you and your staff to take a look at those 
hearing transcripts and so forth that we have done. They really 
are, I think, enlightening around this.
    What are your thoughts about steps that you may be able to 
take or that should be taken and connected to that your 
analysis of the problem I'm describing?
    Mr. Allison. Yes. Well, we are very concerned that there be 
more lending. We're concerned that funds be available to small 
businesses as well as large so that they can grow and create 
and maintain jobs.
    As I mentioned, we're going to measure the success of these 
programs ultimately by their impact on the American people.
    It's, unfortunately, typical during a recession that the 
pace of lending slows. Many companies are seeing their revenues 
decline. They're cautious about taking on additional debt and 
adding to their inventories. For example, they're making new 
investments in plants and equipment. Banks, understandably, are 
concerned about the value of collateral underpinning the loans 
that they're making. They've become more cautious, as well.
    What we're trying to do are several things at once. We're 
trying to ensure that banks have adequate capital and, 
ultimately, the amount of lending will depend on the amount of 
their capital.
    Secondly, we're trying to restore the securitization 
markets so that banks can sell off some of their assets through 
those markets to make room for additional loans in the future.
    We've also been active to make sure that the larger banks 
have additional capital so that they can withstand a possible 
downturn later and be able to continue lending.
    When you look at the lending statistics, as I'm sure you 
have, you see that actually lending has held up reasonably well 
in what is a very, very difficult circumstance, but we're not 
satisfied. We're continually looking for new ways where we 
might be of assistance.
    I think that's also why it's important to have some 
headroom in the Government's overall Financial Stability 
Program and in the appropriation that Congress has given us for 
that, so that if there's a need, we can provide additional 
capital into the banking system.
    Chair Warren. Superintendent Neiman.
    Mr. Neiman. Thank you. As I mentioned, I would like to 
start with the Making Home Affordable Program.
    When that program was announced in February, there was a 
great deal of optimism about the possibilities and the impact 
it could have on millions of families. Just recently, Secretary 
of HUD Sean Donovan began to release and refer to some 
impressive statistics regarding participating servicers having 
extended offers of nearly 200,000 trial modifications with 
40,000 just in the most recent week.
    However, at the state level we are quite engaged, both 
through a large funding program of in fact $25 million to 
housing counselors around the state as well as changes in our 
foreclosure process that encourage modifications pre-
foreclosure filing as well as a mandatory settlement 
conferences after the filing of foreclosures.
    What we're hearing back from all parties, judges, housing 
counselors, and directly from borrowers, is that there is a 
great deal of confusion in the process, continue to be 
significant delays in the implementation, a lack of uniformity 
among servicers, delays in responding to calls from borrowers 
or counselors.
    In fact, yesterday I was told by a counselor that one 
servicer advised them that they shouldn't expect a call for at 
least six weeks, a response to their call, the same thing with 
delays in preparing trial modification proposals once documents 
are received.
    Issues surround capacity of the servicers, staffing to be 
able to handle the volume, and I think the unfortunate part is 
that these delays and obstacles are very similar to the types 
of delays and obstacles that were faced by the industry prior 
to the implementation.
    So I'm very interested, is this consistent with your 
understanding and what would be your assessment of the current 
status of the program?
    Mr. Allison. Superintendent Neiman, thank you for the 
question.
    We certainly are concerned. We want to see this program 
roll out as rapidly as possible. We know that people are eager 
to learn more about it and to have the opportunity to take 
advantage of these programs.
    I think we need to keep in mind that this is a massive 
program of a size never before attempted. It was announced by 
the president on March 4th. The Treasury and others, including 
HUD, spent the next six weeks or so working with the banks, 
explaining the program to them, getting their agreements to 
participate.
    So really, the ramp-up has been only in the last two 
months. It's moving very rapidly, as you said. We have now over 
200,000 offers for modifications out there. We are soon going 
to be, that is the Secretary of HUD as well as the Secretary of 
the Treasury, meeting with members of the servicer community 
here in Washington in the near future to understand from them 
how they're doing and how they can do better.
    We're in constant contact with the servicers. We're working 
very closely with Fannie Mae and Freddie Mac who are 
administering the program on behalf of the Treasury, and 
looking for additional ways that we can make sure we're 
communicating to the public as well as through the servicers to 
have as many people as possible understand the program, to 
speak with one voice.
    Another example is that soon we'll be conducting a tour of 
40 cities around the country to explain to the public directly 
how this plan operates. We have a lot of material available on 
the Web that people can go to through financialstability.gov 
and other websites to learn more about the program.
    But let me say again, we're not complacent about this. 
We're not satisfied. We have to reach millions of people. We 
have to make sure that the servicer's employees are adequately 
trained, that they understand these programs and that they can 
effectively communicate to the homeowners who are so anxious 
for relief.
    So we welcome additional ideas, but I can tell you that the 
Administration is intent on rolling this program out as rapidly 
as possible.
    Mr. Neiman. Who at the federal level has responsibility for 
day to day oversight? Is it Treasury? My understanding is that 
Fannie Mae has administrative responsibilities and Freddie Mac 
has audit responsibilities. Is it HUD? Who is the contact that 
counseling agencies and state agencies would go to with respect 
to questions about the program?
    Mr. Allison. The Office of Financial Stability, which I now 
head has an Office of Homeownership that's working very closely 
with both of the agencies, Fannie Mae and Freddie Mac, on this 
program. We work with other members of the Domestic Finance 
area within Treasury. We're in constant contact with HUD and 
together there is a team effort to expand the program as 
rapidly as possible.
    But I want to say again, we share your sense of urgency. 
People are working day and night to get this program out.
    I also want to say that the banks--we now have at least 18 
banks that are part of this program--and together they and 
Freddie Mac and Fannie Mae account for over 80 percent of the 
mortgages outstanding. So we now have the heft to begin to have 
real impact.
    I think you'll see over the next few months this program 
continuing to expand rapidly. That's our intention. That's our 
plan. We monitor this daily and we're constantly working with 
these banks to make sure that we're clearing away any obstacles 
to their expanding as rapidly as possible.
    Chair Warren. Superintendent Neiman, if you want to pursue 
this line of questioning, we're flexible here.
    Mr. Neiman. That would be great.
    Chair Warren. It's just the three of us here. Please.
    Mr. Neiman. In fact, when I prepared my remarks yesterday, 
the number was 18 and when I went on the site this morning, 
there were 20,----
    Mr. Allison. Okay.
    Mr. Neiman [continuing]. Two were added. But I still think 
that does point--in fact, we've seen websites of banks who are 
not participating, who have advertised that they are 
participating in the program. So I am curious about that.
    I'm also interested in the fact of the servicers who are 
not participating and lenders, particularly those prime 
lenders. I must have counted, of the top 25 prime lenders in 
the country, at least nine major institutions, like HSBC, like 
Citizens, like ING, who are not participating in the program 
and because we are now seeing the greatest rise in foreclosures 
from prime borrowers as a result of economic trends, this is a 
great growing concern.
    And what do you see as the obstacles why those prime 
lenders are not participating yet in this program?
    Mr. Allison. Well, I would say that, first of all, as you 
said, there are two in the past 24 hours.
    We're still working to bring more banks into this program. 
We'll continue to do that. I don't want to speculate on any one 
particular bank's reasons why they haven't yet joined the 
program, but we're certainly not giving up.
    We are--also, we have to recognize, I think one of the most 
important aspects of this program is outreach to as many 
Americans as possible, giving them direct information about how 
these programs work, so they're well-armed with information 
when they go to see their bank or servicer, and so I urge 
people to get on our website, financialstability.gov, and 
become familiar with how this program works or they can get on 
the Fannie Mae or Freddie Mac websites which also have a great 
deal of information about the program.
    But with regard to the banks, we have to--I think, too, 
there's a need for the banks to recruit more personnel. They 
have to train the personnel. They have to reprogram their 
systems in order to be able to administer the details of this 
program effectively.
    So there's been a lot of groundwork that's had to take 
place and I think in the coming months we'll see more banks 
taking part in this program, but I want to underline again we 
completely share your sense of urgency about the importance of 
this program to the American public.
    As was pointed out by Chair Warren, several million people 
have lost their homes. This is a disaster for those people, for 
their communities, and really for our country, and there's 
nothing more important than stabilizing the housing market, 
keeping people in their homes.
    As we know, this crisis began with the decline in house 
prices and the upsurge in foreclosures, and as we monitor this 
economic crisis and do our best to try to relieve the pressure 
on the American public, we're going to be guided by how they're 
doing, what's the state of jobs, how are housing prices, what's 
consumer confidence, and we will not rest without expending 
every effort on their behalf.
    Mr. Neiman. Your point about oversight and responsibility, 
to the extent that that can be clarified to the community, 
specific responsibilities, I may even suggest consideration of 
an appointment of an ombudsman that people can go to to raise 
particular issues or concerns about the program.
    Mr. Allison. Well, thank you for those ideas, 
Superintendent Neiman. We will take them very seriously, and 
I'll be glad to get back in touch with you about them.
