[Senate Hearing 111-208]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-208
 
            OVERSIGHT OF THE TROUBLED ASSETS RELIEF PROGRAM 

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

         CONTINUING THE OVERSIGHT OF THE TROUBLED ASSETS RELIEF
  PROGRAM AND EXPLORING HOW THE PROGRAM CAN BE MADE MORE EFFECTIVE IN 
             ADDRESSING THE FINANCIAL CRISIS IN OUR NATION

                               __________

                              MAY 20, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

              William D. Duhnke, Republican Staff Director

                       Amy Friend, Chief Counsel

                   Dean V. Shahinian, Senior Counsel

                          Julie Chon, Counsel

               Jonathan Miller, Professional Staff Member

                  Drew Colbert, Legislative Assistant

                       Deborah Katz, OCC Detailee

                Mark Oesterle, Republican Chief Counsel

                Andrew J. Olmem, Jr., Republican Counsel

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
















                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, MAY 20, 2009

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Reed
        Prepared Statement.......................................    49

                                WITNESS

Timothy Geithner, Secretary, Department of the Treasury..........     6
    Prepared statement...........................................    49
    Response to written questions of:
        Senator Dodd.............................................    59
        Senator Kohl.............................................    64
        Senator Bennett..........................................    65
        Senator Crapo............................................    67
        Senator Vitter...........................................    70

              Additional Material Supplied for the Record

Letter submitted by Senator Martinez.............................    72

                                 (iii)


            OVERSIGHT OF THE TROUBLED ASSETS RELIEF PROGRAM

                              ----------                              


                        WEDNESDAY, MAY 20, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:38 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Christopher J. Dodd (Chairman 
of the Committee) presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The Committee will come to order.
    Let me welcome the Secretary, and the audience is gathered 
this morning to hear testimony from the Secretary of the 
Treasury. Our hearing this morning is on the continuing 
oversight of the Troubled Assets Relief Program. We thank you, 
Mr. Secretary, for joining us here this morning.
    I intend as Chairman of this Committee for this to be 
something of a regular date with us over the coming weeks and 
months. A number of my colleagues have raised the issue in the 
past, and I know your recent comments about transparency at the 
Department, in a sense you have a lot of important jobs to do, 
and I know that coming before congressional hearings all the 
time can be seen by some as a distraction from the daily 
routines. But, obviously, at times like this where so much of 
our constituents' tax money is at play, having you come before 
us with some regularity to talk about these issues I think is a 
critical component of the job. And so while we will try not to 
abuse the relationship between the Congress and executive 
branch, I think unlike other times, this moment requires that 
we have more of an ongoing public conversation about these 
issues. So with some regularity we will be asking you to be 
here before this Committee in the coming weeks and months.
    I intend for this, as I said, to be something of a regular 
date. The American people have a lot on the line right now, as 
all of us know, and it is their money we are talking about. So, 
Mr. Secretary, with so much on the line,
    I would like to have you before this Committee on a monthly 
basis.
    Today the Committee meets to continue its oversight of the 
Troubled Assets Relief Program and explore the program's 
effectiveness in addressing the financial crisis. When the 
Secretary was last before this Committee in February, only a 
few short weeks after President Obama took office, I said that 
we needed a sharp change in the direction of the TARP program. 
In particular, I wanted to see a commitment to three things:
    First, extending credit to families so that families could 
pay for a home, a car, college tuition for their children, and 
to businesses so they could stock inventory and meet payrolls.
    Second, I wanted to see a commitment to restoring 
confidence, a clearly articulated plan for the prudent 
commitment of TARP funds, and a renewed focus on lending.
    And, third, I wanted to see clarity for the American people 
who have a right to know where our economy is headed and how 
Government assistance is being used.
    Since that time, we have seen several major initiatives, 
many of which the Secretary here played a very key role in 
developing. And to be sure, we have seen progress in certain 
areas. In February, the administration unveiled its 
Homeownership Preservation Program which consists of two parts: 
the first, a refinance program, which will help, we hope, 4 to 
5 million homeowners, many of whom owe more on their homes than 
they are worth, to get into stable mortgages; the second 
component draws upon $50 billion in TARP funds to help between 
3 and 4 million at-risk homeowners modify their home loans. And 
I would like to know what additional tools, if any, the 
Secretary may need to ensure that the program works to the best 
of its ability.
    The Center for Responsible Lending projects that some 
17,000 homes in my home State will go into foreclosure in 2009. 
That will be 60,000 in the small State of Connecticut over the 
next 4 years, reminding us that the housing crisis remains at 
the root of our underlying financial crisis.
    We need to get to the bottom of the housing crisis, I think 
all of us acknowledge, and I believe this program, supplemented 
by the legislation that passed the Congress, both Houses, just 
yesterday offering banks a safe harbor to do modifications, and 
I thank Mel Martinez, our colleague and former HUD Secretary 
for his efforts in that record. It provides a mechanism by 
which we can. But in other respects, it is still too soon to 
tell whether we are seeing the progress that we need. Much of 
the mortgage market and our financial system remain dependent 
on the Government to function at all. Lending remains down, way 
down, and my hope is that the legislation that I have just 
mentioned, which also increases the permanent borrowing 
authority of the FDIC, the Federal Deposit Insurance 
Corporation, and the National Credit Union Administration, and 
increases in deposit insurance limits will contribute to the 
healthier banking system our communities need in order to 
thrive.
    Along the same lines, I am pleased that your Department 
recently announced it will use some $15 billion to free up 
money for lenders to make new loans to small businesses. This 
is a major concern of ours. I hear this every day from our 
colleagues. The SBA program, when is small business going to 
get money? When can they get help? They are struggling. A major 
source of employment in this country comes, obviously, from 
small business, and they are struggling, Mr. Secretary.
    Just yesterday, The Wall Street Journal reminded us again 
of the troubled commercial real estate sector and how that 
poses--what risk that poses to our financial system. That 
report found that such loans which fund the construction of 
shopping malls, hotels, office and apartment buildings, could 
generate losses of $100 billion by the end of next year at some 
940 small and mid-size banks. Indeed, one of the results of the 
stress test administered to the 19 largest U.S. bank holding 
companies returned largely encouraging results. In the rush to 
address concerns facing the institutions that are too big to 
fail in this crisis, we must not forget about the threat posed 
by those that many may well prove to be too small to survive--
the smaller institutions on which families and businesses 
across our Nation depend for credit.
    Perhaps the biggest step the Secretary has taken is the 
Public-Private Investment Program the Treasury Department 
rolled out in March, which I hope will at long last put an end 
to the lurching interventions in the banking system that were 
part and parcel of the previous administration's approach. 
Drawing upon $75 to $100 billion of TARP funds, the program 
seeks to engage private investors in partnership with the FDIC 
to purchase from banks and other institutions so-called legacy 
assets, which have fallen sharply in value and put enormous 
strain in our financial system.
    The question now would appear, Will this program work? Many 
questions have been raised. The Committee will be monitoring 
that program carefully, and I am interested to hear how the 
Secretary believes the results of the stress test will affect 
the program and whether the banks will still be willing to sell 
those assets at discounted prices given the better than 
expected results of the stress test.
    We have also seen Treasury's continued administration of 
the automotive industry financing program under TARP and the 
Presidential task force on the auto industry to help stabilize 
the auto industry, upon which one in ten American jobs depend. 
Now, we know June 1 is a big date, but I want to let my 
colleagues know on the Committee that my intention is shortly 
after June 1 to have either the Secretary or Mr. Rattner or 
whoever is appropriate to come before this Committee to report 
on the results of that effort and where we stand with Chrysler 
and GM as well. The President and the Secretary appreciate the 
risk that the failure of any one of the Big Three automakers 
could pose to our economy, and right now GM is working to beat 
the June 1 deadline for an agreement with management, the UAW, 
creditors, and suppliers. Chrysler, as we all know, is in the 
midst of bankruptcy, and clearly we are still a ways away from 
knowing how successful those efforts are at helping these 
companies achieve long-term viability. But, again, transparency 
demands, I think, that we have a public disclosure of how those 
programs are working.
    And so I think the picture remains mixed, Mr. Secretary. 
After losing some 5.1 million jobs since the recession began in 
December of 2007, with almost two-thirds of those losses 
occurring in the recent 5-month period, there is no question 
about the barrage of initiatives undertaken by the 
administration and the Congress these last several months to 
aggressively combat this crisis that have produced some 
results. And the TARP has played a critical role in virtually 
all of those efforts, I might add.
    Now, having apparently staunched much of the bleeding, the 
challenge now is how we pump new life into the patient. We hope 
to explore what further role the TARP can play in this process 
and what other tools we must provide to our financial system 
and the country in order to get us back on our feet again.
    With those questions the Committee has this morning, I now 
turn to my colleague from Alabama, Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. Welcome to the 
Committee, Mr. Secretary. As Senator Dodd indicated, I think we 
will be spending a lot of time together in the next year or so.
    Mr. Secretary, a review of the Troubled Assets Relief 
Program, or TARP, reveals a record that is mixed at best. Since 
TARP's hasty conception last September, the Treasury Department 
has repeatedly stumbled in its effort to turn it into a 
workable program. Rather than taking the time to devise a 
credible plan, Treasury and the Fed I believe simply demanded 
that Congress write a blank check. Unfortunately, Congress 
panicked and quickly passed the TARP, giving Treasury and the 
Fed exactly what they wanted.
    Secretary Geithner, you have been, first as President of 
the New York Fed and now as Treasury Secretary, a key architect 
and now an implementer of the program.
    Since TARP's creation, Treasury has vacillated about how to 
spend the funds. Initially, Treasury was to purchase toxic 
assets from banks through Government-run auctions. When that 
approach proved unworkable, Treasury decided to make direct 
capital injections into banks. When that approach still left 
large institutions without sufficient resources, Treasury 
embarked on a series of ad hoc financial bailouts.
    Now, today, we have come full circle. Once again the 
Treasury plans to purchase toxic assets, this time, as you have 
told us, using public-private partnerships. All of these plans, 
Mr. Secretary, have one thing in common: Government 
intervention on a massive scale into our economy.
    While the Government has an important role to play in 
stemming a financial crisis, in my opinion the programs laid 
out thus far by you, Mr. Secretary, go well beyond what is 
appropriate and necessary. As a result, TARP has become one big 
bailout fund, and not just for banks.
    When a few insurance companies ran into trouble due to bad 
business decisions, Secretary Geithner, you announced that they 
could access TARP funds and avoid the consequences of their 
actions. When the automakers needed cash, Mr. Secretary, you 
were there with a check. And what has Treasury accomplished so 
far? That is part of this hearing today.
    Its principal achievement over the past year has been, in 
my judgment, to spark the greatest financial panic this country 
has seen in 70 years. The Treasury and the Fed's desperate 
calls last September for the passage of the TARP legislation 
spooked investors and consumers alike. In response, the market 
plummeted and the economy contracted sharply.
    I believe that had the Treasury, as we look back, and the 
Fed exercised different judgment and proceeded in a more 
deliberative and measured manner, the most severe aspects of 
this financial crisis could very well likely have been avoided, 
probably without pain. The failure to devise, Mr. Secretary, a 
clear and credible plan for employing TARP has also resulted in 
a massive waste, some people believe, of taxpayer dollars. 
Today the problems with our banking system remain unresolved, 
despite Treasury having committed approximately $600 billion.
    Lending is still severely depressed, and questions remain 
about the financial health of many of our banks, despite the 
results of the stress tests. While the TARP has treated many 
sick banks, it certainly has not cured them, and as long as the 
integrity of our financial institutions remains in question, 
economic recovery will continue to elude us.
    I believe that this uncertainty would not exist had 
Congress taken the time to provide a clear legislative mandate 
for the TARP rather than leave the program to the discretion 
and the whims of Treasury's ever changing policy preferences. 
That, of course, did not happen, and most of our biggest banks 
today continue to hold large tranches of TARP funds, allowing 
them to avoid making, I believe, Mr. Secretary, difficult 
decisions.
    I fear this situation sets the stage for the creation of 
the American version of the zombie banks that were a principal 
cause of Japan's so-called lost decade. During that period, as 
you well know, Japan's economy stagnated because government 
bailouts propped up banks and sheltered them from making the 
changes that the free markets would have demanded and made on 
their own.
    Another thing that the TARP has accomplished is covering up 
the egregious failures of our banking regulators over the past 
decade. TARP funds have saved financial institutions whose 
failures would have cast a bright light on many of our banking 
regulators. This should come as no surprise to many as many of 
those banking regulators are now running TARP programs, 
including you, Mr. Secretary, yourself.
    As President of the New York Fed, Mr. Secretary, you were 
the chief regulator of many of the financial institutions with 
the most serious problems, including Citicorp. Unfortunately, 
the Treasury also appears to be using the TARP to advance its 
regulatory reform agenda by placing your prior employer, the 
Federal Reserve, at the apex of our financial regulator regime. 
I would point out to the Secretary today that there are 
serious, serious, Mr. Secretary, unexamined questions regarding 
the Fed's failure to fulfill its preexisting regulatory 
responsibilities. You have acknowledged some of those failures.
    With that in mind, I will view with great skepticism any 
move to give the Fed expanded authority. In the meantime, we 
should be under no illusions about how difficult it will be to 
unwind the massive funding facility that Treasury and the Fed 
have constructed. The longer the TARP and these programs exist, 
the more markets will depend on them. As a result, it is very 
likely that the greatest challenge posed by this financial 
crisis still lies ahead, Mr. Secretary. If the Treasury and the 
Fed stumble in dismantling these facilities, they risk sparking 
another and potentially more severe crisis. This is especially 
true if the Fed promises its ability to conduct monetary policy 
in the process.
    If done well, the withdrawing of Government intervention 
will likely go unnoticed. If done poorly, we could be facing a 
serious inflation problem or a prolonged economic downturn.
    I look forward to hearing from you, Mr. Secretary, on how 
you propose to retract TARP facilities and how quickly you 
believe it could be done and under what circumstances. In 
addition, I hope to learn today whether you believe that the 
Fed and the Treasury need to formulate a clearer framework for 
the administration of existing facilities to ensure that the 
Fed remains focused on its core mission of monetary policy.
    Looking ahead, Mr. Secretary, I hope that TARP can be wound 
down in the right way at the appropriate time in manner more 
deliberative and well thought out than the process by which it 
was created and implemented.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Let me ask my colleagues if any of you feel so compelled 
that you would like to make an opening statement. If not, I 
would like to get right to the Secretary, but I certainly do 
not want to deprive anyone of the chance. Bob, do you have----
    Senator Menendez. Mr. Chairman, I do not have an opening 
statement. I have a question for the Chair, and that is, do you 
intend at some point today to pursue the FTA Administrator's 
nomination or is that not on the agenda?
    Chairman Dodd. Well, I do not know. I have to talk to 
Senator Shelby.
    Senator Menendez. I would defer to the Chair and the 
Ranking Member to consider it, if it is possible. There are a 
whole host of projects that are----
    Chairman Dodd. We are talking to the minority, and this is 
a person, I can tell you, who is highly regarded and respected. 
In fact, we will try and get that done.
    Senator Menendez. Great. Thank you, Mr. Chairman.
    Chairman Dodd. Anybody else want to make an opening comment 
at all or suggestion here before we start with the Secretary? 
Hearing none, no takers, Mr. Secretary. We welcome you to the 
Committee once again. Any and all statements, documents, and so 
forth that you want to make a part of the record will be 
included.

