[Senate Hearing 111-367]
[From the U.S. Government Publishing Office]
S. Hrg. 111-367
EMERGENCY ECONOMIC STABILIZATION ACT:
ONE YEAR LATER
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE EFFECTS OF THE EMERGENCY ECONOMIC STABILIZATION ACT AFTER
ONE YEAR
__________
SEPTEMBER 24, 2009
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /congress /senate/
senate05sh.html
U.S. GOVERNMENT PRINTING OFFICE
56-019 WASHINGTON : 2010
-----------------------------------------------------------------------
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001
?
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York JIM BUNNING, Kentucky
EVAN BAYH, Indiana MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia JUDD GREGG, New Hampshire
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado
Edward Silverman, Staff Director
William D. Duhnke, Republican Staff Director
Amy S. Friend, Chief Counsel
Dean V. Shahinian, Senior Counsel
Charles Yi, Senior Policy Adviser
Julie Chon, Senior Policy Adviser
Matthew Green, FDIC Detailee
Mark Oesterle, Republican Chief Counsel
Jeffery L. Stoltzfoos, Republican Counsel
Dawn Ratliff, Chief Clerk
Devin Hartley, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
?
C O N T E N T S
----------
THURSDAY, SEPTEMBER 24, 2009
Page
Opening statement of Chairman Dodd............................... 1
Prepared statement........................................... 3
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 3
Senator Brown
Prepared statement....................................... 57
WITNESSES
Herbert M. Allison, Jr., Assistant Secretary for Financial
Stability (TARP), Department of the Treasury................... 5
Prepared statement........................................... 58
Responses to written questions of:
Chairman Dodd............................................ 122
Neil M. Barofsky, Special Inspector General, Troubled Asset
Relief Program................................................. 41
Prepared statement........................................... 97
Responses to written questions of:
Chairman Dodd............................................ 122
Senator Shelby........................................... 123
Gene L. Dodaro, Acting Comptroller General, Government
Accountability
Office......................................................... 43
Prepared statement........................................... 104
Responses to written questions of:
Chairman Dodd............................................ 127
Senator Shelby........................................... 128
Elizabeth Warren, Chair, Congressional Oversight Panel for the
Troubled Asset Relief Program.................................. 45
Prepared statement........................................... 119
Responses to written questions of:
Chairman Dodd............................................ 129
(iii)
EMERGENCY ECONOMIC STABILIZATION ACT: ONE YEAR LATER
----------
THURSDAY, SEPTEMBER 24, 2009
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee convened at 9:40 a.m., in room SD-538,
Dirksen Senate Office Building, Senator Christopher J. Dodd
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Chairman Dodd. The Committee will come to order. Let me
welcome all of our colleagues here this morning and our
witnesses.
Let me also welcome my very good and dear friend of many
years, Judd Gregg. Judd, we welcome you to the Committee. Judd
and I served on committees together. We serve on the Health,
Education, and Labor Committee, and together, we went through
the marathon markup earlier this summer. I guess you are going
through it again--no, you don't have to go through that again,
I guess----
Senator Gregg. Fortunately, not.
Chairman Dodd. ----but we are a delighted you are a part of
us. We are getting a lot of Governors on this Committee here, I
can only say.
[Laughter.]
Chairman Dodd. Look at the smiles here, the Governors
smiling around the table here, the possibility of being
involved in this. Well, Judd, we are glad you are with us, and
thanks for joining us.
We will miss Mel Martinez. Mel did a great job on the
Committee. He was invaluable to us as a former Secretary of HUD
and brought some wonderful perspectives to housing issues and
others as a Member of the Committee, and so we wish him well.
But again, Judd, we are delighted to have you with us in this
process.
I want to make a couple of opening comments. I will turn to
Senator Shelby, our former Chairman of the Committee, and then
we will turn to our witnesses, following the Corker rule that
unless Members insist upon being heard before we hear from our
witnesses, we will recognize them at their appropriate time in
the process and go forward to----
Senator Shelby. Mr. Chairman, that is an unwritten rule,
though----
Chairman Dodd. It is the unwritten Corker rule, I call it
here. Look at him smile. He smiles every time I mention that.
[Laughter.]
Chairman Dodd. There is the Byrd rule and the Corker rule.
We just have different rules along the way.
Well, good morning, everyone. A little over a year ago,
Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben
Bernanke, and SEC Chairman Chris Cox came to Congress with an
urgent message. The American economy was on the brink of total
collapse and they needed $700 billion of taxpayer money to stop
it.
Already, our Nation, of course, as all of us know here, was
in the midst of an economic crisis that threatened small
businesses' ability to make payroll, cost us more than half-a-
million jobs in our Nation, and turned the American dream of
home ownership into a nightmare for many. It kept students from
getting college loans and wiped out hundreds of billions of
dollars in savings that Americans were counting on for their
retirement. With financial giants toppling what seemed like
every day and with businesses large and small suddenly unable
to access the credit they needed to operate, we clearly needed
to act.
But when the Bush administration's proposal emerged, it was
clearly unacceptable. I know particularly Judd, myself, and Bob
Corker and others were involved in those days and it was a wild
2 weeks that went through back a year ago, one matter after
another. My colleagues may recall that the original proposal
asked Congress pretty much for a blank check with no
protections for taxpayers, those on whose account it was being
drawn. The proposal included no Congressional oversight, even
wanted to prohibit judicial administrative review of the
Secretary's decisions.
In short, the Bush administration asked Congress to put up
an unprecedented amount of taxpayer money and executive power
under the unchecked control of one unelected individual with no
guidelines to ensure that it would be used properly, without
even so much as an office with a dedicated staff to keep track
of where it was going. Doing nothing, obviously, was not an
option, but neither was the proposal that we were submitted, at
least initially.
The crisis demanded that we bring together members of the
House, the Senate, Republicans and Democrats, and hammer out a
better solution, and that is what happened over the ensuing
several weeks. We fought hard to include taxpayer protections
and meaningful oversight. We fought to ensure that if ordinary
Americans who had done nothing wrong were going to pay for this
stabilization effort, they would get to share in the benefits
if companies became more profitable, an initiative driven by
Senator Jack Reed, in fact, of our Committee. We required
Treasury to put homeowners and the financial security of
American families at the top of the agenda. And we established
three oversight bodies that are before us today to keep an eye
on what was happening in the ensuing weeks and months. And we
made certain that we put first and foremost the principal that
with this assistance to the financial sector would come real
change so that a crisis like this wouldn't happen again.
I am glad that we had--are any of us glad that we had to
spend this money? Absolutely not. It was a tragic time in our
country, to go through that period of time. And do I share a
lot of the anger and frustration that many of our colleagues
and our fellow citizens felt at the time and still do in many
quarters, that Wall Street greed and regulatory neglect left
taxpayers on the hook? All of us, I think, share in those
emotions.
But I am also, I think, proud of the work that we did a
year ago. It wasn't easy in the time constraints we were given.
People stepped up. We did the best we could under the
circumstances. Certainly, it was far from perfect. We all know
that today, looking back. But in the time we were given, the
circumstances we were confronted with, I think we did the right
thing and I think history will prove that to be the case.
I am relieved that we have managed to bring our economy
back from that brink. We are not talking about a depression any
longer, a complete meltdown of the financial services sector.
And I am more committed today than ever to taking action so
that the American taxpayers who funded the effort aren't asked
to clean up another mess they didn't make in the future in
related matters.
We need to take action to restore America's confidence,
sense of optimism, and their financial security by reforming a
regulatory system that still continues to contain far too many
gaps, loopholes, and redundancies. The 20th century regulatory
structure has been outpaced by the 21st century innovations in
the financial services industry, and if we don't fix it, we
could be right back where we were a year ago, facing another
dreadful choice between a massive outlay of taxpayer dollars or
an unimaginable economic disaster for our Nation and others
around the globe.
I look forward, obviously, to working with my colleagues.
Senator Shelby and I are good friends. We have worked hard
together on numerous issues. I have mentioned already several
Members of this Committee. And again, I welcome you, Judd, to
this effort because of your knowledge and background and
experience as we try to navigate these waters in the coming
weeks and months to try to respond to the challenge before us.
So with that, I thank my colleagues, and in a minute, after
hearing from Senator Shelby, we will hear from our first
witness, Herb Allison.
Senator Shelby.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
We meet today to continue our oversight of the Troubled
Asset Relief Program, or something we called TARP. Last year,
during a critical phase of the financial crisis, as we all
know, Treasury Secretary Paulson and Federal Reserve Chairman
Bernanke came to Congress warning of an eminent economic
disaster that could only be avoided by the immediate
expenditure of massive amounts of taxpayer dollars. They argued
that hundreds of billions of dollars were needed to purchase
troubled assets from weakened financial institutions.
At the time, I expressed serious reservations about this
plan because I did not believe that a massive and crude bailout
bill was the most prudent course of action. Instead, at that
time, I argued that we should first clearly and thoughtfully
determine what had gone wrong. Only then could we hope to
develop an effective plan of action.
That could have been accomplished in a relatively short
period of time. It seemed apparent that this crisis would
require a wide range of programs and actions to stabilize the
financial markets. Had we recognized this at the outset and
addressed each problem by order of priority and in a
coordinated fashion, I believe our response would have been
more effective and made better use of taxpayer resources.
Unfortunately, this was not the course we chose to follow.
Weeks after the deadline for so-called ``emergency action'' had
passed, we gave the Administration the massive check it
requested, added some oversight provisions, and moved on.
Almost immediately, our hasty actions produced a likely
outcome. The Administration changed course entirely, abandoned
the asset purchase concept, and adopted a plan to make direct
capital injections into financial institutions.
When the Capital Purchase Program was not enough for some
institutions, the Targeted Investment Program was created. When
some institutions required even more assistance, the so-called
``Systematically Significant Failing Institutions Program'' was
put in place. Finally, the TARP became the bail-out fund for
the Auto Industry Finance Program, through which GM, Chrysler,
and a large number of auto suppliers received assistance from
the Federal Government. We certainly have traveled a long way
from a Troubled Asset Purchase Plan to where we are today.
In addition, as I argued would be the case, TARP money did
not address many of the core problems of our financial markets.
The banking regulators had to contort banking law to create a
program to allow the FDIC to guarantee billions of dollars of
bank debt. The Treasury also had to initiate a Money Market
Mutual Fund Rescue Program that was followed by a separate
Federal Reserve Bank of New York program designed to achieve
much the same thing. In addition, deposit insurance coverage
amounts were significantly increased and the SEC banned short
selling of the stocks of certain financial firms.
The Federal Reserve also began a series of efforts, as you
will recall, to address problems in the commercial paper
markets and has stated its intention to buy more than $1
trillion in mortgage securities. The Federal Reserve cut
interest rates. In fact, the Fed has committed over $2 trillion
from its balance sheet to address market instability.
Again, I believe a more deliberate process would have
yielded a better understanding of the crisis and the need for
particular actions. It would also have given the Congress the
opportunity to participate more fully in the decision-making
process. We are, after all, spending the American people's
money.
Going forward, I believe we must continue to ensure that
the program which the CBO is already estimating will cost
taxpayers more than $200 billion is managed as well as
possible. A great deal of work remains. The oversight entities
should work diligently with Treasury and Mr. Allison to
increase transparency and limit taxpayer losses. And as we
approach the expiration of the TARP program, which is December
31, 2009, we must remain mindful of the original intent: Market
stability. The Administration should not, I believe, pursue
policy objectives through the TARP that are unrelated to that
goal. In other words, the TARP should not be extended.
Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
In the absence of any other Members wanting to be heard at
this juncture, we are going to introduce our first witness, and
we thank him for being with us. Herb Allison, Jr., is the
Assistant Secretary for Financial Stability in the Department
of the Treasury. Prior to this position, he served as the
President and Chief Executive Officer of Fannie Mae, when that
company was taken under conservatorship in September of 2008.
He has also served as the Chairman, President, and Chief
Executive Officer of TIAA-CREF, a leading retirement services
company. He had a long career at Merrill Lynch that began in
1971 and culminated in being elected President and Chief
Operating Officer in 1997.
We thank you very much for your service to our country in
this latest capacity and are anxious to hear your thoughts this
morning, Mr. Allison.
STATEMENT OF HERBERT M. ALLISON, Jr., ASSISTANT SECRETARY FOR
FINANCIAL STABILITY (TARP), DEPARTMENT OF THE TREASURY
Mr. Allison. Chairman Dodd, thank you very much, Ranking
Member Shelby and Members of the Committee. Thank you for the
opportunity to testify before you today. As we approach the 1-
year anniversary of the Troubled Asset Relief Program, or TARP,
I welcome this chance to update you about the progress we have
made in restoring our financial stability.
