[Senate Hearing 111-197]
[From the U.S. Government Publishing Office]
S. Hrg. 111-197
HEARING WITH HERBERT M. ALLISON, JR.,
ASSISTANT SECRETARY OF THE TREASURY
FOR FINANCIAL STABILITY
=======================================================================
HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
----------
OCTOBER 22, 2009
----------
Printed for the use of the Congressional Oversight Panel
S. Hrg. 111-197
HEARING WITH HERBERT M. ALLISON, JR.,
ASSISTANT SECRETARY OF THE TREASURY
FOR FINANCIAL STABILITY
=======================================================================
HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 22, 2009
__________
Printed for the use of the Congressional Oversight Panel
U.S. GOVERNMENT PRINTING OFFICE
54-131 WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Paul S. Atkins
J. Mark McWatters
Richard H. Neiman
Damon Silvers
C O N T E N T S
----------
Page
Opening Statement of Elizabeth Warren, Chair, Congressional
Oversight Panel................................................ 1
Statement of Damon Silvers, Deputy Chair, Congressional Oversight
Panel.......................................................... 5
Statement of Richard Neiman, Member, Congressional Oversight
Panel.......................................................... 9
Statement of Herbert M. Allison, Jr., Assistant Secretary of the
Treasury for Financial Stability............................... 12
Responses of Herbert M. Allison to Questions for the Record...... 46
HEARING WITH HERBERT M. ALLISON, JR., ASSISTANT SECRETARY OF THE
TREASURY FOR FINANCIAL STABILITY
----------
THURSDAY, OCTOBER 22, 2009
U.S. Congress,
Congressional Oversight Panel,
Washington, DC.
The Panel met, pursuant to notice, at 10:03 a.m., in Room
SD-562, Dirksen Senate Office Building, Elizabeth Warner, Chair
of the Panel, presiding.
Present: Elizabeth Warren, Richard Neiman, and Damon
Silvers.
OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Chair Warren. This hearing of the Congressional Oversight
Panel is now in session.
I would like to start by welcoming you, Mr. Allison. The
first time you came to see us, you had been in your office for
one week and yet already were full of information. So we are
glad to have you back and hope you will be able to update us on
TARP.
As you know, TARP was able to accomplish direct and
immediate help for the largest financial institutions, but
smaller financial institutions, small businesses, and
homeowners facing foreclosure have waited much longer and
received much less help. People who funded the bailout, the
American taxpayers, are bombarded with news that Wall Street
firms that benefitted from TARP with windfall quarterly profits
are now preparing to reward their executives handsomely with
hefty bonuses. On the other hand, unemployment remains close to
10 percent. Loan defaults continue to rise, and the foreclosure
crisis has no apparent end in sight.
I worry not only because of where we are in this crisis,
but that the factors that led us to this crisis have not yet
changed. The financial sector that we talked about a year ago
as too consolidated, too big to fail, is more consolidated than
it was back then. When we talked about toxic assets on the
books of the banks, those toxic assets remain on the books of
the banks. There is little to inspire confidence in the balance
sheets of the banks, and the health of small and mid-sized
banks remains a very serious concern. That concern is doubled
because they are truly the lifeblood of small business lending.
Ninety-nine of these banks have failed so far, as you know, and
we have more than 400 on the watch list. And many are
dangerously overexposed to commercial real estate. We continue
to face a grim picture.
On regulatory reform, the very rules that will prevent this
crisis from happening again, that process is just starting.
So I think taxpayers are concerned about what this means
for their economic security. We hope you can provide some
answers today and put TARP in the proper context and help us
understand where we go from here. The panel's core mission, as
always, is to ensure that TARP operates with transparency and
accountability. We thank you. We thank your staff for working
with us very closely on that. And we look forward to hearing
from you today.
[The prepared statement of Chair Warren follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Now I call on the Deputy Chair, Damon
Silvers, for an opening statement.
STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Mr. Silvers. Thank you, Chairwoman Warren.
Good morning. It is a pleasure again and an honor to
welcome Herb Allison to be with us. I am very grateful for your
willingness both to appear before us in these formal settings
and the extent to which you and your staff have been available
to the panel informally since you arrived at Treasury.
This hearing convenes as the Office of Financial Stability
and the Treasury Department and the administration more broadly
are undertaking a number of initiatives that appear to be
efforts to respond to concerns raised by, among others, this
panel regarding the provision of credit to business,
particularly small business, the continued excessive and, at
least to my mind, somewhat perversely structured executive
compensation at major TARP recipient institutions, and finally,
as our chair referred to a moment ago, the continued escalation
of the home foreclosure crisis.
While my sense of these initiatives is that they are all
directionally correct, I look forward to hearing today about
the scope and design of these initiatives in some greater
detail.
I also want to compliment you, Assistant Secretary Allison,
on the OFS' handling of the cancellation of the Bank of America
asset guarantee. Bank of America clearly benefitted from the
perception on the part of the markets that this guarantee was
effectively in place for a time, and it was only appropriate
that it should pay a fee for having done so. I do not think it
was a foregone conclusion that that would, in fact, occur and I
attribute that to you and your staff's leadership. I think you
should take some public credit.
Mr. Allison. Thank you.
Mr. Silvers. However, I remain extremely concerned that as
a result of having a strategy with the TARP program that it is
fundamentally about buying time, in the hopes that the
financial system will earn its way back to health, that we are
at risk of a vicious cycle. Persistent high unemployment, in
part generated by the initial financial crisis, breeds more
foreclosures and a continuing housing depression, which in turn
keeps our major financial institutions weak and causes
continued high rates of failures of small banks. Weakness in
the banking sector then threatens to act as a powerful
headwind, preventing the revival of employment outside those
firms that can access the public debt markets. We discussed
this matter with Treasury Secretary Geithner when he last
appeared before this panel.
With this concern in mind, I hope that you will be able to
discuss with us with some specificity the current state and
future prospects of the largest financial institutions that are
continuing recipients of TARP assistance and I believe are at
the core of the threat of continued headwinds from the
financial sector, those being AIG, CitiGroup, Bank of America,
and Wells Fargo. I recognize, of course, that AIG is a special
case.
Ultimately, the Wall Street bonuses that got so much
attention this past week make tangible and specific the growing
feeling among the public that we are back to business as usual
on Wall Street, while the financial system is failing to play
its proper role in supporting the real economy on Main Street.
I am interested in the immediate steps Treasury is taking to
counter this perception in areas like executive pay, but the
real test will be whether we really repair the banking system
so that it can function again or whether we repeat the
unpleasant experience of long-term economic stagnation Japan
went through in the 1990s.
Again, I look forward to hearing your testimony this
morning, and I again extend my thanks to you for joining us
once again.
[The prepared statement of Mr. Silvers follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Superintendent Neiman.
STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. Neiman. Mr. Allison, thank you very much for being here
today. You know more than anyone how important today's hearing
is to the American public. It was about a year ago that the
U.S. Government told the American taxpayer that the financial
system faced possible collapse if taxpayers did not provide
$700 billion to rescue it.
The taxpayers did what was asked, and they did it even
though it meant swallowing what some perceive as a very bitter
pill. I also do not have to tell you about the reluctance and,
in some cases, the outrage of providing financial support to
some of the very institutions that helped cause the crisis,
many of which pay their employees more money in one year than
many Americans make in a lifetime.
So the stakes of the effectiveness of Treasury's use of
that $700 billion are very high. Treasury's programs have to
work to stabilize the financial system, but they also have to
work so people feel they have also gained from this massive
capital infusion. Treasury's programs must restore credit for
small businesses that promote entrepreneurship and create jobs,
and the programs must keep people in their homes by preventing
avoidable foreclosures. Success in these endeavors goes beyond
just restoring confidence in our financial system. Success is
critical to maintaining confidence in our democratic system.
Remembering back to our first meeting with Secretary
Geithner in April, I am glad to say that we can have a
different conversation today than we had then. The Department
of the Treasury deserves credit for making substantial
progress. We are by no means out of this crisis, but yours and
Secretary Geithner's efforts averted a disaster and that should
be recognized.
