[Senate Hearing 111-215]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-215
 
        TAKING STOCK: INDEPENDENT VIEWS ON TARP'S EFFECTIVENESS

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

                                HEARING

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 19, 2009

                               __________

        Printed for the use of the Congressional Oversight Panel


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


                            C O N T E N T S

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                                                                   Page
STATEMENT OF
    Opening Statement of Elizabeth Warren, Chair, Congressional 
      Oversight Panel............................................     1
    Statement of Paul S. Atkins, Member, Congressional Oversight 
      Panel......................................................     5
    Statement of Damon Silvers, Deputy Chair, Congressional 
      Oversight Panel............................................     9
    Statement of Dean Baker, Co-Director, Center for Economic and 
      Policy Research............................................    12
    Statement of Charles Calomiris, Henry Kaufman Professor of 
      Financial Institutions, Columbia Business School...........    20
    Statement of Simon Johnson, Professor of Global Economics and 
      Management, MIT Sloan School of Management, and Senior 
      Fellow, Peterson Institute for International Economics.....    45
    Statement of Alex Pollock, Resident Fellow, American 
      Enterprise Institute.......................................    55
    Statement of Mark Zandi, Chief Economist and Co-Founder, 
      Moody's Economy.com........................................    64


        TAKING STOCK: INDEPENDENT VIEWS ON TARP'S EFFECTIVENESS

                              ----------                              


                      THURSDAY, NOVEMBER 19, 2009

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to the notice, at 9:36 a.m. in Room 
SD-138, Dirksen Senate Office Building, Elizabeth Warren, Chair 
of the Panel, presiding.
    Present: Elizabeth Warren [presiding], Paul S. Atkins, 
Damon Silvers, Dean Baker, Charles Calomiris, Simon Johnson, 
Alex Pollock, and Mark Zandi.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Chair Warren. This hearing will come to order. Good 
morning. I'm Elizabeth Warren. I'm the chair of the 
Congressional Oversight Panel. I am calling to order this 
hearing on the effectiveness of TARP.
    This will be the Panel's 14th public hearing, but not its 
last, so I welcome you all here.
    Last fall, with the country in the midst of a crisis, 
Secretary Paulson appealed to Congress for the emergency 
authorization of $700 billion to restore confidence in the 
system and to rescue the economy from what he said would be a 
catastrophic collapse in the financial sector.
    Today, more than a year later, many conclude that the 
Troubled Assets Relief Program succeeded in achieving this 
fundamental objective. But, TARP was not designed merely to 
rescue large banks; the broader, long-term goals were aimed at 
strengthening the overall economy and dealing with the alarming 
number of mortgage foreclosures.
    The problems are unmistakable. Uncertainty persists about 
the stability of our financial institutions and whether they 
can survive without the benefit of government guarantees. One 
in nine mortgage holders is in default or foreclosure. 
Unemployment is at 10.2 percent. More than 100,000 families are 
declaring bankruptcy every month.
    TARP has also failed to check the culture of excessive 
risktaking that brought on this crisis while it has created 
price distortions and moral hazard that plague meaningful 
efforts at recovery.
    The rules of the financial road, the inadequate and 
wrongheaded regulations and laws that headed us into this 
crisis, remain unchanged. In the midst of these uncertainties, 
Secretary Geithner will make the decision whether to extend 
TARP; indeed, he will make that decision, presumably, in the 
next few weeks. Our December oversight report will contribute 
to this debate by assessing the overall performance of the 
program in its first 14 months and by highlighting some of the 
critical policy choices that have not yet been resolved.
    Today, we are fortunate to have a very distinguished panel 
of five leading experts in the field of finance and economics 
on hand to discuss what TARP has achieved and where it may have 
fallen short, as well as the state of the financial sector and 
the progress of the economic recovery. We are honored to be 
joined by Dr. Dean Baker, the codirector of the Center for 
Economic and Policy Research; by Dr. Charles Calomiris, the 
Henry Kaufman Professor of Financial Institutions at Columbia 
Business School, and a member of the American Enterprise 
Institute's Shadow Financial Regulatory Commission, and 
codirector of the American Enterprise Institute's Project on 
Financial Deregulation; Dr. Simon Johnson, the Ronald A. Kurtz 
Professor of Entrepreneurship at the MIT Sloan School of 
Management, and a senior fellow at the Peterson Institute for 
International Economics; Dr. Alex Pollock, a resident fellow of 
the American Enterprise Institute, and former president and CEO 
of the Federal Home Loan Bank of Chicago; and Dr. Mark Zandi, a 
cofounder and chief economist at Moody's Economy.com.
    I want to thank you all for joining us here today.
    Before we proceed with your testimony, allow me first to 
offer my colleagues on the Panel a chance to make their opening 
remarks.
    [The prepared statement of Chair Warren follows:]
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    Chair Warren. Panelist Atkins.

 STATEMENT OF PAUL S. ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Atkins. Well, thank you very much, Madam Chairman.
    And thank you all very much for joining us here today. I 
really look forward to hearing what you all have to say.
    As Elizabeth just said, today's topic, I think, is very 
important and timely. TARP is now more than a year old, and 
much has changed in that year, and much for the better. Is that 
a coincidence due to other factors, or is it due, in some part, 
to TARP? There are still problems, of course, in the 
marketplace for financial products and financial services, 
including thinly traded markets in once very liquid securities, 
too much government influence and interference in corporate 
direction and affairs, and outright failures of TARP 
recipients, which raises questions, I think, about Treasury's 
credit analysis in the first place, since TARP funds were 
originally supposed to go only to strong institutions.
    So, has TARP been a success? Our discussion today, I hope, 
will shed some light on that question. In many ways, we can 
only see part of the picture, because we are--I think, are 
still too close to the event, and TARP itself seems not to be 
at an end.
    EESA, the statute that gave the Treasury Department the 
power to establish TARP, I think is a poorly drafted statute 
with many internal inconsistencies and ambiguities. That 
probably is embarrassing for the drafters and those who 
approved it, but it is rather understandable, given everything 
that was going on at the time, including a financial crisis and 
a national election campaign. In fact, I think the underlying 
premise of EESA, that Treasury would acquire assets, did not 
really materialize, of course, except in one small program, the 
Public-Private Investment Partnership, which has not really 
even gotten off the ground and probably is unlikely to do so in 
any meaningful way. So, thus, Treasury's implementation, I 
think, is an issue that must be considered in the context of 
its statutory authority.
    So, to assess the success of a program, one must consider 
its goals, its implementation, the conclusion, and any fallout 
that results from the implementation, including unintended 
consequences, bad precedent, and including, in this case, of 
course, moral hazard and costs. Of course, the benefits have to 
be weighed, as well.
    As the goals, TARP is a program that Congress hoped would 
stabilize the financial system. The mortgage foreclosure 
provisions are an adjunct to that mission. So, did TARP stop 
the bleeding? Did it help to stop the panic in the liquidity 
crisis? It probably was a contributing factor, but TARP is not 
a fiscal stimulus program or a means to change the regulatory 
structure of financial institutions. Those targets were 
undertaken by the new administration and a new Congress through 
other statutes.
    So, I think we cannot debate the success of TARP without 
focusing on how it ends. It's one thing to get an airplane into 
the air--you need speed and heft and enough runway to make 
course adjustments, depending on the crosswinds and unexpected 
turbulence--it's another thing to bring the airplane safely to 
the ground.
    The crisis is over, but we still see Treasury doling out 
billions of dollars to TARP--of TARP funds to firms large and 
small, from GMAC to banks with, say, a million or two--a 
hundred million or two in deposits. These are hardly 
institutions that are too big to fail, since their failure 
would not rock the financial system today.
    So, what's the rationale for doing these transactions? 
Treasury has not articulated one, and it's not even apparent 
that Treasury has any plan or decisionmaking standards for 
doing so. Treasury certainly has not made anything manifest to 
this Panel yet.
    So, how will the program end? What will it look like next 
year if the Treasury Secretary extends it beyond the end of 
this year? We have another hearing coming up about that in the 
future.
    So, I look forward to our discussion today and to the 
insights that you all have to give us.
    Thank you very much.
    [The prepared statement of Mr. Atkins follows:]
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    Chair Warren. Thank you.
    The Chair recognizes the Deputy Chair, Damon Silvers.

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Yes, thank you, Madam Chair, and good morning.
    First, I want to express my appreciation to our staff for 
organizing this hearing with such a stellar panel. I also want 
to particularly recognize my friends, Alex Pollock and Dean 
Baker, who, like all of you, have contributed so thoughtfully 
to the intellectual discussion around the impact of TARP and 
the nature of the financial crisis.
    The question of the economic impact of TARP is complex. I 
think you heard a little bit of that complexity from my fellow 
panelist, Commissioner Atkins.
    TARP has been accompanied by other major interventions in 
the economy, in the context of trying to contain and manage the 
financial and economic crisis, both in the form of the stimulus 
package and massive interventions in the credit markets by the 
Federal Reserve. In that context, it is often difficult to 
isolate the impact of TARP distinctly within that landscape. 
I'm particularly interested in this hearing trying to do that, 
trying to isolate the impact of TARP, and then, secondly, 
trying to understand the--what the impact of TARP is in a 
larger economic sense.
    This Panel, in its February report, did a valuation of the 
initial TARP investments in the Capital Purchase Program, the 
SSFI, and the TIP. At the time we did so, we recognized that a 
financial valuation is not the end of the story, that there was 
a much larger and more complex question of the economic impact 
of these actions. That question has been much harder to get our 
arms around than the question of whether or not, from a simple, 
sort of, transactional perspective, the public got a good deal. 
So, I hope this hearing will address that.
    Now, I'm particularly concerned, in that context, about the 
question of TARP's impact on the availability of credit for the 
real economy. This was the subject of some--indirectly, of 
some--of remarks this week by Chairman Bernanke, who noted that 
we have a continuing problem of credit availability in the 
business sector which he attributed to the weakness of our 
banks.
    In this context, I simply do not think it is a relevant 
question whether we would have been better off had there been 
no TARP. I think that, if I'm not mistaken, each of your 
testimony makes clear that each of you believes that some sort 
of significant government action on a large scale was necessary 
last October. I think what we should focus on, rather, is 
whether or not the way that we have managed the financial 
crisis, the way in which TARP has been structured and 
implemented, was and is fair to the American public, and 
secondly, whether it has really repaired our financial system 
or simply bought time, at the risk of exposing us to a 
Japanese-style lost decade.
    These questions have been addressed at some length in the 
written testimony you all have submitted, and very 
thoughtfully. And I commend all of you. I--it was an education. 
And I look forward to the hearing this morning.
    Thank you.
    [The prepared statement of Mr. Silvers follows:]
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    Chair Warren. Thank you, Deputy Chair Silvers.
    I also should note that Richard Neiman, Superintendent of 
Banks for the State of New York, is unable to be with us. A 
last-minute call on his duties, by the Governor of New York, 
meant that he could not join us this morning. And he sends his 
apologies. Also, Congressman Hensarling had hoped to be with 
us, but he is in markup with the House Financial Services this 
morning. So, you're down to the skeleton crew, here.
    I would like to ask each of you for opening remarks. I'm 
going to ask that you hold the remarks to 5 minutes, and I'll 
try to be strict about that if anyone goes over, in the 
reminder that your written remarks will become part of the 
record, in any case, and we want to be sure to save enough time 
that we can have a thoughtful question-and-answer.
    So, I'd like to start with you, Dr. Baker, if I could, 
please.

 STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND 
                        POLICY RESEARCH

    Dr. Baker. Thank you very much for inviting me to speak 
here today.
    What I'll say is, I think that the TARP has been somewhat 
successful. Certainly, the TARP, together with other actions 
that have taken, have prevented the collapse of the financial 
system, something we should all be thankful for. I will say, I 
think that's somewhat of a low bar, in the sense that there 
were other measures, and basically, with the pretty much 
unlimited resources of the Fed, that should have been expected, 
in any case.
    But, the more important point I'll say is that I think the 
TARP ended up--ends up being largely counterproductive, in the 
sense that it really abused public faith, and I think we pay a 
big price for that. And I'll give two specific points, that, 
first, I think it misrepresented the urgency. We had--I should 
say, the proponents of the TARP at the time misrepresented the 
urgency at the time the TARP was passed, and, perhaps more 
importantly, they oversold the benefits that--there were claims 
made, specifically, that would extend credit to businesses, 
we'd, in fact, prevent a recession, that we would save 
homeowners from foreclosure. They clearly have not happened, 
and the fact that those claims were used to help sell the TARP 
to Congress undermines faith in government.
    Okay, well, getting to the first point, the success--I 
mean, again, just realistically, the TARP was--even if all the 
money were allocated, which, of course, we know it was not--was 
$700 billion. The Fed lent over 2 trillion, at the peak, on its 
various special lending facilities. In addition, we had the 
FDIC loan programs, loan guarantee programs, we had the 
guarantee of money market funds. All of these were very, very 
important. The TARP plays a role in that, there's no doubt 
about it; but, to isolate the TARP and say that the TARP was 
essential--well, all of these programs were important. Had we 
not had the TARP, could you have gotten around it? Perhaps. It 
certainly contributed. You know, I don't think there's any 
point in denying that.
    In terms of how we went about doing this, I would say that 
obviously there was a lot of mishandling. Keep in mind, 
Troubled Asset Relief Program. We haven't combined troubled 
assets. We saw that Secretary Paulson--after he had the 
approval of Congress, the bill was signed into law, he waited a 
period of time and decided the best thing to do was inject 
capital directly into banks. I think, a right choice. But, the 
point was, that was not was originally proposed.
    The second point that he did--and I think this was a very 
serious mistake that I don't think there's been a full 
reckoning--was, he made a decision that he wanted to keep the 
bank situation secret, so he insisted that all the major banks 
had to take TARP money, whether they needed it or not. I think 
that was a very serious error. And I think that was corrected, 
to a large extent, with the stress tests that were produced in 
March. Many problems that I and others have raised with those 
stressed tests, but I think it was very valuable in having more 
transparency, and I think the markets actually responded to 
that.
    So, I think that there were some very, very major errors, 
in the early handling of the TARP, that I think it's important 
to come to grips with, just as a matter of record and for 
future reference.
    Now, in terms of undermining public faith, I think this is 
a very important issue, because obviously the government's 
going to continue to play a central role in guiding us out of 
this downturn, which is likely to be very long-lasting. And the 
events around the TARP certainly had the effect of undermining 
confidence in government. And just to very quickly mention a 
few:
    The selling of the TARP--to my mind, the best argument was 
the claim that the commercial paper markets were shutting down. 
That means the economy will shut down, because so many major 
corporations are dependent on commercial paper for meeting the 
payroll and paying other bills.
    Now, President Bernanke, after the TARP was passed, 
announced the creation of a special facility to directly buy 
commercial paper from nonfinancial corporations. My guess is, 
if Members of Congress had known that the Federal Reserve Board 
had that power and was prepared to exercise it, they might have 
put more thought into what the TARP looked like. I don't think 
that's a good practice, to deceive Congress, to deceive the 
public.
    Other aspects of TARP--we were told that money would be 
used to keep homeowners in their home. Clearly that was not the 
case. There was no provision made that if banks took TARP 
money, they were obligated to modify mortgages. That may have 
been a reasonable decision, but there was a selling of TARP as 
though that would do that.
    We were also told that TARP money would--that it would be 
tied to executive compensation. There were claims we'd have no 
excess compensation, golden parachutes. We know that, again, 
was not the case. Was that appropriate? Arguably, yes; 
arguably, no. But, the point was, it was sold that way, and 
people now see that you have the executives of these banks 
going with large bonuses. That, again, undermines confidence.
    Thirdly, the claim that somehow this would extend credit to 
small firms that were starved for credit at the time. Again, 
that was--there were no provisions in the TARP that would 
ensure that. Again, I think that's not necessarily the fault of 
the banks; I think, realistically, given the severity of the 
downturn, it's not surprising to me that small businesses are 
having a very hard time getting credit. You could tell the same 
story in the last recession, or certainly the 1990-91 
recession. That's what happens in recessions. But, again, it's 
a case of overselling the TARP.
    So, just to quickly sum up, I'd say that we have a real 
problem. This was not a well-thought-out, well-conducted 
program. Some of that is understandable, given the rush. But, 
again, I think we should make a point of trying to be honest 
with the public, even in the situation where there is some 
urgency. I think this was a mis-sold program.
    [The prepared statement of Dr. Baker follows:]
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    Chair Warren. Thank you very much, Dr. Baker.
    Dr. Calomiris.

  STATEMENT OF CHARLES CALOMIRIS, HENRY KAUFMAN PROFESSOR OF 
        FINANCIAL INSTITUTIONS, COLUMBIA BUSINESS SCHOOL

    Dr. Calomiris. Thank you, Professor Warren.
    I'm going to skip the questions that I heard from the three 
of you, because--I hope we'll have time for them; I'd love to 
talk about them, but I've got my own things I want to get in.
    I will start by saying I agree with what Mr. Baker said, 
that we're not going to be able to sort out very easily TARP 
from TALF--and credit guarantees, more generally. What I think 
we can do--what I think I can do, as someone who's devoted a 
couple of decades to the study of resolution policies by 
people, by governments throughout the last couple hundred 
years, is evaluate the design of TARP and whether it made 
sense; and not just whether we can snipe at it retrospectively, 
but whether they should have known better ex ante, and whether 
we can articulate principles that will guide the mistakes that 
were made, going forward--that is, that will prevent us from 
repeating it. Because, to me, there were big mistakes. The 
design was very poorly done. And the thing that's more striking 
is that they should have known better.
    Let me be more specific. The mistakes were foreseeable, in 
the sense that we've had, over the past 30 years, an 
unprecedented amount of experience with financial crises and 
their resolution. And yet, the Fed, the Treasury, and Congress 
did not avail themselves of that experience when managing the 
crisis; rather, they invented new, untested, and, I would say, 
logically, inferior mechanisms.
    So, I think we do have a contribution that we can make, as 
economists who have specialized in this, in being able to say, 
``Wait a minute. This wasn't such a smart thing in the first 
place.''
    Government loans and guarantees, of course, have already 
been very costly. Fannie and Freddie alone are going to cost 
the U.S. taxpayer upwards of 350 billion just on the subprime 
loans that were made during the crisis. And if you go forward 
from there and you add FHA's new lending, so-called mitigation 
that's not real mitigation, what you're looking at is pushing, 
maybe, beyond half a trillion dollars, and that's not counting 
all the other stuff.
    And then, of course, as you all pointed out, the incentive 
consequences are also huge.
    Have I already surpassed my time? Oh, thanks.
    Chair Warren. No. You have nearly----
    Dr. Calomiris. So----
    Chair Warren [continuing]. 3 minutes. It's counting down.
    Dr. Calomiris. Thanks.
    So, the central question I want to talk about is, Was 
assistance done the right way? And I talk about, in my long 
paper, what the criteria are. First of all, you should only 
provide assistance in response to truly systemic risk. So, for 
example, we didn't do that. Yes, we were facing systemic risk 
when we enacted TARP, but GMAC came back for second-round 
funding. There's no systemic risk; that's pure politics. So, 
TARP was set up in a way that was open to abuse, and it's being 
abused.
    Second, assistance should be selective. Well, it was 
selective, in some irrational ways, maybe, between choosing AIG 
and not choosing Lehman, but then it was a sort of convoy 
mentality in the approach taken to the commercial banks. So, 
the principle of selectivity, that we know from our past 
experience, wasn't applied.
    And third, the taxpayers' position should be senior.
    Now, I want to emphasize--and I go through this in depth in 
my paper--that there are different kinds of mechanisms that 
need to be used, depending on how severe a crisis is: discount 
window lending, preferred--as you get more severe, preferred 
stock lending; then different things you might call 
``bailouts''--guarantees on assets and then outright rescues of 
firms. I'm not saying that those mechanisms shouldn't be used, 
but the point is, we have vast experience with how to do this 
right, and we didn't. And the key underlying principle, in 
addition to picking the right moment and being selective about 
which institutions, is to always put the taxpayer in a senior 
loss-sharing position. That's incentive-compatible, it can 
always be done, no matter how severe the crisis, no matter 
which mechanism you're choosing, and we didn't do it. And it's 
partly because of bad thinking and partly, perhaps, because of 
politics; I'm not sure.
    I want to briefly talk about mortgage mitigation. The same 
principles of being very rare in your use of it, being 
selective in how you apply mortgage mitigation, and using the 
principle of seniority in the taxpayers' exposure, could have 
been, and should have been, applied to mortgage foreclosure 
mitigation. We should have targeted it properly. I proposed, 
starting in about March of 2008, approaches for doing this. 
Actually, I was inspired by the successful plan that Mexico 
implemented in the late 1990s, called the Punto Final program. 
And there are rational ways to do that. We never did it. We 
didn't do enough of it early, and now we're doing an across-
the-boards approach that's not working and wasting money on 
mitigation that's not realistic.
    Chair Warren. Now, Dr. Calomiris----
    Dr. Calomiris. We're out of----
    Chair Warren [continuing]. We're out of time.
    Dr. Calomiris. Let--okay.
    Chair Warren. Okay. We will----
    Dr. Calomiris. So, I--I'll just wait for more opportunity.
    Chair Warren. And you--and I promise, you will have them.
    Dr. Calomiris. Thanks.
    [The prepared statement of Dr. Calomiris follows:]
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    Chair Warren. Dr. Johnson.

 STATEMENT OF SIMON JOHNSON, PROFESSOR OF GLOBAL ECONOMICS AND 
MANAGEMENT, MIT SLOAN SCHOOL OF MANAGEMENT, AND SENIOR FELLOW, 
         PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

    Dr. Johnson. Thank you very much.
    I was chief economist at the International Monetary Fund 
through August of last year, and I've worked on financial 
crises around the world for the past 20 years, and I'd like to 
put the U.S. experience and the use of TARP in that comparative 
perspective.
    First and foremost, of course, this was a very severe 
financial crisis; perhaps the worst the world has seen since 
the end of World War II, both in its severity, the speed, and 
its global nature. And it came upon a government, the Bush 
administration, that was completely unprepared. The managing 
director of the IMF has entered into the public record the fact 
that we, at the IMF, urged the administration, with some 
specificity, after the failure of Bear Stearns, to plan for 
exactly the kind of contingency that befell us all in 
September, and we made some specific proposals in that 
direction. Unfortunately, the administration, as is already on 
the record, declined to take any such steps. So, this is why 
much of the TARP was on the fly.
    Having said that, though, I'm very sympathetic, having 
worked in other crises, to the difficulty of the situation that 
was faced by the designers and the early implementors. Of 
course, you have three main tasks in this kind of crisis:
    You have to stop the panic. And that really requires doing 
whatever it takes, and it particularly requires, in the U.S. 
kind of constitutional and fiscal arrangements, that you need 
congressional authority to put the government's balance sheet 
behind the financial system. That's what TARP did. That was 
essential. Not passing--if we--if the Congress had not passed 
TARP, you would have had a much bigger disaster, irrespective 
of how the money had been used.
    Secondly, you have to maintain domestic demand. And we've 
seen, obviously, a collapse of private demand--for example, for 
consumer durables in this country--as a result of the 
destruction of credit and the collapse of consumer confidence 
that is at least as bad as what we've seen in many emerging 
market crises.
    Now, the U.S. has many important differences from emerging 
markets, but, in terms of the severity of that collapse, it was 
absolutely on a par. And there, I think the broader policies of 
monetary policy, as my colleagues have mentioned the role of 
the Federal Reserve, but also the fiscal stimulus that was 
passed early this year was absolutely essential. Now, I'm sure 
we can find many things to quibble about, many things we, with 
retrospect, would like to do better; but, those policies were, 
I think, again, essential. You would have had a much deeper 
recession, unemployment would now be higher, unemployment would 
stay high for longer, if you hadn't done those things.
    But, the third piece that you have to do in any crisis is 
lay the basis for a sustainable recovery. If you just take 
government money and throw it at the banks, if you bail out 
everybody unconditionally, if you don't apply an FDIC-type 
resolution process to your biggest banks when they're failing--
just give 'em the money, keep your jobs, don't have to change 
anything about the governance of your banks--that is asking for 
trouble. That is not best practice, that is not what the IMF 
tells countries to do, that's not what the U.S. tells countries 
to do, that's not what the United States tells the IMF to tell 
countries to do. It's--in fact, pretty much the exact opposite.
    If you look, for example, at the detailed content--I refer 
you to the detailed content of the Letter of Intent signed by 
Korea in December 1997. This was a well-designed program in 
this dimension. Not perfect. In this dimension. There are 
specific requirements--which the Koreans asked for, by the way; 
this was not imposed from the outside, but we were strongly 
supported by the U.S. Treasury, including people who are now in 
senior positions in this administration--that involved taking 
over, restructuring, downsizing problem banks.
    The bank cleanup is absolutely essential. It has to be done 
at the beginning, partly for political reasons, because that's 
your opportunity, and partly for sound economic reasons, 
because you need the credit system to be cleaned up and coming 
back as the real economy comes back, let's say, within a 6- to 
12-month window, which is where we are now. Our banking system 
has not had that kind of cleanup, it's not had that kind of 
restructuring; it is a thinly capitalized banking system, given 
the likely trajectory of this economy, given the plausible risk 
scenarios. And it has the incentive to go out and take 
excessive risk again.
    Now, that's not just my view, this is the view of the Bank 
of England. Andrew Haldane, who's the head of financial 
stability of the Bank of England, has a paper out--came out 
about 10 days ago--in which he talks about the cycle. The 
cycle, this cycle, the boom-bust-bailout cycle, as a ``doom 
loop.'' This is very strong language from central bankers, I 
can assure you. They do not ordinarily speak in these terms. He 
is warning the U.K. and the United States, because his analysis 
is about both, that by providing unconditional bailouts on this 
basis--and that, I'm afraid, is how TARP has been implemented--
we are asking for trouble. This will happen again and again 
until we deal with our banking system on a different basis.
    So, in conclusion, I would say TARP was necessary. It had 
to be passed. It created the potential for government support 
of the banking system. That was needed. But, in terms of the 
details, pretty much every detail of how it was--the money was 
actually used, I agree with my colleagues, that it's actually 
made things worse.
    [The prepared statement of Dr. Johnson follows:]
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    Chair Warren. Thank you very much, Dr. Johnson.
    Mr. Pollock.