Let me start briefly with the challenges that we faced a
year ago. We were in the midst of one of the worst periods in
our financial history. Major institutions were in distress,
credit markets froze, and we faced a run on money market mutual
funds. In response, Congress took the difficult but needed step
of creating TARP through the Emergency Economic Stabilization
Act of 2008, or EESA, which gave the Treasury Department
unprecedented authority to stabilize the U.S. economy.
The consequent actions taken last fall achieved the vital
but narrow objective of preventing a meltdown of the financial
system. But by the time President Obama took office in January,
the Nation faced a full-blown economic crisis, as monthly job
loss reached 60-year highs and home foreclosures accelerated
rapidly. There was concern that we were headed toward a second
Great Depression.
One year later, thankfully, that is not the case. Treasury
has made the necessary investments to restore confidence in our
banks, restart credit markets that are critical to American
households and businesses, and support homeowners. We still
have a long way to go before true economic recovery takes hold,
but there is little doubt that we have moved back from the
financial brink and toward economic recovery.
TARP has been central to those achievements over the past
year. Of the $700 billion authorized for TARP by Congress,
Treasury has announced programs totaling $644 billion, under
which $444 billion has been committed to date. Throughout this
process, our goal has always been to recapitalize our financial
system with as much private capital and as little taxpayer
funding as possible.
Since the release of the bank stress test in early May,
banks of all sizes have raised $80 billion in common equity and
$40 billion in nonguaranteed debt. That enabled more than 30
banks to repay their TARP funds, returning over $70 billion to
the general Treasury.
There are promising signs from other TARP programs, too.
For instance, the Term Asset-Backed Securities Loan Facility,
or TALF, operated by the Federal Reserve Bank of New York, has
helped narrow spreads and improve liquidity in the markets that
facilitate lending to consumers, students, and small
businesses.
The Making Home Affordable Program, designed to prevent
avoidable foreclosures, is on track to reach its goal of
500,000 trial mortgage modifications by November 1, and perhaps
even earlier. We do recognize, however, that there is still
much more to be done to help homeowners.
The weighty responsibility of the TARP mandate, to steady
our financial system and visionally protect taxpayers' money,
is one that my colleagues and I take very seriously. We have
instituted strict controls over TARP investments and
operations. The programs also benefit from regular and open
communication with our four oversight bodies, and we have
implemented fully or in large part the vast majority of their
recommendations.
The question now is, what lies ahead? TARP was created as
an emergency response to a major financial crisis. The use of
these programs, by design, will decline as the financial system
recovers. But we must remember that our economic recovery has
just begun and significant parts of the system remain impaired.
Foreclosure and unemployment rates remain unacceptably high
across the country. Small businesses are still grappling with
unusually tight credit. And continued decline in real estate
prices, both in the residential and the commercial markets,
could put additional pressure on bank balance sheets and
capital positions.
But ending the financial crisis is not primarily about
helping banks. It is about restoring the mechanisms that
provide opportunity to everyday Americans, to purchase or keep
a home, to finance an education, or to expand a business.
It is with these goals in mind that we have created the
programs in TARP and President Obama's Financial Stability
Plan. Every day, we strive to meet these challenges to remain
prudent investors on behalf of the American people.
Thank you again for the opportunity to testify, and I look
forward to your questions.
Chairman Dodd. Thank you very much. Thank you very much,
Mr. Secretary, and again, we appreciate your presence here
today.
I am going to ask the Clerk, why don't you put on 6 or 7
minutes and we will try and keep an eye on that so we get
around to everybody here. We have pretty good participation
this morning and I want to make sure we get to hear everyone.
Let me start off, if I can, Mr. Allison, with the Loan
Modification Programs. I suspect what I am about to say could
be repeated by almost everyone on this side of the panel, of
the table here, and that is we get calls every day in our
office from people who just feel terribly frustrated about
their ability to come out with some modification of their
mortgages to try and stay in their homes, if they can. I know
the Administration's plan is starting to ramp up, but
literally, on a daily basis--and we are told maybe for
different reasons now, given the unemployment rates, while they
are not what they were in January, are still very high
obviously, and that a lot of the foreclosure threats come more
from that than, say, the subprime problems that existed a while
ago.
And the question is, what is being done about it? What can
we do? I just find frustration. I am hearing from some people
that just mail notices or calls, or not the contacts with the
actual people who are not yet delinquent but are on the verge
of being so, catching it early could maybe work something out
so you can people there. In some cases, maybe you can't at all,
and I, for one, realize that is also a conclusion you ought to
be able to reach. If so, then you move on and get the property
moving, get it turned over. So there is some flexibility with
all this.
I gather it is a lack of personnel in some cases, getting
people trained, asking people in institutions and banks who
have never really dealt with the volume we are facing today to
deal with these matters, but I want to know if there is any--
what thoughts are you giving to this as the Administration? Are
you thinking about a moratorium, for instance? Some people are
thinking about 3 months of a moratorium on foreclosures in
order to give time for the ramping up of the individuals and so
forth. I get uneasy about moratoriums because they could just
forestall the inevitable and you can have a negative impact of
unintended consequences in the marketplace if you do that.
Does it need more personnel? Do we need to demand that
there is the kind of personal contacts? If you are paying fees,
if you are getting fees as a servicer, are those fees being
used to actually reach out to people to find out early enough
on where they are in their ability to meet their obligations on
their mortgages or not?
But what is presently going on is just not working, so I am
very anxious to hear what plans, if any, the Administration has
to address this problem, which appears to be growing larger
again given some of the indications we have heard about a new
wave of foreclosures coming to the country.
Mr. Allison. Thank you, Chairman Dodd. We certainly do
share your concerns. We have seen the volume of trial
modifications increase rapidly. As I mentioned in my testimony,
we may actually exceed the target number of 500,000 trial
modifications by November 1. Nonetheless, we are receiving
complaints, as well, from homeowners who are anxious, who
aren't receiving responses from their banks as fast as they
would like.
We are publishing now statistics by bank on their efforts
and their success in modifying mortgages. But we also are going
to be soon publishing reports on the service quality by each
bank, and we hope that that daylight being shown on their
service quality is going to provide additional impetus for them
to improve their service quality.
We also, in order to make sure that more people can get
into this program and succeed in the program, we have to
streamline the process of providing documentation from
homeowners to their servicers. We are trying to make that a
simpler process and we are going to have significant progress,
I think, in that over the next weeks and months. I think that
is very important.
We also have to reach out more across the country to make
sure people are aware of the program and of its features and
they have an opportunity to take part.
So far, the servicers have contacted--sent inquiries to
over 2 million people and we have offers out to over 500,000
people and trial modifications are now approaching 400,000. So
we have made material progress over the last few months. But we
are not by any means satisfied.
We had a meeting with all the servicers in late July. We
are going to have another meeting in early October, bring them
to Washington and spend a day discussing with them the various
issues that you have so correctly pointed out.
Chairman Dodd. A lot of this may be anecdotal, so I want to
be careful. I haven't done any big surveys here. But I have
heard, for instance, I have heard that Freddie Mac does a
pretty good job of getting the personal contact with people who
could be falling into a foreclosure situation, whereas I have
heard FHA is doing a dreadful job at this. Again, that may be
anecdotal, I don't know that, but it seems to me there seems to
be an uneven application of the ability to--or the willingness
to actually reach out to people.
Sending people a notice in the mail or making a phone call
is not being proven terribly successful. But where there are
personal contacts with people and making an evaluation of where
people's abilities are to meet those obligations seems to be
producing better results. Is the intention to do a lot more
insisting upon personal contacts with these people or not?
Where are we headed with that?
Mr. Allison. Yes, Chairman Dodd, that is the intention.
There have been events held throughout the country in major
cities and rural areas with bank services. We participated in a
number of those as observers. Freddie Mac and Fannie Mae are
out there, as well.
Modifying mortgages is a homeowner by homeowner operation.
It is intensive. It requires personal counseling in many cases,
and we need to reach out and contact as many people personally
as possible. And some----
Chairman Dodd. Well, I would appreciate hearing back on
this, if you could. I would like to know specifically what is
being done about that, because the complaints are mounting. I
appreciate what you are doing, but I would like to get a far
more frequent analysis of how that is working.
Mr. Allison. We will be happy to provide you information
about that, Chairman.
Chairman Dodd. Let me jump quickly, if I can, to the
regional banks and the growing problem with commercial real
estate, because we are hearing, all of us again, there is a
wave coming in commercial real estate that poses some real
additional threats to our economic recovery.
Many regional banks are reportedly in trouble, in part
because of commercial real estate. One study by Canadian
Observers predicts that over 1,000 U.S. banks could fail. The
FDIC's list of troubled banks reportedly exceeds 400.
One, I guess, is could the failure of over 1,000 regional
banks cause renewed financial instability of the level we have
been talking about? If so, what are we doing, or are we doing
all that we can to help these viable regional and community
banks as we have done to the Nation's largest banks? They are
sitting out there. They didn't cause any of this problem, in
many ways, here, and yet are going to face a tremendous wave of
difficulty.
And how do we intend to use TARP monies here to reduce this
potential for instability, if, in fact, you agree that it would
create a significant amount of instability in our economy, if,
in fact, these numbers that people are talking about turn out
to be accurate numbers? What plans do we have, if any, to
assist our regional banks and community banks that we provided
the same level for these large money-centered institutions?
Mr. Allison. Chairman Dodd, we have--first of all, last
May, we reopened the Capital Purchase Program for smaller
banks, banks with under $500 million of assets. We need them to
be active in the commercial as well as the residential real
estate markets.
Furthermore, the TALF program is aimed directly at the
problem of restarting the securitization markets, which is so
important to providing commercial and residential mortgage-
backed securities to individuals and businesses, and that
program has been quite successful.
We also expect to be launching the first of the Public-
Private Investment Partnerships at the end of this month. We
will have our first closing. And that is also intended to
reignite trading in the mortgage-backed securities markets,
both the residential and the commercial.
It is also very important that banks continue to replenish
capital going forward. I know that the regulators are very much
involved with the banks in dealing with the question of the
impact, the potential impact of continued downturn in the
commercial real estate market.
Chairman Dodd. Well, thank you, and again, this is one we
have got to maintain some close contact with the Administration
on as this evolves.
In fact, I have some additional questions, if we get around
to them, to the Public-Private Investment Program, but let me
turn to Senator Shelby.
Senator Shelby. Thank you, Chairman Dodd.
Mr. Allison, the Treasury Department thus far, according to
my understanding, has sunk close to $50 billion into General
Motors. The Congressional Oversight Panel recently reported
that in order for the taxpayers' bailout to be repaid in full
when Treasury sells its GM stock, GM would need to have a total
market capitalization of $67.7 billion. As of yesterday, the
market capital of GM was a mere $455 million, less than 1
percent of the target that would fully repay the taxpayers. For
taxpayers to be fully repaid, General Motors' market
capitalization would need to increase by about 14,000 percent--
14,000 percent.
Given that GM is facing a challenging environment since its
current market share of U.S. light vehicle sales has fallen to
less than 20 percent, compared to a market share of more than
28 percent in 2000, what is the likelihood, Mr. Allison, that
Treasury will take a huge loss on its investments in GM?
Mr. Allison. Ranking Member Shelby, thank you for your
question. I know that is very much on the minds of the American
public, as well. A number of actions, as you know, were taken
to save hundreds of thousands of jobs by rescuing General
Motors and Chrysler, and at the same time, requiring them to
restructure fundamentally so that they could compete more
successfully going forward.
The success of those companies will depend on their
management and their strategies. We are obviously very much
very closely observing the progress of both of those companies.
We are not, however, an active shareholder in those companies.
We own shares in General Motors, but our intention is to divest
those shares as rapidly as that is possible and not to get
involved in the day-to-day operations of those companies----
Senator Shelby. You are not an active shareholder, yet you
are a shareholder, right?
Mr. Allison. We are a shareholder.
Senator Shelby. Well, why aren't you an active shareholder
if the American taxpayers' money is involved? It is part of
your job to protect that money.
Mr. Allison. Yes. What we did, Senator, is to take very
strong actions before the bankruptcy to ensure that they would
come out as fundamentally different companies with much better
prospects than they had before.
Senator Shelby. Sure.
Mr. Allison. We are also observing very closely their
progress. And we believe that there are possibilities for those
companies to regain market share and to increase value for the
taxpayers.
Senator Shelby. I want to shift to AIG. The Government
Accountability Office this week issued a report on AIG in which
it stated, among other things, that it remains uncertain as to
whether AIG will ever be able to fully repay the $180 billion
in Federal assistance that has been extended to the company. In
addition, the Congressional Budget Office has estimated that
the Treasury will lose a sizable portion of the TARP funds it
has invested in AIG.