  STATEMENT OF TIMOTHY GEITHNER, SECRETARY, DEPARTMENT OF THE 
                            TREASURY

    Secretary Geithner. Thank you, Mr. Chairman. I have a few 
brief opening remarks, and I look forward to getting a chance 
to respond to your questions and concerns. And let me just say 
that I would be happy to come up here as often as would be 
helpful, and I agree with you that these are deeply important 
issues to the future of the country, and they require careful 
public oversight and debate. And I am committed to sitting 
before you as much as it would be helpful and help work through 
the difficult choices we are making, make sure you understand 
how we are balancing those choices. People are not going to 
agree with all the choices we make, but we will give you a 
chance to make sure you have as much exposure to our process as 
possible.
    Chairman Dodd. I welcome that very much, and I know my 
Committee members do as well. So I appreciate that.
    Secretary Geithner. And, Senator Shelby, could I just say 
at the beginning that in my statement today and in my remarks, 
I am not going to talk about what you called an ``exit 
strategy,'' but I want to say that I agree very much with you 
that one of the biggest challenges we face--not just on the 
fiscal front, but in the financial sector--is how we lay the 
foundation for walking back and unwinding these extraordinary 
interventions, and doing that carefully and well will be one of 
the most important things facing us. So I agree with you about 
that challenge, and I very much look forward to a chance to sit 
before you and talk through how best we can do that.
    Senator Shelby. We will have to do that to have a real 
market economy, will we not?
    Secretary Geithner. We will, and, you know, you cannot--you 
know, my view, Senator, as you know, is that crises do not burn 
themselves out. Crises this severe do not burn themselves out. 
To fix them requires the action of Government. But for the 
thing to work, there needs to be critical commitments to walk 
this back, unwind it as quickly as conditions permit. That is 
central to the effectiveness of the strategy, and I agree with 
you it is a very important thing to do. But I just wanted to 
warn you that I am not prepared to talk to that today. It is 
not quite time yet.
    Chairman Dodd. We all agree with that.
    Secretary Geithner. We are not quite there yet.
    Chairman Dodd. Go ahead, Mr. Secretary.
    Secretary Geithner. Thank you, and thank you all on the 
Committee today.
    The last time I was here was early February. Today I am 
pleased to report that there are encouraging signs that the 
financial system is starting to heal. Concern about systemic 
risk has diminished, and overall credit conditions have started 
to improve. These are welcome signs, but we have a long way to 
go.
    Across the country, families and businesses are still 
facing the most challenging economic environment they have seen 
in decades, and we are only at the beginning of laying the 
foundation for recovery.
    I want to provide an update today on the status of the 
programs we put in place to help repair the financial system. 
This administration, working very closely with you and your 
colleagues in the Congress, has moved very quickly. Alongside 
the passage of the Recovery Act, we have outlined a 
comprehensive set of initiatives to help restore confidence in 
the financial system and to restart the flow of credit.
    We began with reforms to establish strong standards of 
transparency, accountability, and oversight. We redirected the 
program to focus on getting the essential channels for lending 
and credit working again. We launched new programs focusing on 
the housing market, on consumer and small business lending, and 
we put in place a strategy to help strengthen, recapitalize, 
clean up, and restructure the major banks so that private 
capital would flow to where it was needed in the financial 
system.
    Just a few examples of progress. Starting with 
transparency, we established a number of new online resources 
so that Americans can see the precise financial terms of the 
assistance we are providing; who is receiving assistance; and 
what they are doing with that assistance; what is actually 
happening to lending across the major banks.
    The President's housing program, alongside actions by the 
Federal Reserve, has helped bring down mortgage interest rates 
to historic lows. Refinancing has surged, and the new loan 
modification program is just starting to get some traction.
    The Federal Reserve's Term Asset-Backed Lending Facility, 
which the Treasury supports with capital, is helping to restart 
the asset-backed securities market, which is critical to 
consumers and businesses. To date, there has been about $25 
billion in total new asset-backed securities issuance since the 
program was launched. As issuance of securities under this 
program has resumed, interest rates have come down 
substantially.
    The stress test led by the Federal Reserve has brought an 
unprecedented level of transparency and disclosure to the major 
banks, helping improve confidence in the financial system as a 
whole. This assessment showed that some banks needed additional 
common equity to ensure they could comfortably absorb extreme 
losses, but it also showed that many banks are now in a 
position where they could choose to begin to repay the 
Government's investments.
    To date, more than $56 billion in additional capital funds 
have been raised or announced by the 19 banks, including $34 
billion in common equity capital. I believe these numbers are a 
day behind. And banks have raised more than $8 billion in non-
FDIC-guaranteed bonds.
    We are making substantial progress in supporting 
fundamental restructuring of GM and Chrysler. In the coming 
weeks, we will be moving to put in place additional pieces of 
our program to help small banks get additional access to 
capital, to help catalyze more small business lending, to put 
in place our Public-Private Investment Program to help restart 
the market for legacy real estate loans and securities, and to 
finalize regulations to clarify conditions on compensation for 
firms receiving capital assistance from the Government.
    While this is not the subject of today's hearing, we have 
been working very closely with this Committee and your 
counterparts in the House to enact comprehensive regulatory 
reform. We have announced proposals to reduce systemic risk, to 
establish comprehensive oversight of derivatives markets, to 
give the Government better tools to manage future crises with 
resolution authority to help contain the damage caused by the 
prospective failure of a large, complex financial institution. 
We detailed plans to improve consumer and investor protection, 
and I want to compliment Chairman Dodd and Ranking Member 
Shelby for their strong leadership, not just in the housing 
area but in advancing important credit card reform legislation.
    Just a brief update on resources committed under the 
Emergency Economic Stabilization Act. At the time the President 
was sworn in, over half of the $700 billion allocated to 
Treasury had already been committed. I have included a detailed 
table of commitments in my written testimony. As the table 
shows, we estimate that we still have about $100 billion in 
resources authorized under the EESA still available and an 
additional $25 billion in estimated repayments over the next 
year. These are estimates only. They may overstate the amount 
of likely take-up under the programs we have announced. They 
may understate the amount of repayments we are going to 
receive, and I want to emphasize that we still face a very 
challenging economic and financial environment, and we need to 
be careful to preserve substantial resources and flexibility to 
deal with future contingencies.
    The combined impact of these programs to date, alongside 
actions by the Fed, the impact of the recovery program, and the 
President's initiatives in the G20 to lay the foundation for 
global recovery, have helped improve conditions in the 
financial system materially. The cost of credit is starting to 
ease. Interest rates on mortgages have dropped to historic 
lows, and refinancing has surged putting additional money into 
the pockets of millions of Americans. Businesses are finding it 
easier to raise money in the capital markets. Securities 
markets, asset-backed securities markets, are starting to open 
up again. State and local governments are finding it somewhat 
easier to finance investments in their communities and 
rebuilding their infrastructure. The cost of borrowing by banks 
has fallen substantially, reflecting greater confidence.
    We have already seen a very substantial amount of 
adjustment in our financial system. Leverage has diminished. 
The more vulnerable parts of the non-bank financial system--and 
banks, too--have diminished substantially. And banks are 
funding themselves much more conservatively.
    This is all welcome news, but I want to emphasize this is 
just the beginning. The cost of credit for businesses and 
families is still unusually high, remarkably high. Credit terms 
are very tight still. Bank lending is falling to both consumers 
and businesses. Much of this, of course, is the unavoidable 
consequence of a recession following a long period of excess 
borrowing and lending. But we still face ahead a prolonged 
period of repair and adjustment. There are still very 
substantial risks to recovery, and it is very important that 
financial institutions take advantage of the recent modest 
improvement in markets to strengthen their institutions and 
raise capital.
    We need to continue to work to improve the capacity of the 
financial system to support a strong recovery. Greater 
confidence in the stability of the system is an important part 
of this, a necessary part of this. But we need to make sure 
that banks are able to expand lending as demand for credit 
starts to increase. And we need the broader securities markets 
working better for the same reason. And this is what our 
programs are designed to do. We will continue to work to make 
sure they meet that objective.
    I look forward to working with this Committee on how best 
to do that. Thank you very much.
    Chairman Dodd. Thank you very much, Mr. Secretary. We 
appreciate that. What I am going to do is ask the clerk to give 
us about 5 or 6 minutes apiece, and I will not be too rigid on 
the time, but so we all get a chance to raise questions with 
you.
    Let me start off, if I can. I suspect this would be a 
question that every one of us would raise with you. I will 
raise it. Others may want to expand on the question. But every 
one of us goes back, Mr. Secretary, to our respective States 
with some regularity, and when we do, I suspect everyone on 
this side of the dais is getting questions from their 
businesses--small, large, medium: Where is credit? How can I 
get credit? You guys are pushing a lot of my tax money into--
the very bank that received my tax dollars is turning around 
and telling me I cannot get a loan or I cannot refinance my 
home.
    That is a pretty basic question we are all getting, and 
they do not understand why, since we are providing so much of 
the resources to keep these institutions afloat--and you made a 
good case why we should do that, for the well-being of all of 
us. But they do not understand why these institutions are not 
being more forthcoming at a time we are providing substantial 
dollars to them to keep them alive.
    And so the question would be: Are we doing all we could to 
get credit flowing? Are there more things that you can be 
doing, the Department can be doing, that we ought to be doing? 
But the frustration level mounts on an hourly basis with 
people's lack of access to credit, despite the billions that we 
made available to these institutions?
    Secretary Geithner. I agree, Mr. Chairman, and I hear that, 
too, across the country, and I agree that in many parts of the 
country, people do not feel it getting better yet. They do not 
feel that the availability of credit is improving materially.
    Small businesses who were careful, who did not get 
overextended, did not borrow too much, still face two types of 
challenges. Some of them had relationships with banks that took 
on too much risk and are having to shrink substantially. They 
were unlucky in the choice of their banks. Some of them are in 
industries that are seeing demand for their products shrink 
dramatically, as happens in any recession, and they are under a 
lot of pressure because of those two things.
    Now, what we have done, working with the Congress--and I 
just think this is important to enumerate. The recovery program 
has very substantial tax credits for small businesses. The 
recovery program includes a substantial increase in guarantees 
and a reduction in fees for small business lending programs, 
and we have seen lending under those programs increase 25 
percent since the Recovery Act was passed.
    We have proposed and laid out and are close to putting in 
place additional programs allowing the Government to directly 
buy small business loans off the balance sheets of banks, 
creating more headroom for them to lend to small businesses. 
Those programs have been delayed a bit, probably by concerns 
about participation in these programs, but we are close to 
launching those programs. Those alongside the Fed facility will 
help reopen markets for small business lending.
    We are also looking at ways to get more capital into 
community banks. I announced 2 weeks ago that we are going to 
reopen the window for small banks to come to the Treasury and 
apply for additional capital, reopen the ability of some banks 
to establish bank holdings companies, which will help as well. 
And I think the combined effect of these programs, when in 
place, will help.
    Now, they will not make it easy for a lot of businesses 
across the country still, again, because we are going through a 
very traumatic financial crisis that was caused in large part 
by too much borrowing and too much lending. And the adjustment 
process of that will be difficult. The demand for credit is 
falling substantially as businesses repair their balance 
sheets. That process has a long ways to go. But I think our 
obligation is to make sure that the financial system has the 
capacity to make credit available to viable businesses. These 
programs will help.
    We are continuing to look at new ways to reinforce these 
programs. We are working very closely with the SBA and with the 
Fed, and we are open to new suggestions and look at any good 
idea.
    Chairman Dodd. I do not want to dwell on the SBA, but I got 
to tell you, you mention the word ``SBA''--and all of us have 
done this to audiences back home--and you get a roll of the 
eyes. That is the mild response. And I say this respectfully 
about the SBA. I know they try hard. But the fact is that this 
program--I know some efforts have been made to increase to 90 
percent the guarantees and do other things under the 7(a) 
program. But it basically is not seen as a great friend in a 
moment like this.
    So I would urge you to be suggesting--you have got bright 
people down there. How could we make that program be far more 
aggressive and supportive of what is going on out there? If 
this is going to take time for the normal private commercial 
lending operations to open up their doors, something better 
needs to be done by the SBA, because it is just not seen as an 
ally and a friend on their side in this matter.
    So I just raise that with you because I can just tell you, 
when I have raised the SBA program, I get the roll of the eyes. 
That is the polite response when you bring it up.
    Let me, if I can, jump to commercial real estate, because I 
do not want to--we all have limited time here. The Wall Street 
Journal reported on Tuesday that when it applied the stress 
test worst-case assumptions to 940 small and mid-size banks, 
total losses would exceed $200 billion in those banks, those 
940 banks, through 2010, with commercial real estate loans 
accounting for half the losses. Two-thirds of the 940 banks 
would fail to meet the common equity capital threshold that was 
applied to the 19 largest banks in the stress test.
    Now, we all know that over $1 trillion in commercial 
mortgages are coming up for renewal over the next several 
years. Certainly there is no financing available to roll these 
loans over.
    So what impact will these commercial loans have on the 
banking sector, the broader economy, and, again--and we do not 
say this enough. We talk about the banking sector. I think most 
of us have been impressed with how our local community banks in 
our States have been prudent, have been conservative, have 
handled themselves well over the last few years, and yet they 
find themselves feeling tremendous pressure and stress at a 
time like this. So how are we going to handle this? This light 
at the end of the tunnel is beginning to look like a train, not 
relief.
    Secretary Geithner. You are exactly right. This is a major 
challenge for banks across the country and for real estate 
developers and people with existing projects they are trying to 
refinance.
    You are also right to say that, in general, community banks 
across the country came into this recession with higher capital 
ratios, higher quality capital, in a stronger position. They 
were not generally part of the problem, and they will be able 
to be a greater part of the solution because of that.
    I think the best thing we can do and the most effective way 
we can deal with this, apart from trying to get the economy 
back on track through the efforts in the recovery program, is 
to make sure we are providing capital where it is necessary in 
the financial system, and that we are getting those securities 
markets working again.
    The Fed announced yesterday the very important step that it 
is going to extend this lending program to commercial mortgage-
backed securities, both newly issued securities and legacy 
assets in that area. The market responded quite favorably 
because the availability of financing in those markets will 
help get the capital markets in those areas going again. So the 
combination of more capital where it is necessary and getting 
the securities markets back to the point where they can help 
refinance viable projects are two very important steps to take. 
But you are right to say this is a significant challenge ahead 
still, and the supervisors are going to be busy trying to make 
sure that the system can manage through that problem.
    Chairman Dodd. I have one additional question. I am going a 
little over time, but I do not want this matter not to be 
raised. I understand that the GAO recommended in March that AIG 
seek concessions not only from management and employees, but 
also from derivatives counterparties and creditors in return 
for receiving an additional $30 billion in TARP funds allocated 
to the company. SIGTARP also announced plans to review 
Treasury's efforts to obtain concessions from these AIG 
stakeholders. I understand that, to date, we have required no 
concessions at all from AIG's derivative counterparts and 
creditors. And while I accept the concerns about systemic risk 
consequences--that is not an illegitimate issue--I find it hard 
to understand why we have to go on indefinitely paying off 
these companies at 100 percent at a time when AIG is not worth 
100 percent, its stock.
    And so where is the negotiation going on here? Why aren't 
we pressing back? Hell, we own about 80 percent of this 
company. It seems to me we ought to be pursuing this more 
aggressively than paying 100 percent on the dollar to this.
    Secretary Geithner. Senator, I agree, it is frustrating and 
it is hard to explain why this is necessary and fair. But let 
me just say it as starkly as we can.
    We do not have the authority as a Government--and we came 
into this crisis without the authority--to intervene to manage 
better the risk posed to the system and the economy of an 
institution like AIG. We did not have the authority and the 
system did not prevent it from taking on too much risk, and we 
did not have the authority to manage its unwinding in a 
carefully measured way.
    That makes it incredibly difficult for us to allocate or to 
negotiate effectively to reduce the value of those claims. We 
have no option now to selectively diminish the value of those 
claims without taking risk that you would have a default and 
its consequences for this institution at this time. And I do 
not believe that the system today can withstand the effects of 
a failure of this institution to meet its obligations.
    I wish it were not the case. Nothing would make me happier 
than if we were in the position today where we could start to 
walk back that support and diminish the Government's 
involvement in this institution. But we do not have that 
ability today. If I felt we did, I would do it in a second. And 
we are working very, very hard with the trustees and the Fed 
and the management of that company for them to put in place a 
restructuring plan which will de-risk the most risky parts of 
the institution and preserve and separate those underlying 
insurance businesses, which are very good businesses still. And 
we have a big interest as taxpayers now in their success in 
maximizing value in the disposition of those companies.
    That is the balance we are trying to strike. If I thought 
there was a better way to maximize benefits to taxpayers, then 
we would do it in a second. But without better authority, 
better resolution authority, we have very limited options in 
the AIG case.
    Chairman Dodd. Well, my time has expired. I have gone over 
a bit and I apologize to my colleagues. But with all due 
respect, Mr. Secretary, we need a better answer on this, 
because that is too much exposure at this. So I will end on 
that particular note, and others may want to raise questions 
about this, but let me turn to Senator Shelby.
    Senator Shelby. Thank you.
    Mr. Secretary, I just want to pick up on where Senator Dodd 
was on AIG. It seems to me that this is a black hole; in other 
words, we keep pumping billions of dollars into AIG. It seems 
that from even some of your statements you have not got all 
your hands around this bear, so to speak, and it is still 
hemorrhaging money. Some people believe that some of the 
company we worth a lot more, the insurance companies, 6 months 
ago than they are worth today. I do not know what they are 
worth today.
    So how are you going to back out of this? How are you going 
to liquidate or sell parts or all of AIG and quit using the 
taxpayers' money? Because the taxpayers are upset with this, as 
you know, and it is a difficult situation. But you have got the 
bear now in the house with you. What are you going to do with 
it?
    Secretary Geithner. I wish we did not have it, Senator.
    Senator Shelby. I know that you do.
    Secretary Geithner. And, Senator, you cannot feel more 
strongly than me about the need to get the Government out of 
this company, get the company to the point where it poses less 
risk to the system and those underlying insurance businesses 
are on a path where they can be viable going forward. And I 
think you are right that this--there is no doubt that this 
company, not just to the Fed and the Treasury, but to its board 
and management proved much more complicated, much more risk 
than people thought. And it has proved much harder to 
disentangle or separate.
    Senator Shelby. Perhaps harder than the Government thought 
when it took it over?
    Secretary Geithner. Much harder than the Government 
thought, but I should just say from the beginning for the 
record, much, much harder than the management and board of the 
company felt as well. And they were the ones that led this firm 
to the edge of the abyss.
    Now, the only way forward, just to say it starkly, is to 
bring down the risk as quickly as possible in the AIG financial 
products company.
    Senator Shelby. How long is that going to take?
    Secretary Geithner. They have brought it down very 
substantially. They are working very hard to bring it down.
    Senator Shelby. What do you mean by ``substantially''?
    Secretary Geithner. About half. Half, if you look at gross 
notionals, but that is a start. But we want it to come down as 
quickly as possible. We need to separate those underlying 
businesses from the risk posed by that company so they are less 
burdened by those losses and can get back to the point where 
they can be viable and the taxpayer can recoup some of the 
investments it has made. And we want that to go as quickly as 
possible, but to be fair, I think the management and board of 
this firm are finding it incredibly difficult to unwind and 
disentangle those basic companies. That is what is causing the 
delay.
    And one more thing is very important. Again, this is the 
worst financial crisis in 50 years. That is not an 
understatement. And all companies are finding it harder to 
sell, raise money to finance purchases in this market. And that 
is one other reason what has caused the delay. But the 
businesses are more stable today. The bleeding has slowed very 
substantially. The money we made available in the last package 
is there as a contingency. We are going to make sure that it is 
used as carefully as possible, if it has to be used. And, 
again, Senator, you cannot feel more strongly than me about the 
importance of getting this company on a path where it has a 
restructuring plan that it can execute over a reasonable period 
of time so we reduce the risk it poses to the system.
    Senator Shelby. How would the AIG bailout having different, 
Mr. Secretary, if a new resolution authority that we talk about 
and you talk about had been in place? In other words, how could 
you have dealt with it if you had the so-called authority that 
you claim you did not have? And how fast would it be?
    Secretary Geithner. Well, the great virtue of the model put 
in place by the Congress for small banks in the country, which 
the FDIC administers, gives the Government the ability to come 
in more quickly with a greater set of options for unwinding, 
cleaning up, separating the bad from the good, and putting the 
good back into the market. It gives the FDIC the authority to 
guarantee temporarily, to put capital in, to do other steps 
that help facilitate a quicker, more surgical separation to let 
the Government get out more quickly.
    Without that authority, the Fed and the Treasury were 
forced to do a very complicated mix of funding and with less 
authority to provide temporary guarantees, rather than what 
would have been more effective to allow a quicker disposition.
    Now, our options were substantially constrained by the 
complexity of this firm and by the fact that the world was in 
such a fragile state that the ability to sell these businesses 
quickly was very limited.
    Senator Shelby. Will you be involved in AIG say a year from 
now?
    Secretary Geithner. A year from now?
    Senator Shelby. You hope not, I hope.
    Secretary Geithner. I think realistically this is going to 
take time, and I think that is true--you know, you said at the 
beginning what is very important, which is you want us to begin 
to plan for a credible exit from the extraordinary 
interventions we have taken. But in some parts of the financial 
system, it is going to take a longer period of time than that, 
probably in AIG, too.
    Senator Shelby. I hope we will have another round, but the 
Fed's role, in your last job before you became Secretary of the 
Treasury, as President of the Federal Reserve Bank of New York, 
you had bank examination and enforcement responsibilities and 
monetary policy responsibilities with your permanent vote on 
the Federal Open Market Committee. Also as President of the 
Federal Reserve Bank of New York, you reported to a board of 
directors, two-thirds of whom were elected by your member 
banks. That is the system, which I think is conflicting. In 
other words, an inherent web of conflicts is built into the DNA 
of the Fed as it now exists.
    You propose, Mr. Secretary, now to complicate the web 
further, I think, by making the Fed the systemic risk 
regulator. In light of the Fed's--and you played a role in it--
the Fed's track record, don't you think there is a significant 
risk that in the name of systemic risk regulation the Fed would 
subordinate its bank regulatory and monetary policy functions 
in order to protect and perhaps preserve the biggest 
institution? Does that concern you?
    Secretary Geithner. I do not think there is a significant 
risk of that.
    Senator Shelby. Why not?
    Secretary Geithner. I would not want to take a significant 
risk of that happening. But can I go through--what is a very 
complicated question, Senator, and let me go through a few 
pieces of your question.
    Congress designed the Federal Reserve System almost a 
century ago. As part of that system, it created this network of 
12 reserve banks, set up as a complicated mix of public and 
private institutions with boards, as Congress designed by law, 
requiring there to be three banks, three directors elected by 
banks, and three directors representing the public interest 
appointed by the Board of Governors. That is the system the Fed 
has operated under the laws of the land for many, many decades.
    Senator Shelby. Do you believe that is a fair system in 
today's 21st century considering all the conflicts?
    Secretary Geithner. I believe--and I wanted to get to this 
because I am trying to get to your question.
    Senator Shelby. Go ahead.
    Secretary Geithner. I believe that as part of regulatory 
reform, as part of our effort to fix this system and make sure 
we do not face a crisis like this again, we have to take a 
comprehensive look at every aspect of our system, the full mix 
of authorities, how supervision is conducted, and it will 
require not just legislative changes like what we are 
discussing with your colleagues on the Committee, but it will 
require that we fundamentally re-examine how supervision is 
conducted, and where there are appearances of conflicts or 
actual conflicts across the system. We are going to want to 
carefully look at those and see how we fix them.
    But I just want to say that the Fed has an enormously 
elaborate set of protections in place against any conflict. 
Those directors play no role in supervision. They play no role 
in the Fed's lending programs because, for the reasons you 
said, it would be inappropriate for them to do so. But as I 
said, I think it is important we take a fresh look at these 
things. I have been very open with the Committee and honest 
with the Committee, and I think that in all aspects of 
supervision, including those areas the Fed was responsible for, 
we did not get many things right. We need to do better going 
forward, and we need to work with you to make sure we put in 
place a framework that does that.
    Senator Shelby. Mr. Secretary, but when banks have a role 
in selecting who their regulator is going to be, that seems a 
problem in the making.
    Secretary Geithner. I understand about the awkwardness of 
that structure, but, again, the system, as designed by the 
Congress and applied over decades----
    Senator Shelby. I understand that, but the Congress makes 
mistakes.
    Secretary Geithner. No, no, but I think there are a lot of 
protections in place against that risk. They have no role in 
setting policy, in applying supervision----
    Senator Shelby. But they have a role in selecting the 
president, like you or anybody, of the reserve bank.
    Secretary Geithner. They have a role, but the Board of 
Governors has to approve that selection process. There are a 
lot of checks and balances. But as I said, we should take a 
fresh look at conflicts across the system because you do not 
want to have anybody in public office have their actions viewed 
through the prism of concern that they are motivated by 
anything but the broad interests of the system. So I share that 
basic objective.
    Chairman Dodd. Thank you, Senator. And this is a subject 
matter that is going to consume a lot of this Committee's time 
and attention, obviously, with the Secretary and others as we 
move forward on the architecture.
    Let me turn to Senator Reed of Rhode Island.
    Senator Reed. Thank you very much, Mr. Chairman.
    Welcome, Mr. Secretary. Senator Dodd and Senator Shelby 
were talking and you were responding about your lack of 
leverage regarding AIG securities. But this afternoon, the 
President will sign a bill giving you some leverage with 
respect to the warrants that you hold because now you will have 
the opportunity to hold those warrants, and I am told now they 
are worth to taxpayers about $5 billion, so that there is some 
return for the investment the taxpayers have made. And I would 
suspect in the days going forward you will let us know how you 
will proceed in general with respect to your ability now to 
hold or to sell publicly these warrants. That is just an 
initial point.
    There is a significant issue in raising private capital in 
a banking system, but one of the issues that may be a potential 
problem is the role of the private equity companies. The 
Federal Reserve has determined that these companies may not 
directly invest in banks, in their regulated institutions. A 
few days ago, OTS accepted the direct investment of a private 
equity company with little fanfare and I think with little 
documentation.
    This raises in my mind the issue of regulatory arbitrage. 
The Federal Reserve has made a careful decision that this is 
not consistent with their policy, but another Federal agency 
has said it is OK. OTS, for the record, regulated AIG, 
regulated WaMu; Countrywide changed its charter from a national 