STATEMENT OF ALEX POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE 
                           INSTITUTE

    Mr. Pollock. Thank you, Madam Chairman, members of the 
Panel.
    I believe an enlightening historical analogy to TARP is the 
Reconstruction Finance Corporation, or RFC, of the 1930s. In 
both cases, the original liquidity idea developed into a 
solvency idea, providing additional equity, not just more debt, 
to banks in the form of preferred stock. TARP has made equity 
investments in almost 700 financial companies. The RFC made 
investments in over 6,000 banks in its day. The vast majority 
of these were retired in full after paying dividends along the 
way. So, counting by the number of financial institutions, the 
RFC was about ten times as big as TARP.
    Now, this next line was especially put in for Congressman 
Hensarling, so I'm sorry he's not here----
    Chair Warren. We'll make sure it gets to him.
    Mr. Pollock [continuing]. That the RFC was run by a 
conservative Texas Democrat, Jesse Jones, who was a tough-
minded, successful entrepreneur, who, among other things, owned 
banks, but who had dropped out of school after the 8th grade. 
An interesting contrast to this panel. [Laughter.]
    ``There was a disposition''--wrote Jones, ``on the part of 
President Roosevelt to use the RFC as a sort of grab bag or 
catchall in spending programs, but I insisted on its being 
operated on a business basis, with proper accounting methods.''
    So, let's start with ``on a business basis.'' In my view, 
the managers of TARP are fiduciaries for the taxpayers as 
involuntary investors. Their principal goal should be to run 
the program in a businesslike manner, to return as much of the 
involuntary investment as possible to its owners, along with a 
reasonable profit on the overall program. That means the 
predominant discipline should be that of investment management, 
not of politics.
    All of the language of the Emergency Economic Stabilization 
Act, which authorized TARP, always speaks of TARP as acquiring 
assets, and approves funding for acquiring assets. However, 
with the $50-billion Home Affordable Modification Program, TARP 
is not acquiring any asset at all, but simply spending 
taxpayers' money. And, very conveniently, whatever TARP spends 
is, under the Act, automatically appropriated.
    Now, an obvious difference of the RFC from TARP is that the 
RFC was a corporation--a government corporation, but a separate 
corporate entity, with the ability to account for itself as a 
corporation. In general, it seems to me that if such 
interventions as TARP or the RFC exist at all, they are better 
established as separate corporations rather than as 
``programs'', mixed into other entities.
    As I quoted above, Jesse Jones said, ``I insisted on proper 
accounting methods.'' In contrast, it appears that, in more 
than a year, no financial statements for TARP have been 
produced for the Congressional Oversight Panel, the Congress, 
or the public.
    Now, the Act requires only an annual fiscal year statement, 
but good managerial practice and proper accounting methods 
certainly require, at a minimum, quarterly financial 
statements. In my view, TARP should have full, regular 
quarterly financial statements which depict its financial 
status and results exactly as if it were a corporation. 
Moreover, TARP's financial statement should include line-of-
business reporting by its major activity areas.
    An essential principle is that government crisis 
intervention should be kept temporary. The emergency programs 
need to be turned off when the crisis is over, allowed to wind 
down over time, and finally disappear. Now, it's easy to 
imagine how much the Treasury and the administration would like 
to extend, as long as possible, the power and independent 
capacity they enjoy through the operation of TARP, but, in my 
view, it's time to observe its target expiration date of 
December 31st, 2009. The very fact mentioned before, that TARP 
disbursements are, by law, automatically appropriated, is 
reason enough to enforce a timely expiration.
    We've experienced not just a bubble, but a double bubble in 
real estate prices, one in housing and one in commercial real 
estate. The banking system--and, notably, smaller banks--are 
disproportionally concentrated in real estate risk--and in 
commercial real estate risk, in particular. The implications 
for bank failures are easy to see.
    At the same time, the FDIC has announced that its net worth 
is negative; that is, that the deposit insurer is itself out of 
capital. So, this gave me the idea that perhaps before its 
December 31st expiration, TARP should make a preferred stock 
investment in the FDIC. And if----
    Chair Warren. Mr. Pollock, I'm afraid you're out of time.
    Mr. Pollock. Could I make one----
    Chair Warren. You certainly----
    Mr. Pollock [continuing]. Final point?
    Chair Warren [continuing]. May.
    Mr. Pollock. The overall program of TARP will either have 
an overall profit or a loss. I hope it has an overall profit, 
like the RFC did. But if it has a loss, the Act provides that 
the President shall submit a legislative proposal that recoups 
from the financial industry an amount equal to the shortfall. 
This is a very interesting possible liability of the financial 
industry, and it's one more good reason to demand full and 
proper accounting from TARP, as well as to question any 
disbursement which does not acquire an asset.
    Thank you very much.
    [The prepared statement of Mr. Pollock follows:]
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    Chair Warren. Thank you, Mr. Pollock.
    Dr. Zandi.

STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND COFOUNDER, MOODY'S 
                          ECONOMY.COM

