[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






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                     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

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                                                                   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:]

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    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.]

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