    Mr. Neiman. Your point on--if I'm----
    Chair Warren. Of course.
    Mr. Neiman [continuing]. Able to follow up? Your reference 
to outreach is really critical because even at the state level 
where we have required by statute mandatory settlement 
conferences, still over 90 percent of defaults go through as a 
default foreclosure, through a default judgment because the 
borrower still does not come to the table.
    So despite the fact that we're funding counselors, despite 
the fact that we've created an environment with notices and 
mandatory settlement conferences, borrowers are still reluctant 
to seek assistance. They don't believe that the lender or 
servicer will operate in their interests or follow the details 
of the program.
    So I'm asking if there are thoughts at the federal level to 
address this critical problem about reaching out to borrowers.
    Mr. Allison. Well, we're actually working on programs in 
Treasury to better educate the public as consumers of financial 
services, especially mortgage services.
    I also had the experience, of course, at Fannie Mae since 
last September seeing this crisis firsthand and hearing from 
people directly who were in danger of losing their homes.
    I think it's important that the public realize they don't 
have to have missed a payment on their mortgage to get help. If 
they see that they have a problem, if they've, unfortunately, 
just lost their job or there's a serious illness in their 
family, they should get in touch with their servicer.
    I think, as you correctly said, many people are afraid. 
They're afraid if they contact their bank or servicer, they'll 
be foreclosed on, and we have to relieve that fear.
    The whole emphasis of this program is to help people and 
the banks, too. Those banks that have joined this program, they 
are making an outreach themselves, many of them, and we're 
working with them on this, to acquaint people that it's all 
right to come in and talk about your situation with a banker 
and see, if you quality, if something can be worked out, so 
that your home becomes more affordable than it is today.
    Mr. Neiman. And my understanding is that the----
    Chair Warren. Can I just add on that----
    Mr. Neiman. Of course.
    Chair Warren [continuing]. Since we're back and forth here?
    Mr. Neiman. Yes.
    Chair Warren. I just want to say, Mr. Allison, I was at a 
meeting over the weekend and heard once again from lawyers, 
those are people I tend to hang out with in my spare hours, 
tells you something about my life, but this same issue came up 
and I just want to say they were talking about people, their 
own clients, who said they had called their servicers, they had 
called their mortgage companies, and I can remember two in 
particular who specifically said we asked for help because 
we're running out of options but we've been current on our 
payments and in both cases, we were told by our servicers stop 
paying. We will not pay attention to you until you are at least 
three months in default.
    Now, we on this panel like to say regularly that the plural 
of anecdote is not data. On the other hand, these stories are 
real and people have no reason to make them up.
    What we continue to hear is you can't get a servicer on the 
phone or when you do get a servicer on the phone, you receive 
incorrect information and so I just want to ask again the 
question that Superintendent Neiman is asking. I just want to 
come behind and push back on it harder.
    What are we doing to straighten this out? I feel bad if 
what comes out of this is you say I want to tell Americans that 
they need to reach out to their servicers. They're doing it. 
That's not the solution.
    Mr. Neiman. And a follow-up.
    Chair Warren. Please.
    Mr. Neiman. My understanding is that letters that are going 
out, and I think there's been reference to nearly a million 
letters that have gone out, my understanding is those letters 
are only to borrowers who are in default. So it would not 
include borrowers who are not delinquent.
    I don't know if any consideration has been given to a 
policy to encourage those who send those letters and I don't 
know how you track those.
    Is that information that's tracked by the servicer or by 
the Treasury? But to the extent that that policy can be 
developed to encourage the lenders and servicers to communicate 
with current borrowers who may be at risk is important.
    Mr. Allison. Let me say again, I fully understand your 
concerns. We also hear from American citizens who are concerned 
that they were given the wrong information. We reach out to the 
banks in question.
    I would again point out this program is still relatively 
new. This is a gigantic effort. It's by far the largest 
mortgage modification program ever attempted. It's already the 
most successful, by the way, even at the level it is today, and 
we're not nearly satisfied.
    I think it's fair to say that the banks are training their 
people. It's only been a couple of months. They've hired a lot 
of people. They have to retrain the people they already have in 
how this program works. So I think that this may account for 
some of the occasional mistakes that are taking place in the 
communication between banks and homeowners.
    I expect that this is going to get better and it's not--
we're not just leaving this up to the public to become educated 
and be their own advocates but that's important, but, secondly, 
to make sure that the banks are doing all they can to educate 
their employees and provide the correct information.
    I do think that the banks are working very hard on this 
program, but we're trying to do something that is truly 
enormous and that is reach millions of people and to try to 
process mortgage modifications very quickly. And as you know, 
I'm sure, a mortgage is a complex instrument and there are 
certain requirements that have to be met and, unfortunately, it 
takes quite awhile to modify a mortgage and we wish it didn't, 
but there are legal issues here, credit verifications and so 
forth. So we're doing our best with a system that wasn't 
designed for this type of a crisis and trying to make the best 
of it as it exists and over time, perhaps there will be reforms 
to the system, as well.
    But I want to just leave you with this on that question. 
We're doing all we can. It's an extremely high-priority for the 
Administration, for the Treasury Department and for my office 
to make sure that we're doing all we can and we're as effective 
as possible, and as I said in my opening remarks, one of my 
responsibilities is to make sure that we carry out these 
programs in the most effective, most efficient way and reach 
the goals that the president has set for us in his March 4th 
announcement.
    Thank you.
    Chair Warren. Is it all right with you if Mr. Silvers 
also----
    Mr. Neiman. Yes.
    Chair Warren. Let's stay on the same subject for a minute 
here. I've got another question on mortgages, as well.
    Mr. Silvers.
    Mr. Silvers. Mr. Allison, it's very apropos of you to raise 
the president's expectations here.
    My understanding, and correct me if I'm wrong, is that the 
letters that have been mailed out describing the program to 
borrowers who are behind in payments and in foreclosure were 
sent by the banks. Am I right about that?
    Mr. Allison. That's my understanding.
    Mr. Silvers. They were sent on bank stationary. You might 
want to consider or perhaps you have considered, and this is 
not practical, communications directly from the Government.
    If you look at, and I'd welcome your response to this idea, 
the last hearing we held on the mortgage foreclosure crisis 
component of our mandate in February in Prince George's County, 
Maryland, not very far from here, where the type of human 
tragedy that you spoke, I think, very compellingly about a 
moment ago is unfolding on a very large scale.
    One of the issues that came up at that hearing in a big 
way, in addition to the issue of borrowers needing to stop 
paying before anybody will help them, in addition to the issue 
of borrowers being afraid that dealing with their bank would 
make things worse and so they ignored communications, both 
which go to the question of whose stationary is that 
communication coming under.
    There's a third problem, and I have experienced it myself 
personally as a resident of Maryland, is that not everybody who 
reaches out to help you necessarily has that in mind. There's a 
fair amount of fraudulent activity going on, victimizing people 
once again, vulnerable homeowners once again.
    This creates an environment in which communications from 
lenders may be among the least effective ways of getting to 
homeowners. You, on the other hand, have one of the--at the 
moment--one of the world's great brands at your disposal.
    I gather you can even swat flies with your bare hand, at 
least my son tells me that. You might want to think about how 
to make use of that and, I mean, something as simple as getting 
those lists from the banks, sending something from the United 
States Government or from the president himself.
    Mr. Neiman. Let me just endorse that recommendation because 
our experience at the state level when we held outreach 
efforts, daylong sessions, inviting county by county, 
delinquent borrowers to sit down face to face with servicers, 
one on one with housing counselors present, that letter came 
over my signature and the response rate was triple what it was 
had that letter gone out from the bank.
    Now, still triple is still only 10 percent, but it's better 
than three percent and so it does make a difference because 
people who are behind in their mortgages are also behind in 
student loans and they're also behind on credit cards and 
they're right, those letters are taken without the realization 
that they're to help.
    Mr. Allison. Yes. Well, I want to thank you for the 
suggestion. We're going to consider it very seriously.
    I would point out again that we are going to 40 cities 
around the country. We're also working with community 
associations across the country, as is Fannie Mae, to try to 
reach as many people through channels that they trust, with 
people in their communities who understand the situation.
    So there are so many ways that we can reach the American 
public and we're going to do as many of them as we possibly 
can. We have to communicate continuously and repeatedly about 
this and we do have to do more to reach people earlier.
    We're also trying to reach people who are in extreme 
situations, who have very high priority because they're about 
to lose their homes. It's very important to reach them as fast 
as possible, and kind of work our way back to those who may be 
less immediately stressed.
    Mr. Neiman. So I think focusing on the outreach at the same 
time, to the extent that you are considering, I'd be interested 
if you are, considering established protocols to be followed by 
the servicers, turnaround times, quality control, and what's 
the process.
    Mr. Allison. Yes. Well, let me also point out that Freddie 
Mac is responsible for auditing the program and they'll be 
making site visits to the servicers to see how things are 
going.