    Dr. Zandi. Thank you, Professor Warren and the Panel. It's 
a pleasure to be here.
    My remarks reflect my own views, and not those of the 
Moody's corporation.
    I'll make four points:
    Point number one, I think the TARP has contributed 
significantly to the stability of the financial system. The 
system isn't functioning normally. Small banks are failing at a 
high rate, and the structured finance market is dormant. But, 
the system is stable, and I think that's significantly related 
to TARP.
    Now, it's very difficult to disentangle TARP with all of 
the other policy efforts at the Federal Reserve, FDIC, and 
Treasury, but I think it's fair to say that, without TARP, none 
of the other things would have worked, that it was a necessary 
condition for the stability in the financial system. So, 
without doing it, I think we'd be in a measurably more 
difficult place today.
    So, point number one, I think it's been very effective.
    Point number two, different aspects of TARP have worked 
better than others. Let me sort of rank-order things from my 
perspective, from the best to the worst.
    I think the CPP program and the bank stress tests, 
absolutely necessary, have worked very effectively, and the 
success of that is evident in the repayments that are already 
occurring, that are coming in quite quickly.
    I think it would have been more desirable if TARP could 
have done what it was designed to do, and that was to buy 
troubled asset, but it was overwhelmed by the environment and 
the situation and the politics, and I don't think there was any 
other choice than to step in and provide that equity. And I 
think it's worked quite well.
    I think backstopping TALF and PPIP, also very effective--it 
hasn't helped increase transactions, but it has had a very 
measurable impact on pricing in asset markets, which has 
significantly reduced pressure in the financial system. So, if 
you look at asset-backed spreads, they've come in quite 
dramatically since the time TALF was announced. I don't think 
that's any accident. So, to look at bond issuance and say it's 
not working would be a mistake. It has helped very, very 
significantly in that way.
    I think the use of TARP money for the auto bailout was very 
efficacious, very important, very well timed, that if GM and 
Chrysler had not gotten that money, they would have been forced 
into liquidation, which would have resulted in mass layoffs at 
a time when the economy was reeling. I think that was critical 
to resolving that in an orderly way.
    What hasn't worked, the housing stability efforts have been 
particularly disappointing. The take-up on HAMP and HARP will 
be incredibly low unless they are changed. And I think it 
should be changed.
    And, of course, small business lending, that aspect of TARP 
has not worked at all, and that's very important. I'll get to 
that in just a second.
    So, point number two, there are differences in the relative 
performance of the different aspects of TARP.
    Point number three, the cost. It's going to be significant. 
By my calculation, it'll probably come in somewhere between 
100- and 150 billion, when everything is said and done. That's 
a lot of money, but that's well below the fears that many had 
when TARP was passed; certainly nothing close to the 700 
billion. And, in fact, that's a good lesson. I think it's 
important--it was very important to pick a big number, to show 
the markets that the Federal Government was, in fact, not going 
to let the system fail. And that's why that number was so key. 
In fact, it helped restore stability and actually reduced the 
ultimate cost of the plan.
    Finally, point number four, I think TARP's objectives are 
not over. I think it needs to remain in place. Two key things 
need to be done, and TARP can play a key role. One is small 
business lending. Small businesses are key to the job machine. 
The job machine is not working. And part of the reason for that 
is the lack of credit, the collapse of the credit card industry 
and the tightening up of credit card lending. And, of course, 
the small bank failures are so key to small businesses in very 
small communities. And I think TARP needs to play a much larger 
role in the provision of credit to small businesses.
    And secondly, foreclosure mitigation isn't done. House 
prices are going to resume falling, in my view, early next 
year, when a lot of these loans in the foreclosure pipeline get 
pushed through into a foreclosure sale. Nothing in our economy 
works well when house prices are falling. That's still the 
largest asset in most people's household balance sheet. And 
creditors aren't going to extend credit unless they know how 
much people are worth. So, I think that needs to be worked on, 
and TARP will play a key role in that.
    Thank you very much.
    [The prepared statement of Dr. Zandi follows:]
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    Chair Warren. Thank you, Dr. Zandi.
    We're going to do questions round robin, sort of, although 
there are just three of us, so you should all feel free to 
intervene if we want to pursue a line together. That's fine.
    I'd like to start, though, with a point you made, Dr. 
Zandi, and that sort of underlies the others, and that is, you 
make the point that TARP helped with bank stability, and was 
critical. I think this was your first point in both your 
prepared remarks and in your oral remarks today. But, the 
question I want to press on is, How stable is ``stable''? Do we 
have a group of very large financial institutions that are 
stable, so long as the government continues to pump money into 
them and to give them substantial guarantees, whether those are 
explicit guarantees or implicit guarantees, and that, in turn, 
forces us into the direction of asking about bank 
profitability--they are stable only if they have a business 
model now that works and that produces the kind of long-term 
profits that we can say, ``Yes, this is now a functional 
banking system''?
    And so, I think about these sources of bank profitability. 
There's lending, which I thought was supposed to be the bank's 
business. Business lending--evidently, not so much. And 
consumer lending, which seems to be, borrow money at a very low 
cost from the taxpayers, and then increase the interest rates 
and fees charged to consumers. A new study out by Pew 
Charitable Trust says they've examined the 400 largest credit 
cards and seen that, in less than a year now, interest rates on 
credit cards have gone up somewhere between 13 and 23 percent 
on these cards, at a time when the cost of funds has actually 
declined. There's also been a big push on fee income.
    The other way that banks seem to be making money is by 
trading. They're out making investments in the marketplace, 
which--I'm old-fashioned, but I didn't think that was a 
traditional banking activity, and certainly raises the specter 
that, yes, they make profits today, but if they make bad 
trading decisions down the line, those banks are not so stable 
as they look.
    So, I want to start with Dr. Zandi, but I welcome anyone's 
comments on this question. We describe our banks as more stable 
than they were, but is this because we just continue to 
guarantee them and put money into them, or is it because they 
have developed business models that, in fact, are not 
sustainable over the long haul?
    Dr. Zandi, you want to start that?
    Dr. Zandi. Sure. I think it's fair to say that the Nation's 
largest banks are stable and viable, and will be profitable 
going concerns. I think that the smaller banking institutions--
many smaller bank institutions will fail, in large part because 
of their bad lending--in large part related to the bad lending 
to commercial real estate lending, which is still being played 
out.
    But, in the case of the largest banks, particularly the 
banks that went through the stress test, I think, in fact, 
they're probably overcapitalized. And the reason they're not 
lending is because house prices are falling and unemployment's 
rising. And I think once house prices stabilize and 
unemployment stops rising, we'll see credit flowing more 
normally, because they are well capitalized. Small banks are 
not, and there will be many bank failures. And that goes to the 
problems with small business. And----
    Chair Warren. Okay. And you're confident--when you say 
they're well capitalized, you're confident that they're well 
capitalized against the projected losses in their portfolio, on 
their toxic assets----
    Dr. Zandi. Yes. I think these----
    Chair Warren [continuing]. Removed from the books?
    Dr. Zandi. I think the stress tests were substantive. I 
don't think they were merely superficial. The stress tests were 
important in establishing confidence, but they were 
substantive, and that if you look at the loss rates that they 
had to capitalize to under the adverse economic scenario, those 
loss rates were significant. So, I believe that unless we get 
the adverse scenario or something worse, they'll be fine.
    Chair Warren. Dr. Baker, could I ask you to jump in on 
that?
    Dr. Baker. Yeah. I'd be a little more pessimistic, for a 
couple of reasons. I mean, I think the stress tests were very 
useful, and I think they did help, as I said, a lot for 
transparency, but in terms of the adverse scenario, we're 
actually looking at higher unemployment rates today--I mean, 
the current rates in the projections, going forward--than what 
we had in the adverse scenario.
    Also, I'd point out, those stress tests only ran through 
2010, and we're looking at having a very bad time going at 
least into 2011, if not further. So, I think we probably are 
looking at high loss rates, perhaps higher than in that adverse 
scenario, for some time into the future. So, I'd be a little 
less confident. And not to say that they're all going to 
collapse, but I'm less confident about their soundness, going 
forward.
    Now, getting to your specific questions about the models, I 
don't know that we have viable models, going forward. I mean, 
if you look at where the profits for the major banks were 
coming from prior to the crisis--well, a lot of this was coming 
from securitization of assets, which, even assuming we get the 
market fixed, securitization back in a proper place--we could 
argue there almost certainly will be less fees from that, going 
forward. I think many of us hope that there'll be less fees 
from things like credit cards, bank overdrafts, because that is 
the purpose of legislation being debated in both the House and 
Senate. That was an important part of the profits for many of 
the major banks, and smaller banks, as well.
    Also, you had situations of, do you want to call it, ``mis-
selling,'' whatever, auction-rate securities, other instruments 
being sold to small governmental units that were almost 
certainly inappropriate to them, that did amount to large fees, 
in many cases, for the major banks.
    So, these are areas of profitability that I think there's 
at least a hope, that many of us have, will not be there in the 
future.
    So, do they have a viable model? Well, you'd mentioned, 
quite rightly, that many of them are making big profits on 
trading. That's fine, but that's inappropriate for a bank. And 
we have a situation where Goldman--I mention them because 
they're just most visible in this respect--they're quite openly 
trading very aggressively--and, for the moment at least, making 
very large profits--but quite clearly with both explicit and 
implicit Government guarantee. The implicit Government 
guarantee: They're too big to fail. No one thinks we will let 
Goldman go under. And the explicit guarantee, that they have, I 
believe it's still, $28 billion in loans, through the FDIC, 
that are guaranteed by--and I shouldn't say ``through''--
guaranteed by the FDIC. So, this is not a proper model, to be 
having the government have the FDIC guarantee money for the 
banks to then speculate with. So, that's certainly not a viable 
model, at least that I would envision, going forward.
    Chair Warren. Mr. Pollock, could you add?
    Mr. Pollock. Jesse Jones, in his most instructive memoirs, 
which I recommend to everybody, says what you're always doing 
in a panic is buying time. Why are you buying time? Because 
what typically happens in the wake of the crisis is, bank 
operating profits and margins become very large. And so, you 
have a race, if you will, or a balancing, between large 
operating profits created by the very low interest rates, and 
recognized losses. So, the low cost of carry--say, carry on $8 
trillion, which is about the total loans of the banking 
system--it's not that the banks have no loans; they have $8 
trillion dollars of loans, now being carried at extremely low 
refinancing rates. That generates big operating profits, which 
allows you to take the time to write down the past losses. This 
is the classic pattern. It happens over and over again. A great 
example was the dealing with the loans to less-developed 
countries, in the 1980s, which followed this pattern.
    So, that's what we're now observing, Madam Chair.
    Chair Warren. Thank you.
    Dr. Calomiris.
    Dr. Calomiris. I want to address your question about the 
credit crunch.
    Chair Warren. Yes.
    Dr. Calomiris. It's going to get a lot worse, or persist 
over time, especially for small businesses. I am not giving you 
that comment as an academic, but as a business consultant to 
banks, especially credit card banks. I can tell you exactly 
what they're doing and exactly why they're doing it.
    First of all, looking at banks more broadly, capital 
scarcity persists, so lending isn't going to happen when banks 
have scarce capital. Even if, from a regulatory standpoint, 
they can be allowed to go ahead and do some lending; there's 
extreme caution.
    Chair Warren. So, I just want to----
    Dr. Calomiris. I have a long list.
    Chair Warren [continuing]. Draw a line under----
    Dr. Calomiris. Yeah.
    Chair Warren [continuing]. What you're saying. I'm going to 
let you do your entire list. But, you would say, when Dr. Zandi 
says they are overcapitalized and have more than enough 
capital, that----
    Dr. Calomiris. It's laughable.
    Chair Warren. Okay.
    Dr. Calomiris. But, I'll explain why.
    Chair Warren. Okay.
    Dr. Calomiris. I'm sorry, I don't mean to be insulting. I'm 
just saying, of course they're not overcapitalized----
    Chair Warren. I----
    Dr. Calomiris [continuing]. For two reasons.
    Chair Warren [continuing]. Just want a chance to draw this 
out.
    Dr. Calomiris. First of all----
    Dr. Zandi. And I consult to them, as well, by the way.
    Dr. Calomiris. Right. Well, let me tell you--let me give 
you an example.
    Banks are not just meeting the statutory capital 
requirements. Regulators can set capital, on a bank-by-bank 
basis, any way they want. You don't know what the bank's 
capital requirements are. I do know what my clients' capital 
requirements are. Their capital requirements, instated by their 
regulator, might be twice what the statutory minimum is. Why? 
Because regulators right now are playing a political game of 
overkill to try to impress Congress with how tough they are, so 
they can survive the shakeout that's happening right now. 
That's a big part of what's going on. The FDIC, in particular. 
Actually, they talk out of both sides of their mouth, because 
they don't want to scare away--they don't want to make their 
banks too mad. But, I'm telling you, literally double the 
statutory capital requirement is being imposed.
    Secondly, small business lending--well, small businesses 
don't want to invest or hire people, because of the huge risks; 
and not just economic risks, but political risks right now. 
Most small businesses pay personal income tax rates. Look at 
what healthcare, energy taxes, and other personal income tax 
rates are being discussed in Washington, and you tell me, if 
you're a small business, if you want to be investing.
    When you look at the credit card bill, the credit card bill 
did exactly what I thought it would do, which is hugely raise 
interest rates on credit cards. The most damaging piece of the 
credit card bill, I'm sure was unintended. It mortgagized 
outstanding credit card balances. In other words, you can't 
raise interest rates on outstanding credit card balances. That 
means that a credit card balance--let's say, $1,000--is now a 
mortgage. Well, that means that the way you think about that, 
as a credit card bank, is completely different. You don't have 
the option to increase the rate, so you're going to have to 
start off with a very, very high rate. It's just basic 
economics.
    So, FAS 166/167 is about to make things much worse, because 
it's, again, overkill. What it's going to do is impose the same 
capital requirements off balance sheet as on balance sheet. We 
should have capital requirements for off balance sheet, but it 
