    [Senate Hearing 111-146]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 111-146

                     TREASURY SECRETARY TIMOTHY F. GEITHNER

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

                                    HEARING

                                   before the

                         CONGRESSIONAL OVERSIGHT PANEL

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   ----------

                               SEPTEMBER 10, 2009

                                   ----------

            Printed for the use of the Congressional Oversight Panel

                                                            S. Hrg. 111-146

                     TREASURY SECRETARY TIMOTHY F. GEITHNER

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

                                    HEARING

                                   before the

                         CONGRESSIONAL OVERSIGHT PANEL

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                               SEPTEMBER 10, 2009

                                   __________

            Printed for the use of the Congressional Oversight Panel

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                         CONGRESSIONAL OVERSIGHT PANEL
                                 Panel Members
                            Elizabeth Warren, Chair
                              Rep. Jeb Hensarling
                                 Paul S. Atkins
                               Richard H. Neiman
                                 Damon Silvers

                                C O N T E N T S

                                  ----------
                                                                       Page
    Opening Statement of Elizabeth Warren, Chair, Congressional
      Oversight Panel................................................     1
    Statement of Hon. Jeb Hensarling, Member, Congressional Oversight
      Panel, U.S. Representative from Texas..........................     4
    Statement of Damon Silvers, Member, Congressional Oversight Panel     5
    Statement of Paul Atkins, Member, Congressional Oversight Panel..     9
    Statement of Richard Neiman, Member, Congressional Oversight
      Panel..........................................................    13
    Statement of Hon. Timothy F. Geithner, U.S. Secretary of the
      Treasury.......................................................    15

                HEARING WITH TREASURY SECRETARY TIMOTHY GEITHNER

                                  ----------

                          THURSDAY, SEPTEMBER 10, 2009

                                         U.S. Congress,
                                 Congressional Oversight Panel,
                                                        Washington, DC.
        The Panel met, pursuant to notice, at 1:23 p.m. in Room SD-
    419, Dirksen Senate Office Building, Elizabeth Warren, Chair of
    the Panel, presiding.
        Present: Elizabeth Warren, Representative Jeb Hensarling,
    Richard Neiman, Paul Atkins, and Damon Silvers.

      OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL
                            OVERSIGHT PANEL

        Chair Warren. This hearing is called to order.
        Thank you for being here today, Mr. Secretary.
        I also want to welcome Paul Atkins, who is the newest
    member of the Congressional Oversight Panel, and we are glad to
    have you with us here today. Thank you.
        I also want to say, as we get started here, the panel has
    agreed to keep their opening statements very short so that we
    can focus on the questions, and we appreciate that you have
    agreed to do the same, Mr. Secretary. So, thank you for being
    here.
        This hearing offers an important opportunity to hear
    directly from you about the $700 billion investment that
    taxpayers have made in the financial system. Almost exactly a
    year ago, Secretary Paulson told Congress that the country was
    in a dire state. Americans were alarmed. To restore confidence,
    Congress quickly passed the laws that created the Troubled
    Asset Relief Program, TARP.
        Since that time, public fear has turned into anger. Savings
    have evaporated, jobs have disappeared, and mortgage
    foreclosures are now measured in the millions of families and
    the billions of dollars. Taxpayers question what TARP
    accomplished when, on an individual level, their financial
    circumstances seem more precarious than ever. They feel like
    they got stuck with the bill for this bailout, but they didn't
    get the benefits.
        In granting Treasury such enormous discretion with TARP
    money, Congress expected an equal measure of transparency and
    accountability. Taxpayers have a right to understand clearly
    what Treasury is doing and why it is doing it.
        Each month, the Congressional Oversight Panel has issued a
    detailed report. In June, we evaluated the stress tests. In
    July, we examined the repayment of TARP funds. And after we
    reported that the first 11 banks had repurchased their warrants
    from Treasury at a price that we believed was only 66 percent
    of their estimated value, the next round of banks repurchased
    their warrants at prices that were much closer to our estimated
    value. In August, the panel examined the impact of the decision
    to leave troubled assets on the books of the banks and how much
    risk that leaves in the banking system.
        Yesterday, the panel released a report examining the use of
    TARP funds in the domestic auto industry and recommended that
    taxpayers, who now own substantial amounts of both Chrysler and
    GM, might be better protected if Treasury would put its shares
    in a trust so that someone not in Government could actively
    manage them and make decisions about the best time to sell.
        Of course, taxpayers are now stakeholders in hundreds of
    financial institutions as well. Taxpayers still want to know
    how their money has been used and what difference their
    enormous investment has made. Have these companies been
    cleansed of toxic assets--the reason TARP was passed? Are these
    companies better run today than they were a year ago? Do they
    treat consumers better now than they did last year? And the
    fear that no one wants to have to think about--what are the
    chances these financial institutions will stumble again? Or to
    put it more directly, are we going to change the rules that got
    us into this mess before it happens again?
        [The prepared statement of Chair Warren follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Again, thank you for coming, Mr. Secretary. We look forward
    to hearing from you.
        Congressman Hensarling.

        STATEMENT OF HON. JEB HENSARLING, MEMBER, CONGRESSIONAL
            OVERSIGHT PANEL, U.S. REPRESENTATIVE FROM TEXAS

        Mr. Hensarling. Thank you, Madam Chair.
        On occasion, I suspect we will disagree in the future, but
    I do want to thank you for your public service at a time of
    great challenge in our Nation's history.
        I would note that this is your second appearance before the
    Congressional Oversight Panel since the President was sworn in
    in January. It is now September. I believe you have agreed now
    to appear before this panel at least on a quarterly basis. I
    would ask you once again to potentially reconsider appearing on
    a monthly basis. Given that the President has made a commitment
    that his administration would be the most transparent and
    accountable administration ever, I would think that would
    comport with that goal a little better.
        We are clearly coming up on the 1-year anniversary of the
    EESA legislation. TARP has never really been as advertised. As
    we know, a toxic asset removal program became a capital
    infusion program. I am not here at this point to continue the
    debate on whether or not it was wise legislation at the time. I
    think there are smart people on both sides of that debate.
    Historians will one day record it. But I must admit almost 1
    year later, I continue to be concerned and am curious as to
    what TARP has evolved into as of today.
        I think that many Americans share a fear that I have that
    an emergency piece of legislation that was meant for economic
    stability has now morphed into essentially a $700 billion
    revolving bailout fund for the administration. I am concerned
    that the previous administration crossed a line in investing in
    GM and Chrysler, something that this administration continued
    to do. I fear that this administration crossed another
    statutory line in favoring members of the UAW in those
    reorganizations over similarly situated creditors and secured
    creditors.
        I feel like the administration crossed another statutory
    line in giving Fiat 20 percent of Chrysler, up to 35 percent--a
    company that I understand was not owed one dime--and they will
    receive this if they produce a car capable of making 40 miles
    per gallon. I am having trouble somehow rectifying this with
    the charge of taxpayer protection and of financial stability.
        I continue to be concerned about the issue of taxpayer
    protection, although certainly not all of it. I need not tell
    you that we have the first trillion-dollar deficit in our
    Nation's history. I need not tell you that recently OMB had to
    change their debt outlook. They missed their figure by about a
    third. They were looking at $7 trillion of debt instead of $9
    trillion.
        Part of this is TARP. Recently, the CBO came out with their
    report that they expect $40 billion more of loss in the
    Chrysler and GM programs. So that continues to be a concern,
    and I look forward to hearing from you, Mr. Secretary,
    particularly after the President announced last night that your
    administration has saved us from the brink of economic ruin--
    and I paraphrase. I don't have the quote in front of me.
        If that is true, why do we continue to need this TARP
    statute that many of us believe is no longer about financial
    stability? So I look forward to hearing your testimony.
        I yield back, Madam Chair.
        Chair Warren. Thank you, Congressman.
        Mr. Silvers.

               STATEMENT OF DAMON SILVERS, DEPUTY CHAIR,
                     CONGRESSIONAL OVERSIGHT PANEL

        Mr. Silvers. Yes, thank you, Madam Chair.
        Good afternoon, Mr. Secretary. Like my colleagues, I very
    much appreciate your presence here with us today. As was noted,
    this is the second time you have appeared, and we are grateful.
        I also wish to express my appreciation to you for the
    support you have given to Herb Allison as head of the Office of
    Financial Stability. Mr. Allison is an outstanding business
    leader, and it has been a pleasure to work with him these last
    few months.
        I believe Congress and the American people should ask
    really three basic questions about the Troubled Asset Relief
    Program. First, is TARP and the associated programs of the Fed
    and the FDIC preventing and/or calming acute crises in our
    financial markets? Secondly, is TARP leading to the private
    financial system once again playing its appropriate role as
    provider of capital to the real economy? And finally, is the
    public, as provider of funds to the financial system through
    TARP and these other programs, receiving fair terms?
        When you last appeared before us, I focused on the question
    of whether the public was being treated fairly. I remain deeply
    concerned about whether inappropriate subsidies are being
    extended in areas such as transactions with weak banks such as
    Citigroup, credit enhancements in the PPIP, and the repurchases
    of warrants from banks that have repaid Capital Purchase Plan
    investments.
        However, I believe that you and Mr. Allison have made
    progress in these areas around the issue of fairness, as
    evidenced, for example, by the price Treasury ultimately
    received for Goldman Sach's warrants, a price very close to
    this panel's estimate of their value in our July report.
        Today, I hope to discuss with you the question of whether
    TARP strategy is leading to the revival of the private credit
    system with particular reference to the continued weakness of
    three of our four largest banks, a subject addressed in some
    detail in this panel's August report. This question is tied to
    the important question of what Treasury, the Fed, and the FDIC
    strategy is for ultimately withdrawing public support for the
    financial system. And you addressed these matters in some
    detail in your written testimony today.
        Looming over this conversation is the precedent of Japan's
    lost decade, in which you are quite expert, and the current
    talk of W- and L-shaped recoveries. Despite optimistic
    statements of the kind that we saw from the regional Fed banks
    yesterday, the numbers that we see tell a tale of rising
    unemployment, of rising foreclosures, a growing crisis in
    commercial real estate, which has been addressed in this
    panel's earlier reports, rising small bank failures, and
    falling bank business lending.
        Together, this data warns of the danger of a vicious circle
    that could overwhelm both the stimulus and Treasury's apparent
    strategy of hoping the banks earn themselves back to health. I
    believe the Treasury, the Federal Reserve, and the FDIC, under
    this administration and the prior administration, can take
    credit for calming the acute crisis of last fall, another
    matter you address in your written remarks.
        I also believe that the decision to infuse capital rather
    than to buy troubled assets that Secretary Paulson made, and
    which I think you have largely carried forward, was the correct
    decision and has borne substantial fruit for our country and
    the world. I also believe the stimulus package is a critical
    part of the recovery plan that is intertwined with these
    matters, although it is not really proper subject for today.
        The question now is, are we addressing the fundamental
    financial weakness in our banking system? Or are we hoping that
    if we close our eyes, it will go away?
        I look forward to your thoughts on these matters. Thank
    you.
        [The prepared statement of Mr. Silvers follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chair Warren. Thank you.
        Commissioner Atkins.