    They also follow up on complaints. They're on the look-out 
for fraud. We also have the FTC. We have the Special Inspector 
General for the TARP and others who are very concerned about 
preventing fraud, which is a problem here.
    Chair Warren. If we could, before we leave the subject of 
the foreclosure crisis, I'd like to ask a policy question about 
it and that's the question about the underwater mortgages that 
are in default.
    This is serious both because with the housing market that 
continues to fall, particularly in some markets, and we're 
seeing more and more houses, a large proportion of houses that 
are in foreclosure are also not just a little bit underwater 
but underwater by a substantial proportion, and at least to the 
extent we can see some data on what happens when people go 
through mortgage foreclosure mitigation programs, those who 
have large overhangs of debt that is unsecured, debt that's 
larger than the value of the home, tend to have much less 
successful rates and obviously no one's goal here is to put 
people through mortgage foreclosure mitigation programs only to 
have them stay in the house a few more months and then default 
on the loan and then ultimately lose it. That can't be good for 
the families and it can't be good for the lenders.
    So when we last met with Secretary Geithner, the question 
at that moment was how to deal with this and the only tool in 
the toolbox was the bankruptcy proposal and that was passing 
the cram-down bill that was going to at least give one option 
for homeowners to go into bankruptcy and at least write their 
mortgages down to a 100 percent of the value of the property.
    Obviously, that has now failed. So far as I know, there are 
no immediate efforts to revive that bill. If that was 
Treasury's plan for how to deal with that part of this crisis 
and if the facts suggest that that part of the problem is 
growing larger by the day, I want to ask the structural 
question.
    Do we need another piece to the Treasury's mortgage 
foreclosure plan?
    Mr. Allison. Well, Chair Warren, there are several 
initiatives that have been undertaken, and others are being 
contemplated, but one is to incorporate the Help for Homeowners 
Program into the Mortgage Modification Program that the 
Administration has announced, which does allow, if people 
qualify, for some principal relief.
    Chair Warren. I just want to make sure I'm following you. 
Is this the voluntary program?
    Mr. Allison. It's the HUD program. This is the HUD program 
which is being incorporated into the Making Home Affordable 
Program, the HAP Program.
    Chair Warren. Right.
    Mr. Allison. And also, it is possible, at the discretion of 
the servicers and at the discretion of the lenders, to make 
principal modifications.
    What we're really solving for here, though, is 
affordability and trying to make the home affordable by 
reducing the mortgage costs through modifications or in some 
cases through refinancings, so that people can afford to stay 
in that home.
    I will tell you that we will continue looking at various 
possibilities to assist homeowners and we are intent on getting 
the program up and running at this point and we'll be measuring 
it very carefully.
    We're well aware of the underwater situation that many 
people face and the question is how best to deal with that, but 
the first step is to allow people to stay in their homes by 
making the mortgage affordable, if they qualify, and we'll 
continue to monitor it.
    I welcome ideas from the Oversight Panel on other 
initiatives that we might consider undertaking, and as I hope 
you'll understand, we're totally open to ideas from any quarter 
about how we can deal even better with this major crisis that 
homeowners face.
    Chair Warren. I appreciate that. I will only state the 
obvious. Mortgage lenders have had the capacity to make 
voluntary principle reductions throughout this crisis and that 
obviously has not gone very far towards solving the problems. 
So we may have to think more aggressively in this area, 
particularly since the tool that was the only tool that might 
have taken more stringent efforts has been abandoned.
    Mr. Neiman. You know, just to support what you're saying, 
in talking to some servicers as to how they do the mix between 
interest rate reduction and principal reduction, I've talked to 
one quite important servicer whose position is that they will 
do a greater extent of reducing principal. So instead of 
reducing a rate from seven down to three, they'll reduce it 
down to four, have the same net present value but reducing 
principal and they see that in the long run that will change 
the behavior to reduce the redefault risk.
    Chair Warren. Right.
    Mr. Neiman. So I think that is something that really should 
be explored and considered as to move it from beyond a 
voluntary program.
    Chair Warren. Right. I really commend the notion of looking 
at why there seems to be so much resistance on the principal 
reduction side and less resistance on interest since these are 
fungible dollars we're talking about and the other structural 
reasons that may underlie this having to do with accounting, 
having to do with rules about the trust that these are placed 
in.
    If that's getting in the way of solving this crisis and 
ultimately costing homeowners their homes and investors money, 
surely our job should be to cut that Gordian knot and something 
better out.
    Mr. Allison. Yes. Well, we'll be having continual dialogue 
with the banks. Again, I'm encouraged that as many banks have 
joined this program, especially the large ones where most of 
the mortgages are being administered. That's very encouraging.
    And we are also looking at ways of having principal 
forbearance and that has been utilized already and stretching 
out the lives of mortgages to provide additional relief.
    Again, the first priority is to keep people in their houses 
by making that home more affordable to them and we will be 
remaining open to other ideas and I think this dialogue we're 
having right now is very useful and we'll take this back and 
once again examine the programs with these ideas in mind.
    Chair Warren. Good. Any more on mortgages? I think it's 
good to be able to pursue a topic all the way through.
    Mr. Neiman. No. I think the only last point is obviously 
you're getting a sense as to this is something important for 
the panel.
    We intend to pursue it. We're anxious to see your metrics 
and data once that's posted. We intend to put a data request in 
both to Treasury but as well as to other servicers, 
particularly servicers who are not participating. We would like 
to know why they are not participating. We would look for your 
encouragement if there's any resistance from those servicers or 
lenders in responding to us and we also intend to follow up 
with our requests to the banking regulators to see their role 
in both encouraging participation as well as collection of 
data.
    Mr. Allison. Thank you very much.
    Chair Warren. Thank you.
    Mr. Neiman. Thanks.
    Chair Warren. Thank you, Superintendent Neiman.
    I want to welcome Congressman Hensarling. I know he's been 
doing the people's business and we're glad that you could join 
us.
    We're going to give the Congressman a minute to collect 
himself and so, Mr. Silvers, would you like to ask the next 
round of questions?
    Mr. Silvers. Well, thank you. I want to take the 
conversation we've just been having focused on foreclosures and 
bring it back to our earlier dialogue about the health of the 
financial system as a whole.
    You mentioned one of your priorities in your opening 
statement would be to focus on internal controls and risk 
management. I think that can be understood in both small-scale 
and large-scale ways and I want to talk about it with you in a 
large-scale way.
    The upside scenario in our current economy and our current 
financial system, I think, is fairly well understood and you 
stated it, I think, in certain respect in response to my 
earlier questions when you talked about the cautious confidence 
that you have and that the department has that the financial 
system will see an earnings-driven recovery.
    Now let's talk for a moment about risk management and the 
downside scenario.
    The downside scenario, it seems to me, is one in which some 
of the dynamics we were just describing in the housing market, 
combined with the failure of bank lending in both commercial 
real estate and ordinary business lending, combines to be a 
drag on an already obviously weak economy. On top of that the 
yield curve development you were describing earlier as positive 
is not positive in terms of sustaining the mortgage refinancing 
business that the banks benefited from in the first quarter and 
is also not positive in terms of what it may be saying about 
some limits to what we can do in terms of liquidity in the 
money supply.
    If those things turn against us, right, and we face another 
stress event, my question to you is not to predict whether 
that's the right scenario or the other scenario is the right 
scenario. My question to you is what is your assessment of the 
degree to which both our systemically significant institutions 
and our financial system remain vulnerable to the kind of 
domino effect, the kind of interconnectedness, particularly 
around their interface with shadow markets that appears to have 
been central to the approach to the cliff that we made last 
fall, and to what extent, if the bad case scenario unfolds, are 
we vulnerable to a repetition of the events of last fall?
    I would encourage you, if you wish, to reflect on the white 
paper as part of that answer, if that makes sense.
    Mr. Allison. Thank you. Well, first of all, the Treasury 
Department and the Administration are not complacent about the 
economy. We still see that there are some downside risks and we 
need to be extremely vigilant in monitoring the health of the 
banking system and the financial markets as a whole.
    We are encouraged by the reaction to the stress tests and 
the ability of these banks to raise capital. It's certainly a 
positive that they've been able to do that.
    We need to be reviving the securitization markets, which 
allow banks more liquidity to sell assets into the marketplace, 
to provide more room for lending, for example, and so while we 
can't predict the future, we have seen some positive 
developments. We need to be monitoring the situation very 
closely and we need to have, as I've mentioned before, head 
room in the TARP Appropriations so that we can provide 
additional capital to the banks on an as-needed basis if the 
situation warrants it down the road.
    Mr. Silvers. How important in your view is it to have 
resolution authority as proposed, broad resolution authority 
beyond banks to bank holding companies and other systemically 
significant institutions as proposed in the white paper?
    Mr. Allison. I think it's very important and I think that's 
why it's a pillar of the proposals by the Administration.
    Mr. Silvers. Do I have more time?
    Chair Warren. Yes.
    Mr. Silvers. Okay. All right. Very good. I want to shift 
now to a subject we haven't touched on at all.