shouldn't be one-for-one. I've analyzed this for over a decade, 
and there are ways to solve this problem.
    The problem right now is, we're in an overkill environment, 
and the credit crunch is just going to continue. I mean, 
there's no way that it's going to come to an end quickly. And 
it's not the banks' fault.
    Chair Warren. Dr. Johnson.
    Dr. Johnson. Just to answer your question, it's not a 
stable system that we have now. When you have an entity such as 
Goldman Sachs, that has direct access to the Federal Reserve, 
as Dr. Baker said, and is allowed to take any kind of risky 
investments they want, you're basically running a big hedge 
fund.
    Now, I understand the strategy is to allow these banks to 
recapitalize themselves by making large operating profits, but 
that assumes they know how to manage their risks, that assumes 
there aren't additional shocks, and assumes they don't pay out 
a large amount of those profits as bonuses, which seems to be 
their intention.
    These are very different days from previous attempts to 
recapitalize and stabilize the banking system, such as the 
1980s, when the strategy worked, over a period of time. So, I 
think we're asking for trouble now.
    Chair Warren. Thank you, Dr. Johnson.
    I've gone way over--
    Panelist Atkins.
    Mr. Atkins. Okay, thank you very much.
    Chair Warren. Thank you all.
    Mr. Atkins. Interesting discussion. What I first want to do 
is go back in time. You all have addressed TARP, and, 
everybody, I think, agrees that it's difficult to unwind that, 
along with all the other programs, and we have to view TARP as 
part of, the bigger government response.
    But, I just want to pose a question, because when we think 
of TARP and we think of that spring and summer after Bear 
Stearns--and some of you all have raised this issue--it was 
sort of a sleepy spring and summer, where I think of--it was an 
opportunity that wasn't grabbed by regulatory agencies, and the 
government in general, to plan for what was going to happen, 
and a lot of folks in the marketplace didn't view things with 
the concern that they should have. So, I just want to pose a 
question. What if there had been no TARP? I mean, how would we 
be worse off than we are now? Because we see all the problems 
that we see now. We have markets that are still sort of 
dysfunctional; they might be stable, but in some of them the 
Fed is the main player. And would there have been any 
difference had we just continued the ad-hocism that we had seen 
earlier in 2008? Because I still don't see the market 
confidence there. But, I was just wondering--pose this to all 
of you--Dr. Baker to Dr. Zandi, you know, everybody in 
between--what you all think of that.
    Dr. Baker. Well, I'm not convinced we'd be in a hugely 
different world. I think that you would have seen, obviously, 
more active Fed intervention, more of the sorts of AIG/Bear 
Stearns bailouts, workarounds, however you want to call it. I 
was sort of struck--we had--you know, after Lehman failed--I 
think that just about everyone would agree that was a mistake, 
to let Lehman go under. And the Fed, some weeks afterwards, 
came up with the statement that they didn't have the legal 
authority. Now, the reality was, at least in my view, that no 
one was in a position to challenge the legal authority of the 
Fed as they acted. Now, whether or not they had the legal 
authority, would a court--could one envision a court having 
said--you know, suppose the Fed had set up some sort of 
structure, AIG-type structure, to keep Lehman afloat--would the 
courts have said, ``You can't do that. You have to let Lehman 
go under''? It's a little hard for me to believe. Maybe that 
would have happened, but it's a little hard for me to believe.
    So, if we envision the world without TARP, I think we would 
have had more AIG-type workarounds. Where would we be today? 
Probably with a less stable financial system. I think that 
stands to reason. It's also possible--again, suppose we imagine 
this crisis continuing, where you had major banks teetering, 
week by week. Congress could have acted subsequently. I mean, 
my biggest criticism about the way Congress acted at the TARP 
was that there wasn't time to really debate, ``Okay, if we're 
going to put forward 700 billion, what conditions do we want to 
address now?'' Because we all know, in Washington, the best 
time to do something is at a crisis. I mean, now we're having a 
debate, going forward, on financial reform, and we'll see what 
comes of that. But, you had an opportunity to at least have 
placeholders. You didn't need final reform, but you could have 
had placeholders.
    And, just to be very specific, suppose we said--we'd put in 
a placeholder, saying that there would be an onerous capital 
requirement on institutions of larger than 50 billion assets 
that would go into effect January 1st, 2011. Well, that would 
be a real strong incentive for Congress to work out a more 
substantive reform.
    Things like that could have been done in the period leading 
up to the TARP. They weren't, because the argument was, ``We 
have to do this tomorrow.'' And that's literally what was being 
said at the time. And that, I think, was the biggest flaw. It 
wasn't, ``We either do this right now or we don't do it.'' We 
would have had other opportunities, and we rushed in with 
something that wasn't well thought out.
    Dr. Zandi. Yeah, I think the world would have been 
measurably worse without TARP. And I think we get a sense of 
that when you think back to the days when TARP was constructed. 
When TARP was voted on for the first time by Congress, and 
voted down, the market responded violently. There was complete 
turmoil. And if Congress had not reversed itself and voted for 
TARP a week later, I think the markets would have completely 
shut down and we would have had major financial failures, and 
the system would be measurably worse.
    Now, we would have ultimately responded to that and done 
something else. It wouldn't have been called ``TARP,'' we'd be 
here talking about something else. We would have responded, but 
we would be in a measurably worse place. The banking system 
would be less stable. It would be more concentrated. Our 
problems would be significantly greater. And in all likelihood, 
we'd still be in a recession, in my view.
    Dr. Calomiris. I think that that's the point. The point is, 
unfortunately, your counterfactual was an incomplete one--that 
is, What replaced TARP is the key question. And I think that we 
could presume that what you would probably see instead of TARP 
would be forbearance, forbearance that is like what we did with 
the guarantees, an across-the-board sort of debt-guarantee 
program that would have found a way to extend guarantees from 
the Fed, from the FDIC, from the Treasury, somehow, on an ad 
hoc basis. And we know that, from a risk standpoint, the worst 
kind of government interventions are forbearance interventions, 
because there you put institutions in a situation where the 
zombies persist, and they have even stronger incentives to take 
on risk.
    So, at least if you recapitalize a financial institution, 
you give them some money that they hope to keep. So, given that 
forbearance probably would have replaced it, from a risk 
standpoint, it would likely have been worse.
    So, I--you know, it's a hard counterfactual.
    Mr. Atkins. All right.
    Dr. Johnson.
    Dr. Johnson. I would just add, to those points, the global 
context. You have to remember that they were forced into this 
by a sequence of events, by--into using TARP for the capital 
purchase program for the attempt at recapitalization--by what 
happened in the U.K. and what the Europeans did the day after 
the G7/IMF meeting. Now, the alternative, I agree with my 
colleagues, would have been, if you hadn't passed TARP, the Fed 
would have had to have done something. It would have done it 
very quickly. And I agree with Charles, it probably would have 
been a very messy thing. And, I think, constitutionally, it 
would have been a very complicated thing. Obviously, Federal 
Reserve didn't want to do that, they had good reason not to 
want to do it. This is an issue--we're using the fiscal power--
it's a fiscal balance sheet of the United States. The authority 
to do that rests with the Congress, no question about it. So, 
getting the authority was absolutely what they needed to do, 
and they got it in a rush, because no one was prepared; they 
hadn't thought ahead.
    Mr. Atkins. Okay. Thank you.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. This has been so interesting, it's hard to 
know even where to pick up the threads in a thoughtful way, but 
I'll try.
    Do you all agree that--and I think several of you have said 
this in the testimony, but I just want to make it clear--do you 
all agree that the primary thing that we did in TARP, with the 
capital purchase program investments in October, was to 
implicitly put the balance sheet of the Federal Government 
behind the financial system, that that was the meaning of that 
act, in more than the precise dollar amounts that went into 
different firms?
    Mr. Pollock. I'd say, Mr. Silvers, that the key, as I 
mentioned in my testimony, is the difference between debt and 
equity. I see financial crises as evolving through three 
periods:
    The first period is denial and hoping for the best, which I 
characterize as ``the subprime problem is contained,'' period.
    The second period is a lending period; central bank is 
lending money. But, if somebody has negative capital, it 
doesn't matter how much you lend them; they still have negative 
capital--they're still broke, even if you're lending them 
money. So, in a really bad crisis, there is an issue of 
replacing capital.
    Now, what happened in that situation was, you might say, an 
act of honesty. The government's balance sheet already was the 
capital of the financial system; we made it explicit. I think 
that making it explicit probably did, as the other panelists 
have said, significantly help.
    The other thing that significantly helped was the stress 
tests programs, which others have mentioned. But I think the 
most important thing about the stress tests was that it threw 
out mark-to-market accounting. It made mark-to-market 
accounting irrelevant. The combination of those two got us the 
normalization of----
    Mr. Silvers. Right.
    Mr. Pollock [continuing]. Spreads that we've seen.
    Mr. Silvers. Yeah. You've answered far more than I asked. I 
just wanted to make sure that we all have agreement here, that 
this is the meaning of what they did.
    Dr. Calomiris is shaking his head, so maybe you don't 
agree.
    Dr. Calomiris. I think that you pose a great question, and 
here's my answer to it.
    Mr. Silvers. All right.
    Dr. Calomiris. ``Was it the announcement or was it the 
actual cash flowing?'' is the way I would put your question. 
Okay?
    Mr. Silvers. Okay.
    Dr. Calomiris. So, first of all, the announcement had--it 
depends on which dimension of financial----
    Mr. Silvers. Right.
    Dr. Calomiris [continuing]. System you're talking about, 
and which institution. And so, if you're asking the question--
from the standpoint of the bear run that was occurring on 
Goldman Sachs and Morgan Stanley stock price, the announcement 
was it. The actual cash flows, probably not very important. And 
from the standpoint of Goldman Sachs, I would say the 
announcement was it; they didn't need the flows.
    From the standpoint of smaller banks, I would say that the 
flows mattered, to the extent that they're going to survive and 
be able to where--you know, survive this crisis--the flows 
mattered more than the announcement of the program.
    So, I think--and the--and I would say that the overall 
policy toward small business lending and consumer lending 
really depended much more on the followthrough. And so, that's 
really----
    Mr. Silvers. Can----
    Dr. Calomiris [continuing]. Where the key issue is.
    Mr. Silvers. Can I----
    Dr. Calomiris. And it----
    Mr. Silvers. Can I stop you right----
    Dr. Calomiris [continuing]. Hasn't been there.
    Mr. Silvers. Can I stop you right there? You say there 
were--in your view, there were certain large financial 
institutions that needed confidence, not cash. Were there not--
what's your view of the large financial institutions for whom 
cash would--whom there simply wasn't enough--might not have 
been enough cash? Right? Citi, B of A, and the like.
    Dr. Calomiris. Right.
    Mr. Silvers. You agree that there's a continuum----
    Dr. Calomiris. I agree. I agree. I was trying to draw the 
two extreme points.
    Mr. Silvers. Right.
    Dr. Calomiris. But, I agree with you, that when you talk 
about Citibank, the physical assistance is just as important, 
maybe more important. So, I think that there's a--depending on 
what you're talking about, the answer is different. But, I 
think the crucial point is that, from the standpoint of 
actually getting consumer and small business lending flowing 
again, which we are not getting, it's the followthrough that 
matters, not just the announcement.
    Mr. Silvers. Well, and----
    Dr. Calomiris. And that's the problem.
    Mr. Silvers. Yeah. Well----
    Dr. Calomiris. The announcement wasn't good enough for 
that.
    Mr. Silvers. All right. Well, on that--I'm sorry--Dean.
    Dr. Baker. I was just going to say, very quickly, I think 
that, you know, putting this in a little context, we, in 
effect, had this implicit ``too big to fail.'' We'd rescued 
Bear Stearns, certainly Fannie and Freddie. The--that was taken 
away when Lehman collapsed. TARP, in effect, put that back in. 
So, in that sense, I think it was the announcement playing the 
largest part. But, certainly, for the smallest banks, 
obviously, there was no ``too big to fail'' with them.
    Mr. Silvers. Dr. Johnson, you had your hand up.
    Dr. Johnson. Yes. To answer your original question, yes, 
but, the way you stop a panic, the way you turn the corner in 
any financial crisis, is, you have to provide--public sector 
provides capital. The reason you're--and the characteristic of 
the crisis, the private sector won't provide capital anymore; 
it's too afraid of what's happening. And the issue most 
countries have is whether they can afford it, whether the IMF, 
some outside entity, will provide the capital, on what basis. 
We didn't have those problems, but we had the problem of 
whether Congress would go for it. And also, what Treasury 
wanted to do. Treasury's intentions were very unclear and made 
more murky, in this regard, their stated intentions around the 
TARP prior to that.
    Mr. Silvers. Dr. Johnson, if we take that point, we now 
have three very large TARP--you said, in your prepared remarks, 
that you thought we had a thinly capitalized banking system. I 
believe Dr. Zandi expressed a somewhat different view. Right. 
Now, we have four large banks that represent the majority of 
bank assets in the United States: Citi, B of A, Wells, and 
JPMorgan Chase. One of those banks has been allowed to return 
TARP funds: JPMorgan Chase. I think there's some consensus 
that, in terms of Dr. Calomiris' continuum, they were always at 
the very strong end.
    So, the other three are not being allowed to return TARP 
funds. This seems to me to be consistent--the other three 
represent a very substantial part of our banking system--this 
would seem to me to be consistent, Dr. Johnson, with your 
remark that the banking system is thinly capitalized, at least 
in the eyes of the regulators, who are not allowing them to 
return the capital.
    That ties, in my view, to this question of what we actually 
did, in terms of putting, effectively, the public's balance 
sheet behind the private financial system, because it appears 
to me now--and I'll ask you to respond, since the Chair is 
allowing me this indulgence, here--if we pull back--do we now 
have a circumstance in which we have strengthened the private 
balance sheets, such that we can pull back on the public 
balance sheet? And that leaves aside the question of how we 
pull back on the public balance sheet. But, have we got there?
    The fact that three of the four largest banks in the 
country are not being allowed to return TARP funds suggests we 
haven't. You all are the experts; I'd welcome your observations 
on this.
    Dr. Johnson. So, yes, we have a thinly capitalized banking 
system, as I said, relative to the trajectory of the economy. 
That's the way I would put it--relative to what I'd see as the 
real risk scenario. So, this is also in the minds of the 
management of these companies; they have raised their capital 
substantially, they're now at the levels that Lehman had right 
before it failed. So, is that enough capital? Probably not, in 
their minds.
    And Charles, I think, is making a good point, that, in any 
crisis, the regulators tend to tighten on capital. They--I 