But our gains remain fragile, particularly as they apply to
the people who need Treasury's programs the most. As you and I
discussed in our last meeting together over the summer, it is
critical that we redouble our efforts to help the millions of
homeowners facing foreclosures. I am grateful to the Treasury
and to you personally for participating and arranging the
participants at the hearing last month in Philadelphia. It was
the first time, to my knowledge, that Treasury, Fannie Mae, and
Freddie Mac came together in a public forum with housing
advocates and mortgage lenders to discuss the progress of the
administration's foreclosure prevention programs. I intend to
follow up on several of the issues that came out of that
hearing with you today.
I also intend to ask you about improving access to credit
for tens of thousands of small businesses that employ the vast
majority of our economy's workers. I would like to commend your
office and the administration for announcing initiatives just
yesterday to provide capital for community banks that are
substantial lenders to small businesses. One year later, the
financial system needs to start working better for small
businesses and for all Americans.
I look forward to our discussion.
[The prepared statement of Mr. Neiman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Superintendent Neiman.
Congressman Hensarling, I hope will be able to join us
later, and Mr. Atkins, our fifth panelist, is traveling and not
able to be with us today.
So that concludes the opening remarks of the panel.
Mr. Allison, I recognize you for five minutes. Your entire
written statement will be made part of the record, but if you
could take a little time, no more than five minutes, to bring
us up to date, I think that would be helpful.
STATEMENT OF HERBERT M. ALLISON, JR., ASSISTANT SECRETARY OF
THE TREASURY FOR FINANCIAL STABILITY
Mr. Allison. Thank you very much, Chair Warren and members
of the panel. Thank you for the opportunity to testify today. I
welcome this occasion to update you about the progress we have
made in restoring financial stability and to discuss the impact
of TARP programs.
The government actions taken last year, including the first
phase of TARP, are widely acknowledged as helping to avert
catastrophic failure of our financial system. When President
Obama took office, the financial system was still extremely
fragile and the economy was contracting rapidly. Measures taken
by the Congress and this administration have helped bring
stability to our financial system, are assisting responsible
homeowners, and are getting credit flowing to consumers and
businesses--all at a lower cost to taxpayers than was
anticipated.
With these improvements, it is time to set a new direction
for TARP. We will begin to wind down and terminate TARP
programs that were launched at the peak of the financial crisis
and cap programs to purchase legacy assets and to securitize
credit at lower levels than anticipated. Now, the
administration will reshape targeted assistance to the key
challenges of helping responsible families keep their homes and
helping small businesses get better access to credit.
Yesterday, President Obama announced new steps to improve
access to credit for small businesses by providing lower cost
capital to community banks. Small business lending represents
56 percent of business loans from small banks, compared to only
21 percent from larger banks. Therefore, community banks with
less than $1 billion in assets will be eligible to receive new
capital at an initial dividend rate of 3 percent when
submitting a plan to increase small business lending. The
corresponding rate will be 2 percent for community development
financial institutions. In the coming weeks, Treasury will work
with community banks and the small business community to
finalize program terms to best support small business lending.
The other continuing focus will be our efforts to help
responsible homeowners. Treasury's Home Affordable Modification
Program has now provided immediate relief to more than 500,000
homeowners who have entered into trial mortgage modifications.
Family in permanent modifications are saving over $500 a month
on average, as this panel noted in its October 9th report, ``An
Assessment of Foreclosure Mitigation Efforts After Six
Months.'' The panel made a number of findings and
recommendations in that report. I have tried to address them in
my written statement so will only touch on two of them now.
First, the panel recommended several areas to improve HAMP
effectiveness and transparency. Treasury recently released
guidance that streamlines and standardizes the paperwork needed
for a modification. To make the process more transparent for
borrowers who have been turned down for a modification, we have
established denial codes that require servicers to report the
reason in writing to Treasury and soon to borrowers as well. We
are also improving transparency of the net present value, or
NPV, model, a key component of eligibility, by increasing
public access to the NPV methodology and encouraging a wider
understanding of the model among housing counselors and
borrowers.
Second, the panel recommended that Making Home Affordable
should try to address a wider population, including borrowers
of option ARM loans with negative equity and those who are
unemployed. Treasury recognizes that these situations can be
particularly challenging. As the panel's report reflected, our
current program does permit borrowers with pay option ARMs to
use HAMP when they meet other eligibility criteria. HAMP can
also help homeowners with negative equity to reduce their
mortgage payments to affordable levels with the Hope for
Homeowners refinance from the servicer if the borrower
qualifies.
Finally, as the recession deepened, unemployment became an
increasing contributor to the ongoing foreclosure crisis.
Therefore, unemployed borrowers that will receive at least 9
months of unemployment benefits are eligible for a modification
under HAMP.
As our efforts progress, we will continue to study ways to
meet the challenges of reducing total foreclosures. We are
pleased to be winding down certain TARP programs, but recognize
there are lingering weaknesses in housing markets and small
business lending. We remain committed to helping American
families and small businesses and building a broad economic
recovery.
Thank you, and I look forward to answering your questions.
[The prepared statement of Mr. Allison follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Assistant Secretary Allison. We
appreciate your remarks.
I must say I am encouraged to hear that Treasury is talking
about winding down large parts of this program and shifting
much of its focus to foreclosures and small business lending. I
will be even happier the day when we are put out of business
because this process is complete and there is no more TARP.
This also changes oversight, obviously. We have to go where
you go. So let me focus first on foreclosure and the
foreclosure mitigation programs, if I can. I just want to make
sure that we are tracking the correct numbers here.
We put the numbers together, as you saw, in the report
suggesting that the current mortgage foreclosure mitigation
program or programs, when they are fully operational based on
the most optimistic assumptions that Treasury has given us,
that nonetheless foreclosures will likely outrun modifications
by about two to one. Does that fit with the numbers you are
seeing?
Mr. Allison. Thanks for the question, Chair Warren.
I think we have to keep in mind that this program, Making
Home Affordable, was designed to help people who are in their
primary homes, and these are working Americans. The program was
not designed for second homes or investment homes. So one has
to look at the foreclosure rate among the eligible population.
And we believe we made great strides in at least matching the
rate of foreclosures or potential foreclosures in that category
with trial modifications.
Chair Warren. I understand the point, but surely you are
not suggesting that the half of all people, even on the most
optimistic assumptions, who are still going to lose homes are
all investors and vacation homeowners. I understand you have
tried to target more. There will still be a substantial number
of homeowners who will be left out of the program. Is that
right? I just want to make sure that we are dealing with the
same set of numbers here.
Mr. Allison. Well, we are obviously trying to reach as many
people as we can in this program. We are now able to reduce the
debt-to-income ratios of people who qualify from above 38
percent all the way down to 31 percent. So we are reaching a
very large number of people. There are some people who will not
qualify for this program. For instance, if you have a jumbo
mortgage, you do not qualify for the program.
Chair Warren. I understand.
Mr. Allison. Or, people with extremely low incomes can
receive other forms of relief. But this program will be able to
serve, we think, a very large number of working Americans who
are having trouble staying in their homes.
Chair Warren. So then let me see if I can understand this
the other way. You give many reasons why there still may be
many foreclosures. But if we think of this problem from a step-
back perspective, and that is, the problem of dealing with
foreclosures in our economy, the impact on neighbors, the
impact on communities, we can still expect substantial numbers
of foreclosures over the next few years?
Mr. Allison. Well, actually there are other measures
underway as well. Under the ARRA legislation, about $12 billion
has been appropriated to help especially distressed
neighborhoods where many people are at risk of losing their
homes. So there are a number of other programs in addition to
the HAMP program that have been instituted by the Obama
administration to try to deal with the broader housing crisis
that the country is facing.
Chair Warren. So let me just then, if I can--I want to
drill in a little bit on the principal program here, though,
for homeowners. And that is, Treasury has estimated that it
will bring--in fact, has announced that it has brought 500,000
homeowners into the first program, into the HAMP program. Now,
of that 500,000 who are brought in, those are people who just
have what are called temporary modifications that last for only
three months. What is the rate at which those people are making
it into what are called permanent modifications?
Mr. Allison. Let me first say that we have extended the
trial modification period up to 60 days for people who are
having difficulty submitting their paperwork. And we are doing
our best to streamline the paperwork so that more people can
get through this process and receive a permanent modification.