    Chair Warren. Or if you prefer, we can just----
    Mr. Silvers. No. I can keep talking. I can certainly use 
time.
    But you alluded to it in your statement, which is the 
involvement of the Treasury Department and your office with the 
auto industry. Can you explain essentially the division of 
responsibilities here as between you and your team and the Auto 
Task Force and, to the extent appropriate, to the extent we're 
asking the right questions of the right person, can you explain 
in some general strokes, the strategic thinking on the part of 
your team in terms of what we are trying to accomplish with the 
auto industry?
    Mr. Allison. Well, let me start with that second question 
since that's the ultimate question here.
    What we're trying to do is to allow the automobile industry 
and encourage the automobile industry to restructure so that it 
is again a highly-competitive sector of our economy and can 
grow and create more jobs over time and that's the reason why 
the Administration--actually, they were asked to take part in 
this. That's the reason why they've decided it was necessary to 
do so.
    The outlook here is very important to the whole economy and 
I think that's been the underlying reason why the 
Administration has acted in the way it has.
    Mr. Silvers. Could you get to the first part?
    Mr. Allison. Yes.
    Mr. Silvers. Who's responsible for what here?
    Mr. Allison. The Office of Financial Stability houses most 
of the people working on that program and it's a part of the 
activities under the TARP which is administered by my office.
    Mr. Silvers. So am I right in understanding that the Auto 
Task Force answers to you?
    Mr. Allison. The--Steve Rattner and Ron Bloom work closely 
with my office and the people under them are housed within the 
Office of Financial Stability.
    Mr. Silvers. But where do their lines of authority run? Do 
they run to you or do they run to someone else?
    Mr. Allison. They run to both of us. The policy and thought 
leaders have been the leaders of the overall Auto Task Force 
and we work closely with them.
    Mr. Silvers. So the question about strategy is properly 
directed to you and to them, it sounds like?
    Mr. Allison. Yes, it can be, yes.
    Mr. Silvers. Okay. Thank you.
    Chair Warren. Thank you. Congressman Hensarling.
    Mr. Hensarling. Thank you, Madam Chair.
    Mr. Secretary, I apologize about being late but we had a 
series of votes on the House side I had to attend to and I also 
apologize since I missed a fair portion of the hearing. We may 
be covering some old ground with my questions and I beg your 
forgiveness there. You may have answered them to my colleagues 
but you haven't answered them to me.
    The first question I have, Mr. Secretary, is, it is my 
understanding that Treasury has taken the position that 
essentially TARP funds, as they are repaid, as they recently 
have been under the CPP, can, for lack of a better term, be 
recycled.
    There are those who have a different opinion on both the 
wisdom and the propriety of doing that, but do I have it 
correct that is the position of Treasury and, if so, is there a 
legal opinion of memorandum that supports Treasury's view in 
this regard?
    Mr. Allison. Congressman, thanks for your question. The 
Treasury is not recycling the funds. As funds are received, 
repayments of the Capital Purchase Plan Program, they are 
deposited in the General Funds of the Treasury Department.
    What that repayment does under the EESA Law is to free up 
additional resources within the appropriation. The law says we 
cannot have more than $700 billion of investment out at any one 
time. So as it's repaid, that 700 billion is a constant under 
the law and so the repayments that go into the General Funds 
free up additional head room under the 700 billion and that's 
strictly according to the EESA Law.
    Mr. Hensarling. To make sure I'm understanding, Mr. 
Secretary, so it's not necessarily the current policy to expend 
extra funds under the CPP, but you find it desirable to keep 
the incoming funds as extra head room. Is that a fair 
assessment?
    Mr. Allison. Well, the incoming funds again are paid into 
the General Account for purposes of making other payments, but 
the way the law operates under the cap of the appropriation, 
that provides additional room for us to make new investments 
but each one is a separate decision and a separate obligation.
    Mr. Hensarling. Again, Mr. Secretary, not that I am 
necessarily a legal scholar, but others have differed in this 
interpretation, I believe, from Treasury and so I guess the 
second part of the question is Treasury's interpretation is 
based on an opinion of the General Counsel at Treasury?
    Mr. Allison. Yes.
    Mr. Hensarling. Okay. Thank you.
    Mr. Allison. Yes.
    Mr. Hensarling. Thank you. A broader question. As you well 
know, TARP has never quite lived up to its advertising. As you 
well know, we started out having a Troubled Asset Removal 
Program advertised. It quickly morphed into a Capital Purchase 
Program.
    What started out as infusing capital into major financial 
institutions now has included General Motors and Chrysler which 
has caused many people to become curious, and I certainly 
include myself among their numbers. I fear to some extent that 
TARP has morphed from something that was at one time meant for 
emergency economic stability into what may have become a $700 
billion revolving bailout fund.
    My specific question is this. Once TARP funds were made 
available to Chrysler, made available to GM, under the statute, 
under this Administration's policy, are there any industries, 
economic sectors, or specific firms that could not potentially 
qualify for TARP funding?
    Mr. Allison. The utilization of the TARP funds is at the 
direction of the Secretary of the Treasury. All of those 
investments have been made within the ESSA Law and all of the 
recipients qualify under the law, and I wouldn't want to 
speculate on what additional investments might be made.
    Mr. Hensarling. Well, Mr. Secretary, then you are not aware 
of any internal Treasury policy that would disallow any 
specific industry or any specific firm from receiving funds 
under TARP?
    In other words, at this point essentially the sky's the 
limit?
    Mr. Allison. No. I'll be glad to provide a more detailed 
answer to your question, Congressman.
    Mr. Hensarling. Okay. Thank you. I'd be glad to receive it. 
I see my time is up for this round of questioning.
    Mr. Allison. Thank you.
    Chair Warren. Superintendent Neiman.
    Mr. Neiman. You mentioned commercial real estate in your 
opening statement and this is a great concern to the panel, as 
well.
    We had a very enlightening hearing in New York City several 
weeks ago, hearing testimony from some of our largest banks who 
have analyzed this market as well as from the Real Estate Board 
representing a number of commercial borrowers.
    There seemed to be a great consensus that hundreds of 
billions of dollars, both on bank balance sheets and in the 
securitization market, will be coming due over the next several 
years without any likelihood of being able to be refinanced.
    We all understand the impact that expanding TALF can have 
on the commercial real estate market, particularly with regard 
to the Legacy assets. I'd be interested in your assessment on 
the success and likelihood that TALF will address this issue. 
Or will there be other plans to address this segment of the 
market?
    Unlike the subprime market, this is something where we do 
have the data with a much greater timeline to address it. So 
are there options, other than the TALF? So I'd like to hear 
your assessment of the TALF as well as other possible plans to 
address the commercial real estate area.
    Mr. Allison. Thank you very much. Well, obviously as you 
said, the TALF has been performing well and we've seen a steady 
increase in the amount of securitization using the TALF in 
recent months, and we also--of course, the Secretary, now 
Secretary Geithner announced the Public/Private Partnership 
Program, and we've been working very hard on that and I'm 
confident that very soon we'll be launching partnerships and 
what that should do--and it deals directly with the commercial 
real estate crisis--is to start providing more liquidity into 
the securitization markets and as I'm sure you know, much of 
the commercial real estate financing in recent years has been 
through the securitization markets, which for some time were 
pretty much shut down.
    So these efforts to act as a catalyst through the PPIP 
Programs, to restart that market, I think will be very 
important to enabling refinancing of commercial real estate in 
the years to come.
    Mr. Neiman. Can you give us a little more flavor on the 
timing around the PPIP and any issues that you see that will be 
impacting the roll-out?
    Mr. Allison. Well, we've made a great deal of progress and 
it shouldn't be long before we announce the first stage in that 
program.
    Mr. Neiman. Great.
    Chair Warren. End of your time?
    Mr. Neiman. No.
    Chair Warren. Okay. Good. Well, it's my turn. So I can 
actually pick up on exactly that issue. We're going to continue 
to----
    Mr. Neiman. I think there's some benefit on a topic, to----
    Chair Warren. To the extent we can.
    Mr. Neiman [continuing]. The extent we can, to incorporate 
others.
    Chair Warren. To the extent we can. Sticking with the 
question on TALF and you point out that there's been some rise 
in securitization, although, you know, as I read the numbers, 
they are very small relative to where they were before, I'm 
concerned about testimony we received in our New York hearing 
that, unlike the home mortgage market where, in effect, the 
best products were reserved for the banks' balance sheet and 
the worst products were moved into asset securitization trusts 
or mortgage-backed securities, that the reverse occurred in the 
commercial real estate market. That is, it was only the 
standardized products that already proved that they had a cash 
flow that supported them that were accepted into the asset-
backed securities market, that were put into trusts and then 
marketed and that what the banks tended to keep, at least 
according to the testimony we received, were the more 
speculative undertakings. That is, new construction short-term 
financing, complete rehabs, the sorts of things that did not 
yet have an obvious source of payment and that these interest-
only loans which produced substantial fees for the financial 
institutions sit on the banks' books now and that they were 
often financed at ratios of 90 percent loan-to-value, 95 
percent loan-to-value ratios, at a time when the market was 
very, very high, which means lots of money was put in and so 
the face value of these notes is very high.