bank under the Federal Reserve and Comptroller supervision to 
become a regulated entity of OTS.
    So this, I think, is a problem in the making. It requires, 
I think, a consistent policy across all regulators--the Federal 
Reserve, OCC, FDIC, and OTS. And it requires, I think, also 
ventilating that policy with the Congress and the public so 
that we understand the transparency that is required, we 
understand the conflict of interest will not be tolerated, we 
understand who the investors are in these entities. Many of 
them have sovereign funds from countries that we would be at 
least interested in knowing about.
    So, Mr. Secretary, I would hope you would take very 
aggressive action and very timely action. I understand under 
the statute that you cannot intercede in a matter or proceeding 
of the OTS, but you have general supervision of OTS. I would 
urge you to use that supervisory authority in conjunction with 
the Federal Reserve and the other regulators.
    Would you like to comment?
    Secretary Geithner. Senator, I think you are right that 
this is an important issue, and we have to balance the 
important objective of trying to make sure that we maximize the 
chance we get new capital into this financial system. But the 
specific question on the appropriate role of private equity in 
banks requires careful thought and care. I also very much agree 
that we should have one standard. A central part of what made 
this system weak was the opportunities we created and allowed 
for arbitrage to get around the set of protections Congress put 
in place.
    So I very much agree, and I would like to come back to you 
and maybe jointly have the Fed and the OTS and the supervisors. 
We will provide a little explanation of what we think policy is 
today and what it should be going forward on this very 
important question.
    Senator Reed. Well, I appreciate that, Mr. Secretary, but 
in the interim, there is a huge door that has been opened, and 
people will rush in. And they will rush in unless you take very 
prompt action to ensure that there is at least a standstill.
    Secretary Geithner. Promptly come to the Committee and 
report, not----
    Senator Reed. Well, I think promptly direct OTS that they 
have to be--their conclusions have to be vetted by you, I would 
assume. This is a general policy matter. This is not on a 
specific issue.
    Secretary Geithner. Senator, we are on it, and I agree with 
you about the need for deliberate speed.
    Senator Reed. Let me ask another question here. I 
understand there is an Acting Director of the OTS. When is the 
President going to appoint a Director, which is subject to 
confirmation by the Senate? We have the irony here of policy 
literally being made by an Acting Director, and I believe this 
individual is the third Director in the last, what, 6 months?
    Secretary Geithner. It is not a good situation, I agree, 
and transitions like this are challenging, and we are moving 
quickly to try to identify a credible leader for this important 
institution and hope to be able to nominate somebody relatively 
soon. But in this case, too, I agree with you about the need 
for speed.
    Senator Reed. Well, again, this is a situation where this 
policy seems to be emerging from an organization that does not 
a Presidential appointee confirmed by the U.S. Senate. So, 
again, I think adding urgency to your role in making sure that 
you harmonize this policy, whatever it may be. And, again, I 
think we all recognize that the ultimate solution to our 
difficulties is a vibrant, privately capitalized banking 
institution, but well supervised. And the ``well supervised'' 
part needs a lot of work.
    Secretary Geithner. I could not agree more.
    Senator Reed. Thank you.
    Chairman Dodd. Senator Bunning.
    Senator Bunning. Yes, thank you, Mr. Chairman.
    There are so many things I would like to ask you, and I am 
not going to get the chance to do it all. You mentioned 
community banks, and you mentioned that they would be in the 
lending business more. You have not been to Kentucky. 
Kentucky's community banks attack me when I go into Kentucky 
because of the new assessment of the SDIC. Now, that will 
change under the new housing bill that we passed, but you say 
they are going to lend more money. They are not going to lend 
more money out very fast. You are looking at about 6 months to 
a year down the road before they start, and none of those 
banks, none of the community banks are part of the problem. 
They did not--I do not know whether you know it or not, but 
Kentucky was in the lowest five States as far as repossessions 
are concerned. We are not in the lowest five of anything 
usually in Kentucky, but we were because of our community 
bankers.
    So one community banker with the assessment going from 
$40,000 to $800,000 with the new assessment--now that will be 
changed, but she is not going to make any loans until it is 
changed.
    Don't we own 80 percent of AIG?
    Secretary Geithner. In effect, we do.
    Senator Bunning. OK. Then tell me why we do not control 
what AIG does?
    Secretary Geithner. Well, we can have substantial influence 
on what they do, but that does not affect the range of options 
we have for dealing with the issue raised by your Chairman on 
how we treat AIG's counterparties and creditors. That is a 
difficult issue that involves----
    Senator Bunning. Well, if you own a company and you are in 
control by 80-percent ownership in that company, you do not 
have to pay a dollar for a dollar on those losses. You can say 
we are going to try to settle with you for 50 cents on the 
dollar, just like you have done with the losses that you forced 
the banks to take on Chrysler and General Motors.
    Secretary Geithner. Senator, I understand everyone's 
frustration with this issue, and I would like nothing better 
than to be in a different position. But unless we are prepared 
to contemplate the risk for the system of default by AIG on its 
obligations, then we have no choice but to help AIG meet those 
obligations. And people will disagree about this judgment, 
Senator, but what the country of the United States went through 
in the last 6 months of last year is substantially due to what 
happened because of the failure of some of the largest 
institutions in the world. Default by them on their 
obligations, caused a traumatic, enormously damaging loss of 
confidence, loss of wealth in our system, and was a big part of 
why growth declined in our economy at 6 percent----
    Senator Bunning. Well, we can disagree on that, because we 
can disagree that the solutions proposed did not solve the 
problem, and the problem then exacerbated throughout the United 
States and the population in the United States when they saw no 
reaction in the markets. And the markets then created even a 
deeper spiral for our economy, and it was a self-fulfilling 
prophecy. So your solution to the problem may not have been the 
right solution.
    Secretary Geithner. You are absolutely right that none of 
us can know with certainty, in retrospect even, whether we 
chose the best of the available options at that time. But one 
thing that I am quite confident is true, which is the damage 
caused by the failure and default by some of the large 
institutions in the world over that period of time made 
everything substantially worse. And our inability and failure 
to arrest that was part of the deepening recession in the 
United States and why there is so much damage coming into this.
    Now, if AIG had defaulted, it would have been materially 
worse across the country and the world. Now, again, that is not 
a judgment that everybody will agree with, but I am quite 
confident that is the case. And I think today we are still in a 
position where----
    Senator Bunning. Well, that is the way it was sold. I mean, 
that is the way the TARP was sold, that the sky was going to 
fall in if we did not do something. That is the way you got----
    Secretary Geithner. I believe that what Congress did at 
that point was absolutely essential to hold this system 
together, and without that authority and the actions to put 
capital in the system, I think we would not have a financial 
system today.
    Senator Bunning. I have some questions on--just three quick 
questions on Chrysler and General Motors. Did anyone in your 
Department or administration threaten or attempt to intimidate 
Chrysler or GM creditors to give up their contractual rights or 
priorities in bankruptcy?
    Secretary Geithner. I do not believe anyone did what you 
suggested. I think what we did in that case was----
    Senator Bunning. Well, wait a minute. There is another 
question. Has there been any influence by your Department or 
the administration on which auto dealerships are being dropped 
by Chrysler and/or General Motors?
    Secretary Geithner. We are trying very carefully not to be 
involved in those decisions. We think those are decisions for 
the board and management of these companies.
    Senator Bunning. Has there been any influence by your 
Department or the administration on which auto plants are to be 
closed or sold by Chrysler and/or General Motors?
    Secretary Geithner. Same answer. Our job is to make sure 
that the overall plan leaves these companies in the position 
where over the longer term they are going to emerge viable. 
That is what we are focused on. That is what we are trying to 
facilitate. Those broad judgments you refer to we want to be 
judgments of management and the board.
    Senator Bunning. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Menendez.
    Senator Menendez. Thank you, Mr. Chair.
    Mr. Secretary, thank you for your service under incredibly 
difficult times. I certainly appreciate it. Let me ask you, 
though, I listened to your statement and some of your 
responses, you know, as it relates to where we are at in 
liquefying the credit crisis. Lending is actually down. Part of 
that is because of the economy. But there is also still very 
significant demand for credit, and yet it is not acquirable.
    And so I look at what Larry Summers sent to us when we were 
all contemplating the second tranche of TARP and saying that 
the administration was going to impose tough and transparent 
conditions on firms receiving taxpayer assistance, including 
ensuring that resources are directed to increasing lending. And 
I hear where we are at, and I have two concerns.
    One, how are we going to get the lending to take place?
    Second, based upon what still exists out there and your 
categorization of it, do you intend at this time to come back 
to the Congress and ask for any more TARP funding?
    And, third, as it relates to lending, community banks, even 
though they are facing pressures, are still the one entity, at 
least in New Jersey that I find, that are still engaged at a 
level that is really about Main Street. But it seems to me that 
all of our focus is on the 19 largest banks, and we have to be 
thinking about our policies in a way that ultimately also looks 
at the community banks and thinking about how our policies 
affect them, not doing it in a macro way in which we are 
focusing on the 19 banks but not thinking about how that works 
for community banks.
    So can you give me a sense, one, what are you doing about 
the actual lending, even though the economy is obviously still 
in significant challenges, but there is still a demand for 
credit?
    Second, do you think that you are going to be coming back 
to the Congress for TARP funds or similar funds?
    And, third, how do we start looking at these community 
banks? And even under the Capital Purchase Program on TARP, how 
do we look at the conditions for community banks?
    Secretary Geithner. Excellent questions, so let me go 
through----
    Senator Menendez. I only ask excellent questions.
    [Laughter.]
    Secretary Geithner. Let me try to go through them quickly.
    As you said, the dominant imperative, the only reason we 
are doing any of these programs, is to try to make sure there 
is enough credit to support a growing economy. And as I said, I 
think the best way we know to do that is to make sure there is 
capital where it needs to be. People raise capital where they 
can, we put capital in where they cannot, and we get the credit 
markets, and asset-backed securities markets going again.
    I do not know a better way to do it than those two things, 
and you are right that, as you said, in a recession when the 
economy is going like this, demand for credit will fall. And we 
had borrowing go very high as a share of GDP, and so demand for 
credit will fall more in this kind of a recession than it would 
in a normal recession. But, still--and I think you are right, 
and you can see this in the fact that interest rates are so 
very high--demand for credit is greater than what looks like 
the available supply. That is why it is so important that we 
get capital into these institutions and get those markets 
working again.
    A dollar of capital produces about $12 of lending capacity. 
The Government, before I came into office, put about $200 
billion of capital into banks. So that is about more than $2 
trillion of lending capacity. Otherwise, it will not exist. 
Without that capital, you would have had lending capacity 
shrink by more than $2 trillion.
    As a result of this focus on the larger banks, you are 
right to say large banks are not the entire banking system. But 
they are about 50 percent of loans and about three-quarters of 
assets in the banking system. Without stability in those 
institutions, the economy would be weaker. But community banks 
will play a critical role in this stuff. We have been moving 
very quickly to try to make sure their applications are 
processed. We have more people processing those applications. 
They are concerned, frankly, still about participating in this 
program. They are worried about the stigma that comes with 
participation. We need to make it more comfortable for them to 
come and not feel they are going to be stigmatized and 
penalized for coming for capital.
    As I said in my remarks, we believe we still have something 
a bit north of $100 billion in uncommitted resources available 
to deploy to these objectives and get credit flowing again. We 
are going to use that as carefully as we can. At this point, we 
have no plans to come to the Congress and ask for additional 
resources and authority. I do not know whether that is likely 
or not, but at this point, have no plans to do so.
    But, again, our biggest imperative, because the economy is 
still going through such a challenging period, is to make sure 
we are doing as much as we can so that the financial system is 
not going to slow recovery.
    Senator Menendez. Well, I hear your qualifier at this 
point, and I understand that. And these are uncertain times. 
But I have to be honest with you. Some of us----
    Secretary Geithner. You would like us to come.
    Senator Menendez. I always welcome you before the 
Committee. I do not about coming to ask for money for TARP. I 
will be honest with you on that. But, no, some of us who have 
supported this because we thought it was essential to, you 
know, strengthen the financial institutions, not because for 
their sake, but for what it meant to the overall economy and to 
Main Street. But that Main Street is still having challenges, 
is still not getting access to the credit that it seeks, even 
if that is overall reduced, but there is still a credit demand. 
And, therefore, the school teacher who has got a 720 credit 
score cannot get a car that she needs to get to work. And the 
small contractor who comes up to me and says, ``I do not have 
my credit line at my supplier anymore, and I cannot get a 
credit line and get the supplies to do the work that keeps the 
people I have employed.''
    That is what I am worried about. And we may have created $2 
trillion of credit capacity. I do not know that we have used 
that credit capacity that you described or that the 
institutions have used that credit capacity in this period of 
time.
    Secretary Geithner. No; I agree. But I think you said it 
exactly right. The real risk to the economy is that you had 
viable businesses that were relatively prudent and did not 
overextend themselves, get forced to shrink or close because 
there is not credit available for them to keep operating. That 
is a principal challenge we face still, something we have got 
to keep working very hard at, and that is why I believe these 
programs are so important. We need to make sure that banks are 
willing to take capital where necessary, that they raise 
capital, and we get these securities markets working better. 
And we have got a pretty effective set of programs in place, 
but they are just beginning, and we have got to keep at it to 
make sure they are working to the maximum extent we can.
    Senator Menendez. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator.
    Senator Martinez, Mel.
    Senator Martinez. Mr. Chairman, thank you very much, and, 
Secretary Geithner, again, thanks for your service. I agree 
with Senator Menendez. You are serving at very difficult and 
unusual times. But let me follow up on Senator Menendez's 
question and the liquidity of local banks, the very problem he 
is talking about, the local contractor, and that sort of thing.
    What I hear from bankers when I ask them, because that is 
the other side of the equation, they tell me, ``Regulators are 
telling me not to lend. Regulators are telling me to increase 
my reserves. Regulators are telling me to grow my capital. But 
we are fine. We could be lending more, except they are coming 
back in 2 months and they told us that we better not have so 
many real estate loans.''
    Well, in Florida, that is like telling a man in a desert 
that you cannot drink water. What are we going to do? What is 
the issue there?
    Secretary Geithner. I am not--because I have heard those 
concerns from banks across the country as well, and I know it 
is something that the supervisors at the national level are 
trying to make sure they get the balance right. I am not sure 
they have the balance right, but it is their responsibility to 
get that balance right.
    I think it is important to recognize that we are in the 
middle of a financial crisis that was caused by banks being 
overextended.
    Senator Martinez. Well, maybe that is when they should have 
been telling them to lend less, not now when the system needs 
the money.
    Secretary Geithner. That is true, but it is a difficult 
balance. But I think we have a very diverse banking system. 
Many banks came into this with very strong capital levels, and 
they will be growing and expanding, and they will be taking 
business away from their weak competitors. But there are some 
institutions and banks that probably got themselves a little 
overextended, and they are going to probably have to be a 
little more conservative going forward. There is probably no 
way around that, and we do not want to have a financial system 
where those institutions are kept going on a level that they 
are not going to be viable over time, and that is why the 
balance is so difficult.
    But I agree with you about the concern. I hear it, too. 
Supervisors put out a statement in November trying to be 
responsive to this concern. But I do not feel like it has 
gotten better.
    Senator Martinez. It has not.
    Secretary Geithner. And it is something that I know they 
are trying to be attentive to.
    Senator Martinez. Well, I appreciate your continuing to 
pursue that issue, and just as a follow-up to Senator Bunning, 
the issue of the board of directors of these car companies, you 
know, in an unusual time like this, it is difficult to know 
exactly where the fiduciary responsibility lies. However, I 
still continue to believe that their fiduciary responsibility 
lies to the stockholders of the company, first and foremost, 
and, therefore, they should be acting as independent of 
Government as they possibly could, without Government pressure 
to take actions or whatever. But it troubles me when I hear 
that the CEO has been removed by directions from Government or 
that boards of directors are being told that they are not going 
to be staying on when the new directors are going to come. That 
I find troubling, and I would like a comment from you on that.
    Secretary Geithner. I understand those concerns, but let me 
try to explain the framework we are using for making these 
judgments.
    When institutions get themselves to the point where they 
need to come to the Government for assistance to restructure 
and there is no alternative for them, then it is our obligation 
to make sure they have a strong enough board and management so 
they are able to emerge from this viable and without Government 
assistance over time. That is a very important obligation we 
have, but I agree with you completely that we do not want to 
have the Government involved in day-to-day management 
decisions. We want to structure these arrangements so that we 
get out as quickly as possible. And where we take action to 
help strengthen boards or management those new directors are 
going to have a fiduciary obligation to shareholders. That will 
be their obligation going forward.
    Senator Martinez. Let me move to another area, which is 
TARP transparency. Senator Warner and I and Senator Brown have 
filed Senate bill 910 which has to do with TARP transparency, 
the idea being that we want to make it readily available, the 
information where the funds have gone, how much of them 
remains, who has gotten them, what they are doing with them. 
And I hope you could support that type of legislation. I think 
it gives the public a great deal of confidence about what we 
are doing in Government today with so many incredible amounts 
of dollars, of their tax dollars.
    Secretary Geithner. Well, I am committed to giving as much 
transparency in the public as we can and happy to take a close 
look at those proposals. And it is very important to me that we 
have as much explanation and detail in the public domain about 
the financial costs of these programs, their objectives, how 
much is being spent, how much is still available, what they are 
achieving, and what they are not achieving. And so I very much 
share that objective.
    Senator Martinez. Mr. Chairman, I would like to put in the 
record a letter from a number of consumer groups that are very 
supportive of this legislation and have that be part of today's 
record.
    Chairman Dodd. It will be so included.
    Senator Martinez. Finally, let me just say that, with the 
remaining moments I have, one of the issues that I still see 
out there, like the credit problem with banks and local banks, 
is the TALF issue. There are areas of securitizing money that 
would be very, very helpful, again, to the system, to put 
people to work and back to work. Two of the areas that would be 
very, very important in my State, and I think in many others, 
is the area of the time-share industry where securitizing their 
mortgages would be of tremendous help to bring liquidity. You 
know, they have a marketplace where people want to buy these 
units; however, they cannot do the financing because there is 
no secondary market for them at this moment in time.
    The second one is floor planning for recreational boats, 
watercraft. This is a huge industry in my State from the 
manufacturing to the sale to the use, and, again, there you see 
businesses that have a good business track record and what-not, 
but simply cannot stay open because their floor plans are being 
closed.
    These are two areas that I know might seem frivolous, but 
these are job-creating industries in a State like Florida, and 
I would implore your attention to extending TALF so that these 
industries could be participants in that, just like we have 
done for car floor planning and some of the other areas, credit 
card and other areas where we have done it.
    Secretary Geithner. Senator, I would be happy to take a 
careful look at that and talk to the Fed about what is possible 
in that area. I do want to underscore, as you did, that this is 
a very effective program, very important program. It would not 
be possible without the Federal Reserve. Treasury cannot do it 
on its own. We would like to make sure it works to the maximum 
benefit of this broad objective and make sure it is getting 
credit flowing again.
    So I agree with you about the importance of the program and 
I am happy to take a careful look at those suggestions.
    Senator Martinez. Thank you, Mr. Secretary.
    Chairman Dodd. Thank you, Senator, very much.
    Senator Brown.
    Senator Brown. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for joining us. I want to follow 
up on a couple of questions that Senator Bunning mentioned 
about the auto industry. News reports tell us that in the GM 
plans and their restructuring that they are now working through 
with the UAW to close 16 plants in the United States and cut 
more than 20,000 jobs. The same reports tell us that the 
company is planning to increase imports from plants in Mexico, 
South Korea, and China. The emphasis has been especially on 
China, a country where GM has a major presence, they do a lot 
of car assembly and production there and sell to that market. 
But now they are talking about closing plants down here and 
opening plants in China and selling them back. You and the 
automobile task force will decide whether to grant GM billions 
more in loans on top of the $13.4 billion.
    What gives here? The overall plan that you have to approve, 
you have to show--you need a viable plan overall to approve. 
What gives here? What is going on here?
    Secretary Geithner. Well, Senator, you know, it is a 
difficult balance. I think our objective is, the President's 
objective, to try to make sure that we help facilitate a 
restructuring that will leave this firm in existence, save it 
from bankruptcy, and allow it to operate over time as a viable 
company without Government support. That is what we are trying 
to do, and we are doing exceptional things to make that 
possible.
    But I do not believe that we can do that and also be 
involved in making detailed decisions about how they run their 
business and that is the balance we are trying to strike. We 
are trying to make sure those decisions are left to the board 
and management. We leave our role to try to make sure that the 
overall plan is sufficiently strong and that it is going to 
leave them viable so that the taxpayers' interest will be 
protected.
    Senator Brown. So are you raising--if it was a firestorm in 
this country when we give billions to banks and they pay huge 
bonuses, you have not seen anything yet for what is going to 
happen if we put billions into auto companies and they shut 
down plants in this country and open plants in China at $1 an 
hour or less.
    Are you pushing back on the auto industry and the 
restructuring? Is the Government representing taxpayers and 
representing workers and communities pushing back on their 
including anything like this plan to shut down plants in the 
United States and move them abroad and open plants and produce 
and sell back here?
    Secretary Geithner. Well, again, Senator, I think just to 
be probably fair to the facts in this case, I probably should 
come back to you with more detail on exactly----
    Senator Brown. Well, we do not know the facts yet. We only 
know that GM told us that--I remember as a kid, I remember 
reading that Charles Wilson--an Ohioan, I would add--CEO of 
General Motors said, ``What is good for GM is good for the 
United States,'' and vice versa, however he said that. It is an 
interesting point to make. But when we asked GM, they simply 
said, ``We are not going to use tax dollars to open plants in 
China,'' which really means absolutely nothing. They are not 
going to use these tax dollars--or these dollars to open plants 
in China.
    So we do not really know, but we are counting you as 
representatives of this Government--and I understand GM--I 
mean, GM helped to push through permanent normal trade 
relations with China. They write the rules. Then they say, 
``Well, the only way we can compete is to go to China. Sorry. 
Those are the rules of globalization,'' even though their CEO 
is wandering the hall in the House and Senate getting votes one 
by one by one for this trade policy.
    Secretary Geithner. Senator, I just want to underscore the 
scale of what we are doing. Because the President is committed 
to trying to make sure these firms emerge viable over time, 
that they are saved from the prospect of going out of 
existence, we are doing exceptional things to try to help 
facilitate a restructuring that would not be possible without 
the Government playing a temporary role.
    Senator Brown. I get that. Let me ask----
    Secretary Geithner. And that will save thousands and 
thousands and thousands of jobs in this country.
    Senator Brown. I get the economic argument, but I also get 
that--well, let me take it from another direction, if you are 
doing exceptional and extraordinary things.
    Chairman Bernanke said last year that China's currency 
misalignment is ``an effective subsidy.'' Then-Senator Obama 
sponsored legislation that currency manipulation is a subsidy 
that should be offset with duties. The analysis in Treasury's 
April 15th report on exchange rate shows China is cheating by 
manipulating the currency. But then your report does not make 
the conclusion that China is manipulating its currency.
    The Treasury and the Government seem to push back on this 
whole currency issue, so you are saying--you are implying, GM 
is saying--you have not affirmed that, but GM is saying, well, 
we--I think they are saying, ``In order to cut costs and stay 
competitive and save American jobs, we have got to cut American 
jobs and open plants in China and send them back.'' But then 
you are unwilling to stand up on currency and deal with that 
subsidy that it makes it more attractive for China--for GM to 
go to China and sell cars back to the United States.
    Secretary Geithner. Senator, I do not agree with that 
characterization. That is not our policy with respect to China.
    Senator Brown. Which is not your policy?
    Secretary Geithner. What you just described. Now----
    Senator Brown. Which part, the currency part or the GM 
going to China is not your policy?
    Secretary Geithner. Well, I think neither are our policy, 
but just on the China case, let me explain what the report laid 
out. It is an important issue. China has allowed their exchange 
rate to appreciate significantly. They are intervening 
substantially less. They are committed to moving to a more 
flexible system over time. They are moving very actively to 
help stimulate domestic demands. Their economy is growing more 
rapidly as a growing market for U.S. exports and other markets 
around the world.
    We are focused on this issue. We are going to continue to 
encourage further progress, but that is what the report says--
--
    Senator Brown. Tell me how you define progress on their 
currency floating. Is it 3 percent, 5 percent in the last 5 
years?
    Secretary Geithner. Well, again, if you look back, there 
has been very substantial change over the last 2 years. They 
are committed to further evolution. We want to encourage that.
    Senator Brown. Mr. Secretary, what does ``substantial'' 
mean in percentage--I mean, economists say 40 percent valuation 
differential in the Chinese currency versus the floating world 
currency, floating currencies around the world. What percent 
is----
    Secretary Geithner. I believe what has happened has been 
substantial in percentage terms relative to what people 
estimate as the potential undervaluation of their currency. 
But----
    Senator Brown. I guess I really want something more than 
``substantial,'' if you can at least----
    Secretary Geithner. We would like it to be more----
    Senator Brown. No, I would like it to be more--I would like 
a figure. ``Substantial'' to you probably does not mean 
``substantial'' to me. Is it 2, is it 5, is it 20, is it 30?
    Secretary Geithner. Well, I do not want to misstate the 
numbers, but those are just facts. I would be happy to 
provide----
    Senator Brown. OK. I would like that. I do not think it is 
fair to characterize it as ``substantial,'' because I think the 
numbers are a small percentage of the 40, but----
    Secretary Geithner. Look, I understand your concern on 
this. That is why we are working to encourage further progress, 
because it is important to us, to the administration, to the 
President, and to the country. We want it to happen. And we are 
going to continue to encourage it. But, again, what China is 
doing today is playing a very constructive, stabilizing role as 
the world goes through the worst recession in decades. And so 
you need to look at the full picture in terms of what they are 
doing to strengthen their economy and their commitment to 
further evolution.
    Senator Brown. I have looked at the full picture for 10 
years, Mr. Secretary, and I have not seen the progress. and I 
do think they play a major role. I appreciate what they have 
done on their own stimulus and encouraging consumption in their 
country. They came to the table pretty late on that. There are 
lots of other issues there. But I thank, Mr. Secretary.
    Chairman Dodd. Thank you. If my colleagues will recall, the 
very first hearing that I held as Chairman of this Committee in 
January of 2007--or maybe February--was on currency 
manipulation, and your predecessor was the first witness before 
the Committee. So this issue is with us. And I have just got to 
say, Mr. Secretary--and then I am going to move right on to 
Senator Corker--when you see what access we have to Chinese 
markets with U.S. products, it is terribly frustrating, to put 