From your perspective, how much do you expect the
Government to lose on its bailout of AIG, and how long do you
believe it will take for Treasury to divest its interest in
AIG? I know they are tough questions.
Mr. Allison. Well, sir, I think first of all that the
rescue of AIG was absolutely essential at the time to protect
the financial system of the United States. I think the
consequences of a sudden, unorganized failure of AIG would have
been extremely damaging.
We, again, are monitoring our investment very closely. The
company has a new board of directors. It has a new chief
executive officer. They are working very hard to stabilize the
insurance companies and reduce the risk in that company. And I
think they have made substantial progress so far, but they
still have a long way to go. And I think the eventual outcome
is still unclear, but they have made notable progress, and we
expect further progress going forward.
Senator Shelby. I want to shift to Citigroup. Easier--not
really. Citigroup has received more than $300 billion in
financial support from the Federal Government, including $50
billion from TARP. This is exceptional financial assistance.
Because the Treasury Department received significant equity
stakes in Citigroup--36 percent, I believe--in exchange for
this assistance, the Federal Government now has a major say in
how Citigroup will operate. You are the large stockholder.
What steps is Treasury taking to restructure Citigroup to
ensure that it does not present systemic risk or require
additional taxpayer funding? It is still a sick bank.
Mr. Allison. Senator, first of all, again, we are not
actively involved in the day-to-day management of Citigroup. We
are, as you correctly say----
Senator Shelby. Excuse me a minute. Let me interrupt you a
minute. I did not mean to be--you are a 36-percent stockholder,
the largest stockholder in Citigroup--that is, the taxpayer.
Part of your job is to oversee how this company is run, and you
just said, as I understood you, that you are not actively
engaged in the running--or what--of Citigroup. And if you are
not, why aren't you?
Mr. Allison. Well, sir, we first of all believe that the
Federal Government's role should be limited to voting on
certain matters as a shareholder, such as the election of
directors and major corporate events. We believe that it is not
the job of the Federal Government to be micromanaging
companies. And, in fact, it is in the taxpayers' interest for
the companies to have strong boards of directors and strong
management. If the Government were to interfere too much, we
actually might reduce the potential value of those companies.
Senator Shelby. But looking at the history of Citigroup in
the last 20 years, are you satisfied that Citigroup is going to
grow strong and grow out of all this and pay all this money
back? Or do you not have those concerns?
Mr. Allison. Well, again, Citigroup has made progress since
the crisis in reducing risk in that company and strengthening
its management and especially its board of directors. So we
have seen progress in Citigroup, and we expect further progress
in the months ahead.
Senator Shelby. Well, my last question--I know my time is
running. At a recent Congressional Oversight Panel hearing,
Secretary Geithner observed that certain Capital Purchase
Program investments are earning taxpayers a double-digit
return. The Congressional Budget Office, CBO, however,
estimates that the CCP alone will lose in excess of $20
billion. We will lose more than half of our investment in the
car companies and AIG, they predict, and for the entire TARP
program, we will lose more than a third, at least, of the $700
billion.
Do you believe that CBO's--the Congressional Budget
Office--numbers are accurate? And if not, how do you differ
with them?
Mr. Allison. Well, first of all, Senator, let me mention
again that we have received over $70 billion of repayments and
close to $80 billion of total payments of dividends and
interest and so forth.
Senator Shelby. That is over 10 percent? A little over?
Mr. Allison. Well, actually, in terms of the Capital
Purchase Program, the total amount that was committed was $204
billion. We have received $70 billion of that money back. And
the return of the banks that have completely repaid, including
repurchasing their warrants, has been close to 18 percent.
On November 16th, we will be publishing the valuations of
all the assets in the TARP program, and----
Senator Shelby. This would be a complete picture?
Mr. Allison. Yes, sir.
Senator Shelby. OK.
Mr. Allison. That will be a complete picture, so at that
time you will be able to see what the returns have been so far.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Tester.
Senator Tester. Thank you, Mr. Chairman, and I want to
welcome Mr. Allison to the Committee. It is good to have you
back.
Mr. Allison. Thank you very much, Senator.
Senator Tester. I very much appreciate the opportunity to
ask you a few questions.
During the debate last fall on the TARP, I was concerned
that there were not enough limitations on the TARP money, that
it might end up in foreign banks. And then later on, we ended
up dealing with the auto manufacturers, in particular, GM and
Chrysler, and there was some concern by me that the money that
would be given to them would not be spent domestically. And
since it was taxpayer dollars, I thought it was important. In
fact, I think at one point in time in the questioning of GM and
Chrysler and Ford's execs, I asked the question, you know:
Where is the money going to be spent? What is it going to be
spent on? What country is it going to be spent in? Because,
quite frankly, these were taxpayer dollars, and the economy
here was tanking in a big, big way, and I thought the right
thing to do was to spend it here.
In response to that, a few months after they received the
$50 billion, GM went to the bankruptcy court and got a contract
negated between Stillwater Mine with supplies, GM with
palladium, got it thrown out so they did not have to live up to
it. The only palladium mine in the United States. Instead, they
wanted to use palladium and are using palladium from South
Africa and Russia, and their reasoning for doing this was that
they could pay back the TARP money quicker, even though a few
months earlier they said they needed the money to keep their
suppliers whole, of which the Stillwater Mine is one of those
suppliers, 1,300 jobs, one of the largest employers in Montana,
and these are jobs that have good health care benefits and
good-paying wages.
I guess the question I have is: Do you think it was
appropriate for GM, as one of their actions--well, actually one
of their first actions out of the chute--to negate a contract
with a U.S. company--a U.S. mine, I should say, so that they
could do business with a foreign mine?
Mr. Allison. Senator Tester, first of all, we share your
concern about maintaining jobs, not only in Montana but across
the country, and that is one reason why the Obama
administration has launched the largest economic plan in the
history of our country, as well as the financial stability
program.
Again, with regard to General Motors, we are not taking an
active role in the day-to-day management of that company, and
we believe it is in the taxpayer's interest that we not do so.
And as I have said, we have strengthened the management and the
board at General Motors, and we do see progress. We, though,
cannot get directly involved in decisions like the one that you
talked about.
Senator Tester. But in the spirit of the TARP dollars, who
gets involved? Because the fact is this is a half-a-million-
dollar hit a month to this mine. It is going to result,
potentially, in some job loss. I cannot imagine it not. And it
is absolutely shipping money outside the country. And GM will
turn around and say, yeah, but we are recycling with a
Pennsylvania firm--that also does all the recycling outside
this country that could be done inside this country. And part
of the whole idea from my perspective with the TARP money was
maintaining our manufacturing base, and part of that
manufacturing base is industries in this country that supply
them.
So who does get involved? How do we hold GM's feet to the
fire? I think we are about--and correct me if I am wrong, Mr.
Chairman--a 60-percent owner in that company, if I am not
mistaken.
Mr. Allison. I think, Senator, we have to look at the
totality of the Obama administration's economic recovery
programs, where there is a great deal of effort and funds being
directed toward job training, toward maintaining jobs, toward
unemployment insurance, and so forth. We have to get this
economy growing again so that we can create more jobs. And we
also have to assure that General Motors is in a position to
grow and to employ more people down the road.
Senator Tester. I could not agree with you more, and I
guess the question is that I have a level of frustration in
that GM, with taxpayer dollars, has chosen to do business with
a mining operation that has very, very little environmental
restrictions and very, very poor wages and basically sold our
workers down the tube. My opinion.
And, I guess, how do we hold GM's feet to the fire? Or can
it be done? Or do we just let them do their thing? I, quite
frankly, have asked for their contracts to find out what they
are paying for that palladium in South Africa and Russia, and
we await that response, because I do not think they are private
contracts anymore because this company is owned, a fair amount,
by us, the U.S.
So the question is: Who can hold their feet to the fire? Or
am I shouting into the wind, blowing in the wrong direction?
Mr. Allison. Well, sir, I think you are holding their feet
to the fire right now by raising this issue as effectively as
you are. I will take your concerns back with me and discuss it
with my colleagues.
Senator Tester. I appreciate that. I do very much
appreciate that. It is just one of those things.
The purpose of the TARP funds--and you know--is to provide
authority and facility to the Secretary so he can restore
liquidity and stability to the financial system, protect home
values, college funds, and retirement accounts. The list goes
on. You know what they are. Keeping the original purpose of the
act in mind, do you believe this should be extended? Do you
believe this act should be extended out?
Mr. Allison. That is a determination that the Secretary of
the Treasury will make later on this year. I know----
Senator Tester. What is your recommendation to him going to
be?
Mr. Allison. This will be a decision that the Secretary
will make. He will have a variety of inputs, and I know he is
going to look at many different measures of the economy and the
prospects of the economy and the financial system as he makes
that decision.
Senator Tester. Well, I also appreciate that. OK. Keep it
in mind, all that.
That is good enough for now. Thank you, Mr. Chairman.
Chairman Dodd. Thank you very much, Senator.
Senator Corker.
Senator Corker. Mr. Chairman, thank you and, Mr. Allison,
thank you for your service.
I want to not dwell on the past much, but I do want to say,
you know, that the three components of TARP were to focus on
our financial system. That was the purpose of it because of the
liquidity crisis that existed. We were supposed to buy things
of value, and the money that was returned was supposed to be
used to reduce the deficit. And I would say that had we stuck
with that, we would have gotten the kind of yields that I think
all taxpayers would want on their money. And it is a shame that
it eroded over time and moved into industrial policy. You know,
TARP really was not set up for mortgage modifications, I will
say. That is not really what it was set up to do.
But, with that, I just want to say that these kinds of
things do erode trust. I know you had nothing to do with that.
But, again, if we had stuck to the three major premises of the
act itself, I think we would be in a very, very different
situation. And I know that is all subject to interpretation,
but let me move on to the future.
There is a brewing commercial real estate issue, and I
think everybody knows that. And it is my sense that there is a
little bit of a moral hazard being created right now. I was in
New York on Monday, and I know numbers of people there think
that the Federal Government is going to get involved in
commercial real estate. And for that reason, they are pausing.
And we talked about the regional banks and others. The fact is
that banks today can issue stock that they might not be able to
issue in 6 months if they do not. And so there is a greed
factor that is taking place right now. They do not want to
dilute their shareholders by raising capital that they are
going to need, because there will be losses on commercial real
estate. And the reason they are not doing that is they are
thinking that there may be some additional bailout, if you
will, from the Federal Government as it relates to commercial
real estate.
I just wonder if you might address that, and would we not
be better off to say we are not doing anything as it relates to
commercial real estate? TARP is ending at this year-end. And
would the financial system then not do the things that it needs
to do to deal with this issue and do it themselves?
Mr. Allison. Thank you for your question, Senator, and this
certainly is an issue that we are monitoring very closely. We
are seeing deterioration in commercial real estate prices
across the country, and that is one reason why we reopened the
Capital Purchase Program, especially for smaller banks, which
are directly exposed to commercial real estate.
It is also important to reenergize the securitization
markets, which play and have played a very important role in
providing funding for commercial real estate over time. And
that is why we are launching the Public-Private Investment
Partnership. That is why the TALF is still active and is----
Senator Corker. And I am aware of all those things, and I
know they are just at the fringes. But back to the core issue,
would we not be better off from the standpoint of creating
additional moral hazard here or causing the system to be
dependent, just to go ahead and say that you are on your own?
We have these other things. They are going to nibble at the
edges. They may prime some securitization, which would be good.
But while they wait--and I know while they think that you guys
may be coming up with something, they are basically missing the
opportunity that they have right now, with bank stocks being up
and their ability to issue stock, aren't they missing an
opportunity to solve their own problem?
Mr. Allison. Well, Senator, we have seen banks restoring
capital, both through capital raising as well as improving
profits and better risk taking. And these are issues that the
Secretary will have to be deliberating as he considers whether
to extend TARP.
But let me point out again that the securitization markets
have not yet returned to normal. The housing markets, for
instance, depend heavily on Federal activity today. And so I
think he will be considering both the improvement in the
economy, which is substantial, as well as the improvements in
the market, which are substantial, but also looking at the
areas that still remain troubled today in the financial
markets.
Senator Corker. I respect your service. That is not much of
an answer. I do hope that very soon--because I am afraid we are
going to miss a window. I am afraid the private sector is going
to miss a window, as they think that there are discussions
taking place. They are not issuing stock because of dilution
issues, and I am afraid they are going to be up here in greater
numbers because there is this uncertainty. So I do hope at some
point very soon you all either say you are going to do
something, which I hope is not the case, or you are not going
to do something. But I think, again, this mystery around it is
problematic.
Let me move on to resolution authority. Sheila Bair and
others have been--and certainly Senator Warner and I have
worked on this issue together, the whole issue of resolution.