    Those notes will be maturing in 2011, 2012, 2013, and at 
least according to our witnesses on this, the projection is (a) 
it will be a much lower market, (b) no one is going to take 
those 95 percent loan-to-value ratio mortgages anymore, lending 
standards have tightened, so that the estimate was that they 
were looking at somewhere in the neighborhood of 60 to 65 
percent loan-to-value ratio mortgages, which is going to make 
many of these not eligible for any serious financing 
opportunity and throw many of them into default if we don't see 
substantial changes here.
    So my concern here, I appreciate that we're seeing a little 
uptick in asset-backed securities, but my concern here is to 
hear just a little more about how Treasury plans to wrestle 
with this problem that remains, as our witnesses told us, on 
the books of the financial institutions.
    Mr. Allison. Well, first of all, Chair Warren, we have to 
take account of efforts to stimulate the entire economy. 
Commercial real estate is a sector of the entire economy, and 
so the Obama Administration has been undertaking, as you know, 
a sweeping program to stimulate the economy in a wide variety 
of ways. Included in that is the Financial Stability Program, 
and part of that program is aimed at reopening the 
securitization markets which will be very important to the 
banks to provide liquidity, so that they are able to sell 
marketable securities back into that market and free up balance 
sheets. And at the same time we need to be making available, in 
case it's needed, additional capital to these banks which are 
so important to our economy.
    So I think you have to look at this as a multi-pronged 
effort to try to build the economy in a way that is good for 
business, good for the American public, and ultimately good for 
commercial real estate prices and home prices.
    So it's, I think, too early to draw conclusions about how 
serious the commercial real estate crisis will be over time. 
We're not making predictions about that, but we do know it's 
very important to restore stability to the financial markets, 
not just the banks but to the securitization markets, as a way 
of enabling banks to manage their capital and their asset 
positions as effectively as they can.
    Chair Warren. Thank you. Congressman Hensarling.
    Mr. Hensarling. Thank you, Madam Chair. Mr. Secretary, I 
don't want to put words in your mouth, but I think earlier--I 
want to kind of revisit an earlier line of questioning.
    I think you said it was a desirable goal or quality to have 
head room within the TARP Program for future financial 
stability efforts. Is that a fair assessment?
    Mr. Allison. I did say that, yes.
    Mr. Hensarling. Of what you said?
    Mr. Allison. Yes, sir.
    Mr. Hensarling. Let me ask you this, Mr. Secretary. What is 
it under Treasury's analysis, what is it that TARP can do that 
cannot be done by the Federal Reserve under their 13.3 exigent 
powers?
    When you talk about, from a policy perspective, needing the 
extra head room, why does that head room not already exist with 
respect to the Federal Reserve at 13.3?
    Mr. Allison. Yes. Well, I'm not an expert on 13.3, 
Congressman, but I do understand that what the Treasury is 
doing is providing a source of capital for the banks, and 
capital is essential for them in order that they be able to 
lend and support the assets on their balance sheet and there 
has been--there was an erosion of capital in a number of those 
banks.
    I think what the program has done is not only to provide 
immediate capital but to provide competence in the banking 
system and among investors and among----
    Mr. Hensarling. I'm not here to debate that at the moment, 
Mr. Secretary. I'm just trying to figure out again what is it 
that can be done under TARP that can't be done under 13.3, and 
again not necessarily expecting you to have that expertise 
immediately, but is this a matter that you would be willing to 
send a written answer?
    Mr. Allison. Sure.
    Mr. Hensarling. I'd love to have Treasury's opinion on that 
matter.
    Mr. Allison. Yes. Certainly.
    Mr. Hensarling. Next question, Mr. Secretary. The 
Congressional Oversight Panel, I believe in July, will hold a 
hearing dealing with GM and Chrysler--the auto bailout, 
controversial in a number of different ways.
    There was a press report on May 1st, I believe I have the 
source right, a CNBC interview, I could be wrong on the source, 
where an attorney for the Chrysler bond holder said, ``One of 
my clients was directly threatened by the White House, in 
essence compelled to withdraw its opposition to the deal under 
threat that the full force of the White House Press Corps would 
destroy its reputation if it continued to fight.''
    Are you aware of this press report and allegation?
    Mr. Allison. No, sir, I have no awareness of that.
    Mr. Hensarling. Is it something that--do you have any 
knowledge if Treasury has investigated this allegation?
    Mr. Allison. I have no knowledge of the issue at all.
    Mr. Hensarling. In your capacity, would you be willing to 
have Treasury investigate this allegation?
    Mr. Allison. I'll be happy to follow up with my colleagues 
in Treasury on your question.
    Mr. Hensarling. Thank you. Moving to a different subject, 
the subject of the next report of the Congressional Oversight 
Panel will be dealing with the valuation of warrants under the 
CCP Program.
    Number one, it's my assumption but I'd like it confirmed. I 
assume Treasury intends to adhere to the terms set forth in the 
Securities Purchase Agreements in divesting warrants.
    Mr. Allison. We intend to and we must adhere to the 
agreements we had with the banks when we advanced the Capital 
Purchase Program funding.
    Mr. Hensarling. And is it your understanding or position 
that Treasury may transfer, sell, assign, or otherwise dispose 
of these warrants at any time? In other words, they need not 
necessarily be held to maturity? Is that the position?
    Mr. Allison. After the bank has repaid its----
    Mr. Hensarling. Yes.
    Mr. Allison [continuing]. Preferred----
    Mr. Hensarling. Yes. I'm just--yes, just speaking of the 
warrants.
    Mr. Allison. Under the contract, Congressman, the bank has 
the ability shortly after the repayment to bid to repurchase 
its warrants. That's part of the contract.
    So the first element is their decision whether to bid to 
repurchase their warrants. If they decide that they're not 
going to repurchase the warrants, then we have the ability to 
sell the warrants over time.
    Mr. Hensarling. I see my time's out for this round. Thank 
you.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. Well, there's certainly a nice symmetry to 
today's hearing because I want to also talk about warrants. 
That way we at least don't keep you moving around from topic to 
topic, and I want to talk about warrants as part of a larger 
inquiry into the general theme of protecting the public's 
financial interest as we go through this program.
    There are many ways of pricing things. Some of them can 
generate controversy. There's been some controversy around the 
warrant repurchases that have occurred. Without pre-judging 
that matter, one way people often find as a way of resolving 
controversies around value is through an auction.
    I wonder if that is an option for how to deal with 
warrants--for how to deal with warrants that are held after the 
return of the money, of the Capital Purchase Preferred Stock 
funds, and what your thoughts are in that regard.
    Mr. Allison. Thank you for the question, and let me again 
point out that there is--there are provisions in the contracts 
with the banks as to how they can repurchase their warrants 
themselves. We must honor the contract. As you correctly said, 
if the bank decides not to repurchase the warrants, we have 
some choices to make about how we might dispose of those.
    We have been studying this issue very carefully over a 
period of time and will soon be publishing on our website our 
approach to valuing the warrants and, if it comes to that, 
disposing of the warrants.
    Mr. Silvers. I wanted to make a suggestion. The Treasury 
finds itself in the unique circumstance with respect to these 
warrants, which is that typically a holder of a warrant or an 
option is worried about the downside.
    When one takes the current market price with downside risk 
built into it because one is concerned because you're exposed 
to the downside. There is an argument, it seems to me, and I 
would like to call it to your attention, that the Treasury 
Department in this circumstance, at least with respect to the 
potential for a repurchase from the bank itself, does not have 
that same downside exposure. Consistent with complying with the 
contracts, it is in Treasury's interests to sell right now, 
that the reason you would sell right now, even though there's a 
potential upside if the stock price rises, is because you would 
be concerned about that downside.
    But if the downside environment develops, you don't want to 
sell because you don't want the cash to leak out of the bank, 
and I would commend to you and your staff that you think 
carefully about that set of circumstances, so that consistent 
with the fact that there may be circumstances in which you are 
compelled to sell, that to the extent you have a choice, it may 
be both in the public's financial interests and in our policy 
interests not to do so.
    Let me move from there--I have a little bit of time left. I 
want to move from there to the question of the Public-Private 
Investment Program.
    As you may know, we've had some discussions with Secretary 
Geithner about this matter as they were initially described. I 
am extremely concerned that in their initial description, that 
program constituted a wealth transfer from the public to 
various private entities.
    I had the impression from the Secretary that he was 
contemplating in a final or operational version making certain 
adjustments, particularly with respect to the cost of 
government-provided debt or debt guarantees, to ensure that 
this program really was essentially an investment or at least 
neutral vis a vis the public purse, much as Secretary Paulson 
promised that the Capital Purchase Program would be.
    As you know, our February report suggested, that didn't 
turn out to be true, but Secretary Geithner was suggesting that 
with respect to the PPIP certain changes would be made.
    Since you noted that you were moving forward with the PPIP, 
can you comment at all on your plans to ensure that the PPIP, 
in whatever form it actually rolls out, is financially fair to 
the public?
