[Senate Hearing 111-316]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 111-316
 
                             HEARING WITH 
                  TREASURY SECRETARY TIMOTHY GEITHNER

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

                                HEARING

                     CONGRESSIONAL OVERSIGHT PANEL

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           DECEMBER 10, 2009

                               __________

        Printed for the use of the Congressional Oversight Panel


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                     CONGRESSIONAL OVERSIGHT PANEL
                             Panel Members
                        Elizabeth Warren, Chair
                              Paul Atkins
                             Mark McWatters
                           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 ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT 
      PANEL......................................................     4
    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
      OVERSIGHT PANEL............................................     8
    STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
      PANEL......................................................    12
    STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY, UNITED STATES 
      DEPARTMENT OF THE TREASURY.................................    14
    RESPONSES OF HON. TIMOTHY GEITHNER, SECRETARY, UNITED STATES 
      DEPARTMENT OF THE TREASURY TO QUESTIONS FOR THE RECORD FROM 
      THE CONGRESSIONAL OVERSIGHT PANEL..........................    73


            HEARING WITH TREASURY SECRETARY TIMOTHY GEITHNER

                              ----------                              


                      THURSDAY, DECEMBER 10, 2009

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to notice, at 10:03 a.m. in Room 
SD-138, Dirksen Senate Office Building, Elizabeth Warren, Chair 
of the Panel, presiding.
    Present: Elizabeth Warren [presiding], Damon Silvers, 
Richard Neiman, and Paul Atkins.

  OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Chair Warren. This hearing of the Congressional Oversight 
Panel for TARP, with Secretary of the Treasury Geithner, is now 
called to order.
    Welcome, Mr. Secretary, to your third appearance before the 
Congressional Oversight Panel. We appreciate your being here 
and appreciate your commitment to coming every quarter.
    Yesterday, this Panel released its monthly oversight report 
for December. It was a comprehensive assessment of TARP's 
accomplishments and an exploration of the places where TARP has 
fallen short. You made it a busy news day by announcing, at the 
same time, that Treasury will extend TARP until October of next 
year. Thus, it seems that, between the two of us, we have 
intensified a vigorous debate, here in Congress, about what 
direction the program should take going forward.
    As the starting place for our conversation, I want to note 
the conclusion of our report. TARP was an important part of the 
government's rescue strategy and it helped rescue the financial 
system from imminent collapse. The apocalyptic fears that we 
were all suffering 14 months ago have not come to pass. And for 
that we owe a great debt of gratitude to the public servants 
who toiled through the darkest days of this crisis.
    But, as the report also highlights, TARP has been far from 
an unmitigated success. Credit for consumers and small 
businesses remains scarce. The foreclosure crisis continues 
unabated. And Treasury's mitigation programs have not achieved 
the scope, the scale, or the permanence necessary to stabilize 
the housing market. Large banks survived the crisis, with the 
help of government support, but smaller banks continue to fail 
at nearly unprecedented rates. And the FDIC is in the red for 
the first time in 17 years.
    Perhaps most disturbing of all, TARP created an implicit 
government guarantee for major financial institutions, a 
guarantee that is not shared by their smaller counterparts. The 
unprecedented government actions taken to stabilize the system 
have created a huge moral hazard that makes our system riskier 
and that infects the pricing of assets.
    We welcome you here today, Mr. Secretary, to engage in a 
constructive process of evaluating the TARP and assessing 
whether it is serving taxpayers in the manner that was 
intended. I look forward to your testimony and a productive 
discussion.
    And with that, I call on Mr. Atkins for two minutes of 
remarks.
    [The prepared statement of Chair Warren follows:] 

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STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL

    Mr. Atkins. Thank you, Madam Chair.
    And welcome, Secretary Geithner.
    Milton Friedman once said that, ``Nothing is so permanent 
as a temporary government program.'' Yesterday, we learned 
that--what most of us had already suspected--that TARP will not 
die at the end of this year. The program can no longer--I 
think--be considered a hastily arranged effort to arrest the 
financial freefall. I can understand why a Treasury Secretary, 
any Treasury Secretary really, would want to extend TARP. Why 
not? It's a free option, at taxpayer expense, and essentially a 
blank check to finance any macroeconomic stimulus initiative 
that the executive branch can imagine, to the tune of hundreds 
of billions of dollars. But, now that last year's emergency has 
abated, the rationale behind TARP as a salve for financial 
markets in distress no longer supports Treasury's choice, I 
believe, to extend it.
    The previous Congress reluctantly authorized TARP in 
response to an extraordinary financial panic. Would Congress, 
today, approve TARP? I cannot imagine it. That, essentially, is 
why it was extended, I believe. But, to extend TARP's borders, 
I think, is recklessness and irresponsibility in Treasury's 
role as a steward of the Nation's financial system.
    TARP continues to inflict great economic cost, both 
directly to the taxpayer, in the form of actual and potential 
tens of billions of dollars of losses, and indirectly, as the 
Chair said, of moral hazard, distorted incentives created by 
implicit government guarantees, and inefficient government 
interference in the operation of private firms. Moreover, the 
administration's legislative proposals will not solve these 
problems, I believe, but only institutionalize them.
    Now that unbridled financial panic, that was cited as the 
original justification for TARP, has disappeared, why deepen 
and prolong these costs? I think we're still too close to the 
events of last year to determine whether TARP was a success. 
I'm not convinced that we can even yet credit the program 
itself for stopping a panic in the markets.
    The United States Government basically threw out $8 
trillion in the form of guarantees, loans, and direct outlays 
to the financial markets. Something had to happen out of all 
that liquidity. And, in fact, I think this chart here shows how 
TARP rates as but a small portion of the total government 
outlays--this little red triangle here--compared to everything 
else--guarantees, outlays, and loans--that the federal 
government did last year.
    So, the lack of political accountability, I believe, may be 
TARP's greatest liability of all. And I think the Treasury 
Department has done very little to assuage many obvious 
oversight concerns that this panel has expressed.
    First, Treasury takes the position that TARP essentially is 
a revolving line of credit with a $700 billion limit on 
outstanding balances at any time. At your previous appearance 
before the panel, I asked for a legal opinion justifying the 
view that TARP is a revolving fund. We have yet to receive such 
an opinion from Treasury. I believe that this omission needs to 
be addressed as soon as possible.
    So, I thank you.
    [The prepared statement of Mr. Atkins follows:] 
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    Chair Warren. Thank you.
    Mr. Silvers.

    STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL 
                        OVERSIGHT PANEL

    Mr. Silvers. Good morning, and thank you, Chair Warren.
    I wish to begin by saying, Mr. Secretary, that I believe 
the administration's decision to extend TARP was the only 
responsible course of action. The financial system today is not 
fundamentally stable, in my opinion. The mortgage foreclosure 
crisis is accelerating. And the overall economic situation, 
particularly when looked at globally, is not good. The risk of 
a systemic problem in the coming months is significant.
    While I believe a tough resolution authority, such as 
proposed by the Obama administration and being acted on, 
hopefully, by the the House in the coming hours, would be far 
superior to TARP as a means of dealing with a possible future 
financial crisis. At the moment, Congress has not passed any 
such authority.
    In this context, the administration's decision was the only 
responsible one. And as I think we--you just got a little taste 
of--it was an act of political courage for which I think you 
deserve a substantial amount of credit.
    Now, we found, in our December report, released earlier 
this week, that TARP played a positive role in halting a 
runaway financial crisis in the fall of last year. I recognize 
this is hard to prove in the way that a mathematician would 
prove something, but I'm completely convinced this is true. And 
the reason I think this is true is--and the reason why my 
colleague Mr. Atkins has it wrong--is because there's a 
difference between liquidity and equity.
    Now, nonetheless, TARP is wildly unpopular among the 
American public. And this is not because the public does not 
understand what happened. It's because the public understands 
all too well what happened. This panel has found, in report 
after report, that TARP transactions have been undertaken on 
less than fair terms to the public, that there have been issues 
of transparency in key TARP actions, including the stress 
tests, that the underlying weaknesses in the financial system 
have been inadequately addressed, and finally, and perhaps most 
importantly, that key credit markets that matter to the 
American public remain weak, with real consequences for jobs.
    It did not have to be this way, and it does not have to be 
this way in the future. This administration has taken 
significant steps to make TARP a program that works in the 
interests of the American people and not simply in the 
interests of the financial firms we bailed out, including 
allocating significant monies to foreclosure relief and 
managing to avoid putting more money into the large banks. But, 
more must be done. TARP, in its second year, must, one, work 
for Main Street, not just Wall Street; two, always transact 
with private parties on terms that are fair to the American 
public; and, three, address the underlying weaknesses in our 
large financial institutions by cleaning up firms that are 
broken, rather than continuing to hope that time will heal all 
wounds.
    This week, President Obama spoke powerfully about the need 
to help solve the Main Street credit crisis so businesses can 
create jobs. And he spoke about the role TARP might play in 
that mission.
    I look forward today to hearing in more detail about those 
plans and, like the Chair and my colleagues, I'm very pleased 
to see you here today and thank you for your attention to the 
panel.
    [The prepared statement of Mr. Silvers follows:]
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    Chair Warren. Thank you, Mr. Silvers.
    Superintendent Neiman.

 STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT 
                             PANEL

    Mr. Neiman. Good morning, Mr. Secretary.
    Yesterday morning, our panel issued a report analyzing the 
overall effectiveness of TARP in a comprehensive year-end 
review. And while the report criticized several of TARP's 
shortcomings to date, it also gave a large share of credit to 
the Treasury Department and to Congress and, in my opinion, to 
the Fed and the FDIC, for the achievement of the primary 
objectives of the EESA. TARP's primary objectives were to 
restore financial stability and liquidity. And this has largely 
been achieved, as the report stated and I elaborated in my 
additional views.
    This reflection is critically important so that the 
American public can fully appreciate the depth of the crisis 
and how the Treasury's multi-prong response stabilized not only 
the financial sector, but also avoided a dramatic worsening, if 
not collapse, in the real economy. But, Congress also charged 
Treasury with using TARP funds in a manner to preserve 
homeownership, in addition to promoting jobs and economic 
growth. And we are now entering perhaps the most critical stage 
of Treasury's foreclosure prevention program.
    Hundreds of thousands of mortgage modifications in their 
trial phase are at risk of not converting to permanent 
modifications because servicers are not obtaining adequate 
supporting documentation from homeowners. The majority of the 
homeowners in these trials are, in fact, making their modified 
monthly payments, but they will soon be in danger of 
elimination from the program and will again face foreclosure as 
their trial period expires with documentation still deemed 
insufficient. I am sure you agree that neither homeowners nor 
our financial system can afford a trip back to square one.
    I look forward to reviewing these and other issues with you 
this morning, and, again, I thank you for your time with us 
this morning.
    [The prepared statement of Mr. Neiman follows:]
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    Chair Warren. Thank you, Mr. Neiman.
    I want to note that we are missing our fifth and newest 
panelist, Mark McWatters, who joined the panel by appointment 
last night. He can't be with us today because he has the flu. 
So, we are sorry, and we wish him well.
    As you can see, Mr. Secretary, we have kept our remarks 
brief so that we will be able to have the maximum amount of 
time for questions and answers. So, I would ask that you keep 
your remarks to five minutes.
    Mr. Secretary.

 STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY, UNITED STATES 
                   DEPARTMENT OF THE TREASURY

    Secretary Geithner. Thank you. Thank you, Chair Warren and 
members of the Congressional Oversight Panel. And thanks for 
the opportunity to come before you again to testify about this 
important set of policy issues facing the country.
    More than a year ago, as you noted, we faced one of the 
most severe financial crises in the past century, a deep 
economic contraction, and we've now begun to turn this around. 
Confidence in the stability of the financial system, in the 
security of American savings has improved dramatically, credit 
is flowing again, the economy is now growing, borrowing costs 
have fallen, businesses have raised substantial capital from 
private markets, housing prices have stopped falling in many 
parts of the country, and job losses have slowed at a pace that 
is more consistent with stronger recoveries than weaker 
recoveries.
    However, this is a very tough economy, and households and 
businesses still face very significant challenges. 
Unemployment, of course, is very, very high. Commercial real 
estate losses weigh heavily on many small banks, impairing 
their ability to extend new loans. Credit is tight for many 
small businesses. Foreclosures, driven now principally by 
unemployment, are very high.
    Today, I want to outline our strategy to address these 
challenges, going forward, and how we're going to wind down and 
ultimately exit the TARP. There are four elements to the 
strategy:
    First, we will terminate and wind down the emergency 
programs that were put in place at the peak of the crisis that 
were necessary to break the back of this financial panic. In 
September, we shut down the Money Market Guarantee Program, 
which earned taxpayers $1.2 billion. We've effectively shut 
down, now, the Capital Purchase Program, under which the 
majority of TARP investments in banks were made.
    Second, we will limit new commitments under this program in 
2010 to three areas: housing, small banks, and credit markets 
for consumers and small businesses. For housing, we're going to 
continue to work to mitigate foreclosures for responsible 
American homeowners as we take the steps necessary to continue 
to help stabilize the housing market. For small businesses, we 
recently launched initiatives to provide capital to small and 
community banks that commit to increase lending to small 
businesses. And we are reserving additional funds for 
additional efforts to facilitate small business lending. And 
finally, we're going to continue to support the securities 
markets that are necessary for credit flows to consumers and 
small businesses.
    Third, beyond these limited new commitments, we will not 
use remaining TARP funds--unless necessary to respond to an 
immediate and substantial threat to our economy stemming from 
financial stability, a determination that I will only make 
after consulting with the President and the Chairman of the 
Federal Reserve Board and submitting written notification to 
Congress.
    Fourth, we will continue to reduce our financial stake in 
banks and manage our other investments. We will keep the 
government out of the business decisions of these companies, 
and we will exit from our investments as soon as is practical 
and return ownership to private hands. This strategy requires a 
limited temporary extension of the authority provided by the 
Congress under the Emergency Economic Stabilization Act. It 
would be irresponsible to do otherwise.
    The expected costs of TARP have fallen dramatically. While 
we are extending the program, we do not expect, at this point, 
to deploy more than $550 billion, in total. We also expect up 
to $175 billion in repayments from banks by the end of next 
year, and substantial additional payments thereafter. And as a 
result, we now expect that the ultimate costs of TARP will be 
at least $200 billion less than was projected as recently as 
the August midsession review of the President's budget.
    We now expect to make--not lose, but to make money on the 
$245 billion of investments in banks. We estimate that the TARP 
programs for banks will yield a positive return of over $19 
billion. Indeed, banks have already repaid more than $116 
billion in investments. The stress test of the major financial 
institutions helped accelerate repayments by providing markets 
with the transparency and the confidence necessary for banks to 
be able to raise capital from private sources. These programs, 
as you know, have generated significant income, roughly $15 
billion, which have been used already to help pay down our 
Nation's fiscal obligations.
    Of course, we do not expect all TARP investments to 
generate positive returns. It's unlikely that we will be repaid 
for all of our investments in AIG, GM, and Chrysler. But, even 
there, the outlook, too, has improved. And you'll see new 
estimates in the report we're issuing today.
    We're going to continue to manage TARP in a transparent and 
an accountable manner. Earlier this morning or maybe sometime 
today, I'm not sure it's out yet, Treasury published the first 
annual financial statements for this program. These statements 
discuss in great detail the operations, the impact, the 
expected costs of the program. GAO provided an unqualified 
audit opinion of those statements, and concluded there were no 
material weaknesses in internal controls. And this is a notable 
achievement for the men and women that have helped put in place 
this very complicated, very important program in a very short 
period of time.
    Let me just end by emphasizing, as you did, the importance 
that we continue to work to reinforce the process of repair in 
our financial system. It is absolutely essential to try and 
make sure that we establish a strong recovery that will put 
Americans back to work. And it is very important, because of 
the consequences created by the actions necessary to put out 
this financial fire, that Congress move to adapt a strong and 
comprehensive package of financial reforms. And I am encouraged 
by the progress received to date. There's a lot of challenges 
ahead in getting a strong package in place. I know you've 
played a very helpful role in trying to help bring some 
thoughtful insight to those choices, and I hope you'll continue 
to work with us to help make sure we have a strong package of 
reforms in place as quickly as possible.
    Thank you.
    [The prepared statement of Secretary Geithner follows:]
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    Chair Warren. Thank you, Mr. Secretary.
    So, let's start with your statement. You say, as part of 
the extension, that you want to focus any new spending on 
housing, small banks, and supporting credit to consumers. Let 
me focus on the small business initiative. I understand the 
importance of the initiative. This is the one part of TARP that 
may have a direct effect on unemployment, or maybe the most 
easily traced effect on unemployment. And, that is, if small 
businesses can borrow money, then they'll be able to stay in 
business, they'll be able to keep their employees or hire more 
employees.
    So, I understand the importance of this, and applaud that 
approach, but my concern is that last spring Treasury launched 
the TALF program to stimulate small business lending. I think 
it was not a success. Later, Treasury announced a program to 
purchase up to $15 billion in securities backed by SBA loans 
and I believe it's the case that, so far, Treasury has not 
spent a single dollar under that program. And two months ago, 
Treasury announced a third program to support small business 
lending by providing low cost capital to community banks. And, 
as I understand it, so far nothing has happened.
    So, you know, it's not news to anyone that small business 
lending is important. Small businesses are closing every day. 
But, Treasury has now announced three plans, and clearly has 
not gotten the job done. What's going to be different now, Mr. 
Secretary?
    Secretary Geithner. Let me just start by saying the economy 
would not be growing today without TARP. Unemployment would be 
dramatically higher today without the actions we took to help 
stabilize the financial system and open up the markets that 
were so broken.
    Let me walk through those specific programs you pointed 
out.
    Small businesses, as you know, depend on banks, 
overwhelmingly, for credit. And small banks provide about half 
the credit small businesses get from the banking system as a 
whole. Small banks are among the most affected, still, by the 
challenges facing the economy as a whole. Many of them are 
going to need more capital. Those that need more capital are 
cutting back on lending and commitments; and, as you said, 
that's affecting small businesses.
    In our judgment, to address this requires a set of 
different approaches. We actually have been quite successful in 
bringing liquidity back to the securities markets that are 
important for small business lending. The TALF program has 
actually been very helpful; that's one reason why small 
business--SBA loans have increased so much. The SBA program, 
providing temporarily higher guarantees, lower fees, is also 
helping, although those programs are small in total magnitude. 
But, for this to work, we have to make it possible for banks to 
come get capital from the government so they can support more 
lending.
    Banks are, and have been, very reluctant to come. And the 
reason the 7(a) program you referred to has not yet been 
launched is because the institutions necessary to make that 
work have been very reluctant to come and do business with the 
government. And they're concerned that if they come, they will 
be stigmatized and they will be subject to the risk of 
conditions, in the future, that might make it harder for them 
to run their businesses.
    So, if we're going to be effective in dealing with this, we 
have to find some way to mitigate both the stigma of coming and 
the fear of changes in the future rules of the game that are 
going to apply to them. It is something we cannot do on our 
own. It's going to require some help from Congress, to help 
deal with those basic concerns.
    But, I think you're right to say that, unless banks have 
access to capital, this is going to be a harder problem to 
solve.
    Chair Warren. Well, let me just follow up though, Mr. 
Secretary, because I'm afraid I'm a little confused here. You 
were talking about small banks as the most effective lenders to 
small businesses. And we know this to be true. We've----
    Secretary Geithner. About half are lending----
    Chair Warren [continuing]. Written a report about this.
    Secretary Geithner [continuing]. Half of banks----
    Chair Warren. That's right.
    Secretary Geithner [continuing]. Are lending to small 
businesses----
    Chair Warren. But, I thought you started by saying you were 
going to terminate and wind down the Capital Purchase Program. 
And then I thought I just heard you say you were talking about 
putting more capital into small banks?
    Secretary Geithner. Yes, as a----
    Chair Warren. I'm just a little confused on this.
    Secretary Geithner. Again, the emergency programs that were 
necessary to break the panic and the capital programs for large 
banks can be wound down and put out of their misery.
    But, as you said, the President announced a program for 
capital for small community banks----
    Chair Warren. Right.
    Secretary Geithner [continuing]. A few months ago, and 
we're going to preserve that, and we're exploring ways to build 
on that. But, for it to work, Chairman, we need to make it more 
comfortable for banks to be willing to come.
    Chair Warren. So, let me just, if I can, pinpoint--how can 
it be that we can manage to put hundreds of billions of dollars 
into the hands of very large financial institutions, in what 
was effectively a matter of days, and 14 months into TARP, 
we're still talking about trying to figure out how to put much, 
much smaller amounts of money into very small financial 
institutions?
    Secretary Geithner. Let's go back a little bit. We actually 
did not give the large banks a choice, because it was necessary 
for the country that they have capital put in right away.
    Chair Warren. So----
    Secretary Geithner. But, let me say that small banks, and 
we made the capital quite attractively priced, as many of you 
pointed out, are reluctant to come. They don't want to come to 
do business with the government, they think it's a sign of 
weakness, not strength. Even though capital is the best way to 
help get lending going again----
    Chair Warren. So----
    Secretary Geithner [continuing]. They're reluctant. And 
so----
    Chair Warren. So, let me make----
    Secretary Geithner [continuing]. It's not----
    Chair Warren [continuing]. Sure, then, that----
    Secretary Geithner [continuing]. It's not about us or our 
willingness to do it, and as you said, we've tried, quite 
creatively, many different ways to design these things to make 
them more attractive, but we can't force them to come.
    Chair Warren. So, your statement here today is, the reason 
we're having a problem with small business lending is that 
you're making the money available to the small banks and they 
just won't come----
    Secretary Geithner. That is one----
    Chair Warren [continuing]. Pick it up?
    Secretary Geithner. That is one of the problems, and is 
absolutely a central problem in this area. The basic credit 
crunch you see across many small businesses across the country 
today is partly as a result of banks pulling back who don't 
have capital. To solve that, which is not the only thing you 
can do, banks have to be willing to come get capital.
    Chair Warren. All right. Thank you, Mr. Secretary. Mr. 
Atkins.
    Mr. Atkins. Okay, thank you, Madam Chair.
    Well, I salute you very much for producing an audit of the 
TARP program. I think that's great, and--as something that 
we've been, obviously, expecting, and that's super. So, I look 
forward to seeing that, later today.
    Again, I disagree with you, as far as how important TARP 
was for the situation with the economy today. That's basically 
the sine qua non of where we are with our meager recovery and 
whatnot. It's hardly, anyway, an approbation of the program.
    But, I want to focus on--with all this talk from the White 
House and elsewhere about--job creation initiatives coming out 
of TARP. What troubles me is what sort of parameters are you 
going to put around this? When you're talking about injecting 
money in the small banks that are not really troubled, but 
you're doing it for some other reason, I think you're very much 
drifting away from the intent of Congress in passing EESA. And 
I wonder, how are you going to analyze this and come to these 
determinations?
    Secretary Geithner. TARP was essentially about credit, 
recognizing that there is no growth without credit. The banking 
system is critical to the provision of credit. What we've 
designed for small banks, for community banks, is to help get 
small business lending going, securitization markets to open 
up, and housing more stable. These items are central to the 
basic objectives of TARP and fully consistent with the 
authority that Congress provided us.
    Mr. Atkins. Okay, well, I guess one thing I want to 
disagree with is that EESA was enacted in a crisis atmosphere 
where people were afraid that banks were going to go under. 
We're not afraid the community banks are going to go under. And 
obviously--well, I mean, maybe we are--I mean, it depends on 
what's going to happen in the future, which is, I assume, why 
you're keeping TARP alive, to react. But, your rationale of 
injecting money into them in order to spur lending is not a 
rational of keeping them from going under. It's for----
    Secretary Geithner. No, I wouldn't say it quite that way. 
Again, capital is critical for lending. Without capital, 
lending will decline. Well, that means that a viable business, 
that has good demand for its products, will not be able to 
grow. The risk is, its oxygen will be deprived and it will risk 
failure e.g., having to cut back on payroll, et cetera.
    Mr. Atkins. But, you're talking about the business, the 
lendee----
    Secretary Geithner. That's why----
    Mr. Atkins [continuing]. The borrower, right?
    Secretary Geithner. That's why credit----
    Mr. Atkins. But, we're talking--I'm talking about the 
bank----
    Secretary Geithner. No, exactly. But, again, banks are 
critical to that. They're not the only thing, but they're 
critical to that. And, you know, if you're a small business, 
and you were unlucky in your choice of bank, and your bank got 
exposed to a bunch of commercial real estate exposure, that 
bank's going to cut back on your credit. You're going to have 
to cut back on payroll and employment, and it takes time to 
find another bank, particularly in a system so traumatized by 
the crisis. But----
    Mr. Atkins. Well, I think, part of that is examiners and 
other people who are, through their scrutiny--and this is a 
natural human reaction, overreacting to a crisis----
    Secretary Geithner. You're exactly right.
    Mr. Atkins [continuing]. And to ask----
    Secretary Geithner. Right.
    Mr. Atkins [continuing]. Questions that maybe need to be 
asked, but through that sort of process, it then causes banks 
to recoil a bit and not be so ready to lend.
    Secretary Geithner. As Superintendent Neiman knows, this is 
a very important balance to get right. And you're exactly right 
to say, what happens in recessions after financial booms is 
everybody tends to overreact the other way. Banks may pull back 
more than is rational and supervisors may tend to overreact. 
These are independent supervisors, independent of Treasury----
    Mr. Atkins. Right----
    Secretary Geithner [continuing]. But we've been encouraging 
the supervisors to try to provide some more balance in the 
guidance they give through examiners across the country, so 
they don't overdo it. They issued some guidance on commercial 
real estate lending valuation standards a few weeks ago. I 
think that's very helpful. They're looking at additional steps. 
And you're right to emphasize the importance of trying to lean 
against overreaction by supervisors.
    Mr. Atkins. Okay. I want to go back to GMAC. Evidently, you 
all have decided that GMAC deserves some more funds from TARP.
    Secretary Geithner. Well, no----
    Mr. Atkins. And----
    Secretary Geithner. GMAC is part of the institutions we put 
through the stress test early in the spring.
    Mr. Atkins. Okay.
    Secretary Geithner. As for many institutions, we identified 
a significant capital need. And for all those institutions, we 
said, ``If you do not go raise capital from the private 
markets, if you're unable to, we will put capital into you, 
because it's important to the stability of the system.'' So, 
the only thing you had for GMAC is what we committed to do back 
then. And I think the ultimate estimates will be a little lower 
than we anticipated back in June when we were----
    Mr. Atkins. But, apparently, you've decided to inject more 
capital into----
    Secretary Geithner. No, actually somewhat less than we 
estimated in June.
    Mr. Atkins. But, the more recent round, where they've come 
back----
    Secretary Geithner. No it's----
    Mr. Atkins [continuing]. And asked for----
    Secretary Geithner. Just like in June, when we released the 
estimates in the stress tests, the estimated capital needs for 
these institutions, we gave them a period of time to go out and 
raise capital from the private markets. Overwhelmingly, banks 
were able to do that. In fact, it's much better than that, 
because you see private investors wanting to come in and 
increase their stakes in banks across the country now, allowing 
the taxpayer to get out of those investments. It was never 
going to be possible for GMAC. They're in a uniquely difficult 
situation. All we're doing is----
    Mr. Atkins. I'll say.
    Secretary Geithner [continuing]. Committing to put the 
capital in we committed to do back in June, probably at a 
slightly lower level than we thought back in June.
    Mr. Atkins. I'll follow up later.
    Thank you.
    Chair Warren. Thank you.
    Mr. Silvers.
    Mr. Silvers. Mr. Secretary, when EESA was enacted and TARP 
began, my read of the statute was that the purpose of TARP was 
not to rescue particular institutions, even particular firms. 
It was to preserve the system. And for the purpose--and the 
statute was, I think, pretty clear about this--not because the 
system was a thing of beauty or because of our particular 
concern for those businesses, but because of the role the 
financial system played in providing the resources necessary 
for the real economy to function.
    In that regard--and stop me if I've got it wrong--in that 
regard, it seems to me that you appear to be identifying--you 
and the President appear to be identifying that aspects of this 
system continue not to be working adequately and continue to 
need more support, particularly small business credit. Am I 
reading your own words back at you correctly?
    Secretary Geithner. Exactly. There has been a dramatic 
improvement in the overall stability and functioning of the 
U.S. financial system. But, parts of the system are still very 
damaged and broken. I'll mention just three. Housing markets 
are still overwhelming dependent on the temporary programs put 
in place by the government. Commercial real estate financing is 
still very difficult, as you would expect with an economy 
coming through such a large basic adjustment. And there is a 
significant risk of a credit crunch across small businesses; in 
part, because of the small banks that are still somewhat 
exposed to the risk of losses ahead.
    I don't really know anybody who would look at our system 
today and not say that those parts of our system are still 
significantly impaired. And it's not a surprise, given the 
scope of the damage caused by the crisis.
    There is a very strong economic case to use the authority 
provided, and it was perfectly consistent with the objectives 
of the authority, to continue to work to do that. But, that's 
not the only reason we're extending TARP. Mr. Silvers, as you 
understand, we still need to keep in reserve some ability to 
respond if we were to face again a serious escalation of 
systemic concern. It would be deeply irresponsible and 
imprudent, at this stage, only a year into this recovery 
process--only three months after we have the first period of 
growth--to stand back and walk away from those challenges 
ahead. That would leave the taxpayer at much greater risk of 
future losses. Ultimate costs of the program would go up, not 
down. That's why we've judged it would be prudent to put in 
place this limited qualified extension.
    Mr. Silvers. Now, if I may pick up on your exchange with 
the Chair, there are, under the TARP, two types of programs. 
You have programs where capital has been provided to firms who 
are then TARP recipients. And you have programs where TARP 
funds have been injected into markets in ways--such as the TALF 
and the PPIP--in ways in which the various private parties that 
may touch those funds are not actually TARP recipients. Is that 
a fair characterization of the--of one way of understanding the 
two--the range of programs you have?
    Secretary Geithner. That's right. Programs for individual 
institutions. The institutions are TARP recipients. Although, 
as you said, they're not for the benefit of the institutions; 
they're because of the importance of the system. Programs that 
are about marketwide support to capital markets, securities 
markets, are designed differently.
    Mr. Silvers. Now, in light of the concern that you stated 
that small banks have with receiving TARP money, particularly 
the issue of reputational risk, which I find that an 
understandable concern, and I'm not sure how congressional 
action can change that--in light of that, and in light of your 
description of the small business problem as a market problem, 
not a--it's not a particular firm that's weak, here, that's the 
issue--in light of that, why not take the market-support 
approach rather than the firm-support approach in the small 
business area?
    Secretary Geithner. Our view, from the beginning, is, you 
have to work on both channels of credit. You have the bank 
channel and you have the capital markets, and you need both. If 
you can make a capital-market channel work better it creates 
competition for banks. It might pull the banks out of their 
concern and uncertainty. You need both to work. But, these are 
small business credits. They are very small loans. The capital 
markets were never going to be called a significant provider 
of----
    Mr. Silvers. Mr. Secretary, can I----
    Secretary Geithner [continuing]. Support--in the future, so 
you have to work on both.
    Mr. Silvers. My time is running out, so I just want to be 
clear of what I'm saying to you. I'm not suggesting that you 
can have a public capital-market solution here.
    Secretary Geithner. Right.
    Mr. Silvers. I'm suggesting that, if you want to move this 
money to small business quickly, that, both from the 
perspective of getting the banks involved without making them 
into TARP recipients and from the perspective of tapping small 
bank expertise, that you should be looking at structures that 
move money; and, thirdly, to avoid the problem, that's been 
present in TARP from day one, of handing money to banks and not 
knowing what use is made of it, that the right way to do this 
is to do this through a conduit that moves TARP money more or 
less directly to small firms, with banks as a manager of the 
process rather than as an intermediary.
    Secretary Geithner. I generally agree with you, and I think 
the most promising ideas out there lie in that realm. Banks 
still need to have risk on the table----
    Mr. Silvers. No, I agree with you there.
    Secretary Geithner [continuing]. For that to work, and--
because we don't think the government--and we couldn't do it 
through TARP--should be in the business of providing loans 
directly to businesses.
    Chair Warren. Thank you.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    I'd like to come back to the foreclosure mitigation 
program. Over the last few weeks, there's been a lot of media 
focus on the 25 percent of those individuals who are in trial 
modifications and who are not current on those trial 
modifications. In fact, some may not even have made the first 
payment. I'd like to focus, though, on the 75 percent of those 
borrowers who are making payments in a timely fashion. And for 
them, January 1 of this new coming year will not only bring in 
a new year, but will also be a fateful day for almost 400,000 
homeowners whose trial modification period expires. Most of 
these homeowners have made at least 3 months of timely payments 
and, in some cases, four, five, or even greater, as required 
under the program. However, less than half of these homeowners 
have submitted all the required documentation. And, by some 
estimates--and I've talked to some of the largest servicers 
directly--half of this group, the group that has submitted all 
of their documents, have yet to have their documentation 
validated by the servicer.
    Now, given these numbers that I've stated, it looks as if 
possibly over 75 percent of the homeowners who have 
demonstrated a willingness and ability to make timely payments 
on their trial modifications may be eliminated from their 
program and once again face foreclosure.
    Now, you have recognized the urgency of this situation by 
implementing SWAT teams at the largest institutions, among 
other efforts, to engage homeowners and servicers to facilitate 
both the submission of documents by borrowers and the 
validation of that documentation by the servicers.
    So, fundamentally, my question is, does this expected low 
conversion rate imply that the original documentation standards 
are not set correctly and are too onerous? Or do you think that 
the standards are correct and any liberalization would impact 
the integrity of the program?
    Secretary Geithner. Well, as you said, we're working on 
this on many, many fronts. We've taken a careful look about 
whether we can streamline the documentation requirements to 
help address this. We've tried to mobilize a huge amount of 
resources to make sure services are processing these and 
convert to permanent modifications as quickly as possible. 
We're working very closely with counseling agencies across the 
country to assist them in doing a better job of helping people 
benefit from a permanent modification. And I think we're going 
to be able to make some substantial progress in the area, 
although there's a lot of challenge in here.
    I just want to emphasize, though, what we've achieved so 
far. Almost three-quarters of a million Americans now are 
benefiting from modification programs that reduce their monthly 
payments dramatically--on average, $550 a month, $6,000 a year. 
That is a meaningful amount of support for income for some of 
the people hurt most by this crisis.
    Now, we want those modifications made permanent. And banks 
will not get a dollar from the Treasury unless they convert to 
permanent modifications. And we are using a tremendous amount 
of force and persuasion to try to make sure we get those 
conversion rates up to a reasonable level.
    Mr. Neiman. But, if those--and I agree with you, those 
reductions in monthly payments are significant--but if, at the 
end of the year, this first group cannot convert to permanent 
modifications, they will lose those monthly payments and now be 
faced with the same situation of being offered a non-HAMP 
modification by the servicer, which will likely increase those 
payments or foreclosure actions proceeding.
    So, are you considering extending again the opportunity for 
the trial modifications so that borrowers who have not had 
documentation validated----
    Secretary Geithner. We're going to work very hard to avoid 
the outcome you describe. We have a huge stake in trying to 
make sure this program reaches as many eligible homeowners as 
possible in order for them to benefit in real economic terms 
from this program. We're not there yet. But, I think we're 
going to be able to make substantial progress.
    Mr. Neiman. Okay. We look forward to some of your 
performance numbers being issued today, and I note that----
    Secretary Geithner. I think we issue them today. And, you 
know, one of the benefits is that you can see performance, 
servicer by servicer. Everybody can look and see how many 
eligible homeowners they are reaching, and a number of them 
need to get their numbers up and do a better job. And they have 
the ability to do that.
    Mr. Neiman. There are two other big issues----
    Secretary Geithner. It's about will and effort.
    Mr. Neiman. There are certainly two other big issues around 
both negative equity and unemployment. You mentioned 
unemployment in your opening remarks. I appreciate the response 
from Mr. Allison as a follow up to our last hearing, promising 
to review some of the proposals that I have been promoting for 
quite some time, with regard to emergency mortgage assistance 
programs. And I look forward and thank you all for agreeing to 
meet separately on those issues.
    Secretary Geithner. Well, you're right that those are two 
areas where there're a lot of ideas out there of ways we can 
help modify this program. And you're also right to emphasize 
that this program was not designed to start with a principal 
reduction. And we made that choice because we thought it would 
be dramatically more expensive for the American taxpayer, 
harder to justify, create much greater risk of unfairness, and 
our program was not designed to do that. Our program, though, 
is doing what it was designed to do: to reach many, many people 
across this country and to substantially reduce monthly 
payments. And we are always looking at ways to try to help make 
sure this program reaches as many people as possible.
    Mr. Neiman. Thank you. My time's expired.
    Chair Warren. If I could, Mr. Secretary, I'll just pick 
right up on that point. And that is the deliberate decision not 
to deal with negative equity, because it's created an irony 
against the backdrop of the subprime mortgage crisis that 
started with zero-down loans and 100-percent financing. We now 
are creating modified loans, supported by the United States 
Government, that have 110-percent loan-to-value ratios, 120-
percent loan-to-value ratios, 125-percent loan-to-value ratios. 
We have no experience with long-term payment of deeply 
underwater mortgages, but the little bit of data that we do 
have available about even modestly underwater mortgages 
suggests that, over the long term, second only to the question 
of affordability of the payment, being underwater on a mortgage 
means that people are unlikely to continue to make their 
mortgage payments.
    So, I want to push back on this a little bit. Are we 
creating a program in which we're talking about potentially 
spending $75 billion to try to modify people into mortgages 
that will reduce the number of foreclosures in the short term, 
but just kick the can on down the road so that we'll be looking 
at an economy with elevated mortgage foreclosures, not just for 
a year or two, but for many years? How do you deal with that 
problem, Mr. Secretary?
    Secretary Geithner. Our program reduces the basic overall 
obligation of these mortgages. It does not increase it. And we 
have people in these programs with very, very high LTV's, 
substantial amounts of negative equity, able to qualify. And it 
does bring down the overall burden.
    Chair Warren. I'm sorry, are you saying that you are doing 
principal reduction?
    Secretary Geithner. No, but the change in payment schedule 
does reduce the basic value of the obligations in the mortgage. 
But, I think that it's more helpful for me to say it this way--
I think you're right to point out the huge problem the amount 
of negative equity across the system presents for us. The 
question is what to do about it?
    The whole foreclosure crisis across the country now is 
really driven by what happened to unemployment and what 
happened to the income of Americans. The best things we can do 
now to help mitigate that risk is to help get the economy 
growing again, bring unemployment down as quickly as we can, 
put people back to work, and continue to make sure we're 
providing overall stability to the housing market. And we've 
seen, actually, better results on prices, and expectations 
about future prices, than many of us expected. We've brought 
interest rates down to a very low level so that houses are much 
more affordable now. And housing demand is actually picking up 
a bit.
    The question is not whether what you've described is a 
problem; you've been eloquent and persuasive about the scale of 
the problem. The question is whether, in addition to those 
actions, we should embark now on a program that would be a 
dramatic additional cost to the taxpayer, helping relieve 
people of that obligation. And the problem in doing that, apart 
from its expense, is the basic sense of fairness and what it 
does to incentives in the future.
    But, I think you've got--you're asking the right question, 
the question is do we have a solution that's fair?
    Chair Warren. Well, you know, I really would like to push 
back. You talk about relieving the homeowner. Let's keep in 
mind this is about whether or not the investors in these 
mortgages, some of whom made substantial profits during the 
glory days, should be required to take the losses when the 
mortgages that they invested in turn out not to be worth----
    Secretary Geithner. Through what----
    Chair Warren [continuing]. Nearly so much as they had 
promised. You know, the----