                   STATEMENT OF PAUL ATKINS, MEMBER,
                     CONGRESSIONAL OVERSIGHT PANEL

        Mr. Atkins. Thank you, Madam Chairman.
        Good afternoon, and I join my colleagues on the panel in
    welcoming Secretary Geithner, and it is a privilege to be here
    today. And thank you very much for appearing today in what I
    understand is the meeting for the third quarter of 2009.
        It is a privilege for me to be here today to serve the
    American taxpayers on this panel in our oversight role over the
    Troubled Asset Relief Program. In the context of the current
    Federal budget and the talk today in Washington of programs
    costing trillions of dollars, TARP's size of $700 billion seems
    almost quaint.
        Since we are in the building named after him, I am reminded
    of Senator Everett Dirksen's famous tongue-in-cheek line about
    the Federal Government's spending habits. ``A billion here and
    a billion there, and pretty soon you are talking about real
    money.''
        TARP is large. And frankly, the slush fund aspect of it
    invites potential problems. Thus, Congress has set up this
    robust oversight framework with a special inspector general, a
    separate audit under GAAP and GAAS, not Government accounting
    rules, and of course, this panel.
        I take this accountability and transparency mandate from
    Congress very seriously. Press reports indicate that you and
    Mr. Barofsky have resolved any ambiguities in his reporting
    relationship to the Treasury in favor of independence. I think
    that is an appropriate result of the unusual nature of the
    program.
        I also understand that the information-sharing relationship
    between Treasury and this panel has been problematic in the
    past and perhaps can be improved. There is now a special
    liaison, I understand, in Treasury assigned to work with this
    panel. So I look forward very much to working with you all and
    experiencing for myself the state of interaction.
        We are approaching the 1-year anniversary of the passage of
    the EESA, as Representative Hensarling said, that set up TARP.
    Since its passage, Treasury has created an alphabet soup of
    programs under TARP, and that does not include the other
    programs of the Fed, the FDIC, and other banking agencies.
        Several questions arise. How effective has each of these
    programs been? Have some been more effective than others? Has
    TARP achieved its original purpose and mission? What are the
    costs, not just in terms of out-of-pocket expenses, but also of
    the real, if latent, costs such as moral hazard?
        The authority under EESA expires on the 31st of this year.
    The Treasury Secretary, of course, has the authority under EESA
    to extend TARP until October of 2010. Will TARP be extended?
    Has that decision already been made? If not, what criteria will
    be used in making the decision? What are the conditions under
    which you might make the decision?
        The statute provides only vague guidelines. For example, it
    requires a quantification of the expected cost to taxpayers of
    an extension, and that cost cannot be quantified without a
    rigorous economic analysis, including direct and indirect
    costs. And that includes the moral hazard that I mentioned.
        So, with that, Madam Chairman, I yield my time, and I look
    forward to the testimony of the Secretary.
        [The prepared statement of Mr. Atkins follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chair Warren. Thank you, Commissioner Atkins.
        Now, Superintendent of Banking for the State of New York,
    Superintendent Neiman.

     STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT
                                 PANEL

        Mr. Neiman. Thank you, Madam Chair.
        Mr. Secretary, thank you very much for being here today.
    And I will keep my comments brief as well to maximize the time
    for questions.
        First, I do want to acknowledge Treasury's responsiveness
    to the panel's inquiries on behalf of taxpayers. When we first
    met with you 5 months ago, you pledged that you and your staff
    would be available to us and maintain open lines of
    communication. From our public hearings over the summer with
    Ron Bloom and Herb Allison, to the many conference calls and
    face-to-face meetings we have had with other members of your
    staff, I thank you for your level of cooperation and for
    supporting our oversight work.
        You also responded to nearly 30 questions that I put to you
    directly from members of the public, some of which were very
    tough and candid. These questions and responses are now posted
    on the Internet to serve as a resource for all concerned
    Americans.
        Second, although financial stability has not yet been fully
    achieved, you deserve credit for making substantial progress.
    We are by no means out of the crisis, but there are positive
    signs, such as decreasing credit spreads and the revival in
    areas of the securitization markets.
        Nevertheless, our gains in financial stability remain
    fragile. Addressing the millions of homeowners facing
    foreclosures is key to breaking the downward cycle and
    achieving sustainable results. The Home Affordable Modification
    Program is integral to this effort, but initial results have
    been mixed.
        I intend to explore several of these issues with you during
    my time here, including issues around delays in servicer
    participation and uneven servicer performance, borrower
    frustrations around eligibility standards and access to account
    information, and the need to complement the HAM program with
    additional initiatives to address foreclosures stemming from
    job loss and recession.
        Finally, with Congress returning this week, it is widely
    expected that your regulatory reform proposals will experience
    significant movement and debate. I will be asking about your
    vision for developing a regulatory architecture that best
    supports consumer protection and long-term financial stability.
        I look forward to your testimony.
        [The prepared statement of Mr. Neiman follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chair Warren. Thank you, Commissioner.
        Mr. Secretary, we received your remarks this morning. Thank
    you very much. They will, of course, be part of the record.
        So that we will have more time to be able to question you
    and hear your answers, I am going to ask that you keep your
    oral remarks to five minutes. Of course, anything else that you
    wish may be entered in the record.
        Mr. Secretary.

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

        Secretary Geithner. It is a pleasure to be here again. Let
    me just begin by saying this is my 16th time testifying before
    the Congress of the United States and the oversight panel this
    year. Glad to hear you still want to see more of me. Happy to
    come and try to do it again, and I think this is an important
    part of the process.
        And Congress, when it acted last fall, didn't just give the
    executive branch unprecedented authority to try to resolve this
    crisis, it created an unprecedented level of oversight not just
    with the Congressional Oversight Panel, but with the
    establishment of the SIGTARP and, of course, giving the GAO its
    usual mandate for oversight.
        We take that process very seriously. We have examined
    carefully everything you have written, recommendations you have
    made, adopted many, many of the recommendations of the
    oversight panels, and I think they have made our programs more
    effective than they would have been. So I welcome that role and
    compliment you for the thoughtfulness and seriousness of your
    approach.
        I also want to thank you particularly, Mr. Silvers, for
    what you said about Herb Allison and just say that I have the
    privilege of working with just exceptionally talented,
    dedicated people at the Treasury. It is a good thing about our
    country that people are willing to come, work in Government at
    a time of crisis, and bring great expertise and talent. You
    want to have working for the American people, people with the
    greatest sophistication about financial markets and these
    things, so that they can drive a hard bargain in the interest
    of the taxpayer. And I think that the team at Treasury is doing
    a good job of that.
        Just a few initial remarks. Last September, of course, we
    faced the risk of catastrophic financial failure and the risk
    of a great depression. And today, I believe because of
    comprehensive policy actions put in place since then, we are
    back from the edge of the abyss. The consensus among private
    forecasters now is that the U.S. economy is now growing again.
    The financial system is showing very important signs of repair.
    Cost of credit has fallen dramatically not just for homeowners,
    for households, but for businesses as well.
        Because of these signs of progress, we are now in a
    position to start to adjust our strategy, moving from crisis
    response, from the emergency response to recovery, from
    rescuing the economy to repairing and rebuilding the financial
    system, to repairing and rebuilding the foundations for future
    growth. And as we enter this new phase, we have to begin
    winding down in programs that are no longer necessary and that,
    by design, are less needed, less important as the economy
    recovers.
        Let me just highlight a few things that underscore this
    transition we are in the midst of now. Earlier this year, we
    put a reserve fund in the President's budget, recognizing the
    possibility we might need additional $750 billion of authority
    to fix this problem. Today, we believe that money is unlikely
    to be necessary. We have removed it from the budget
    projections. We are borrowing less already than we expected to
    resolve this crisis.
        Later this month, the Treasury's money market guarantee
    fund will be allowed to expire, earning more than $1 billion in
    income, no cost to the taxpayer. The FDIC's program to
    guarantee senior debt, which has generated more than $9 billion
    in fees, has seen very, very dramatic declines in usage. The
    suite of facilities the Federal Reserve put in place to provide
    liquidity to markets, to provide broad support to credit
    markets, have seen dramatic reduction in usage.
        So we are now at a point where reliance on these facilities
    is down 80 to 90 percent from their peak, from swap lines for
    foreign central banks to a backstop for the commercial paper
    market, et cetera. The details are in my testimony.
        When I took this job, the Government had outstanding
    commitments in terms of capital to the U.S. banking system in
    the range of $240 billion. Today, we have $180 billion
    outstanding. So that is a dramatic reduction in the scale of
    our exposure, direct exposure in terms of capital to the
    financial system, due in large part, to the success of our
    efforts to force a greater level of disclosure and to make it
    more possible for private capital to come in and recapitalize
    this damaged financial system.
        The dividends paid on those investments and the warrants
    you have received now total $12 billion. And for the 23 banks
    that have fully repaid, Treasury has earned an annualized
    average return of roughly 17 percent.
        Now, all these steps underscore our commitment to unwind
    these extraordinary programs put in place during the crisis as
    soon as conditions permit. At the same time, though, we have to
    recognize that we have to continue to reinforce this process of
    repair and recovery until it is truly self-sustaining, led by
    private demand. The classic errors of policy during crises once
    that governments not only act too late with insufficient force,
    but they put on the brakes too early. We are not going to
    repeat those mistakes because to do so would increase the
    ultimate cost of this crisis not just to taxpayers directly,
    but in terms of the damage it causes to the fabric of the
    American economy.
        Now, millions of Americans are still suffering deeply from
    this crisis, still facing probably the most challenging
    economic and financial environment we have seen in generations.
    Unemployment is still unacceptably high. The mortgage market,
    outside what is supported directly by Fannie, Freddie, FHA, is
    still significantly impaired. Commercial real estate financing
    remains strained. Small businesses, in part because they are
    more dependent on banks, have less options to access credit in
    this difficult environment. And of course, among----
        Chair Warren. Mr. Secretary, we are at 5 minutes. So----
        Secretary Geithner. I am winding it up. And foreclosures
    are rising significantly because of the high rate of
    unemployment we are seeing as a country.
        Because of those challenges, we need to make it clear that
    we are going to keep those programs that are necessary for
    recovery as long as conditions require. There is a lot of
    concern that as things have improved, that we are going to let
    the market go back to the conditions it enjoyed before the
    crisis, and we are not going to let that happen.
        We have seen dramatic restructuring in our financial system
    already. If you look at the list of the top 20 firms in the
    country 2 years ago, a substantial fraction of those firms no
    longer exist today as independent entities. The financial
    system is going to be smaller, but it is going to be stronger,
    and that is a fundamentally healthy, desirable thing for our
    economy. But for that to happen, the Congress of the United
    States need to come join with us in passing comprehensive
    financial reforms so we have much stronger rules of the road
    and constraints in place to prevent this from ever happening
    again.
        I look forward to your questions.
        [The prepared statement of Secretary Geithner follows:]