Chair Warren. And we are very glad to see those changes. We
are very pleased.
Mr. Allison. Thanks.
Chair Warren. But the question is, of the 500,000, how many
are likely to make it into permanent modifications? What are
your numbers so far and what are your projections?
Mr. Allison. Well, so far, the numbers are low because we
are still in the trial period for most of these people, and it
is going to be some months--I would say sometime in the first
quarter of next year--before we have a really good idea
statistically of what the conversion rate seems to be.
Chair Warren. But I thought they were only in the trial
part for three months. So why can we not tell it on the 91st
day how many people are making into permanent modifications?
Mr. Allison: As I mentioned, we have actually extended that
trial period for many people to five months.
Chair Warren. To five, all right. So I will just do the
math. On the 151st day, why is it that we cannot tell what the
conversion rate is to permanent modifications?
Mr. Allison. The reason is that they are small numbers to
date. We have less than 10,000 people who have moved into
permanent modifications out of the 500,000 because the program
was ramped up rapidly, and given the three- to five-month delay
before they are given a permanent modifications
Chair Warren. All right. But from this point going forward,
it cannot take you more than a couple of months. I mean, they
are into the pipeline.
Mr. Allison. That is right, a couple of months, and then we
will be into the new year. So we are figuring that early in the
new year, we will have a much better idea statistically of how
many people are moving from trial to permanent modifications.
Now, let me say our biggest concern in the program right
now is making sure that as many people as possible are able to
convert to a permanent modification.
Chair Warren. Are you using any projections on this number?
Surely, Treasury is doing its own modeling and using some
internal projections.
Mr. Allison. Yes. Well, we had projections before the
program even started. Now we are interested in the actual
rates.
Chair Warren. So what were your projections?
Mr. Allison. Well, the projections were----
Chair Warren. From temporary to permanent.
Mr. Allison. Yes. The projections were very rough at the
time and----
Chair Warren. What were they?
Mr. Allison. They were--it depended on the type of
individual we are talking about. So it was a very complex set
of calculations.
Chair Warren. But you had a number.
Mr. Allison. I would not go with any one number as an
overall rate.
Chair Warren. So give me a range of numbers.
Mr. Allison. Well, as you know, in the past where there
were not actual deep reductions in expenses, the rates could be
as low as 50 percent. Given the nature of these modifications,
which have not been done before on a large scale, that is,
where there are large reductions in people's monthly payments,
we do not have good statistics.
Chair Warren. I understand, but you have designed the
program. So you surely must have some model. How many people is
Treasury projecting will make it from these temporary, short-
term modifications into a so-called permanent modification?
Mr. Allison. Well, the estimate is significantly more than
50 percent, but I do not want to place overdue emphasis on any
one number.
Chair Warren. Surely you are already using a model
internally. You are not using a model that says significantly
more than 50. You must have a number.
Mr. Allison. The reason is, as you know, models are simply
models, and they do not reflect the outcome.
Chair Warren. I know. So I am asking just a model number.
Mr. Allison. It is ranging up to 75 percent, somewhere
between 50 and 75. But again, the real issue----
Chair Warren. That was not so painful.
Mr. Allison. Well, the real issue for America--because I do
not want to give overdue emphasis to any one particular number
because I think we can focus on the wrong thing. The real
issue----
Chair Warren. But you do understand to engage in oversight,
we need to understand your numbers and the projections here so
we can see if this is working even on your assumption.
Mr. Allison. The real issue, though, is converting people
as fully as possible to the permanent modifications. And that
is why we are taking these steps to try to make it simpler.
Last week, we brought in, again, the main servicers in this
program and we sat down with them to discuss the issue of
trying to increase conversion rates and maximizing those. We
have also told them that we are going to start publishing
service metrics for the servicers starting in early December,
and they will provide measures such as how long does it take
between the time that someone applies for a modification and
the time they actually receive a permanent modification. Also,
how long does it take for the servicers to answer the phone and
provide answers to people who are very concerned about whether
they will qualify or not? So we are trying to----
Chair Warren. And you will be naming names.
Mr. Allison. We will be naming names. We will be naming
individual banks against more than five of these different
service measures starting in early December. The banks are on
notice, and we think by providing sunlight on the data around
services, that these banks will try even harder to meet the
highest standard.
Chair Warren. Thank you. I look forward to it.
I apologize to both of you, and I will skip my next round
of questions if need be. Mr. Silvers.
Mr. Silvers. Thank you. I am all for thoroughness. So you
have no problem with me.
Assistant Secretary Allison, you have heard a bit about
mortgages. I understand my colleague, Superintendent Neiman, is
going to talk to you a bit about small business. I would like
to focus on very big business, but do not take that as a lack
of interest in the other two subjects.
Yesterday, I think, although it is a little hard to tell
with the combination of official announcements and leaks, but
it appears that yesterday the pay czar, Ken Feinberg, announced
a plan to require that the very largest recipients of TARP
funds cut their executive pay significantly, particularly in
relation to the cash component of that pay. There have been
some anonymous quotes in the press this morning from executives
at these firms pointing out that a lot of what Mr. Feinberg has
in mind is to shift that pay toward long-term compensation,
equity-based compensation. I hope you will tell me if what I am
saying is not true. I am gleaning it from the published
accounts.
There is a concern I want you to address about this, which
goes right to the statements that have been made by the Federal
Reserve about the proper way to do executive pay in financial
institutions. On the one hand, it appears that Mr. Feinberg is
moving in the direction of lengthening the time horizons of
pay, and I think that is a very good idea.
On the other hand, I am very concerned, and I would like
you to address the question of whether or not we have got the
risk element correct particularly in the context of banks with
very low stock prices, that in pushing pay into equity form
where the stock price is low, it is not clear these folks
really have that much downside exposure. And so as a result, I
am concerned that we are incentivizing a certain amount of
risk-taking with the public's money as a backstop. And I wonder
if you could comment on that.
Mr. Allison. Well, as you know, the Special Master will
soon be announcing his compensation determinations and will be
explaining to the public how he made those determinations. So I
will leave some of that explaining to him. And he has operated
in a very independent way. He is making his own decisions.
But it is important that we protect the interests of the
taxpayers who have invested so much of their money into these
companies over the past year. Therefore, these programs are
being designed in a way that will provide that most of the pay
will be long-term in nature. Some of the pay will be
conditioned on returning TARP money to the taxpayers. They are
designed to discourage excessive risk-taking. At the same time,
under the interim final rule that governs the Special Master,
he is encouraged to consider the need for the long-term
survival and competitiveness of these institutions in the
interest of taxpayers getting their money back while ensuring
that the pay is not excessive, taking away from the overall
profitability of the banks and their ability to rebuild
capital.
Mr. Silvers. I guess my question--let me hone my question.
If you pay an executive--I think this problem is most severe at
Citi and potentially at AIG, depending on exactly what the
Special Master does. If you pay an executive at Citi with a
package that is stock-based primarily--the stock is at $4, as I
believe it is roughly today--there is just not that much
downside in that package. And what downside there is is going
to be absorbed frankly by us, by the public, because we all
know if Citi takes large losses, the pressure to try to do
something on the part of the government will be profound.
What is your view--I know you are not the Special Master,
but you are in front of us today--as to how we avoid and incent
a situation where those people have all the upside of risk but
none of the downside?
Mr. Allison. Well, let me, first of all, say that since the
United States Government is a significant shareholder in
CitiGroup, we are aligning the interests of those employees
with the interests of taxpayers. And if the stock price of
CitiGroup does go up, the American taxpayer will benefit as
well.
Mr. Silvers. I am worried about what happens if it goes
down because if you are thinking about this from the taxpayer
perspective--we have the downside. They do not, they being the
executives we are incentivizing. I recognize this is not a
simple problem to solve in compensation design, but I want you
to focus on it.
Mr. Allison. Well, sir, the executives do have considerable
downside because, as you mentioned, much of their compensation
is paid out over the long term and is dependent upon
performance metrics, including the stock price----
Mr. Silvers. But you recognize, do you not, that the
downside for the executive is counted at zero. When the value
of the stock hits zero, that is as low as they can go. We will
take the rest of it, and it is the full value of all Citi's
liabilities potentially.