    Secretary Geithner. Through what means is the issue.
    Chair Warren. Well, one means would be bankruptcy, which 
doesn't----
    Secretary Geithner. That----
    Chair Warren [continuing]. Cost the American taxpayer any 
money.
    Secretary Geithner. That would be one option. And we've----
    Chair Warren. Another that I am deeply concerned about is 
the extent to which the current programs that Treasury advances 
send a signal to investors in mortgages. And the signal is, 
``Sit on the sidelines. You know, there's no reason to come to 
the table and negotiate these mortgages. You can wait for the 
U.S. Treasury to offer a bribe to get you to the table to do 
what should have been in your interest to begin with.'' We all 
understand that foreclosures don't just destroy value for 
homeowners, they destroy value for the investors themselves. 
And yet, investors are hanging back. They are not engaging in 
rational write-downs that would keep a good stream of payments 
coming from these businesses. Instead, holding out for larger 
streams of payment and holding out for help from your Treasury 
Department.
    Secretary Geithner. Well, I don't think I quite agree with 
that. You're right that bankruptcy reform is one option that 
might help change the incentives a bit. And you've been an 
eloquent advocate of those reforms. As you know, the President 
of the United States did propose, and was supportive of this 
option, but Congress was unwilling to act, in part, because of 
concerns that it would make it harder for capital to come back 
into the banking system and help support improvement in housing 
markets that have broader returns. Congress considered this, 
but chose a different strategy.
    I don't agree that the programs we have in place are 
working against this process of repair that you're--we all 
support. I think, actually, they're helping. And, we're seeing 
quite a lot of new interest and willingness from investors, 
people who hold these things to renegotiate and write down. 
We're seeing much more of that than you saw before, and I think 
that's encouraging. I don't think we're deterring that.
    Chair Warren. You know, I have to say, Mr. Secretary, I 
lived through a big housing boom and bust down in the 
Southwest, during the late 1980s. In fact, I lost money on the 
house we had to sell during the bust. But, the government 
didn't step in and help in the same way. The lenders had to eat 
the losses for bad investments that they got involved in, and 
so did the homeowners. This was not a question of taxpayer 
support there.
    Secretary Geithner. This crisis simply is not like that 
crisis. It's much more dramatic in its scale and impact, much 
broader effects on people across the country. And I don't think 
there's anything from that basic crisis in the past that would 
have been helpful now.
    One could take the view that it was a mistake to try to 
give Americans the ability to see a substantial reduction in 
their monthly payments and therefore improve the odds they get 
to keep their house. I don't agree with that. I don't think you 
do, either. And I think, actually, this is a program that's 
doing quite well in delivering a very meaningful improvement in 
the basic financial economic position. As I said, it helps 
almost three-quarters of a million Americans now. And I think 
it's been part of what has actually been a successful effort to 
bring some modicum of stability to housing prices much earlier 
than many people would have thought.
    Chair Warren. Thank you, Mr. Secretary. I apologize to my 
fellow panelists for going over my time.
    Secretary Geithner. I ask for----
    Chair Warren. No. I apologize to my fellow panelists for 
running over by two minutes, and I'm going to skip my next 
round of questions.
    Mr. Atkins.
    Mr. Atkins. Thank you very much.
    Actually, I think you had some good rationale there with 
respect to negative equity. I think it would be a mistake to 
start dumping money into that. I don't know that there's enough 
money around to, once you start getting to that and the issues 
of fairness and everything else. I agree with you on that.
    I wanted to turn to, as far as TARP goes, the exit that we 
were talking about earlier, that you alluded to. The recent 
Capital One warrants auction, I guess you can call that a 
success of some sort. I was wondering how you foresee this 
going forward in the future. Are you still planning on engaging 
in negotiated price buybacks with TARP banks before 
establishing an auction? What is the current view of Treasury 
as to how you're going to unwind this?
    Secretary Geithner. I think it's possible that we're going 
to still see a mix of approaches, going forward; in part, 
because, for many small banks, an auction is not going to be a 
realistic approach. But, an auction is a good approach for many 
cases and that gives a way to let the market determine the best 
price. We think that'll help maximize the return to the 
taxpayer.
    In the recent one you refer to, it was oversubscribed by 
about a factor of 12. And, the ultimate test as to what these 
things are worth is established by what people are willing to 
pay for them. So, I think it's an approach that is going to 
deliver better returns than the alternatives in this case. But, 
it won't be possible for all the institutions in which the 
government took warrants.
    Mr. Atkins. So, then, as we go forward, and you talk about 
putting money into all sorts of community banks and others, 
what is the approach? What is actually the decisionmaking 
process of, you know, how the money goes in and what is 
received by the Treasury in return for a myriad--we already 
have 600-and-some banks that are participants.
    Secretary Geithner. Well, the program, at its beginning--
and I was not the Secretary of the Treasury then, but I agree 
very much with this basic design--was--to make capital 
available on the same terms to all institutions. So, the same 
capital that was provided to some of the largest institutions 
was made available to any other institution that made similar 
standards for eligibility. And my predecessor and the 
supervisors put in place an elaborate process for determining 
viability to try to screen institutions. That process is in 
place today, and it will be used going forward.
    We're changing strategy in some important ways. We do not 
believe it's necessary to keep Capital Purchase Program open 
for large institutions. So, the remaining programs we're going 
to provide, that provide capital, will be for institutions 
below a certain threshold.
    We're trying to design these programs in a way that's going 
to maximize the chance that they spur lending. We want them to 
come as a sign of strength, not a sign of weakness, as we just 
discussed with the Chair. But, we're going to leave in place a 
basic viability standard, to make sure that we're not 
supporting nonviable institutions.
    Mr. Atkins. Sir, how do you determine that?
    Secretary Geithner. Well, the bank supervisors have a 
process in which they look at----
    Mr. Atkins. Capital ratings or----
    Secretary Geithner [continuing]. All sorts of measures of 
financial strength. And, this is a highly imperfect process, 
but it's better than the alternatives.
    Mr. Atkins. Okay. Well, then, to go back--I'm sorry to go 
back to GMAC again--so, I understand, at least on the call I 
listened in on, that there is a negotiation going on. And I 
guess I want to try to understand how--I mean, who is actually 
the decisionmaker--is it Assistant Secretary Allison, or is it 
you--as far as determining, you know, under what terms a 
further extension of credit is given, viewing the particular 
facts----
    Secretary Geithner. Well, the financial terms will be as 
defined in the other programs. They're not differentiated 
financial terms. The question ahead is what plan for 
restructuring will the new board and management of this firm 
embark on? We want to be confident that there is some basic 
path to exit and viability; and what are the incremental 
capital needs, relative to what was identified back in June 
under the stress test.
    Mr. Atkins. And so----
    Secretary Geithner. Those are the issues ahead.
    Mr. Atkins. Okay. And so, two of those board members are 
Treasury picks. How much interaction do you have with people on 
the board?
    Secretary Geithner. Well, we have just about what you'd 
expect and hope, and not more than you fear, in the sense 
that--again, our obligation----
    Mr. Atkins. Our fears are rampant. But, anyway----
    Secretary Geithner. I'm not sure what your fears are, but 
our obligation is to make sure that this institution has a plan 
in place for getting back to viability without government 
assistance, that has a reasonable prospect of working. And we 
want the plan to be as strong and robust as possible. At the 
same time, of course, we need to reassess what the incremental 
capital needs would be, and that's the process we're 
undertaking now.
    Mr. Atkins. Okay. My time is up.
    Chair Warren. Thank you.
    Mr. Silvers.
    Mr. Silvers. Mr. Secretary, I'd like to shift, in terms of 
the wind-down discussion, to the large banks, which we've 
mentioned a couple of times. My New York Times this morning 
tells me that--something that I think we all kind of already 
knew--which is that Citi would very much like to return its 
TARP money. Citi argues that they have lots of cash--at least 
that's an argument they've made to this panel--and that having 
lots of cash means they should be able to return the TARP 
money. I don't have your experience with banks, but that 
doesn't strike me as exactly the right argument.
    Secretary Geithner. I think you're right.
    Mr. Silvers. Can you explain to me what the criteria is for 
being able to return the money, and what relevance, if any, 
having lots of cash has?
    Secretary Geithner. A few critical points.
    One, it is a good thing for the country that banks are 
eager to get out of the investments the government was forced 
to put in.
    Mr. Silvers. Oh, I agree.
    Secretary Geithner. That is healthy, necessary, and 
desirable.
    Two, it is a very good thing for the country that private 
investors are willing to come in and, in effect, take the 
government out of those positions. We are not prepared to have 
this money come back in a way that would leave the system or 
these institutions with inadequate capital to face their 
challenges ahead. If we did that, that might seem good, near 
term, but it would be bad for the country as a whole, because 
it would leave the system with too little capital.
    So, what we've done is to say, ``We want you to go out and 
raise capital--raise capital for the markets so you can repay 
the taxpayer with interest.'' And that's what's happening.
    Mr. Silvers. Mr. Secretary, do I have it right that the 
requirement is that you should be able to raise the entirety of 
your TARP money, that we're not allowing repayments in stages? 
Is that correct?
    Secretary Geithner. I don't think I would say it quite that 
way. And this is a difficult thing for me to do, because, under 
the laws of the land, the supervisors are responsible for 
setting the terms of exit. But, effectively, all----
    Mr. Silvers. Surely you know a few things about how they're 
doing it.
    Secretary Geithner. I do know a few things about it, and I 
have some views on that. But, the basic objective is to make 
sure that, as we exit, which we're going to do as quickly as is 
prudent, we're leaving the capital position of the institutions 
stronger, not weaker.
    Mr. Silvers. Very good. In this regard, Mr. Secretary, 
obviously Bank of America has repaid--is now in process. It can 
be a little hard to follow the steps in which they're doing it. 
Can you explain, are they repaying all of the TARP money, and 
have they raised equity capital to do that repayment in an 
amount that is equivalent to both the TIP and CPP?
    Secretary Geithner. Well, the good news is that I got a 
check for $45 billion last----
    Mr. Silvers. That's nice. I'm interested what the source of 
funds for that check is.
    Secretary Geithner. And, as you said, they raised a 
predominantly common stock. But, I'd be happy to respond in 
writing or have the Fed respond in writing with the details of 
that.
    Mr. Silvers. All right. But----
    Secretary Geithner. Actually, I think the details are out 
there clearly in the market, because----
    Mr. Silvers. Yeah.
    Secretary Geithner [continuing]. That should be a public 
offering.
    Mr. Silvers. Right. But, the policy appears to be--judging 
from what one reads out in the public, the policy appears to be 
to raise all the equity, in preferred or common stock, all of 
the money necessary to repay, not a portion. Is that your 
understanding?
    Secretary Geithner. I think that is generally a desirable 
approach, because a cleaner exit is better than a staged exit. 
I'm not sure that's going to be possible in every circumstance, 
but I think it's very desirable that these institutions are----
    Mr. Silvers.  Yes.
    Secretary Geithner [continuing]. Eager to go out and have 
private investors come out and take the government out of it.
    Mr. Silvers. Mr. Secretary, Andrew Ross Sorkin, a reporter 
for the New York Times, who, judging by his book, seems to 
often know more than we do, has written about the Bank of 
America repayment, that, quote--well, actually, I'm not going 
to quote, because it'll take too long. He said, basically, two 
things. He said, one, the FDIC didn't think they should be 
allowed to repay. And, two, that the reason why they were so 
eager to repay was so that they could increase their executive 
compensation that could be offered to a successor to their 
current CEO, Mr. Lewis. Can you tell me, are either of those 
statements true?
    Secretary Geithner. I don't want to speak to the first 
question. I think it would be inappropriate for me to do that.
    On the second question, I think you're absolutely right, 
that the compensation restrictions that we put in place for 
firms that took exceptional assistance were very tough 
restrictions. And they were appropriately tough restrictions. 
With these and other restrictions, you're going to be viewed as 
stronger, in the eyes of the market, if you're an institution 
without public capital. These banks were eager to come and 
repay. And I think we should welcome that, encourage it, and I 
expect to see substantially more repayments.
    Mr. Silvers. I'm not going to press you to reveal, perhaps, 
what you view as a confidence, but it strikes me that it's a 
matter of deep concern if the FDIC doesn't agree with allowing 
the repayment because the bank is too weak. My time is about to 
expire, so I'm going to express a further thought rather than 
pressing you on this.
    Effectively, the strength with which Treasury and the 
regulators sense that the premature repayment, when these banks 
are weak, is bad for the country. That is an extremely 
important thing. And----
    Secretary Geithner. Right. And we would not----
    Mr. Silvers. And----
    Secretary Geithner. And we would not allow that or support 
it.
    Mr. Silvers. Right. And I want to encourage and bolster 
your viewpoint there, and I would be concerned, deeply 
concerned, if those kinds of considerations were overridden by, 
no matter how well meaning, any desire to increase people's 
executive pay.
    Secretary Geithner. No, I agree. Again, we would not 
support that. And I think that the agreement you saw reached in 
that context strengthens the institutions. The best test of 
that is what happens, going forward. But, to have private 
investors come in and willing to put substantial amounts of 
capital is a sign of confidence and strength.
    Chair Warren. Superintendent Neiman.
    Mr. Neiman. Thank you.
    Now, we all acknowledge the crisis that was avoided by the 
impressive efforts of the multi-prong efforts by the 
administration and other agencies. And we hear words, some of 
which you used this morning--last week, Chairman Bernanke 
characterized what we avoided as a ``global financial meltdown 
of a magnitude unseen for generations, a second Great 
Depression, cataclysm.''
    As I stated in my opening, I think it really is imperative 
that the American public understand the linkage to the real 
economy, as well as what really was avoided. Could you share 
with us your descriptions of the sequencing of what could have 
played out with the failures of large interconnected firms and 
the direct linkage to the real economy? Because I think that 
really is at the heart of assessing the effectiveness of the 
program.
    Secretary Geithner. In September of last year, for the 
first time, I think, in almost 70 years, Americans across the 
country were starting to take their money out of banks, banks 
that were strong with no connection to the weaknesses in the 
subprime crisis, because they were scared about the security of 
their savings. Economic activity around the world come to a 
stop. Markets froze around the world. The value of American 
savings fell by more than 40 percent. People were faced with 
the prospect of having to work 10 years longer than they 
expected because of the loss of the value of their savings. 
Millions of Americans lost their jobs, thousands of businesses 
failed that did not need to fail, deeply unfair and unjust 
damage to the basic confidence of Americans in the fairness and 
justice of our system. Deep loss of confidence around the world 
in our basic financial stewardship of this country.
    It is not something that is about a set of individual 
institutions or Wall Street, it is about the basic fabric of 
confidence in America, basic security Americans have in their 
future. When you allow that to suffer so--cause as much damage 
as you're seeing, it takes a huge amount of time to repair that 
basic damage.
    So, financial crises are unjust and traumatic, because they 
cause deep damage to people who were careful and prudent and 
had nothing to do with the crisis. And the scars that creates 
are long-lasting, and we are going to live with, for a long 
time, the challenge of trying to repair that damage.
    Mr. Neiman. Thank you for that. You know, one issue that is 
also addressed in our report, issued yesterday, are issues 
around moral hazard. And we have debate, among the panel 
itself, as to the extent that TARP increased the risks and 
costs of moral hazard. I think moral hazard was almost built 
into the fact of the emergency efforts. The question is, will 
government always be there? I think you just explained the 
criticality of why the government had to step in and why--I 
think your position, which I also agree with, is that we have 
to address ``too big to fail,'' and that is an imperative for 
our Congress, which they are debating currently.
    I strongly agree with the need for a systemic regulator and 
a resolution authority. But, I'd like your views on whether we 
should be, in effect, allowing institutions to grow to such 
largeness and complexity to be characterized as ``too big to 
fail.'' And isn't it time to engage in a debate in this 
country, now that we all recognize the safety net that there is 
for financial institutions, the benefits that financial 
institutions, particularly depository institutions, have from 
FDIC programs, from Fed as a lender of last resort? Isn't it 
time to debate what we want our institutions to be? Are they 
social utilities that should be able to engage in speculative 
and high-risk activities?
    Secretary Geithner. Well, I think I agree with everything 
you said. The tragic choice in financial crises is to solve the 
problem, put out the fire, protect the innocent, and limit 
damage. You have to act. You can't sit there and hope it's 
going to burn itself out. And if you worry about moral hazard 
too much, which was an issue for the first 18 months of this 
crisis, you can see enormous pain and damage. And what it takes 
to clean that up will cause even more moral hazard. So, if you 
care about moral hazard, you have to care about having basic 
protections to prevent panics from spreading.
    It's a paradox. People tend to think that if you care about 
moral hazard, you should be against the fire station. But, if 
you don't have the ability to act, the damage is so sweeping 
and traumatic, governments will have to do so much more, on 
such broader scale, with much greater cost to future 
incentives. So, there is a good case for emergency authority.
    We are having a debate about ``too big to fail.'' And we 
have proposed a sweeping set of new authorities and constraints 
that reduce the risk that banks in the future take on so much 
risk that they could imperil the system. And we're offering a 
proposal whereby banks would be allowed to fail with less 
damage to the system and less risk to the taxpayers as a whole. 
It's very important to have this debate and we're having it now 
in Congress.
    Chair Warren. Thank you.
    Mr. Atkins.
    Mr. Atkins. Well, that's great. I wanted to, actually, pick 
up that thread. So, this is a good segue to talk about ways in 
which, in remaining months of TARP, you intend to use them.
    My friend from the United Auto Workers here has been very 
supportive of TARP, because, I guess, $80 billion went into GM, 
Chrysler, and GMAC. And we heard----
    Mr. Silvers. Paul?
    Mr. Atkins. Yes.
    Mr. Silvers. I don't work for the United Auto Workers.
    Mr. Atkins. Well--I'm sorry.
    Mr. Silvers. I don't know who you're talking about.
    Mr. Atkins. Okay. The socialization of small business 
lending that you were suggesting--one thing I wanted to focus 
on was the Treasury's use of the funds, going forward, and how 
it's going to be allocated. I think that has implications. You 
mentioned the proposals, the administration's proposals, for 
new statutory authority for resolution and for a systemic risk 
regime. And basically, I guess the way I view the resolution 
authority is really just a codification of TARP, for years to 
come, because of the flexibility it builds in.
    And when we view how Treasury has interpreted TARP, over 
the last year and now, by the sounds of it, if we're talking 
about job creation or whatever else is coming out from the 
administration, exactly what sort of uses are you going to put 
these funds to? Because you've said, sort of, both sides, now. 
You want to keep some in reserve, you want to put some in the 
community banks. And I guess I don't really understand what----
    Secretary Geithner. All right. Let me start with the----
    Mr. Atkins [continuing]. The process is.
    Secretary Geithner. Let me start with the job creation 
question. Because of what we've been able to achieve, in terms 
of stability in the system, there are at least $200 billion in 
lower costs ahead. That----
    Mr. Atkins. Because of?
    Secretary Geithner. Because financial stability has 
improved, we do not believe it's going to be necessary to spend 
a substantial amount of resources. Also, since the expected 
value of these investments has gone up substantially, those 
savings reduce the budget deficit.
    You cannot use TARP to fund an infrastructure program. You 
can't use TARP to provide a tax cut to small businesses. You 
can't use TARP to incent green energy efficiency products. 
Those are choices Congress is going to have to make.
    What we've done, though, because of the careful financial 
stewardship of this program, is dramatically reduce the 
expected costs--much, much lower than anybody anticipated. Not 
just at the beginning of last year, but in August. That gives 
the Congress and the President some choices to make about how 
to use those resources. There will be a very strong case for 
using some of those resources to support targeted measures that 
can help get job creation back quickly. But, there's going to 
be substantial resources also to reduce our long-term future 
deficits.
    Now, I want to come back to where you've begun, though. The 
resolution authority we proposed is nothing like a permanent 
TARP. And I want to make this very clear. And I would not 
support that, for reasons I think you would agree with. What 
resolution authority does is allow the government to, in 
effect, take an institution that has mismanaged itself, put it 
in receivership, and wind it down. Not save it, not give it a 
chance for redemption, but to sell and wind it down safely, at 
less cost to the taxpayer, less damage to the public.
    Mr. Atkins. Well, the problem is, though, there is so much 
flexibility built into that, it'll----
    Secretary Geithner. No, I don't think so. In fact, this is 
very important. The challenge with this proposal is giving the 
government some authority to contain financial panics. That has 
to be very constrained----
    Mr. Atkins. They have plenty of authority right now.
    Secretary Geithner. No, it doesn't, actually.
    Coming into this crisis, the only emergency authority the 
President had to contain the panic, in this case, before TARP 
was passed and the Fannie and Freddie legislation was passed--
was to, in effect, declare a bank holiday and close markets. 
That was it.
    Mr. Atkins. But the other----
    Secretary Geithner. A tragic----
    Mr. Atkins [continuing]. Has a lot of power.
    Secretary Geithner [continuing]. A tragic mistake for the 
country. No, actually very limited. But, the panic-containing 
authority----
    Mr. Atkins. Eight? Okay.
    Secretary Geithner [continuing]. Reserved for emergencies, 
we think we need to limit the discretion, in that case.
    Mr. Atkins. Well, I--okay. I think that--going back, then, 
to--basically, this goes back to the issue of TARP as a 
revolving--a revolving----
    Secretary Geithner. Well, let's talk about that.
    Mr. Atkins. I would like to have an opinion, from the 
general counsel of the Treasury, addressing that issue, which 
we have--I've asked for, back in September, and we haven't 
gotten yet. Because I think that is really germane to what 
you're talking about, as far as how much money has been saved 
and is going to be reallocated.
    My time's up.
    Chair Warren. Okay.
    Secretary Geithner. Happy to provide that. And----
    Chair Warren. We're at time, here.
    Secretary Geithner. We've provided that many times to a 
number of the sitting Members of Congress that have asked, but 
happy to copy you on those opinions. But, Congress designed the 
resolution authority with that basic feature. It was wise to do 
it, at that time.
    Mr. Atkins. Well, you read the statute differently, because 
I disagree with that. I think, it really calls on the question 
of support.
    Secretary Geithner. Actually, there's been no challenge 
from the Congress----
    Mr. Atkins. Not yet, maybe.
    Secretary Geithner [continuing]. Who wrote the law to----
    Mr. Atkins. Not yet.
    Chair Warren. All right, gentlemen.
    Mr. Silvers.
    Mr. Silvers. I'd like to just make an observation, because 
my colleague mischaracterized whom I work for. I work for the 
AFL-CIO, the United Auto Workers is a member of the AFL-CIO. I 
do not work for the United Auto Workers. I don't have that 
honor. And, I feel very, very strongly about the dignity of 
people who work hard, physically, for a living. And I think 
that is often not properly honored in Washington.
    Mr. Secretary, I'd like to come back to the big-bank 
issues. I'm just confused about something, and perhaps it's 
just I'm not reading closely enough, but we passed notes back 
and forth with the staff here, and the staff is confused, as 
well. The government holds $45 billion in preferred stock of 
Bank of America.
    Secretary Geithner. Held.
    Mr. Silvers. Held. Bank of America had a public offering of 
$19 billion. What is the source of funds for the remainder of 
the $45 billion the federal government received from the Bank 
of America?
    Secretary Geithner. I should give it to you in writing, 
which I'd be happy to do.
    Mr. Silvers. There isn't any other equity offering, is 
there?
    Secretary Geithner. It's a little more complicated than 
that.
    Mr. Silvers. Okay.
    Secretary Geithner. The bulk of it was raised in common 
equity. That leaves the capital position of the institution 
stronger than it was before this, not just in the eyes of the 
banking supervisors, which they all agreed on, but also in the 
eyes of the market and their creditors. And that's the ultimate 
test. But I'll be happy to provide----
    Mr. Silvers. Are you saying that Andrew Ross Sorkin's 
comment about the FDIC isn't correct? Because you said they all 
agreed on it.
    Secretary Geithner. Well, I was trying to stick to my line, 
which is I'm not going to comment on the discussion.
    Mr. Silvers. But, you just did.
    Secretary Geithner. And it is there. But, I know the 
banking supervisors believe that it is important to make sure 
that, as we exit, the institutions are stronger, not weaker. I 
think that they share that view. I'm glad they do.
    Mr. Silvers. Okay. Well, perhaps Mr. Sorkin is wrong.
    I don't have all the numbers in front of me, or can run 
them in my head, but, to what extent, if any, are the funds for 
the repurchase of the Bank of America preferred stock coming 
from internal earnings?
    Secretary Geithner. I don't think they are. But, again, I 
need to go back and give you the numbers in detail.
    But, let's focus on the stuff that is critical to the 
financial position of the firm. So, the best way to do this is, 
look at their common equity ratio to assets before the 
repurchase and after. That measure, which is probably the most 
valuable measure of financial strength, is stronger with 
repayment, not weaker.
    Mr. Silvers. What I'm concerned about--and I think I've----
    Secretary Geithner. So, the quality of capital that has the 
strongest source of confidence to markets----
    Mr. Silvers. Well, now, if it's a common equity ratio--of 
course it'll be stronger, because you're----
    Secretary Geithner. Yes.
    Mr. Silvers [continuing]. Because they raised common and 
paid off preferred.
    Secretary Geithner. That's it. That's the basic nature of 
the strategy. And it's a good strategy.
    Mr. Silvers. But, that would, of course, happen even if the 
bulk of the funds were raised by something other than a public 
offering. It concerns me that the basic standard appears to be 
a good one, which is that if you want out of TARP, you've got 
to be able to raise the equivalent in new equity as the TARP 
funds you are paying back.
    Secretary Geithner. That's not quite the standard.
    Mr. Silvers. Well, it's not----
    Secretary Geithner. I'll be happy to explain.
    Mr. Silvers. Well, explain the standard then.
    Secretary Geithner. Well, again, this is really a 
discussion you should have with the banking supervisors, 
because under the laws of the land, the banking supervisors set 
the terms for repayment.
    Mr. Silvers. Yeah, I know. But, you seem to----
    Secretary Geithner. I'm sure they'd be happy to----
    Mr. Silvers [continuing]. Know a fair amount about it, and 
you're the only one here today.
    Secretary Geithner. I don't think it's as complicated as 
you're making it. It's a simple thing. Common equity is higher 
after repayment. It's good for the system.
    Mr. Silvers. It's not clear to me that if you raised a 
little bit of common equity, but mostly allowed preferred to be 
paid back with cash that comes out of earnings----
    Secretary Geithner. I don't think that's right. But, 
again----
    Mr. Silvers. All right.
    Secretary Geithner. Again, I'd be happy to ask the banking 
supervisors. I'm sure they'd be responsive and willing to lay 
it out in detail. But, I think it is in the market now. But, 
we're happy to provide an authoritative report on that.
    Mr. Silvers. I just hope you keep insisting on that in the 
future. I can't change what you've done with Bank of America, 
but I hope you keep insisting in the future that you have to be 
able to have the strength to raise the equivalent amount in the 
public markets in equity, common or preferred, that you're 
paying back in TARP money.
    Chair Warren. Okay, that's it on time.
    Superintendent Neiman.
    Mr. Neiman. I'd like to go back to a dialogue regarding 
supporting small business lending through expanding capital 
investments in community banks. And I am on record strongly 
supporting those initiatives. And I also agree with your 
assessment of the reluctance of community banks, in particular, 
to participate. And I think you identified the primary reason 
for that reluctance being a stigma.
    One way to address that reluctance and stigma is to issue 
those details regarding the program, focusing on eligibility 
requirements, criteria for approvals, details about the 
approval process. I think greater transparency in the program--
and the program was announced, I believe, October 19th, so 
we're approaching almost two months before the details are 
issued--I think greater transparency, full disclosure of the 
eligibility requirements--Is there a black box that's going to 
determine eligibility?--would go a long way in addressing those 
concerns and reluctance on the part of the banks.
    So, any further insight on how you intend to address those 
concerns of the banking community, as well as any projections 
as to when we may see more details about the application and 
approval process?
    Secretary Geithner. I am happy to try and do that. You're a 
supervisor, so you know that some of this is going to have to 
be about judgment, too. You can't reduce it to a clear, simple 
set of criteria.
    It's not just about stigma, though. Again, it's partly the 
concern about what future conditions might be, how they might 
change. Because they have changed over time. And that's a big 
part of the deterrence.
    Mr. Neiman. Let's talk about lessons learned in developing 
those details for the program. What are the lessons learned 
from the large-bank capital investments that can now be 
employed to the smaller-bank program? I was glad to see that 
the outline of the program would include detailed lending 
programs to be submitted as part of that application, as well 
as ongoing reporting requirements.
    Secretary Geithner. We think that would help. I can't tell 
you, though, whether that's going to be sufficient. We don't 
want to have the government in a position of forcing banks to 
lend or meet quantitative criteria for lending; it's just not a 
feasible way to do it, particularly with loan demand falling so 
much in the aftermath of the recession. But, we think it's a 
promising approach.
    I think we are improving substantially. The survey we've 
put in place that allows banks to report on how they used the 
funds and what actually happened to different categories of 
lending and asset growth should help, too. And we're open to 
other suggestions.
    Mr. Neiman. That raises another important point. Can you 
share with us your assessment or evaluation of bank lending in 
terms of both originations as well as bank balances?
    Secretary Geithner. You have to look at overall credit to 
have a good sense of the risk and credit crunch now. Overall 
credit, the price credit, has come down a lot. Bank lending is 
still falling. Borrowing from the securities markets, for those 
who have access, is increased very, very dramatically. On net, 
credit is still falling. No surprise in that, of course, 
because, in the recession the economy slowed and contracted so 
much, demand would fall as well. But, the pace of decline is 
slowing a bit. And if you look at surveys of what businesses 
say they're seeing, they do not cite credit as the principal 
problem they face; instead it is lower demand for their 
products, going forward.
    Mr. Neiman. So, when we hear about banks maintaining large 
balances at the Federal Reserve, earning a spread, is that 
something that the public should be concerned about or are we 
looking at----
    Secretary Geithner. No, I don't think so. I think that's 
