[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

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                                                                   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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