mean, without even worrying about losing jurisdiction, which 
I'm sure is an issue here. But, this is a natural reaction. You 
need to have more capital. So, the problem, of course, was, we 
didn't put enough capital in, because, in the United States, we 
shy away from things that feel like the government is owning a 
productive enterprise. Most other countries don't have that 
scruple; they'd tend to treat this on a much more pragmatic 
basis--the government use the public balance sheet, 
overcapitalize, and then get out, privatize that, sell that 
off. We don't like to do that, here. So, it was done on a thin-
capital basis.
    Dr. Zandi. I think the large banks, in aggregate, are very 
well capitalized, and, in fact, arguably, overcapitalized under 
the most likely economic scenario. Now, I think, given the 
uncertainties with regard to that scenario, and the fact that, 
if you go into a scenario that's more adverse, that it could be 
very adverse, given a 10.2-percent unemployment rate, it makes 
sense to be very cautious in allowing institutions that you 
think are at the bottom end of that spectrum to give back their 
capital. You want to be sure that in your economic forecast 
that you're making is the right forecast before you do that.
    So, I think the way this process is working is entirely 
appropriate. You're saying that the institutions at the good 
end of the spectrum can repay, institutions at the bottom end 
can't repay, until it is absolutely certain that the coast is 
clear. And how can we say that it is? Unemployment's 10.2 and 
rising, and house prices are falling. How can we?
    Mr. Silvers. Well, this brings me back to, really, the 
point of this hearing, which is the economic impact of TARP, 
because if the bottom end of--and this may sound like a 
statement, but it's going to wind to a question--if the bottom 
end of the banking system, in terms of capital adequacy, 
represents, say, 40 percent of the banking system's assets, 
which is roughly what the three institutions that are not being 
allowed to return TARP money are--and then there's a whole lot 
of weakness, obviously, in the small bank sector, which you all 
have discussed--but, if the bottom end is that big, what does 
this tell us about the relationship of what we've done in TARP? 
If the bottom--and then, let me just add one more complicating 
thing--if the bottom end is that big, and the Chairman of the 
Federal Reserve is saying that, ``we're not getting business 
lending, because our banks are weak''--what does this tell us 
about the way we have managed TARP in relationship to the 
economic--not the financial, but the economic--consequences of 
the way we have managed it?
    Dr. Calomiris. If I can answer your first question----
    [Laughter.]
    Which I haven't had a chance----
    Mr. Silvers. Feel free.
    Dr. Calomiris. I think that I have a very different 
calculation than my friend Mr. Zandi on where the very largest 
financial institutions are. I think it is a spectrum. I agree 
with him there. But, I think that it's highly debatable 
whether, if we really did mark-to-market, or even--not just 
mark-to-current-market, but mark-to-recovery-value--on some of 
those banks, whether they would be solvent. I don't believe 
that one of them would be. And so--when you look into the weeds 
of this, you will find different pros and cons. For example, in 
Citibank,--I understand, most of their securities are not going 
to be resetting to interest rate--adjustable rates. And that's 
a positive, in terms of risks of default, going forward, on 
that portfolio. But, you know, overall, there's a lot of 
negative within that portfolio, too.
    If you read Michael Pomerleano's analysis of this, which he 
started about a year ago and has been continuing to do, it's 
very much more pessimistic on recovery values of those 
portfolios. I'm not telling you that he's right, but I'm 
telling you that I don't think, based on my conversations with 
bankers, that anyone thinks that it's obvious that one or two 
of those banks are even solvent. Now, on the other hand, I 
think that there's a big difference among them. And I don't 
really want to go on the record saying that a particular bank 
is insolvent, but I'll just say that I think that, arguably, 
one of them is, and that the other two are pretty weak.
    Mr. Silvers. Why don't we just go down the line, here.
    Mr. Pollock. I would say, when it comes to being thinly 
capitalized, banking systems are, by definition, thinly 
capitalized. Walter Bagehot wrote, ``The profitability of 
banking depends on the smallness of the capital.'' He was 
right. So, when you get into a panic and prices are moving in 
ranges that aren't going from 99 to 98 and a half, but from 99 
to 42, of course we have capital problems.
    I think the way this relates to TARP is the issue of timing 
that I said before; TARP has made these investments. The point 
of the investments is to buy time for the operating earnings. 
We're talking about something that's less than a year so far 
for these investments, or maybe a year. So, my view would be, 
the investments could stop on December 31st, but the existing 
investments are going to be managed over a period of several 
years. Continental Illinois was bailed out by an RFC investment 
in 1934. It repaid the investment in 1939. That's 5 years. In 
1939, it was the most profitable bank in the country.
    So, I think, in TARP we have to have a similar several-year 
time period for the management of the investments that the 
government has made as fiduciary for the taxpayers. As I said, 
that's where I think the focus should be.
    Dr. Johnson. So, if I understood the question correctly, my 
answer would be that TARP has not been well managed with a view 
to building a sustainable recovery in the credit system. I 
think that the banks that pay back the capital probably 
shouldn't have been allowed to pay back. I think it's a tricky 
judgment. You want them to raise more capital; you, ideally, 
want them to raise more private capital. And then, you do reach 
a point where the government ownership gets in the way of that. 
I'm not suggesting the government should run the banking system 
in this country. That, I think, very obviously would be a 
disaster. But, the government has to be involved, and you have 
to come back with a lot of capital, relative to the worst-case 
scenario, because the worst-case scenario is what people are 
worried about. That capital is your cushion against losses. And 
if they're trying to get by with a little bit of--thin capital 
and a lot of implicit guarantees from the government, that's a 
good deal, if it works. If it's a bad deal, it's not their 
problem; it's your problem. And that's a very bad arrangement.
    Mr. Silvers. Does that arrangement, in particular, tend to 
give you a Japan scenario?
    Dr. Johnson. Well, the Japan scenario is the extreme 
version of what Charles talked about before--is forbearance. 
And it came in a particular set of macroeconomic circumstances 
I don't think are going to be repeated here. But, the idea--I 
think that we will avoid that kind of--the zombie banks, the 
zombie companies. We do actually--we're better--we're not good, 
but we're better at recognizing losses and at moving on, than 
was Japan.
    I think you're just going to have--it's going to be--it's 
going to be some combination of sluggish credit for small 
business and excessive risktaking in trading markets that go 
bad. Of course, hedge funds fail all the time. They're supposed 
to fail. Hedge funds are designed to fail. You go and set up 
another hedge fund. That's the business model. And sometimes 
you have good years, and you share that with your investors, 
and sometimes you have bad years, and you just move on.
    Having your major banks in your--that's fine. I'm not 
opposed to hedge funds. We should see it--recognize what it is. 
But, to have your biggest banks do that, as long as hedge-fund 
investors know what they're getting into, that's okay. But, if 
you have your biggest banks operate on that basis is reckless 
and irresponsible. It's a bad idea.
    Mr. Silvers. We've taken tons of time, but Dean hasn't 
gotten his chance.
    Dr. Baker. Yeah. Well, just quickly, to comment on some of 
the differences here on whether the solvency of the three major 
banks, there; someone questioned it. I think the differences 
largely depend on what our projections are, going forward. I 
mean, there's a wide variance here, and really an extraordinary 
wide variance, because it's not just on, sort of, unemployment, 
but we're also looking at a situation where we could come up 
with very plausible scenarios that say that house prices more 
or less stabilize where they are now, or the real estate prices 
more or less stabilized. I can also give you very plausible 
scenarios where they fall by another 15 percent. And from the 
standpoint of bank solvency, that's a huge, huge difference. 
So, again, Mark--you know, I'm not going to say who's--we don't 
know who's right; we'll find out in a year or two. But, the 
point is, there's a very, very wide range, here, and it's clear 
we could find plausible scenarios under which those three banks 
will all be just fine, but also plausible scenarios under which 
they may well face insolvency.
    Chair Warren. Thank you.
    I want to follow up, if I can. I'm going to stay in the 
same line of questioning so we can still keep talking about 
this. But, I just want to bear down on one part of this. Thanks 
to TARP, we now have some very large financial institutions who 
are operating with implicit guarantees. Citi has an explicit 
guarantee of more than $300 billion. That has enormous pricing 
effects in the market, and distortions in attracting capital. 
Obviously, it also creates the kind of moral hazard questions 
you're all talking about, the idea that our largest financial 
institutions are giant hedge funds for which we can all 
celebrate when they have a good year, but--I think we have some 
recent experience that suggests they don't always have good 
years.
    So, I want to just ask the question, following exactly the 
same line of questioning. If these largest financial 
institutions are raising capital only because the guarantees 
are there, and the guarantees are distorting market 
investments, risktaking, pricing, how do you wind back out of 
that? How do you get the ball to spin in the other direction?
    Dr. Calomiris.
    Dr. Calomiris. The way you do is profitability. Just to 
remind you, from 1992 until 2006 was consistently an 
unprecedented high-profitability experience for the U.S. 
banking system.
    Chair Warren. Dr. Calomiris, let me stop you right there.
    Dr. Calomiris. But, that's----
    Chair Warren. I'm all for profitability.
    Dr. Calomiris. No, no, I'm just saying----
    Chair Warren. I get that.
    Dr. Calomiris. That's the only way out.
    Chair Warren. No, I understand. But, that's why I started 
the questions, back when I started my questions, with how 
they're producing their profits. And they're producing their 
profits from being a hedge fund--I think Dr. Johnson referred 
to that calmly as ``reckless.'' Was that the term? Taking on 
reckless risks. And the other way they're producing profits 
right now is trying to squeeze consumers to try to get in ahead 
of a move; they're borrowing cheap from the taxpayer and then 
increasing rates on the taxpayer for their consumer lending. 
And they're not doing any other form of lending. I'm sorry, 
that's not a sustainable profit model. So----
    Dr. Calomiris. No, I'm not----
    Chair Warren [continuing]. What's our model, here? Should 
we all just go to Las Vegas and----
    Dr. Calomiris. No.
    Chair Warren [continuing]. And bet it all on black-22? And 
if it comes in, we have a stable banking system, and if we 
don't, we'll just quit.
    Dr. Calomiris. Well, no, of course not. But, what I would 
say is kind of troubling, and I agree with you; what's 
troubling is, Citibank, of course, has made a lot of its 
profits from one activity that's not going to be very 
profitable for it, going forward, and that's the credit card 
business, especially with FAS 166 coming into play, starting in 
January, and because Citibank, unlike some small credit card 
issuers, will not be able to exempt itself through various 
loopholes from FAS 166/167. So, you have a huge problem, which 
is consumer credit is not going to be as profitable for 
Citibank as it used to be.
    So, I think what I'm trying to get at here is that part of 
the problem is that we're tying one hand behind the banking 
system right now with the overkill that we've done, and we're 
actually taking the profitable business away from them, in two 
ways: first of all, I talked already about credit cards; but, 
secondly, small business lending. And small business lending is 
not going to be profitable until small businesses start 
demanding loans more. And I don't think that's going to happen 
until they're more confident about the recovery.
    Chair Warren. And if I can----
    Dr. Calomiris. And my view is, it's not going to be a 
sustained, high-growth recovery; it's going to be great 2010, 
and what most economists are projecting is 5-year growth rate 
for the U.S. economy around 2 percent. That is not good news 
for small businesses. And the regulatory and political risks 
they're facing are really--
    So, I'm worried, but I'm saying, the way we get out of it 
is with profitability in the bread-and-butter of banking. And 
the problem is, I'm not seeing it right now.
    Chair Warren. Dr. Johnson.
    Dr. Johnson. I think, broadly speaking, there are two ways 
out of this. One is to allow the banks to take more advantage 
of consumers than they have in the past. Kind of an 
extraordinary----
    Chair Warren. Ah, there's a solution.
    Dr. Johnson [continuing]. Kind of an extraordinary concept. 
If you explained it to consumers, I'm not sure they would 
really go for it, given the way they've been treated. But, you 
could relax the rules, you could allow them to mislead 
consumers more, all kinds of trickery could be allowed, and 
that would, without question--as Charles said, that would allow 
them to boost their profits.
    Dr. Calomiris. I'm sorry, that's a distortion. I didn't say 
anything about trickery. I'm talking about capital 
requirements, and I'm talking about limitations on interest 
charges.
    Dr. Johnson. I think an alternative way forward is to break 
up the biggest banks. The reason you have implicit guarantees 
in a system like this is because banks are too big to fail, or 
they're perceived to be too big to fail. That's what the debt 
market thinks. That's why Goldman Sachs can borrow at a 
relatively small spread over Treasury's. And it's very hard 
to--there are, of course, regulated proposals to try and 
restrain that power and to try and make it a credible threat 
that if bad things happen, you would be able to close them 
down. Unfortunately, I think that the likelihood that those 
would work are really very low, because these banks are so big, 
and, when they fail--when they bet it all on black-22, and the 
bet goes bad, you can't just say, ``Well, you're out of luck. 
Go away.'' Because the damage--the collateral damage--I think 
the issue Charles raised--of small business is very important. 
That's a macroeconomic effect. That's the effect of a massive 
recession, primarily. That's why they're not going to be 
borrowing money, that's not why they're not going to come back. 
That is going to hurt the bank's bottom line. But, that's 
because the massive banks were able to get themselves into the 
position where some failed, and the ones who survived now have 
more market share, they have some more pricing power, which is 
part of the profitability, but they're also taking a lot more 
risk. Even the standard VaR models, which are deeply flawed, 
show risk levels in the big banks back to the levels of 2005, 
perhaps 2006.
    Chair Warren. So, if I'm understanding you correctly, 
you're saying that the advantage to breaking up the big banks 
is, we end up with more banks that can fail, because we let 
them fail, but more banks, then, that can figure out their 
profitable models and go forward. Is that----
    Dr. Johnson. Absolutely.
    Chair Warren. Is that the consequence of----
    Dr. Johnson. If you----
    Chair Warren [continuing]. Breaking them up?
    Dr. Johnson [continuing]. If you try to run capitalism in 
which some people have a ``Get out of jail free'' card or a no-
bankruptcy exemption, it goes badly. You cannot run a market-
based system on that. And I think there's broad agreement 
across the political spectrum. The question is how to implement 
that. My view is, you've got to keep it simple. And ``simple'' 
means more banks, financial institutions the size of CIT group, 
which was turned down for a second bailout this year, rightly, 
and which is going through bankruptcy, and that's a good thing, 