You came from the private sector. One of the huge problems that
we had and one of the reasons TARP was created, there was no
resolution mechanism to deal with highly complex bank holding
companies. And because there was no mechanism, we were stuck
with putting taxpayer monies in these entities to keep them
alive, because there was not any way for them to actually be
out of business.
Do we not need into the future to have something that is
clear that, where management, shareholders, even debt holders,
know that in these bank holding companies, the highly complex,
large entities that operate around the world, that if they
fail, they actually fail versus what the Administration has put
forth in reg reform that says that, in essence, Treasury is
going to hold unto itself into the future prominently the
ability to do what has been done with TARP?
Mr. Allison. Well, first of all, we think that the
Administration's regulatory reform actions are very much needed
in order to assure that the larger institutions are adequately
capitalized----
Senator Corker. Well, I am just talking about resolution. I
am not talking about the entire 13-title bill. Let us talk
about resolution.
Mr. Allison. Well, there have to be mechanisms for
resolving the situations of very large institutions that get
themselves in trouble. First of all, we have to try our best to
prevent that from happening by reforming regulation over the
financial industry and assuring responsibility by boards and
managements regarding taking risk and in the way that they
compensate or incent their employees.
And as to resolution, we are seeing that if the--we believe
that if the reforms are enacted, there will be mechanisms to
resolve these institutions in ways that do not jeopardize the
entire financial system and the economy.
Senator Corker. I respect very much someone like you coming
into public service. I will say that this hearing so far has
been not very useful, and those are pretty unclear responses.
But I understand that maybe that is just the way it is. But I
look forward to the next panel.
Chairman Dodd. Well, thank you, Senator, very much. Your
questions are valuable, though, in this hearing. I appreciate
it.
Senator Corker. The answers would be even more valuable, I
would add.
Chairman Dodd. We are working on it here.
Senator Warner.
Senator Warner. Thank you, Mr. Chairman, and thank you, Mr.
Allison, for being here. There is a lot to cover.
I want to come to one point. I was at a function recently
with Senator Corker, and everybody was going around the room,
and they were describing what everybody did. And a lot of folks
were in private equity, and it came to my turn to introduce
myself, and I said, ``I am a United States Senator, and I guess
I am in the private equity business as well as this point.''
And something that I hope will only be a short description and
not something that will go long into the future. I share
Senator Corker's concerns about the resolution authority, and
we may get a chance to come back to that.
One of the other areas that Senator Corker and I have
worked together in is with the very legitimate questions that
have been asked by Senator Shelby, for example, about these
equity holdings we have, wouldn't it be better for all
concerned, recognizing that anything the Government does, the
Administration does, or does not do, is going to be constantly
second-guessed with these equity holdings, to take the idea
that Senator Corker and I advanced and that I know we have
discussed before of taking these equity shares and actually
putting them out and letting them be managed by somebody who
actually is in the equity business, in the equity management
business?
We have a proposal out there that would put any American
interests that we have more than 10 percent of any major
company and have these managed by an independent group of
trustees that would be appointed by the President and with the
goal of trying to dispose of these assets in a way that
maximizes value to the taxpayers by the end of 2010.
Why not take the management of these holdings and get them
out of your shop and get them into some place where they can
actually be managed professionally with a goal of shareholder
maximization in terms of the American taxpayer?
Mr. Allison. Well, under the EESA law, Senator, we can set
up trusts or limited liability companies which could own the
shares. But under the law, the ultimate supervision over those
companies remains with the Secretary of the Treasury. So under
the law, he retains oversight responsibility for those
holdings.
Senator Warner. Well, some of us believe that the approach
that is currently being taken is not the right one and are
looking at ways that we might be able to change the law to
insist that that independent management takes place. I think it
would do a great deal for the Administration and I think it
would do a great deal for the confidence of the American
taxpayer if these equity interests were being managed to
maximize our value.
Mr. Allison. Senator, we are certainly working to maximize
the value for taxpayers. I think the issue about the trusts or
having a limited liability company, manage those independently,
is what would be the goals, to whom would they be accountable
and so forth. I think all of us want to maximize value for the
taxpayer. The question is how to go about it----
Senator Warner. I think we would be very anxious to work--
--
Mr. Allison. ----and what would be the most cost----
Senator Warner. I think we would be very anxious to work
with you to accomplish----
Mr. Allison. We would be happy to work with you on that,
Senator.
Senator Warner. Let me come--and I know my time is--I have
only got a couple more minutes and a lot of areas. The PPIP
program, again, back to Senator Shelby's initial comments, the
original intent of the TARP was to try to get the so-called
``toxic'' assets off the balance sheets. And I think we have
all been glad to see a bit of recovery in the financial sector.
But as recently as earlier appearances you have made and other
officials from Treasury have made, it was held out a lot of
hope that the PPIP program was going to be the area where we
could leverage private capital to get these assets out of the
banks.
I am concerned that we have not seen any action in that
program. I know you have said there is going to be a first
closing coming up. Do you have any sense of how successful this
program will be over the coming months? Will the banks be
willing to dispose of some of these assets, or are they going
to continue to hold them and just hope for better times? And if
that is not going to be successful, should we shut that program
down?
Mr. Allison. Well, it is interesting that since the program
was announced last spring, the spreads on those securities
tightened dramatically. Just the announcement, the fact that
the Government could be active in that market, did a great deal
to improve both liquidity and pricing in the market, and we are
very gratified about that.
Nonetheless, we still see a need to further expand the
securitization markets, and that is why we are launching the
PPIP now. And we are going to monitor and see how well that
performs and what impact that has on the markets as well. But
there has been encouraging progress. So I would say that the
PPIP program already, even before the first closing, has been
extremely helpful in those markets.
Senator Warner. But you are not going to be willing--you
are not willing to give us kind of a sizing of what you expect
the total amount of assets purchased in the PPIP program will
amount to, say over the next 6 months?
Mr. Allison. Well, we will know soon enough of how the
first program works. We are committing----
Senator Warner. The first closing will be how large?
Mr. Allison. The first closing will be announced at the end
of this month. We have set aside $30 billion of funding, both
in equity investment as well as for the debt program. And so
the size of the program could be as large as $40 billion. But
we will see with the final closings how large it actually is.
But it seems to be progressing well.
Senator Warner. Mr. Chairman, I hope when we get the
regular updates on the loan modification program we can also
get the regular updates on this program, because, again, the
original intent was to try to get some of the so-called
``toxic'' assets off of balance sheets, and my fear is, again,
that banks are not being willing to bite the bullet, and we are
happy to see some of the financial recovery starting to take
place. But I still think there remains a lot of assets on these
balance sheets that are going to have to be dealt with, and the
PPIP program is one initiative. If that does not work, we ought
to see what else works.
One last area I would like to get your comment on. One of
the casualties, I think, of this economic crisis has been small
business lending, and I recognize that a lot of the small
business lending was taking place actually in the nonbank
financial sector, and we have seen the demise of entities like
CIT and others.
I am very concerned that, you know, as we see large-cap
companies return, as we see some of the spreads shrink, one
area that still is in desperate need of assistance is the small
business financing, and particularly companies that have had
perhaps a good track record, have been solid customers, are now
in this valley, and will come out of this valley. But how do we
get them from here to when we have recovery?
I am sure I speak for a number of my colleagues. We hear
from folks in our respective States all the time about the lack
of small business financing, and this is a challenge. We do not
want to micromanage the banks, I understand, but have you given
any additional thought on what we can do to jump-start small
business financing?
Mr. Allison. Yes. First of all, we have to make sure that
the small banks are adequately capitalized because they provide
an out-sized portion of small business financing. We have seen
that overall lending, while it has declined, has not declined
as much as it has in prior recessions because of the financial
stability programs that have been instituted, as well as the
overall economic recovery programs.
We are actively looking at other measures that we can take
to assist small business. We share your concern that that very
important segment of our economy be healthy. And so we have
been talking with representatives of small business and working
on various alternatives to provide additional assistance.
Senator Warner. I know my time has expired, but does that
mean you will come back with some specific suggestions by some
date certain?
Mr. Allison. We are working and close to possibly taking a
particular program and making it live.
Senator Warner. Is that weeks away?
Mr. Allison. It should happen very soon. I would not want
to put a pin in an actual date, Senator, but it is close.
Senator Warner. At least some consistency on some answers.
Thank you, Mr. Chairman.
Chairman Dodd. Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman. Thank you, Mr.
Allison, very much.
I know when I was gone, Senator Tester asked if Treasury
planned to extend the TARP beyond the term. It is supposed to
wrap up the end of this year, and you said that you didn't
know. No decision had been made. You would look at a number of
factors.
Mr. Allison. Mm-hmm.
Senator Vitter. If we were in December right now and
current economic conditions were conditions in December, what
would your analysis be of extending the TARP or not?
Mr. Allison. Senator, again, I don't take your question
lightly, but the Secretary takes it very seriously and he is
considering carefully what should be done, should it be
extended or not. So I don't want to prejudge his decision which
he has not yet made. It is an important question.
And again, I want to say that while there has been much
improvement in the financial markets and in the economy, there
are still troubled areas and I think he has to weigh both the
progress that has been made and the need going forward as he
makes that decision.
Senator Vitter. Well, certainly the TARP was sold as an
extraordinary program in light of an extraordinary threat, and
it was clearly sold over and over in light of a threat of
absolute collapse of the financial sector. I hope you agree
with me that that threat is past, that that sort of threat of a
collapse of the financial sector is minuscule to nonexistent
right now. So what would be the rationale for extending TARP in
light of that clear argument under which it was sold?
Mr. Allison. Well, first, let me say that we are seeing
that some programs are already being wound down and others have
definite termination dates and many of them have terms that
become uneconomic as the markets recover. So a lot of this is
going to wind down by itself and already has started doing so,
and we see that we have been repaid substantial amounts of TARP
money already as the banks recapitalize.
Nonetheless, there are still areas that are troubled.
Therefore--and again, I wouldn't want to speculate on what the
Secretary might do if conditions don't change. That is his
decision. He is going to weigh it very carefully, looking at a
lot of factors. So I don't want to in any way prejudge what he
might do.
Senator Vitter. Well, I would just make the comment, there
are going to be areas that are troubled in virtually any
economy. It sounds like a very different mindset than the one
we were presented with when TARP was originally sold as an
absolutely extraordinary response to an absolutely
extraordinary threat, and I share the concern of a lot of
Americans that this is creeping into status quo and a much
higher permanent level of Government involvement in the
marketplace.
Mr. Allison. Senator, I think this Government does not have
any interest in maintaining long-term shareholdings or long-
term investments in banks and corporations. We would like to
see this wound down as soon as possible, given the need to
return to financial stability. And so that is the question that
the Treasury Secretary has to weigh.
Senator Vitter. Another concern I have had for a while
deals with FHA, because I have thought for a while that that is
a bit of a ticking time bomb that is going to be perhaps the
next big bailout. The Washington Post reported on Friday that
an independent audit of them will reveal that they will dip
below their 2 percent capital ratio. Now, their Commissioner
maintains everything is just hunky-dory. They are not going to
need any help. Can you assure the Committee that the Treasury
will not use TARP funds to bail out, to assist, to shore up the
FHA?
Mr. Allison. The TARP law provides that an eligible entity
must be an institution, must be operating under the laws of the
U.S., and so forth. So I think that is a question that you
would need to ask the FHA. We have no current plans to provide
any support ourselves to the FHA, but I don't want to in any
way speak for the Secretary on that matter.
Senator Vitter. So you clearly won't take that off the
table?
Mr. Allison. I--again, I think that is not part of TARP as
currently contemplated.
Senator Vitter. Well, neither was GM. How does the Treasury
plan to deal with--is there a concrete, aggressive plan for the
repayment of TARP funds from the biggest institutions,
CitiGroup, Bank of America, AIG? What are the plans as of now?
Mr. Allison. Their regulators will work with those banks to
make that determination as to when they are eligible and able
to make those repayments to us. We don't make those decisions
for the banks.
Senator Vitter. There has been a lot of concern recently,
for obvious reasons, in terms of the media reports, Mr.
Allison, about ACORN. Many of these big institutions that have
billions in taxpayer funds contract with ACORN. Has there been
any effort within the TARP program to ensure that taxpayer
funds aren't used in that way?
Mr. Allison. We provided no funding to ACORN, Senator, and
they did participate in some counseling sessions. They provided
some counseling in the past. We have no ties to ACORN.
Senator Vitter. Mr. Allison, I don't think you understood
my question. We give billions of dollars to these mega-
institutions. Many of them contract with ACORN. Has there been
any effort within the TARP program to ensure that those
taxpayer dollars that are going to those institutions do not
flow to ACORN?