just a necessary consequence of the actions the Fed's taking to 
help bring growth back, bring unemployment down. And banks are 
still somewhat cautious. But, there is much more capital in the 
finance system today, and the overall system is a much stronger 
position to support recovery as recovery takes hold.
    There are a number of charts in my testimony that report on 
these survey-based measures of credit conditions and I think 
they provide some other helpful indications of the broad trends 
we see.
    And so I would say, the credit conditions are dramatically 
better than they were and recovery is quicker than we would 
have hoped, but there are still pockets of the country that are 
very vulnerable to a damaging contraction in credit.
    Chair Warren. Okay. Thank you.
    So, Mr. Secretary, we're talking a great deal here about 
systemic risk. And, of course, systemic risk is what we were 
talking about a year ago when we got into the business of 
bailing out large financial institutions. And particularly with 
AIG. That's why I read the November 17th report of the Special 
Inspector General for the Troubled Assets Relief Program. As 
you know, he was quite critical of the actions that you took in 
negotiating with, ultimately, the counterparties for the AIG 
financial instruments.
    Now, I was struck by two quotes in there. He says that the 
Federal Reserve and Treasury officials defended the rescue of 
AIG on the grounds that the company's failure, quote, ``posed 
considerable risk to the entire financial system and would have 
significantly intensified an already severe financial crisis 
and contributed to a further worsening of global economic 
conditions,'' which I think has been the standard story for 
well over a year.
    But, the report also states that you told SIGTARP that, 
quote, ``The financial condition of the counterparties was not 
a relevant factor in the decision to see to it that Goldman 
Sachs and other counterparties were paid 100 cents on the 
dollar.''
    I have to say that these two statements appear to be at 
odds with each other.
    Secretary Geithner. Let me try to explain.
    Chair Warren. Please.
    Secretary Geithner. Systemic risk, you know, is complicated 
and difficult to assess and measure. The risk to the system 
from AIG's collapse is not particularly reflected in the direct 
effects on its major counterparties, the banks that bought 
protection from AIG. The direct effects of failure--this is 
true for Lehman and for all the other financial failures in 
that period of time--would not have been particularly 
significant. What was significant for the system as a whole was 
the broader collateral damage that would've happened in the 
event of failure. So, what you saw after Lehman, for example, 
was a general pullback or a classic run on the entire system. 
AIG presented exactly that type of risk but, in some ways, on a 
much greater scale. AIG, unlike Lehman, unlike Bear Stearns, 
had written a bunch of different types of insurance products--
savings, protection, vehicles--to the retail community across 
this country and around the world. And if those policyholders 
had lost confidence in the system as a whole, then the damage 
could've been much greater.
    So the entire system was at risk. And if the system had 
collapsed, no institution in the United States or around the 
world would have been invulnerable to that collapse.
    Chair Warren. I'm losing the logic here, Mr. Secretary. If 
Goldman Sachs could have withstood these losses, and the----
    Secretary Geithner. Only the direct----
    Chair Warren [continuing]. Other counterparties----
    Secretary Geithner. Only the direct effects of that--it's 
not the right way to capture----
    Chair Warren. So, they still could have paid off all the 
parties that they owed money to. This would not have caused 
Goldman Sachs to collapse----
    Secretary Geithner. No, but that----
    Chair Warren [continuing]. This would not have caused the 
direct counterparties to collapse.
    Secretary Geithner. But, Madam Chair, you understand this. 
When you decide it is necessary to prevent default, you prevent 
default. If AIG had not met its contractual obligations to its 
counterparties----
    Chair Warren. But, this is----
    Secretary Geithner [continuing]. It would have defaulted, 
it would have been downgraded, and the company would have 
collapsed and happened to be liquidated in the midst of the 
worse financial storm in generations. There was no feasible way 
to selectively default on its counterparties without bringing 
the whole thing down.
    Chair Warren. Mr. Secretary----
    Secretary Geithner. That was the choice.
    Chair Warren. But, Mr. Secretary, we did not step in and 
back up all of the counterparties, all of the trades. We picked 
AIG, and AIG alone.
    Secretary Geithner. No, no, that----
    Chair Warren. And we moved in----
    Secretary Geithner. Well, that's not----
    Chair Warren [continuing]. And backed up----
    Secretary Geithner. But, that's not----
    Chair Warren [continuing]. A 100 cents on the dollar 
repayments.
    Secretary Geithner. No, that's not true at all. We acted to 
prevent AIG's default, because there was no other way to 
protect the system from the damage of that. The consequence of 
preventing default was that AIG met its contractual 
obligations. You cannot selectively default on contractual 
obligations without courting collapse and downgrade. Now, what 
we did----
    Chair Warren. But, Mr. Secretary----
    Secretary Geithner [continuing]. For the rest of the 
system----
    Chair Warren [continuing]. The consequence of what you have 
just described is that these counterparty obligations, these 
financial instruments that are bought by very sophisticated 
parties, are going to be treated, effectively, like deposits in 
checking accounts----
    Secretary Geithner. No----
    Chair Warren [continuing]. And saving accounts.
    Secretary Geithner. Absolutely not.
    Chair Warren. They ended up----
    Secretary Geithner. Absolutely not.
    Chair Warren [continuing]. Effectively, with 100-cent-on-
the-dollar government guarantees----
    Secretary Geithner. They did, because there was no----
    Chair Warren [continuing]. For which they had never paid.
    Secretary Geithner. No. You have to distinguish two things. 
First of all, there is no other way, in the context of that 
storm, to protect the economy from that failure. Now, looking 
forward, we need resolution authority, a strong package of 
reforms. We do not want investors, in the future or these 
particular firms to live with the expectation that the 
government bail them out. That is the challenge. That's why 
financial reform is so necessary.
    Now, Madam Chair, nothing would have made me happier, in 
that basic context, to have a different set of choices. But, 
given the laws of the land, the authority we had, a tragic 
mistake for the country, we had no other choice in that 
circumstance.
    Chair Warren. AIG believed that it had a choice, until you 
moved in, and that was that they could pay 90 cents on the 
dollar----
    Secretary Geithner. I don't understand why----
    Chair Warren [continuing]. 85 cents----
    Secretary Geithner [continuing]. This is----
    Chair Warren [continuing]. On the dollar, 80 cents on the 
dollar.
    Secretary Geithner. I don't understand why this is so 
complicated. You either prevent default----
    Chair Warren. I don't think it is complicated Mr. 
Secretary.
    Secretary Geithner. No, but it's come down to two choices. 
You either prevent default, because default would be 
cataclysmic, or you don't. And when you prevent default, you're 
doing it so that institutions can meet their obligations to 
everyone they have contractual obligations to. If you 
selectively default on any obligation, the institution will 
come crashing down. That is the consequence of the system we 
had, going into this crisis. That's why we want to change the 
system.
    Chair Warren. Mr. Secretary, I come from a world of Chapter 
11. People default all the time. They negotiate down on their 
obligations.
    Secretary Geithner. Right.
    Chair Warren. And they do not bring down----
    Secretary Geithner. But----
    Chair Warren [continuing]. The entire----
    Secretary Geithner. You're exactly----
    Chair Warren [continuing]. Financial system.
    Secretary Geithner [continuing]. Right. And you're a 
national expert on this basic issue. But banks are different. 
AIG is effectively a bank.
    Chair Warren. AIG was not a bank.
    Secretary Geithner. It----
    Chair Warren. I'm out of time, and I've done it to myself 
again. I apologize.
    Secretary Geithner. Can we do it a minute longer? It's a 
very important debate to have.
    Mr. Neiman. Fine. I think that's fine.
    Chair Warren. Go ahead, Mr. Secretary.
    Secretary Geithner. You can borrow my time.
    Chair Warren. Go ahead, Mr. Secretary.
    Secretary Geithner. Financial institutions, which Congress 
has recognized for a long time, need a different type of 
bankruptcy regime than we have for other companies. Now, AIG is 
not a bank, but, in effect, it operated as a bank. It borrowed 
money, it operated on leverage, it did not have capital to 
support that. We've had in place a different type of bankruptcy 
for banks for many, many decades, however, we need one for 
complex finances that operate just like banks.
    Now, in bankruptcy, you have lots of choices. You can 
negotiate all sorts of different treatments, in this context, 
and in ways that would be helpful for the country. What we want 
is a bank-type resolution regime that gives us the choices that 
we've had for banks. But, we did not have that for complex, 
large financial institutions. And that's what limited our 
choices.
    Chair Warren. Well, we may disagree about whether or not we 
had it, but we would certainly agree that we do need a system 
in order to be able to liquidate large financial institutions. 
Where we may draw a very sharp difference is whether or not we 
should ever be in the business of doing that after the fact, 
and going back and effectively guaranteeing transactions with 
nonbank institutions----
    Secretary Geithner. Do you feel the same way?----
    Chair Warren [continuing]. With taxpayer dollars behind it.
    Secretary Geithner. Just so I understand, do you feel the 
same way about the FDIC guarantees put in place in September?
    Chair Warren. I----
    Secretary Geithner. You would never, ever want a country to 
be in a position where you have to do guarantees--temporary, 
effective, whatever price--because of the moral-hazard risk. 
But, in a financial panic, there is often no other way to stem 
the risk of much greater damage to the innocent.
    Chair Warren. Mr. Geithner, there are, though, real 
consequences to doing that, because now markets understand that 
you may, at any point, decide that anyone is large enough and 
that their debts should therefore be backed up by the U.S. 
taxpayers.
    Secretary Geithner. Well said, and no one feels more 
strongly about that. And that is why, even in the midst of this 
deep crisis, we propose sweeping reforms that would give us 
better choices in the future.
    Chair Warren. In the future.
    Secretary Geithner. We could not feel more strongly about 
that.
    Chair Warren. Good. Thank you.
    I apologize to my fellow panelists.
    Mr. Atkins.
    Mr. Atkins. No, that was a very fruitful discussion, I 
thought. And I note that next month we'll be drilling into AIG 
as a topic so I look forward to that, as well.
    But, I just wanted to turn back to--I think part of the 
problem, especially last year, was predictability, transparency 
of what the government's actions were, and also with respect to 
what balance sheets and other things were consisting of, and 
that sort of made the marketplace itself uneasy. I think that's 
part of the same thing that I wanted to discuss here now which 
is the predictability of who gets what and who does what to 
whom. And that's what I was trying to refer to earlier, as far 
as the auto programs. I wasn't, certainly, disparaging the 
working man, but there is a huge perception out there that 
other unions got a great deal out of that audit rescue package 
that was negotiated earlier this year.
    That dovetails into the situation with small businesses 
that we've been talking about. A lot of the problem in today's 
business environment is an uncertainty as to what the future 
holds. The administration is talking about--and Congress--huge 
tax increases, a huge new expensive healthcare plan, new 
onerous environmental regulations, and then looming deficits 
far into the future, not even counting the off-balance sheet 
obligations of the United States Government, which some people 
have put at $100 trillion or more. So, nobody, basically, can 
plan for anything, and that affects borrowing, and that 
obviously then affects lending.
    At the same time, we're talking about the stigma of 
participating in TARP among some small banks. And people have 
been leery to participate in the Public-Private Investment 
Partnership, and others, because they don't want to get close 
to any sort of government control of their business or 
influence.
    So, my main question is, how are you going to inject more 
predictability into the system? You're talking about this vague 
notion of limiting TARP to $550 billion or so, and then 
focusing on small businesses and housing and other and--I can't 
remember the last part. How exactly are you going to put these 
funds to work? What is the general plan?
    Secretary Geithner. Well, there's a table attached to my 
testimony that gives very detailed estimates on what we think a 
reasonable estimate is of future programs. It's very clear, and 
those programs have very clear, transparent conditions. And one 
of the things we did right from the beginning was make sure we 
put the specific terms of any contracts in the public domain 
for everyone to see. So, I think that we'll be very effective 
and very clear in making sure what the limits are going to be 
in these programs and what the precise terms are going to be.
    Now, you're right that businesses across America still face 
a lot of uncertainty. They face a lot of uncertainty about how 
strong the recovery is going to be. And they face some 
uncertainty about what the rules of the game are going to be, 
going forward. And I think that that's one good reason why we 
hope that Congress can bring to closure the healthcare reforms 
moving through the system and the broader changes ahead on 
energy policy, things like that. I think that will help reduce 
uncertainty, help improve confidence. Businesses want to know 
what the rules of the game are. And so, I think I agree with 
you on that. You want to bring clarity as quickly as we can.
    Mr. Atkins. Well, again, going back to the resolution 
authority that you're asking for, I think that will just 
perpetuate the lack of clarity, because----
    Secretary Geithner. Relative to what? Let's think about the 
choice ahead. Do you want to go back to a situation in which 
the United States comes into the worst crisis in generations 
with no authority, no ammunition, no ability to contain the 
damage? It cannot be good for us to court that disaster again. 
We're describing----
    Mr. Atkins. But, it cannot be good to ascribe these 
particular undefined powers to either----
    Secretary Geithner. No, they're very well defined, and 
they're----
    Mr. Atkins. Are they?
    Secretary Geithner [continuing]. Carefully limited. They're 
more limited, in some ways, than those that exist today. And 
the ones that were created that are new are modeled on a 
resolute regime established and tested for banks over the 
decades.
    Mr. Atkins. Well, I agree with the Chair that bankruptcy is 
probably the best----
    Secretary Geithner. Bankruptcy itself or a quasi-bankruptcy 
for banks?
    Mr. Atkins. Well, a bankruptcy--I'm talking about even 
beyond the banking system, about firms that are not necessarily 
banks, but are deemed to be, for some reason, too big to fail 
or a systemic risk. And I think that's the thing that we're 
concerned about.
    Secretary Geithner. Well, again, you know, these are all 
about choices, because I think many of us would share the basic 
objectives. It was not good for the country to allow very 
large, very risky, complex institutions to operate effectively 
as banks, outside all of the protections we put in place for 
banks in the wake of the Great Depression and the crisis that 
preceded it. That was a terrible mistake.
    So, institutions that effectively are banks, which take 
risk and could imperil the system, need to have constraints on 
their operations.
    Chair Warren. I'm going to do time.
    Mr. Atkins. Oh.
    Chair Warren. And that way----
    Mr. Atkins. All right.
    Chair Warren [continuing]. We'll get another round.
    Mr. Atkins. Okay. All right.
    Chair Warren. Okay?
    Mr. Silvers.
    Mr. Silvers. Mr. Secretary, why don't you finish that 
sentence? Maybe you've lost it in the interim, but----
    Secretary Geithner. Well, it's one of the hardest problems 
to solve. Again, people want to know what the boundaries are, 
what the scope of this is. But, again, what caused this crisis, 
what made it so severe, was that we allowed an entire separate 
system of, effectively, banks operating without adequate 
constraints on risk-taking and without the protections we put 
in place to mitigate runs and panics.
    Mr. Silvers. Now----
    Secretary Geithner. That was the classic mistake of the 
government, that's something we have to fix. As part of that, 
we need to be better tools to manage failure with quasi-
bankruptcy-type regimes for those type of institutions.
    Mr. Silvers. And, Mr. Secretary, is it your view that the 
bill currently in the House, which I understand the 
administration supports, that that bill provides this FDIC 
model, quasi-bankruptcy process, with no provision for TARP-
like equity infusions, other than to transition a failed firm 
into an FDIC-like resolution process? Is that----
    Secretary Geithner. That's correct.
    Mr. Silvers. Is that a----
    Secretary Geithner. Yeah.
    Mr. Silvers [continuing]. Fair statement?
    Secretary Geithner. That's a fair statement.
    Mr. Silvers. Fine. Let me just say that this issue is of 
great concern to me. I've looked closely at that bill. I 
thought earlier drafts were inadequate with respect to this and 
did run the risk of another TARP. I think the bill that's in 
front of Congress today is the right one, and I think that your 
leadership on this has been very helpful.
    Let me return to the broader discussion, about panics and 
runs and so forth, in the context of AIG. I want to better 
understand the argument that you're making. Are you saying that 
the reason that the counterparties to AIG had to be made whole 
was not because of the threat that, were they not made whole, 
they would fail, but because of the threat that, if anybody was 
not made whole in a credit derivative transaction, that there 
would be a broader, sort of, disintermediation of derivatives 
markets? Was that your concern?
    Secretary Geithner. I think you have most of it right, but 
let me say it slightly differently.
    Mr. Silvers. Okay.
    Secretary Geithner. If AIG had defaulted on any single 
counterparty, derivatives or any other contractual obligation, 
that would have forced a generalized default.
    Mr. Silvers. All right. Well----
    Secretary Geithner. The system would have collapsed.
    Mr. Silvers. Right. Now----
    Secretary Geithner. The consequence of that collapse 
would've been cataclysmic for the system as a whole.
    Mr. Silvers. Well, ``default'' is an interesting term here. 
``Default'' is a formal legal term, it's where the person who 
has the obligation asserts that the party hasn't paid. And in 
that circumstance, the--in that circumstance, perhaps can try 
to insist on payment and force a bankruptcy. Is it your view 
that a negotiated haircut would have had same impact? I mean, 
because that would not have been a default. People----
    Secretary Geithner. Let's----
    Mr. Silvers [continuing]. Negotiate haircuts all the time--
--
    Secretary Geithner. Let's just----
    Mr. Silvers [continuing] Between commercial parties----
    Secretary Geithner. They do. But that's the point. 
Remember, this is not like there were three people that had the 
total exposure of counterparties and derivatives to AIG. There 
were tens and tens of counterparties on the derivatives side, 
maybe hundreds; there were thousands of other counterparties at 
stake in this context. No one would have been willing to 
individually volunteer a concession without it being extended 
to all of the counterparties in similar positions.
    It's a simple thing, it's like flipping a switch. Either 
the firm is able to pay and avoid default, or it courts 
default----
    Mr. Silvers. So----
    Secretary Geithner [continuing]. And downgrade and 
collapses.
    Mr. Silvers. Is your view that SIGTARP is wrong--Mr. 
Barofsky and his staff, seem quite convinced that there was an 
opportunity to negotiate, not a default, but a concession on 
the part of the major parties. And the Chair mentioned----
    Secretary Geithner. The real world does not work this way. 
You can't run a strategy on the hope that people will be nice 
and decide they're going to voluntarily give up a set of 
contractual obligations, and, if they're unwilling to do it, 
then your only choice is that you not pay----
    Mr. Silvers. All right. So, your----
    Secretary Geithner [continuing]. And take the consequences 
of default.
    Mr. Silvers. So, your concern was that the default of AIG, 
not a broader run in the derivatives market.
    Secretary Geithner. It--well----
    Mr. Silvers. Is that right or was it both?
    Secretary Geithner. I think part of--just I--think about 
what happened after Lehman. It's the simplest way to think 
about it. So, what happened to Lehman, Lehman failed, Lehman 
defaulted----
    Mr. Silvers. All right. But, that----
    Secretary Geithner [continuing]. On a set of obligations--
--
    Mr. Silvers. But, then you're saying that the issue was the 
default of AIG, not a run--I want to understand whether you 
believe that derivatives markets in a crisis are markets where 
everyone has to get a 100 cents on the dollar all the time.
    Secretary Geithner. In a financial panic if you see 
cascading defaults like this on any type of contractual 
financial obligation, that will accelerate, not mitigate, the 
panic. Again, nothing would have been better if there was a 
solution in place in this case, where you could have negotiated 
a set of outcomes that left the taxpayer with less exposure to 
losses. That has no realistic prospect of success in a 
financial panic of this magnitude.
    Resolution authority would make some of the choices a 
little bit easier, but there are no good choices in a panic 
like that.
    Mr. Silvers. I would just conclude that if derivatives are 
the kind of instrument that have the kind of importance in our 
markets in which 100 cents on the dollar is necessary in a 
crisis, then we need to regulate them as such.
    Secretary Geithner. And we have proposed sweeping changes 
on how derivatives are treated and regulated in our markets, 
and partly because of that risk.
    Chair Warren. All right. Thank you.
    Superintendent Neiman.
    Mr. Neiman. I'd like to weigh in on the AIG issue, for one 
reason, just to confirm that there is not necessarily a 
consensus on this viewpoint on the panel, but also, more 
importantly, to delve into it a bit deeper, to encourage 
everyone to read that SIGTARP report, not because of the 
lessons learned, but because it does outline the sequencing of 
events that led up to and defined that transaction.
    My reading of that report says that, once the government 
decided that AIG was ``too big to fail,'' they no longer had 
leverage over negotiating any of those haircuts. That is a very 
different situation than was faced with the municipal issuers 
of months earlier. I think it also indicated very clearly the 
issues around violating the contractual obligations once the 
government decided to prevent a default.
    Also, treating U.S. counterparties differently than the 
foreign counterparties would have raised significant issues. 
Utilizing the supervisory powers of the Federal Reserve as 
leverage to force negotiation, I think, would also have raised 
significant concerns.
    Lastly, the issue that you raised, of downgrades, the 
impact it would have on the American taxpayer and the global 
system.
    So, I would encourage everybody to read that report, 
because of the descriptions and details, which, to my 
knowledge, were not clearly outlined up to the issuance of that 
report, but take disagreement with the lesson learned. And, in 
my opinion, the lesson learned is that we did not have the 
right tools for resolution of an institution of that nature. 
And that's why it is so critical that we have a resolution 
authority to deal systemically with institutions.
    Secretary Geithner. Well said, and I think you said it 
right. I think it's important to recognize that this is good 
for our country; it is going to happen for years to come. 
People are going to pore over every decision we made. They're 
going to look very carefully at all those judgments. It's, of 
course, hard to judge, with the benefit of hindsight, what 
would have been possible. And a lot of it's going to be hard 
for anyone to appreciate who did not live through, minute by 
minute, what was happening in that acute series of financial 
panics, with not good choices for us.
    Our job was to make a set of choices among unpalatable, 
deeply offensive basic choices, and to do what was best, we 
thought, for the country at that stage. But, I respect the 
efforts of people to come back and look over this again. A lot 
will happen in the future. We're going to cooperate with it, 
because the American people deserve to try to understand that.
    But, again, understand that no one really can appreciate 
the range of choices that were really available at that time. 
And that's one reason why we have to work so hard to make sure 
we have better choices in the future. We need resolution 
authority to allow these firms to fail without the taxpayers 
being exposed to the risk of loss and that put constraints on 
risk-taking in the future that can help mitigate the moral-
hazard risk.
    Mr. Neiman. Before moving on to another subject, can you 
give us an update on AIG, particularly what we're reading in 
the press about issues of risk of losing individuals resulting 
from compensation directives from the Treasury?
    Secretary Geithner. Well, there is risk of that, as you 
expect, and as you've seen. I would say, in general, the new 
board, the new management of the institution are working very 
hard and effectively to strengthen the underlying insurance 
businesses, improving the prospect of the taxpayer being repaid 
and bringing down the risk in the financial products division 
that took the institution to the edges of collapse. The risk in 
that has come down very, very dramatically. Overall scale of 
exposures and derivatives are about half of their peak level. 
But, that's the basic strategy.
    Mr. Neiman. Is it something that we should be concerned 
about at this time?
    Secretary Geithner. What?
    Mr. Neiman. The impact to the American taxpayer if there is 
a loss of critical employees at an institution?
    Secretary Geithner. Absolutely. I mean, we need people who 
are capable running these businesses. The interests of the 
taxpayer, in making sure we maximize return on those actions we 
took, require there be capable people running these firms, 
running these businesses.
    Mr. Neiman. Thank you.
    Thank you.
    Chair Warren. Thank you, Mr. Secretary. Our time grows 
short, so we'll enter the lightning round here and try to get 
in at least one more question.
    Secretary Geithner. I have to be----
    Chair Warren. We know you need to leave----
    Secretary Geithner [continuing]. Somewhere else at 12:00.
    Chair Warren. We understand you're here with us until 
12:00----
    Secretary Geithner. Okay.
    Chair Warren [continuing]. So we will make sure----
    Secretary Geithner. So, just until five minutes before 
12:00, because I need to be at my next thing at 12:00.
    Chair Warren. Then this----
    Secretary Geithner. I thought we were going to end at 
11:45.
    Ms. Warren. Oh, I think I was told we were ending at 12:00, 
that we had you for 2 hours.
    So, let me do ask the question.
    Secretary Geithner. You'll have me again, I believe.
    Chair Warren. But that's three months off. As the banks 
we're talking about how to wind down TARP, so here's my 
question. We've talked about the fact that the guarantees for 
the money markets expired on September 18th. That's one of the 
winding-downs of TARP. But, we jumped in--we, the federal 
government, we, the Treasury Department--jumped in when the 
money markets were about to break the buck. Now the money 
markets don't have any official guarantees, they don't pay 
anything for any guarantees, but most of the market believes 
that if the money markets started to break the buck again, 
there would be substantial government assistance.
    You described the banks as leaving TARP. They are stronger. 
Sure they're stronger. They've paid back their debts, they have 
no restrictions under TARP. But, they also bask in the glow of 
implicit guarantees. After all, we've held up a big sign that 
says, ``Those folks are worth saving, no matter what.''
    So my question is, how do we wind out of implicit 
guarantees? Out of the fact that the market sees and 
specifically assesses these institutions as stronger, and 
capital as cheaper for these institutions, for the specific 
reason that there is this implicit government guarantee.
    Secretary Geithner. I think the only way to do it is to put 
in place financial reforms that achieve two outcomes. One is 
authority for the government to constrain risk-taking, more 
broadly, more effectively in the future. That is necessary; 
it's not sufficient. And you need quasi-bankruptcy authority 
that allows a credible risk that these firms can be failed, 
unwound, more safely. I don't know a better way to do it.
    I worry about the risk you laid out. It's inherent in any 
successful effort to put out a financial fire. There is no way 
to put out financial fire, arrest a recession, without taking 
some risk that you're going to hurt future incentives in the 
way you described. The only solution to that is to change the 
rules of the game.
    Chair Warren. Thank you, Mr. Secretary.
    Mr. Atkins.
    Mr. Atkins. Thank you very much.
    Secretary Geithner. Mr. Atkins, you said something very 
important in the beginning, although you said it in 
disagreement with me, but I want to underscore it.
    Mr. Atkins. Oh, yes. Right.
    Secretary Geithner. TARP was only one part of what helped 
bring growth and stability back to the economy. TARP would not 
have been effective without the guarantees put in place by the 
FDIC, without the broad measures of financial market support by 
the FED, and, most important without the Recovery Act itself. 
The economy did not improve, or bottom, until you had that full 
arsenal of policy responses deployed in parallel. It wouldn't 
have worked without TARP. TARP was necessary; it was not 
sufficient, and it was a part of that basic strategy. TARP 
can't claim the credit for all the things that improved, in 
this case, but it wouldn't have been possible without it.
    Mr. Atkins Yes, well, the Recovery Act is another whole 
issue, and I don't have time to go into that one, so I'll leave 
that.
    There are two things that I wanted to bring up. One is--you 
were discussing nonbanking firms before--I do have to note that 
many of them fared a lot better than the huge banking 
institutions that had regulators and examiners living in their 
offices----
    Secretary Geithner. For example?
    Mr. Atkins [continuing]. Day after day.
    Secretary Geithner. For example?
    Mr. Atkins. A lot hedge funds and others have a lot less 
leverage two to one, three to one--than the other sorts of----
    Secretary Geithner. I make that point a lot myself, and I 
agree with that.
    Mr. Atkins. Okay.
    Secretary Geithner. I just might point out, that is in part 
because we were actually quite effective in making sure the 
institutions that provide them leverage, that give them 
financing, were much more constrained than they were in 1998, 
for example.
    Mr. Atkins. Right. Well----
    Secretary Geithner. But, I agree with you.
    Mr. Atkins. So, we'll have to pick that one up later. I 
just want to say that transparency, I do believe, is the 
answer, ultimately.
    There is one last thing I did want to point out. With 
respect to the housing issues, we had a hearing, not too long 
ago, with six folks, one of whom brought up an issue as to EESA 
and the authority of Treasury to do some of the programs that 
you're doing--HAMP and HARP--because the statute talks about 
how Treasury will acquire assets, meaning loans or the 
underlying mortgages or the securitized assets. And some of 
your programs are not geared towards that. And so, I wanted to 
ask you----
    Secretary Geithner. So, you'd like a legal opinion on that?
    Mr. Atkins. I would.
    Secretary Geithner. I'd be happy to provide it.
    Mr. Atkins. Other homework for that.
    Secretary Geithner. Happy to provide that.
    Mr. Atkins. Thank you very much.
    Chair Warren. Thank you.
    And Mr. Silvers is going to take the last question.
    Mr. Neiman. No, I think, in recognition of your time 
considerations and your participation with us this morning, I 
will waive my last question.
    Chair Warren. Mr. Silvers.
    Mr. Silvers. I've looked at the composition of the 
revenue--it's hard to look at the composition of the profits--
of the four largest banks over the last six quarters, and it 
appears that there's a trend toward interest income from loans 
declining slowly and income from securities--again revenue--
from securities trading increasing. Are you at all concerned 
about this--essentially the quality of earnings within the four 
largest banks?
    Secretary Geithner. I'm not, at this stage. I think that 
actually they're getting better, not worse. Most important is 
that what's happened to earnings across the financial system is 
not just that the government did extraordinary things to save 
them from collapse, but that the markets are now opening up, 
firms are able to raise capital again, and that companies are 
able to go out and raise equity, raise debt again. This is a 
substantial source of revenue. That's what banks exist to do. 
So, I think it's largely a healthy thing. Obviously, we look at 
this very carefully, because what we don't want to do is have a 
situation where the same type of risks that brought the system 
to the edge of collapse start to reemerge again.
    Mr. Silvers. Thank you.
    Chair Warren. Thank you very much, Mr. Secretary.
    I want to say our characterization of the past may not 
always be in agreement, but I think we are very much in 
agreement--at least I hope we are--that we cannot go this way 
again. There must never be a TARP 2.0.
    Secretary Geithner. And this is not over yet. We've got 
work to do to fix what was broken, not just put in place 
reforms to prevent the crisis of the future.
    Thank you very much.
    Chair Warren. Thank you.
    This hearing is adjourned. The record will be held open for 
questions for the Secretary.
    [Whereupon, at 11:57 a.m., the hearing was adjourned.]
    [The responses of Secretary Geithner to questions for the 
record from the Congressional Oversight Panel appear on the 
following pages.]
 Questions for the Record from Elizabeth Warren, Chair, Congressional 
                            Oversight Panel