Mr. Allison. Well, first of all, these banks did undergo
the stress test last spring. They raised a considerable amount
of equity capital. In fact, the total raised by the large banks
was about $80 billion. Their capital positions are far better
today than they were then, thanks to the stress test initiated
by the Secretary of the Treasury and conducted by the Fed and
other regulators. So, I think the banks are in a much stronger
position today and we hope in a position to start repaying the
Federal Government before too long.
Mr. Silvers. My time has expired. I will pass on.
Chair Warren.. Thank you
Mr. Neiman.
Mr. Neiman. Thank you.
So I would like to come back to the initiatives to enhance
and promote small business lending that were announced
yesterday. I was pleased to see the inclusion of capital for
smaller community banks who provide a substantial amount of
credit to small businesses. I was particularly pleased to see
that the extension of capital to community banks is contingent
on a submission of a business plan to demonstrate the amount
and type of lending where that capital would go to support
small businesses and that there would be a follow-up
requirement of quarterly reporting detailing those lending
transactions. I think you would not be surprised that many of
us would have liked to have seen a similar contingency and
requirements earlier in the CPP when that was announced by the
prior administration.
There are a number of questions that I think still remain
and many which I think you acknowledged are final decisions
that will take time as you roll out the specifics of the
program. But some of the questions I have--and there seems to
be some inconsistent reports in the press as to, in addition to
the three percent dividend, are there other charges for the
capital that would be provided to the banks. For example, will
there be a requirement of issuing warrants? There was a report
in the American Banker today that it would include warrants.
Mr. Allison. Well, there is a de minimis exception for
issuing warrants, and the exception is that those banks that
receive less than $100 million. Virtually every bank in this
program would be receiving less than $100 million. Now, these
have yet to be fully worked out. We are going to be issuing
detailed guidance on this program after we discuss the program
features with the banks, as well as small business. But it is
very likely that these banks will not be subjected to the same
degree of a warrant requirement as was in the case of CPP for
the larger banks, for example.
Mr. Neiman. Now, one of the other program provisions is
modeled after the CPP program that requires that it be based on
a determination that the institution is deemed viable without
the capital. Have you or the administration considered
modifying that program to permit under certain circumstances
banks that would be deemed to be viable after receipt of that
capital?
What we are seeing and what we have heard from others is
that in order to attract private capital, a determination by
the administration that an institution is not viable serves as
a red letter to discourage private capital. So I would be
interested if you had considered under certain circumstances--
it is my understanding, in fact, that FDR's program did have
specific categories of those banks that would be viable without
and those banks that would be viable only after a contribution
of capital.
Mr. Allison. First, we want to make sure that the capital
is used for the intention of the program, to stimulate lending,
and not simply to fill a capital hole on the bank's balance
sheet that will not produce additional lending. And we have
considered this issue very carefully, Mr. Neiman, because we
have been asked this question many times and it is an important
question. But we believe that this program, to be most
effective, should be aimed at viable banks so they can use the
additional capital to promote lending; With the additional
capital, they can leverage that capital and lend quite a bit
more than the amount of the capital itself.
Secondly, we have to protect the interests of the
taxpayers. Their interests are better protected if we are
lending to viable banks, and there are a very large number of
these. By the way, this program covers about 91 percent of all
the banks in America, about 7,500 banks. So it is a very broad
program. But we think that for it to be most effective, every
dollar of this additional capital should go to additional
lending.
Mr. Neiman. So there was internal discussion and analysis
of whether that viability test should be reconsidered.
Mr. Allison. Yes, sir, there was.
Mr. Neiman. And was there the same analysis and discussion
around the $1 billion cap? Should it be increased to $5 billion
or even $10 billion in terms of the contributions to small
business lending?
Mr. Allison. We did consider that very carefully for a
number of months actually, and we determined that because of
the outside role that the smaller community banks play--up to
$1 billion of assets. Because of their outside role, we think
it is important to direct the funding to them, and they have
the highest rates of small business lending of all the
different segments of banks. So we think this is the best use
of taxpayers' dollars to get this economy rolling, especially
in communities all across the country.
Mr. Neiman. Do you have an estimation of the timing? There
has been a clear level of concern around the number of banks
and the time it has taken to process these applications. Do you
expect that these will be approved by the end of the year, or
will it be dependent whether the TARP program is extended
beyond the end of the year?
Mr. Allison. Well, the good news is we have the
infrastructure for this program already in place. We do not
have to build it. We can use the existing Capital Purchase
Program infrastructure since we have the procedures and the
policies largely in place already. So we can roll this program
out very rapidly.
We are anxious to get going. We want to meet with bankers
and small business people just as soon as we can to finalize
the program and then get it moving. So we feel a sense of
urgency to roll this out rapidly.
Mr. Neiman. Any estimates on the timing of receipt of
applications?
Mr. Allison. Well, we want to begin to take the
applications very soon. I cannot give you an exact date when we
will be doing that, but we will be announcing that very
shortly.
Mr. Neiman. Thank you.
Mr. Allison. Thank you.
Chair Warren. Thank you.
Okay. I am still on the hunt for some numbers on
foreclosure. So I want to make sure I understand this. We talk
about the HAMP program, 500,000 people into it by mid-October.
We raised the question about whether or not this will be enough
to slow down the rate of foreclosures so that we can get some
stabilization in the housing market. We then asked if the
people who come into the program, the 500,000, just to use that
example, how many will make it into permanent modifications.
And you said somewhere between a quarter and a half are
unlikely to.
So I want to ask the next part, and that is, of the people
who make it into so-called permanent modifications, what are
Treasury's projections on how many people will actually be able
to make those payments and still be in those houses at the end
of the 5-year period and make the transition back into their
permanent mortgages? In other words, I just want to draw as
fine a point on it as I can. Are we preventing foreclosures or
are we simply delaying them?
Mr. Allison. Well, first of all, I would like to correct
the record on this. I did not say that we expect that one-
quarter to a half of the 500,000 trial modifications will not
be converted.
Chair Warren. I thought that was our 50 to 75 percent
success rate. I was doing the math the other way.
Mr. Allison. What I was saying was that we had looked at
some modeling last winter and early spring. In fact, it was
before I arrived. What we are interested in, now that we are
actually operating and growing rapidly, is looking at the
actual conversion rates and trying to maximize those as much as
possible.
Chair Warren. Of course.
Mr. Allison. So I am not prepared to say what we think the
rate will be of successful conversions. All I can say is that
we will have much better information and much better estimates
based on real experience by early in the first quarter.
Chair Warren. Right. But you are also not telling that
Treasury is flying here with no projections on how this program
works in terms of numbers. You cannot be telling me that. There
must be projections on how this program will work.
Mr. Allison. What we have projected is what we will be able
to do within the three-year period of this program when we are
actively bringing people in and modifying mortgages--we expect
to be able to succeed with about 3 million to 4 million people,
which is a very large portion. We also believe that, given the
eligible population of people for this program today, that we
are about keeping pace at least, and maybe ahead of, the
foreclosure rate for that population.
Chair Warren. You do not mean foreclosure filings because
the foreclosure filings are accelerating.
Mr. Allison. I am referring to what the rate would be
without this program. And so I think we are making tremendous
progress.
Now, we are not satisfied with the place we are at today.
We are working with the servicers to increase, as much as
possible, the rate of trial modifications. Some banks still
have a long way to go to reach their eligible populations here.
We want them to move as rapidly as possible. And then the
challenge is going to be--and you are absolutely right, to
minimize the failure rate of getting people from a trial
modification to an actual modification.
Chair Warren. So let me ask so that I do not have to run 4
minutes over again.
Mr. Allison. Okay.
Chair Warren. What projection is Treasury using for the
proportion of homeowners who will be able to make it from a
trial modification to a permanent modification?
Mr. Allison. Well, again, we would like to have as many
people as possible. If we were to achieve----
Chair Warren. And I would like all the children to be above
average, but that is not the world we live in. You must have a
projection here.
Mr. Allison. I think if we can get this rate to something
like three-quarters then, that is a very ambitious success
rate.