        [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Chair Warren. Thank you, Mr. Secretary.
        Secretary Geithner. I was only about 6 minutes.
        Chair Warren. And 19 seconds.
        [Laughter.]
        Chair Warren. A year ago, Secretary Paulson told us that we
    were in a financial crisis because of toxic assets on the
    banks' books. In fact, he came to Congress and explained that
    Congress needed to give $700 billion to the Treasury Department
    to deploy in order to remove those toxic assets, and we have
    had a year to get rid of them.
        Does Treasury know how many toxic assets remain on the
    books of the banks? Do you have a dollar figure for that?
        Secretary Geithner. Given the stress tests we put the U.S.
    banking system through, you now have an unprecedented level of
    disclosure for the 20 largest banks in the country about
    exactly what loans and securities they hold, with a pretty
    careful estimate of the potential losses on those exposures you
    might face in a worse economic environment. That gives a much
    better picture today.
        But the critical thing to recognize is and the reason we
    care about these toxic assets and their losses is because they
    require capital. And we came into this crisis with a banking
    system that did not have enough capital to cover losses in a
    deep recession, and that is what helped produce the worst
    financial crisis in generations.
        Because we put the system through this incredibly exacting
    set of stress tests with much more disclosure, the banking
    system today has much more capital in it, and that makes it
    much less likely that the financial system is going to be a
    source of headwinds, a constraint on future recovery.
        Chair Warren. I understand----
        Secretary Geithner. Now, if they had not been able to raise
    private capital, if they were still left with too little
    capital against potential losses, then we would be facing a
    much greater challenge. But the problems posed by those assets
    are substantially addressed by the dramatic improvement in
    capitalization of the financial system.
        Chair Warren. So let me see if I can just pin this down,
    though. You say for the 20 largest banks for which we have
    stress tests, you believe we have a sense of how much is left
    in the way of toxic assets on their books?
        Secretary Geithner. Absolutely.
        Chair Warren. Do we have a dollar figure for that?
        Secretary Geithner. Well, again, I would be happy to----
        Chair Warren. For the 20?
        Secretary Geithner [continuing]. Summarize for you or have
    the Fed summarize for you. They put out a lot of detail on
    exactly very detailed composition of exposures by those banks.
        Chair Warren. And for all the banks for which a stress test
    was not run, do we have any sense of how much remains in the
    way of toxic assets in the banks, in these books?
        Secretary Geithner. My compliments to you for highlighting
    this question. We are a country of 9,000 banks, not just 20
    banks.
        Chair Warren. Yes. That is right, although fewer every day.
        Secretary Geithner. Fewer every day, but that is sort of a
    necessary process of repair and restructuring that we are going
    through. But many of those banks came into this crisis with
    more capital than the big banks held, but many of them also had
    more concentrated exposure to commercial real estate, other
    real estate investments. So there are challenges ahead for the
    financial system as a whole.
        Now, we decided not to put the rest of the U.S. banking
    system through the kind of exacting stress tests that we
    applied to the biggest institutions. A lot of complicated
    judgments went into that, and so you are right to point out
    that we are left today with somewhat less disclosure of that.
        But the supervisors of the country are spending a lot of
    care and attention looking at those risks in those
    institutions, helping them work through that. But you are right
    to highlight this is a significant challenge ahead.
        Chair Warren. Okay. So when----
        Secretary Geithner. But it is important to recognize that
    those remaining 9,000 banks together account for between a
    quarter and a third of the U.S. banking system.
        Chair Warren. All right.
        Secretary Geithner. Or a much smaller share. So we are
    probably likely as a country to be able to manage and withstand
    those remaining pressures, and we can do so with much greater
    confidence because of the actions we took to stabilize the rest
    of the system.
        Chair Warren. So when the Washington Post this morning
    summarized yesterday's Federal Reserve report, the Beige Book,
    they summarized it by saying the banking sector remains a mess.
    Would you take issue with that characterization?
        Secretary Geithner. I guess I would say it this way. I
    think the U.S. financial system today is in substantially
    stronger shape than it was 3 months ago, 6 months ago, 9 months
    ago, and on the eve of this recession. There is, again, more
    capital, greater recognition of losses, and we are in a better
    position to get through this.
        But remember, this is just the first quarter. We are just
    starting to see signs of growth. It is very early, and we did a
    lot of damage to the financial system of this country, and it
    is going to take a while to get through this. And it is going
    to take longer to do it because we are going to do it right.
        So I would not want anyone to be left with the impression
    that we are not still facing really substantial challenges
    throughout the U.S. financial system. And where there has been
    improvement, it has been dramatic, much more than I would have
    expected at this stage in the crisis. But a lot of that has
    come through the direct effects of policies--to put capital in
    banks and to provide support for the markets that were most
    damaged.
        We do not have a mortgage market today except for that
    directly supported by the Government, and that sort of
    underscores the basic fact that we have got a lot of challenges
    ahead.
        Chair Warren. Okay. Thank you, Mr. Secretary.
        Congressman Hensarling.
        Mr. Hensarling. Thank you, Madam Chair.
        Mr. Secretary, under the EESA statute, how do you define
    financial institution?
        Secretary Geithner. I was looking forward to this
    discussion, and I think I understand where you are going. The
    statute was written, as you implied in your opening statement,
    really quite broadly. And as you also said in your opening
    statement, my predecessor--the previous administration--made a
    judgment not just that it was in the economic interest of the
    country to provide support for the automobile industry, but
    that it was legal and appropriate to do so using the EESA
    legislation.
        Mr. Hensarling. And you concurred in that opinion?
        Secretary Geithner. And obviously, we would not have spent
    a penny of taxpayers' money using that authority if we did not
    concur in both those judgments.
        Mr. Hensarling. If you concur, then clearly, you believe
    that Chrysler and GM are financial institutions. Is AT&T a
    financial institution?
        Secretary Geithner. If you look at the plain facts of what
    I inherited in terms of judgments like this, I understand why
    it might be hard to explain why an automobile industry is a
    financial institution. But again, that was the judgment made by
    my predecessor and under----
        Mr. Hensarling. I understand that, Mr. Secretary. But you
    voluntarily chose to continue the practice----
        Secretary Geithner. Only----
        Mr. Hensarling [continuing]. And I am still trying to
    figure out your legal interpretation of the EESA statute. And
    so, clearly, I assume you don't believe you are breaking the
    law. So you believe that Chrysler and GM meet the statutory
    definition of a financial institution. So we have a number of--
    --
        Secretary Geithner. As the law was written.
        Mr. Hensarling. Well, of course. So, again, the question
    is, is AT&T a financial institution? Is American Airlines a
    financial institution? Is Walmart----
        Secretary Geithner. No and no.
        Mr. Hensarling. No and no.
        Secretary Geithner. But Congressman, I think it is
    important to recognize two important things. One is that I did
    not design this statute. I was not in office when it was
    written into legislation.
        Mr. Hensarling. I assure you I didn't either, Mr.
    Secretary.
        Secretary Geithner. But it did what was necessary for the
    country, which is to give the executive branch of the United
    States broad authority and discretion to fix this. And the fact
    that we waited so long to make that authority available made
    this crisis more damaging and worse.
        One important fact--In a crisis of this severity, a
    recession this deep, we have things that we would never want to
    do.
        Mr. Hensarling. Mr. Secretary, I understand that. As you
    well know, Congress had--the House had legislation that dealt
    specifically with the automotive industry. So there were at
    least some members of the House who clearly did not believe
    that Chrysler and GM came within that statutory limit.
        So what I hear is Chrysler and GM, yes, are financial
    institutions. AT&T, American Airlines--happen to be two Dallas-
    based companies--are not. So, is there any additional clarity--
    and I believe one of the things the markets continue to demand
    is clarity of public policy.
        Who will you bail out? Who will you not bail out? And so, I
    again ask you for some clarity on what is a financial
    institution?
        Secretary Geithner. Congressman, I don't think we are going
    to be able to take this further.
        Mr. Hensarling. Okay.
        Secretary Geithner. But I want to revise slightly how I
    responded to your question about AT&T and American Airlines. I
    would say it slightly differently, which is I do not believe
    you can read the statute today to justify action beyond the
    scope of the actions we have taken in this context.
        Mr. Hensarling. Well, I personally----
        Secretary Geithner. Now, things might change in that case.
        Mr. Hensarling [continuing]. Hope, Mr. Secretary, that the
    legal interpretation of a statute doesn't change with the
    passage of a handful of months.
        In the remaining time I have on this question----
        Secretary Geithner. No. That is clarity in the sense that
    we have to pass two tests to use this authority. One test is
    does the law give us the authority to act? And the other is,
    are those actions necessary and prudent in the interest of
    fixing this mess, restoring financial stability?
        It is not the simple test of what----
        Mr. Hensarling. Mr. Secretary, forgive me. Unfortunately,
    our time is constrained, and I may have time for one more
    question here. Leaving the question of the definition of a
    financial institution, there are roughly, I don't know, six,
    eight major programs under TARP now. And I am curious, having
    been serving on this panel for almost a year, I think with
    perhaps one exception, I am having trouble discovering where
    Treasury has identified any particular metrics of success
    beyond financial stability----
        Secretary Geithner. I would be happy to help you on that.
        Mr. Hensarling. Well, I look at the Capital Purchase
    Program. Its purpose is to stabilize the financial system, the
    automotive program, prevent significant disruption of the
    automobile industry that could pose systemic risk to the
    financial market stability----
        Chair Warren. I am going to have to stop--I am going to
    have to stop you there, Congressman. I am going to be
    disciplined about time.
        Secretary Geithner. But could I say I think that----
        Chair Warren. I will give you 20 seconds.
        Secretary Geithner. Okay. You can look at each of these
    programs, and this is the great virtue of the markets, and you
    can see almost day-to-day evidence of whether they are having
    an effect in lowering borrowing costs, improving confidence in
    the stability of the system.
        For example, you can look at the cost of borrowing for
    businesses and families, the cost of mortgages, confidence in
    financial institutions, price advantage. Those things are a
    good day-to-day indication of where these programs are having
    effect, and you can see a big impact----
        Chair Warren. Thank you, Mr. Secretary.
        Mr. Silvers.
        Mr. Silvers. Yes, Mr. Secretary, I want to pick up, I
    think, on the threads of your testimony, which I think flow
    very nicely into the real issues facing the country right now,
    which do include the question of the unemployment rate.
        A couple of weeks ago, in two parallel stories in the
    Washington Post, the following statement was made on the front
    page. The wounded U.S. economy, and I quote, ``has shown signs
    of improvement in recent weeks, but many economists are
    accentuating the negative, bracing for headwinds''--you
    mentioned headwinds--``that could cause the recovery to be
    weak. Huge swaths of the financial system have been damaged,
    which could lock consumers and businesses out of loans for
    years to come.''
        Next to that story was another story about Asia. You are
    smiling. You probably read the same papers I do. And that story
    says the Asian recovery was--I won't quote it, but to the
    effect of the Asian recovery has been far more robust than
    ours, and a key factor in that has been the relative strength
    of Asian banks.
        Now, do you agree with this characterization that appeared
    in The Post of the circumstances we find ourselves in?
        Secretary Geithner. There are several important points to
    start with. In the best of times, we grow roughly an average of
    2.5 percent a year. For an emerging market economy, in China,
    India, Brazil, Mexico----
        Mr. Silvers. Mr. Secretary, I think Japan was the--Japan
    was the comparative here.
        Secretary Geithner. Yes, I doubt that you are going to see
    a more robust recovery there than here. But I would say, again,
    you need to think about that relative comparison. I think that
    we are in a position where it is much less likely today that
    weakness in the banking system or in the rest of the financial
    sector proves to be a substantial constraint on the pace of
    recovery here.