it mildly. I saw the other day where 20 American films are 
allowed to be shown in China. That is the quota. And I do not 
know the number of automobiles, but it is rather limited of 
what we can export into that market. So in addition to the 
currency manipulation, this would be more warmly received, 
understanding where China is, if, in fact, they were willing to 
take a lot more of our products on their shelves than we do of 
theirs. So it is just a sore, sore point with a lot of our 
people.
    Secretary Geithner. I am nodding because I agree with you, 
of course, about that important imperative.
    Chairman Dodd. Senator Corker.
    Senator Corker. Mr. Chairman, thank you, and, Mr. 
Secretary, thank you for being here. I do appreciate the timely 
forwarding of your testimony last night. I hope that will 
continue. I very much appreciate that. Just a couple editorial 
comments.
    On the AIG situation, we have heard now for 6 or 8 months 
that there is no resolution authority to deal with that entity. 
My guess is that on a one-off basis, if you were to ask for 
that, instead of pumping additional monies into a company that 
really has turned out to be a honey pot for many of the 
institutions that have relationships with it, my guess is 
that--we have had numbers of vehicles come through this body. 
That would pass pretty quickly. So I do not know why the 
Treasury has not asked for conservatorship ability to deal with 
that entity. Again, my guess is it would be like 100 to zip in 
the Senate and 435 to zip in the House.
    So I think continuing to hide behind not having resolution 
authority for AIG and continuing to pay out 100 cents on the 
dollar, which we all know is a major honey pot for many, my 
guess is we would work with you to give you that authority. And 
I know you have particular authorship of that. My guess is you 
would like to see it through in an orderly way. So I hope 
that----
    Secretary Geithner. We will work on that that, Senator, and 
could I just say we have provided draft legislation----
    Senator Corker. For overall resolution authority, but I 
think if you came to us today, as, by the way, Paulson did with 
Fannie and Freddie on a one-off basis, my guess is it would be 
passed. So I do not think that argument holds water anymore. I 
think you could get the authority for this one organization 
very, very quickly.
    So to me, there is something else driving--something else 
is driving this, if not--and one other editorial comment. I 
know that we are going to have auto hearings later, and I 
realize that those negotiations are underway now. I do want to 
offer one comment. I know that you all have offered ownership 
stakes in most unusual ways. I imagine there are streets in our 
country where there is a retiree, part of the greatest 
generation, those people who came before us, that bought GM 
bonds thinking that that was their ticket to retirement. And 
sitting right beside them, a neighbor next door might be a UAW 
worker that is being treated totally differently.
    The way this GM buyout is now set with 50-percent ownership 
by the taxpayers, 40-percent ownership, 39 and change, by the 
UAW, and yet the bondholders basically becoming toast, to me is 
something that is very politically, philosophically motivated 
in a way that shows no balance.
    Now, I think most of us are aware up here that once this is 
done, according to Steve Rattner, you are still going to have 
$80 billion in debt at GM. I am not sure the public is fully 
aware of that yet. So after the bond exchange, there is going 
to be $80 billion in debt left, which is more debt than we 
began with. GM has $62 billion when this all began. OK? And so 
my guess is you are going to have to make additional offers. 
The company cannot sustain $80 billion in debt.
    I am asking that you consider fairness when you make the 
offer, again, because there is going to have to be another 
exchange offer made, that you treat other retirees that have 
invested in these bonds, thinking that GM would be something 
that they could--and not do it in such a politically motivated 
way. I have heard that there are concerns about strikes. I 
cannot imagine a greater public relations disaster ever 
happening. It would be a strike by the UAW if this sort of non-
pro-rated bankruptcy structure is not held to. But I would just 
hope you will consider that.
    Let me just move on. Those are a couple--and I hear the 
word ``trying.'' You are artfully using the word ``trying'' to 
stay out of those decisions. Look, I know that Fritz was going 
over to see Treasury and the UAW the day after meeting with us 
a couple weeks ago to make these major decisions. I hope that 
they will be done based on what is best for the company and not 
just certain parts of the country.
    Let me just move to the resolution----
    Secretary Geithner. Senator, you are not asking me to 
respond now, but as you said at the beginning of your question, 
I think it is very important we go through these things, Mr. 
Chairman, once we are through the first--because you are 
talking about a set of prospective concerns which we will 
probably best address when we see the package that is 
announced, and then we can talk through that. But, of course, 
we want to see a fair and balanced package that produces a 
viable company over the longer term. And I understand your 
point. I just want to say, not responding to your concern and 
suggestions, it is not because I don't think they are 
justified. It is just that I think it is not possible to do it 
justice until we get to the other side of this.
    Senator Corker. Well, I would hope you would not deem the 
first offer ``fair,'' and I would hope that you would intervene 
in some fashion, because it is obviously a strong, 
philosophical and political motivation when you look at $27 
billion in debt being worth 4.5 percent of the company and 
$10.5 billion being worth 39 percent of the company. You know, 
most students in our country would consider that to be unfair.
    But let me just move on to a bigger philosophical issue----
    Secretary Geithner. As long as you let me come back and 
talk about that once we get through the first.
    Senator Corker. Perfect. I would love to. And that is why 
we have not pressed. We know there is still, again, $80 billion 
that has got to be dealt with after all this occurs. I think 
the taxpayers probably would be alarmed to know that, but there 
is still a lot to be done.
    On the resolution authority, you came before us in sort of 
a private meeting, but then since had sort of a public hearing 
in the House talking about your resolution authority. And I 
have to tell you, I was greatly perplexed by the notion of 
giving the Treasury the ability in perpetuity to, in essence, 
codify TARP. I think on entities that pose a systemic risk, 
what you have wanted to do is to have the ability that you now 
have under TARP in perpetuity for those entities and to 
actually designate certain entities as those that pose systemic 
risk, so there would be a bright line.
    Sheila Bair came in the other day with something that was 
actually very market based and I think was applauded by many, 
certainly by me here, which basically gave her the resolution 
authority to basically unwind these companies in an orderly 
way.
    Huge philosophical differences in those approaches, and, in 
essence, the possibility of causing systemically risky 
computers to be like Fannie and Freddie because the public 
would know which entities those were. I wonder if you might 
respond to that.
    Secretary Geithner. I would like to respond, Senator. We 
are not going to do that, and we are not going to take that 
risk for exactly the reasons you said, because it would create 
the expectation that there is a set of institutions that will 
enjoy Government support without conditions in the future and 
would leave our system more risky, and re-create a kind of more 
vulnerable system in the future. We are not going to do that.
    Senator Corker. So you are withdrawing that offer?
    Secretary Geithner. No.
    Senator Corker. You are withdrawing that proposal?
    Secretary Geithner. I am saying what you described as our 
proposal was not our proposal, and we would not design a 
proposal that had those risks, because I could not support it 
and you would not support it. But what I was going to say is 
that--let me step back for 1 second.
    The proposal we have made and we will make for resolution 
authority will be based on and modeled on what Congress 
designed for the FDIC, and what was designed for small banks 
and thrifts, not for a crisis like this, but has not caught up 
to the dramatic evolution in the structure of our system. We 
need to take that model and modify it so it works for a large 
complex institution built around a bank or an institution like 
AIG could pose broader risk to the system. But the authority we 
are looking for will be replicated very closely on the 
authority you have given the FDIC, same basic balance, same 
benefit, same constraints, same checks and balances, same 
protections against it being misused.
    That is the model we are looking at, and I think that you 
will find that proposal to have all the benefits of the FDIC 
model and some of the same concerns and constraints in that 
model.
    Senator Corker. I know I am out of time. I look forward to 
a second round. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Tester.
    Senator Tester. Thank you, Mr. Chairman, and thank you for 
being here today, Secretary Geithner.
    Through your conversations with the FDIC and with your 
dealings with the stress test, what is your opinion on 
community banks? Do you believe that--I know you talked about 
opening the credit window to them again. Do you believe that 
they need to raise significant capital to remain solvent?
    Secretary Geithner. Well, again, we have 9,000 banks in the 
country. Many of those small community banks, their 
circumstances are very diverse. On average, they came into this 
crisis with, again, more healthy capital positions, higher 
levels of capital, and a better quality of capital, because 
they were generally more careful. But in parts of the country 
with high unemployment, where the focus of most of the real 
estate trauma has been concentrated, they are under a lot of 
pressure, and supervisors responsible for those institutions 
are working closely with them to make sure that where they need 
to be strong and restructure they are doing that.
    Senator Tester. Well, I think it was the Chairman who 
earlier talked about 940 banks that needed $200 billion. Do you 
think that is the exception, not the rule?
    Secretary Geithner. Senator, I did not look at the details 
of that study, but I would caution anybody to draw any 
conclusions from a study published in that way, because it is 
very hard for people to sort of step back without access to 
confidential supervisory information and provide a reasonable 
picture of health and weakness across the system. So I would 
not encourage you to draw any conclusions from that particular 
report.
    Senator Tester. So you do not anticipate any sort of wave 
of failures in that sector.
    Secretary Geithner. No. I would say that. Again we are 
going through the most challenging financial crisis in decades. 
Community banks will not be immune to that. You have already 
seen significant distress across the banking system, outside 
the major institutions, and our challenge is to make sure that 
is managed carefully so there is less damage to the communities 
affected.
    Senator Tester. What kind of participation do you 
anticipate community banks will utilize the TARP dollars? Can 
you give me a percentage of those 8,000?
    Secretary Geithner. I do not have a sense of the magnitude, 
and as I said and I am sure you have heard this. A lot of banks 
have withdrawn their applications. A lot of banks are reluctant 
to come. They feel like the capital is stigmatized, will come 
with conditions that will make it hard for them to run their 
business, and we need to try to counteract that because the 
insurance this capital provides is not valuable unless people 
are willing to come take it.
    Senator Tester. All right. But you do believe that there 
are adequate resources out there with the community banks.
    Secretary Geithner. I do. I do.
    Senator Tester. OK. The commercial mortgages, the 
information is that the Fed will only buy the AAA-rated 
mortgages.
    Secretary Geithner. That is right.
    Senator Tester. How is that going to be helpful for a lot 
of those community banks? Because the commercial mortgages is 
actually where the rub is, in my neck of the woods.
    Secretary Geithner. Well you are absolutely right to say 
that this facility cannot solve all those problems. It will not 
relieve the market of these. A lot of the challenges lie ahead. 
But, you know, we cannot take on all that risk. It does not 
make sense for the taxpayers through the Fed and the Treasury 
to take on all that risk. We are trying to find the right 
balance that helps get the markets going again without the 
taxpayer taking on too much risk.
    But doing the AAA piece of this can help get the rest of 
the markets going again. There is no market without the AAA 
piece finding a financer. And, again, where those programs are 
now operational, they are having a meaningful difference on 
opening up those markets.
    Senator Tester. OK. I want to touch a little bit on TARP 
repayment. I have got a minute and 20 seconds, and you could 
burn this with your answer with not a problem at all. But could 
you concisely tell me what the Treasury's definition of ``well 
capitalized'' is as far as repayment of the TARP dollars?
    Secretary Geithner. Well, under the program the Fed 
designed, under this so-called stress test capital assessment, 
they said institutions had to have a Tier 1 regulatory capital 
ratio of 6 and a Tier 1 common equity ratio of 4 even in the 
more adverse loss you might face in a deeper recession. That is 
the ratio the Fed established under that program.
    Senator Tester. OK. Real quickly----
    Secretary Geithner. Just for the largest 19 banks. The 
supervisors were very clear that for the rest of the system 
they will leave the existing framework in place.
    Senator Tester. OK. All right. Very quickly, not getting 
into trade policy, but to kind of dovetail on what Senator 
Brown asked about, and before, I will tell you that I have 
been--I have wanted to keep the auto manufacturing business in 
this country because I think it has been an important part of 
our history and an important part of our manufacturing based, 
and I do not want to lose it.
    On the other hand, trade policies aside, just as a dirt 
farmer would see it, I will tell you that if we are putting 
taxpayers into a company that is going to transfer those jobs 
to China, I do not want to do it. Do you want to comment on 
that?
    Secretary Geithner. I understand your concern, and again, 
the reason why we are trying to figure out a way to help 
restructuring is because we want to preserve these companies as 
part of the American economy, and the substantial jobs they 
provide not just directly but through supplier relationships. 
And so we are going to do everything we can to make sure that 
they are going to emerge viable over the longer term.
    Senator Tester. What about everything as far as keeping 
those jobs here? And I will tell you that there are some that 
would say, you know, if they can do it cheaper somewhere else, 
they will go somewhere else. I have got a decent standard of 
living. I want to keep it.
    Secretary Geithner. Of course, I completely agree, and, 
again, that is why we are engaged in this. And it is an 
enormously difficult set of challenges, but, you know, we will 
have a chance to come up and talk to the Committee and the 
Chairman about the plans as they are designed once we get 
through the June 1st date.
    Senator Tester. I appreciate that, and I again want to 
thank you for being here today.
    I think it is important, Mr. Chairman, that we do this with 
regularity. I think it is very helpful.
    Chairman Dodd. Thank you very much, Senator. Let me just 
say on that point, too, by the way--and Senator Corker raised 
the issue about the UAW. This is an industry 3 years ago that 
employed--three automakers--250,000 people, and the 
anticipation is it will be down to 90,000 pretty quickly. This 
is an industry that has been devastated in terms of employment.
    One suggestion on this I might make, we had--Senator Kohl 
had a conversation--I know, I was a witness to it--with Mr. 
Rattner about a plant in his State of Wisconsin, Mr. Secretary, 
and we would like to at least see where offers are made to 
companies, divisions and so forth. I think this may have been a 
supplier. I am not sure which. But the decision was to pack it 
up and move it, I think to China, and at least the offer to say 
can you meet this, can you somehow--you know, before you just 
decide and make a decision to close it, give them a chance to 
determine whether or not they can compete or at least try to 
compete, those workers, before the decision is made to just 
close the operation down. It seems to me the minimum that we 
ought to do is that before making those decisions.
    Senator DeMint.
    Senator DeMint. Thank you, Mr. Chairman, and, Mr. 
Secretary, thank you for being here. I would just like to begin 
with a personal observation. I think until last year, most of 
us would agree that the traditional understanding of the role 
of the Secretary of the Treasury would be to manage the Federal 
Treasury, to manage the collection of revenues, the paying of 
debt, protect our general fund, and by doing that, protect the 
value and stability of our currency, all on the Government side 
of the equation.
    The frightening thing for me today is that you are speaking 
and we are questioning you as the Chief Executive Officer of 
America's financial system, of our banks, of our largest auto 
company, of our largest insurance company. So we are playing 
right along. To me this is not a mission creep. This is a 
stampede of any traditional understanding of constitutional 
boundaries.
    Now, we could talk about this in the context that we had to 
do all this because we had a crisis, but we hear very little 
talk about any exit strategy and very little real understanding 
that at least what we are hearing on the ground, most of us, it 
is not working. And I will just repeat what we heard over here. 
In talking to my bankers, they do not understand. It does not 
make any common sense. We are throwing all this money, and they 
say, ``You are tightening the reins on us.'' The things we 
normally do to help our companies, our clients do business, 
roll over loans, allow them to defer payments, do interest-
only, anything they do to change the terms of a loan red-flags 
it with our regulators, makes it nonperforming, and essentially 
brings down the value of all the loans they have. And it seems 
that instead of throwing money that we just need to use some 
common sense. But that is not my question.
    My bigger question gets back to this huge intervention in 
the private market, how we are going to get out. When we were 
told we had to vote for this TARP bill or the whole world 
economic system would collapse the next day if we did not go 
buy all these toxic assets--of course, you know we never bought 
the toxic assets, the world economic system did not climb, but 
we still have the money on the line. But we were told, ``Don't 
worry. It is a loan. The Government is actually going to make 
money on these TARP funds.''
    So my question to you is: As you begin to speak of, OK, we 
are going to allow these banks to pay this money back now, how 
much money in the next year and 5 years--what are your 
estimates at this point? As this money comes in, how much is 
going to be returned to the general fund in the next year or 5 
years?
    Secretary Geithner. A very important question, and hard to 
make that judgment now. The way the scoring rules work, as you 
know, the CBO and OMB make an estimate of what the potential 
loss might be or credit cost might be over time. That is just a 
very conservative general estimate, I can't tell right now.
    If we are successful in getting this economy back on track 
and helping repair the system, then there is a very, very good 
chance, very substantial probability that that money will come 
back with substantial interest and return. But the Government 
is taking risk here. We are taking risk because there is no 
other way to help get the economy back on track. We are taking 
risk because the markets will not take risk now, where they 
would normally take risk. So I do not want to underestimate the 
amount of risk in this, but these are carefully designed to 
minimize risk to the taxpayer, and there is a reasonable 
prospect that this money will come back----
    Senator DeMint. If over the next 6 months $50 billion comes 
back, will $50 billion go into the general fund of the United 
States?
    Secretary Geithner. The way the TARP is designed--and I did 
not design this, but the way it is designed is every dollar 
that comes back goes into the general fund, but that does still 
create additional headroom under the $700 billion authority for 
us to make capital investments. So we have the ability to still 
use the $700 billion if we think there is a strong case for 
doing that, but the way the program works is a dollar comes in, 
goes to the general fund, but still creates additional room for 
us to make a new----
    Senator DeMint. So your understanding of what we did is 
that the Treasury now has $700 billion that it can use 
permanently rotating in and out of the capital markets as you 
see fit?
    Secretary Geithner. I am not quite sure of permanent, but 
you are right. The way it was designed as our lawyers look at 
it--and I think this is clear in the interpretation of CBO and 
others, is that what I described is the way it works. A dollar 
comes back, goes in the general fund, and that leaves us with 
the ability to make an additional commitment going forward. And 
that flexibility is important.
    And just to emphasize what I said before you came in, I 
think, it is very important that these things be designed so 
that it is very likely that banks want to repay as quickly as 
possible, want to replace our investments as quickly as 
possible, that it is not economic for them to continue to use 
the Government assistance. The Fed programs are designed that 
way. Our programs are going to be designed that way, because we 
want these things to diminish and taxpayers to be repaid as 
soon as conditions normalize.
    Senator DeMint. But instead of backing out of this whole 
intervention, you see now, instead of fixing the problem of the 
banks that were too big to fail, the Treasury is going to be a 
permanent player in the financial system?
    Secretary Geithner. No. I would not support that. I would 
not want that to happen. We are going to do what it takes to 
fix this system. We are going to do no more than what it takes. 
We are going to try to get out as quickly as possible because 
it is not going to be healthy for the system or the economy for 
the prospect of a sustained Government involvement in either 
the automobile industry or the financial sector as a whole.
    What we did, I am sure, was essential and necessary. But 
for it to work, we want it to be temporary and exit quickly.
    Senator DeMint. Are you working on a plan to show us how 
you are going to move out of all of this market, the ownership 
of General Motors, the ownership of AIG, all the money in the 
private banking--you have got a plan?
    Secretary Geithner. Senator, as I said to Ranking Member 
Shelby at the beginning, this is a very important issue to me. 
We think about this a lot, and there will be a time when we 
will be able to come to you and say here is how the unwinding 
process will work. But it is too early to do that now. You know 
the economy is still shrinking. The financial system is still 
quite damaged. And we will get to that point, but we are not 
quite there yet.
    Senator DeMint. Thank you.
    Chairman Dodd. Thank you very much, Senator.
    Senator Bennet is next.
    Senator Bennet. You caught me by surprise, Mr. Chairman. I 
appreciate it.
    Mr. Secretary, welcome and thank you for everything you are 
doing. I sent you a letter last Friday with my colleague Mark 
Udall and Betsy Markey from the House about a bank in northeast 
Colorado called New Frontier, which has failed and is in the 
hands of the FDIC right now, and spent Saturday morning in a 
room of hundreds of farmers and ranchers and small business 
people and community bankers. And from their perspective, if 
the argument is made that AIG was too big to fail, this New 
Frontier would have been too big to fail. It already has 
failed. It has had huge implications across the region, and the 
local banks, community banks, are saying two things: one, ``The 
reserve requirements are making it harder for us to lend, not 
easier to lend.'' You have been over that ground today, and I 
accept the fact that part of what got us here in the first 
place is the credit was too easy. But it is a balance, and 
especially when you have got an environment like the one the 
people in northeast Colorado are facing.
    The second thing they are saying is, ``We have applied for 
TARP money, but we did not get an enthusiastic response about 
that.'' And I guess I would ask you whether or not in a context 
like that--I am not asking about the specific case, although we 
have in the letter. In a context like that whether it is 
appropriate for the regulators to look at a situation and say 
this is a good candidate for TARP money because in this place 
at this time, this institution is, in effect, too big to fail 
because it is dragging the entire regional economy down with 
it.
    Secretary Geithner. I think you are right, it is a 
difficult balance, a difficult consideration. The TARP program 
was designed and the criteria designed by the supervisors, by 
my predecessor, to only be open to what they call viable 
institutions in the eyes of the supervisors. The FDIC does----
    Senator Bennet. I am sorry, Mr. Secretary. I am not talking 
about getting TARP money into the failed banks.
    Secretary Geithner. No; I understand. But the challenge is 
to those institutions at the margin where some additional 
assistance would help, and in that context, we designed a 
process--I did not design it, but designed a process where the 
supervisor would make a judgment about whether they met the 
terms for eligibility.
    The FDIC does have flexibility in those cases where the 
impact would be very severe to make a different judgment, and 
they have some discretion in that complex. They have to use 
that carefully. But I think you are absolutely right that costs 
of failure by what may seem to be modest institutions can be 
very substantial in parts of the country and parts of the 
community. And we need to be careful, supervisors have to be 
careful that they are not sustaining the nonviable over time, 
but still providing assistance where it could be helpful. And I 
think it is a difficult balance, and they are not going to get 
it right every time, but they are being careful.
    You know, in any financial crisis, there are some people 
who want the Government to take on a bunch more risk, and there 
are a bunch of people who do not want us to take any risk. And 
that is fundamentally what these choices are about. And in a 
world which is so uncertain, the path of the economy is going 
to be so uncertain that it is going to be even harder to make 
those judgments.
    But I understand your concern, and I believe the 
supervisors are trying to be as careful and sensitive as they 
can.
    Senator Bennet. I think part of the issue for people living 
in Colorado is that they can accept the fact that there is a 
balance to the risk and to the Government's involvement in the 
economy. The problem comes when their perspective is that we 
are only worried about the risk of these institutions on Wall 
Street, not about the institutions on Main Street. And I think 
that it is really important that the administration continues 
to drive policies that are really going to have an effect for 
small businesses in places like Colorado for our community 
banks. Every month we have come here and had testimony from 
somebody, and what you have heard, what people who have sat 
where you are sitting have heard from both sides of the aisle 
is the same thing, which is our community banks do not feel 
like they are participants in this program, that they are able 
to lend, that they are able to roll over credit or do other 
kinds of things.
    And, again, it is a different credit environment, but that 
does not mean that we should not have as strong a focus on 
those institutions around our Main Street businesses as we do 
these institutions, important institutions.
    Secretary Geithner. I completely agree. You know, we have 
given capital to more than 500 banks. Now we have 8,000 banks. 
A bunch of those banks have withdrawn applications because of 
the concerns I mentioned, but as I said, I announced 2 weeks 
ago that we want to reopen the window and make more capital 
available. We want it to be open for a longer period of time 
for exactly the reason you pointed out, which is that they are 
going to--small community banks, which are responsible for a 
disproportionate share of lending to small businesses. Small 
businesses account, as you know, for most of the job creation 
in the country. So that is a very effective way to help support 
recovery, and that is why we are making sure these programs are 
expanded for them.
    Senator Bennet. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator. I appreciate 
that.
    Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman.
    Thanks, Mr. Secretary, for being here. I want to go back to 
an issue you touched on with Senator DeMint, which is that when 
TARP funds are paid back to the Treasury, the common 
understanding on Capitol Hill--I think this is very fair to 
say--is that that would be paid to reduce the Federal debt and 
would be a permanent reduction of the initial $700 billion.
    That is not how Treasury is interpreting it or putting it 
into practice, and a lot of us are very concerned about that, 
certainly me. Senator Gregg has written you. Many others think 
that this is clearly contrary to the law and to all the 
discussion we had on the topic when the law passed.
    I would like your response to that.
    Secretary Geithner. Senator, I wrote you a letter this 
morning or last night about just this issue. I am aware of that 
concern, but our reading of the law as designed--and we were 
very careful going over this again, and I checked with my 
colleagues at OMB--is consistent with what I put in the letter, 
which is as we read the law and as we think it was designed. It 
works the way I described, which is a dollar that comes back to 
us goes in the general fund, but that does create additional 
room to make another dollar of commitments.
    Now, we are going to use that flexibility very carefully. 
We are only going to do it if we think it is very important to 
this broad objective of trying to make sure there is credit 
flowing across the financial system in the economy. But we 
think the law was designed with that. I did not design the law, 
but that is what our fair reading of the statute is. I would be 
happy to talk through our interpretation with you, but we were 
pretty careful to check it. We went over it very carefully, and 
we think we are doing a fair reading of the law.
    Senator Vitter. If I can help explore that, one of the 
relevant provisions is 106(d). It says, ``Revenues of and 
proceeds from the sale of troubled assets purchased under this 
Act, or from the sale, exercise, or surrender of warrants or 
senior debt instruments acquired under Section 113 shall be 
paid into the general fund of the Treasury for reduction of the 
public debt.''
    So what you are saying is while you do that--when a bank 
repays TARP funds, you do that with one hand, and then with the 
other hand, you take new public debt out to go up to the 
overall limit of $700 billion.
    Secretary Geithner. We may. We believe the law permits 
that, but----
    Senator Vitter. In deficit spending, you do.
    Secretary Geithner. But let me read from the statute. You 
are right about 106(d), but 115(a) authorizes the Treasury to 
purchase troubled assets having aggregate purchases of up to 
$700 billion ``outstanding at any one time,'' and Section 
106(e) authorizes Treasury to continue to purchase troubled 
assets under commitments entered into by Treasury prior to the 
sunset date of the statute.
    So, again, we are happy to spend more time working through 
this with you, but that is our reading of the statute. I do not 
think we have it wrong, and we were careful and checked it 
again, and I would be happy to come spend some time with you 
walking through it. But that is our sense of it.
    Senator Vitter. Well, let me just ask you this. Normally, 
when you read two parts of a law together, one of the rules of 
statutory construction is you do not read it in such a way as 
to make either part meaningless.
    Now, your reading of the law together makes 106(d) 
meaningless----
    Secretary Geithner. No, I don't----
    Senator Vitter. ----because, yes, you pay down public debt 
for 5 minutes, and then 5 minutes later you raise up public 
debt if, in fact, you issue the same amount of money to another 
institution.
    Secretary Geithner. But it does not quite work that way, 
Senator. The way I am suggesting is that these resources come 
back. If they come back, they go into the general fund. We have 
already had some modest repayments. That is what has happened 