Chair Warren. So are you telling me that that is what you
are projecting? As you are working this program out----
Mr. Allison. No, I am not.
Chair Warren. You must have a projection for what number
you are using for the conversion rate from temporary
modifications to permanent modifications. Treasury must. You
cannot have a program for which you are not projecting how many
people will be in it and how many will be in at each stage.
So the question I am asking is what is your projection on
the proportion that will make it from temporary modifications
to permanent modifications so that we can evaluate this
program, whether or not it is likely big enough to deal with
the problem.
Mr. Allison. Right. Again, based on past experience with
different types of modifications, which were not materially
reducing people's monthly payments, you saw a failure rate of
about fifty percent. So we could use that as a bare minimum
success rate, but we would like to achieve a much higher rate.
If we were to get to something like 75 percent, which is an
aspiration, we would deem this quite a successful program.
Chair Warren. So I just want to make sure I am
understanding. The projection is that the floor will be that
you will have at least fifty percent of those who get into a
trial modification will make it--I am sorry. I did the wrong
one. Fifty percent of those who make it into a permanent
modification will actually be able to make their mortgage
payments for five years.
Mr. Allison. No, actually we would say that the bare
minimum of getting from a trial modification to an actual
modification should be above, and then the failure rate----
Chair Warren. I am sorry. I also confused it.
Mr. Allison. Yes.
Chair Warren. I confused it.
Mr. Allison. I understand.
Chair Warren. The redefault rate, the rate at which those
people who get these so-called permanent modifications actually
stay in their homes for at least five years, and we are not
simply delaying foreclosures. We are actually preventing them.
What is the rate there? How many people who make it to
permanent modifications does Treasury anticipate will actually
be able to pay those mortgages?
Mr. Allison. Well, there is not a historical basis for a
program like this. What is so important about the program is
that we are materially reducing people's payments.
Chair Warren. I understand. The Panel has been quite
complimentary about the approach. The question is what is the
number you are using in your projection. Of those who make it
to permanent modifications, what proportion in fact will still
end up in foreclosure?
Mr. Allison. Well, we are really not sure what proportion
will end up in foreclosure.
Chair Warren. You must have a projection. We all have
looked at numbers. We have been looking at numbers now for a
year in terms of what are called redefault rates, that is,
people who get a modification and then it does not work. You
must have a projection for this. Treasury has put this program
forward. What is the projection you are using based on all the
data you have read? I understand the programs are different. I
understand there are lots of different studies that use lots of
different information.
Mr. Allison. Right.
Chair Warren. What is your projection?
Mr. Allison. Well, I think, again, what I can do is to come
back to the panel with our best estimate on what that might be.
But I think, our goal is to get beyond the projections to
reach real Americans who are in trouble and try to have as many
of them succeed in this program as possible.
Chair Warren. I am sure that is everyone's goal.
Mr. Silvers.
Mr. Silvers. Assistant Secretary Allison, can you tell us
what is the dollar amount assigned to the small business
program you were discussing with Superintendent Neiman a moment
ago?
Mr. Allison. Well, at this point, we are going to be
working with the communities that are going to be helped by
this program to try to estimate the potential eligible
population for it. So we will be in a better position to
estimate for you what the actual expenditure might be once we
have completed that work because we are going to try to tailor
the program as much as we can to the actual needs. Instead of
designing the program in the abstract, finalizing every aspect
of it, and rolling it out, we have announced the broad metrics
of the program. Now we want to work with them to see how we can
maximize the potential eligible population. Then we will be
able to give you a better estimate.
Mr. Silvers. We are using TARP money here. Right?
Mr. Allison. Yes, we are.
Mr. Silvers. So it cannot be more than the amount of TARP
money that is left.
Mr. Allison. That is absolutely correct.
Mr. Silvers. Can you give me any further insight into your
thinking as to what the range might be? I do not want to get
into a 10-minute discussion of it, but I am interested. Can you
scale it for me in any respect?
Mr. Allison. Yes. Well, it would be a fraction of the
amount of remaining money. I would say it would be somewhere
between $10 billion and as much as $50 billion.
Mr. Silvers. That is very helpful.
Mr. Allison. And the answer could be somewhere in between.
Again, we want to be responsible here when using taxpayers'
money, by providing an accurate estimate as possible.
Mr. Silvers. There have been some suggestions. I believe
Senator Warner in particular suggested the idea of essentially,
as we have done in some of the credit markets, just effectively
bypassing the bank credit system and moving TARP money directly
to small business with private sector managers. Can you explain
to me why you appear to have decided to go this route instead
of that route?
Mr. Allison. Yes. We have decided to go through the
community banks. We think that is by far the most effective and
efficient way of reaching large numbers of small businesses
since these banks already have relationships with these
companies throughout the country.
Mr. Silvers. No, that is not the question. I think the
proposal Senator Warner had was actually to go through those
same banks. The way you are proposing to do it is you are going
to give the banks some equity capital and then they are going
to give you a plan for how they are going to lend, you assume,
that money plus other money to small business.
Mr. Allison. If I may say, the program is structured in
reverse. The banks are going to give us the plan. Then, we are
going to give them the money.
Mr. Silvers. All right. I was not implying an order.
You have to have a certain confidence that they are
actually going to do that and not as you suggested--your
concern might be that they were going to fill capital holes and
the like. On the other hand, if you did what was done with TARP
in more financialized markets, which was to go directly into
the markets in the TALF program----
Mr. Allison. I see.
Mr. Silvers. Right? Senator Warner was talking about going
directly into the small business lending market, hiring the
community banks to manage it for you, thereby ensuring that the
money, in fact, ended up where you wanted it to end up.
I am just curious that you made a choice to use the bank's
capital structure, not just their managerial capacity, but
their capital structure.
Mr. Allison. Right, and the reason is because by providing
capital, they can leverage the capital to do much more lending.
Perhaps eight to ten times the amount of the capital can be
lent out.
Mr. Silvers. So your hope is that, for example--just a take
a number--that if you put $25 billion into this, that you might
be able to generate between $100 billion and $200 billion of
net----
Mr. Allison. That is correct.
Mr. Silvers. That is the hope. I think that is very
thoughtful.
Mr. Allison. Thank you.
Mr. Silvers. Let me shift back for a moment to big
business. When our last round ended, you were telling me about
the perception that Treasury believes in the growing strength
of the large banking sector. I am curious. If each of Wells
Fargo, Citi, and BofA showed up this morning with a check for
the balance of their TARP funds, would you accept it?
Mr. Allison. Well, that is really a matter for the
regulators to determine because they are responsible for the
financial soundness of those institutions.
Mr. Silvers. All right. I hope you would correct me if I am
wrong. My perception is that at least Wells Fargo, of those
three banks, has almost begged in public to be allowed to
return the money, which suggests that they have got the check,
and yet they are not being allowed to return it. Why in your
view is that so?
Mr. Allison. Well, again, I would not speak for the
regulators of Wells Fargo. So I would defer to them and their
determination of whether Wells Fargo is ready to repay.
Obviously, on behalf of the taxpayers, we would be delighted to
receive our money back from these banks. But we also have to
recognize that the money was put out there to enhance financial
stability. The regulators are far better qualified than the
U.S. Treasury Department as to when those banks will be able to
repay.
Mr. Silvers. If I can ask the indulgence of my fellow
panelists just to express a final thought here.
It seems to me that you and the regulators are behaving
wisely here, that this is the real test of whether or not we
have repaired our large financial institutions, whether or not,
in the privacy of whatever rooms that these decisions are made,
people, fully informed individuals, presumably acting in good
faith with the public interest in mind, are willing to allow
these banks to return the money. And I think the evident fact
that they have not returned the money suggests that in truth
there is not a comfort level with doing that. I think that is
very good. I would urge you not to submit to any kind of
pressure to allow banks that are fundamentally not yet sound to
return the money.
But I think it raises a larger issue which goes back to my
concerns in my opening statement and to the backdrop to your
views about the weakness of the small business lending market
and to the backdrop to the sort of end game around mortgages,
which is these institutions do not appear to really be healthy.
And that is a very dangerous thing, given the size of those
institutions. And it seems to me that that remains a continuing
challenge.