        The dominant constraint on pace of recovery here is the
    basic reality that as a country we borrow too much, save too
    little, live within our means, and the process of correcting
    that pattern of behavior is going to necessarily produce a
    slower recovery for the United States.
        Mr. Silvers. Mr. Secretary, why is it, in your view, that
    the weakness of the banking system, and particularly the three
    out of the four largest banks, whom you are, I believe,
    correctly not allowing to repay TARP money--in light of your
    comments about the fact that, to take an example, the mortgage
    market is a creature right now of your efforts, and secondly,
    as you noted in your written testimony that business lending--
    not just small business lending, but business lending by banks
    is going the wrong direction quite seriously, why is that not a
    problem?
        Secretary Geithner. I think it is a problem, and I said we
    are in a much better position today than we have been and we
    could have expected to be. So it is much less likely today that
    it will be a constraint.
        But just a few observations. Bank lending, as you point out
    correctly, is declining, but it's declining much, much less
    than it has in past recessions and much less than the decline
    in economic activity in part because we have been, again,
    relatively effective in restoring some confidence and
    stability. The decline in bank lending has been more than
    offset by the increase in borrowing in the securities markets.
        So, overall, what we are seeing is a reduction in demand
    for credit. Again, as people improve their balance sheets, save
    more, spend less, there is less evidence of a substantial
    contraction in the supply of credit. But it is still early.
    Largely because of the forceful actions we took and the support
    we will continue to provide, it would not be appropriate or
    prudent for us to infer from that sign of progress that we are
    at the point where we can wind it back completely.
        Mr. Silvers. Just to come back to that one sentence in your
    written testimony, which I found by far the most interesting--
    no offense to the rest of it--is that is it really a good thing
    that essentially credit provision has moved away from the
    banking system to the extent that it is going on, particularly
    with respect to the fact that most employers, most creators of
    jobs, can't access the bond market?
        Secretary Geithner. It is an interesting question. But
    remember, our banking system took on too much leverage.
        Mr. Silvers. Unquestionably.
        Secretary Geithner. So, inevitably, the banking system
    leverage was going to have to come down. That was a necessary.
    The consequence is that you are going to see less growth in
    lending by banks. I think it is important to the future
    stability of our system, that there are alternatives to banks
    in the capital markets that actually work.
        So if there is weakness in banks, there is an offsetting
    source of strength, and vice versa. So part of the reform
    process we are all committed to is not just to make sure there
    is stronger capital in banks, much stronger shock absorbers in
    banks, much better capacity to absorb future risk, but that the
    securities markets, asset backed and others, have a stronger,
    more robust framework because that will make our system more
    stable in the future.
        Mr. Silvers. My time has expired. I will come back to you
    next round.
        Chair Warren. Thank you.
        Commissioner Atkins.
        Mr. Atkins. Thank you, Madam Chair.
        I wanted to start out by looking ahead, I guess, if we
    could. Because as I said before, the authority under EESA
    expires at the end of this year, and you have the authority to
    certify that it should be extended with appropriate
    justifications under the statute. And no one would be happier
    than I to see it meet its end.
        But according to the statute, your certification should
    include a justification why the extension is necessary to
    assist American families and stabilize financial markets, as
    well as the expected cost to the taxpayers for such an
    extension. So I guess my first question is, have you made a
    decision yet one way or the other?
        Secretary Geithner. No. I have not yet decided. We are
    going to think through that carefully.
        Mr. Atkins. Well, and that is what I wanted to explore
    because this is rather for a statute--no offense to the
    congressman here who didn't vote for it anyway--but it is very
    squishy, and it is really questionable to me what it means, for
    example, to stabilize financial markets. You just said that you
    have been relatively effective in restoring stability.
        So when you determine that the markets have been
    stabilized, are you comparing it to a year ago, in which case
    they are much more stable; 3 years ago, in which case they
    might not be? What kind of markets would you look at--U.S.
    stock market, commodities, international markets, the dollar? I
    mean, I think all of these things need to be carefully looked
    at, but I don't know if you have started this process.
        Secretary Geithner. I completely agree with you, and I
    think you listed a range of important factors. You want to look
    at, again, what is the capacity of the financial system to live
    on its own now without these exceptional supports? How likely
    is it that you are going to see enough repair and strength in
    the securities markets, not just in the banking system, for us
    to withdraw that support?
        I think that some of these programs realistically are going
    to take a longer time for them to work. For example, the
    expected path of foreclosures in the United States is going to
    last for a long time. So it is very, very unlikely that we are
    going to be at the point in the next few months to have said
    that the housing market is at a point where we can be confident
    that we can withdraw these exceptional actions.
        There are parts of the credit markets in asset-backed
    securities where there has been very substantial improvement,
    but a lot of that has come on the strength of the basic
    backstop we have provided. So we want to look at a broad set of
    measures of basic health in the system, and we want to make
    sure that people are confident that we are going to get the
    economy on a strong foundation before we withdraw it.
        Because as I said, again, I think the classic mistake
    people make is that they declare victory too soon. They put on
    the brakes too early. They withdraw support and then the system
    has to go back and build more insurance against the risk of a
    bad outcome, which could intensify the recession or reignite--
    --
        Mr. Atkins. Well, but contrary wise, too, you can also make
    a mistake of leaving the crutch on too long, and the patient
    then gets too dependent on that.
        Secretary Geithner. You are exactly right.
        Mr. Atkins. And we are talking about moral hazard, which I
    hope that as you all do your cost analysis here, you have to
    take that into account because I think that is a huge usually
    undermining factor of our financial system.
        Secretary Geithner. I completely agree with you, and I
    think you said it exactly right. But let me just point out one
    thing that is helpful on that front.
        Largely, these programs are designed so that they will be
    expensive when things normalize. And that is why you have seen
    use of these programs dramatically decline as conditions have
    improved. This helps mitigate the risk that people rely on
    these programs too long.
        Mr. Atkins. But I think you could argue that, for example,
    the warrants are, even now, relatively under priced. I mean,
    sure, the taxpayer is making a nominal profit. But query
    whether or not in relationship to the humongous risk that the
    taxpayer took a year ago, is that recoupment commensurate with
    the risk that was taken?
        Secretary Geithner. I like the way you frame it. I think we
    need to look at two things in measuring the effectiveness of
    these programs. One is what was the direct measured benefit to
    the taxpayer in terms of the return on the risk we took? But
    that is not sufficient.
        The best way to measure the effect of these programs is to
    take a broader view of what you did to help get this economy
    out of crisis into recovery. And that is a harder thing to
    measure.
        Mr. Atkins. Right.
        Secretary Geithner. But still, if you look at almost any
    measure of cost of credit--confidence in the financial system,
    availability of credit, concern about risk--all of those
    measures are dramatically lower, and that is the fair way to
    capture the return on these investments, not just the 18
    percent return on average we have gotten on our investments and
    warrants.
        Mr. Atkins. So that argues in a way for ending the
    program----
        Secretary Geithner. No, I don't think it does because,
    again, I think the art of this--and there is no science to it.
    The art in this is if you commit to do enough and you make that
    credible to people, you are not going to be behind always
    chasing a crisis, and you are more likely to solve it at lower
    cost.
        If you prematurely pull it back, you are going to live with
    too much risk. It is going to be more expensive in the future.
    That is the basic central design of effective strategy in
    financial crises.
        Chair Warren. Thank you, Mr. Secretary.
        Superintendent Neiman.
        Mr. Neiman. Thank you.
        Mr. Secretary, the new Treasury servicer report on mortgage
    modifications represents, I think, an important step in data
    access and accountability. But it also confirms in the report
    just issued this week that there are wide disparities among the
    rates of modifications. Some firms, as you well know, have not
    started any trial modifications, while many more firms have
    started rates in the low single digits.
        You held an important meeting with servicers on July 28th
    to discuss these very issues. I was also encouraged yesterday
    to hear Assistant Secretary Barr's House testimony with respect
    to new commitments that have been made in key areas such as the
    speed of implementation, data collection, and borrower
    outreach.
        Now the report that was just issued shows that there are
    trial modifications started, and the number is around 360,000.
    These would indicate only about 12 percent of estimated
    eligible borrowers. Secretary Barr indicated that servicers
    have committed to increase that number to a total of around
    500,000 trial modifications by November 1.
        Based on that, your benchmark of reaching 3 million to 4
    million homeowners who are at risk, are you satisfied we are on
    that track? Have we set realistic expectations? And even more
    importantly, is the real risk and challenge in converting those
    trial mods to permanent sustainable modification?
        Secretary Geithner. You describe the facts and the progress
    and the challenges absolutely right. It is not enough just to
    have sent out $1.8 million of solicitations to participate in
    modification, which is the numbers we have approached now, or
    almost that level. It is not enough that you have close to
    500,000 offers extended, it is not enough that you have more
    than 350,000 households now benefiting from substantial
    reductions in mortgage interest rates. You need to make sure
    these modifications are going to work over time, and we are
    very focused on making sure this program reaches as many
    eligible homeowners as possible.
        Two important points. It is very helpful to put in the
    public domain every month detailed numbers that allow the
    American people to see the number of people these banks are
    reaching. And I am quite confident that will produce much, much
    faster modifications much more quickly because institutions do
    not want to live with the consequences of being so far behind
    the curve of what is possible in helping families get through
    this exceptional set of problems.
        We also want to make sure that we are going in after the
    fact and looking at whether people are denying eligible
    homeowners access to modification. So there is a so-called
    second look program. That is a softer form of what it actually
    is, which is a program of auditing to make sure that they are
    not denying eligible homeowners the chance to participate.
        So I think this is going to reach a substantial share of
    people that are eligible. But it is important to recognize that
    this was just one part of a set of actions we took to help
    stabilize the housing market, to bring down mortgage interest
    rates. And those actions when viewed in total, have helped
    bring down mortgage interest rates to very low levels, and it
    helped bring a measure of stability to housing markets, housing
    prices, housing activity faster than many economists had
    forecasted.
        And it is that broader measure that should be the ultimate
    test of this program.
        Mr. Neiman. I think I would be interested in your comments
    about the continued obstacles to effective and increasing the
    effectiveness of servicer participation. I will do that in a
    follow-up QFR.
        But what we are hearing in talking to servicers is there is
    still concern about outreach, getting documentation back from
    servicers. Some creative approaches that I have heard from
    servicers are, because people are not responding, to going out
    physically and visit. I would like your thoughts on other
    creative approaches.
        I have suggested in the past possibly even letters from
    yourself or ideally, the President of the United States to
    assure that people are opening their mail, realizing that this
    is not just another creditor notification, but a real response
    and involvement from the Government.
        Secretary Geithner. We welcome those suggestions. And of
    course, we are very pragmatic. We want this to work, and we
    will take and act on any reasonable suggestion.
        I think you are right to point out for this to work, people
    need to take some initiative, to ensure they get help. But,
    350,000 families today have seen a dramatic reduction in the
    cost of carrying their mortgage, there is more money in their
    hands at a time when they are going through an enormous
    challenge.
        Chair Warren. That is our time.