Mr. Allison. We will go back and consider your suggestion.
I don't know what these companies have been doing with ACORN.
Senator Vitter. OK. So as we speak now, there is no effort
in the TARP program to look into that or regulate that, is that
fair to say?
Mr. Allison. Well, again, we don't get involved in the day-
to-day management of TARP companies, and I think that that is
not something that would really be appropriate for the U.S.
Treasury, to get involved in their day-to-day management.
Senator Vitter. OK. So a minute ago, you said you would
look into it, but are you saying that it would not be
appropriate for you all to have any policy with regard to that?
Mr. Allison. I will go back and consult with my colleagues
about your question and we will get back to you.
Senator Vitter. OK. If you could get back to me----
Mr. Allison. I certainly will.
Senator Vitter. ----and the Committee in writing----
Mr. Allison. I certainly will.
Senator Vitter. ----that is obviously a broad concern.
Mr. Allison. Yes, sir.
Senator Vitter. OK. Thank you.
Chairman Dodd. Thank you, Senator, very much.
Senator Merkley.
Senator Merkley. Thank you, Mr. Chair.
I was a strong critic of the TARP program, and in January,
I was asked what I thought should be done to improve it and I
said, we need to spend an enormous amount of effort assisting
homeowners in this Nation. And the Administration sent over a
letter saying that the Administration would commit substantial
resources, $50 to $100 billion, to a sweeping effort to address
the foreclosure crisis and then enumerated that funds would be
spent on preventable foreclosures, they would reform our
bankruptcy laws, and they would revive initiatives like Hope
for Homeowners.
Right now, the GAO reports that very little money has been
spent to assist homeowners. Are you familiar with how much TARP
funds have been spent?
Mr. Allison. Well, we have planned to devote $50 billion to
the Making Home Affordable Program----
Senator Merkley. I am not asking about the future. How much
has been spent----
Mr. Allison. Yes. And so far, we have committed over $22
billion----
Senator Merkley. Not committed, but spent to date.
Mr. Allison. ----and to date, we have spent very little of
those funds because we are just beginning the Mortgage
Modification Program. And the amount we are spending will ramp
up rapidly over time, but right now, it is envisioned that for
the servicers now in the program and the eligible homeowners--
--
Senator Merkley. Is very little--do you have an estimate on
that?
Mr. Allison. Actually the amount today? We, again, as I
said, because the program is new, it is very small.
Senator Merkley. OK. It is very small. It is zero. It is
zero dollars according to the GAO report. They note in a
footnote that $275,000 have been spent as incentives to
participating services, but apparently not a dollar has gone
out the door yet in terms of interest reduction, equity
reduction, or any other form that actually assists the
homeowner.
Mr. Allison. Actually, Senator, as the trial modifications,
and there are almost 400,000 of those already on the books, as
those take place, the payments by the participants go down. And
what is unique about this program is we are actually reducing--
--
Senator Merkley. Oh, I am very aware of how the--you are
welcome to answer someone else's question about the future.
Mr. Allison. Right.
Senator Merkley. I was trying to establish, and I think you
are agreeing with me, that to date, now that we are 8 months
into the future from the January 15 letter assuring a sweeping
program, we have yet to spend a dime that actually helped a
homeowner yet. You are saying--I agree with you. A big program
is in place, and I want to turn to that. In your shop, there is
a post called the Chief Ownership Preservation Officer.
Mr. Allison. Right.
Senator Merkley. Is that person in place yet?
Mr. Allison. That person will be in place very soon.
Senator Merkley. Why has it taken, with home ownership, so
many millions of our Nation's families struggling, why has it
taken so long to fill such a critical----
Mr. Allison. Well, we have had a head of the Home Ownership
Preservation Office since its inception, and they have been
doing a very good job. We are now bringing in someone who will
be the permanent person in that role. But that has not slowed
us down from making great progress.
And if I can get back to your question, I just want to
emphasize your earlier question, that people are receiving
relief immediately as they enter the trial modification
program. We have currently, I think the latest statistic is we
have about 1,800 people who are now in the actual modified
loans, in the permanent modified loans, but they lag three to 5
months the actual trial modifications. And so there is a period
where we are not yet paying the servicers. We only pay them for
performance. But those payments are now commencing and will
rise rapidly.
Senator Merkley. And if 85 percent of the people who are in
the trial modifications now succeed in making it through, based
on the numbers of about $20,000 per family, we would be talking
about expenditure of about $6 billion. If indeed, we reach a
significantly larger number of an additional 120,000 families
coming into the trial modification per month, 80 percent of
those succeeding, doing it over the next two-and-a-half years,
we will be spending something closer to $50 billion. That does
leave another $25 billion still on the table in this program.
Are you looking at aggressive ways that we could do more more
quickly to assist homeowners?
Mr. Allison. The other $25 billion is under the HERA
programs. It has to be spent by the GSEs, by the Government
Sponsored Entities. Our program is $50 billion and we believe
that that will be adequate to cover the mortgage modification
incentives for all of the eligible people in the servicers who
are now in the program.
Senator Merkley. Actually, there was another $25 billion
pledged, and that is in your own testimony, for the making--no,
it is not. I am sorry. It is in the Inspector General's
testimony for the Making Home Affordable program.
But I come back to the core point that we are facing--
reported yesterday an anticipated seven million additional
homes going onto the market through foreclosures----
Mr. Allison. Right.
Senator Merkley. ----and that is folks who are either the
foreclosure has already happened, it is about to go on, or it
is about to happen. That is not including the massive number of
foreclosures that will happen under the triple-option wave
anticipated next year. So we have a significant factor in
assisting America's families, a significant factor in reviving
and restoring the economy, and it seems like--I mean, to date,
the score is something like this.
We have spent, out the door, $288 billion to the banks, $76
billion to the auto industry, and less than $1 million,
$270,000, according to GAO, for our homeowners. It is
disproportional. There are so many different things that could
be done to accelerate this program that have come out of the
focus groups around the country--electronic submission, single
point of contact, increased transparency, closer work with HUD
counselors, not doing punitive credit ratings when people are
in the modification programs.
We are seeing little action on these common sense
approaches to really pay attention to the plight of the
American family, so I am pushing to say we could do more, and
as a leader in the TARP program that has made this $50 billion
commitment, I am asking you to do more.
Mr. Allison. Thank you very much, Senator. We are looking
at all those and we are working with the servicers to try to
implement as fast as we can streamlined procedures for people
to get into this program.
I want to point out that this crisis has gone on for 2
years. When the Obama administration got into place, they put
in effect this program, which is by far the largest Mortgage
Modification Program ever attempted. It is already the most
successful, even though it is not nearly close to the numbers
that we want to see. It is ramping up very rapidly.
We are seeing that the servicers who needed time to
reprogram their systems and train their people are starting to
gain momentum. We are staying on them every day. We are meeting
with them periodically as a group and in contact with them
almost every day and working very close with Fannie Mae, the
agent for this program, and Freddie Mac, who is auditing. We
are going to be as transparent as we can possibly be about the
results of the program, about the quality of service provided
by the servicers, and the overall cost and effectiveness of
this program.
The results in terms of the actual payments out the door--
remember, we are paying only for performance. We are paying for
modifications completed. And so as these are completed and made
permanent, we start these payments. And we have already,
though, provided financial relief for about 400,000 people, and
that number is going to be growing very rapidly.
So we are taking this extremely seriously. If we can make
improvements, we are wide open to any advice from any quarter
about how to make this program better.
Senator Merkley. Well, I am glad you are wide open, because
many members here in the Senate have been hearing from their
constituents--I think probably all of us have been--having
great difficulty accessing the modification programs, and in
forums across the Nation, the same feedback has been occurring.
We have been forwarding the same set of pieces of advice on how
it could be much simpler so you are not routed to ten different
people and ten different phone calls. That is the single point
of contact. So you can submit your paperwork in an electronic
form so that the papers are not continuously lost, which is a
huge complaint.
Mr. Allison. Right.
Senator Merkley. So that HUD counselors have a sense of the
models so they can give better advice to people as to whether
they can approach the system. And so that citizens not receive
punitive credit ratings while they are applying to the program.
Those have been raised time and time again, and each time I
raise them, I hear, interesting ideas. We are looking at them.
We are looking for more serious consideration of ways we can
make this program work better.
Mr. Allison. Let me mention on the credit ratings of people
being affected by modifications, there already is, and it was
announced, a change that is going to be made by the agencies
who provide the FICO scores so that they are not going to
affect people's ratings materially for at least a year while
they gauge the success of these modifications. That is a big
step forward.
Senator Merkley. I am pleased to hear that.
Mr. Allison. And on the others, we also share your
frustration. We are having to, in effect, revamp the mortgage
servicing industry in order to provide the kinds of services
that people need right now. We know people don't want to wait
months and months to get their modification. It is frustrating
to us, and that is why we are working very intently with these
servicers to try to get them up to speed as rapidly as
possible. The service quality isn't what we would like, either,
and that is why I mentioned earlier that we intend to be
publishing service quality metrics on every servicer in this
program, which ought to shine the light of day on this and
provide additional impetus for them to improve as fast as
possible.
Senator Merkley. Thank you for your comments. I apologize
to my colleagues. I wasn't paying attention and ran
significantly over time.
Chairman Dodd. No, no, thank you, Senator, and it gets at
the points that I raised in my first questions.
Again, this is a very, very important area to all of us. We
are looking for a system that works here, making some
decisions. As I said earlier, we would like to keep people in
their homes where we can, but there are occasions when that may
not be the case, in which case you have to move on. And just
sort of dangling things out there forever, I think are creating
unintended consequences in the marketplace, as well. So we
really do need to have an expedited system that cuts through a
lot of the bureaucracy and time out there so we can draw those
conclusions.
Mr. Allison. Right. We agree.
Chairman Dodd. I appreciate that. Let me jump--Senator
Gregg, Senator Johanns will be coming back, but you are next.
Senator Gregg. Oh, I thought I was----
Chairman Dodd. We follow different rules in this Committee
here. You showed up early, so you are recognized for your early
arrival here.
Senator Gregg. Well, I appreciate that, Mr. Chairman, and I
appreciate the opportunity to be on this Committee with you and
Senator Shelby. You have done great work in the area of
financial services. It was an interesting time last fall when
we negotiated----
Chairman Dodd. Was it ever.
Senator Gregg. And I guess some of my questions go to--
first off, I think you ought to take credit for it worked. I
recognize that at the margins, some of it is still an issue,
but the purpose at the time was to step back from a catastrophe
of unpredictable proportions, but we knew it was going to be
horrific, and the action was taken and it was done in a
bipartisan way. The negotiations were both parties sitting down
and making sure that we put in place the best ideas we had at
the time in a timeframe where we only had, literally, only days
to take action. As a result of the action taken, and it may not
have been the action specifically anticipated, the system has
stabilized.
And actually, the return to the taxpayers, at least on the
capital investment, is going to be pretty good, I expect,
before we are finished. I don't believe CBO is going to be
right. I think we are going to find we make a little money here
for the taxpayers overall.
In fact, if you look at the stock prices today of some of
the companies that we have invested in, we have already made a
paper gain that is very significant. And in addition, we are
getting preferred dividends here of 8, 10 percent, which is a
pretty good way to arbitrage money. We are borrowing at zero.
We are getting 8 to 10 percent back. That is not bad for the
taxpayer.
But I do think there is, at least from my viewpoint, a
legitimate question as to whether it has done its purpose and
should be wrapped up. That is, I think, a legitimate concern.
This discussion which you just had with Senator Merkley,
that appears to me to be a permanent Federal program for
mortgage relief, almost an adjunct to Fannie Mae and Freddie
Mac, not the original purpose of TARP, which was obviously to
do something in the area of mortgages, but not to create a
permanent program.
So I guess my question to you is, define the systemic risk
that you see today. Chairman Bernanke has told us that the
recession is technically over. Obviously, a lot of people are
still in pain and a lot of people are unemployed and clearly a
lot of people are going through trauma. But he has told us that
the recession is technically over, and therefore, I think we
can assume that things are going to get better. So define for
me the systemic risk that exists going forward that is going to
require the type of capital that you presently have available
to you under TARP and where you are going to put that capital
to address that risk.
Mr. Allison. Thank you for the question, Senator.
Senator Gregg. In specifics, if you could. I mean, your
testimony has been a little amorphous so far.
Mr. Allison. First of all, let me just mention on the
mortgage program, it is not a permanent program. The ability to
add to the commitment on that program will expire at the end of
the EESA, either whether that is at the end of this year or, at
the latest, at the end of October of next year. And we will
provide the required subsidies for some years, but no more than
5 years after the mortgage has been started. So it is not a
permanent program.