    1. According to Treasury's Monthly Lending and 
Intermediation Snapshot, which measures the lending levels of 
the top 22 Capital Purchase Program recipients, there have been 
mixed signals with regards to the lending habits of those 
institutions that benefitted the most from TARP assistance. 
There are certain areas of lending that have shown improvement, 
most notably the 32 percent increase in mortgage originations 
and the 75 percent increase in refinancing originations since 
the enactment of EESA. However, precipitous drops in other 
lending categories have offset these increases. For example, 
new commitments to commercial real estate loans by these 22 
institutions have decreased by nearly 64 percent while 
commercial and industrial loans have decreased by 26 percent 
since October 2008. Total originations made by these 22 
institutions have decreased by 9 percent since October 2008. 
Why has lending continued to shrink after these financial 
institutions took TARP money? What do these trends indicate 
about the success of the TARP? Do these trends concern you?
    The role of the financial sector is to provide credit to 
our economy. Americans rely on that credit for homes, 
education, and cars. Businesses rely on it to hire and pay 
their employees. While U.S. credit conditions and the outlook 
for economic growth have improved significantly over the past 
year, bank lending continues to contract. It is vital that 
banks lend to creditworthy American consumers and businesses.
    A major cause of the reduction in lending is the fact that 
the U.S. banking system entered this crisis with insufficient 
capital. As credit losses mounted, first because of the 
correction in the U.S. housing market and subsequently because 
of the sharp contraction in the economy, banks have had to 
adjust. That adjustment has come through raising additional 
capital, reductions in total assets held by banks, and changes 
in the composition of those assets. The declines in loans held 
by banks are one part of this process of adjustment. But the 
economic contraction has also reduced the demand for credit as 
both consumers and businesses ave pulled back. In addition the 
contraction has undermined the credit worthiness of many 
borrowers. In past recessions, particularly those driven by 
credit cycles, bank lending has tended to lag the recovery of 
the economy. The fact that bank lending continues to contract 
is an indication that the adjustment in the U.S. banking sector 
is incomplete. Without TARP, the contraction in lending would 
no doubt have been much more severe. But TARP was never 
intended to solve all the problems of the banking sector. 
Relative to this historical record, the performance of bank 
lending in this cycle is not unusual.
    However, there has likely been some overcorrection in bank 
lending practices. And tight bank credit has a particularly 
severe impact on small businesses, which do not have the 
ability to raise funds in securities markets. To help mitigate 
this decline in bank credit, we are seeking legislation to 
transfer $30 billion from TARP into a new Small Business 
Lending Fund that would provide smaller and community banks 
with capital structured to provide an incentive to increase 
small business lending. We are also expanding our community 
development lending program. Eligible banks will now be able to 
receive more capital from the government--up to 5% of risk-
weighted assets and the Treasury will match private investments 
in firms in order to increase the number of firms that have 
access to the program. Finally, we continue to encourage major 
U.S. banks to expand lending, and we created and publish a 
monthly snapshot of their lending activity.
    As the President has repeatedly stated publicly and 
privately to these banks: ``The taxpayers were there for you to 
cleanup your mistakes. You now have a responsibility to be 
there for the community.''
    2. There were 149 bank failures between January 1, 2008 and 
November 30, 2009. The FDIC, forced to repay depositors at a 
growing number of banks, is in the red for the first time in 17 
years. In the absence of a robust economic recovery, this 
problem may worsen. How do you explain this rate of failure? 
What are you doing now to redress that balance and protect the 
FDIC against further losses? What implications for financial 
stability do you see in the FDIC's present level of assets?
    The current elevated pace of bank failures is a consequence 
of the excesses that built up in our financial system in recent 
years, resulting in large credit losses that many institutions 
were not equipped to absorb. Among the key lessons of the 
crisis is the need for more capital and more vigilant 
supervision of banks to make sure our system is safer and more 
resilient going forward.
    Despite the elevated pace of bank failures, it is clear 
that the FDIC has the resources and necessary tools to protect 
insured depositors and resolve failed banks. Throughout the 
FDIC's 75-year history, no depositor has ever lost a penny of 
insured deposits. Although the Deposit Insurance Fund (DIF) 
balance fell to negative $21 billion as of December 31, the DIF 
balance should be distinguished from the FDIC's liquid 
resources, which stood at $66 billion of cash and marketable 
securities. To bolster the DIF's cash position, the FDIC's 
Board approved a measure on November 12 to require insured 
institutions to prepay 13 quarters worth of deposit insurance 
premiums at the end of 2009. These prepayments were collected 
on December 31 and totaled approximately $45 billion. 
Additionally, the Helping Families Save Their Home Act, enacted 
on May 20, 2009, permanently increased the DIF's statutory line 
of credit with the U.S. Treasury from $30 billion to $100 
billion, and increased it to $500 billion through the end of 
2010 if certain conditions are met.
    To redress the negative DIF balance going forward, on 
September 22, the FDIC took action to increase assessment rates 
on the banking industry. The FDIC's Board decided that 
effective January 1, 2011, rates will uniformly increase by 3 
basis points. The FDIC has projected that bank and thrift 
failures will peak in 2009 and 2010 and that industry earnings 
will have recovered sufficiently by 2011 to absorb a 3 basis 
point increase in deposit insurance assessments. The Budget 
projects the DIF reserve ratio will return to 1.15 percent in 
2018.
    3. Section 134 of the Emergency Economic Stabilization Act 
of 2008 (EESA) (P.L. 110-343) states that should TARP realize a 
net loss, ``the President shall submit a legislative proposal 
that recoups from the financial industry an amount equal to the 
shortfall in order to ensure that the Troubled Asset Relief 
Program does not add to the deficit or national debt.'' Please 
explain the plan Treasury is putting in place to recoup any 
losses.
    Due to improved market conditions and the effective 
performance in the management and use of TARP authority, the 
projected cost to the taxpayer is now significantly lower than 
earlier anticipated. In our FY 2011 budget, we estimated that 
the cost to taxpayers and the deficit will be about $224 
billion lower than the estimate of $341 billion projected in 
the Midsession Review in August. However, as part of our 
commitment to ensuring that taxpayers do not face the costs of 
the extraordinary efforts taken to stabilize the financial 
system, the Administration proposed the Financial Crisis 
Responsibility Fee on January 14, 2010. This fee--which 
fulfills the President's commitment to submit a plan to recoup 
TARP losses three years early--would be levied on the 
liabilities of financial institutions with over $50 billion in 
assets, and is expected to raise $117 billion over about 12 
years, and $90 billion over the next 10 years.
    Our proposed fee fulfills the requirement of Section 134 of 
EESA--ensuring that taxpayers are paid back in full--while also 
providing a deterrent against excessive leverage among the 
largest financial firms. In the coming weeks, we will be 
developing further details concerning the Financial Crisis 
Responsibility Fee, and we look forward to working with 
Congress and members of this Panel in designing it to most 
effectively recover the costs of TARP.
    4. I understand that the regulators' enforcement action 
with respect to certain very large banks are embodied in 
memoranda of understanding with these banks, but those 
memoranda have not been made public. In the past, the 
regulatory agencies have explained that all such material must 
be confidential to assure the cooperation of banks with the 
examination process. The events of the last several years have 
revealed critical flaws in that process, flaws that have led to 
a bailout using hundreds of billions of dollars of taxpayer 
money. In light of the failure of the examination process and 
its results, do you believe that supervisory enforcement 
memoranda should be disclosed to the public, which is 
ultimately responsible for paying the costs of such failure? If 
you do not believe that such memoranda should be made public, 
please explain why not in light of the rationale I have cited.
    Treasury agrees that the financial crisis revealed serious 
flaws in the supervisory process. Supervisors for several large 
financial institutions missed emerging weaknesses or failed to 
react forcefully when such weaknesses were known. Treasury has 
called for a fundamental reassessment of the supervision and 
regulation of financial institutions based on an analysis of 
the lessons learned in the years leading up to this crisis.
    However, Treasury does not believe that memoranda of 
understanding that were confidential at the time of signing 
should be made public after the fact. Supervised entities rely 
on decisions taken by supervisors, including supervisor's 
decisions to keep information confidential. Supervisors need to 
maintain their ability to ensure confidentiality in order to 
effectively carry out their authorities. In addition, the 
distinction between public and nonpublic enforcement actions is 
important to the conduct of supervision: the issuance of public 
enforcement actions represents a significant escalation in 
supervisory efforts to address weaknesses at financial 
institutions. It is important that supervisors retain the 
ability to address issues either confidentially or publicly, as 
warranted by specific circumstances.
                                ------                                