        Mr. Neiman. In my 10 seconds I have left, I just want to--
    we will be holding a hearing on September 24th in Philadelphia
    on this very issue, and we would look for support from your
    office to assure that we have representatives from the Treasury
    and Fannie Mae and Freddie to go over those very programs that
    you reference, particularly the second look.
        Chair Warren. A good use of your extra 20 seconds there.
        Mr. Neiman. Thank you.
        Chair Warren. Thank you, Superintendent Neiman.
        So I would like to return, Secretary Geithner, to a point
    you raised, and that is that the stress tests are effectively
    the tool by which we have measured the strength of the 20
    largest financial institutions, and that is what gives you
    confidence both that we understand the risk of exposure on the
    toxic assets and the overall projections on how stable these
    institutions are.
        But the worst-case scenario under the stress test for 2009
    projected average unemployment for the year at 8.9 percent. As
    you know, the current unemployment rate is 9.7 percent. The
    average for the year has now reached 8.9 percent. So the panel
    has recommended that under those circumstances, the stress
    tests be repeated for these financial institutions. Does
    Treasury plan to do that?
        Secretary Geithner. It is important to start determining
    whether this was a conservative enough stress test, and the
    measure of the forecast for growth in employment that was
    framed as part of that scenario is not significant. The most
    important thing to observe was the loss rates that were assumed
    in the worst-case scenario. And if you look carefully, as you
    have done, at what the Fed designed and produced, the loss
    rates that were assumed in the stress scenario were worse than
    peak losses experienced by this country in the Great
    Depression.
        So they assumed roughly loss rates in the stress test could
    rise as much as 9 percent. We are now more in the 2 to 3
    percent range. Over the last quarter, losses are running well
    below that level and in earnings are running substantially
    above the assumptions. So----
        Chair Warren. Mr. Secretary, I am sorry. Let me stop there
    because you are the one who put out what the appropriate
    details were in the stress test.
        Secretary Geithner. Actually, the Fed designed it, as you
    would expect, and they are the ones who put it out.
        Chair Warren. That is right. The Fed designed. But you are
    the one who advanced it and said we could rely on it. And one
    of the featured elements was unemployment, and we all know that
    unemployment relates very closely to the level of foreclosures,
    which, in turn, relates very closely to the value of the toxic
    asset, the declining value.
        Secretary Geithner. But the framing constraint in the
    stress test was the loss estimates that were applied and the
    earning estimates that were constrained. Those did not relate
    to the unemployment forecast. So, again, what matters----
        Chair Warren. Is not what you advertise?
        Secretary Geithner. No, we put in the public domain for
    everyone to see and assess for themselves what the loss rates
    were.
        Chair Warren. You know, Mr. Secretary----
        Secretary Geithner. So people can judge on their own.
        Chair Warren [continuing]. That raises the question. We
    would like to be able to rerun the stress tests, and I
    understood from conversations with you that we would have
    enough information about how the stress test is composed that
    reasonable people could sit down, build in other assumptions,
    and see how the stress test would come out with these major
    banks. And in fact, we don't have the risk model, and we don't
    have the data inputs----
        Secretary Geithner. Again, I would be happy to----
        Chair Warren [continuing]. That make it necessary to repeat
    them.
        Secretary Geithner. I would be happy to remedy that. And I
    would be happy to spend as much time as you would like going
    through this.
        Chair Warren. That is--I will take yes for an answer.
        Secretary Geithner. But I need to slightly change the way
    you framed it. These were an important improvement in the
    market's capacity to assess risk in these institutions. And on
    the strength of that improved capacity, you have seen a
    substantial amount of private capital come into the U.S.
    financial system.
        Now, we never said it was sufficient. There is no certainty
    in life. Things could change going forward. But I think we have
    a basis for people to independently assess whether these
    assumptions were rigorous enough and whether they need to be
    revisited.
        Chair Warren. And so, let me ask the other half of that,
    and that is we also asked the question about expanding the
    stress test to mid-size banks and perhaps even smaller banks in
    a somewhat modified form. Is Treasury willing to do that?
        Secretary Geithner. Well, as I said, we said publicly--and
    I am not going to change this view--at the time of the stress
    test results that were not going to conduct a similar exercise,
    bank by bank, across the 9,000 other banks in the country. But
    what supervisors have done----
        Chair Warren. How about the next 100?
        Secretary Geithner. Well, again, let me explain what the
    supervisors have done because this is their job. What they have
    done is apply a carefully structured framework through the
    supervisory process to the rest of those institutions. Then, we
    can have a better sense for making judgments about the rest of
    the strength of the remaining system. But it is not realistic
    or feasible for the Fed and the supervisors to conduct the
    level of detailed assessment required for this to be credible
    for a banking system that has 9,000 additional banks.
        Chair Warren. Thank you, Mr. Secretary.
        Congressman Hensarling.
        Mr. Hensarling. Thank you, Madam Chair.
        Mr. Secretary, I don't want to replow the old ground on
    financial institutions. I agree with you we have probably made
    about as much headway between ourselves as we are going to make
    on that.
        Secretary Geithner. We could try.
        Mr. Hensarling. But I certainly think it is reasonable for
    anyone to conclude that there is a fair amount of subjective
    power that is assumed by Treasury in deciding who will receive
    bailout or economic recovery funds under EESA. I do want to
    start replowing some old ground in my earlier line of
    questioning because I am concerned the American people need to
    know what are we getting for our $700 billion today?
        And again, having been on this panel, I started reading
    from Treasury's Website on the purpose of these programs. And
    frankly, with the exception of the Foreclosure Mitigation
    Program, where you offer the goal of assisting 7 million to 9
    million homeowners--I think today we stand at roughly 350,000,
    if my records are correct--I can find no demonstrable metric of
    success by the administration. So can you enlighten me as you--
    --
        Secretary Geithner. Again, I would be happy to walk you
    through, like I do a Murton testimony and the substantial
    reports the Fed and the Financial Stability Oversight Board
    have provided. But I just don't think what you are saying is
    fair.
        With these programs, you can see directly not just how much
    money we are spending, where we are spending it, but what is
    actually happening to borrowing conditions in those markets
    because--I will give you an example. One of the most important
    things we did with the Fed was this program called the Term
    Asset-Backed Lending Facility, which was designed to provide a
    backstop of support to the lending markets critical for small
    businesses, for auto finance, for student loan finance, for
    credit card receivables, et cetera.
        And you can see in detail how much issuance has come with
    this program, what has happened to the cost of issuance, how
    much has been directly funded by these programs rather than
    indirectly supported by it. In the banking----
        Mr. Hensarling. Mr. Secretary, what you are asking us to
    do, though, is draw, in essence, the cause and effect. Happy to
    look at the statistics in the economy, but again, coming from
    an oversight panel here, it is hard not to conclude that
    essentially you have the subjective power to invest $700
    billion on a revolving basis on any institution you deem is a
    financial institution and that any program will be judged as a
    success if you deem it a success after the fact. All I am
    saying is that----
        Secretary Geithner. No, I don't agree with that.
        Mr. Hensarling [continuing]. I can't find----
        Secretary Geithner. And I would never claim that. I would
    just remind you of two things. The Congress of the United
    States designed the authority Treasury was provided. We are
    using that authority----
        Mr. Hensarling. And Mr. Secretary, you have the ability
    under the programs that you design to say here are the metrics
    for success.
        Secretary Geithner. Right. However, the great virtue of
    this program is that you can see not just the return we are
    getting when people repay, the price we are getting relative to
    the market, but you can see directly, program by program, what
    is happening to credit conditions, which is the ultimate test
    of what we are trying to do.
        In fact, you can do better than that----
        Mr. Hensarling. Well, Mr. Secretary, let me ask, if what is
    happening in the credit markets is the ultimate test--and
    again, we can question cause and effect--clearly, the LIBOR-OIS
    spreads 1 month were incredible back in the crisis in September
    of '08. By the time your administration took office, they went
    down from 300 basis points to 20 basis points.
        Now since your administration has come into power,
    apparently they are down to 10 basis points. So, certainly,
    that is an improvement. But it sounds like a lot of this
    happened on the previous watch.
        Secretary Geithner. Well, hold on.
        Mr. Hensarling. And again, I don't know what the cause and
    effect relationship is.
        Secretary Geithner. Cause and effect is difficult in
    economics and finance, but it is much easier and more clear in
    these programs than in these markets where we try to measure
    the effects of economic policy. And you are right to point out
    that the actions taken by my predecessor, which, of course, I
    was part of, did have an important effect in breaking the panic
    in the fall of 2008. But it is also true that almost any
    measure of financial health for this country, in January of
    this year, was still in signs of emergency. And----
        Mr. Hensarling. But Mr. Secretary, again, the question is
    what is the taxpayer getting for their money today? We can
    debate what purpose it served a year ago.
        Secretary Geithner. I will tell you what the taxpayer is
    getting. You have a financial system that is more stable.
    Credit is more available. People can borrow at much lower cost.
    And the taxpayer of the United States can observe the returns
    in the investments we have made in the banking system in terms
    of actual billions of dollars.
        Mr. Hensarling. Well----
        Secretary Geithner. There is no better measure than the
    return of these programs, and I would be happy to----
        Mr. Hensarling. How about an additional 2.5 million jobs
    lost, the highest unemployment rate that we have seen in 25
    years, mortgage delinquencies and foreclosures up? Mr.
    Secretary, it is a mixed report card at best.
        I see my time is up.
        Secretary Geithner. But Congressman, no one is going to----
        Chair Warren. Our time is up.
        Secretary Geithner. I was very clear in my statement. It is
    only now we are seeing positive growth for the first time.
    Unemployment is still very high and could stay high for some
    period of time. We are not close to being through this. But on
    the clearest, direct measures of the program we were tasked
    with executing, we have made more progress than I think people
    reasonably expected. Not enough yet, though. And we are going
    to keep at it.
        Chair Warren. Thank you, Mr. Secretary.
        Mr. Silvers.
        Mr. Silvers. Mr. Secretary, I want to take this up from a
    sort of different angle. I think one of your achievements--
    clearly yours, not the prior administration's--in the stress
    tests was to put an end to the fiction that all banks were
    equally healthy. I understand why that fiction was indulged
    originally. I don't think it was done out of bad faith or for
    anything other than the best of reasons, but it was important
    to put an end to it.
        However, I think many of the characterizations of success
    that you have just indulged in with my colleague are due to
    unwinding funds that were given to strong banks. And when they
    paid them back, they paid them back at a profit, and that was
    never where the risk was embedded anyway. I mean, there was
    always some risk, but the big risks were not there.
        So I want to turn to weak banks. And I hope you will
    indulge me in what may seem a little peculiar sort of
    questioning. Can you explain to me and to the listening public
    what is a ``zombie bank,'' and why is it so dangerous?
        Secretary Geithner. I don't ever use that term myself
    because I don't think it helps anything. I think the risk in
    any financial crisis is if you have a banking system that
    doesn't have enough capital, they will have to reduce lending.
    And viable businesses or families will not have access to
    credit, and therefore, they will be forced to shrink or go out
    of business or delay a college education for their children.
        That is why the health of the banking system matters, and
    that is why it is a good use of policy and financial resources
    to try to make sure you bring capital in. So you are not living
    with a set of institutions that are too weak to lend.
        Mr. Silvers. Too weak to lend. Is it fair to say that those
    people who like the term ``zombie bank'' mean by it the walking
    dead, meaning an institution that is not in receivership or
    insolvent, but is too weak to lend? Is that a fair
    characterization of that term?
        Secretary Geithner. I think I just said it. Again, I
    don't----
        Mr. Silvers. You know----
        Secretary Geithner. I am being less graphic than you, but I