to those repayments. We are left with authority still to go 
back and new commitments with that. But whether we choose to 
exercise on that depends on whether we think we can make a 
strong case that that is a sensible thing to do.
    Senator Vitter. But my point is if you exercise it, to the 
extent you exercise it you make the repayment to reduce public 
debt under 106(d) completely meaningless.
    Secretary Geithner. No, I do not think so because it means 
that temporarily----
    Senator Vitter. You are certainly not--yes, you have 
reduced public debt for the 10 minutes between transactions.
    Secretary Geithner. Senator, I think I understand your 
concern and why this is uncomfortable. I did not design the 
statute. We are trying to apply it as fairly as possible. But I 
think what we are--and I think we are doing that in this case. 
But I believe that anytime we decide we are going to expand an 
existing commitment, make use of those repayments, we are going 
to have to make the case that it is consistent with the purpose 
of the statute and it has got the right balance of helping fix 
our system at acceptable risk to the taxpayer. So we will have 
to make that case every time.
    Senator Vitter. Well, again, I think it was clearly the 
understanding here during the debate that we would permanently 
reduce public debt with repayments, and that is not what is 
going on. My concern is that in a number of cases, this case, 
the fundamental question of how the money is used--I mean, you 
cited the statute to buy troubled assets. Of course, we have 
not started doing that yet. So that is a fundamental question. 
The question of whether it is for financial institutions or 
anyone else, now under the Bush administration went to 
manufacturing institutions.
    Secretary Geithner. Right. But as you said, those were not 
my judgments, Senator, and I am being very careful to make 
sure--and I will always be very careful--that we are applying 
the letter and spirit of the law in this case. And, again, we 
were very careful to check interpretations, so I talked last 
night again to the people that were there in October, in 
September, in drafting legislation and looking at its 
interpretation, and they confirmed our reading of that 
flexibility.
    And I think it is important flexibility, and I think you 
want--I cannot tell you what you want. I think it is important 
that the Government with the right checks and balances has the 
ability, has that flexibility, because we are still in an 
enormously difficult, challenging, fragile period of time, and 
there may be circumstances where the necessary thing for the 
country is to use that authority carefully to support expanding 
these programs. Because without a financial system working 
better, our recovery will be arrested. It will be weaker than 
we like. Unemployment will be higher. There will be more damage 
to businesses. So I think the flexibility in the statute was 
well designed. We are going to use it very carefully. But I 
think it is there.
    Senator Vitter. Well, again, I think both your predecessor 
and you have been reading enormous flexibility into the statute 
that has not been there. I think the political rationale behind 
it is to avoid coming back to us for anything. My suggestion is 
you better be perfect in that execution because if you ever 
have to come back, you have built up with a lot of members 
complete distrust of the next step because of these 
interpretations.
    Secretary Geithner. We will never be perfect in execution 
on anything, but we will be exceptionally careful. And, 
Senator, as you know, we have crawling all over us the 
Congressional Oversight Panel, the GAO, the special SIGTARP, 
and we are being extraordinarily transparent and laying out to 
the public the terms of what we are doing so that people can 
make their judgments about whether these are effective or not. 
That is necessary and desirable, and I welcome that. But we 
will never be perfect, and we will make mistakes. We will get 
things wrong, But we will try to fix those, and we will be as 
open and honest as we can with you. And, again, I think the 
flexibility here is important, to retain it. We may not use it. 
But if we use it, we will do so with as much care and 
justification as we can.
    Chairman Dodd. Thank you. Let me inform my colleagues, by 
the way, there is a vote that begins at 11:45, so we will be 
able to stay here close to another half an hour, I would say to 
my colleagues. So people keep that in mind as we go through so 
we can complete and get to everyone.
    I would just point out as well, by the way, having been 
involved back in September and several members of the Committee 
were, the major thrust here was to try and get resources--75 
members of this body, many of whom knew the political 
consequences, but we decided to get resources out, to do what 
we could responding to it at the time. People can have a 
different look at history going back, but the idea was to 
provide some flexibility in all of that. And as I recall very 
specifically, that was the tension at the time. But I 
appreciate the discussion and debate. It is important.
    Senator Warner.
    Senator Warner. Thank you, Mr. Chairman. Thank you, Mr. 
Secretary, for being here and the time and energy you are 
putting into responding to our questions.
    I want to go back to where, actually, Chairman Dodd started 
the questioning about the issue of how we can help the small 
businesses--and that is a theme that obviously we have come 
back to repeatedly by a lot of my colleagues--and echo again a 
comment made by the Chairman, and I think others, that the SBA 
programs, while good, many of the businesses do have concerns 
about them.
    And two, there has been enormous concern, I hear repeatedly 
around my State, that SBA programs that were announced in 
March, people are in the middle of May still waiting for the 
details so they can actually apply for the funds.
    So my hope is, with SBA Administrator Mills in place now, 
that we can get the details out.
    But one of the areas that you did touch on this morning 
that I think has great possibility is the question of buying up 
some of these small business loan portfolios to provide more 
headroom for banks. And this can cut across not only large 
banks, but go to what Senator Bennet mentioned in terms of some 
of our community banks.
    I know you have been talking about that generically, but is 
there any way you can put some specificity behind that? What 
your dollar goal is going to be? Something that we can then 
take back out and say there is going to be X billions of 
dollars that are going to be committed to buying up these loan 
portfolios? Which then, if the banks who were buying out those 
loan portfolios would replace that with additional loan 
capacity, oftentimes to already existing prior relationships, 
we would see great relief.
    Secretary Geithner. Right. When we initially announced this 
program, we said we would do up to $15 billion for this. It is 
possibly we could do more. And you are right, it is not 
operational yet. The reason for the delay is--and it is a 2-
month delay, but these things are hard to get going--is there 
was just a huge amount of concern by the participants that they 
might be subjected to a whole bunch of conditions that they 
were not comfortable with. And so we have been trying to work 
through those concerns.
    I think we are close to resolving it. But the number we 
started with was 15, which is a pretty substantial fraction of 
the available loans outstanding.
    But you have got the objective exactly right. If you have 
an entity come purchase these off the balance sheet, then the 
bank has room to lend. So it has a direct increase in their 
capacity to lend.
    Senator Warner. And will a piece of that detail be any--it 
will be the expectation, but will there actually be a 
requirement that says that if this additional headroom is 
created, the expectation is the bank will continue to lend out 
that new headroom back to small businesses? Or will it just be 
added capacity to the bank?
    Secretary Geithner. Well, that is the objective. We 
generally said that we want banks committing to explain to us 
how they are going to use the resources and what they are going 
to do to expected lending going forward. And at least for the 
large institutions, we have got reports that they are required 
to submit every month that people can see what they do.
    It is very hard, though, to force banks to lend. And it 
is--as you know, and I know you are not suggesting that.
    Some institutions may still feel like they are short in 
capital. And for those institutions, the impact of this program 
would be they are going to shrink less than they otherwise 
would. That still has the same benefit because then you still 
have more credit outstanding than would have otherwise been 
available. So you still have $1 of capital--it is not quite 
this example--$1 of capital gets you $10 or $12 of additional 
lending capacity. And that is the power----
    Senator Warner. The faster we can get that out with more 
specificity, the better.
    I have got two other questions. One is, and there were two 
issues that Senator Reed raised earlier that I thought were 
quite appropriate. One, I want to associate myself with his 
comments around the concerns at OTS making policy about 
acquiring banks.
    But the second, and I know Senator DeMint and others have 
raised this issue about funds coming back. One of the questions 
you are going to soon have to confront are the questions of the 
values of the warrants. And my concern is as you take back--as 
these banks try to rush to the window to repay--and you have 
already seen a--you have already indicated some small banks 
have already done it. Some of the 19 are anxious to do it.
    My hope would be that rather than having a policy that is 
kind of one-off, and clearly you have to evaluate not taking 
back the money too quick if the bank is going to get itself 
back into trouble down the road.
    But my hope would be, particularly as we evaluate the 
warrant policy, that you have got a macro policy here that says 
is our goal at the end of the day to get back 90 cents on the 
dollar, 95 cents on the dollar, 100 cents on the dollar. But 
some macro approach that is going to say here is what we, the 
Congress and the American people, can expect back from these 
TARP investments.
    Secretary Geithner. Yes, I think that you are raising an 
important issue and I want to think about it a little bit 
before I come and explain to you what the policy is. But I 
think that, in general, our objective will be to sell these 
warrants as quickly as we can. We think that is probably going 
to be the best way to maximize value. And we have got a 
carefully designed program in place to make sure we are getting 
the best price for those warrants as possible.
    You are not suggesting this, but what I am a little 
reluctant to do is have the Government be in the position where 
we hold these investments for a long period of time, longer 
than is desirable, in the hopes we are going to maximize value. 
I think that we are probably unlikely to be better at that--I 
know that you are not suggesting that.
    Senator Warner. But my hope would be that there are other 
options, other than simply selling them back to the 
institution. You could sell them back to some third party where 
you might have shared appreciation, where we are not calling 
the shots anymore but we could still gain some downstream 
appreciation. We are not taking all the risk.
    Secretary Geithner. I want to think about that. I will 
reflect on those concerns and am happy to come back and talk to 
you.
    Senator Warner. One last point, and I apologize, Mr. 
Chairman, I am going over my time a bit. But I want to follow 
up on an issue that you raised and Senator Corker raised.
    I am very, very troubled by your comments on AIG and our 
obligation to maintain the 100 cents on the dollar in the 
counterparties. I think your comments about last fall, that the 
unwieldy resolution of Lehman caused great systemic damage. But 
I think we are in a very different space right now.
    And what I am unfortunately--what I believe I have heard is 
if we do not get one-off resolution authority on AIG and I 
would be happy to cosponsor with Senator Corker if you ask for 
that one-off resolution authority on AIG. And we can--I think 
we could get it through very quickly.
    But if we do not get that one-off resolution authority, and 
I--then by implication you are saying we are going to be 
continuing to pay out, even if we have taken down 50 percent of 
that exposure, the balance of that 50 percent of the exposure 
on these counterparties is still at 100 cents on the dollar.
    I just do not believe that the reaction of the market would 
be so traumatic at this point if we sent out warning signals 
that hey, we are thinking about not paying off 100 cents on the 
dollar on these counterparty obligations because everybody is 
taking haircuts on the AIG situation. And the notion that it is 
going to somehow affect the ability to get best value for the 
remaining insurance companies and all of the other challenges 
we have got with AIG, I just do not buy it.
    So I hope you will either challenge us to do that one-off 
with the AIG or think differently about the implication which--
correct me if I am wrong--that otherwise we are stuck with 
paying off 100 cents on the dollar on all of these 
counterparties for as long as we are in AIG.
    Secretary Geithner. I very much welcome the chance to work 
with this Committee on passing resolution authority as quickly 
as possible.
    Everything we do in AIG going forward we are going to try 
to balance what we think is the best way to reduce risk to the 
taxpayer over time and have the least potential damage to the 
financial system. It is an incredibly difficult balance.
    And it is very hard to know if we are going to get that 
balance right, but we kind of had a good experience with what 
happens when people got that balance wrong.
    Senator Warner. But the balance at that point was in a 
moment of crisis.
    Secretary Geithner. The world is different today, but again 
many people would have said what you said--you did not say it 
at the time. But maybe they would have said what you just said 
in March of 2008, in August of 2008, in September of 2008. And 
it just proves how hard it is to know.
    Senator Warner. But then by implication----
    Secretary Geithner. If you get it wrong, you are taking a 
lot of risk.
    Senator Warner. But by implication, then the taxpayer 
should be expected to continue to honor all of the AIG 
obligations, 100 cents on the dollar, for as long as we are in 
AIG. Is that not----
    Secretary Geithner. I think, Senator, I would say it 
differently. What my obligation is, again, is to try to manage 
through this incredibly difficult problem in a way that 
minimizes losses to the taxpayer and minimizes broader risk of 
damage to the rest of the financial system because, as we saw 
last year, the effects of getting that judgment wrong are 
deeply traumatic to people who were careful and responsible. 
Unemployment is substantially higher, pension values 
substantially lower. Businesses failed across the country in 
part because people got that balance wrong.
    I do not want--my obligation is not to protect the 
counterparties of AIG. I would not give a penny to AIG to 
protect the counterparties of AIG. What I care about is trying 
to make sure that we reduce the risk of loss to the taxpayer 
and we reduce the risk of avoidable damage to the fabric of 
confidence in our financial system because of the effect it has 
on pension values, on business viability, on the cost of 
credit, on the ability to put your kid through college, on the 
viability of business on main street, and on levels of 
unemployment.
    I know that that connection seems remote, hard to 
appreciate. We cannot be certain we are getting that balance 
right.
    But again, look at what happened when reasonably careful 
people got that balance wrong.
    Senator Warner. We all acknowledge, we are in the 100-year 
flood. We were taking extraordinary actions that causes all 
great concern. But it does seem--this is the one-off that seems 
like--the counterparties of AIG seem to be the one-off that 
still seems to be coming off whole when everyone else across 
the board has been taking some level of hit.
    Secretary Geithner. There is nothing fair in it and it is 
deeply frustrating, particularly for me personally because I 
have to sit up here and explain and defend this.
    But again, my obligation is to try to make sure we get that 
balance right. And if I felt there was a better way, I will 
come up here and explain it, and I will support it.
    Chairman Dodd. Senator, thank you. We have to move on.
    Let me just say on this, and I want to just clarify, I have 
been under the impression we were going to try and craft 
something legislatively to deal with the resolution mechanism 
generally, not just for AIG but across the spectrum.
    And then there is a suggestion we might do something on a 
one-off basis. First of all, do you think you need legislation? 
I mean, it seems to me, is there some lack of existing 
authority that would prohibit you to begin a resolution of AIG 
short of there being some legislative response, even in a one-
off situation?
    I can understand if you are trying to come up with a 
mechanism broadly for the long-term with a lot of unanticipated 
entities. But with AIG specific, why can't we do that?
    Secretary Geithner. Without broad authority like what we 
have for small banks, we have limited options. We are forced to 
do the range of things we have been doing at AIG since the 
fall.
    Chairman Dodd. You need some authority?
    Secretary Geithner. Yes. And I know that you have offered--
you have suggested we legislate for this specific thing and, 
Senator, you suggest I am hiding behind that, which I do not. I 
do not hide behind things, Senator.
    I think it is hard to do as a one-off thing. I think this 
is important to do. It is a necessary part of the authority 
this country needs going forward. I think to do it right you 
need to have it designed for a range of circumstances where you 
could face systemic risk of failure of a large complex 
institution. So I would not go one-off----
    Chairman Dodd. Can I ask you something? Can you give me 
some broad ballpark number of what we are talking about in 
terms of the counterparties? What is the exposure dollar-wise?
    Secretary Geithner. Remaining exposure?
    Chairman Dodd. Yes.
    Secretary Geithner. I cannot do it today but I will be 
happy to commit to this--I think the Fed has already done it--
to provide estimates of current value of those outstanding 
obligations. And there is, of course, lots of different types 
of obligations AIG has outstanding.
    Chairman Dodd. Let me tell you the number I have, Mr. 
Secretary, and you tell me if I am wrong. The national value of 
financial products contracts with counterparties is still $1.5 
trillion.
    Secretary Geithner. That is the notional value and that is 
about half the level it was at the peak. But that is not the 
right way of thinking about risk or the exposure after 
collateral. That is a very different number. But I would be 
happy to talk to the Fed and see if we can give you that 
number.
    Chairman Dodd. I wish you would, because we want to get 
some sense of the magnitude of what we are talking about here 
because that, at 100 cents on the dollar, obviously is a 
massive----
    Secretary Geithner. No, that is nothing like the potential 
obligation that AIG has to its counterparties. It does show how 
complex it is to unwind this complicated amount of risk, but it 
is not a measure of actual credit exposure.
    Chairman Dodd. Senator Johanns.
    Senator Johanns. Thank you, Mr. Chairman.
    Mr. Secretary, thank you for being here. It has been always 
very informative to listen to you.
    I want to zero in on something that I try to pay attention 
to, I think everybody here tries to pay attention to. That is 
that not only that the private sector operate within a set of 
rules, but that the Government and its officials operate within 
a set of rules. So I want to talk about the rights of people 
here with you a second.
    I will just be very blunt. I never personally thought I 
would live to see the date that a private CEO of a company 
would go to the White House and leave without their job. I just 
never thought I would see it.
    Soon after that you gave interviews, and even the President 
did, saying well, there could be others. You have talked very 
boldly today about changing board membership of private 
companies, reconstituting boards. You have a feeling, I can 
tell, that that is within the purview of your power as a 
cabinet member.
    I must admit, as a former cabinet member, I never imagined 
that I had the power to bring a company in that had been 
getting Government money for whatever and suggest to the CEO 
that they were without work.
    Tell me, if you would, Mr. Secretary, what specific--very 
specific--statute gives you that power? What would you cite me 
to that leads me to the conclusion that legally CEOs can be 
dismissed, boards can be reconstituted, all of those things?
    Secretary Geithner. Senator, I think to do that carefully I 
am going to have to respond in writing, but let me try and 
respond to the concerns you have raised about this.
    We would never, as a Government, want to be in the position 
where it is necessary for us to broad public policy reasons to 
come in and provide substantial financial assistance to avoid 
the prospect of bankruptcy by a major institution. We do not 
want to be in that position. It should be--it has been 
extraordinarily rare. I hope it will be rare in the future.
    But when we face that situation, it is, I believe, 
necessary for the Government, for the people providing 
financing in that context, to make a judgment about whether the 
board and management are going to be able to preside over a 
restructuring which would leave the firm viable over time. I am 
now talking about non-regulated financial institutions. In the 
kinds of banks, there is a whole set of existing authorities 
that operate now that give supervisors very broad authority in 
circumstances like that.
    But I think this is an exceptionally sensitive careful 
balance and should rarely if ever be used. Do not expect there 
to be that situation in many cases going forward. I am talking 
about the banks as a different kind of framework.
    But again, like in any situation where a company is going 
to get financing for its operations, that is a judgment any 
creditor would have to make. And I think for the Government, 
the taxpayer, not to do that in that kind of context would 
leave us vulnerable to the charge that we are not meeting our 
fiduciary obligation to taxpayers.
    But we would use this ability exceedingly carefully, with 
extreme reluctance, extreme care, as you would expect. Because 
we do not want to have the country faced with the prospect of 
the Government coming in, making those judgments without a very 
strong reason for doing so.
    Senator Johanns. You know, Mr. Secretary, here is what I 
would say. I think you are a careful person. But again, having 
been where you are at, in a much different role but where you 
are at. And having been a CEO of a State, one of the first 
questions I was asked is what is my legal authority here. If I 
were to ask the GAO or your Inspector General or whoever to 
audit this action, would I find a specific statute that allowed 
you to do this?
    Secretary Geithner. Senator, I am completely confident that 
we acted fully within the authority of the executive branch in 
this case, and again would welcome a chance to lay that out for 
you.
    But let me try and do the basic principle. I said nothing 
to day that I have not said in public, or that the President 
has not said in public before. So do not interpret anything I 
said today as anything about the prospects of future actions 
like this.
    But again, I think the basic principle, just to restate it, 
is an understandable principle. If you look at what the 
Government of the United States did in the fall in the context 
of the interventions of Fannie and Freddie, or even in the AIG 
case, you saw in that context your Government act as a 
condition of assistance to make sure that the boards and 
management of those companies were going to be strong enough so 
that the taxpayers' obligation will be protected going forward.
    So that framework, as you saw enacted by your Government in 
September, in those three specific cases, I do think it meets 
the reasonable test. Again, we have got obligations to the 
taxpayer, obligations where we are making financial assistance. 
And we have an obligation in that context to make sure that we 
are putting in place assistance that is going to come back.
    Senator Johanns. I am going to suggest to you I do not 
believe it is a test of reasonableness. I think you are a 
reasonable guy. I think it is a test of specific statutory 
authority to take the action.
    The other thing I will offer on a related matter, and I am 
out of town and so I appreciate the Chairman's indulgence. I 
did not do a lot of bankruptcy when I was practicing law. But I 
did enough to know that there is a well set of established 
rights and risk is priced based upon where you end up in that.
    And as I understand it, the bondholders in the Chrysler 
bankruptcy had certain rights. Those rights, whether we like it 
or not, were superior to the rights of the employees. How did 
they end up being subjected to a situation where they, in 
effect, lessened their rights in the bankruptcy court? What 
happened to make that occur?
    Secretary Geithner. That package of commitments went 
through a bankruptcy proceeding, was reviewed and approved by a 
bankruptcy judge as you would expect under the laws of the 
land--and that is the way our process works. That is the way it 
should work.
    So we had an independent check on whether the balance of 
treatment of a range of creditors to that firm was fair and 
equitable.
    Chairman Dodd. I have got to get to Senator Merkley. I 
apologize to my colleague. I know we have a lot of questions.
    Senator Merkley.
    Senator Merkley. Thank you very much, Mr. Chair and Mr. 
Secretary.
    Chairman Dodd. I am trying to get this done before we have 
to terminate.
    Senator Merkley. Thank you so much for your testimony. I am 
going to ask my questions quickly and ask for quick responses.
    First, in your testimony you note that financial innovation 
has expanded financial products available. These have many 
benefits. But we have to make sure that households make choices 
to borrow or to invest their savings, when they do so there are 
clear and fair rules to avoid manipulation, deception, and 
abuse.
    Are you essentially making the case for a financial 
products safety commission?
    Secretary Geithner. I believe that as part of regulatory 
reform we need to put in place stronger protections for 
consumers that are enforced more effectively and evenly across 
institutions that offer those products. And as part of that, we 
are examining whether we should change the oversight structure 
so that we have better enforcement of stronger rules.
    Senator Merkley. I certainly--that sounded like a yes, we 
are considering it. I certainly want to encourage that because 
while we are considering legislation to take on specific 
challenges and abuses, the design always is changing. And just 
as we have commissions to address consumer products in general, 
I think that would be quite useful.
    Turning to the Making Home Affordable Program, you note in 
your testimony that it covers now 75 percent of all loans. I 
think by that you are referring to, in theory, the design of 
the loans. Because on the ground, homeowners are still having 
an extraordinarily difficult time reaching folks representing 
participants in the MHA program. Your testimony notes 55,000 
trial modifications with 14 servicers.
    How do we speed up this process? And just say on the ground 
I have people calling my office very day who have loans with 
folks who are participating who are being told we are sorry, we 
cannot talk to you until you are two or 3 months delinquent. Or 
no, our organization is not participating in the program when 
we have told them yes, they are, and so forth.
    Secretary Geithner. It is just beginning. You cannot judge 
it by its effectiveness yet. Secretary Donovan has got a very 
substantial program of assistance to counselors to help make 
sure that people who are eligible are able to get assistance 
and to help them navigate the process. We are trying to create 
very strong incentives for services to participate and deliver 
and execute. It is just getting started.
    The benefits of the refinancing program, lower interest 
rates, people can see. And that has moved much more quickly. 
This will take a little bit more time.
    But I think it is going to benefit a lot of people, but 
really will not know the full scale of the benefits and how 
successful the modifications are until we have a few more weeks 
and months behind us in this. But we are working very hard, 
have a lot of resources devoted to it. Fannie and Freddie, 
which are implementing the program, are doing a lot. And I 
think you will start to see more traction.
    Senator Merkley. Thank you. I certainly want to encourage 
that. I will repeat what I said to the Secretary of Housing, 
that any form of a hotline that bypasses hundreds of servicers 
who have no idea of how this particular program works and helps 
us connect people with representatives of those participants 
who understand the program, who know how to talk about it, 
would save so much frustration.
    Because homeowners, after three or six or 10 calls, they 
give up.
    Secretary Geithner. There is such a hotline. There is also 
a Web site, which is very careful. In fact, I think last week 
Shaun Donovan and I together, to try to give more exposure to 
this program, used the example of a man from California--I 
think he was from California--who went on the Web site, found 
out about the program, and got a modification that 
substantially reduced his interest payment simply by going 
through that process.
    And he stood up there and said, on national television, 
these programs work. They will work for you. You need to just 
make sure you are eligible and you are working on it.
    But again, it is early days. We want to make sure it gets 
to as many people as we can.
    Chairman Dodd. Thank you.
    Senator, we have got about 2 minutes left on our vote on 
the floor and they are going to call that vote. I get nervous 
about making it over.
    Senator Merkley. Thank you very much.
    Chairman Dodd. I apologize to my colleague from Oregon. He 
has been very patient and waiting for the end here.
    Mr. Secretary, we thank you very much.
    I am going to leave the record open. I know members may 
have some additional follow up questions we might get to you. 
But this has been very, very informative, very helpful today 
and we will follow up with you. But I thank you for being here.
    Secretary Geithner. Thank you for having me.
    Chairman Dodd. The Committee will stand adjourned.
    [Whereupon, at 12 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]
                PREPARED STATEMENT OF SENATOR JACK REED
    Chairman Dodd and Senator Shelby, thank you for convening this 
hearing. I look forward to hearing from Secretary Geithner about the 
status of the Troubled Assets Relief Program (TARP) and other efforts 
to help our economy recover from the significant turmoil we have been 
experiencing.
    Since the passage of the Emergency Economic Stabilization Act 
(EESA) last fall, I have been focused on making sure taxpayers are 
adequately protected. This has been extremely important to me given the 
unprecedented nature and magnitude of the investment we have asked them 
to make to help get our financial sector back on track.
    The TARP program is just one aspect of a significant investment 
being made to respond to the financial crisis, with the Federal Reserve 
and Treasury making key decisions involving billions of taxpayer 
dollars. Today's hearing is a critical part of overseeing these 
investments, but we also need to continue to look closely at the 
Federal Reserve as we think about these issues.
    As we work to stabilize the financial sector, I want to reiterate 
how important it is that we make decisions in a way that supports 
taxpayers.
    As you are aware, Mr. Secretary, I included specific language in 
TARP to allow Treasury to hold warrants as a way to ensure that 
taxpayers would not just be exposed to the downside of these TARP 
investments, but would also benefit from the upside of these companies 
when they recover. As you are aware, a provision I wrote to protect the 
integrity of the warrants passed both the Senate and House yesterday 
and should give Treasury the discretion and leverage it needs to 
maximize this investment for taxpayers.
    Finally, I am alarmed by recent news that, despite the Federal 
Reserve's prohibition of private equity firms acquiring struggling 
banks, the Office of Thrift Supervision has recently gone ahead and 
approved such a transaction. This is yet one more example of how our 
current regulatory system allows financial institutions to shop bad 
products or activities around until they find a regulator to say yes. 
So I hope to discuss this more with you during questioning.
    Secretary Geithner, thank you for joining us today.
                                 ______
                                 