    Mr. Allison. Let me answer that question, first of all, 
with a general comment that applies both to the warrant 
valuations and disposition of warrants as well as the PPIP.
    We're acutely conscious of the fact that we are acting as 
fiduciaries on behalf of the taxpayers and we want to do what 
we think is in the best interests of the taxpayers, the 
American public, and that's how we approach the decisions on 
how we might administer both the warrants and the PPIP.
    When we make the announcement of the PPIP, we will be 
making disclosures that should allow you to evaluate the 
diligence of the Treasury in protecting the interests of the 
taxpayers to the rates that we're charging, the structure of 
these transactions, and I can assure you that a great deal of 
thought has gone into that, strictly from the standpoint of how 
best to protect the interests of taxpayers.
    Mr. Silvers. My time has run out. Thank you.
    Chair Warren. I'm going to exercise for just one second the 
prerogative of the Chair and particularly of the staff that's 
working on a report right now on valuing the warrants.
    I just heard you mention that Treasury will soon issue 
guidance on the pricing of the warrants. I don't think I knew 
about that.
    Could you tell us about when it is that you plan to issue 
that?
    Mr. Allison. We'll be disclosing the methodologies in a 
general sense that we're using and as soon as we can, which----
    Chair Warren. Could you just maybe be a little more 
specific? You see, let me be clear. Let me be clear on this 
point, Mr. Allison. You will understand the intensity behind 
this question.
    We are required by law to issue a report every 30 days and 
that means we have a deadline by which we need to write about 
the valuation of the warrants.
    Mr. Allison. Yes.
    Chair Warren. So it would be helpful to know what your 
plans are vis a vis explaining what you're doing with the 
warrants.
    Mr. Allison. Chair Warren, we're as eager as you are to 
have this announced, and we will do that as soon as we possibly 
can, and when I say soon, I mean I'm hopeful it will be very 
soon.
    Chair Warren. As opposed to only slightly soon?
    Mr. Allison. Well, I'm not going to check my watch, but it 
should be very soon. I'd like to be more helpful to you, but--
--
    Chair Warren. You could.
    Mr. Allison. I'm sure I could.
    But in all fairness,----
    Chair Warren. I thought I just did. Yes, we have a date.
    Mr. Allison. And what is your date, if I may?
    Chair Warren. Our date--our report must be--we must have a 
final draft of our report by the 5th of July, is that right?
    Mr. Silvers. Yes.
    Chair Warren. But we are hoping we will have finished the 
work by then.
    Mr. Allison. I'm very hopeful and I'm very confident we'll 
meet your deadline.
    Chair Warren. And give us time to analyze it. That will be 
very helpful.
    Mr. Allison. Yes, it will certainly be aware and mindful of 
your deadline.
    Chair Warren. Thank you. I appreciate it, Mr. Secretary.
    Mr. Allison. Let me also, if I may, go back to Mr. Silvers' 
question about the PPIP, and as I said, we're very concerned 
about taxpayers' interests.
    Under the law, we're required, as I mentioned in my opening 
remarks, to really have two goals. One is to help stabilize the 
financial system and the second is to protect the interests of 
taxpayers.
    We've also had to be mindful of that first goal, 
stimulating the financial markets, stabilizing the financial 
system, and so we've been balancing both of those objectives as 
we look at the structure of the PPIP and the pricing and so 
forth.
    And I think that--I'm hopeful that you will see when we 
publish this, that a lot of thought has been given to it.
    Chair Warren. I do want to say, Mr. Allison, 
notwithstanding the fact that we spoke with some jocularity 
there, I know that we want to work together on this and I know 
that you don't want our staff and all of us who work here 
heading in the wrong direction if you have--you obviously do 
have plans about valuation of the warrants.
    I think to the extent we can share those, even in less than 
final form, and, if necessary, on a confidential basis, 
ultimately it's good for Treasury, it's good for oversight and 
that makes it good for the American public.
    Mr. Allison. Let me say, Chair Warren, I fully agree with 
you, as do my colleagues in Treasury.
    Chair Warren. Good.
    Mr. Allison. We are eager to move this forward and to 
provide that disclosure.
    Chair Warren. Good. Thank you.
    Mr. Allison. Great.
    Chair Warren. Superintendent Neiman.
    Mr. Neiman. And I will follow up. This is an area, as I 
think you heard from Damon, a sense of where he's coming from 
regarding the policy and timing of the sale of the warrants.
    This, as you're probably not surprised, is one of several 
issues where there's not a consensus view on the panel. I have 
a view of having a public policy of disposing of those warrants 
as soon as practical. I'm concerned about Treasury trying to 
time the sale of those warrants, the cost of maintaining those, 
and I'd like to give you an opportunity, since your staff spent 
a great deal of time with us last week in explaining that and 
that was the policy I heard, but I'd like to give you an 
opportunity to reiterate that, to the extent that you wish.
    Mr. Allison. Well, in determining our policy on the 
warrants, we have to consider both the timing of the sales, 
should we hold the warrants for a long period of time, or try 
to sell them off as fast as we can, and also what should be the 
manner of sale, if it comes to a sale, by the Treasury 
Department.
    There are many different alternatives. There are also 
many--there's another question, which is what is the right 
price for the warrants? Well, there is a wide divergence of 
opinion. There are many different ways of valuing warrants. 
There are many considerations, without getting too wonky here, 
in valuing warrants. So we've had to examine many different 
approaches and then the pros and cons, the probabilities and so 
forth.
    We're trying to come up with an approach that we think 
again best serves the interests of the taxpayers and best 
serves the stability of these markets.
    When we do disclose, I'm sure there's going to be a wide 
range of opinions about the approach that we're taking. 
Therefore, we have to be thorough in the manner in which we 
explain what we're doing. So that's one reason why we're being 
careful to be prepared as we make our disclosure so we can 
provide the types of useful information that the public will 
need as it examines our planned approach.
    Mr. Neiman. Okay. We'll look forward to that.
    Mr. Allison. Thank you.
    Mr. Neiman. I think the discussion of the policy regarding 
timing and disposal of those warrants as soon as practicable, I 
think, was a separate issue from the process that was going to 
be used and I assume that's the details of which will be 
forthcoming.
    Mr. Allison. We'll be describing the process, how this 
whole process works, and the decisions we're making about if a 
bank is not repurchasing the warrants, how we would dispose of 
them, both in the timing and the manner.
    Mr. Neiman. One area, following up on that, as we do look 
at both the repayment, policies around repayment, as well as 
policies around the warrants, I'm interested in whether you 
have any intent to calculate the total investment return, 
including dividends received on those preferred investments. I 
think that would be useful information----
    Mr. Allison. Thank you.
    Mr. Neiman [continuing]. To the public to get a real sense 
of the return to the taxpayer.
    Mr. Allison. Yes. Yes, we've been looking at that, as well. 
Yes, sir.
    Mr. Neiman. Staying on metrics, it was really the focus of 
my questioning of Secretary Geithner when we had that 
opportunity, to press the Secretary on expanding the scope of 
the metrics that are posted, make them both broader and more 
readable on the website.
    I think it's something that our panel can provide. There's 
certainly real challenges to it because of the causality 
features as to what actions you can really attribute to these 
factors, but I think it is meaningful information to Congress 
and to the public to get an understanding of markets, of 
equity, of interest rates.
    So to the extent that you can share with us some ideas of 
where you are going, it will help us to try to identify are 
there other areas that we should be exploring to report on a 
regular or periodic basis.
    Mr. Allison. Yes. Well, I very much agree with the 
importance of disclosure, as I mentioned before, and we are 
working on coming up with additional disclosures that we think 
would be useful in analyzing the success of the program and 
we're developing internal measures, as well, and we're 
involving a number of areas around the Treasury Department on 
that project.
    So I share your interest in seeing more disclosure and 
having it done in a thoughtful way and I would welcome feedback 
from this panel about our disclosure and specifically the kinds 
of information that you would like to receive, and I think 
we're going to get a lot of feedback from others, too, among 
the public.
    So we are working on behalf of the American public, 
obviously, and we are accountable to the Congress and this 
panel and others, and we want to be as responsive as we 
possibly can and be as open as we possibly can, but we want to 
do it in a responsible way and so we're working hard on that 
and I hope to have progress to report to you before long and 
that is evident to you on our website, as well.
    Mr. Neiman. Great. Thank you.
    Chair Warren. Thank you. Despite the name, Troubled Assets 
Relief Program, we have almost since the inception veered away 
from dealing with the troubled assets and now it seems more 
than ever that the banks continue to hold what we were calling 
troubled assets last October and the Legacy loan part of the 
Public-Private Investment Program seems not to be in an active 
phase.
    So I want to ask, are you concerned that the banks continue 
to hold troubled assets?
    Mr. Allison. Well, I think we would all like to see a more 
liquid market, so that the banks could be disposing of more of 
those assets and have turnover in their asset base so they can 
continue to provide new sources of lending and other forms of 
finance to the economy.