    think you have got the right concept.
        Mr. Silvers. Okay.
        Secretary Geithner. Where are you going with this?
        Mr. Silvers. Well, I thought I got to ask the questions.
        [Laughter.]
        Mr. Silvers. Where I am going with this is whether or not
    you like graphic terms, graphic terms sometimes have the
    ability to clarify things that otherwise seem very mysterious.
    Whether or not you like graphic terms and whether you use the
    terms I just used or the terms you used, in your view, is
    Citigroup such an institution today?
        Secretary Geithner. No.
        Mr. Silvers. Why?
        Secretary Geithner. This won't satisfy you, Mr. Silvers. I
    can't talk in this context, and I will never talk in this
    context about the detailed outlook for individual institutions
    in our country, no matter which they are in this case. So I
    want to return to where I began, which is that the best test of
    whether these programs are working is whether you are seeing
    private investors in this country and around the world willing
    to come in and provide capital to those institutions, to
    provide funding for them.
        And one of the great virtues of the stress test was it gave
    them a chance to make that choice, and they basically voted
    with----
        Mr. Silvers. Mr. Secretary, how can you be sure? And I
    recognize the cause and effect issues that you mentioned
    earlier are real in these areas. But how can you be certain
    that what you didn't really do in the stress test was signal
    that you, the Treasury Department and the Fed, were not going
    to further hammer the capital structures of these banks and
    that they could be invested in because there was an implicit
    guarantee behind them, even though they remain at their core
    not really functioning institutions or, to use the graphic
    term, zombies?
        Secretary Geithner. Again, you are right to point out that
    we did a range of other things besides just making it possible
    for private capital to come into these banks. Part of that
    included the set of guarantees, liquidity facilities that the
    Government and the Fed provided together. Those were important
    and necessary and have been helpful in restoring confidence.
        But again, I think, by any measure, you have the system
    that we have today, which is in a smaller, but stronger
    capacity to support the economy going forward. That is the
    ultimate test of what we are trying to do.
        Mr. Silvers. Mr. Secretary, I am going to refrain because I
    think folks at Citigroup may feel I am picking on them. I was
    going to ask you about Bank of America and Wells in order. I am
    not going to spend the time doing that because you are not
    going to answer, and I appreciate why you feel it would be
    inappropriate for you to be specific with respect to particular
    institutions.
        Those three institutions are a macroeconomic problem,
    right? And they go directly to jobs. As this panel has gone
    through the country talking to people who are trying to create
    jobs, we hear over and over again that in various ways--whether
    it is agriculture or with commercial real estate or large firms
    or small firms--we hear over and over again that the system is
    weak, and the large institutions are not stepping up.
        Chair Warren. Mr. Silvers, that is our time.
        Mr. Silvers. I am done.
        Chair Warren. Commissioner Atkins.
        Mr. Atkins. Thank you, Madam Chairman.
        I wanted to go back to the statute a bit because one of the
    other provisions of the statute regarding TARP is that the
    Government Accountability Office is to do an audit, and I
    think, significantly, it is not under Government accounting
    rules, but under GAAP and GAAS, which will be, I think,
    interesting. So they are going to have to get to some of these
    issues if they are going to do a balance sheet and a P&L
    statement and all that sort of thing. They are going to have to
    look at cost and what not.
        So I guess my question is, first of all, has this been
    scoped out yet as far as the audit goes? Where does that stand?
        Secretary Geithner. I don't think I can do adequate justice
    to that today, but I would be happy to get back to you in
    writing with exactly where that process stands.
        Mr. Atkins. Okay.
        Secretary Geithner. I know that we have a response to put
    out in terms of a broad financial statement of the Government,
    which will include some estimates of those measures. But in
    terms of the GAO process itself, I don't know the details of
    that right now.
        Mr. Atkins. Okay. So as far as when it might be public?
        Secretary Geithner. I just can't tell you, but I would be
    happy to have them get back to you or we can do it ourselves
    directly.
        Mr. Atkins. Okay. Another issue, and you brought this up in
    your opening statement, is regulatory changes that you all have
    proposed to Congress. And I guess having come from an
    independent agency, I value that sort of tradition of
    independence from the administration.
        And earlier this year, there were reports in the press
    about I guess I would term it as maybe excessive pressure from
    the administration, especially the Treasury Secretary, with
    respect to your colleagues on the President's working group and
    elsewhere. So I wonder where that stands as far as you are
    concerned, as far as dealing with others as independent
    agencies that are not part of the administration, of course,
    and how you view your interaction?
        Secretary Geithner. I actually believe that, just by what
    you read, that there is a lot of agreement across those
    agencies on the core things we try to achieve. And I think on
    the broad structure--that is, the framework for protection of
    derivatives and on resolution authority for dealing with failed
    institutions in the future. This is evident by the core
    provisions on capital you heard us outline a couple of weeks
    ago. There is a broad base of agreement across those agencies
    on the core parts of reforms.
        There are some areas, though, where they would prefer that
    we leave the existing authority they have. And so, the focus of
    their concerns have been on taking authority from them and
    putting it in a different place, most conspicuously in the area
    of consumer credit protection, where I think by any measure, it
    failed.
        And our belief is to put in place a stronger system. You
    had to put in a single entity, both the authority to write
    rules and to enforce them. But that is, I think, where there is
    still disagreement across these institutions. And you would
    expect to have disagreement. There is nothing surprising in
    that.
        Mr. Atkins. Well, people have vested interests and
    everything else. But I guess we can--we will have another
    chance to talk about these particulars later on.
        With respect to the programs under TARP, do you have any
    expectation of expanding the list that you have now?
        Secretary Geithner. Again, what we tried to do earlier in
    the year was to lay out a broad framework to recapitalize the
    system and to provide targeted support for the credit markets
    that are necessary for recovery. And as many of you said, we
    put out a broad framework of programs in that area. It was our
    best judgment at the time.
        We want to have some capacity to modify and adapt those
    over time to make sure they are doing what they need to do and
    to wind them down and redeploy capital as necessary.
        At this stage, we don't have any specific plans to
    substantially expand the scope of the entities into areas we
    would target, but it is possible that----
        Mr. Atkins. Well, if----
        Secretary Geithner [continuing]. Looking at the damage in
    the system remaining, we might make that judgment. But we would
    want to set a very high bar for doing so because we want to be
    able to demonstrate an appropriate use of taxpayers' money,
    measured by returns we are going to get.
        Mr. Atkins. Well, speaking of which, one of the issues I
    think that is still in question is whether or not TARP is a
    revolving type of arrangement, whether the monies that are paid
    back are then available for the future? Do you have any legal
    analysis of this?
        Secretary Geithner. Yes, in previous testimony, we provided
    extensive responses to the Congress on how that authority was
    drafted. And I actually think there is broad acceptance in the
    Congress by the architects of that legislation that the process
    works as follows:
        If a dollar comes back--and, of course, as I said, billions
    of dollars have come back to the Treasury from the financial
    system--that goes directly to the general fund to reduce debt
    outstanding.
        Chair Warren. I am sorry----
        Secretary Geithner. But the law is designed----
        Chair Warren. Mr. Secretary.
        Secretary Geithner [continuing]. To still give us the
    authority to use that if we think we need to do it to help
    protect the system.
        Mr. Atkins. Well, I guess I would like to see the legal
    analysis.
        Secretary Geithner. Happy to do that.
        Chair Warren. Thank you.
        Superintendent Neiman.
        Mr. Neiman. Thank you.
        A major aspect of regulatory reform is the streamlining and
    modernizing of our regulatory structure. Your proposal includes
    merger of the OCC and the OTS, and I support that change. Some,
    including our Nation's largest banks, however, propose going
    further to create a single monolithic Federal bank regulator,
    which raises, in my opinion, serious concerns. Creating a
    single regulator as a means of improving financial regulation
    relies, in my opinion, on the faulty assumption that regulatory
    consolidation leads to a stronger and safer banking system in
    itself.
        In my opinion, the opposite is true. Such a proposal would
    increase the fragility of the system by increasing industry
    consolidation, by eliminating needed checks and balances, and
    subordinating the interests of the consumer to the business
    goals of a handful of mega banks. In my experience, multiple
    regulators yield better results for consumers and for financial
    stability, much like multiple judges are used in the Olympics
    to arrive at the right score.
        What are your concerns about the proposals to create a
    single monolithic regulator? And how important was it for you,
    in drafting your proposals, that the FDIC and the Federal
    Reserve retain examination authority to better inform their
    respective missions of deposit insurance and lender of last
    resort?
        Secretary Geithner. Thank you for raising that question,
    and I think you have framed the choices thoughtfully.
        One of the most important things we decided that we had to
    do was to eliminate the weakest parts of supervision in the
    system and eliminate the opportunity for people to take
    advantage of weaker supervision by flipping their charter or
    shifting risk to those parts of the system.
        One of the principal examples of that, unfortunately, was
    in the difference between the standards applied to thrifts and
    applied to banks. So we thought eliminating that was a
    necessary, essential condition for reform.
        If you look beyond that, there is less evidence that having
    two entities responsible for different types of State-chartered
    banks alongside a single Federal supervisor, would create
    really meaningful risk of arbitrage in the future. In fact, if
    you look at the standards applied by our bank supervisors, in
    general, they were more evenly applied and more effectively
    enforced.
        So we don't think it was necessary or desirable to try to
    force all of that into one new entity, partly because of the
    concerns about concentrated power and partly because we are
    asking the Congress to do a lot in a very short period of time.
    And a guiding principle that affected our choices was to say we
    want to make sure they are focusing on the things that are
    essential to do. It should not be on those that might be
    desirable to some people, but would not offer a benefit that
    was proportionate to the political difficulty or the practical
    difficulty of doing it. Further dramatic consolidation of bank
    supervisors we didn't think met that test.
        But of course, we are open to suggestions, and if there is
    the desire in the Congress and the interest in going further in
    terms of consolidation, we would, of course, be happy to
    support that. But I think you have to balance the factors that
    you laid out in your comments.
        Mr. Neiman. And you would share my concerns over the role
    of the checks and balances that I often use as an example, the
    role of the independent FDIC in raising issues of the
    importance of the leverage ratio--is it an important check and
    balance in the regulatory scheme?
        Secretary Geithner. I think you are right that there is
    virtue in multiple pairs of eyes looking at these institutions.
    But on the other hand, competition across regulators creates
    risk, too. We didn't get that balance right. We thought we had
    to propose how to fix the weakest parts of the problem, the
    greatest opportunities for evasion of arbitrage. But of course,
    we will be open to suggestions about how to get that balanced
    better.
        Mr. Neiman. Thank you.
        I yield my time. I am going to pick up regulatory reform in
    the next round.
        Chair Warren. Thank you.
        Mr. Neiman. Assuming we are going to have a next round?
        Chair Warren. I hope so.
        Mr. Neiman. Right.
        Chair Warren. Thank you.
        So AIG has received about $70 billion in TARP money, about
    $100 billion in loans from the Fed. Do you know where the money
    went?
        Secretary Geithner. Absolutely. I am happy to provide any
    detail that you would like to see on this. The money helped
    prevent default and helped to stabilize a very damaged
    institution that would have posed, we think, very substantial
    risk of systemic failure----
        Chair Warren. Well, maybe I should ask it with more
    specificity. Was Treasury aware of who the counterparties were
    that were going to receive payment in full on the credit
    default swaps when $170 billion went to AIG?
        Secretary Geithner. They have hundreds, maybe thousands of
    counterparties. I am sure that the supervisor is involved and
    the Fed would have access to detailed information.