      Questions for the Record from Damon Silvers, Deputy Chair, 
                     Congressional Oversight Panel

    1. Can you explain how it was in the public interest to 
allow Bank of America to repay TARP funds in such a manner that 
it had less Tier I capital than it did before the repayment? If 
you disagree with this characterization of the transaction, 
please explain why?
    While it would not be appropriate for Treasury to comment 
on any individual institution, it is important to note that 
Treasury is required under the American Recovery and 
Reinvestment Act of 2009 to accept repayment of TARP funds 
``without regard to whether the financial institution has 
replaced such funds from any other source,'' subject to 
consultation with the appropriate federal banking agency. As a 
result, many of the elements of this question would be best 
directed to the regulatory bodies that oversee the safety and 
soundness of individual institutions.
    We also note that one of our objectives has been to improve 
the quality of capital in the banking system. Although in some 
cases following the repayment of TARP, the total Tier 1 capital 
of an institution has been lower than that immediately 
preceding repayment, the quality of capital at institutions 
that have repaid TARP funds has generally improved. Tier 1 
capital, the highest quality form of capital, has accounted for 
the vast preponderance of new capital raised by institutions 
since the Supervisory Capital Assessment Program (SCAP) stress 
test results were released. For example, the institutions 
subject to the stress test alone have raised more than $110 
billion from common equity issuance since the May release of 
the stress test results.
    Further, the level of capital immediately before and 
immediately after TARP repayment is not the only relevant 
comparison. Post-repayment capital levels and ratios should 
also be compared to pre-TARP capital levels and ratio and, more 
generally, to supervisory capital requirements. Tier 1 capital 
has increased substantially at individual institutions and in 
the banking sector as a whole since the inception of TARP, 
demonstrating that TARP has successfully served as a bridge to 
private capital.
    Lastly, we believe that, consistent with the stability of 
the financial system, it is in the public interest for 
taxpayers to get their money back from TARP recipients, with 
interest, at the earliest date consistent with continued 
financial stability. Our judgment has been and continues to be 
that by replacing the Treasury investments with private 
capital, institutions will be in a better position to expand 
lending as the economy expands.
    2. Can you explain further why it was not possible in your 
view to negotiate concessions from the largest AIG 
counterparties as part of the rescue of AIG, in light of their 
limited number and those entities' substantial stake in 
government intervention to support AIG and their relative 
financial and political vulnerability? Note I am not asking 
whether the Treasury and the Federal Reserve Bank of New York 
should have allowed AIG to go bankrupt or whether the Treasury 
and the New York Fed should have allowed a general default on 
all AIG derivaties-related obligations.
    On January 27, 2010, the House Committee on Oversight and 
Government Reform held a hearing that addressed the 
government's role in negotiations with AIG's counterparties.\1\ 
As part of that hearing, I, former Treasury Secretary Henry 
Paulson, Federal Reserve Bank of New York (FRBNY) General 
Counsel Thomas Baxter, and others provided extensive testimony 
on the subject. Although I provide an answer to your question 
below, I also refer you to the testimony from that hearing.
---------------------------------------------------------------------------
    \1\ House Committee on Oversight and government, Hearing, ``The 
Federal Bailout of AIG,'' Jan. 27, 2010, transcripts and webcast of 
hearing available at http://oversight.house.gov/
index.php?option=com_content&task=view&id=4756&Itemid=2.
---------------------------------------------------------------------------
    In the fall of 2008, a near-complete collapse of our 
financial system was a realistic possibility. Americans were 
starting to question the safety of their money in the nation's 
banks, and a growing sense of panic was producing the classic 
signs of a generalized run. Peoples' trust and confidence in 
the stability of major institutions, such as AIG, and the 
capacity of the government to contain the damage was vanishing. 
Lehman Brothers filed for bankruptcy just a few days after AIG 
alerted Federal authorities that its problems had become acute. 
In the wake of Lehman's failure major institutions such as 
Washington Mutual and Wachovia experienced debilitating deposit 
withdrawals, eventually collapsed, and were acquired by 
competitors. Money market funds also suffered a broad run, 
threatening what was considered one of the safest investments 
for Americans and severely disrupting the commercial paper 
market, a vital source of funding for many businesses.
    In this chaotic environment, the Federal Reserve and 
Treasury concluded that AIG's failure could be catastrophic. At 
the time, the failure of a large, global, highly-rated 
financial institution that had written hundreds of billion 
dollars of insurance on a range of financial instruments could 
have tipped an already weak and fragile financial system and 
economy into the abyss. The company's failure would directly 
threaten the savings of millions of Americans to whom it had 
provided financial protection through investment contracts and 
products that protect participants in 401(k) retirement plans. 
AIG was one of the largest life and property-casualty insurance 
providers in the United States. The withdrawal of such a major 
underwriter at the time risked creating a void for millions of 
households and businesses for basic insurance protection. And 
doubts about the value of AIG life insurance products could 
have generated doubts about similar products provided by other 
life insurance companies, feeding the panic that was crippling 
the economy.
    Convinced that the failure of AIG could be catastrophic for 
a financial system already in free fall, the Federal Reserve 
and Treasury determined that it was in the best interests of 
the United States to support AIG in order to slow the panic and 
prevent further damage to our economy. From the beginning, it 
was clear that AIG needed a durable restructuring of its 
balance sheet and operations. Although the government faced 
escalating and unprecedented challenges on many fronts of the 
financial storm in September and October, it continued to work 
to address this need. Falling asset prices generated both 
substantial losses on the company's balance sheet and increases 
in required payments to AIG's counterparties under the terms of 
its credit production contracts. This, along with other 
factors, undermined market confidence in AIG and put its 
investment-grade credit rating again at risk. Understanding the 
counterparty negotiations addressed by your question requires 
an understanding of the role of the rating agencies in AIG's 
businesses. Avoiding further downgrades of AIG's credit rating 
was absolutely essential to sustaining the firm's viability and 
protecting the taxpayers' investment. Under credit protection 
contracts that AIG had written and the terms of various funding 
arrangements, AIG was required to make additional payments to 
its counterparties if its credit rating was downgraded. A 
downgrade (to below a certain level) also constituted an event 
of default or termination under many contracts. In addition, 
rating downgrades of the AIG parent holding company would have 
significantly undermined confidence in its insurance 
subsidiaries. People do not buy insurance products from firms 
they do not believe have the financial capacity to make good on 
those commitments over the long term--firms that they do not 
believe will pay out a life insurance policy or compensate a 
business if a factory burns down. Credit ratings are central to 
how people judge that viability.
    The counterparty negotiations were conducted in connection 
with the formation and funding of Maiden Lane III LLC (ML III), 
a company formed to purchase troubled assets that AIG had 
insured and to help insulate the company from further liquidity 
drains, thereby preventing it from being downgraded and 
failing. Before the Federal Reserve became involved with AIG, 
the company had entered into credit default swap (CDS) 
contracts with various third parties to protect the value of 
certain risky securities, called multi-sector CDOs, in exchange 
for periodic premium payment. The value of these securities was 
tied to pools of other assets, mostly subprime mortgages. The 
contracts required AIG to provide its counterparties collateral 
as the market value of the underlying CDOs, the credit rating 
of the assets behind the CDO, or AIG's credit rating declined. 
As the financial crisis intensified, each of these events 
occurred. As of November 5, 2008, AIG had already posted 
approximately $37 billion in collateral against these exposures 
in accordance with the terms of the contracts, and these 
collateral calls contributed significantly to the $25 billion 
in losses that AIG reported for the third quarter of 2008. The 
box below provides a simplified example to help understand 
these contracts and negotiations with counterparties to them.