As to what are the systemic issues that might cause this
program to be extended, and again, it can't be extended beyond
October of next year, again, we have seen, as you pointed out--
thank you for your comments--we have seen great progress in
restoring parts of the financial system that in many, they are
back to normal. There are others that are not. The
securitization market is one that still has a great deal of
support from the Government behind it. That has been a very
important provider of credit in this country, as much as 40 or
50 percent. We need to make sure that we have a return to
stability in the mortgage market----
Senator Gregg. Well, the securitization market is a self-
righting mechanism, that if you were moving out of a recession,
it will self-right itself. And so I don't take that as systemic
risk. It is clearly a risk and there are going to be some bank
failures as a result of the situation, but it is not a systemic
risk at this point that justifies $700 billion.
So give me a specific proposal, a specific reason why we
still need $700 billion on the table.
Mr. Allison. Well, again, I don't want to preempt the
Secretary of the Treasury. He is going to be considering all
those questions that you are asking and a number of others, and
also looking at various measures of financial stability as he
makes his decision. So again, I understand the great interest
in whether this is going to be extended, but I don't feel I can
speak for the Secretary.
Senator Gregg. I associate myself with Senator Corker's
thoughts on that answer.
Let me ask another question. Why in the bailout of the
automobile companies, which clearly, in my humble opinion, was
not within the context of TARP but was pursued by both
Administrations, so therefore was legitimized--under the
Chrysler bailout, the taxpayers put up about $4 billion and we
got 8 percent of the stock. The unions put up about $6 billion
by waiving liability and got 55 percent of the stock.
When we wrote the TARP, which we spent a lot of late nights
doing, as I recall, the language said the purpose of the TARP
money, when invested, shall be to enhance the value of the
taxpayers' position. I didn't note any language that said the
purpose of the TARP money was to enhance the position of the
unions' investment, and yet the taxpayers seem to have gotten
the short end of the stick in relationship to the unions in the
Chrysler bailout. Can you specifically answer why that
happened?
Mr. Allison. Well, the bailout was done on what you might
call close to commercial terms, where various parties who were
necessary to the ongoing success of the entity, in some cases,
have to play a role, and that----
Senator Gregg. Well, the taxpayers were essential to the
success of the party----
Mr. Allison. Yes.
Senator Gregg. ----and yet the taxpayers for $4 billion got
only 8 percent. The unions, for $6 billion, got 55 percent.
What was the value that was brought to the table that the
taxpayers got so little for their money versus what the unions
got for their money?
Mr. Allison. I think that at the time, the breakdown and
the financing was determined on what you would call commercial
terms. This is not a very unusual outcome, and each of these
entities, whether it is the banks or the Government or the
employees, have a stake in the survival of that company. And it
was felt by great professionals who worked on that that this
was the best outcome to secure the future of the companies and
that was in the interest of the taxpayers.
Senator Gregg. Well, I don't see how it is in the interest
of the taxpayer to only get 8 percent of the company for $4
billion when another entity gets 55 percent for $6 billion. How
do you define that as being in the interest of the taxpayer?
Mr. Allison. Well, I would have to consult with my
colleagues who actually worked on that program, so----
Senator Gregg. But they were TARP dollars----
Mr. Allison. I will be happy to get back to you with a
fuller explanation.
Senator Gregg. Thank you.
Chairman Dodd. Thank you very much, Senator.
Let me just, before I turn to Senator Johnson, just I
mentioned earlier in my question to you that there are
predictions of anywhere from 400 to 1,000 bank failures. Now, I
am not--I don't know whether you want to acknowledge that
number as something that is the number that the Department of
the Treasury is accepting as a realistic number of not. But if
you were talking the magnitude of that, and the question being
raised here about a continuation of the TARP program beyond its
projected expiration date, does that number pose to you the
issue of whether or not we would be looking at a return, not to
the point where we were a year ago necessarily in September--
and I understand Senator Corker's point, as well. There is a
way of addressing this issue and whether or not you are going
to have the banks issue more stock or not.
But posing the issue of having 400 to 1,000 banks, many of
them regional, facing collapse, does that pose the kind of
stability question in terms of our recovery that would warrant,
in your mind, at least, a consideration of a continuation of
the program.
Mr. Allison. Again, this is one of many factors that the
Secretary will have to consider as he makes his determination.
We are seriously concerned about bank failures and we want to
make sure that the banks have adequate capital, that regulators
are consulting with these banks frequently, and that is
obviously one factor that would be taken into account by the
Secretary.
Chairman Dodd. Yes. And, again, last, I just want to make
the point--and Senator Shelby and I were talking privately a
minute ago. When I took over the gavel of this Committee in
January of 2007, we held an extended set of hearings, in
February, in March, in April, with stakeholders in this room,
those on the Committee, all about the mortgage crisis. And we
had witnesses that were predicting a million foreclosures, and
they were ridiculed for doing so. It was at the heart of the
problem.
I respect the fact the Chairman of the Federal Reserve
Board has acknowledged that they did not act quickly enough.
Had they acted in 2007 on this issue more aggressively--I
cannot predict we would have avoided what we saw last September
that Judd Gregg has just, I think, accurately described, but I
think we would have mitigated it substantially.
So at the heart of this crisis was the issue of the
mortgage crisis, the mortgage failures in the country, and I
just think it is important to note that in our discussion here.
And while I do not disagree with you, this cannot be a
permanent program. And Judd is absolutely correct. This cannot
be seen as somehow a permanent program we have in place. That
is why I say we have got to make decisions about this. If
someone cannot get out of this, then the property ought to be
put up and auctioned off or foreclosed or whatever you do. So I
am not enthusiastic about moratoriums. I think it just delays
the inevitable in some cases.
But to the extent someone can be kept in their home, we
ought to try and resolve that if we can. And if not, move on.
Senator Gregg. Mr. Chairman, if I could just point out,
during the negotiations of the TARP, you were absolutely
insistent that mortgages and the foreclosure issue be part of
the exercise, so it is clearly within the TARP, almost purely
as a result of your single-minded focus on this as being where
the essence is of concern. So it is legitimate. I just do not
want to see a program that goes on forever.
Chairman Dodd. And I agree with you totally on that. You
are absolutely correct on that. But I appreciate you
remembering that night of September 18th when we sat in that
room together with this guy here, sitting next to each other
that night. So I apologize to Tim Johnson. I jumped here on
those. But those two points--I find the notion if we lose
400,000 banks, that to me is pretty intimidating, to put it
mildly. I do not know the answer to it. Maybe Bob Corker is
right on this thing. And I do get worried about the ``too-big-
to-fail'' notion. This is maybe just too many to fail or
something in that category. So I think his point is a good one.
And we do need to get some answers on this. And I expect--
listen, I have great respect for you, Mr. Allison. You are a
dedicated person. You have had a distinguished career on the
private side. You came over to the public side to bring that
wealth of experience. Let me speak for all of us here. We
admire you immensely, and we thank you for what you are doing.
Mr. Allison. Thank you.
Chairman Dodd. But we need to get some answers on this
stuff. We are not going to have hearings on this every day. And
so while you may not be able to--and I appreciate the fact you
are not the Secretary of the Treasury.
Mr. Allison. Exactly.
Chairman Dodd. But we need to get some answers back on
these questions that have been raised so that we can--we have
got some big decisions to make here in the coming weeks, and
having your best judgment and the judgment of the Secretary on
these matters is going to be critical to our consideration as
we go forward, particularly in the area of reform or
modernization, or whatever we want to call it, of the
regulatory structure.
So, again, I appreciate the fact that you are not in the
position to answer all of these questions, and there will be
others who will be involved in them. But to the extent you can
get back to us on these things, we would appreciate it very
much.
Mr. Allison. Thank you.
Chairman Dodd. Senator Johnson.
Senator Johnson. Thank you, Mr. Allison, for your service.
There is legislation pending which would compel repaid TARP
monies to be used to repay the deficit. Is that a good idea or
not?
Mr. Allison. Well, as we do receive monies, it is put into
the general account of the Treasury, which reduces the need for
Federal fundraising. So it is already helping in that regard as
we receive money back.
Senator Johnson. SIGTARP has recommended that the Treasury
begin reporting on reviews of its TARP portfolio so that
taxpayers can get regular updates on the financial performance
of the TARP investments. Has Treasury started to do this?
Mr. Allison. Senator, thank you for the question. We have
very high regard for the work that the SIGTARP has been doing.
I meet with the SIGTARP every week. We discuss all the issues
around TARP and also making information available about TARP
programs.
We have provided extensive information at the end of every
month about, for instance, the lending activity of banks. We
provide a report on all of our TARP activities. We have made
that much simpler to understand, and we have a new report that
I think is much more accessible by the American public.
The SIGTARP has recommended that we include more
information about the use of funds, and we are going to be in
our October quarterly report providing information about all
the categories of use of funds that the SIGTARP has
recommended.
We have adopted about three-quarters, either totally or
almost totally, of SIGTARP's recommendations, and he has been
very helpful to us in making these programs even better and
better controlled.
So what we are doing, though, is to provide actual data on
bank lending and, beginning in October, a number of other bank
activities that is provided by the regulators. It is the most
accurate information that we have about how capital is being
used by banks.
What is most important, I think, to the American public is
how are banks using the capital in order to promote lending and
financial recovery. And that information is on our Web site
today, and we are working with the SIGTARP to see how we can
enhance the information going forward.
Senator Johnson. The SIGTARP has also recommended that the
Treasury require more disclosure of how individual institutions
are using TARP funds from the Capital Purchase Program. Why has
Treasury not responded more fully to these recommendations?
Mr. Allison. Again, we are making available information
about how banks are using their capital. The purpose of the
Capital Purchase Program was to strengthen the capital base of
the banks so that they could make more loans than they would
otherwise and also conduct other activities connected with
their role in the financial system.
It is very difficult to identify exactly how the capital,
our capital is used, as distinguished from all the capital of a
bank. And so we have had many discussions with SIGTARP about
how we can best report this.
We are going to be expanding, as I said, our reporting in
order to show how all the banks' capital is being utilized with
actual data, and I think it will be an extremely useful source
of information for the American public and for the Congress as
to how banks are using capital.
Senator Johnson. Now that the large banks are largely
stabilized, what do you plan to do for the Nation's community
banks? Is there any way to modify the definition of
``viability'' to help the smaller banks that might just need a
small infusion of capital?
Mr. Allison. As I mentioned, Senator, we did reopen the
Capital Purchase Program for small banks, banks with less than
$500 million, last May. We are receiving applications every
week and providing capital for smaller banks every week.
Senator Johnson. Do you think the TARP money has been
distributed fairly amongst banks in need, especially smaller
banks?
Mr. Allison. Well, the great majority of the banks that
have been assisted by the Capital Purchase Program are midsized
and smaller banks. And so they are playing a very important
role in the economy, which we well recognize, and that is why
we have been giving special attention to the smaller banks by
reopening the Capital Purchase Program several months ago.
Senator Johnson [presiding]. Senator Johanns.
Senator Johanns. Thank you, Mr. Chairman.
Mr. Secretary, good to see you again.
Mr. Allison. Senator.
Senator Johanns. As you know, as I have probably mentioned
this to you before, in another life I used to sit where you sit
while the Senators went around and interrogated me on what was
happening in my mission area of the Federal Government. When I
was a Cabinet member, I would work with an Inspector General on
an ongoing basis. It is just part of the oversight of doing the
job. And so in my brief time today to offer some questions, I
would like to focus on the Inspector General's most recent
report relative to Treasury and the TARP program.
I have to tell you, and I will be very blunt with you, it
is very damning. I am referring to the introduction, and there
are four major findings that are identified in that
introduction.
The first one is that it is extremely unlikely that the
taxpayers are going to get a full return on their TARP
investment.
Second, Treasury's originally stated goal of increasing
lending has not yet occurred.
Number three, the goal of preserving homeownership and
promoting jobs and economic growth have not been met.
And then the very program for which I think TARP was
created, which was to get toxic assets off balance sheets--I
think that is really what this program was focused on
initially--about that, this is said: ``In the meantime, the
risk of foreclosure continues to affect too many Americans.
Unemployment continues to rise at levels Treasury finds
unacceptable. And the so-called `toxic' assets that helped
cause this crisis for the most part remain right where they
were last fall--on the banks' balance sheets.''
Now, I understand your job. I understand your need to
present a very rosy picture. I heard your testimony that
Treasury action has restarted credit markets, et cetera. But
then I go to a report from an enterprise that I grew to respect
as a Secretary, the Inspector General. And although their
reports to me would often make me grind my teeth, I did come to
respect their impartial analysis, and I paid attention to them.
Let us just level today, Mr. Secretary. That is a very
damning report toward TARP and the Treasury's operation of
TARP, isn't it?