        Chair Warren. So they knew who was going to get the money,
    the counterparties?
        Secretary Geithner. Well, I think they could have known.
    Now, whether they knew at the time, I am not sure they knew.
    But of course, they would have access to that.
        Chair Warren. Do you know if they spoke with any of the
    counterparties?
        Secretary Geithner. In what sense?
        Chair Warren. In any sense.
        Secretary Geithner. About what?
        Chair Warren. About the fact that they were----
        Secretary Geithner. Remember, many of the counterparties
    are institutions that are supervised all the time. So I suspect
    they were talking at all times.
        Chair Warren. They were holding pieces of paper from an
    entity that was clearly insolvent, and the question of the
    Government infusion of dollars there was going to make the
    difference between whether they got paid off in full or they
    ended up with nothing.
        Secretary Geithner. Right. But maybe I should let you
    finish. So where are you going? What would you like to know?
        Chair Warren. I just want to know.
        Secretary Geithner. What?
        Chair Warren. Did Treasury have conversations with any of
    the counterparties----
        Secretary Geithner. And I don't----
        Chair Warren [continuing]. Who ultimately profited from
    this infusion of cash?
        Secretary Geithner. I was not Secretary of the Treasury at
    that time of the initial investment, but I was the president of
    the New York Fed. And of course, I was central to the basic
    judgment we reached together to prevent default by AIG. I am
    sure that was the right judgment at the time. You are right to
    point out that that action did help make the system more
    salient and did have broad benefits to the stability of the
    system, including the counterparties.
        But more importantly, the reason why AIG posed systemic
    risk was not principally because of the direct exposure of
    those institutions, those counterparties. The biggest risk to
    the system was in the damage it would have done to both retail
    people who bought insurance protection, saving protections from
    AIG and systemic risk. So it was a more complicated picture----
        Chair Warren. So let me then follow up. I understand your
    point and the distinction you are drawing. We just finished our
    auto report, and Chrysler and GM, insolvent company. AIG,
    insolvent company. Chrysler and GM have bondholders, unsecured
    creditors, secured creditors, and employees, and they all took
    big haircuts. AIG had people holding credit default swaps, and
    they took no haircut at all.
        Secretary Geithner. AIG had----
        Chair Warren. They ended up with money from the Federal
    Government 100 cents on the dollar, and I am trying to
    understand why those two are different from each other.
        Secretary Geithner. This is the tragic failure about the
    regime we came in with because we did not have the legal
    capacity to manage the orderly unwinding of a large, complex
    financial institution. We do have the capability to unwind
    small banks and thrifts, but did not have it for an entity like
    AIG. And that forced us to do things that we would not ever
    want to do.
        But as an----
        Chair Warren. Are you saying that you couldn't find a way
    to pay less than 100 cents on the dollar there, but since you
    could find a way in the auto industry, you did?
        Secretary Geithner. Of course not. I mean, we would have
    done that immediately if we could have done that. But in
    deciding that a default by AIG would have presented the risk of
    further systemic damage to a very fragile system, we made the
    judgment to prevent this. By preventing default, we helped AIG
    meet its financial obligations not just to people that bought
    insurance protection, savings protection products, but to its
    broad counterparties. That is the consequence of that decision.
    And if you think through----
        Chair Warren. But not the same for the auto industry?
        Secretary Geithner. Completely different situation, you are
    right. But if you think through what happens when you let
    default happen, consider the trauma caused by Lehman's default
    to get a sense of the damage that can result. And then, again,
    that is why we moved so quickly to propose broad resolution
    authority to give us better tools for dealing with these in the
    future.
        Chair Warren. And I appreciate that. Let me ask one quick
    question, if I can slip it in before we run out of time, and
    that is a year ago, we were worried about banks that were too
    big to fail. But in the last year, big banks have gotten
    bigger, while 84 small banks have been allowed to fail. And
    some experts are estimating that 1,000 smaller and mid-size
    banks could disappear before this crisis is over.
        I just want to know, are we more at risk on the question of
    concentration than we were a year ago?
        Secretary Geithner. You know, I don't think so. But it
    depends largely on what Congress ultimately decides to do in
    terms of financial reform. The only way to deal effectively
    with the moral hazard risk created by the consequences of this
    crisis and by the too big to fail problem is to make sure there
    is a set of reforms in place that make us better able to
    withstand the failure of large institutions so we don't have to
    intervene to put taxpayers' money at risk to prevent them from
    or to provide for more orderly resolution.
        And that requires resolution authority, stronger capital,
    better derivatives protection, a whole set of cushions and
    safeguards to limit the risk of contagion spreading, and that
    is why, again, reform is so important. And that is the only
    way, I think, to make the system safer----
        Chair Warren. Thank you, Mr. Secretary.
        Secretary Geithner [continuing]. From future failure.
        Chair Warren. Thank you.
        Congressman Hensarling.
        Mr. Hensarling. Thank you, Madam Chair.
        Mr. Secretary, I continue to be concerned over the
    precedent being set for the taxpayer and our financial markets
    with the Chrysler and GM intervention. You are well acquainted
    with the facts since it was your team that helped put together
    the reorganizations. And GM bondholders were asked to swap $27
    billion in debt for initially 10 percent common equity. The UAW
    agreed to swap $20 billion for 17.5 percent of common equity,
    $9 billion in preferred stock, and the UAW, through their VEBA,
    ended up with 55 percent of Chrysler. They ended up with 17.5
    percent of GM.
        When you talk about the success of your administration in
    stabilizing the financial markets, I am just very concerned
    about how when senior secured bondholders are treated less
    equally than those who are unsecured and equally unsecured
    creditors, still we see the UAW receives preferential
    treatment. Warren Buffett, perhaps the most famous investor in
    America, has said, ``If priorities don't mean anything, that is
    going to disrupt lending practices. Abandoning that principle
    would have a whole lot of consequences.''
        The Wall Street Journal, some would say I guess the
    investor journal, wrote an op-ed back in May. ``By stepping
    over the bright line between the rule of law and the arbitrary
    behavior of men, President Obama may have created 1,000 new
    failing businesses. That is businesses that might have received
    financing before, but now will not since lenders face the
    potential of future Government confiscation.''
        Investors Business Daily. ``This undermines the reason for
    buying a bond at all. Accepting the lower returns in exchange
    for legal guarantees, that, in turn, will reduce the
    willingness to buy bonds.''
        Now I must admit it is somewhat anecdotal, but when I speak
    to investors, I believe there are hundreds of billions of
    dollars that are sitting on the sidelines because investors are
    concerned about what the Government policy is, concerned about
    the potential to confiscate their investment. I have small
    businesses, at least throughout the 5th District of Texas, that
    tell me they can't get lines of credit. So I know there was a
    huge stabilization by the time your administration took office.
    I am not sure I have seen a lot of improvement since then.
        And I simply question what precedent have you set, and what
    is the impact for financial stability in treating the UAW so
    differently than senior creditors of those who are equal?
        Secretary Geithner. Panel members had a lot of time to look
    at this carefully. Your report provides a pretty thoughtful
    discussion of the choices we faced in that context and the
    outcomes. I know you have had testimony on this before. And I
    understand the concerns you are raising. As you said, many
    people have raised those concerns for some time.
        But this was a process overseen by a bankruptcy judge. That
    bankruptcy judge looked at the terms of the agreement and
    reached a judgment about whether that was acceptable. That is a
    great strength of our system, and that really is the ultimate
    test----
        Mr. Hensarling. Well, it was a plan, though. It was a plan
    financed with taxpayer money under TARP.
        Secretary Geithner. Yes, it was, and I think you know--you
    don't agree with it. You opposed this action, which I
    understand, for thoughtful, principled reasons. But we took
    this action because we thought it was important and effective
    to do in the face of this crisis and recession. And I think
    this will be judged as an exceptionally well-designed, dramatic
    restructuring.
        The scale of the restructuring designed and approved
    through this process went well beyond what is contemplated by
    many people in this Congress, including on your side of the
    aisle----
        Mr. Hensarling. Well, and in the time I have remaining, Mr.
    Secretary--I am sorry. We have limited time here.
        But another aspect of this that I simply don't understand
    is how Fiat is brought into the deal--20 percent, I believe, of
    Chrysler. Up to 35 percent if they produce cars that receive 40
    miles per the gallon. I know the President and the
    administration is passionate about their global warming agenda.
    We can have that debate. But under EESA, I am having trouble
    finding out why Fiat, who wasn't owed a dime, who I don't
    believe put a dime into the deal, what having them use TARP
    money--U.S. taxpayer money to produce these cars sometime in
    the future has anything to do with taxpayer protection or
    financial stability. I just don't get it.
        Secretary Geithner. Congressman, again, I don't think I am
    going to talk you out of your concern, and I respect why you
    have opposed what we did and what my predecessor did in the
    automobile industry. But we made a set of judgments that we
    thought was in the interest of the country, and I think we are
    much better off today because those companies were not forced
    to go into liquidation. And I think that was a prudent,
    sensible use of the authority that Congress gave us.
        Chair Warren. Thank you, Mr. Secretary.
        Mr. Silvers.
        Mr. Silvers. Mr. Secretary, my colleague seems to be under
    the misapprehension that you are a bankruptcy judge. Are you a
    bankruptcy judge?
        Secretary Geithner. Last time you asked me if I was an
    investment banker, and I said no then. But I have also never
    been a bankruptcy judge. You are right.
        Mr. Silvers. Although I did recall after our previous
    exchange about your resume that the term ``banker'' does seem
    to apply to the Federal Reserve Bank of New York when last I--
    --
        Secretary Geithner. That would be stretching the
    definition.
        Mr. Silvers. It is not a bank?
        [Laughter.]
        Mr. Silvers. Anyway, but you are not a bankruptcy judge,
    are you?
        Secretary Geithner. No.
        Mr. Silvers. And the role of the TARP in respect to any
    bankrupt entity is as a provider of debtor-in-possession
    financing, is it not?
        Secretary Geithner. In that context, yes.
        Mr. Silvers. And then a provider of such financing makes
    strategic decisions about how they want their money to be used,
    right? Mr. Buffett would, if he was a debtor-in-possession
    financer. I assume the Treasury would as well.
        Secretary Geithner. We did. And we did so on what we
    thought were the best financial terms for the taxpayer and for
    the country. But again, those judgments were overseen by a
    bankruptcy judge.
        Mr. Silvers. All right. Let me move on. You have made some
    references in your testimony to regulatory reform. One
    criticism of a program, which I personally believe is a pretty
    serious and positive program that the administration has put
    out, is the criticism that it doesn't really deal with what
    structurally went wrong in our banking system and financial
    markets in that it doesn't deal with the combination and risks
    associated with investment banking, in particular proprietary
    trading combined with commercial banking and insured deposits.
        I am particularly concerned about this problem because of,
    to go back to my prior questioning, essentially the zombie bank
    problem. If you have very weak financial institutions,
    particularly ones that think they have an explicit or implicit
    guarantee, they have not been resolved. They are really very
    weak. The temptation to gamble is almost irresistible.
        Can you comment on your views as to how this problem should
    be addressed and will be addressed under the administration's
    program?
        Secretary Geithner. Again, most important is to make sure
    the institutions hold more capital and a higher quality form of
    capital against the risks they might face in the future. You
    know, capital is sort of like a rainy day fund. It is the
    resources they can draw on if things don't turn out so well.
        It is probably the most important protection we have
    against the risk of future crisis. While constraining future
    leverage and risk taking, it will make the system better able
    to withstand the stress that might come if one institution
    faces the risk of failure, and that is the centerpiece of
    reform. We laid out, last week, a comprehensive set of
    proposals for reforming capital standards.
        The banks would be required to hold more capital against
    the risk they take in whatever form. It is probably the most