------------------------------------------------------------------------
 
-------------------------------------------------------------------------
         AIG's CREDIT DEFAULT SWAP EXPOSURE--SIMPLIFIED EXAMPLE
    While the financial contracts involved were complex, AIG had
 basically agreed to insure the value of certain risky securities called
 multi-sector CDOs. The value of these securities was tied to pools of
 other assets, mostly subprime mortgages. As the financial crisis
 intensified, the value of the securities fell sharply. AIG incurred
 losses on these contracts and had to post collateral or make payments
 on the insurance.
    To help understand this kind of contract, imagine AIG had provided
 insurance on the value of a tangible asset, such as a house, to the
 homeowner. If the price of the house fell, AIG would be required to
 post collateral, or essentially make a payment to the owner, equal to
 the decline in the value of the house. So, if the house was originally
 worth $200,000 and fell to $125,000, AIG had to give $75,000 to the
 homeowner as collateral and would incur a loss of the same amount. In
 addition, AIG would have to post more collateral if the credit rating
 of the house fell, because it would signal that the home's value was in
 jeopardy. Finally, if AIG's credit rating fell, it would have to post
 even more collateral because the homeowner would be concerned about
 whether AIG could ultimately pay on the insurance.
    The problem was AIG had written billions of dollars of such
 insurance without sufficient capital. AIG was fine as long as the
 prices of the assets they were insuring--housing prices, in the
 example--didn't fall, the credit rating of the assets didn't fall, and
 AIG's own credit rating didn't fall. But if any of those events
 happened, it would be in trouble. In the fall of 2008, each of these
 events occurred. The value of the assets, their credit rating, and
 AIG's own credit rating all fell, bringing AIG to the brink of
 bankruptcy.
    The counterparty/homeowner was fully protected and had all the
 leverage. If AIG failed to pay on the insurance, the counterparty could
 keep the collateral and the asset (house) and sue AIG for damages.
 Further, if AIG had failed to pay or threatened not to pay, it would
 have been downgraded and collapsed--threatening the economy. If the
 government had guaranteed the insurance, as some have suggested, and
 asset prices fell, the counterparty could demand more collateral and
 keep the asset (house). Therefore, the government funded ML III to buy
 the asset (house) at fair market value ($125,000). The counterparty
 kept the collateral ($75,00) in exchange for tearing up the insurance.
 As a result, the counterparty received par ($200,000), but the taxpayer
 gained the opportunity to benefit from recovery in asset prices--as has
 occurred. The transaction supported AIG's viability and credit rating,
 removing a substantial threat to the economy at the crisis's peak.
------------------------------------------------------------------------

    To remove the persistent threat that these contracts posed 
to AIG's continuing viability, ML III purchased the underlying 
CDOs from the counterparties at their then fair market value. 
The counterparties received $27 billion in payment from ML III, 
retained approximately $35 billion in collateral previously 
provided by AIG, transferred the CDOs to ML III, and terminated 
the CDS contracts. Thus, the counterparties essentially 
received the ``par'' value of $62 billion, consistent with the 
terms of their insurance contracts with AIG. ML III's purchase 
was funded by a $24 billion loan from the FRBNY and $5 billion 
equity contribution by AIG.
    In designing and implementing this transaction the FRBNY's 
objective was, as it always is, to protect the taxpayer. The 
FRBNY made judgments about these transactions carefully with 
the advice of outside counsel and financial experts. As they 
had done when establishing the lending facility in September, 
the FRBNY and its advisors reviewed a range of materials, 
including details regarding AIG's exposure to each counterparty 
under the CDS contracts. However, the FRBNY faced significant 
constraints. The CDS contracts entitled the counterparties to 
full or par value. The FRBNY could not credibly threaten not to 
pay without being willing to follow through on that threat and 
put AIG into bankruptcy. At the time, the government was 
working desperately to rebuild confidence in the financial 
system. Any suggestion that it might let AIG fail would have 
worked against that vital aim. The FRBNY could not risk a 
protracted negotiation. AIG's financial position was 
deteriorating rapidly, and the prospect of a further ratings 
downgrade was imminent. AIG was scheduled to report a $25 
billion loss for the third quarter on November 10, and the 
ratings agencies had informed AIG that, absent a parallel 
announcement of solutions to its liquidity and capital 
problems, they would downgrade the company yet again. Such a 
downgrade would have led to AIG's failure and triggered the 
same catastrophic consequences the government had been trying 
to avoid since September 2008. Moreover, a bankruptcy would 
have entitled the counterparties to terminate the CDS contracts 
and keep the collateral that AIG had previously posted, as well 
as the underlying CDOs that AIG had insured.
    The Special Inspector General for the Troubled Asset Relief 
Program (SIGTARP) has suggested that the FRBNY should have used 
its regulatory authority, or some other means, to coerce AIG's 
counterparties to accept concessions.\2\ This was not a viable 
option for several reasons. First, if the FRBNY had tried to 
force counterparties to accept less than they were legally 
entitled to, market participants would have lost confidence in 
AIG leading to the company's failure. Once a company refuses to 
meet its full obligations to a customer, other customers will 
quickly find other places to do business. Second, the 
counterparties could have said refused to grant such 
concessions, kept the collateral they had already received, 
kept the CDO securities that AIG had insured, and sued AIG for 
breach of contract. This would have increased the taxpayer's 
potential exposure and precluded them from benefiting from any 
recovery in the value of the CDOs, which has in fact happened.
---------------------------------------------------------------------------
    \2\ Factors Affecting Efforts to Limit Payments to AIG 
Counterparties, Nov. 17, 2009, available at http://www.sigtarp.gov/
reports/audit/2009/Factors_Affecting_Efforts_to_Limit
_Payments_to_AIG_Counterparties.pdf.
---------------------------------------------------------------------------
    Third, if the FRBNY had attempted to use its regulatory 
authority to coerce or extract concessions from AIG's 
counterparties, that attempt would likely have led to a further 
downgrade of AIG's ratings, precisely the result that all of 
the government's actions were intended to avoid. An 
``investment grade'' credit rating is the rating agencies' 
judgment that creditors will likely be repaid in accordance 
with the terms of their contracts, not according to a 
hypothetical government-coerced discount. If the FRBNY had 
attempted to force counterparties to accept less than they were 
legally entitled to, then AIG would not have met the ratings 
agencies' standards for ``investment grade'' status, and it 
would likely have lost its ``investment grade'' rating. Such a 
downgrade could have led to the company's collapse, threatened 
government efforts to rebuild confidence in the financial 
system, and meant a deeper recession, more financial turmoil, 
and a much higher cost for American taxpayers. In addition, the 
SIGTARP has stated that Treasury and the Federal Reserve ``were 
fully prepared to use their leverage as regulators to compel 
the nine largest financial institutions (including some of 
AIG's counterparties) to accept TARP funding.'' The SIGTARP 
suggests that the government should have similarly compelled 
concessions from AIG's counterparties. First, I disagree with 
the SIGTARP's characterization of the government's discussions 
with the initial recipients of TARP funds. Second, the 
circumstances and authority in that situation were 
fundamentally different from what existed in the ML III 
transaction. Congress granted the Federal Reserve and, through 
EESA, Treasury with the responsibility to ensure the safety and 
soundness of the financial system. In the Federal Reserve's 
case, that authority was limited to providing liquidity and 
regulating bank holding companies. In Treasury's case, it was 
limited to purchasing or guaranteeing assets. Consistent with 
that responsibility and authority, in the midst of the 
financial crisis the government encouraged nine banks to accept 
additional capital. They were not forced to forfeit contractual 
rights for the benefit of another financial institution. The 
latter would have been an abuse of the authority granted by 
Congress, violated private parties' contractual rights, and 
undermined confidence in the government's strategy to stabilize 
the U.S. financial system.
    Operating with these constraints, the FRBNY and AIG 
initiated discussions with the major counterparties about 
whether they would be prepared to accept concessions on the 
prices of the securities. The FRBNY knew that the likelihood of 
success of such a negotiation was modest, especially given the 
imminent deadline and the bargaining constraints under which it 
was operating. Not unexpectedly, the FRBNY discovered that most 
firms would not, under any condition, provide such a 
concession. One counterparty (UBS) said that it was willing, 
but only if every other counterparty would agree to equal 
concessions on their prices. In the end, the prices paid for 
the securities were their fair market value, and because the 
counterparties retained the collateral they had previously 
received from AIG, they all received an aggregate amount equal 
to par value of their securities. In return, the insurance 
contracts were terminated, and ML III kept the securities.
    I strongly believe that the strategy that the Federal 
Reserve pursued in establishing ML III will generate a better 
outcome than any alternative. In particular, attempting to 
coerce concessions risked making the U.S. taxpayer 
significantly worse off.
    Since ML III purchased the CDOs, they have generated 
significant cash flows that have been used to pay down the 
FRBNY's loan by more than 25 percent. The Federal Reserve and 
Treasury expect ML III to pay the FRBNY back in full and to 
generate substantial returns for U.S. taxpayers. The FRBNY is 
not only the senior creditor to ML III. It also has a right to 
two-thirds of any profits from the portfolio, once its loan has 
been repaid. Moreover, because ML III can hold the CDOs to 
maturity, it is largely immune from the trading prices and 
liquidity needs, and is therefore in a better position to 
maximize the value of the portfolio.
    However, the government's return on ML III should be 
considered in the context of the overall return on its support 
for AIG. On the one hand, the Federal Reserve will likely 
generate returns on its financial support of AIG, including the 
FRBNY Credit Facility, its loans to Maiden Lane II and Maiden 
Lane III, and its preferred interests in AIA Aurora LLC and 
ALICO Holdings LLC. On the other hand, it is unlikely that 
Treasury will fully recover the direct costs of its capital 
investments in AIG. In June 2009, the Congressional Budget 
Office estimated that Treasury would lose $35 billion of its 
$70 billion total commitment to AIG, including undrawn funds in 
the equity facility.\3\ And the 2011 Budget reflected an 
expected loss of $48 billion on that commitment.
---------------------------------------------------------------------------
    \3\ Congressional Budget Office, The Troubled Asset Relief Program; 
Report on Transactions Through June 17, 2009, Jun. 2009, 2, available 
at http://www.cbo.gov/ftpdocs/100xx/doc10056/06-29-TARP.pdf.
---------------------------------------------------------------------------
    Today, on the basis of a range of measures, Treasury 
believes that losses on its investments in AIG are likely to be 
lower. If market conditions continue to improve and AIG's 
businesses perform well, the actual recovery on Treasury's 
preferred stock could be significantly higher. The 
Congressional Budget Office recently estimated that losses on 
all Treasury investments in AIG would be $9 billion.\4\
---------------------------------------------------------------------------
    \4\ Congressional Budget Office, The Budget and Economic Outlook: 
Fiscal Years 2010-2020, Jan. 2010, at 13, available at http://
www.cbo.gov/ftpdocs/108xx/doc10871/01-26-Outlook.pdf.
---------------------------------------------------------------------------
    The President has put forward a concrete plan to recover 
every penny that Treasury committed to stabilize our financial 
system, including Treasury investments in AIG. The President's 
proposed Financial Crisis Responsibility Fee would be imposed 
on large financial institutions to recoup all losses from TARP 
investments.
                                ------                                


Questions for the Record from Paul Atkins, Panel Member, Congressional 
                            Oversight Panel