    What has to be considered is what is the most effective way 
of accomplishing this and so we have an approach that's really 
threefold.
    First of all, to assure that the healthy banks, especially 
when the markets are in an extreme condition, have access to 
capital which is essential to maintain lending.
    Secondly, the stress tests were aimed at assuring that the 
major banks, the largest banks, will have adequate capital if 
they undergo additional stress out in the marketplace because 
of continued difficulties in the economy.
    And thirdly and very importantly, it's to reopen the 
securitization markets.
    All these need to be achieved in order to hasten a return 
to normal markets where the private sector is operating 
effectively, and it's not any one of those measures that's 
going to get us there and some of this is going to take time.
    As I said, we are working on the PPIP Plan. We've been 
encouraged by the success of TALF so far, by the rapid growth 
in that, and by the reduction in spreads in those asset classes 
which is the market's indication that the TALF is having a 
positive effect, and I think the announcement of the PPIP 
Program, as it's called, also has had a positive effect.
    So I think we have to give some of this a little more time 
to operate. These are complex programs. They need to be 
carefully designed, but I think we're making progress in terms 
of the roll-out of the PPIP Program in the near term.
    Chair Warren. But, Mr. Secretary, it worries me a little 
bit. You describe this in terms of liquidity, that the only 
problem we have here is the liquidity problem, suggesting that 
the banks that are holding these troubled assets would sell 
them if only there were more liquidity in the marketplace.
    I just want to ask if you've considered an alternative 
scenario and that is, that it's really a pricing problem, that 
since we first described these assets as troubled, there have 
been more foreclosures and bigger drops in the housing market 
which would suggest to me that if they were troubled in 
October, they should now be described--I don't know what the 
right word is--deeply troubled, but they are in worse shape and 
that the real issue is that if they were sold for their current 
market value, that the price they would fetch would suggest 
that the banks were in much more serious trouble than they are 
and that, in effect, they are--they need not acknowledge that, 
so long as they hold these assets on their books, particularly 
with changes in accounting rules.
    So I'm concerned--I appreciate the point about liquidity--
but I want to hear if Treasury is considering an alternative 
scenario that could be far more disturbing.
    Mr. Allison. Well, let me offer thoughts on why liquidity 
is closely related to the problem you just pointed out of asset 
values.
    It's our belief that when markets are illiquid and a bank 
tries to sell assets, they're selling at fire sale prices 
because it's a highly-inefficient market. The idea is that if 
we increase liquidity, if we can act as a catalyst to get these 
markets going, we will see the spreads between bid and ask 
declining and there will be more activity, more sales by banks, 
more investment by individuals in a self-reinforcing process. 
But we have to, we think, play a role in jumpstarting sectors 
of the securitization market so that can happen.
    In other words, there is a gap and has been a gap between 
what the banks are willing to sell the assets for because of 
their own internal analysis of what they're worth and what the 
market has been willing to pay.
    Chair Warren. But the problem we've got, Mr. Allison, is 
that the same set of known facts could be described by two 
different causes. One could be liquidity, as you rightly 
describe it. The other could be that the banks simply do not 
want to acknowledge the losses that even a flush market would 
put on packages of subprime mortgages, even prime mortgages now 
that are experiencing astonishing default rates and a housing 
market that continues to fall.
    Mr. Allison. Well, on your point, and I understand your 
point and it's a thoughtful one, in my opinion, the answer may 
be provided in part by launching the PPIP Program and let's see 
how much demand there is for that program. It's just a start, 
but we had the same issue with asset-backed securities and what 
we've seen is that for sectors of the asset-backed market, in 
recent months we've seen spreads decline and more activity 
taking place away from TALF.
    So there's no magic quick solution to this. It's going to 
take some time. I think your point is a very thoughtful one. I 
think the answer is in launching this program and seeing what 
the demand is, seeing who the sellers and buyers are, and with 
the beginning of this, we've already seen the spreads come down 
to some extent since this program was announced, in 
anticipation, I think, of the program, but I think we need to 
let it work.
    We're mindful of your concern. As I've said, we don't think 
this crisis--that we're totally out of the woods here. There 
are still risks in this economy. You pointed to one. I think we 
all have to be mindful of it. We have to continue this 
dialogue.
    I certainly respect your viewpoint here and we are 
considering all aspects of this problem.
    From the standpoint of how do you stimulate financial 
stability, how do you protect the interests of taxpayers, from 
those two standpoints, what kinds of programs make the most 
sense? We've looked at a wide range, but what we think is worth 
focusing on, at least for the immediate moment, are the plans 
that we're rolling out now, but we are willing to take input 
from all sources. We're continually thinking about these 
issues. We want to try to continuously improve effectiveness in 
dealing with this problem.
    Chair Warren. Thank you, Mr. Secretary. Congressman 
Hensarling.
    Mr. Hensarling. Thank you, Madam Chair. Mr. Secretary, how 
are we going to know when the system is stabilized?
    Mr. Allison. I think that's a very profound question, 
Congressman. Let me tell you how I view it.
    As I said in my opening remarks, this problem isn't really 
about banks. It's about the American people. It's about the 
hardships that they're facing right now with housing prices 
falling, with loss of jobs, with difficulty getting credit in 
many cases, and I think that we'll judge the success of these 
programs in terms of how they're affecting people's lives.
    What's happening with consumer confidence, what's happening 
with housing prices, are creditworthy borrowers able to borrow, 
small businesses, large businesses, and individuals?
    Mr. Hensarling. Well, Mr. Secretary, it gets back to again 
how does one measure success?
    Mr. Allison. Right.
    Mr. Hensarling. And I think in terms of the overall 
challenge of oversight of this panel, there are several 
challenges. Number one, it has been disappointing to me that 
roughly seven months into this process, this is the second time 
we've had a hearing with somebody from Treasury. Our fault, 
Treasury's fault, nobody's fault. That has been disappointing. 
I understand we now have a commitment from Treasury going 
forward, greater access. I thank you for that.
    Another item of effective oversight not only is access to 
you and the Secretary, it also has to do with other bodies, 
including ourselves, involved in the accountability and 
transparency process.
    I'm sure that you are painfully aware that the Inspector 
General for TARP, Neil Barofsky, wrote on April 7th a memo to 
then Acting Attorney General of the Treasury regarding 
Treasury's intention to seek a legal opinion from the Justice 
Department on SIG TARP's independence from Treasury.
    Now that has concerned a number of us on the panel about 
frankly what is going on here. Is there some assertion of 
attorney-client privilege that ultimately might deny SIG TARP 
access to materials and documentation?
    So I ask the question, do you know why this Justice 
Department memo has been sought? What is the purpose?
    Mr. Allison. Well, what I do know is that this question 
first came up last December by non-political career staff 
within the Treasury because of the peculiarities of the EESA 
Law. It was unclear who's responsible, for example, for IT 
security for the SIG TARP, where does the SIG TARP's budget go 
and so forth. They're more administrative issues. We have 
provided Neil Barofsky whatever information he wants. I meet 
with him.
    Mr. Hensarling. And going forward, will that be the policy 
at Treasury?
    Mr. Allison. Absolutely. When he asks for information, I 
would invite you to ask him the same question. I have met with 
him and my predecessor met with him weekly. I've met with him 
more than weekly. I met with him yesterday, as a matter of 
fact, and we talk on the phone, as well.
    Mr. Hensarling. Let me move on, if I could then, to another 
challenge we have in oversight.
    Mr. Allison. Sure.
    Mr. Hensarling. Clearly, we've spoken about the access to 
Treasury officials, ensuring that there's access to 
documentation, information.
    Mr. Allison. Yes.
    Mr. Hensarling. When I ask you the question of how do we 
know what stabilization of the system looks like, I mean to 
some extent, it's we're going to kind of know it when we see 
it. I don't want to put words in your mouth, but we don't have 
a tangible metric there.
    I'm curious, and maybe this was covered earlier, but, you 
know, what is the exit strategy today with respect to Chrysler, 
with respect to GM, with respect to AIG? How as an oversight 
panel are we to provide oversight if Treasury does not 
articulate--what is the metric? How do you manage what you 
cannot measure?
    Mr. Allison. Yes.
    Mr. Hensarling. And if you have plenary powers to 
essentially pick winners and losers in the economy, choose to 
infuse capital or bailout GM, Chrysler, or choose not to bail 
out, for example, Pilgrims Pride, the second largest poultry 
producer in the nation near my congressional district, if we 
don't know what financial stability looks like, all the access 
that we have to you, all the access we have to documentation.
    Again I get back to the central question, how do you 
convince the American people that this hasn't simply turned 
into a $700 billion revolving bailout fund? Can you not tell 
the American people this is what we're going to achieve with 
your $700 billion investment, this is when you know we have 
achieved it, and this is how we plan to go about returning you 
your valuable capital?
    Mr. Allison. First of all, let me go back. As I said, 
ultimately, the success of all these programs, including 
financial stimulus, depends upon how well the American public 
is doing.