Mr. Allison. Mr. Silvers, first of all, these banks have
raised large amounts of capital, in some cases very large
amounts of capital, since last spring since the stress tests.
They are far better capitalized than they were then. So they
are in a better position to begin considering, I think but the
regulators have to be the arbiters of that. Of course, we are
in dialogue with the regulators as well.
So I would not characterize these banks as being impaired
today. They are far healthier than they were before. They have
taken a number of steps to reduce risk on their balance sheets
as well. So I think the day is nearing when they will be able
to begin repaying. It is closer than it was last spring.
Mr. Silvers. My time has far expired.
Chair Warren. Mr. Neiman.
Mr. Neiman. So I had intended to use this round of
questioning to focus on conversion rates from trial mods to
permanents and redefaults. But considering the time we spent on
that, I will just make a few points. In my additional views in
the October report, I did note that in my opinion it was too
early to calculate those conversions and because of the very
low statistics, it could be skewed for a number of reasons.
However, I think those kinds of projections would be
helpful, and there are already press reports. BofA--it has been
reported in the New York Times that they have estimated a 50
percent conversion rate. So I was going to frame my question
that it would be helpful to Treasury to provide its own
guidance. And my question was going to be, when do you expect
to be in a position to project conversion rates and redefault
rates and ongoing volumes for HAMP?
Mr. Allison. We are trying to continually improve this
program to increase the conversion rates. We are going to be,
as I mentioned before, in a better position to estimate what
the goals for conversion should be when we have further
experience and have made further improvements in the program,
and that should be early in the first quarter. And, I think we
will be revising those estimates as we go forward.
Mr. Neiman. Now, also in the October report--and you
responded briefly to the issue in your written testimony--we
pointed out that the Administration's housing foreclosure
prevention program was designed six to eight months ago, and
unemployment has continued to grow since then and the crisis
has certainly extended and foreclosures extended from subprime
into prime.
So my question is really focusing on what is the Treasury
doing on the issue of targeted foreclosure relief for the
recently unemployed. I have suggested both in our last report
and in other meetings with you and personally with the
Secretary to explore Federal funding for State programs that
are modeled after Pennsylvania's successful program, the HEMAP
program, Housing Emergency Mortgage Assistance Program, that
provides, in a sense, short-term secured bridge loans for
people who are recently unemployed. A program of this nature
could be funded either possibly through TARP or through
legislation.
So my question is, is there a reason not to pursue this
approach to explore whether TARP or legislative proposals,
which my understanding is there are some that have been
proposed on the Hill, should not be pursued as part of the
Administration's program?
Mr. Allison. We are familiar with the Pennsylvania program,
and we have high regard for what has been done in Pennsylvania.
Also, a number of other States have initiated foreclosure
prevention measures as well.
Let me mention again that our own program now allows people
to qualify who have expected unemployment payments for at least
nine months to come. We are still studying what more we might
do in that area. We think that our program, as it is designed
today, is the most efficient one to reach a large number of
people while at the same time protecting taxpayer dollars.
But we are open to suggestions, as we have been all along.
We are looking further at the Pennsylvania model as well to see
what more might be done.
And let me also mention that there are, other federal
programs underway such as for state housing finance agencies,
for cities or other areas that are impacted more than average.
Already these programs are in place. So we cannot look just at
the HAMP program as the only federal program.
Let me also mention that outside of the TARP program, the
Government-sponsored entities, Freddie Mac and Fannie Mae, also
have their own program which is identical to ours to reach
their borrowers as well.
Mr. Neiman. Well, to the extent that the analysis around
that program continues and a decision is made one way or
another, I would appreciate it if you would get back to our
panel and provide us any analysis or decisioning around it.
Mr. Allison. Thank you. We will.
Mr. Neiman. Thank you.
Chair Warren. I am going to start by following up on the
previous two lines of questioning. I just want to make sure in
following on Mr. Silvers' question, as I understand it, in the
small business lending, you will be asking the banks to propose
plans for using this money, which I think is a substantial
advance over where we were a year ago. But I just want to make
sure. Unlike the TARP funding for the big banks a year ago,
this time will we be tracking the money?
Mr. Allison. Well, first of all, with the program that
already exists, the Capital Purchase Program, we have
voluminous information on our Web site, financialstability.gov,
about the actual lending by all these banks. And we think it is
very important that the public be able to see for themselves.
What is very important is how much lending they are doing. We
also have indications that this program has been quite
successful in producing lending rates in the banks that are
higher than they would have been without the program. So we
think we are being quite transparent about actual lending
activity.
Chair Warren. That was not my question.
Mr. Allison. In terms of tracking how the money is being
utilized, we are asking the banks to provide their goals, then
we will look at their goals, and measure their performance, for
instance, in lending, which is the main objective of the
program, in a way that the American public can judge for
themselves how each of these banks is performing.
Chair Warren. So we will be verifying that they use the tax
dollars for small business lending.
Mr. Allison. They will be verifying and----
Chair Warren. We will look at their lending rates before
they take the money.
Mr. Allison. That is correct.
Chair Warren. And we should expect to see essentially
either a dollar-for-dollar improvement in their lending or with
leverage from private investment, a better than dollar-for-
dollar improvement in small business lending.
Mr. Allison. Absolutely, we hope there is a better than
dollar-to-dollar improvement. But I think that it is important
to judge them against the plans that they submit as to how much
additional lending they are doing, which should be more than
the dollars we are putting into the banks.
Chair Warren. All right, and we will be documenting that.
Mr. Allison. Yes.
Chair Warren. That sounds good. That sounds very good.
Mr. Allison. Thank you.
Chair Warren. Let me ask a follow-up to Mr. Neiman's
question. We were talking about all these programs, the various
programs, some obviously underway on mortgage foreclosure
mitigation, some perhaps in the wings to try to deal with the
problem.
I just want to ask about the other half. These are all
questions about using taxpayer money in order to bail out
homeowners and in particular the investors who bought those
mortgages, who invested in those mortgages for high profits.
How much are we talking about programs where the investors have
to acknowledge their losses and come to the economically
rational place in dealing with foreclosures?
I worry about two facts.
The evidence suggests that $120,000 is lost in every
mortgage foreclosure. That would seem to me to be an enormous
incentive for the mortgage lenders themselves, frankly, with no
government help, to come in and modify those mortgages.
But the second part is for every dollar of federal money
that goes in and ultimately makes it into the hands of the
mortgage lenders, there is an increased incentive for them to
sit on the sidelines and hope that more federal dollars are
coming and not come to the table and negotiate with their
homeowners.
So I just want to hear about the part of the program that
encourages the lenders to acknowledge their losses rather than
taxpayers having to pick that up.
Mr. Allison. As you point out, foreclosure is very
expensive. It is expensive to everybody, to the homeowner, as
well as to the original lender. We believe that our program,
which is designed for situations in which there is a positive
net present value to modifying the mortgage, has caused banks
to take a hard look at whether they might be better off by
modifying the mortgage.
As to principal relief, the Making Home Affordable program
does allow for principal relief. It provides the same types of
incentives. We also have now coupled the Hope for Homeowners
program, which involves principal relief, into our waterfall of
alternatives. And the individuals who run the Hope for
Homeowners program are working on revised rules and guidance
that will soon be rolled out. So, we should see more activity
in the Hope for Homeowners program as well.
In addition, the Obama Administration has long advocated
responsible reform of bankruptcy rules to encourage affordable
modifications. That is, bring lenders together with borrowers
to try to prevent bankruptcy, which is expensive to all sides.
Chair Warren. Thank you.
Mr. Silvers.
Mr. Silvers. I want to pick up on this line of questioning
a little bit.
As Superintendent Neiman mentioned, we had a hearing in
Philadelphia and your office was very helpful in providing
witnesses. At that hearing, there was a great deal of focus on
these two issues you just mentioned: the question of negative
equity and the reform of our bankruptcy laws, on the one hand,
and secondly, the issue of the unemployed.