    1. With respect to Treasury's position that its 
authorization under EESA to extend $700 billion for the 
acquisition of troubled assets operates in the nature of a 
revolving line of credit, how does that treatment of repayments 
as restoring the ability to make further payments out of TARP 
up to the overall statutory limit not render nugatory the 
provisions of EESA that the public debt be reduced through 
repayments?
    Section 106(d) of the Emergency Economic Stabilization Act 
of 2008 (EESA) requires that revenues and the proceeds from the 
sale of troubled assets purchased under that law must be paid 
into the general fund of the Treasury for reduction of the 
public debt. However, other applicable provisions under EESA 
govern the use of TARP funds. Section 115(a) authorizes 
Treasury to purchase troubled assets having aggregate purchases 
up to $700 billion ``outstanding at any one time,'' and section 
106(e) authorizes Treasury to continue to purchase troubled 
assets under commitments entered into by Treasury prior to 
EESA's sunset date. Finally, section 118 makes new funding 
available for new purchases of troubled assets.
    Taken together, these provisions operate as follows: When a 
purchased troubled asset is sold or when a TARP investment is 
repaid, the proceeds are deposited into the Treasury general 
fund for reduction of the public debt. Upon such a sale or 
repayment, the total amount of troubled assets that are held by 
the Treasury and count against the $700 billion cap is reduced. 
This reduction in the total amount of assets ``outstanding'' 
frees up headroom under the cap. To be clear, the funds used to 
pay for any new purchases under the freed-up headroom under the 
cap are not the same as the funds received from the sale or 
repayment of troubled assets. Instead, new funding is made 
available under section 118 for any new purchases and is 
recorded as a new, current-year cost.
    That the words ``outstanding at any one time'' mean that 
the statutory cap is a ``revolving'' cap on purchasing 
authority is without question. These words are always used by 
Congress to confer revolving budget authority (whether 
revolving borrowing authority, revolving lending authority or, 
as in this case, revolving purchase authority) as opposed to 
``once-used-gone'' authority.
    EESA provides the U.S. government with a powerful tool for 
stabilizing the financial system. The Congress wisely provided 
Treasury with the flexibility to apply EESA's purchasing power 
over the lifetime of the statute.
    2. How are the equity and other securities that Treasury 
has acquired under the CPP and other programs ``troubled 
assets'' under EESA, particularly since Treasury and the 
various institutions participating in those programs over the 
course of the past approximately 14 months have averred that 
the institutions into which Treasury's capital injections have 
been made were ``healthy''?
    EESA defines ``troubled asset'' to mean ``(A) residential 
or commercial mortgages and any securities, obligations, or 
other instruments that are based on or related to such 
mortgages, that in each case was originated or issued on or 
before March 14, 2008, the purchase of which the Secretary 
determines promotes financial market stability; and (B) any 
other financial instrument that the Secretary, after 
consultation with the Chairman of the Board of Governors of the 
Federal Reserve System, determines the purchase of which is 
necessary to promote financial market stability, but only upon 
transmittal of such determination, in writing, to the 
appropriate committees of Congress.'' Each purchase of a 
troubled asset has been made in accordance with this language. 
Since the enactment of EESA, I have made such determinations, 
in consultation with the Chairman of the Board of Governors of 
the Federal Reserve System, which have been transmitted to the 
appropriate committees of Congress. In the case of the Capital 
Purchase Program, participation was reserved for viable 
institutions that were recommended by their federal banking 
regulator to receive a TARP investment. The Secretary of the 
Treasury under the prior Administration determined that 
injecting capital into viable institutions by purchasing 
preferred shares in those institutions was an effective way of 
increasing the capital base and strength of those institutions, 
thereby promoting financial market stability.
    3. At our hearing on 10 December, you discussed Treasury's 
plans to extend more TARP funds to smaller banks, ostensibly to 
increase their lending. If Treasury acquires equity or other 
securities from these banks, does that mean that these 
instruments are perforce ``troubled assets'' under EESA? Or, if 
Treasury acquires the underlying loans, are they perforce 
``troubled assets,'' even if the loan is performing? By 
extension, does that mean that any such bank receiving such a 
capital injection is a troubled bank?
    Under the terms of the Small Business Lending Fund that the 
President announced earlier this month, capital investments 
would be made under new legislative authority, not through 
EESA. We are currently in the process of developing legislation 
with Congress that would define the exact parameters for 
purchases under that program, although--as Treasury has 
announced--our proposal would provide for capital investments 
in banks with less than $10 billion in assets that receive 
approval from their primary federal regulator.
    4. Do you believe that the acquisition of stock and 
warrants under the CPP has been more--or less--effective than 
the original intent of TARP, which was to purchase 
``residential or commercial mortgages and any securities, 
obligations, or other instruments that are based on or related 
to such mortgages, that in each case was originated or issued 
on or before March 14, 2008''?
    Capital injections and purchases of illiquid assets serve 
somewhat different functions. The purchase of illiquid assets 
is a targeted response to problems involving specific assets. 
Capital injections have the advantage of providing insurance 
against the full range of challenges facing financial 
institutions. As the financial crisis intensified following the 
failure of Lehman Brothers, the broadening panic moved beyond 
mortgage-backed, and related, securities. In addition, the 
deteriorating economic outlook posed new challenges for banks. 
In this context, capital injections through the CPP were a more 
effective means of containing the financial panic than 
purchases of illiquid mortgage-related assets.
    5. Would you describe the current process in which Treasury 
determines which institutions should receive TARP assistance, 
how much, and under what terms? How was this determination made 
with respect to GMAC?
    Each institution receiving Troubled Asset Relief Program 
(TARP) assistance followed a different determination process 
depending on the individual program within TARP through which 
the institution applied for funding.
    Treasury's assistance to GMAC was provided under the 
Automotive Industry Financing Program (AIFP) consistent with 
the goals of that program. Treasury's determination to make 
additional investments in GMAC in 2009 was driven by the need 
to maintain automotive financing for dealers and consumers 
during the critical restructuring periods for GM and Chrysler 
and Treasury's commitment under the Supervisory Capital 
Assessment Program (SCAP).
    Treasury's investments in GMAC have helped to provide a 
reliable source of financing to both auto dealers and customers 
seeking to buy cars following the severe contraction of credit 
in the auto finance markets starting in 2008. Alongside 
Treasury's efforts through the TALF program, a recapitalized 
GMAC has offered strong credit opportunities, helped stabilize 
our auto financing market, and contributed to the overall 
economic recovery.
    As to the SCAP, U.S. federal banking supervisors believe it 
to be important for the largest U.S. bank holding companies 
(BHCs) to have a capital buffer sufficient to withstand losses 
and sustain lending even in a significantly more adverse 
economic environment than is currently anticipated. In keeping 
with this aim, the Federal Reserve and other federal bank 
supervisors engaged in the SCAP, or the stress tests, with each 
of the 19 largest U.S. BHCs, including GMAC. As part of the 
SCAP, Treasury committed to contribute capital to these 
institutions in the event that any of them could not meet their 
SCAP buffer requirement via third party sources.
    In line with its commitment to support the SCAP 
institutions, Treasury made a $7.5 billion investment in GMAC 
in the form of mandatorily convertible preferred stock (MCP) in 
May 2009. This investment was the result of two distinct 
capital needs: (i) $3.5 billion of the investment was an 
initial contribution towards the $9.1 billion SCAP buffer 
requirement, and (ii) $4.0 billion of the investment was to 
support the origination of Chrysler dealer and retail loans 
which had been previously funded by Chrysler Financial.
    Treasury did not fund the additional $5.6 billion for the 
SCAP buffer requirement at that time. Waiting for certain 
events underlying the assumptions that formed the basis for the 
SCAP buffer to play out, resulted in a smaller Treasury funding 
requirement for the second installment. Due to a variety of 
factors, including that the establishment of the new General 
Motors and new Chrysler was accomplished with less disruption 
to GMAC than banking supervisors initially projected, the 
amount of funding to meet the SCAP was determined by the 
Federal Reserve to be $3.8 billion ($1.8 billion less than the 
$5.6 billion previously announced).
    On December 30, 2009, Treasury funded the second 
installment of an additional $3.8 billion in GMAC. In 
structuring the investment, Treasury ensured that its capital 
contribution was in a form the Federal Reserve deemed 
satisfactory to establish the SCAP buffer and was made on terms 
most beneficial to the U.S. taxpayer. As such, $2.54 billion of 
the investment was made in the form of trust preferred stock, 
which are senior to all other capital securities of GMAC.
    6. Does a potential failure of GMAC itself pose a systemic 
risk to our financial system?
    The investment in GMAC was consistent with the purposes of 
EESA, which is to restore liquidity and stability to the U.S. 
financial system. The Secretary of the Treasury was given broad 
discretion under EESA to establish programs to purchase 
``troubled assets.'' One such program was the Automotive 
Industry Financing Program (AIFP), which was established by my 
predecessor, in the Bush Administration, to prevent a 
significant disruption of the American automotive industry. It 
was determined that such a disruption would pose a systemic 
risk to financial market stability and have a negative effect 
on the economy.
    Treasury's investments in GMAC were made pursuant to the 
AIFP and a ``troubled asset'' determination made by Secretary 
Paulson in December 2008. These investments have helped to 
provide a reliable source of financing to both auto dealers and 
customers seeking to buy cars. A recapitalized GMAC has enabled 
GMAC to restore liquidity to its finance business and helped to 
restore stability to the U.S. domestic automobile industry. 
This has in turn contributed to the overall economic recovery 
and to financial stability.
    As noted above, the current investment in GMAC also 
represents the completion of funding provided to GMAC as part 
of the SCAP process. Ensuring SCAP compliance enables GMAC to 
maintain adequate capital under stressed conditions and 
continue to fulfill its role as a leading provider of financing 
within the U.S. automotive industry. Completing the SCAP 
exercise should help assuage investor concerns and assist GMAC 
in its private capital raising efforts. Capital market access 
will provide GMAC with necessary liquidity and should allow 
Treasury ultimately to exit its investment in a manner that 
protects taxpayers.
    7. Has Treasury performed a legal analysis of its authority 
under EESA with respect to foreclosure mitigation, including 
section 109 of EESA? Has Treasury performed such a legal basis 
for HAMP, HARP, etc.? Please provide any such legal memoranda 
or opinions to the Panel.
    Treasury has separately provided Mr. Paul Atkins with a 
response to the request for a legal analysis of Treasury's 
authority under EESA with respect to foreclosure mitigation, 
including section 109 of EESA, and Treasury's legal basis for 
its Home Affordable Modification Program (HAMP). Delivery of 
that response did not waive the attorney-client privilege and 
its subject to the Panel's confidentiality protocol entered 
into on May 21, 2009 and updated on December 11, 2009.
    The Home Affordable Refinancing Program (HARP) is a 
refinancing program developed by Fannie Mae and Freddie Mac 
(Government-sponsored enterprises, or GSEs) under the 
supervision of the federal regulator of the GSEs (the Federal 
Housing Finance Agency), and is available for eligible GSE-
owned or GSE-guaranteed mortgages. Treasury does not administer 
the HARP, and the HARP is not based on Treasury legal 
authorities.
    8. According to Treasury's guidelines with respect to the 
Home Affordable Modification Program (HAMP), ``new borrowers 
will be accepted until December 31, 2012'' and ``program 
payments will be made for up to five years after the date of 
entry into a Home Affordable Modification.'' How does Treasury 
intend to make HAMP payments using TARP funds beyond EESA's 
expiration date of October 3, 2010? Please cite the specific 
legal authority that allows Treasury to do this.
    EESA section 106(e) specifically authorizes Treasury to 
continue to fund the purchase of assets after the EESA 
purchase-authority sunset date (now October 3, 2010) under 
purchase commitments entered into before that purchase-
authority sunset date. All HAMP payments made to servicers 
after October 3, 2010, will be funded under purchase 
commitments with servicers that will have been entered into 
before October 3, 2010.
    9. Has Treasury performed an analysis or developed a metric 
to determine how effective TARP has been in encouraging various 
categories of lending, including interbank, commercial, 
residential mortgage, consumer revolving credit, etc.? Can 
banks and similar institutions in the current economic 
environment increase their lending, while simultaneously 
increasing their capital and writing off non-performing assets?
    The U.S. banking system entered this crisis with 
insufficient capital. As credit losses mounted, first because 
of the deterioration in the U.S. housing market and 
subsequently because of the sharp contraction in the economy, 
banks have had to adjust. That adjustment has come through 
raising additional capital, reductions in total assets held by 
banks, and changes in the composition of those assets. The fact 
that bank lending continues to contract is an indication that 
the adjustment in the U.S. banking sector is ongoing.
    But the recession has also reduced the demand for credit as 
both consumers and businesses have pulled back. In addition it 
has undermined the creditworthiness of many borrowers. The 
reduction in lending by banks reflects all three of the 
factors: the need for banks to adjust their balance sheets; 
reduced demand for credit; and the decline in the 
creditworthiness of many borrowers.
    The primary objective of TARP was to first contain the 
financial panic that followed the failure of Lehman Brothers 
and then to ensure the stability of the financial system by 
encouraging private capital raising by major financial firms. 
TARP has made an important contribution to achieving those 
objectives. Without TARP the contraction in lending would no 
doubt have been much more severe. But developing a specific 
estimate of TARP's impact on lending is problematic because it 
requires making a judgment about what would have happened had 
TARP not been put in place.
                                ------                                


      Questions for the Record from Richard Neiman, Panel Member, 
                     Congressional Oversight Panel

    1. Foreclosure Prevention: As we discussed at our December 
hearing, January 1st is expected to be a critical day for the 
roughly 375,000 homeowners whose trial modification period 
expires. Most of these homeowners have made at least 3 months 
of timely payments as required by the HAMP program. However, 
less than half of these homeowners have submitted all required 
documentation, and by some estimates half of these borrowers 
that have submitted their documentation have yet to have their 
documentation validated by the servicer. Thus, it looks as if 
possibly over 75% of homeowners who have demonstrated a 
willingness and ability to make timely payments on their trial 
modifications may be eliminated from the program and once again 
facing foreclosure.
          (a) Do you see the documentation problem as one of 
        homeowners failing to get their materials in, servicers 
        failing to validate, or perhaps a problem inherent in 
        the documentation requirement itself?
          Converting trial modifications to permanent 
        modifications is the shared responsibility of borrowers 
        and servicers. Treasury has taken a number of steps to 
        simplify the process for both borrowers and servicers. 
        On October 8, Treasury published streamlined and 
        simplified documentation requirements for HAMP. In 
        November, Treasury launched a conversion campaign, 
        including posting the HAMP application documents and a 
        number of new tools for borrowers on our consumer 
        website, www.makinghomeaffordable.gov. As part of the 
        conversion campaign, Treasury and Fannie Mae (as our 
        agent) are requiring servicers to report conversion 
        progress on a daily basis.
          As of the end of January, over 1 million Americans 
        had begun trial modifications, saving an average of 
        $500 per month. However, only about 31,000 of those 
        trials had become permanent modifications. Although 
        both borrowers and servicers share responsibility for 
        increasing the number of permanent modifications, it is 
        clear that servicers need to do a better job of 
        increasing capacity, reaching out to borrowers and 
        processing documents quickly. The current number of 
        permanent modifications suggests a lack of mobilization 
        by major servicers to convert borrowers to permanent 
        modifications.
          For this reason, on December 23, Treasury released 
        Supplemental Directive 09-10 (SD 09-10), enclosed here 
        and posted at www.hmpadmin.com. Per SD-10, effective on 
        December 23 and lasting through January 31, 2010, 
        Treasury implemented a temporary review period for all 
        active HAMP trial modifications scheduled to expire on 
        or before January 31, 2010, with the exception of 
        modifications failing property eligibility 
        requirements, such as those that are investor owned.
          During this review period, servicers were required to 
        confirm the status of borrowers in active HAMP trial 
        modifications scheduled to expire on or before January 
        31, 2010 as either current or not current. Servicers 
        also must have confirmed which, if any, documents are 
        due from borrowers. Servicers must send written 
        notification to borrowers to inform them that they are 
        at risk of losing eligibility for a permanent HAMP 
        modification because the borrower has (i) failed to 
        make all required trial period payments, (ii) failed to 
        submit all required documentation, or (iii) failed both 
        to make all required trial period payments and to 
        submit all required documentation. The notice must have 
        provided the borrower with the opportunity to correct 
        any error in the servicer's records or submit any 
        missing documents or payments within 30 days of the 
        notice or through January 31, 2010, whichever was 
        later. If a borrower provided evidence of the 
        servicer's error or corrects the deficiency within the 
        timeframe provided, the servicer must have considered 
        the new information and determine if the borrower is 
        eligible to continue in the HAMP modification process.
          On January 28, 2010, Treasury took an additional step 
        to streamline the documentation process, releasing 
        Supplemental Directive 10-01 which introduces a 
        requirement for full verification of borrower 
        eligibility prior to offering a trial period plan. 
        Effective for all HAMP trial period plans with 
        effective dates on or after June 1, 2010, a servicer 
        may only offer a borrower a trial period plan based on 
        verified income documentation in accordance with 
        program guidelines. This Supplemental Directive also 
        provides guidance to assist servicers in making HAMP 
        eligibility determinations for borrowers currently in 
        active trial period plans, including those borrowers 
        subject to the temporary review period required by 
        Supplemental Directive 09-10.
          (b) What documentation flexibility, if any, could 
        perhaps be provided that would not impact program 
        integrity but would help people meet their 
        documentation requirements and stay in their homes? For 
        example, could alternative documents such as bank 
        statements be accepted in lieu of a profit and loss 
        statement? What particular documents does your office 
        find to be consistently missing or deemed inadequate?
          Treasury has taken a number of steps to simplify 
        documentation requirements. On October 8, Treasury 
        published streamlined documentation requirements for 
        borrowers, simplifying the documentation required for 
        borrowers to get permanent modifications. As outlined 
        above, on December 23, Treasury published new guidance 
        for servicers requiring trial modifications to be 
        placed in a temporary review period while servicers 
        review document receipt and processing to ensure that 
        all borrowers are being treated fairly and in 
        accordance with program guidelines.
          Treasury has also launched a conversion campaign, 
        requiring servicers to provide detailed data describing 
        the status of all borrowers in trial modifications and 
        cataloguing which documents are missing. As part of the 
        conversion campaign, Treasury and Fannie Mae have sent 
        staff to servicer locations to better understand 
        alternative documentation processes that could 
        facilitate conversions while maintaining program 
        standards. These specific documentation issues are 
        being discussed and resolved by Treasury and Fannie Mae 
        on a daily basis, with new FAQs posted on the 
        administrative website, www.hmpadmin.com, to explain 
        program flexibilities on a regular basis. We will 
        continue to examine ways to further streamline 
        documentation and to make program adjustments to 
        improve execution.
          The program guidelines released on January 28, 2010 
        also included a number of additional steps to 
        streamline specific documentation requirements, so as 
        to increase the number of permanent modifications.
          (c) Do you expect that upcoming program improvements 
        such as document standardization and the implementation 
        of a web portal for online document tracking will 
        alleviate the problem? Can any of these program 
        improvements be implemented before the current March 
        start date, so they can help people now at risk of 
        losing their trial modifications?
          Steamlined documentation requirements announced on 
        October 8 have had a significant positive impact in 
        simplifying the HAMP modification process for servicers 
        and borrowers. The streamlined documentation 
        requirements were effective as of October 8, 2009. The 
        temporary review period will also help require 
        servicers to re-evaluate the status of trial 
        modifications and document handling procedures. In 
        addition, the temporary review period will require 
        servicers to let borrowers know where they stand--by 
        providing a letter outlining any missing documents, and 
        an opportunity to correct errors or complete the 
        application. The temporary review period process was 
        effective as of December 23. The new additional 
        streamlined processes for conversions of modifications 
        announced on January 28, 2010 also became effective 
        upon announcement--and we are seeing the impact of 
        these changes in improved pull-through rates. As of the 
        end of January there were over 116,000 permanent 
        modifications and over 67,000 permanent modifications 
        pending final approval. This group of approximately 
        180,000 permanent and pending permanent modifications 
        represents about a third of the population of trial 
        modifications who have completed the trial modification 
        and are at a point in the process where they are able 
        to convert to permanent. We recognize that there is 
        much additional work to be done in converting borrowers 
        to permanent modifications but view the changes 
        outlined above as significant progress.
          We expect that the web portal will further enhance 
        the ability of borrowers to submit documents and 
        servicers to receive and process HAMP applications. We 
        are working to implement the web portal as quickly as 
        possible.
          (d) What is the process for notifying borrowers if 
        their trial modification fails to convert to a 
        permanent modification? Will the reasons be provided, 
        and what process is in place for borrowers to appeal?
          As described in Supplemental Directive 09-08 (SD-09-
        08), enclosed here and posted at www.hmpadmin.com, 
        every borrower that is not approved for a trial 
        modification must be sent a written explanation for the 
        denial, indicating one of the specific denial reasons 
        outlined in SD 09-08. In the letter required by SD 09-
        08, the borrower must also be provided with information 
        about other foreclosure alternatives, contact 
        information for the servicer, contact information for 
        the HOPE Now hotline, and instructions on how to 
        contact MHA Help.
          In addition, on December 23, Treasury released 
        Supplemental Directive 09-10 as outlined above, 
        requiring most trial modifications to be placed into a 
        temporary review period. During this review period, 
        servicers must have provided borrowers with a notice 
        indicating application deficiencies. The notice must 
        have provided the borrower with the opportunity to 
        correct any error in the servicer's records or submit 
        any missing documents or payments within 30 days of the 
        notice or through January 31, 2010, whichever was 
        later. If a borrower provides evidence of the 
        servicer's error or corrects the deficiency within the 
        timeframe provided, the servicer must consider the new 
        information and determine if the borrower is eligible 
        to continue in the HAMP modification process.
    2. Small Business Lending: What additional clarity can you 
provide regarding Treasury's capital assistance program for 
small banks announced in October? As you stated, banks my be 
reluctant to participate due to potential stigma. What steps 
are you taking to address these concerns and to implement the 
program? What is the date for release of additional program 
details? Assistant Secretary Allison responded to questioning 
at our October hearing that he expected between $10 and $50 
billion allocated to the program; is this still the estimated 
amount?
    On Tuesday, February 2, the President announced details of 
his new proposal to create a Small Business Lending Fund. Under 
this proposal, $30 billion in TARP funds would be transferred, 
through legislation, to a new program outside of TARP to 
support small business lending. The program would be separate 
and distinct from TARP. Participation would be limited to 
community and other smaller banks with less than $10 billion in 
assets. A core function of the new fund would be to offer banks 
capital with built-in incentives to increase small business 
lending--as banks increase lending, the dividend rate on the 
new capital they had received would fall. The administration 
will work closely with the Congress to design this program and 
discuss other ways that the Small Business Lending Fund could 
be fully deployed.
    As referenced, concerns about TARP stigma have been a 
significant concern throughout the policy process. These 
concerns in large part motivated the decision to call for TARP 
funds to be formally transferred through legislation to a new, 
separate entity. We believe that creating a distinct fund will 
encourage broader participation.
    3. Limitations on Banks' Risky Activity: Large financial 
institutions are a large part of our free market system, but 
they are also supported by a Federal safety net. Their deposits 
are insured by the FDIC, they have access to funding through 
the Federal Reserve, and of course have recently received 
significant taxpayer assistance through TARP. Are there certain 
activities that bank holding companies currently engage in that 
might be too risky given their access to government and 
taxpayer support?
    Under the legislation proposed by the Administration and 
passed by the House in December, the largest financial firms 
operating in the U.S. would be subject to higher capital, 
liquidity, and supervisory standards. For instance, the 
largest, most interconnected institutions will be subject to 
additional concentration limits and regulators may establish 
short-term debt limits as well. These new limits will help 
ensure that our largest, most interconnected financial firms 
have sufficient capital, liquidity, and other buffers to bear 
the risks they take. The Administration recognizes that the 
engagement by one or more of the largest, most interconnected 
firms in high volumes of certain high-risk activities could 
increase risk to the financial system. Accordingly, the 
Administration supports provisions in the House bill that give 
regulators the authority to force institutions to limit or 
terminate any activity that could threaten financial stability.
    While many of the largest, most interconnected firms are 
currently organized as bank holding companies (BHCs), these are 
not the only firms that will be subject to activity limitations 
and higher prudential standards. The Administration's proposed 
legislation would also require any firm that owns an insured 
depository institution to become a bank holding company and, 
therefore, to be subject to the activity limits and higher 
safety and soundness standards of the Bank Holding Company Act. 
In addition, the Administration's proposal would identify other 
firms that are so large and interconnected that their failure 
could threaten financial stability and bring those firms under 
BHC Act activity limits and tough, consolidated supervision at 
the holding company--subject to the higher capital, liquidity, 
and supervisory standards mentioned above.

                                  
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