    Now, we have a lot of measures, we were discussing that 
when Mr. Neiman asked his questions, in terms of the health of 
the financial markets themselves. For instance, what's 
happening to credit spreads, how much risk is seen within the 
economy, within the financial markets? What's the state of the 
banking system? What's the volume of loans being granted today? 
Is it growing? Is it shrinking, et cetera?
    There are many metrics that we are monitoring. As was said 
earlier, and I agree, it's hard to attribute cause and effect. 
There are associative relationships that we think are also 
important, however, and in terms of the end game or how we're 
going to exit from all this, the TARP Program calls for expiry 
of Treasury's ability to provide new funding at the end of this 
year, or with the discretion of the Secretary of the Treasury. 
That can be extended until October of 2010.
    Mr. Hensarling. Does he intend to ask for an extension?
    Mr. Allison. I think it's too early for him to make that 
determination. I'm sure he'll be watching the status of the 
markets, the economy as a whole, and at some later point he'll 
make that determination.
    In terms of the actual investments, these investments 
either have termination provisions or the dividend rates 
charged become prohibitive and so it has an automatic wind-down 
feature to these programs.
    These were not intended to be permanent programs. It's not 
intended that the office that I manage is a permanent office 
within the Treasury, and we are, as the president has said, as 
the Secretary of the Treasury has said, we are very reluctant 
shareholders in corporations. We don't want to be in that 
position, and there are--there's work being done in terms of 
General Motors, AIG, and so forth on exit strategies, and the 
debt holders in GM will end up with about 10 percent of the 
shares.
    They'll eventually register and sell those shares. We are 
hopeful that there will be an IPO from General Motors, perhaps 
next year, and so we are working with those companies to try to 
move them to the point where they can stand on their own or 
make other adjustments and enable the U.S. Government to get 
out of the business of being a shareholder in those 
corporations.
    Chair Warren. Mr. Secretary, if I could, would you be 
willing--I know we had agreed on 4:30, but to even this out at 
least a little bit to let Mr. Silvers and Superintendent Neiman 
each ask one more question?
    Mr. Allison. I'll be happy to.
    Chair Warren. Thank you very much. I appreciate your 
indulgence and then we'll wrap this up. We'll be a few minutes 
over. Thank you.
    Mr. Silvers. Thank you for this and the generosity of the 
time provided today. You have a few other things going on, I'm 
sure.
    I want to come back to the thread of questioning that our 
Chair was on because it seems to me, as this hearing winds 
down, that an awful lot of what we have asked you has actually 
been about one thing. It has appeared not to be about one 
thing. Questions about dealing with principals, principal 
reductions in mortgages, questions about the capital, real 
capital strength of the 19 banks subject to the stress tests, 
questions about the PPIP and the pricing issues.
    These are actually all the same thing, and I think that 
there are two theories operating here and I would like you to 
comment as to whether you agree that there are two theories and 
how certain you feel that the one that Treasury has embraced is 
correct.
    The first theory is that there is a substantial set of 
losses unrecognized on the books, some recognized, some 
unrecognized on the books of our major financial institutions, 
that the gap between the real losses and what's been 
recognized, is driving the refusal of the financial 
institutions to voluntarily restructure mortgages because then 
you'd have to recognize it. That drives increased foreclosures.
    The real state of the banks' capital structures are weaker 
than has been formally acknowledged. Therefore, they're not 
lending because they know what the real state is, and that the 
decreased spreads that you were referring to, and the increased 
confidence in the equity markets is fundamentally nothing more 
than their reaction to this perception they have that we, the 
public, have guaranteed these institutions and not only have 
guaranteed them against bankruptcy but through the statements 
associated with the stress tests have effectively stated that 
there's not that much risk of further dilution on the equity 
side or any possibility that, like the bond holders in GM and 
Chrysler, they might face some form of restructuring of their 
debt positions.
    If I'm an investor or participant in those markets and I 
have that guarantee, I get very relaxed, spreads close, equity 
is saleable again. That's one story.
    The other story is the one that you have told us today and 
that's a story of--and by the way, the first story I just told 
leads to, at best, a W in terms of economic recovery. It's a 
story in which those large banks that dominate our credit 
system are unable to play their role and there are macro 
economic consequences and they're not good. That story has a 
name. It's called Japan.
    The other story is the story that bank earnings, driven by 
improvements in the real economy, are sufficient to 
recapitalize the banks and that either the losses aren't real, 
that those houses in Las Vegas that we saw, our committee, that 
those houses are actually worth what people said they were 
worth in 2006, either those losses aren't real or they will be 
made up by earnings off of credit cards and mortgages and so 
forth and that we don't have anything to worry about.
    Those seem to me to be the two narratives. Do you disagree 
that they are the two narratives, and how confident are you in 
the narrative that you've given us today?
    Mr. Allison. Well, I--first of all, I think that your 
concerns are certainly ones that people consider today.
    Mr. Silvers. Mm-hmm.
    Mr. Allison. I think there's concern about that. I'm not 
sure it's a case of one theory or another theory.
    Mr. Silvers. That's fair enough.
    Mr. Allison. I think one of the best ways to resolve the 
question of what the assets of the banks are worth is by 
restoring price discovery in the marketplace.
    Mr. Silvers. Can I stop you there?
    Mr. Allison. Go ahead.
    Mr. Silvers. The marketplace, the marketplace, the 
financial markets today are not cash-deprived. The private 
equity funds, the hedge funds that you're seeking to attract 
with the PPIP have lots of cash. They're sitting on mountains 
of it. Their refusal to deploy--your recipe, your prescription 
raises the fear in my mind of a hidden subsidy to that 
transcription in which case it won't do what you say it's going 
to do.
    Now I understand that you said earlier that that's not the 
game plan, but the story about liquidity, given how much cash 
is sloshing around right now, doesn't seem credible to me.
    Mr. Allison. Let me just give you my experience when I was 
heading TIAA-CREF.
    Mr. Silvers. Right.
    Mr. Allison. We were one of the largest investors in the 
United States in both the debt and the equity markets. We--as 
we saw the markets freeze and they started almost two years 
ago, we, as a cash--what's called a cash investor--became very 
reluctant to invest because we couldn't see price discovery. We 
didn't know what was the right price, and we--I've been 
outspoken on that question in various forums in the past--there 
was a need to restore the secondary markets.
    Now, we can have different opinions about this. We can have 
our theories. In the last analysis, that's why you have 
financial markets. You have to have liquid interchanges and 
then the truth will out as to what the assets are actually 
worth.
    I think under any scenario, under any concern that anyone 
has, it can only benefit the country if we can try to restore 
these markets and that will lure back those holders of cash. 
There are trillions of dollars of cash out there. I totally 
agree with you.
    How do you bring them back into the market and that's what 
we are attempting to do, and these programs start out 
relatively modestly. We want to be, as I call it, a catalyst to 
bring others back into the market.
    Mr. Silvers. If the Chair will indulge me for 10 seconds--
--
    Mr. Allison. Yes, sir.
    Mr. Silvers [continuing]. I agree with you, that if you 
design PPIP so it's not a back door subsidy, right, that it 
will be a very sharp test of this little colloquy we've had.
    Mr. Allison. It will be.
    Mr. Silvers. But if you design it so it's a back door 
subsidy, it will not be.
    Mr. Allison. Well, I await your judgment on that and we 
should soon find out, and I would certainly like to get your 
views once the terms are announced and we'll see how the 
program progresses.
    Mr. Silvers. Thank you.
    Chair Warren. Mr. Neiman, I want to be fair. Superintendent 
Neiman.
    Mr. Neiman. I would like to follow up on that because one 
of the programs to attract cash back to the market is the PPIP 
Program, including the Legacy Loan Program, and with the 
announcement that that program is delayed, I'd like to 
understand, you know, your sense of the reasons for that, that 
it's no longer a priority.
    We've read that it's the reluctance of financial 
institutions to sell assets. We've read that the changes in 
mark to market may have impacted it. There are others who say 
that the results of the stress test may have taken off some of 
the priority.
    From your perspectives, what are they?
    Mr. Allison. I think it would be presumptuous of me to 
speak for the FDIC. I would simply ask that you wait for 
developments there, but I don't think I should speak for the 
Chairperson of the FDIC.
    Chair Warren. Okay. Good.
    Mr. Neiman. Thank you.
    Chair Warren. I want to thank you. I appreciate your 
staying longer.
    Mr. Allison. Thank you very much.
    Chair Warren. We appreciate your coming, Secretary Allison. 
We're going to hold the record open for seven days so that if 
panelists have additional questions, they can be asked and they 
will be made part of the record.
    Mr. Allison. Thank you. Thank you, Chair Warren, for asking 
me to be here, and I look forward to working with all of you 
very closely and to be as responsive as possible to your 
questions and concerns.
    Chair Warren. Thank you. This meeting is adjourned.
    Mr. Allison. Thank you.
    [Whereupon, at 4:37 p.m., the hearing was adjourned.]
    [The responses of Assistant Secretary Allison to questions 
for the record from members of the Congressional Oversight 
Panel follow:]

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