In respect to reform of the bankruptcy laws--and I just
draw this to your attention--it was acknowledged by our expert
witness from the Federal Reserve Bank of Boston that really
bankruptcy reform was the only way anybody could think of to
target relief in the area of negative equity. There is a
problem if you just throw money at negative equity, that it
goes to lots of people who can actually afford to pay their
mortgages. But with the bankruptcy process, there is kind of a
gatekeeper mechanism there. Bankruptcy is unpleasant and has
real consequences for the person going bankrupt, but you target
the relief that way.
Secondly, I want to come back to unemployment. There was a
near universal--I think actually universal view among our
witnesses that the Treasury's programs did not adequately
address the unemployment-driven foreclosure wave, and as
Superintendent Neiman suggested, a deep interest in the HEMAP
program, the Pennsylvania program. Do I take from your
testimony that you are looking at further actions in this area.
Am I hearing your testimony right?
Mr. Allison. We have been looking at a wide variety of
actions, including to help people who are unemployed. As I
mentioned, this program now makes it possible for people who
have the prospect of another 9 months or more of unemployment
insurance to take part in the program, and we will continue to
look at what else we might do in balancing the interests of the
taxpayers with the needs, the very serious needs, of people who
become unemployed. And, we are looking at various models. I am
not committing that we will be able to instigate any particular
method at this point, but we----
Mr. Silvers. I did not hear you commit.
Mr. Allison [continuing]. Are certainly actively looking at
it.
Mr. Silvers. But you are actively looking.
Mr. Allison. Absolutely.
Mr. Silvers. I mean, I think you know this, but I would
urge you to not just consider this as a balance between the
interests of the taxpayers and the interests of people facing
unemployment and foreclosure, but the systemic consequences of
the unemployment-driven foreclosure wave.
Mr. Allison. The Obama Administration takes this very
seriously. It has initiated a wide variety of measures, again,
beyond the HAMP program. The entire economic stimulus program
is intended to create jobs and to preserve jobs as much as
possible during the most serious recession we have had in at
least 50 years.
Mr. Silvers. At least I personally am aware and supportive
of much of that work. I think that the particular problem of
unemployment-driven foreclosures is one that I think was
underestimated through no one's particular fault early on in
the development of the Making Home Affordable program. I am
glad to hear that you are looking at what options are
available. I would urge you to do that.
Mr. Allison. Thank you. And we certainly understand the
importance of this issue.
Mr. Silvers. Very good.
I want to then turn back to the small business piece for a
moment. There is a tradeoff, it seems to me, between the
potential of leveraging small business lending versus the
certainty of a direct TARP pipeline, that you would be certain
that that money was going to small business lending if you did
it directly. I think that I would urge you to focus on our
chair's comments about the need, given the choice you have
made, to very closely monitor not just the plan at the front
end, but the implementation of the plan at the back end from
these banks.
Mr. Allison. Thank you, and we fully agree with you.
Mr. Silvers. Very good.
I will stop here and pass it on to my colleague.
Chair Warren. Mr. Neiman.
Mr. Neiman. Thank you.
I want to focus on the stress tests and pick up on
commercial real estate lending, which we really have not
touched on yet. The stress tests required that the largest
banks carry and in some cases raise additional regulatory
capital. When those tests were conducted last spring, many of
the concerns revolved around the mark-to-market securities. Now
it appears that those securities may have stabilized somewhat
and now the concerns have really shifted to portfolio loans on
bank balance sheets particularly commercial real estate.
Is your office looking at or considering any programs other
than PPIP and TALF for CMBS programs, commercial mortgage-
backed securities, or an expansion of those programs to address
the particular issues around commercial real estate loans?
Mr. Allison. We have looked at many alternatives. This is a
problem that is considerable across the country, both because
the securitization markets are not as robust as they were
before and because banks have a large amount of commercial real
estate loans on their books. In fact, the smaller banks tend to
have a larger proportion of commercial real estate on their
books than do the bigger banks. That is another reason why we
have launched this program aimed at community banks. A lot of
their small business lending is connected with commercial real
estate lending. So by providing them access to additional
capital, we can help them to withstand a deterioration in the
value of those assets on their books.
Now, we think that providing capital is more efficient and
more effective than trying to directly intervene to support
prices in the commercial real estate market, which would be
very expensive and impractical. By providing capital, the banks
are better able to deal with the problems on their books by,
for instance, extending loans or modifying loans over time. And
we think that already there is a lot of creativity in the
commercial real estate market. Some investors are entering this
market. We are seeing somewhat more activity in the
securitization markets, and banks' earnings also can help them
to withstand this problem over the next several years. So I
think the banks are well aware of the problem, as are the
regulators, and they are working actively to deal with it.
Mr. Neiman. Are there any proposals around addressing the
commercial real estate problem that you could share with us,
particularly projects that support affordable housing, multi-
family housing?
They are a great concern in many urban areas, including New
York. Large commercial lenders who use those funds to purchase
low- and medium-income housing projects, now that they are
facing possible default, are cutting back on maintenance and
services and it is becoming a real community concern. Are there
any programs that you can share with us today that may have
some level of real interest to confirm that there are programs
under consideration?
Mr. Allison. Well, we have been in dialogues with community
leaders and also with housing finance agencies and others to
look at this problem. So overall, there have been measures
taken to support the housing finance agencies and to work with
them on this problem. As you know, there are different
situations for different housing projects, and in some cases,
the banks are stepping in to deal with this or other new
investors as well. So there are a variety of ways of dealing
with that problem. But again, right now, our focus is going to
be on providing capital to the community banks to help them
with their widespread concerns about commercial real estate and
to support small business. These two factors are intertwined in
the communities across the country.
Mr. Neiman. Still on the stress tests, is there any
consideration being given to rerunning any of those stress
tests on large or regional banks with a particular focus on
commercial real estate loans and to extend the time horizon on
those tests out another year? In New York we have utilized
stress tests on an ad hoc basis in situations where we feel a
bank may have issues. But is there any consideration? We have
recommended it in past reports that the Administration and the
regulators consider expanding out either on an ad hoc or
systemic basis the stress tests.
Mr. Allison. As you know, the regulators are well aware of
these issues and they are the ones who determine how to
administer stress tests to those institutions. And I am sure
that they have had extensive dialogues with these banks to
understand their current situation.
Mr. Neiman. Thank you. My time has expired.
Chair Warren. I would like to ask some questions about the
winding down. I was interested to see that on September 18th
the money market guarantees were permitted to expire. Is the
guarantee really gone?
The next time money market managers face big losses and the
money market account breaks the buck, is there anyone in
America who does not believe that the American Government will
rush back in and support the money markets?
Mr. Allison. Well, the need for that program went away.
Chair Warren. It has gone away for today. I am asking about
tomorrow, the next time we hit a financial crisis. So do we
have, in effect--the question I am asking--do we have a pre-
guarantee out there? That is, we will not call it a guarantee
in boom times and when there is a bust, then we will move in.
So unlike FDIC insurance, for example, which you have to pay
for all the time, it is just an insurance policy that you pay
for only when you're sick.
Mr. Allison. Well, that is another reason why the
Administration has been proposing comprehensive reform of the
financial industry and also adequate disclosure by institutions
about their financial situations. So I think you are asking
whether there is a moral hazard with regard to the design here.
The intention of the Administration's programs is to reduce
drastically the need for Federal intervention going forward.
Chair Warren. Through regulatory reform.
Mr. Allison. Absolutely.
Chair Warren. Good.
So let me ask another one then. Will CPP, CAP, and TIP--I
am learning the acronyms of Washington. Will those three
programs be closed by the end of the year?
Mr. Allison. Let me just mention that is the Capital
Purchase Program, the Capital Access Program, and the program
for just a few banks.
Chair Warren. And the TIP.
Mr. Allison. The TIP, Troubled Investment Program.
Those programs are, in effect, going away. They are being
capped.
Chair Warren. So they will be gone by the end of the year.
Mr. Allison. At the end of the year.
Chair Warren. Are we planning any new programs to launch?
Mr. Neiman. The programs that are planned are the ones I
have talked about today.
Chair Warren. Okay. So that means that going forward, just
if you could, describe what TARP will be starting in January.
What is left?
Mr. Allison. Well, we have the homeowners program.
Chair Warren. So the homeowners program will be ongoing.
The new small business lending program.