    important thing we can do against the risk you are framing. Now
    if we had adopted a strategy, Mr. Silvers, of just simply
    guaranteeing the liabilities of the financial system, not
    forcing recapitalization, not conditioning our assistance on
    the kind of pretty dramatic restructuring, then I would be more
    worried about the risks that you refer to. But that is not the
    strategy that we adopted.
        Mr. Silvers. Is it your view, that allowing an aggressive
    proprietary trading desk as part of a holding company that has
    significant insured deposits is a wise form of public policy?
        Secretary Geithner. I think it is very important to make
    sure that institutions will hold a lot of capital against all
    the risks they take. Now if you look at this crisis--and of
    course, we will be looking at this for a long time--most of the
    losses that were material, for both the weak and strong
    institutions, did not come from those activities. They came
    overwhelmingly from what I think you can fairly describe as
    classic extensions of credit, particularly where they are
    backed by real estate.
        And those basic choices, which are classic banking types of
    decisions--is the sort of the tragedy of this crisis----
        Mr. Silvers. Well, Mr. Secretary, I am not so sure about
    that. I think if you look at where the big holes came in the
    major commercial banks, they were substantially--I give one
    example. I had this very interesting conversation with one
    large bank where they said, you know, ``We didn't make any
    subprime loans.'' And so, I said, ``Well, how did you get into
    so much trouble?'' And they said, ``We had something called a
    capital markets desk.''
        And they were in the business of repackaging other people's
    subprime loans and putting them in off balance sheet vehicles.
    Do you disagree with that as a characterization of how we got
    here?
        Secretary Geithner. Maybe we are agreeing rather than
    disagreeing.
        Mr. Silvers. Right.
        Secretary Geithner. And what you may call trading, I would
    call the extension of credit. And these were extensions of
    credit. But in any case, the basic point I agree with is that--
    --
        Mr. Silvers. Underwriting----
        Secretary Geithner [continuing]. You want to make sure that
    if firms aren't forced to hold capital against the risky things
    they do, we will be vulnerable again to a repetition of this
    crisis, and we are not going to let that happen.
        Chair Warren. Thank you, Mr. Secretary.
        Mr. Silvers. Thank you.
        Chair Warren. Commissioner Atkins.
        Mr. Atkins. Mr. Secretary, I am glad that you have a lot of
    confidence in capital, but I think even the capital levels that
    you are talking about would not have prevented what went on
    last year. And so, some of it is a bit of flying by the seat of
    the pants, I think, ultimately.
        Secretary Geithner. Well, no, I think you are right. It is
    necessary, but not sufficient.
        Mr. Atkins. Exactly.
        Secretary Geithner. But it is central.
        Mr. Atkins. And one of the central things is really
    predictability because as you were talking with the chair about
    AIG, I think if you go back last year--and this is a debate for
    another time. But when you track Fannie Mae, Freddie Mac, and
    then what happened there, and then allowing Lehman to go, but
    then turning around with AIG, I think that freezes up the
    marketplace more because people were uncertain than anything
    else.
        But I wanted to get to PPIP, the Public-Private Investment
    Program, to find out where that stands. There are two basic
    programs under it--the legacy securities program, of course,
    and then the loan program. The legacy securities program is the
    only one that is really up and going, and I was wondering where
    that stands, how many purchases have been made? Do you view
    these as viable in this grand, great scheme of instruments that
    are out there?
        Secretary Geithner. I think at the end of this month, you
    are going to see the asset managers we selected to raise
    capital to help launch these programs close on their capital
    raising. All indications are that they are raising a lot of
    capital.
        Soon after that happens, they will be in the market buying
    securities. But when the details of the program were announced,
    there was a pretty significant effect on prices in those
    securities since the prospect of financing capital coming in
    did help restore and improve liquidity in those markets. So you
    are seeing some positive effect.
        As I have said many times before in public, we expect there
    to be less demand for these facilities than was initially
    expected in part because liquidity has improved and partly
    because more capital came into the financial system. But I
    still think that they are valuable enough, worth going ahead
    with. And if we think there is a high return to the taxpayer
    and to the overall economy from expanding them, we will be open
    to expanding them further.
        Mr. Atkins. Okay. Well, I think we can probably save that
    for another day. I know your time is short. I wanted to give
    Mr. Neiman an opportunity as well.
        Chair Warren. Thank you, Commissioner Atkins.
        Secretary Geithner. Madam Chair, could I just very briefly?
        Chair Warren. Of course.
        Secretary Geithner. You are very right to say that if you
    look back over the arc of this crisis, one thing that was very
    damaging to confidence was the lack of clarity about whether
    the Government was going to step in and decisively stabilize
    the system.
        But just to be fair to my predecessors and the other people
    who have been living with this crisis, that was----
        Mr. Atkins. We were there, too.
        Secretary Geithner. Largely, that was the consequence of
    the fact that until Congress acted to pass the EESA, the
    Government of the United States did not have the authority to
    step in and provide capital, and it was only with that
    authority and the subsequent actions by the Congress and the
    President to make sure the additional resources were available
    that we really had the broad set of tools that were necessary
    to help stabilize this financial crisis.
        But I think you are right to say that clarity about
    strategy, matched by resources in authority, is central to
    confidence. And this crisis was more damaging, more prolonged
    in part because of the absence of authority and the constraints
    that were put on the capacity of the Government to escalate,
    and that is something we have to fix.
        We can't put the country in the position where we enter the
    next crisis with a limited set of tools. That is why resolution
    authority is so important.
        Mr. Atkins. Well, then I will take back my time a little
    bit just to respond. I am not sure that your proposals will do
    that, actually, and I think they also raise other very
    dangerous issues, especially with this systemic type of
    regulator and what not.
        So we can debate the authority issue from last year another
    time. But anyway, I will yield my time.
        Secretary Geithner. Again, we welcome a chance to talk
    about this in more detail, and we don't claim to have a
    monopoly of wisdom on these things. We expect our proposals to
    be refined and improved as they work their way through the
    Congress. But it is important to recognize that we can't let
    the system or the country go back to where things were with
    that much risk and so few tools to help contain the damage.
        Chair Warren. Mr. Secretary, we are down to our last
    questions.
        Superintendent Neiman.
        Mr. Neiman. Thank you.
        Mr. Secretary, I applaud the administration for taking the
    long overdue steps to make consumer protection a national
    priority with respect to financial services. I share this
    commitment to consumer protection and have seen firsthand the
    impact of predatory lending. And I strongly agree with your
    proposal to empower States and consumer protection,
    particularly by guaranteeing that any Federal standards would
    serve as a floor and not a ceiling.
        Yet I have some serious reservations about another aspect
    of the proposal. First, I have a fundamental concern about any
    agency restructuring that separates consumer protection from
    safety and soundness. These are not conflicting missions. Isn't
    one of the primary lessons learned from the current crisis that
    a loan that is unfair to consumers when made is not a safe and
    sound loan? Doesn't that lesson argue for greater integration
    of the two disciplines into a holistic approach to supervision
    rather than further segregation?
        So I would also question whether it is absolutely necessary
    to create a new and separate agency with all the start-up and
    unintended consequences it would bring or whether expanding the
    mission of an existing agency like the Federal Trade
    Commission, which has a strong consumer protection track
    record, may have a better ability to achieve the goals of
    regulatory reform without creating new bureaucracies,
    inefficiencies, and cost?
        So my question to you is what thought, if any, was given to
    alternatives such as expanding the mission of the Federal
    Reserve Board or increasing the jurisdiction of an agency like
    the FTC that may better protect consumers and not create a new
    bureaucracy?
        Secretary Geithner. We looked at a lot of models and
    thought carefully through the concerns, many of which you
    expressed. But let me just say it starkly. We have been living
    as a country with a system where we gave bank supervisors
    primary responsibility for writing rules and enforcing those
    rules for consumer protection. And how did that turn out for
    the country?
        It did not serve us well enough. It is not a system that
    worked. It failed in its most basic mission. The reasons for
    that failure were complicated, but I think we had a test of the
    viability of the model that combined the authority for
    prudential supervision and consumer protection. And the
    judgment we reached was based on that record of experience over
    many decades, several recessions, past crises. That is, you
    need to put rule-writing authority and primary enforcement
    authority in a single place with the resources and expertise
    necessary to do that job well.
        Now, by clarifying where enforcement authority is, we are
    not going to be adding to the overall burden of the system. FTC
    does a great job. They have a lot to do, and the specific
    challenges of getting consumer protection right, particularly
    in credit, is, as we have seen, very, very hard.
        So, again, this represents in our view, looking at a range
    of alternatives, what we thought was the best path forward. But
    I understand why many supervisors look at the prospect of a
    different model, and many banks are uncomfortable with the
    implications of that change.
        But I think separating rule writing from enforcement would
    not be a sensible strategy. I think the rules would be at risk
    of being poorly written. And if you----
        Mr. Neiman. Would you not, though, acknowledge that the
    Federal Reserve, though late to the game, did take strong
    action with respect to mortgages and credit card issues?
        Secretary Geithner. I completely agree with you, and they
    provided a set of reforms and regulation that became the body
    of important credit card and mortgage legislation passed by
    Congress. But you asked when did those rules come?
        Mr. Neiman. But if Federal Reserve was directed to,
    statutorily, report to Congress, to have a governor on the
    board with consumer responsibilities and experience, would that
    not be an alternative?
        Secretary Geithner. There are many alternatives, but we
    have to make a judgment together with the Congress about what
    is going to be most effective. And again, we have had a painful
    experience about the limits of effectiveness of the system we
    had, which gave those entities responsibility for the rules and
    the enforcement. And the system failed.
        Now, some of the most damaging things have happened outside
    banks. The standards were worse outside banks, and part of the
    failure of the system was not to provide greater protections in
    place for nonbanks, and that is a centerpiece of what we are
    proposing. That should be helpful for banks, not just bank
    supervisors.
        Mr. Neiman. Let me move on to another area that has
    arguably not gotten as much attention as the creation of a new
    agency to protect consumers, and that is product suitability
    and effective disclosures. Consumers and investors need
    effective disclosures, not just more pages of print. For
    example, it may be a suggestion of a nationally recognized
    rating system could clearly communicate product safety and
    complexity, perhaps along with a one-page or two-page summary
    of key terms.
        I often compare this rating system to the rating system
    used on ski slopes. I am a poor skier. When I get up to the top
    of a mountain, I could not imagine skiing without a green, red,
    or double diamond. Don't consumers deserve the same level of
    protection? Is this something that you would consider?
        Secretary Geithner. I agree with you. Better disclosure,
    that kind of differentiation is central to the basic strategy
    recommendations we made, and of course we are open to
    suggestions about how to get it better.
        Mr. Neiman. And then my last question----
        Chair Warren. Excuse me. We are out of time.
        Mr. Neiman [continuing]. I did not get an agreement with
    our September 24th hearing.
        Secretary Geithner. We will try to respond appropriately.
        Mr. Neiman. So your cooperation with respect to
    participation of Treasury and Fannie and Freddie would be very,
    very welcome.
        Secretary Geithner. We will do as much as we can to make
    sure you have good representation there.
        Mr. Neiman. Thank you.
        Chair Warren. Thank you very much, Mr. Secretary. We
    appreciate your being here. We appreciate your very detailed
    answers to our questions, and we look forward to seeing you
    again soon.
        Secretary Geithner. Happy to do so again. Thank you.
        Chair Warren. This hearing is concluded.
        [Whereupon, at 3:06 p.m., the hearing was adjourned.]

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