                 PREPARED STATEMENT OF TIMOTHY GEITHNER
                               Secretary,
                      Department of the Treasury,
                              May 20, 2009
    Chairman Dodd, Ranking Member Shelby, Members of the Senate Banking 
Committee, thank you for the opportunity to testify before you today.
    On October 3, 2008, during a time of tremendous financial upheaval 
and economic uncertainty, Congress passed the Emergency Economic 
Stabilization Act (EESA) with the specific goal of stabilizing the 
Nation's financial system and preventing catastrophic collapse. Soon 
after taking office, this Administration rebuilt the EESA programs from 
the ground up with a new foundation. We also unveiled a financial 
stability plan to restore the flow of credit to consumers and 
businesses, tackle the foreclosure crisis in order to help millions of 
Americans stay in their homes, and comprehensively reform the Nation's 
financial regulatory system so that a crisis like this one never 
happens again.
    Today, just 4 months into President Obama's term of office, there 
are important indications that our financial system is starting to 
heal. For example, spreads for investment grade corporate bonds have 
fallen about 210 basis points and spreads on high yield corporate bonds 
are down about 770 basis points since the end of November. Spreads on 
AAA municipal bonds have come down 150 basis points since October. Risk 
premiums in short-term, inter-bank markets have fallen 280 basis points 
over roughly the same period and the cost of credit protection for the 
largest U.S. banks has fallen by about 180 basis points just since 
early April. Treasury is continuing to look into additional metrics 
that gauge the markets more broadly, as well as additional economic 
metrics, to determine the effectiveness of the current strategy and 
whether additional or different steps are needed.
    With the help of our lending facility with the Federal Reserve, new 
securities issuance has started to revive. Spreads for AAA credit card 
receivables asset-backed securities (ABS) have fallen about 330 basis 
points from their peak. There has been more issuance of consumer ABS in 
the past 2 months than in the preceding 5 months combined. In our 
housing market, interest rates on 30-year mortgages have dropped to 
historic lows and refinancing has surged.
    Finally, we have already seen a substantial amount of adjustment in 
our financial system. Leverage has declined, the most vulnerable parts 
of the nonbank financial system no longer pose the same risk, and banks 
are funding themselves more conservatively.
    These are all welcome signs. However, the process of financial 
recovery and repair will take time.
The Conditions We Confronted Upon Taking Office
    The challenges that our financial system confronts are complex, 
interrelated, and the result of developments over many years. Earlier 
this decade, a combination of factors generated unsustainable bubbles 
in many housing markets across the country. A protracted period of 
rapid innovation, excessive risk taking, and inadequate regulation 
produced a financial system that was far more fragile than was 
generally appreciated during the boom times.
    Starting in 2007, unexpected losses experienced by major banks on 
mortgage-backed securities set off a vicious cycle. The losses reduced 
their capital, which forced them to pull back on lending. This put 
downward pressure on asset prices, which generated further losses for 
the banks and reduced wealth for millions of American families and 
businesses. Tightening financial conditions became a drag on the 
broader economy. As workers lost jobs and as prospects for businesses 
darkened, prospective losses on consumer and business loans increased. 
And as the scale of the potential financial losses increased, market 
concerns about the viability of individual institutions mounted, and as 
firms became reluctant to maintain even normal exposures to one 
another, the basic functioning of our financial markets was 
compromised.
    In the fall of 2008, major policy intervention (including the EESA 
legislation) was, in the end, successful in achieving the vital but 
narrow objective of preventing a systemic financial meltdown. However, 
while those actions reduced overt concerns about systemic risk, as 
President-Elect Obama and his economic team prepared an economic 
program, the outlook for the economy was deteriorating rapidly. 
Economic data that became available in November and December pointed to 
a very sharp fall in economic activity. For example, the advanced data 
on orders for durable goods fell by 6.2 percent in October, the largest 
monthly decrease in 2 years. On December 4, it was reported that 
payroll employment had fallen by 533,000 in November. \1\ This was the 
largest monthly decline since the deep recession of 1973-74. Quickly 
worsening prospects for the economy meant that likely losses for U.S. 
financial institutions were rising sharply as well, and this heightened 
concerns about the adequacy of their capital.
---------------------------------------------------------------------------
     \1\ The estimated change in payroll employment in November was 
later revised to a decline of 597,000.
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    The disruptions to the financial system were a major factor 
undermining the economy. Liquidity in a broader range of securities 
markets, including the market for long-term Treasuries, fell sharply. 
Credit spreads for virtually all credit products reached historic highs 
in the fourth quarter. Loan growth and bond issuance slowed in the 
fourth quarter. In particular, the issuance of new ABS essentially came 
to a halt in October. Part of the decline in credit growth reflected 
falling demand for credit as consumers and businesses became more 
cautious. But a variety of factors pointed to meaningful constraints on 
the supply of credit. For example, a record number of banks reported 
tightening credit standards in the fourth quarter.
    In addition, given the substantial burden placed upon the American 
taxpayers, there was deep public anger, skepticism about whether the 
government was using taxpayer money wisely, and a perceived lack of 
transparency, all of which led to eroding confidence.
Our Response
    Leaving that situation unaddressed would have undoubtedly risked a 
deeper recession and more damage to the productive capacity of the 
American economy. It would have resulted in higher unemployment and 
greater failures of businesses.
    The lesson of past economic crises is that early, forceful and 
sustained action is necessary to spur growth, repair the financial 
system and restore the flow of credit in order to sustain economic 
recovery.
    Facing these extraordinary challenges, this Administration and the 
Congress responded with extraordinary action. Within weeks, we enacted 
the American Recovery and Reinvestment Act (ARRA) that is giving 95 
percent of working Americans a tax cut, creating or saving 3.5 million 
jobs, providing nearly 4 million students with a new higher education 
tax cut and helping 1.4 million Americans purchase their first home by 
providing $6.5 billion in tax credits.
    On February 10, the Administration outlined a series of proposals 
to stabilize the housing market; boost new consumer and business 
lending by re-starting the market for securities; increase transparency 
and new capital in the financial system by conducting an unprecedented 
regulatory review of our Nation's largest banks; and create a market 
for legacy real-estate related loans and securities that are clogging 
banks and making them reluctant to lend.
Reforming EESA
    Upon taking office, this Administration reformed EESA in four 
concrete ways. First, we brought a new framework of transparency, 
accountability, and oversight. Second, we redirected the program to get 
credit flowing again to the financial system. Third, we focused the 
program on the housing market, consumer business lending, small 
business lending, and efforts to help create a market for legacy loans 
and securities. Finally, we worked to ensure that our programs 
facilitated broader restructuring in the financial system by providing 
unprecedented transparency about the health of our major financial 
institutions, allowing investors to differentiate more clearly among 
banks and ultimately make it easier for banks to raise enough private 
capital to repay the money they have already received from the 
government. I would like to update the Committee on each.
Transparency, Accountability, and Oversight
    A key element to our new approach came in March, when the 
Department of the Treasury launched a new Web site, 
www.financialstability.gov, that lists how taxpayer dollars are spent, 
what conditions are placed on institutions in exchange for government 
assistance, and provides an interactive map illustrating State-by-State 
bank and financial institution funding.
    We have also taken a number of steps to better measure whether our 
programs are increasing the flow of credit through Monthly Lending and 
Intermediation Surveys. Treasury undertook this important initiative to 
better understand the effects the program is having and to help the 
public easily assess the lending and intermediation activities of banks 
participating in the Capital Purchase Program (CPP). The Surveys 
capture data from the 20 largest recipients of investments under the 
CPP, detailing quantitative information on three major categories of 
lending--consumer, commercial, and other financial activities--based on 
banks' internal reporting, as well as commentary to explain changes in 
lending levels for each category. We are in the process of expanding 
our monthly survey to include all banks participating in the CPP, 
including more than 500 small and community banks across the country 
and are adding a metric to follow lending to small businesses. For 
institutions taking part in the Capital Assistance Program (CAP), which 
I will describe momentarily, Treasury is requiring recipients to detail 
in monthly reports their lending broken out by category.
    In addition, on January 28, 2009, Treasury announced that it would 
begin posting all of its investment contracts online within 5 to 10 
business days of each transaction's closing. Treasury is in the process 
of posting all the contracts signed prior to January 28 to the Web site 
as well. To date, Treasury has posted over 240 investment contracts on 
www.financialstability.gov, in addition to terms and program guidelines 
for all programs under the EESA.
    Since taking office we have worked closely with the General 
Accounting Office, the Congressional Oversight Panel, and the Special 
Inspector General for the Troubled Asset Relief Program, the three 
oversight bodies examining the implementation of EESA. We are 
continually reviewing their recommendations and are adapting our 
programs in response to their proposals.
    Finally, on February 4, the President laid out a set of broad 
reforms for compensation packages for financial institutions that 
receive government assistance. Congress put in place additional reforms 
and currently Treasury is preparing an Interim Final Rule to implement 
the executive compensation and corporate governance provisions of the 
ARRA.
Housing
    As we are all painfully aware, the collapse of the housing price 
bubble, and the sharp reversal in lending standards that helped fuel 
that bubble, have had a devastating effect on homeowners and the 
financial sector, with dire consequences for the economy overall. In 
addition to reducing household wealth across the country, and thereby 
further intensifying the economic contraction, falling home prices and 
extraordinarily tight lending standards have trapped homeowners in 
their old mortgages. Even many homeowners who made what seemed to be 
conservative financial decisions 3, 4, or 5 years ago find themselves 
unable to benefit from the low interest rates available to unencumbered 
borrowers today. At the same time, increases in unemployment and other 
recessionary pressures have continued to impair the ability of some 
otherwise responsible families to stay current on mortgage payments.
    Since January, the Administration has spent considerable effort 
developing and implementing a comprehensive plan for stabilizing our 
housing market. Working with the Federal Reserve, along with enacting 
programs to help provide more financial strength to the GSEs, we helped 
bring overall mortgage interest rates down to historic lows.
    We launched a new program called Making Home Affordable to make it 
possible for millions of American homeowners to refinance and take 
advantage of those lower interest rates.
    And we put in place a program to reduce the monthly mortgage 
payments for eligible borrowers. This loan modification program ensures 
monthly mortgage payments are at most 31 percent of a person's income 
for 5 years.
    On April 6, building on MHA, Treasury announced a major interagency 
effort to combat mortgage rescue fraud and put scammers on notice that 
we will not stand by while they prey on homeowners seeking help to 
avoid foreclosure.
    On April 28, Treasury announced a Second Lien Program so that, when 
a Home Affordable Modification is initiated on a first lien, servicers 
participating in the Second Lien Program will automatically reduce 
payments on the associated second lien according to a preset protocol. 
Servicers alternatively have the option to extinguish the second lien 
in return for a lump sum payment under a preset formula determined by 
Treasury, allowing servicers to target principal extinguishment to the 
borrowers where extinguishment is most appropriate. Treasury also 
announced steps to incorporate the Federal Housing Administration's 
(FHA) Hope for Homeowners into MHA.
    And on May 14, Treasury announced new details on Foreclosure 
Alternatives and Home Price Decline Payments. The Foreclosure 
Alternatives are meant to prevent costly foreclosures by providing 
incentives for servicers and borrowers to pursue short sales and deeds-
in-lieu of foreclosure in cases where a borrower is eligible for a MHA 
modification but unable to complete the modification process. The Home 
Price Decline Protection Incentives will provide additional payments 
based on recent home price declines, and therefore will incentivize 
additional modifications in areas where home prices have been falling.
    To date, MHA's progress has been substantial. Fourteen servicers, 
including the five largest, have signed contracts and begun 
modifications under our program. Between loans covered by these 
servicers and loans owned or securitized by Fannie Mae or Freddie Mac, 
more than 75 percent of all loans in the country are now covered by 
MHA. The 14 participating servicers have extended offers on over 55,000 
trial modifications and mailed out over 300,000 letters with 
information about trial modifications to borrowers and Fannie Mae and 
Freddie Mac have acquired thousands of refinancings for high loan-to-
value (LTV) borrowers.
    Since the launch of its new automated underwriting system on April 
4, Fannie Mae has had over 233,000 eligible refinance applications 
through DU Refi Plus, with over 51,000 of these having LTVs between 80 
and 105 percent. More than 3,650 Home Affordable Refinance loans have 
closed and been delivered to Fannie Mae and Freddie Mac already. These 
application volumes indicate the desire of homeowners to take advantage 
of the Administration's program.
    Since the Treasury released guidelines for servicers under MHA on 
March 4, close to 3 million borrowers have accessed Fannie Mae and 
Freddie Mac loan look-up tools online to see if they have a loan 
eligible for refinancing. Just 2 weeks after the guidelines were 
released Treasury also launched www.makinghomeaffordable.gov, a Web 
site dedicated to helping empowering homeowners with the tools to 
gather information about the program and determine whether they might 
be eligible. The site has received more than 17.7 million page views in 
less than 2 months.
    Going forward, we will continue to explore additional ways to help 
the housing market and report on ongoing progress.
Capital Assistance Program
    Currently, the vast majority of banks have more capital than they 
need to be considered well capitalized by their regulators. However, 
concerns about economic conditions--combined with the destabilizing 
impact of distressed ``legacy assets''--have created an environment 
under which uncertainty about the health of individual banks has 
sharply reduced lending across the financial system, working against 
economic recovery.
    For every dollar that banks are short of the capital they need, 
they will be forced to shrink their lending by eight to twelve dollars. 
Conversely, every additional dollar of capital gives banks the capacity 
to expand lending by eight to twelve dollars. Providing confidence that 
banks have a sufficient level of capital even if the economic outlook 
deteriorates is a necessary step to restart lending, so that families 
have access to the credit they need to buy homes or pay for college, 
and businesses can get the loans they need to expand. Moreover, 
reassuring investors that banks have sufficient resources to weather 
even a very adverse economic scenario will make it possible for banks 
to raise additional private capital.
    That is why a key component of any credible program to restore 
confidence to the financial system and get credit flowing again is to 
recapitalize the banking system, ensuring that the largest banks in the 
country have sufficient capital so they can support lending, even in a 
more severe economic scenario.
    On May 7, Federal banking supervisors announced the results of the 
most extensive regulator review in our Nation's history of the biggest 
19 banks. The forward-looking test provided unprecedented levels of 
transparency and clarity to address uncertainty in the banking system.
    The results found that 9 of the 19 firms currently have capital 
buffers sufficient to get through the adverse scenario and that the 
remaining 10 firms collectively need to add $75 billion to their 
capital buffers to reach the target.
    Any Bank Holding Company needing to augment its capital buffer is 
required to develop a detailed capital plan to be approved by its 
primary supervisor, after consultation with the FDIC and Treasury. 
These plans are due 30 days following the release of the results, on 
June 8, and must be implemented within 6 months of the release of the 
results. Also, some firms may choose to apply to Treasury for Mandatory 
Convertible Preferred (MCP) under our program as a bridge to private 
capital.
    This review is helping to increase confidence in the financial 
system. To date, more than $56 billion in funds have been raised or 
announced by the 19 banks, including $34 billion in common equity 
capital. Of the $56 billion, about $48 billion has been planned or 
executed by banks with a SCAP shortfall. Banks without a shortfall have 
signaled their intent to use funds to repay EESA capital if approved. 
One of the preconditions to repaying EESA capital is that banks must 
demonstrate financial strength by issuing senior unsecured debt for a 
term greater than 5 years not backed by FDIC guarantees. To date, banks 
have also raised $8 billion in non-FDIC guaranteed bonds.
    Going forward, we plan to re-open the application window for banks 
with total assets under $500 million under the Capital Purchase 
Program, established last October by the previous Administration, and 
raise from 3 percent of risk-weighted assets to 5 percent the amount 
for which qualifying institutions can apply. This applies to all term 
sheets--public and private corporations, Subchapter S corporations, and 
mutual institutions. Current CPP participants will be allowed to 
reapply, and will have an expedited approval process.
    In addition, we plan to extend the deadline for small banks to form 
a holding company for the purposes of CPP. Both the window to form a 
holding company and the window to apply or re-apply for CPP will be 
open for 6 months.
    These are essential steps to ensuring that community banks, a 
source of strength and resilience for the U.S. financial system, 
continue to lend during this economic crisis. Community banks have 
accounted for more than one third of the dollar volume of loans to 
small businesses--the businesses which in turn have accounted for the 
majority of new jobs created annually over the past decade.
Consumer and Business Lending Initiative
    Securitization has come to play a very important role in the U.S. 
financial system. Banks develop and maintain expertise in originating 
certain types of loans. This includes loans to individuals through 
credit cards, mortgages, student loans, and other forms of consumer 
credit as well as loans to businesses, particularly those that are not 
able to raise funds directly in securities markets. In recent years, an 
increasing portion of these loans have been aggregated into pools and 
sold as so-called Asset Backed Securities, or ABS. The rapid growth of 
the market for ABS in the years before the current crisis increased the 
supply of credit available to individuals and small businesses because 
once banks pool and sell loans to the securitization market, it opens 
up their balance sheet to create new loans.
    As the economy deteriorated over the summer of 2008, credit spreads 
on ABS began to rise, and the disruptions that followed the failure of 
Lehman Brothers severely disrupted the market of newly issued ABS. 
Issuance of consumer ABS averaged $20 billion per month in 2007, and 
$18 billion per month during the first half of 2008. However, ABS 
issuance slowed sharply in the third quarter before coming to a virtual 
halt in October 2008. The closure of this market is a major constraint 
on the supply of new credit to individuals and businesses, particularly 
in an environment where banks have little scope to expand their balance 
sheets.
    An important part of the FSP is a significant expansion of the Term 
Asset-Backed Securities Loan Facility (TALF) through the Consumer and 
Business Lending Initiative (CBLI). The TALF is designed to jumpstart 
the securitization markets, which in turn will increase lending 
throughout the economy. Under the TALF, the Federal Reserve extends 
loans to investors who purchased newly issued ABS. Treasury has 
committed funds under the EESA program to provide a degree of credit 
protection for the Federal Reserve's TALF loans. The program was 
initially proposed in November 2008, with a focus on highly rated ABS 
backed by student loans, auto loans, credit card loans, and loans 
guaranteed by the Small Business Administration (SBA). As part of our 
financial stability plan, we announced an expansion of the size and 
scope of the program, increasing the scale of potential ABS funding 
under TALF.
    Recently, Treasury and the Federal Reserve expanded TALF to include 
newly or recently issued AAA-rated ABS backed by four additional types 
of consumer and business loans--mortgage servicing advances, loans or 
leases relating to business equipment, leases of vehicle fleets, and 
floor plan loans. Treasury and the Federal Reserve have expanded the 3-
year TALF loans to include a 5-year term and just yesterday we 
announced extending certain legacy commercial mortgage backed 
securities as an eligible collateral for TALF loans. Addressing the 
dislocation in the commercial real estate market through this program 
is critical to restoring the flow of credit to owners of commercial 
real estate and preventing a damaging chain of events in this market.
    The terms of the funding provided under TALF, including fees, are 
set in a way that is designed to limit the risks faced by U.S. 
taxpayers while still meeting the objective of encouraging lending to 
consumers and small businesses. The amount and cost of funding that is 
provided varies depending on the riskiness of the assets being 
financed. Treasury and the Federal Reserve used conservative 
assumptions when calibrating the limits on the funding provided given 
the uncertain economic environment.
    To date there has been $24.8 billion in total new issuance under 
TALF, of which $17.2 billion was borrowed by investors using TALF 
loans. The 3 month average of TALF issuance was equivalent to 50 
percent of the 2007 market volume. Spreads on ABS securities have 
narrowed between 40-60 percent from the peak in December 2008. Since 
the fourth quarter of 2008, 5-year fixed rate AAA credit cards 
tightened 300 basis points in four months. Finally, the commercial 
mortgage-backed securities spreads have narrowed by 800 basis points 
just from the presence of the TALF program.
    Going forward, Treasury and the Federal Reserve will continue to 
monitor and enhance the ABS programs to bring in new, more niche asset 
classes and make sure that the number of eligible borrowers and issuers 
continues to increase.
Small Business Initiative
    In recent years, securitization has supported over 40 percent of 
lending guaranteed by the Small Business Administration (SBA). As a 
result of the severe dislocations in the credit markets that began in 
October 2008, however, both lenders that originate loans under SBA 
programs and the ``pool assemblers'' that package such loans for 
securitization have experienced significant difficulty in selling those 
loans or securities in the secondary market. This, in turn, has 
significantly reduced the ability of lenders and pool assemblers to 
make new small business loans. While the SBA guarantees about $18 
billion in new lending in 2008, new lending was trending below $10 
billion earlier this year.
    On March 16, 2009, Treasury announced a program to unlock credit 
for small businesses as part of the Consumer and Business Lending 
Initiative. As part of the program, Treasury will make up to $15 
billion in EESA funds available to make direct purchases to unlock the 
secondary market for the government-guaranteed portion of SBA 7(a) 
loans as well as first-lien mortgages made through the 504 program. 
These purchases, combined with temporary benefits, including higher 
loan guarantees and reduced fees implemented under the American 
Recovery and Reinvestment Act of 2009, will help provide support to 
small business lending.
    The announcement impact of this initiative--combined with the 
implementation of 90 percent guarantees and reduced fees--has helped 
raise weekly SBA loan volumes by over 25 percent since March 16. In 
addition, secondary market activity has picked up, with $185 million in 
total loan volume settled from lenders to brokers in April, the highest 
monthly total since September.
    Going forward, Treasury expects to finalize details that will allow 
purchases to begin shortly.
Public Private Investment Program
    A variety of troubled legacy assets are congesting the U.S. 
financial system. The vicious cycle of deleveraging has pushed some 
asset prices to extremely low levels, levels that are indicative of 
distressed sellers. The difficulty of obtaining private financing on 
reasonable terms to purchase these assets has reduced secondary market 
liquidity and disrupted normal price discovery. This constraint on 
capital reduces the ability of financial institutions to provide new 
credit and uncertainty about the value of legacy assets is constraining 
the ability of financial intuitions to raise private capital.
    The Public Private Investment Program (PPIP) \2\ is intended to 
restart the market for these assets while also restoring bank balance 
sheets as these devalued loans and securities are sold. Using $75 to 
$100 billion in capital from EESA and capital from private investors--
as well as funding enabled by the Federal Reserve and FDIC--PPIP will 
generate $500 billion in purchasing power to buy legacy assets, with 
the potential to expand to $1 trillion over time. By providing a market 
for these assets, PPIP will help improve asset values, increase lending 
capacity for banks, and reduce uncertainty about the scale of losses on 
bank balance sheets--making it easier for banks to raise private 
capital and replace the capital investments made by Treasury.
---------------------------------------------------------------------------
     \2\ See ``White Paper: Public Private Investment Program,'' U.S. 
Treasury, March 23, 2009, http://www.treas.gov/press/releases/reports/
ppip_whitepaper_032309.pdf.
---------------------------------------------------------------------------
    By following three basic principles, PPIP is designed as part of an 
overall strategy to resolve the crisis as quickly as possible with the 
least cost to the taxpayer. First, by partnering with the FDIC, the 
Federal Reserve, and private sector investors, we will make the most of 
taxpayer resources under EESA. Second, PPIP will ensure that private 
sector participants invest alongside the government, with the private 
sector investors standing to lose money in a downside scenario and the 
taxpayer sharing in profitable returns. Third, the program will use 
competing private sector investors to engage in price discovery, 
reducing the likelihood that the government will overpay for these 
assets. By contrast, if the government alone purchased these legacy 
assets from banks, it would assume the entire share of the losses and 
risk overpaying. Alternatively, if we simply hoped that banks would 
work off these assets over time, we would be prolonging the economic 
crisis, which in turn would cost more to the taxpayer over time. PPIP 
strikes the right balance, making the most of taxpayer dollars, sharing 
risk with the private sector, and taking advantage of private sector 
competition to set market prices for currently illiquid assets.
    The program has two major components, one each for securities and 
loans. The Legacy Securities Program initially will target commercial 
mortgage-backed securities and residential mortgage-backed securities. 
Treasury will partner with approved asset managers. Pre-approved asset 
managers will have an opportunity to raise private capital for a 
public-private investment fund (``PPIF''). Treasury will invest equity 
capital from the EESA in the PPIF on a dollar-for-dollar basis with 
participating private investors. Additional funding will be available 
either directly from Treasury or through TALF. The program is designed 
to encourage participation by a wide range of investors, and we 
extended the application deadline to facilitate that objective.
    The Legacy Loans Program is designed to attract private capital to 
purchase eligible legacy loans and other assets from participating 
banks through the availability of FDIC debt guarantees and Treasury 
equity co-investments. Under the program, PPIFs will be formed--with up 
to 50 percent equity participation by Treasury--to purchase and manage 
pools of legacy loans and other assets purchased from U.S. banks and 
savings associations. The FDIC will provide a guarantee of debts issued 
by PPIFs and collect a guarantee fee. The FDIC will be responsible for 
overseeing the formation, funding, and operation of legacy loan PPIFs 
and for overseeing and managing the debt guarantees it provides to the 
PPIFs.
    The terms of the funding provided under both parts of PPIP, 
including fees, will be set in a way that is designed to limit the 
risks faced by U.S. taxpayers while still meeting the objective of 
generating new demand for legacy assets. In addition, those 
participating in the program will be subject to a significant degree of 
oversight to ensure that their actions are consistent with the 
objectives of the program.
    To date, Treasury has received more than 100 unique fund manager 
applications representing various types and sizes of institutions, 
geographical diversity and including a significant number of women, 
minorities and veterans. Treasury is evaluating a select group of 
finalists and will inform applicants of their preliminary 
qualifications in the next several weeks.
    Working with the Federal Reserve and the FDIC, we expect these 
programs to begin operating over the next 6 weeks.
Auto Task Force
    On February 20, 2009, National Economic Council Director Larry 
Summers and I convened the official designees to the Presidential Task 
Force on Autos to analyze the February 17 restructuring plan 
submissions of Chrysler and General Motors and work toward a 
determination on the ability of the plans to yield long-term financial 
viability and competitiveness for these companies without taxpayer 
support. On March 30, the President laid out a new finite path forward 
for both companies to restructure and succeed; Chrysler would have 
until April 30 to reach a definitive deal with Fiat and secure the 
necessary support of stakeholders, and General Motors would have until 
June 1 to engage in more fundamental restructuring and develop a 
credible strategy for implementation.
    In addition to supporting these companies with working capital 
during this restructuring period, the Administration took steps to 
ensure that consumers had confidence in the cars they buy and that 
suppliers that depend on viable auto companies had support to weather 
the storm. To this end, the President announced a warranty commitment 
program, which would guarantee the warranty of all new cars purchased 
from GM or Chrysler during the restructuring period, and a $5 billion 
Supplier Support Program to provide suppliers with the confidence they 
need to continue shipping their parts and the support they need to help 
access loans to pay their employees and continue their operations. In 
addition, the launch of the Term Asset-Backed Securities Loan facility 
(TALF) has expanded the funding available for retail auto loans.
    On April 30, President Obama announced an agreement among Chrysler, 
Fiat, and their key stakeholders that positions Chrysler for a viable 
future. As a result of the sacrifices by key stakeholders and a 
substantial commitment of U.S. government resources, Chrysler now has a 
new opportunity to thrive as a long-term viable 21st century company. 
We have been heartened by the steady progress that Chrysler has made 
through its bankruptcy proceeding and are confident that the new 
Chrysler-Fiat partnership will emerge from the court process shortly. A 
sale hearing on the transaction is scheduled for May 27--less than a 
month after the company filed for Chapter 11.
    As the President has made clear, this restructuring process will 
require sacrifice by all stakeholders in the auto industry, including 
auto workers, debt and equity investors, dealers, suppliers, and the 
communities in which they operate. Yet, the Administration's commitment 
to the American automotive industry has given both GM and Chrysler a 
new lease on life, preventing plant and dealership closings on a 
massive scale and saving tens of thousands of jobs across the country. 
By helping these companies become more competitive, this process will 
result in more secure employment for tens of thousands of American 
workers and the best possible chance for the American auto industry to 
create more good jobs in the future.
    Through the Task Force, we will continue to work with GM and its 
stakeholders in the lead up to the June 1 deadline. We will also 
continue our significant efforts to ensure that financing is available 
to creditworthy dealers and to pursue efforts to help boost domestic 
demand for cars.
EESA Funds
    Some of the programs I have mentioned have required the 
Administration to use additional EESA funds and I would like to provide 
the latest estimate we have on how much remains. By the time President 
Obama was sworn in, over half of the $700 billion allocated to Treasury 
under the EESA had already been committed.
    The new programs where we committed additional resources are our 
housing programs, consumer business lending, small business lending, 
the auto program and our program to create a market for legacy loans 
and securities. We've also had to make additional resources available 
to help stabilize AIG. An attached chart shows our latest accounting.
    Today, Treasury estimates that there is at least $123.7 billion in 
resources authorized under EESA still available. The attached table 
provides a breakdown of our expenditures. This figure assumes that the 
projected amount committed to existing programs will be $601.3 billion 
(of which $355.4 billion was committed under the previous 
administration), but also anticipates that $25 billion will be paid 
back under the CPP over the next year and available for new assistance.
    Because the most relevant consideration is what funds will remain 
available for new programs, we believe that our estimates are 
conservative for two reasons. First, our estimates assume 100 percent 
take-up of the $220 billion made available for our housing and 
liquidity programs, which require significant voluntary participation 
from financial participants. If any of those programs experience less 
than full take-up, additional funds will be available. Secondly, our 
projections anticipate only $25 billion will be paid back under CPP 
over the next year, a figure lower than many private analysts expect.
Regulatory Reform
    As we work to stabilize the financial system, we need to make sure 
we are also putting in place comprehensive reforms to ensure a crisis 
like this never happens again.
    The rapid growth of the largest financial institutions and their 
increasing interconnections through securities markets have heightened 
systemic risk in the system. In response, we need to expand our 
capacity to contain systemic risk. This crisis--and the cases of firms 
like Bear Stearns, Lehman Brothers, and AIG--has made clear that 
certain large, interconnected firms and markets need to be under a more 
consistent and more conservative regulatory regime. It is not enough to 
address the potential insolvency of individual institutions--we must 
also ensure the stability of the system itself.
    Financial innovation has expanded the financial products and 
services that are available to consumers. These changes have brought 
many benefits. But we have to make sure that when households make 
choices to borrow, or to invest their savings, there are clear and fair 
rules of the road that prevent manipulation, deception, and abuse. Lax 
regulation has left too many households exposed to those risks. We need 
meaningful disclosures that actual consumers and investors can 
understand. We need to promote simplicity, so that financial choices 
offered to consumers are clear, reasonable, and appropriate. 
Furthermore, there must be clear accountability for protecting 
consumers and investors alike.
    The rapid pace of development in the financial sector in recent 
decades has meant that gaps and inconsistencies in our regulatory 
system have become more meaningful and problematic. Financial activity 
has tended to gravitate towards the parts of the system that are 
regulated least effectively. Looking ahead, our regulatory structure 
must assign clear authority, resources, and accountability for each of 
its key functions.
    The financial landscape has become ever more global in recent 
years. Advances in information technology have made it easier to invest 
abroad, which has expanded and accelerated cross-border capital flows. 
Greater global macroeconomic stability has also helped to accelerate 
financial development around the world. To keep pace with these trends, 
we must ensure that international rules for financial regulation are 
consistent with the high standards we will be implementing in the 
United States. Additionally, we must seek to materially improve 
prudential supervision, tax compliance, and restrictions on money 
laundering in weakly regulated jurisdictions.
    Finally, the recent financial crisis has shown that the largest 
financial institutions can pose special risks to the financial system 
as a whole. In addition to regulating these institutions differently, 
we must give the Federal government new tools for dealing with 
situations where the solvency of these institutions is called into 
question. Treasury has proposed legislation for a resolution authority 
that would grant additional tools to avoid the disorderly liquidation 
of systemically significant financial institutions that fall outside of 
the existing resolution regime for banks under the FDIC.
Conclusion
    Let me conclude by saying that our central obligation is to ensure 
that the economy is able to recover as quickly as possible, and a 
prerequisite for that is a stable financial system that it is able to 
provide the credit necessary for economic recovery. Our work is not yet 
completed.
    But, even then, stability is not enough. We need a financial system 
that is not deepening or lengthening the recession, and once the 
conditions for recovery are in place, we need a financial system that 
is able to provide credit on the scale that a growing economy requires.
    Meeting this obligation requires early and aggressive action by the 
government to repair the financial system and promote the flow of 
credit. It requires governments to take risks. It also requires the 
financial system to support sustainable economic expansion. And it 
requires comprehensive regulatory reforms that deter fraud and abuse, 
protect American families when they buy a home or get a credit card, 
reward innovation and tie pay to job performance, and end past cycles 
of boom and bust.
    This is our commitment. Thank you.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
         RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN DODD
                     FROM TIMOTHY GEITHNER