Mr. Allison. The small business/small bank program,
absolutely. We will still have the investments that we have
made that have not yet been repaid.
Chair Warren. But surely, we do not need a whole TARP
apparatus to be----
Mr. Allison. Well, actually, we are going to need people
who are looking after those assets, asset managers, as well as
accountants and many other----
Chair Warren. I am actually sorry to hear that. We are
still not considering the panel recommendation to put those
shares of stock in trust. I should say Treasury is still not
considering the panel's recommendation to put the shares of
stock of the auto industry and the large financial institutions
in trust?
Mr. Allison. Most of our holdings are in preferred stock.
We are common stockholders in a few companies.
Chair Warren. And the recommendation is to take our common
stock and put it in trust.
Mr. Allison. Under the EESA, the Emergency Economic
Stimulus Act, the Treasury Secretary has the responsibility for
overseeing those investments. He cannot shed that
responsibility. Even if we put them in a trust or a limited
liability company, the Treasury Secretary still has that
responsibility under the law.
Chair Warren. I am sorry. I am not quite understanding. Are
you saying it is not lawful for the Secretary of the Treasury
to put the shares of stock in Chrysler and GM into trust?
Mr. Allison. No, I am not. I am saying that even if they
are put into a trust vehicle or a limited liability company,
the Treasury Secretary still has the responsibility for
overseeing those assets. It is possible to do that. The
question is whether that is an efficient use of taxpayers'
dollars to create that administrative infrastructure since the
Treasury Secretary still has the responsibility for oversight.
Chair Warren. Good. I am going to quit early this time.
Mr. Silvers.
Mr. Silvers. Thank you.
I want to circle back to where we started on executive pay.
Thinking about this, it seems to me that this week we have seen
a fair amount of public anger about bonuses in the financial
sector, most of which are actually not to top executives and
most of which are across a number of firms not all of which
will be subject to Mr. Feinberg's recommendations.
So what do you say to the public who are expressing the
view that firms like JP Morgan, Goldman Sachs, Morgan Stanley
are alive today because of the combination of CPP funds and
Federal Reserve dollars, that they have now handed out vast
sums to a relatively small number of people, sums that would
simply not have been there absent government support? And they
are not going to be affected by Mr. Feinberg's recommendations
because they apply only to the banks we were discussing
earlier. What do we tell the public?
Mr. Allison. Well, the Administration and the Treasury
Secretary have been outspoken about the need for financial
institutions to structure their compensation in ways that
promote a long-term view for the health of those companies and
responsible risk-taking. Obviously, the public is angry about
the pay levels in the financial industry among some
institutions, not all by any means. I am sure that the boards
and the managements of those institutions must be aware of
this.
We have also, as you know, imposed the interim final rule
on the institutions receiving special assistance from the
Federal Government and the results of those determinations will
be out very shortly. Other banks that are still in the Capital
Purchase Program, for instance, and these other programs that
we mentioned are still subject to the rules that govern those
companies on compensation as well.
What we need is comprehensive reform of financial
institutions and the regulations that cover them. Boards have
to be responsible in making sure that their pay programs are
reasonable, that they are paying for real economic performance
and not just spurts in market prices. In addition, they are
creating incentives for their employees to think about the long
term and to manage risks responsibly.
Mr. Silvers. It seems to me that in respect to the bonuses
that were just announced, the horse has left the barn. And my
question is, would the Administration consider looking at tax
policy as a way of roping that horse?
Mr. Allison. Well, I am sure that Congress and the
Administration are equally concerned about this, but I cannot
speak for tax policy.
Mr. Silvers. With some of your colleagues at Treasury, you
might want to have a chat together.
Mr. Allison. I am sure that others will have more to say
about this in the future.
Mr. Silvers. Let me move from that.
Earlier this week, Neil Barofsky issued his report as the
Special Inspector General. He raised an issue. His report
talked about a sort of confidence deficit or something of the
like. I forget the exact term he used. And he cited
particularly the statements made by your predecessors about the
fact that all the banks that were getting CPP money were
healthy and that that was clearly not true.
I have noted in the past that I think one of the
achievements of your team and Secretary Geithner was to reverse
that position, that the stress tests were effectively a
reversal of that.
I would like you to address what other steps you are taking
to, shall we say, reverse this confidence deficit, with
particular reference to what plans you have to be forthcoming
about the destiny of these large banks that were the subject of
this misrepresentation, according to Mr. Barofsky, around their
health.
Mr. Allison. Well, first, let me make clear that as we
expressed in a letter that I sent to Mr. Barofsky some time
ago, we fully share his concern that the Government operate
with transparency and accountability. And that has guided us
during this administration.
And we have published voluminous information about the TARP
program on our Web site, financialstability.gov, about the
lending practices of the banks, about every transaction that we
have done, and about the models we use in valuing warrants and
valuing our investments. We are going to be reporting a full
accounting of the value of these investments by the end of this
year so that the public can see for themselves what the returns
have been on the money they have invested through TARP. So we
are trying to be as open as possible.
I have dialogues with Mr. Barofsky every week and sometimes
more than once a week. For example this week we met several
times. We, I think, share the same goal: to try to protect the
interests of taxpayers while also promoting financial
stability. We have adopted at least three-fourths of the
Special Inspector General's recommendations, as we have your
own recommendations, which we welcome, the GAO, and the
Financial Stability Oversight Council. So, we are trying to be
as open and responsive as we can possibly be, and we understand
our substantial responsibility to the American public.
Chair Warren. Mr. Neiman.
Mr. Neiman. Thanks.
To give you a heads up for our future reports, in our
December report we are going to look back over the last 12
months and really look at how effective--what are the
measurements, what are the metrics that we should be looking
at, what measurements that the American taxpayer should be
looking at to see the state of the economy and the
effectiveness of the Treasury's program. And credit
availability will be an important part of that analysis.
As you know, though, measuring credit availability in this
environment is very complex, and we know that credit contracts
in a recession as banks and consumers deleverage, and we know
that underwriting standards become tighter as banks strive to
conserve capital.
So I am looking to you as we grapple with this question.
How should the American taxpayer be assessing the effectiveness
of the Treasury's programs to promote bank lending? Should they
be looking at credit spreads or bank origination levels or
portfolio holdings? What would be helpful and meaningful for
the American taxpayers?
Mr. Allison. Thanks for your question. Actually we do a lot
of thinking and work on that subject. We have many different
measures that we use to assess the effectiveness of these
programs as well as the activity in the financial markets. We
would be glad, by the way, to sit down with members of your
staff to go over our metrics, as you produce your own report.
But I have to say that for all the measures of debt spreads
and prices capital ratios, what is important to the American
public is whether the job market is getting better, can I
afford to stay in my home, and are businesses able to get
credit. And even though these programs have helped to alleviate
these problems, we are not by any means satisfied. We have to
keep on striving to make these programs as relevant and as
useful to the American public and produce real results.
That is why we are altering the thrust of the TARP program
today from having helped the large financial institutions
survive, which was important to the financial system given
their role, but now get into what is happening with the
American public. Can the small businesses get capital? Can
small banks be helpful, and can people stay in their homes? So
that is where we are focusing our effort today.
We can give you the financial metrics, the more
sophisticated measures that we use, but I think ultimately
these programs will be judged by their impact on the American
economy as felt by the American public.
Mr. Neiman. Are there any plans to expand the monthly
lending snapshot? I know you have extended it beyond the
largest 19 to include 200 banks, though it is a monthly
snapshot. I have been recommending for a while that it should
include trend information, comparisons to earlier periods such
as 2006 when credit was running high and even the fall of 2008
when credit markets were frozen. And I think those kind of
trends would provide perspective for the American public as to
where we are in comparison to where we were.
Mr. Allison. I think that is a great suggestion and let us
see what we can do there.
Mr. Neiman. Great.
Mr. Allison. Thank you.
Chair Warren. Assistant Secretary, thank you very much.
Thank you for your time. Thank you for your service.
Mr. Allison. Thank you.
Chair Warren. We appreciate your coming here today.
The record will remain open for additional questions from
the Panel and from our members who could not be here today.
With that, this hearing is adjourned.
[Whereupon, at 11:30 a.m., the hearing was adjourned.]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]