and that's not causing massive financial distress in the United 
States or around the world--you need more banks the CIT Group 
size, 80 billion--eight-zero--fewer of the Goldman Sachs size, 
800 billion or going up to a trillion.
    Chair Warren. Dr. Zandi, I think, has been cut out of the 
conversation. I want to be sure he gets a chance.
    Dr. Zandi. Thank you.
    Taking a less ambitious approach than breaking up the big 
banks, maybe there are a few things you could influence that 
would have an impact on your exit strategy.
    And, in my view, the exit strategy becomes much easier if 
the economy stabilizes; again, if unemployment stops rising and 
house prices stop falling. And there are three things you could 
influence that would have an impact on that:
    First is, you could have an impact on small business 
lending. And I do think that's very important to job growth. I 
agree with Dr. Calomiris--that they're not getting credit, and 
that's a problem.
    Second, the housing--the foreclosure mitigation, that's not 
working well. And the foreclosure mitigation plan should be 
adjusted. And TARP money can be used for that, because a lot of 
the TARP money that's been allocated to the current mitigation 
plan will not be used, because you're going to get takeup. And 
there are things you could do to make that measurably better, 
and that would help in stemming the house price declines.
    And then, third, something we haven't talked about--and I 
think this is really important to lending, more so than capital 
for these large institutions--one of the key reasons why the 
credit card lenders aren't extending credit is, the structured 
finance market is not working well. It's improved. Those 
spreads have come in. But, there is no bond issuance.
    The amount of structured finance issuance this year is less 
than $200 billion for the entire year. And I'm not suggesting 
we want to go back to 2 trillion a year, because that was 
obviously dysfunctional, as well, it represented a lot of bad 
lending. But, there's got to be a happy medium, because those 
institutions need to be able to use the structured finance 
market to clear off their balance sheet. And so, there are 
things that you could do with the TARP money to make that work 
better.
    So, those are--it's not as ambitious as breaking up the big 
banks, but maybe these are some things you can do to make the 
system work a little bit better and get to the exit strategy 
quicker.
    Chair Warren. That's very useful, thank you.
    I'm way over my time.
    Panelist Atkins.
    Mr. Atkins. Thank you, Madam Chairman.
    Well, I want to continue, actually, on this, because I do 
think that this ties into what we're going to look forward to 
in the future, which I think is--TARP, for all its warts and 
what's happened, you know, we're stuck with. The Treasury 
Secretary has to make a determination by the end of the year as 
to whether he's going to extend the program. So, the real 
question is, you know, If he does, you know, what should TARP 
look like next year? And, you know, when we talk about, you 
know, the whole structured finance market and securitization, 
that had a great benefit of lowering costs for everybody--for 
consumers--and helping the whole machine work the way it did up 
until last year. And it has--at least my perception is--like 
yours, it has ground to a halt. And then you have--Dr. 
Calomiris said you have government intervention, because you, 
unfortunately, do have deadbeats out there who don't pay their 
credit card bills. And so, of course, that raises the costs for 
all the good folks, who do pay their credit card bills. And 
then you have government intervention on top that then, by 
preventing companies to differentiate, raises the costs for 
everybody.
    So, how do--how can--you know, if the Secretary does decide 
to extend this program, how can TARP work to help ameliorate 
this situation? And then, with the view that Mr. Pollock said, 
that TARP is constrained by the statute, literally, to buy 
assets. Treasury has veered away from that, I think, you know, 
very problematically, if that were to be challenged in court. 
So, I just want to solicit your opinions as to, you know, if 
they were to buy assets, how could this move forward?
    Dr. Calomiris. Well, I would tell you that if I were king, 
here's the--here are the things I would do.
    Number one, I agree with Alex that we should just bring 
TARP to an end, in terms of new funds. But, I--that doesn't 
mean that we can't address these two very important problems of 
consumer credit and small business credit. We already have 
something called the Small Business Administration. We have a 
lot of interesting vehicles there. I would caution you that I 
have a study that shows a lot of moral hazard in Small Business 
Administration lending. It needs to be reformed, but it could 
be expanded, potentially. But, that shouldn't be done as part 
of TARP.
    In terms of what we can do for consumer credit, and for 
credit more generally, and for securitization problems, which 
Mark mentioned, I think we really have to get serious about not 
letting accounting standards, run wild, destroy the financial 
system. FAS 166/167, it's happening January 1st. It's going to 
make a big difference. A bunch of accountants, sitting off in 
their monastery, have decided that they're going to destroy 
consumer credit and other credit markets through an excessive 
burden on securitization capital requirements. It's--I'm not 
saying that they're doing it mean-spiritedly, I'm just saying I 
think they're wrong. And the problem is, no one elected them. 
I'm not saying we should politicize all of our accounting. I 
don't know the answer. But, I know one thing--just as they were 
very unhelpful--FAS was very unhelpful in its mark-to-market 
accounting during the crisis, FAS 166 is going to be very 
unhelpful getting out of it. So, we need an answer for that.
    And I think, also, finally reforming the credit card bill 
to get rid of the limitation on increasing interest rates on 
outstanding balances--just that one thing, which I think was an 
unwitting part of the bill; I don't think they intended to 
mortgagize credit cards--but, I think that that kind of reform 
could make a huge difference.
    So, I would say, shut down TARP, reform and expand SBA, 
potentially, get rid of this FAS 166/167 bomb that's about to 
go off, and think about some slight tweaks to the credit card 
bill.
    Mr. Pollock. I agree on the problems with the Financial 
Accounting Standards Board, but I don't see what TARP can do 
about it. The only investment of TARP, in terms of acquiring an 
asset, that occurs to me that could be helpful, going forward, 
is the one I mentioned: Namely, recapitalizing the FDIC. Other 
than that, I don't see what it could do; and therefore, I think 
cessation of the new activities on December 31st makes sense.
    But TARP will last a long time. As I said before, we're 
looking at a several-year period where these investments will 
exist. I think the profitability coming from banks isn't what 
we talked about at all, it's something very basic; it's the 
yields on the fundamental assets minus extremely low cost of 
carry, which generates high operating profits. I said, you work 
through the asset writeoffs while these profits continue, and 
they ultimately succeed, if all goes right, in paying off the 
preferred stock investments, and then we rack up TARP and find 
out if we had an overall loss or profit, by business line.
    Mr. Atkins. Dr. Baker.
    Dr. Baker. Yeah, a couple of points. I want to get back to 
a point that Mark had raised about the issue of falling house 
prices. I think some of our policies--and part of this is TARP, 
part of this is other policies we've pursued--have been 
designed quite explicitly to keep house prices from falling. 
And I think it's very problematic, because we've had a bubble--
we had a housing bubble. We still have a bubble in many areas; 
it's partly deflated. Other areas, it's completely deflated. I 
don't think we have interest, in those areas where it's partly 
deflated, in trying to sustain that bubble for longer. In 
effect, it's a form of forbearance. And we've had a number of 
policies. The Fed's policy of buying mortgage-backed 
securities. The FHA, I think, has gone overboard; that's why 
it's in trouble. It's made more loans than--in contexts where 
it should not have; it did not use good judgment in, basically, 
replacing the subprime market. And finally, we've also had the 
housing tax credit, which was certainly--a first-time-buyer tax 
credit, which was a boost to the market, at least thus far.
    I don't think we have an interest in trying to prevent 
house prices from adjusting. We may want to help homeowners. 
I've talked about ways. There's other ways we could do it: 
bankruptcy reform, right to rent. But, I don't think we have an 
interest in propping up house prices.
    The other point, again--just in terms of the unwinding--I'd 
just get back to what Simon had said--we have, basically, two 
alternative scenarios that we all sort of recognize, with the 
large institutions. One is to trust the regulators to do a good 
job. And I'm not questioning their competence, but it's just--
it's a difficult thing. We've seen they did not do that. The 
alternative is to go the route he had suggested, of looking to 
break them up. Those are really the two options. Unfortunately, 
I think that Congress, with their reform measures, looks to be 
taking the route that, ``We'll do a better job next time.'' And 
we could hope that's true; I'm just not confident that it'll 
turn out that way.
    Mr. Atkins. Dr.----
    Dr. Johnson. I wouldn't spend the TARP money that's 
available on any of these initiatives we're discussing. You 
should--you should extend TARP for 1 year; you should save the 
money in case you need it. We are not out of the woods yet. I 
think we're all agreeing there are serious risks. We have 
different versions of those risks. Those all could be large. 
Those all could impact financial institution. If you--either 
the money is committed or it's no--you're no longer authorized 
to spend it. You'll have to go back to Congress again for 
another conversation. That, I think, would not be an easy 
conversation. And that, you know, you're going to have--
exacerbate the issues of turmoil. The world economy is not 
settled. Okay? The U.S. economy is certainly not settled back 
onto a sustainable recovery path. If you've still got some--you 
still have over 200 billion--$250 billion available in TARP, I 
would keep that, very carefully, and use it only when you 
absolutely need it.
    Mr. Atkins. Yeah. The counter is that it does weigh down on 
the deficit, and, you know, obviously we have problems in that 
area, as well. But--good.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. I have a couple of, sort of, more specific 
questions that the testimony has brought forward.
    I would just note, first, that having TARP funds in--TARP 
is accounted for, as a deficit matter, based on the losses. 
It's not a $700-billion impact on the deficit. It was 
originally budgeted by CBO at 250; it's now at 150. I don't 
have an independent opinion about whether those numbers are 
right, but that's how it works. And so, I believe that Dr. 
Johnson's comment has almost--has no deficit impact, per se.
    Now, let me come to my questions. Dr. Calomiris, you said 
something very interesting that I want to follow up on. You 
know, this Panel issued a report on guarantees. I guess it was 
our last report?
    Chair Warren. Uh-huh.
    Mr. Silvers. On guarantees. And we did the best we could at 
trying to figure out what the economic impact of the Citi 
guarantee was. We had a lot of trouble doing it. Perhaps 
apropos of Mr. Pollock's comments about disclosure and 
accounting and so forth, we just had a lot of trouble trying to 
figure out what it was--what its value was and how it moved.
    You made a comment that made me think that you might have 
an opinion as to what the ultimate net cost of the Citi 
guarantees might be, if any, to the Federal Government.
    Dr. Calomiris. I could have an opinion about that, but I 
haven't done that calculation.
    Mr. Silvers. Well, let's take the biggest--let's take it at 
the crudest level. Do you think, based on some of the 
observations you made a moment or two ago about Citi's 
portfolio--do you think that that guarantee, given that there 
is a fee involved--we've been paid for it in preferred stock 
and the like--do you think that guarantee is likely to end up 
being a positive or negative? Going to make money, or lose?
    Dr. Calomiris. I--you know, I wouldn't want to give you an 
opinion without--I'm willing to look at it, actually, and 
could----
    Mr. Silvers. I would very much----
    Dr. Calomiris [continuing]. Give you an opinion afterwards.
    Mr. Silvers. I would very much appreciate it.
    Dr. Calomiris. But, I don't want to----
    Mr. Silvers. That's fair enough. I'm ambushing you a little 
bit. I'd very much appreciate your opinion----
    Dr. Calomiris. Okay.
    Mr. Silvers [continuing]. Afterwards.
    Mr. Pollock, you seem to have----
    Mr. Pollock. I can't speak to the specifics of it, but, 
generically, with this kind of a deal, you make money in most 
scenarios, and in the terrible scenarios, you lose a lot of 
money.
    [Laughter.]
    Mr. Silvers. I see. Well, that's a--certainly a--I think 
that's a safe comment----
    Chair Warren. Safe prediction.
    Mr. Silvers [continuing]. Safe prediction to make.
    Secondly, there is some type of dialogue around TARP that 
talks about one of the successes of TARP being the rise in our 
equity market prices. I think other people seem to be concerned 
that--about, sort of more broadly, the comment, Dean, you made, 
that we may--be going through sort of mini-asset bubbles in 
different markets, perhaps in housing, perhaps in equities. Dr. 
Johnson, you talked about--you talked, in your written 
testimony, about the influence of, essentially, what you called 
a ``carry trade'' on the equities markets, which is an analysis 
that, I believe, Nouriel Roubini has also made. There are some 
settings in which everyone knows what that means, and so forth; 
but, we're in Washington, and not everybody does. Can you 
explain what you mean by that, and what you think the 
relationship between the state of the banking system we've just 
been talking about and the equities markets is?
    Dr. Johnson. Certainly. I think the statement--or--as 
used--or the terms most commonly used in financial markets 
today, is not particularly about the equity market; it's much 
more about emerging markets. So, the question of--Where's the 
next bubble? Right? Where do you have the overexuberance? And I 
think many people take the view, and I take the view, that 
we're back to a pattern we've seen before, from the `70s, `80s, 
and `90s, which is--the frontier of reckless lending, where 
borrowers get carried away is not actually in the United 
States, it's in--somewhere in--it's Asia, it's around China, or 
it's Brazil, or it's Russia. Unfortunately, it's funded by 
institutions that are based in the United States, so that 
creates financial system risk, which we've not been good at 
controlling in the past.
    I think the Federal Reserve made it very clear--and this is 
facilitated--I mean, this--that's a general pattern--for 
example, recycling petrol dollars, I think, given the likely 
trajectory of oil prices, will again run through New York--from 
Middle East, through New York, out to Asia, for example.
    Very low interest rates in the U.S., which makes sense from 
a domestic U.S. point of view, given high persistent 
unemployment--will only facilitate this and make the U.S. more 
attractive as a funding currency. Some of that happens 
offshore, some of that you will see also coming directly as 
borrowing in the United States. Whether or not it--you see it 
in the balance of payments depends on whether people are 
willing to take the foreign exchange risk, which is an 
interesting question. But, this is to carry cheap interest 
rates.
    If you remember, the big discussion about low interest 
rates in the runup to--the role in the subprime crisis; people 
talked about the global savings glut. Not exactly a global 
savings glut, necessarily, this time, but cheap funding costs, 
easy monetary policy would definitely do the same thing.
    So, what they do is, this feeds the exuberance, this 
encourages overborrowing, and this comes back to damage the 
global financial system.
    Mr. Pollock. I'm sure----
    Mr. Silvers. And can I just make sure that I--because your 
statement didn't quite get to what my question asked.
    It--am I right in understanding what you say to mean, that 
because we have very low cost of funds in the United States, a 
lot of financial actors, both domestic and international, go to 
dollar-denominated markets to borrow. And some of that money 