Mr. Allison. Well, Senator, let me take each one of those
points, if I may. It is unlikely--the first point is, I believe
you said, that we are going to receive a return on TARP funds.
We have already received $70 billion of funds back from banks,
and the banks that have fully repaid us, including repurchasing
warrants, we have close to an 18-percent annualized return for
the taxpayers.
Senator Johanns. Mr. Secretary, let us just focus here,
because you can cite those numbers. Quite honestly, to me they
are not very impressive. We have billions more on the line.
Now, if you were my investment adviser--and you worked in
this area for many, many years in the private sector--I am just
going to guess you never would have called me the Friday before
the President bought General Motors and said, ``You know, Mike,
I have been talking about it. I want to put you into General
Motors.'' Right? I mean, you would not have given me that
advice.
Mr. Allison. Senator, we have to look at, first of all, the
expected returns on the TARP investments on behalf of
taxpayers. It is too early to say how this is going to turn
out. Some areas will probably see better performance than
others. But we also have to look at the overall impact of the
financial stability program on the American economy, on the
banking system, and on the American public in general. And I
would shudder to think what the situation would be if the
Congress and the Administrations had not taken strong action to
deal with this crisis by, for example, creating the TARP
program.
So I think we have to look at returns beyond simply the
returns of this program. I can assure you we are working
extremely hard and aggressively on behalf of the American
taxpayer----
Senator Johanns. I am not questioning how hard you are
working----
Mr. Allison. ----and we will also have a report on November
16th that will allow you to see, and the public, exactly what
are the valuations of these assets according to the methods
that are prescribed by the GAO, and there will be audited
financials. And from that I think you can make informed
judgments about the progress so far.
We still have a long way to go, and much of the outcome is
going to depend on the success of stability programs going
forward. We have already seen asset prices have risen
dramatically in the financial markets. It has been pointed out
that share in many banks are up. This is helping in terms of
the returns. But we are not yet declaring victory either in
fully restoring stability in the financial system or in
achieving the returns on the TARP program. It still has a way
to go.
Senator Johanns. You are not seriously arguing that we are
going to get our money back on the General Motors investment,
are you? I mean, you did not come here today to convince this
Committee that is going to happen, did you?
Mr. Allison. I was talking about the overall program.
Again, some areas will perform better than others. I do not
know yet what the outcome will be. The head of the auto program
has testified, and his forecast or his analysis is on the
record already.
If I may, I would like to refer to the other elements of
the SIGTARP report that you mentioned. Have we been successful
in increasing lending? I think we have to look at, first of
all, the absolute facts. Lending is down. That is normal during
a recession. The question is: Has TARP prevented an even worse
reduction in lending? And I am very confident it has, because
the banks, by restoring capital in the banking system, they are
able to sustain their lending activities. And there is no doubt
in my mind that there is more lending going on than would have
been the case without the TARP program.
On the toxic assets----
Senator Johanns. Before you go on to the next one, do you
have anything, any study, any analysis that you could provide
to me that would prove that last statement?
Mr. Allison. Well, the Federal Reserve just released
information saying that in their view--actually, the reduction
in lending has been less in this recession than it was in the
1991 recession, which would indicate--it is an association, but
it would indicate that the TARP program and other elements of
the economic recovery program have helped to sustain lending at
a greater level than it would have been without those programs.
I do not think there is much doubt about that.
Senator Johanns. Yes, there is. That is a leap of faith.
You know, I hear these tremendous promises, but then there is
just nothing to support it. I mean, you know, if you could
point to something that leads me to that conclusion, I would be
willing to go there with you. But, you know, even the report
here, the people who are to provide you insight say increased
lending has just simply not occurred, the toxic assets remain
on the books.
I mean, the very things that TARP was designed to deal
with, quite honestly, it appears to me this has been a failed
program. The very promises made to the taxpayer of what was
going to happen with this money in my judgment have not been
kept. And I just think that is very concerning. Somebody
watching this hearing must be so frustrated, we can get
billions out, we can buy General Motors overnight, but we
cannot help a homeowner. And that just does not make any sense,
you see. It is just--I think it is a failing. And I really
think Treasury should come to grips with what the Inspector
General is saying here and try to deal with those issues or
close down the program.
Mr. Allison. Well, Senator, I think we are being very
candid and fact-based on what is going on in our programs.
Again, with the homeownership program, this is a program that
really got underway in May in terms of actual activity, and it
is now September. We already have 500,000 people--no, I am
sorry. We have about 400,000 people in trial mods, and we will
have 500,000 by November 1st, if not sooner. The pace of the
increase is on line with our objectives today.
We still have a long way to go. I am not declaring victory
at all. We have to do many more modifications than have been
done so far. But this is a program that was announced by the
Administration in February, shortly after they took office.
There has been great urgency to get it going. We have to work
through a number of banks around the country. We now have close
to 50 banks, and they account for 85 percent of eligible
mortgages in this country. And we are working very actively
with them to ramp up and to serve as many people as we possibly
can.
So I think that the progress has actually been good, but in
an absolute sense, have we arrived where we want to be? No. We
all have to do a great deal of work to get there. We are being
as open as we possibly can. We are not declaring victory by any
means.
Senator Johanns. Let us wrap up. I am way over my time, and
I appreciate the Chairman's indulgence. I would just wrap up
and tell you that when I got an Inspector General's report that
was this critical, we tried to act on it, and I hope you will
because, quite honestly, it is very damning.
Thank you, Mr. Chairman.
Senator Johnson. Senator Brown.
Senator Brown. Thank you very much, Mr. Chairman. Welcome,
Mr. Secretary. Thank you for joining us.
I want to shift gears and talk about credit. I hear
consistently, as we all do, from particularly small and medium-
sized businesses about the difficulty of getting credit, that
the Feds put hundreds of billions in TARP money, the
Administration released $5 billion from TARP for Tier 1
suppliers, as you know, for the auto industry. And I think it
is particularly acute, the problem is particularly acute for
manufacturers. I bet you I get a dozen calls or letters every
single week from manufacturers in my State, especially
manufacturers in the auto supply chain but beyond that.
The SBA has been actively making adjustments, increasing
its loan guarantees to 90 percent, yet banks still are not
lending to companies, to manufacturing companies, and these are
companies that have customers. They are companies that could
make sales, that have the capacity, that have skilled employees
ready to go.
Economists will say that historically what pulls us out of
recession is housing and auto, perhaps they say auto and
housing, in that order. And the President was in Lordstown,
Ohio, a week ago, a thousand people coming back to work at
Lordstown, being called back to work. There are signs that that
industry, partly because of Cash for Clunkers, partly because
of perhaps Chairman Bernanke is correct about the country
beginning to come out of recession, at least the recession
ending. Yet if the suppliers and the component manufacturers,
particularly Tier 2 and Tier 3 auto suppliers, and coupled with
a lot of those auto companies are beginning to look at
transition into other manufacturing--glass makers in Toledo who
make glass for trucks can make it for solar panels, component
manufacturers that make gears for cars can make gear boxes for
wind turbines. And we are seeing that transition.
My State is one--Toledo has more solar energy jobs than any
city in America, and we are seeing that around my State, and a
State that people are surprised when they hear that.
What gives here? What do we need to do, what do you need to
do? What tools can we give--and I know Elizabeth Warren is
going to talk about this on the second panel, about the lack of
credit in manufacturing and other businesses. But give me your
thoughts on what we can do to help the Feds put more--somehow
get the banks to begin to give credit to especially
manufacturing.
Mr. Allison. Well, Senator, again, we are encouraged by the
progress that is being made. I know that the President himself
was out there urging that more progress be made. We have to
transition this economy to new industries in order for it to
grow and to have greater stability over time.
Important in my role is to assure that we are making
capital available to the banking system so that they can in
turn provide credit, as you are pointing out to small business
and large. And, again, we have seen, I think, encouraging signs
that the lending activity has been helped by the TARP program.
It is not as robust as we would like. That is normal during a
recession. But it has not been as bad a downturn in lending as
it might have been and certainly would have been without the
TARP program.
Senator Brown. I am sorry to interrupt. I appreciate that.
And I really do believe that if we had not done a lot of things
we did, contrary to what some in my State and some in the
Senate and House think, it would have been significantly worse.
I agree with all that. But I still have--the Subcommittee I
chair of this Committee, the Economic Policy Committee that
Senator Merkley sits on with me, we have had hearings on this,
and we are still having manufacturers come to us. I said I get
at least a dozen calls and letters and visits a week from
people that cannot get the financing that will produce jobs.
These are people that are not particularly high risk.
What gives? What do we need to do? Other than saying we are
beginning to make progress, what unfreezes this so they get
credit?
Mr. Allison. Well, again, a lot of credit has come for the
securitization markets as well as the banks. It is very
important for us to increase activity in those markets, and
that is why we are still following through with the PPIP
program. That is why the TALF facility has been actually
extended by the Fed into next year. And we have to look at this
as a problem of total credit availability. And it is not only
the banks, which play a vital role, but it is also the ability
of banks to be able to take assets from their books and sell
into the securitization markets, as was pointed out earlier.
In order to do that, we have to have an active marketplace,
and that is why some of these programs are so essential to
getting that activity going on. We have seen encouraging signs.
The securitization markets have picked up in activity
dramatically since last spring thanks to these programs. More
still has to be done, but the signs are encouraging, and we are
seeing glimmers of growth in the economy in certain sectors.
So, all in all, the economic recovery program and the
financial stability program seem to be having a favorable
impact.
Senator Brown. OK. Thank you, Mr. Chairman.
Senator Johnson. Senator Hutchison.
Senator Hutchison. Well, thank you, Mr. Chairman, and thank
you, Mr. Allison. I know you have been here a long time, and I
appreciate that you are making great efforts.
I just want to say a couple of things. First, in Mr.
Barofsky's report, the IG, it goes through exactly what we were
told last fall for TARP, that it was primarily to take the
toxic assets off the books, particularly in the area of
mortgages, to try to stabilize that area. It is my belief that
had we stuck to that, maybe the stabilization of the housing
market and the banks would have been enough and certainly would
have kept us from going through these huge spending binges that
I think are scaring people more than anything else in this
country.
And yet I go through my State and small business person
after small business person after small business person says
they cannot get loans. They cannot do the normal things that
they have done throughout their small business experience. And
so I am very concerned that part of the new programming has not
even gotten up and going, specifically the mortgage part of the
new program.
I am just going to ask the direct question. We do not feel
it out in the marketplace that it is getting into the home
mortgage area enough, that it is getting into the small
business area enough. And yet we just continue to say we are
going to extend the program. There is $330 billion that is not
spent, and we hear that Secretary Geithner is going to ask for
an extension of the program.
Let me just ask you this question: Isn't this huge debt and
the deficit as important as all of these other factors? And why
wouldn't you consider not extending TARP, having the paybacks
go directly into paying down debt so that the American people
can see that there is light at the end of the tunnel, that
maybe this excessive spending that is causing debt, that we see
beyond our children and grandchildren's generations, that maybe
if we stop TARP where we are now, about halfway through, and
try to work on the paybacks going into debt, wouldn't that be a
signal to the American people that we are going to look at this
debt, it is a great concern, it is going to be as important to
the success of coming out of this recession as anything else we
could do? Why not?
Mr. Allison. Senator, first of all, thank you for your
thoughtful question. The payments back into TARP do go to
reduce the funding of the debt----
Senator Hutchison. Let me ask you on that point, because
you did say that to Senator Johnson. But is it going back--is
the interest going back? Is the corpus going back? Because it
is looking more like a revolving----
Mr. Allison. The interest and the corpus go directly into
the general account of the U.S. Treasury to reduce the
Treasury's funding needs.
Senator Hutchison. So is that no longer, the $70 billion,
no longer part of the $700 billion?
Mr. Allison. Actually, the way the law works, Senator, is
that the amount appropriated remains at $700 billion, so as the
money is paid back, that frees what we call headroom in the
program, if needed, to provide additional commitments.
Senator Hutchison. I do not think that is what I certainly
envisioned, nor is it the way I heard it described when we
passed this, that it would continue to revolve, basically. I
think people thought there would be a finite amount, and that
would be used to jump-start the economy through mortgage-backed
security purchases and buying the toxic assets.
So I do not think we considered it a revolving fund, but
wanted to get out of debt as soon as we could.
Mr. Allison. Let me say, Senator, we follow the law
explicitly and the amount that we have actually committed is
$444 billion. We have actually invested or spent about $360
billion out of the $700 authorization.
On the--let me mention about home ownership. One has to
look at the overall programs that the Government has been
carrying out. Mortgage rates are certainly lower than they
would have been, which is extremely important to the American
public, because of the activities of the Fed as well as the
Treasury. And the Mortgage Modification Program, as I said, it
is relatively young. It is ramping up very rapidly. We are
going to be reaching a lot more people.