Q.1. Mr. Secretary, the TARP fund, at its core, was implemented 
to help remove bad assets from creditors' books so that we 
might unfreeze the credit markets and get our economy moving 
again. Yet it has come to my attention that some of the largest 
recipients of TARP monies are engaged in efforts to seek 
modifications to their ``creditor'' status in certain 
bankruptcy restructurings. Such modifications would benefit the 
banks' bottom lines, but could also threaten the viability of 
the restructurings themselves. Do you believe that TARP 
recipients should be engaging in activities that would make it 
more difficult for American companies to successfully 
restructure?

A.1. United States bankruptcy judges are guided by law to 
ensure that EESA recipients, like all creditors, behave in a 
manner consistent with the bankruptcy code, and these judges 
are responsible for preventing creditors from improperly 
delaying a debtor's emergence from bankruptcy. To the extent 
that objections raised by these recipients are unreasonable or 
unreasonably time consuming, it is incumbent upon the 
bankruptcy judge in each of these cases to both recognize and 
dismiss spurious objections.

Q.2. SIGTARP Reports--The Special Inspector General of the 
TARP, the GAO, and the Congressional Oversight Panel regularly 
issue reports that identify areas of concern and provide 
recommendations for the TARP. We carefully analyze these 
reports and the recommendations. What has been the Treasury's 
practice and what is the policy with regard to analyzing and 
acting on the concerns and recommendations raised in these 
reports?
    The SIGTARP noted on page 137 of the April 21, 2009, 
Quarterly Report to Congress that the Treasury indicated it 
will not adopt several of the earlier recommendations. These 
recommendations are to require TARP recipients to account for 
the use of TARP funds, set up internal controls to comply with 
such accounting, and report periodically to Treasury on the 
results, with appropriate sworn certifications. Why did 
Treasury dispute the SIGTARP's recommendations? What measures 
is Treasury implementing to improve accountability and address 
the concerns raised by SIGTARP?

A.2. Treasury gave careful consideration to all recommendations 
issued by SIGTARP. Treasury's policies and programs currently 
address many of the issues raised by SIGTARP's recommendations, 
and in other cases Treasury has taken specific action to 
implement SIGTARP's recommendations. Treasury also has or will 
execute alternative approaches that we believe address some of 
the issues raised by SIGTARP in their recommendations. The 
steps that Treasury has taken and the progress Treasury has 
made in this regard are detailed in our July 2, 2009, 
correspondence in response to the SIGTARP recommendations, 
which appear on pages 240-256 in Appendix G of the SIGTARP 
Quarterly Report dated July 21, 2009.
    As described in Treasury's response to SIGTARP's 
recommendations, Treasury always seeks to ensure accountability 
for TARP funds and includes measures in each of its programs to 
ensure such accountability. In discussing use of TARP funds, it 
is important to distinguish between Treasury's capital-
enhancement programs and its other programs. The Capital 
Purchase Program (CPP), Capital Assistance Program (CAP), and 
the programs under which exceptional assistance has been 
provided to AIG, Citigroup, and Bank of America are designed to 
provide capital to cushion against losses and allow financial 
institutions to continue operating in the ordinary course of 
business, including lending to consumers and businesses. In 
order to serve its purpose, capital must be available for 
general business purposes. By contrast, Treasury's Home 
Affordable Modification Programs (HAMP), Small Business Lending 
Initiative (SBLI), Public-Private Investment Program (PPIP), 
and Term Asset Backed Securities Loan Facility (TALF) program 
impose specific restrictions on the use of TARP funds, and 
require controls and periodic reports to ensure that those 
restrictions are respected.

Q.3. AIG Counterparties--In response to several questions asked 
at the hearing, you stated that the government is unable to 
impose losses on the creditors and counterparties of AIG. The 
Treasury has proposed legislative language to create new 
resolution authority for systemically significant financial 
companies. Would the resolution authority you have proposed, 
allow the government to impose haircuts on or otherwise 
negotiate changes in terms with creditors and counterparties of 
AIG or of other large, complex financial companies that became 
similarly troubled? If it would not, then what changes in 
statute are needed to do so?

A.3. The resolution authority legislation that we have proposed 
would give the government the tools to establish a conservator 
or receivership for a failing financial firm in situations that 
threaten financial stability. As part of these tools, the 
conservator or receiver would have the authority to sell or 
transfer the assets or liabilities of the institution in 
question, to renegotiate or repudiate the institution's 
contracts, and to address the derivatives portfolio, thereby 
reducing the potential for further disruption.
    In the case of AIG, the government has provided financial 
assistance in order to avert the risks to the global financial 
system posed by the rapid and disorderly failure of such a 
large, complex entity in a fragile market environment. Had the 
government possessed the authorities contained in the proposed 
legislation, it could have resolved AIG in an orderly manner by 
sharing losses among equity and debt holders in a way that 
maintained confidence in the institution's ability to fulfill 
its obligations to insurance policyholders and other 
systemically important customers.

Q.4. Continuing risk posed by AIG--During the hearing, you were 
asked about the continuing risks posed by the Financial 
Products subsidiary of AIG. When specifically questioned about 
the risk posed by derivative contracts held by Financial 
Products which have been reduced from a notional value of $2.7 
trillion to $1.5 trillion, you stated that the notional value 
of these contracts was not an appropriate measure of the risk 
posed and offered to provide a more accurate number. 
Accordingly, we request that you provide a better estimate of 
the continuing risks posed by the outstanding derivatives 
contracts issued by Financial Products.

A.4. The continuing risk posed by Financial Products (FP) 
cannot be measured using any single metric, such as the number 
of contracts or trade positions outstanding, gross notional 
size of the portfolio, number of counterparties, and gross 
market risk sensitivities (D V01, delta, vega, gamma, etc.). 
These single metrics provide individual perspectives on the 
question.
    To be more specific, a trade can generate an enormous 
amount of market and credit risk, and therefore looking only at 
trade count is insufficient to draw a meaningful inference 
about the risk posed by FP. Similarly, a book of trades with a 
very large gross notional value, but that is short dated and 
has a low net market risk profile is something that may pose 
relatively little risk to FP and the financial system. Reliance 
on any single metric misses the complexity of the continuing 
risk posed by FP and likely over-estimates risk along some 
dimensions and under-estimates risk among others. Both FP and 
the USG review a wide range of metrics to assess FP's risk 
profile to guide the risk reduction process. Progress has been 
made along all of the dimensions cited above, and work 
continues in this regard.

Q.5.a. Public-Private Investment Program--I am concerned with 
the details of the nascent Public-Private Investment Program. 
The SIGTARP's recent report stated that ``the private investors 
would thus enjoy 50 percent of the profits from this enhanced 
buying power, but only be exposed to less than 7 percent of the 
total losses if the fund were wiped out.''
    Is it fair to the taxpayer to structure the PPIP in such a 
manner that the private investors would enjoy such a large 
percentage of the profits relative to the losses?

A.5.a. PPIP is designed to encourage private investors to take 
on reasonable risk to reinvigorate markets for a specific set 
of assets. The incentives provided in the program are focused, 
calibrated, and subject to significant oversight.
    The substantial due diligence by Federal authorities--
Treasury, Federal Reserve, and FDIC--regarding the terms of 
government financing will ensure that there is a responsible 
balance between providing incentives for risk-taking and 
protecting the Federal government's financial position. The 
Public-Private Investment Funds (PPIFs) are structured to give 
investors incentives not to overpay for the assets they buy. If 
the assets acquired by PPIFs underperform, the full amount of 
the private investors' capital will be exposed, and the private 
investors will bear a share of the ``first losses'' as equity 
investors.
    Additionally, it is important to make a clear distinction 
between equity capital and debt financing. The equity capital 
raised from private investors will be matched by Treasury in 
each PPIF. Treasury will also provide debt financing for up to 
100 percent of the total equity of the PPIF.
    In addition, PPIFs will be able to seek additional leverage 
through Legacy TALF or private debt financing, subject to total 
leverage requirements and covenants (when the Treasury-provided 
leverage equals 50 percent of the total equity of the PPIF).

Q.5.b. What is the rationale for structuring the program in 
this manner?

A.5.b. The goal of the Legacy Securities PPIP is to restart the 
market for legacy securities, allowing banks and other 
financial institutions to free up capital and stimulate the 
extension of new credit. In achieving this goal, Treasury seeks 
to quickly maximize the inflow of private capital into the 
market while protecting the interests of U.S. taxpayers. 
Creating equity partnerships with private investors should 
serve both to protect the interests of taxpayers over the long-
term and to help restore liquidity and enable price discovery 
for troubled assets in the short-term. The partnership approach 
is superior to the alternatives of either hoping for banks to 
gradually work these assets off their books or forcing the 
government to purchase the assets directly. If the government 
acts alone in directly purchasing legacy assets and securities, 
taxpayers will assume all of the myriad risks, including the 
risk that the taxpayers will overpay if government employees 
are setting the price for these complex and hard-to-value 
assets. By using attractive government financing and equity co-
investment with private sector investors, substantial 
purchasing power will be created, making the most of taxpayer 
resources. Once loan and securities markets have been 
stabilized, loans and securities should trade more in-line with 
intrinsic value. Throughout the process, the government's 
interests are well-aligned with those of the private sector.

Q.5.c. How else could the program be structured to attract 
private investors without giving them such disproportionate 
upside compared to the downside?

A.5.c. The Public-Private Investment Funds (PPIFs) are 
structured to give investors an appropriate upside in which 
private investors and Treasury share equally in potential gains 
while mitigating the likelihood that fund managers will overpay 
for the assets they buy, thereby incurring losses. If the 
assets acquired by PPIFs underperform, the full amount of the 
private investors' capital will be exposed, and the private 
investors, as equity investors, will bear a share of the 
``first losses.'' Moreover, fund managers will be required to 
invest their own capital in the funds and receive most of their 
compensation in the form of incentives tied to investment 
returns to private investors.

Q.5.d. Finally, can we expect the banks to sell their legacy 
assets at a sufficient discount to attract private investors? 
Are you prepared to ask the regulators to press the banks to 
sell in order to clear their balance sheets?