that they borrow is being fed back into our equities markets. 
Is that the answer to my question? Or is there--if not, 
please----
    Dr. Johnson. I don't think it's a--I don't think the 
mechanism we're discussing particularly affects the equity 
markets. I mean, this is----
    Mr. Silvers. You don't. Okay.
    Dr. Johnson. It's a--the--there is an equity-market effect. 
Obviously, this is the cyclical effect of Fed, loosening and 
presume to tighten, and equity prices are based on a market 
view----
    Mr. Silvers. Right. Of course.
    Dr. Johnson [continuing]. Of what that tightening path is. 
And as you revise that view, that affects equity prices.
    I think the big dynamic and the carry trade that people 
worry about is funded in dollars, going to take risk in 
emerging markets----
    Mr. Silvers. In emerging markets.
    Dr. Johnson [continuing]. Which, for example, Goldman Sachs 
does within its own balance sheet, does private equity 
investments in China, funded by very low cost of capital in the 
United States.
    Dr. Zandi. Yeah, I don't----
    Mr. Silvers. Gotcha. Thank you.
    Dr. Zandi [continuing]. Think anyone's arguing that there's 
a carry trade into U.S. equity. It's carry trade--I borrow 
here, and I'm going overseas and buying assets in Asia. So, I 
don't know that----
    Mr. Silvers. Well, I thought that Roubini argued that it 
was U.S., but perhaps I'm mistaken.
    Dr. Calomiris. If I could comment quickly----
    Chair Warren. Thank you.
    Dr. Calomiris [continuing]. Just on the equity runup. I 
mean, there has been dramatic runup since March, but it's 
important to keep in mind there was a dramatic fall, you know, 
even after the TARP was passed, until March, you know, so we're 
still looking at equity prices that are down roughly 30 percent 
from what their pre-recession peaks were.
    Chair Warren. Okay. Thank you.
    Mr. Pollock. I agree with everything that Dr. Johnson said 
about the carry trade. There's one thing we could add, which is 
that when people talk about a carry trade, they're often 
talking about a cross-currency position----
    Mr. Silvers. Right.
    Mr. Pollock [continuing]. Where not only have you borrowed 
cheaply, but you are borrowed or you're short a currency you 
expect to be falling, versus, usually, fixed income in some 
other currency. So, there are two aspects to it. One is the 
cheap interest rate, the other is the expectations of a falling 
dollar.
    Dr. Calomiris. If I can just add quickly to that. So, you 
can also talk about--look, banks make their money, let's say, 
in about six different ways. One of them is by just taking up 
bets that come in, 99 percent of the time, profitable. Riding 
the yield curve is a form of a carry trade. It's taking 
interest-rate risk. Should banks really be all about taking 
interest-rate risk? I'm not sure. But, that's how they make a 
lot of their money.
    They also do carry trade in foreign exchange. There's a 
wonderful paper--I think it's very good--on the carry-trade 
puzzle. It turns out--like the equity-premium puzzle in 
finance, there's a carry-trade puzzle--it turns out that the 
carry trade, using any kind of reasonable utility models of 
risk, is just excessively profitable. But, when you look at the 
states of the world in which you lose on the carry trade, 
they're extreme states of the world, so that it's not a sort of 
normal distribution. So, the key----
    Mr. Pollock. Just like your Citibank position, Mr. Silvers.
    Dr. Calomiris. Exactly. And so--well, this is Alex's point, 
also, about how banks make money--so, the reason--I mean, banks 
do, and have traditionally, taken bets that, like carry-trade 
bets or riding the yield-curve bets, that are their bread-and-
butter, which sometimes finance professors criticize them for.
    Chair Warren. Thank you.
    [Laughter.]
    Chair Warren. We'll take that.
    So, I want to go back to a point you made, Dr. Johnson, 
just a minute ago. You started your testimony, both your oral 
testimony and your written testimony, talking about what needs 
to happen after a crisis like this, and you put very strong 
emphasis on the need for financial reforms, going forward, and 
how, without that, we really will be caught in a ``doom loop.'' 
And you talk about the need for reform in banking practices. 
You have suggested the need to break up large financial 
institutions. And we have talked here about how to back out of 
government guarantees so these markets can start to function 
normally again.
    You also just said you think we need to keep TARP open; 
otherwise, there would be a very uncomfortable conversation 
with Congress the next time we face a crisis.
    So, this puts, to me, the question--and that is, the TARP 
is what keeps these large financial institutions comfortable 
and powerful, and they are, as we speak, lobbying Congress for 
a continuation of the status quo, in terms of the means by 
which they earn their profits and the guarantees that they 
enjoy. So, I'm a little confused about why you would want to 
keep TARP open and keep the notion of a larger guarantee to 
come if you make mistakes, at the same time that you're 
advocating critical reforms that seem to be, at best, facing an 
uphill climb.
    Dr. Johnson. Well, it's a good question. And, you know, I 
am emphasizing the need for these fundamental reforms, break 
them up. And, I think, in the context--if you had a smaller 
system, where banks could fail, and that was--that's obviously 
what we don't have--I would still be in favor of being able to 
provide systemic support, when needed. And I think that is best 
practice. That's not to say you should have open-ended money 
available for these massive financial institutions. And just as 
a practical matter, if you are faced by--with a choice between 
collapse or rescue, if you get to that point, ever, because of 
some--something happened, you didn't--you know, the system 
didn't work as you designed, I would choose rescue, because 
collapse means a second Great Depression.
    Chair Warren. Well, I understand that. But, what I'm really 
trying to push on is the other half of the question, and that 
is--I understand your point, that we need reforms, but 
evidently we have not pinned reforms to the receipt of TARP 
money. And so, we are in the position of having given away the 
money without having asked for anything in return. And I'm just 
concerned about what that means and why we would want to extend 
in that direction.
    Dr. Calomiris.
    Dr. Calomiris. I'm more optimistic, apparently, than most 
of the people on the panel, about reform. And I want to just 
take a minute to tell you what I think is some good news, which 
is, I think, tomorrow, but maybe as late as Monday, the Pew 
Trust Task Force on Financial Reform, in which I am a member, 
is going to issue a report, which is going to be a bipartisan 
consensus of prominent economists and a couple of lawyers, on 
how we can solve a lot of these problems. And it may seem 
unlikely, but actually I think that some of the problems 
associated with ``too big to fail,'' especially, are solvable. 
They're not easy to solve, but they are solvable. And I think 
we've got a pretty interesting approach to it.
    So, I'll just leave it at that, except to say, that's part 
of the reason, I think, we don't need to keep this fund, this 
open-ended fund open, because I think, actually, we'll have 
another approach which is better.
    Chair Warren. Dr. Baker.
    Dr. Baker. Well, I really look forward to the report 
tomorrow.
    But, in terms of, whether we keep TARP open, I think that 
we had a lot of inaccurate information that was behind the 
original passage of TARP, and that resulted in us not putting 
conditions on it that should have been put on it. And from that 
perspective, I think it makes perfect sense to say, ``Well, why 
not go back to the drawing board. And in the event we do end up 
in a bad situation''--again, I--you know, we could say--and 
I've said many bad things about Congress, but the fact was, 
they generally do respond to a crisis, and hopefully, if we get 
into this situation again, we will put better conditions on it 
that will ensure that the banking system is reformed. So, 
again, maybe this will all become moot after tomorrow, but, if 
not, my view would be, start over with TARP.
    Chair Warren. I'm going to try and ask just one very quick 
question, and then I will yield. And that is--Mr. Pollock, I 
read your testimony with great care, and listened to what you 
had to say in your oral remarks. You make the point about 
investment, which I fully understand. But, the statute also 
requires that TARP money be used to deal with foreclosure 
mitigation. It's quite explicit that that is an intent and what 
Congress had in mind when it authorized the $700 billion. So, 
you're saying that you think HAMP is not the right way to do 
it. Can you give us some idea of what you think would be the 
right approach?
    Mr. Pollock. Thank you, Madam Chairman. I think it's a very 
important question.
    I read the sections of the statute, with some care, that 
deal with foreclosure mitigation. What they say is, ``When TARP 
acquires the mortgages''--in other words, it's about an 
acquisition of a mortgage--then we don't want you to act like a 
cold-hearted moneylender, we want you to carry out----
    Chair Warren. I didn't read that part in the statute.
    [Laughter.]
    Mr. Pollock. Well, I'd just suggest we could take a look at 
the sections. It seems to me--I don't give this as a legal 
opinion, but just as a reader of the statute--that it's phrased 
in the context of the statute's assumption that TARP was going 
to be in the business of acquiring mortgage securities and 
mortgage assets, and that when it did acquire these assets, 
then the statute was telling it, here's how you have to act as 
an owner of these mortgages. We want you to look at a 
modification with an eye to maximizing the present value for 
the taxpayers and to dealing in a fair way with borrowers.
    Chair Warren. So--I want to make sure I understand--so, 
it's your view that TARP is not designed as it has unfolded, 
that TARP money should not be used to deal with mortgage 
foreclosures?
    Mr. Pollock. That's correct. It's my view that reading the 
plain language of the statute, you would conclude that, yes.
    Chair Warren. Thank you.
    Dr. Zandi.
    Dr. Zandi. I would disagree. I think it's very important 
for TARP to focus on foreclosure mitigation. And I think the 
only way to do foreclosure mitigation that will be effective is 
to help incent principal write-down, that the current problems 
with the HAMP plan is the fact that it's lowering rates 
temporarily to get the monthly payment down, and not addressing 
the negative equity that many of these homeowners face. And 
moreover, that's resulting in less takeup, because the 
servicers and owners know that the redefault rates are going to 
be too high, and therefore, they're not HAMPing them. So, the 
only way this is going to become more effective--and, of 
course, there are many issues with that--moral hazard, adverse 
selection, fairness, a lot of issues--but, the only way to make 
it effective will be principal writedown.
    Chair Warren. Dr. Calomiris.
    Mr. Pollock. May I just add one point on----
    Chair Warren. Let----
    Mr. Pollock [continuing]. The statute.
    Chair Warren. Let me give Dr.----
    Mr. Pollock. If you will----
    Chair Warren [continuing]. Calomiris a chance.
    Mr. Pollock [continuing]. Come back to me. Thank you.
    Dr. Johnson. Could I just return to the question--sorry. 
What, did you call--I thought----
    Chair Warren. Sure.
    Dr. Johnson [continuing]. You called me.
    Chair Warren. No, no, I was--let's do it all. Mr. Pollock, 
go ahead.
    Mr. Pollock. I just wanted to add that I assume that there 
is, in the Treasury Department, an opinion of the general 
counsel of the Treasury Department covering this matter, which 
I would suggest that----
    Mr. Atkins. It's not very good----
    Mr. Pollock [continuing]. The Oversight----
    Mr. Atkins [continuing]. But, anyway----
    Mr. Pollock [continuing]. Oversight Panel might wish to 
request.
    Chair Warren. Thank you.
    Dr. Calomiris and then Dr. Johnson. You'll get the final 
word.
    Dr. Calomiris. My--yes. I don't know about--I know that 
your charge has to do with TARP, and I haven't read the 
statutory language carefully, and I don't think it's a TARP 
issue; I think it's not which pocket of the government we take 
the 50 to 100 billion, or whatever we're going to take; it's 
how to design the thing.
    And I want to agree with Mark Zandi, that if you look at 
the--and I mentioned it before--the Mexican program for 
business and consumer debt in the 1990s, they went for several 
years in gridlock, and then they finally said, ``Well, suppose 
that the government steps in and shares the cost with creditors 
of writing down the principal, but you have to do it within 6 
months.'' Everybody did it.
    Chair Warren. Yes.
    Dr. Calomiris. So, that was what Punto Final meant, meant, 
you know, final point, ``You do it now, or you don't do it.'' 
And so, that's been, I think, the essence of what's been 
missing.
    And the nice thing about that writedown of principal is 
that it works to help marginal borrowers, but not hopeless 
cases, because creditors won't do their 80 percent, or whatever 
it is, writedown on a hopeless case. But, if you're a close 
case, it really works.
    Now, there are other good ideas, but I think if you don't 
start from some sort of concept of government sharing costs of 
principal writedown, you're not going to get the job done.
    Chair Warren. Thank you, Dr. Calomiris.
    And Dr. Johnson.
    Dr. Johnson. Just to challenge, a little bit, the premise 
of your question to me a few minutes ago, which is, if we end 
TARP, if it ends at the end of the year, does that end ``too 
big to fail''? I don't think it affects it at all. I don't 
think you would even see that in the pricing of Goldman Sachs 
debt right now, because I think the guarantee is this implicit 
guarantee, and it's the understanding of what would happen in 
these rare scenarios that, you know, can ruin the world 
economy. So, that's one thing. I think those are separate 
questions.
    Secondly, I'm very much in favor of being prepared. One of 
the big frustrations out of the IMF is the culture of ministers 
of finance who don't want to talk about the bad things that can 
happen, and don't want to have any money available, because 
somehow having the money available will cause the bad thing to 
happen. We don't run the FDIC with zero capital. Right? If we 
had zero capital, maybe it would be more credible.
    Chair Warren. Actually, we do.
    Mr. Pollock. We do, at the moment.
    [Laughter.]
    Dr. Johnson. Yes, right. And it's not a good idea. You 
should be prepared. And being prepared means that you have 
money to use, there are clear conditions under which you use 
it. You war-game the scenarios in which you're going to use it. 
You talk about that clearly with Congress. You're prepared. 
This is Dean Baker's very good point. You're never going to be 
prepared if you wait for the crisis. Right?
    So, I don't--I think that there's a bit of a gap between 
those things, and I'm in favor of being prepared and ending the 
``too big to fail'' problem, which is the most obvious. I'm 
sure that ending it will only buy us another if we could end 
it, it would only buy us 20 years of tranquility; the banks 
will be back, one way or another in ways we can't now 
anticipate. But, unless you do that and address that directly, 
none of these other changes are going to make much difference.
    Chair Warren. Dr. Johnson, I take your point, and we can 
now take this conversation to the next phase, which is the part 
of the conversation about resolution authority and how we 
create ways to terminate large financial institutions that have 
failed if they didn't have adequate government support.
    But, you and I are going to have to continue that 
conversation on an airplane. Dr. Johnson and I both must leave, 
because we have to get back to classes.
    And so, do you still want to ask questions, Paul? You're 
welcome--I can hand the gavel over.
    Mr. Atkins. Well, having--you have, like, 2 minutes----
    Chair Warren. So--all right--so, with that, I'm going to 
say, we will hold the record open so that we can send 
additional questions for the record and so that you can make 
additional comments. We will send those to you.
    I appreciate very much both of our panelists coming here, 
our staff who put together this hearing, and very much 
appreciate all five of you coming. It was a very thoughtful, 
very informative hearing, and we appreciate hearing from you.
    Thank you.
    This hearing is closed.
    [Whereupon, at 11:30 a.m., the hearing was adjourned.]
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