A.5.d. The PPIP is divided into two distinct programs: one for 
legacy securities and one for legacy loans. The securities 
program targets the purchase of assets that are marked-to-
market and thus the lower prices are already reflected on bank 
balance sheets. In recent months, the prices of these legacy 
securities have slightly appreciated, and many financial 
institutions have raised substantial amounts of capital as a 
buffer against weaker than expected economic conditions. In 
order to purchase assets at a discounted price and attract 
private investors, the program will initially be modest in 
size. However, we are prepared to expand the amount of 
resources committed to the program should conditions 
deteriorate. This effort should help to free up balance sheet 
capacity to help facilitate lending, which is vital to our 
economic recovery.
    The Legacy Loans Program (LLP) is being developed with the 
FDIC. On June 3, 2009, the FDIC publicly announced that the 
development of the program will continue but that a previously 
planned pilot sale of assets by open banks would be postponed. 
As a next step, the FDIC intended to test the funding mechanism 
contemplated by the LLP in a sale of receivership assets this 
summer. This funding mechanism draws upon concepts successfully 
employed by the Resolution Trust Corporation in the 1990s, 
which routinely assisted in the financing of asset sales 
through responsible use of leverage. On July 31, 2009, the FDIC 
publicly announced that the first test of the funding mechanism 
would commence during that week.
    One of the primary challenges of the LLP has been the 
willingness of healthy banks to sell loans at prices that 
investors were willing to pay, also known as a wide bid-ask 
spread. However, banks have been able to raise capital without 
having to sell bad assets through the LLP, which reflects 
renewed investor confidence in our banking system. The FDIC and 
Treasury will continue working on the LLP to be a tool for 
cleansing bank balance sheets.

Q.5.e. With several banks announcing their intention to repay 
their TARP funds and with the stress test results reported to 
have been better than expected, some critics have argued that 
the PPIP is no longer necessary. Do you agree with this view? 
If not, when do you expect this plan be implemented?

A.5.e. Financial market conditions have improved since the 
early part of this year, and many financial institutions have 
raised substantial amounts of capital as a buffer against 
weaker than expected economic conditions. However, these legacy 
assets are still highly illiquid. The difficulty of obtaining 
private financing on reasonable terms to purchase these assets 
has limited the ability of investors to reduce liquidity 
discounts in legacy assets.
    One of the PPIP's primary objectives is to facilitate price 
discovery and reduce excessive liquidity discounts embedded in 
current legacy asset prices. As capital is freed up, U.S. 
financial institutions should engage in new credit formation. 
Furthermore, enhanced clarity regarding the value of legacy 
assets should increase investor confidence and enhance the 
ability of financial institutions to raise new capital from 
private investors. Finally, an inherent link exists between the 
new issue securitization market and the secondary market 
performance of legacy assets. As spreads compress in the legacy 
asset market, new securitization issuance should come to market 
at reasonable borrowing costs. The new issue securitization 
market is an absolutely critical component of lending in the 
economy.

Q.6. Stress Tests--The Administration and the Federal Reserve 
expressed some relief about the stress test results for the top 
19 banking companies. It appears that the $75 billion in new 
capital needed by these companies can be obtained either from 
private investors or by drawing on remaining TARP funds. (At 
least 9 of these companies have already issued new common stock 
or announced plans to do so.)
    Still, several critics maintain that the assumptions for 
the test's ``adverse scenario'' were not stressful enough--
especially the unemployment rate assumption of just over 10 
percent, which many consider likely in the near future and not 
a worst case scenario. How do you respond to critics who say 
the stress tests were not stringent enough and who cite the IMF 
estimate of $4 trillion in credit losses?

A.6. The Administration believes the stress tests took into 
account an appropriate range of scenarios in which the economy 
experienced an unexpected downturn. The loss estimates in the 
adverse scenario used in the regulatory assessments were 
generally in line with private sector estimates by the IMF and 
others.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR KOHL
                     FROM TIMOTHY GEITHNER

Q.1. Last fall, Congress appropriated $25 billion for the 
Advanced Technology Vehicles Manufacturing Incentive Program, 
which provides grants and low-interest loans to U.S. automakers 
to retool factories to produce fuel efficient vehicles and 
component parts. Is the Treasury Department working with the 
Department of Energy to target factories which can be retooled? 
I have a Chrysler engine plant in Kenosha, Wisconsin that is on 
the list to be closed in 2010 and using these loans to retool 
closing factories is a way to keep jobs in the U.S.

A.1. The Department of Energy (DOE) will make the final 
determination as to which applicants will be approved for loans 
under the Advanced Technology Vehicle program.

Q.2. One requirement for financial institutions who take TARP 
money is that they have to participate in the Administration's 
Making Home Affordable Program. This requirement, however, does 
not apply retroactively to banks who received TARP money pre-
February 2009. What steps is the Treasury taking to encourage 
the banks who have taken money prior to the requirement, to 
participate in the mortgage modification plan? Does the new 
requirement apply to the various TARP programs, or just to the 
financial institutions who receive capital purchase program 
money?

A.2. To date, over 40 servicers have signed contracts to 
implement the Making Home Affordable (MHA) program. The names 
of participating servicers are listed on 
www.MakingHomeAffordable.com, the program's Web site. Between 
loans covered by these servicers and loans owned or securitized 
by Fannie Mae or Freddie Mac, more than 85 percent percent of 
all loans in the country are now covered by the MHA program. 
Consistent with our earlier February 18th guidance that ``all 
Financial Stability Plan recipients going forward . . . 
participate in foreclosure mitigation plans consistent with 
Treasury's loan modification guidelines'', recipients of 
assistance in new Financial Stability Plan programs have 
adopted HAMP or are implementing plans consistent with 
Treasury's guidelines.

Q.3. Recently, Treasury announced that smaller financial 
institutions will be able to access TARP funds. Wisconsin is a 
small-bank State, with 300 institutions with less than $1 
billion in assets. Many of these institutions would like to 
participate in the TARP program, but are denied because of 
strict eligibility requirements. I understand that the Treasury 
does not want to put money into failing institutions, but many 
of these banks can survive if given the necessary tools. Would 
the Treasury consider modifying the eligibility requirements 
for community banks so more could participate? Do you 
anticipate the Treasury allowing smaller banks to participate 
in the capital assistance program?

A.3. As you note, Treasury recently reopened the Capital 
Purchase Program (CPP) application window for banks with total 
assets less than $500 million. This reopening was intended to 
small and community banks that play a vital role in our 
financial system and a central role in our economy. This 
program is intended for healthy banks, and our standard for 
participation remains viability, as determined by the Federal 
banking regulators.

Q.4. Recent business reports of Treasury's preliminary approval 
to provide six life insurance companies with capital infusions 
has shown mixed reactions among the insurers about actually 
accepting the funds. In your opinion, why would some of the 
insurance companies that applied for funds last November now be 
skeptical of accepting the funds? Is it your opinion that some 
of the insurance companies who have been approved for TARP 
funds are in financially weak positions--weaker than those that 
are not receiving funds? How did the Treasury determine which 
insurance companies would be approved? Are all of the insurance 
companies who have been approved for TARP funds viable, or were 
some applications approved because these insurance companies 
are considered ``systemically important?''

A.4. Many insurance companies qualified for CPP under the 
public term sheet issued in October 2008. We took additional 
time in processing these applications, as we needed to develop 
a framework for analyzing the particular characteristics of 
these institutions. We processed all insurance company 
applications under the existing criteria for participation in 
CPP-viability without CPP funds. All insurance companies that 
received preliminary approval were considered to be viable. 
Given the measured improvement of the economy, it is not 
surprising that some insurance companies have declined to 
accept CPP funds at this point. We understand that each 
institution makes capital plans according to its specific 
situation and that not all institutions feel that CPP funds are 
appropriate for their particular needs.
                                ------                                


        RESPONSE TO WRITTEN QUESTIONS OF SENATOR BENNETT
                     FROM TIMOTHY GEITHNER

Q.1. In the legislative text of the Emergency Economic 
Stabilization Act of 2008 which created TARP, which I 
supported, it states the purpose is to: ``To provide authority 
for the Federal Government to purchase and insure certain types 
of troubled assets for the purposes of providing stability to 
and preventing disruption in the economy.''
    This is the TARP I voted for. I voted against the second 
disbursement of the TARP money because I believed the immediate 
crisis had been mitigated. I continue to be concerned about how 
the taxpayer money is being used to effect things other than 
the functioning of the financial markets. As I stated, I saw 
TARP as a desperately needed capital investment in our 
financial system and economy. As I held multiple conferences 
with business and economic interests in my State of Utah I came 
to the conclusion that we had no other choice and no other 
viable option. Many, including the past Secretary, believed it 
likely that the taxpayer would make a return on their 
investment in this program.
    So my question is, is the taxpayer seeing a return on this 
expenditure? What is the likelihood that the full $700 billion 
will be returned? How can the taxpayer track repayment progress 
and the value of the collateral that was given in exchange?

A.1. Taxpayers have already seen a direct financial return on 
some TARP investments. For example, in the Capital Purchase 
Program, the taxpayer earns a dividend of 5 percent of the 
senior preferred shares during the first five years of the 
program. This coupon steps up to 9 percent in the sixth year. 
There are currently over 600 participants in the program, and 
the taxpayer has received an estimated $6.67 billion in 
dividend payments under CPP as of September 1st. Through 
September 1st, 34 CPP recipients have fully repaid their 
investments worth $70.13 billion plus an additional $2.90 
billion in warrants and related instruments. However, 
approximately $134 billion in CPP investments are still 
outstanding, and the ultimate repayment rates and earning from 
warrants will depend on business conditions of the recipients, 
future economic conditions, and other related factors. The full 
return taxpayers will see on these investments is hard to 
estimate because it is impossible to quantify the number of 
jobs and businesses that were saved by investments that pulled 
the financial system back from the brink.
    Taxpayers can track progress on all of the financial 
stability programs and investments, as well as repayments by 
institutions, on Treasury's Web site. Specifically, taxpayers 
can look at investments within 2 business days of closing in 
our TARP transaction reports at www.financialstability.gov. In 
addition, Treasury will initially be publishing audited annual 
financial statements under Federal financial reporting 
standards on November 15th, which will provide detailed 
information on the value of the TARP portfolio.

Q.2. I am told there is estimated to be somewhere in the 
neighborhood of $470 billion dollars right now on the sidelines 
that would like to have the opportunity to invest in our 
banking system, however it is currently prohibited by what I 
believe are antiquated rules governing who can control a bank 
and what defines ``control''. Should we continue to pour in 
taxpayer money or continue to go to foreign investment funds 
for capital to recapitalize our banks? Why shouldn't we do 
everything we can to make this type of investment possible as 
long as it can be done within a safe and sound and well 
regulated system?

A.2. Treasury does not have regulatory or supervisory authority 
regarding private equity investments in banking organizations. 
The Office of Thrift Supervision, the Board of Governors of the 
Federal Reserve System, and the Federal Deposit Insurance 
Corporation have supervisory authority in this area with regard 
to institutions subject to their jurisdiction. Treasury is 
currently reviewing developments on this subject and is 
encouraging the banking agencies to develop consistent 
policies.

Q.3. I am very concerned about the termination of the franchise 
agreements with Chrysler and GM dealers. I did not support the 
TARP disbursement to the auto companies because I feared just 
this case; government involvement is decisions the markets 
should be making. I recognize that something had to be done in 
this area but am concerned about the process and how this 
decision was made. I am also very concerned about the 
repercussions of this decision in communities across my State. 
Please share with us your understanding of the criteria for 
creating the list of who should continue as a Chrysler dealer 
and who should be forced to close their doors and also the 
timing of the termination notices.

A.3. The Task Force was not involved in the decision-making 
process or implementation of the dealer consolidation plans. GM 
and Chrysler made independent decisions about the dealerships 
with which they planned to maintain franchisee agreements.
    GM and Chrysler's dealer consolidation plans will be 
difficult for those dealers that no longer maintain franchise 
agreements. The sacrifices of the dealers, alongside those of 
the auto workers, suppliers, creditors, and other company 
stakeholders, have been necessary in order for these companies 
to once again compete as global enterprises. However, it is 
important to recognize that without the President's commitment 
to an American auto industry and the efforts of the Task Force, 
both Chrysler and GM would have liquidated, potentially 
resulting in the complete elimination of their dealer networks 
across the country and accounting for roughly 9,200 dealerships 
and countless jobs. Because of the successful Chrysler-Fiat 
partnership and the Task Force's commitment to standing behind 
GM's restructuring efforts, both companies are now positioned 
to move forward with plans that retain the substantial majority 
of their dealers. By helping these companies become more 
competitive, this process will result in more secure employment 
for tens of thousands of American workers and will be the best 
possible chance for the American auto industry to create more 
good jobs in the future. The Presidential Task Force on Autos 
is continuing to pursue efforts to help boost domestic demand 
for cars and is working to help ensure that financing is 
available for creditworthy dealers.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO
                     FROM TIMOTHY GEITHNER

Q.1. In your testimony, you state the President has made clear 
this restructuring process will require sacrifice by all 
stakeholders in the auto industry, including auto workers, debt 
and equity investors, dealers, suppliers, and the communities 
in which they operate. What impact do you believe that the 
planned closing of thousands of dealerships around the country 
will have on small businesses and rural communities and what 
criteria was used to determine which dealers would be closed 
and which dealers would remain open?

A.1. The Task Force was not involved in the decision-making 
process or implementation of the dealer consolidation plans. GM 
and Chrysler made independent decisions about the dealerships 
with which they planned to maintain franchisee agreements.
    GM and Chrysler's dealer consolidation plans will be 
difficult for those dealers that no longer maintain franchise 
agreements. The sacrifices of the dealers, alongside those of 
the auto workers, suppliers, creditors, and other company 
stakeholders, have been necessary in order for these companies 
to once again compete as global enterprises. However, it is 
important to recognize that without the President's commitment 
to an American auto industry and the efforts of the Task Force, 
both Chrysler and GM would have liquidated, potentially 
resulting in the complete elimination of their dealer networks 
across the country and accounting for roughly 9,200 dealerships 
and countless jobs. Because of the successful Chrysler-Fiat 
partnership and the Task Force's commitment to standing behind 
GM's restructuring efforts, both companies are now positioned 
to move forward with plans that retain the substantial majority 
of their dealers. By helping these companies become more 
competitive, this process will result in more secure employment 
for tens of thousands of American workers and will be the best 
possible chance for the American auto industry to create more 
good jobs in the future.

Q.2. I am hearing a lot of concern about the proposed Public-
Private Investment Program and how it will work. Could you 
please explain how the private sector pricing of assets will 
function and how you close the bid-ask spread between the buyer 
and the seller? Many of the banks holding these assets were 
told they do not need to raise capital to meet the stress tests 
and there appears to be fewer reasons for these banks to 
participate.

A.2. The PPIP is divided into two distinct programs: one for 
legacy securities and one for legacy loans.
    The Legacy Loans Program (LLP) is being developed with the 
FDIC. On June 3, 2009, the FDIC publicly announced that the 
development of the program will continue but that a previously 
planned pilot sale of assets by open banks would be postponed. 
As a next step, the FDIC intended to test the funding mechanism 
contemplated by the LLP in a sale of receivership assets this 
summer. This funding mechanism draws upon concepts successfully 
employed by the Resolution Trust Corporation in the 1990s, 
which routinely assisted in the financing of asset sales 
through responsible use of leverage.
    One of the primary challenges of the LLP has been the 
unwillingness of healthy banks to sell legacy loans at prices 
that investors are willing to pay. However, the banks' 
demonstrated ability to raise capital without having to sell 
bad assets through the LLP reflects renewed investor confidence 
in our banking system. The FDIC and Treasury will continue to 
work on the LLP to be prepared to offer it in the future as a 
tool to help cleanse bank balance sheets.
    The legacy securities program targets the purchase of 
assets that are marked-to-market and thus the lower prices are 
already reflected on bank balance sheets. In recent months, the 
prices of these legacy securities have appreciated slightly, 
and many financial institutions have been able to raise 
substantial amounts of capital as a buffer against weaker than 
expected economic conditions. This effort should help to free 
up balance sheet capacity to help facilitate lending, which is 
vital to our economic recovery. This has brought added 
stability to these markets and has narrowed the bid-ask spread.

Q.3. When TALF was announced, policy makers expected the 
program to provide financing up to $200 billion in securities. 
At this point, the number is less than $20 billion. Do you 
consider this a success or are changes necessary?

A.3. We are pleased with the results of TALF to date. Since we 
launched TALF with the Federal Reserve, there have been a total 
of approximately $80 billion of TALF eligible consumer ABS new 
issuance securities. Of that amount, approximately $44 billion 
or 55 percent has been borrowed from TALF to purchase those 
securities. Issuer volume and investor participation has 
increased at a fast rate, and spreads are narrowing at a 
similar pace, indicating that where TALF is present, confidence 
is being restored.
    The following are some additional key statistics to 
illustrate the benefits of the TALF:

    Eighty percent of TALF issuers experienced a 
        reduction in their funding costs since the advent of 
        the program. Nearly half have reduced funding costs by 
        100 basis points, and nearly one-quarter have done so 
        by more than 200 basis points.

    As of September, TALF has supported a total of 3.6 
        million individual loans and leases to consumers and 
        small businesses, including approximately 380,000 loans 
        to small business and approximately 760,000 to 
        students. In addition, TALF is supporting approximately 
        130 million active credit card accounts.

Q.4. Do you agree that no firm should be considered too big to 
fail and how do you reduce the potential size and scope of the 
spillovers so that policymakers can be confident that 
intervention is unnecessary?

A.4. The recent financial crisis has taught us that some of our 
financial firms are so large, leveraged, and interconnected 
with the financial system that their failure poses a threat to 
overall financial stability. The problem wasn't just that such 
firms were ``Too Big.'' The problem was that those firms had 
not been required to maintain sufficient capital and liquidity 
cushions. Under our proposal, higher capital charges for these 
firms (Tier 1 FHCs) would be used to account for the greater 
risk to financial stability that these firms could pose if they 
failed. To identify firms that should be subject to these 
higher standards, our proposal does not focus only on the size 
of a firm, it also considers the interconnectedness of a firm, 
and how important a firm is as a source of credit to American 
households and businesses.
    The resolution authority legislation that we have proposed 
would give the government the tools to establish a conservator 
or receivership for a failing financial firm in situations that 
threaten financial stability. As part of these tools, the 
conservator or receiver would have the authority to sell or 
transfer the assets or liabilities of the institution in 
question, to renegotiate or repudiate the institution's 
contracts, and to address the derivatives portfolio, thereby 
reducing the potential for further disruption.

Q.5. It is my understanding that both FDIC Chairman Sheila Bair 
and SEC Chairman Mary Schapiro are supportive of a systemic 
risk council to monitor large institutions against financial 
threats. What are your thoughts on this issue?

A.5. We agree that having a council of regulators to monitor 
emerging threats across the financial system is a critical part 
of regulatory reform. We propose the creation of a Financial 
Services Oversight Council to identify and help fill gaps in 
regulation and to facilitate coordination of policy and 
resolution of disputes among Federal financial regulators. The 
Council would play a key role in identifying which firms should 
be subject to regulation as Tier 1 FHCs and it would be 
consulted about material prudential standards for these firms 
as well as important payment and settlement systems. It would 
have a permanent staff within Treasury and authority to gather 
information from any firm across the financial system. It would 
have the vital responsibility to identify emerging risks in the 
system.
    However, we believe that supervising the largest, most 
complex and interconnected institutions requires tremendous 
institutional capacity and organizational accountability. A 
single point of accountability for the regulation of the 
largest, most interconnected firms would be better positioned 
than a council to achieve that objective.
                                ------                                


        RESPONSE TO WRITTEN QUESTIONS OF SENATOR VITTER
                     FROM TIMOTHY GEITHNER

Q.1. Taken over by the Federal government in September 2008, 
The Obama Administration has rolled out several initiatives 
since mid-February aimed at addressing the housing market. This 
Administration is using Fannie Mae and Freddie Mac as active 
players in the housing market in an effort to stimulate demand 
in the housing market. The two companies have an unlimited line 
of credit with the U.S. Treasury and have drawn down a total of 
$400 billion to date.
    A report to Congress earlier this month from the Federal 
Housing Finance Agency said `` . . . they [Fannie Mae and 
Freddie Mac] still face numerous significant challenges 
including building and retaining staff and correcting 
operational and credit management weaknesses that led to 
conservatorship.''
    For that reason the future of these two companies must be 
addressed by policymakers immediately.
    What is the plan get Fannie and Freddie out of 
receivership? Do we want them out, or is this Administration 
going to allow the two companies to be run by the government 
forever?

A.1. Given the important role that Fannie Mae and Freddie Mac 
play in the mortgage market, their participation in efforts to 
reduce preventable foreclosures is vital to speeding the 
housing recovery. The Administration has committed to 
undertaking a wide-ranging initiative to develop 
recommendations on the future of these institutions. This 
process will require careful consideration of the appropriate 
role of the Federal government in the mortgage market.
    Fannie Mae and Freddie Mac each have a $200 billion line of 
credit (for an aggregate of $400 billion) with the U.S. 
Treasury, and together have drawn down a total of $95.6 billion 
to date.

Q.2. Some of the smaller financial institutions that took TARP 
funds did so because they are healthy banks and wanted to help 
the economy by increasing their ability to lend to consumers. 
Treasury has announced that banks that want to repay TARP funds 
will be required to raise capital in the private markets. While 
this requirement seems to make sense for some banks, 
particularly those that have relied on the FDIC's Temporary 
Liquidity Guarantee Program which guarantees debt issued by 
banks, but for other banks whose health has not materially 
changed since they were given TARP this requirement seems 
overly burdensome and unnecessary.
    Will you develop a distinction for which banks should 
appropriately be required to raise private capital before 
allowing to repay TARP and those who should be allowed back 
TARP immediately?

A.2. The banking regulators established the criteria for 
evaluating repayment requests and currently perform analysis of 
the request independent of Treasury. Treasury is not involved 
in this evaluation. Requests for more information on the 
analysis used to evaluate repayment requests should be directed 
to the regulators.
              Additional Material Supplied for the Record
                                                       May 18, 2009
Hon. Mark R. Warner
459A Russell
Washington, DC 20510

Hon. Mel Martinez
356 Russell
Washington, DC 20515

Dear Senator Warner and Senator Martinez:

    We write in support of S. 910, a bill that would amend the 
Emergency Economic Stabilization Act to add greater transparency to the 
Troubled Assets Relief Program (TARP). The bill would require the 
Treasury Department to establish a database that would provide ongoing, 
continuous and close to real-time updates of the distribution of TARP 
funds. Such a database would allow for detailed analysis of the 
effectiveness of the TARP money in stimulating prudent lending and 
strengthening the health of the financial institutions receiving the 
funds.
    While FinancialStability.gov is an excellent start for TARP 
oversight, there are many TARP activities and related data that are not 
captured there. S. 910 would integrate public and private sources to 
track the TARP funds, collecting all regulatory filings, internal 
models, financial models and analytics associated with the TARP 
assistance. Making all relevant information available in a centralized 
database, updated daily, will make it much simpler to determine whether 
the funds are being used as intended.
    We have one suggestion for improving the bill and that is to make 
it clear that the database must be publicly available. We believe this 
was your intent, but the text of the bill is not clear. Both government 
officials and members of the public have roles to play in ensuring the 
accountability of TARP, so the database should be public.
    A centralized, public database of information about the TARP would 
enable analysis of the data by the TARP Investigator General, the 
Congressional Oversight Panel, and the public. Giving the public and 
the oversight bodies access to this data will greatly increase citizen 
confidence in the TARP program. In addition, this will allow watchdog 
groups to analyze the data, reuse it and present it in novel ways, and 
uncover risky practices among TARP institutions.
    Thank you for advocating greater TARP transparency and 
effectiveness. We look forward to working with you and your colleagues 
for swift passage of S. 910.
        Sincerely,
                                              Ari Schwartz,
                               Center for Democracy and Technology.

                                                 Gary Bass,
                                                         OMB Watch.

                                            Danielle Brian,
                                   Project on Government Oversight.

                                            Ryan Alexander,
                                        Taxpayers for Common Sense.

                                         Patrice McDermott,
                                             OpenTheGovernment.org.
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