We share your concern about is this--are these efforts
reaching people in their communities around the country, and we
monitor that very closely, as well. That is----
Senator Hutchison. Do you agree that it isn't?
Mr. Allison. Oh, it is. It is. But a lot of people are
still suffering in the American public. There is still a
concern, many people, about losing their homes or losing their
jobs. We are not back to a normal, healthy economy. There are
improvements that are dramatic in many parts of the economy,
but we still have a way to go. And those are some of the
factors that the Secretary will be considering as he decides
whether to extend.
But let me emphasize again, a number of these programs are
already winding down and they will wind down further, and this
program ends either the end of this year or no later than next
year in any case. So we are looking toward the--some of these
programs beginning to wind down and making sure that we are
implementing the programs that are underway as well as we
possibly can to get assistance out to the public as well and as
rapidly as possible.
Senator Hutchison. Well, let me just finish by asking, why
wouldn't you show good faith with the American people and not
ask for a full extension of $700 billion at the end of this
year, and perhaps just lower the amount and put that amount
into a position in which we would not have that available to go
further into debt when we are seeing such a skittishness in the
American economy about the huge debt that is being created?
Mr. Allison. Yes. These are all considerations that the
Treasurer--that the Secretary of the Treasury will take into
account. These are important concerns that you are raising. We
understand those concerns. Those have to be factored into this
very complex decision that the Secretary will have to make.
Senator Hutchison. I appreciate what you are saying. I
don't see, as you do, that people feel like the money is
flowing, and that there is credit availability for small
business people. I hope you will monitor that very carefully
and maybe talk to people on the ground about whether they feel
like they are able to get their inventory loans, their payroll
loans as they have in the normal processes of their businesses.
Mr. Allison. Yes. May I say, Senator, we share your
concern. We do talk to many people out across the country. We
are listening to small business associations, small bank
associations. We understand the frustration of many. This is a
very serious recession. We have taken dramatic efforts to deal
with it. We look at the situation with small business
constantly and discuss ways where we might be even more
helpful.
Senator Hutchison. Thank you, Mr. Chairman.
Senator Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman. Mr. Secretary,
thank you for your service.
Let me--a couple things. First of all, I held a field
hearing of my subcommittee in New Jersey on the foreclosure
crisis and one of the things I heard from witness after
witness, including actual citizens as well as groups that are
working with groups certified by HUD, is that the lenders have
a strategy--many lenders have a strategy that some define as
the three Ds--delay, deceive, and deny. It actually reflects
what many of the constituents coming to my office and letters
that I receive beyond my State reflect.
In many cases, we have these institutions, these servicers,
telling people what is clearly in violation of the law, is not
the law, telling them that you have to be in foreclosure before
you can get assistance. That is not the law.
Mr. Allison. Right.
Senator Menendez. Taking long periods of time when a
mortgage mitigation and/or readjustment is being sought, and
then piling on fees and penalties months after the application
has been made. Telling them that they need not only to be in
foreclosure, but that they need to be delinquent in their
mortgages to qualify for a modification. Or steering them into
non-HAMP mortgage modifications.
Now, if I can hear at a field hearing what I have heard in
my office for months now, how is it that the Treasury
Department, which has the authority to fine servicers for not
complying with the loan modification agreements they sign with
the Federal Government, has not faced, as I understand it, one
such violation?
Mr. Allison. Yes. Senator, we share your concern about this
and one of the roles of Freddie Mac in this entire program is
to audit the program, to go into each of the servicers and
determine whether they are conforming with the rules and the
law, and we do have the power, as you said, to either withhold
payments, and even to call back previous payments if we find
that violations have been taking place. We are going to be
looking at that.
First, we want to be assembling information about the
servicers and their service quality. We are going to be
publishing information according to metrics of service quality
on each one of these servicers so the American public can see
for themselves who is following through with this program
effectively and who isn't. We are going to be meeting again
with the servicers in early October. We are bringing them into
Washington to have an all-day meeting to examine the state of
the program and how well they are carrying out their
responsibilities on behalf of the program and the public.
We are sincerely concerned about this. We don't think the
service quality across the board is at the level that it needs
to be, and we are committed to trying to make this better. And
one answer is public disclosure.
Senator Menendez. Well, I appreciate that, and I am all for
public disclosure, but public disclosure without consequence
means nothing.
Mr. Allison. We understand. We understand.
Senator Menendez. The bottom line is that there are
incentives of all types proposed in the law.
Mr. Allison. Right.
Senator Menendez. There clearly were incentives on the
positive side to induce and help the servicers to do what we
would want them to do in loan modifications. There is also a
different type of an incentive, sometimes we call that a stick,
when you don't act correctly. However, if the penalty is never
used, if I can go through the red light all of the time and
never worry about being fined, then guess what? Very often,
people will just take that red light when they are in a hurry.
There has to be some action upon servicers that consistently
have this MO. And if not, they will continue with impunity to
the detriment of the homeowners.
Mr. Allison. Yes, sir, and we will use the stick when that
is called for. I can assure you of that. So we are assembling
the information and we will be sitting down with the servicers
and speaking with them----
Senator Menendez. Because I have already looked at some of
your metrics as to who, of all of these institutions, are
performing, and it is like this. Whoosh.
Mr. Allison. Exactly.
Senator Menendez. Now, I don't know what these people down
here are doing and when they are going to get the incentive to
do better, but my patience is quickly dissipating, so I look
forward to seeing what we are going to do in that respect.
Mr. Allison. Thank you.
Senator Menendez. Second, Professor Warren in her testimony
soon to come says that in May, they surveyed the state of
lending for small businesses and families and examined the TALF
program and their report raises concerns about whether TALF is
sufficiently well designed to help market participants meet the
credit needs of households and small businesses. It also raised
serious doubts about whether the program would have a
significant impact on access to credit.
Now, I know that in response to some of my colleagues'
previous questions--I am concerned, first of all, under all of
these programs, that we have not seen lending be realized. I
know that your answer to that is but for TARP, for example, it
would have been much worse. That is not consoling to the
private sector that is seeking to have access to capital so
that they can get this economy moving and their own personal
businesses moving again and hiring people and producing goods
or services that our economy can move on.
So I listen to story after story of people who talk to me
about the incredible percentages above LIBOR in order to get a
loan, and I then see this comment about TALF, particularly as
it relates to small businesses, and I say to myself, why is it
that we cannot structure the program in such a way that meets
those challenges and what are we going to require from the TARP
recipients as sufficient enough activity as it relates to
lending so that, in fact, this is, one, yes, about
strengthening those financial institutions, but yes, about
lending in the marketplace. When are we going to get that
reaction?
Mr. Allison. Well, again, I think, as you pointed out and
as I have said, lending is stronger than it would have been
otherwise. Are we satisfied? No. We are--we need to make sure
that, working with the regulators, that the banks retain
adequate capital to conduct lending activities.
There is, if you look at the normal runoff of bank loans or
years, you would see that actually there is a great deal of
lending going on, but there is not enough. In part, this is--
there needs to be confidence on the part of businesses who
borrow as well as lenders, and we are seeing that there are
signs of greater confidence. We had in the month of June, for
example, an increase in loan originations across the country.
But it is still spotty and it is going to take some time to
restore confidence both on the part of businesses and banks to
get to--and the capital markets so that we have a strong
securitization market again.
So we are not yet out of the woods completely. We have made
progress. We want to see progress as much as anyone, and we are
working day and night to try to make sure that our programs are
as effective as possible in stimulating lending.
Senator Menendez. I will just close, as my time is
finished, simply by saying, plenty of people, plenty of
entities I know, they have the confidence in their business and
their business plan to borrow. The only thing is, when you have
rates that are almost usurious, it is pretty difficult to
borrow.
And last, it still doesn't answer the question on TALF and
the small business community that is the backbone of the
country that needs to have access to capital, that clearly is
not taking place.
Mr. Allison. Well, TALF has been expanding and it has
provided material sources of liquidity in the--especially the
commercial mortgage-backed securities and the residential
mortgage-backed securities markets. Also, the asset-backed
securities activities have picked up, as well, thanks to TALF.
There are billions of dollars of financing that have been
provided, for instance, for credit cards, auto loans, floor
plans, that would not have been the case without these
programs.
I will share your view, however, that more needs to take
place so that rates are appropriate for borrowers and there is
ample liquidity in the system. Again, I want to point out, we
are not yet where we would like to be, but we are seeing a
great deal of improvement in those markets.
Senator Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman, and
thank you, Mr. Secretary.
Let me just follow up on Senator Menendez's questions with
respect to TALF. I think the Treasury reserved about $80
billion to lend into that program, and only about $20 billion
has, I think, been committed, so there is a significant gap. In
light of what we are all hearing back home, where companies
can't get credit, they have a good business plan, et cetera, I
would think that the problem we would have is these funds would
run out, not that there is no call on them. Can you help me
understand?
Mr. Allison. Yes. Well, the TALF program has been expanding
and it has provided substantial liquidity. We have set aside
funds for the TALF and actually recently increased the amount
of commitment to the TALF program as it moves forward into next
year. It is still a very important part of securitization, but
we have seen overall spreads come down thanks to TALF, so
funding is more affordable today than it was before and it is
more ample.
Senator Reed. No, I absolutely agree with you, but we
continually hear, and you do, also, that good businesses can't
get loans. Small businesses can't get loans. No one can get
loans. It might be sort of urban folklore, but it is a very
powerful one. It is contributing to the confidence, or lack of
confidence, of the public. I would think you would try to,
having committed the money, expeditiously try to get it out----
Mr. Allison. Yes.
Senator Reed. ----not foolishly, but with purpose, and I
hope you will do that.
Mr. Allison. Well, we are doing that, sir, and we will try
to keep that going with great momentum.
Senator Reed. Now, let me follow up another theme of my
colleague from New Jersey, and that is the home foreclosure. I
listened and you, I think you are aware of the problems, you
are trying to deal with them. But at some point, if these
measures are not eliciting the proper behavior, particularly
after you make some sanctions or take some sanctions, the
question is, what more can we do? The clock is ticking. If we
don't really, I think, turn the mortgage market, or build on
the stability that you have helped provide----
Mr. Allison. Right.
Senator Reed. ----by next spring or next summer, people, I
think, will continually feel that they--the economy has
improved, the market, we hope, is still up, but they have
missed out.
So my question is, is there anything more we can do
legislatively, and I will sort of answer, in a way, my own
question, that if these results continue to be as Senator
Menendez described, we will do more things legislatively, and
hopefully they will be helpful.
Mr. Allison. Yes. Well, again, we are seeing that the
Mortgage Modification Program is gaining steam and we are
continually in dialog with the servicers to make sure we ramp
this up as quickly as we possibly can. We are most likely going
to beat our target that we set for half-a-million trial
mortgage modifications underway by November 1. But we are not
stopping there. We want to keep on ramping this up. We are
monitoring which banks are lagging, which banks seem to be
doing a good job, what is the service quality, and so forth.
We feel the same sense of urgency, Senator, that you do and
your constituents do. We have a long way to go, but we are
hopeful that as we move toward the end of the year, this
program will be at pretty much full steam and we will be moving
forward into next year with a lot of momentum.
Senator Reed. Thank you very much, Mr. Secretary.
Mr. Allison. Thank you very much, Senator.
Senator Johnson. With that, Mr. Allison, thank you very
much for being here. You may be excused.
Mr. Allison. Thank you, Senator.
Senator Johnson. Next comes panel number two, and it
involves Neil M. Barofsky, who is the Special Inspector General
for the TARP. Prior to his serving in his current position, he
was a prosecutor in the U.S. Attorney's Office with the
Southern District of New York for more than 8 years.
Gene L. Dodaro is the Acting Comptroller General of the
GAO. He has worked for over 30 years in a number of key
positions at GAO, including Chief Operating Officer.
Elizabeth Warren is the Chair of the Congressional
Oversight Panel. She is the Leo Gottlieb Professor of Law at
Harvard University.
Welcome to all. Mr. Barofsky, why don't you lead it off.
Welcome.
STATEMENT OF NEIL M. BAROFSKY, SPECIAL INSPECTOR GENERAL,
TROUBLED ASSET RELIEF PROGRAM
Mr. Barofsky. Thank you, Mr. Chairman, Members of the
Committee. It is an honor to appear before you today as the
Special Inspector General, and it is also an honor to appear
sitting next to my copanelists and partners in providing
oversight to this historic program, Mr. Dodaro and Professor
Warren.
It has been about a year since TARP was enacted and EESA
created this program, and about 9 months since I took office.
During that past year, the program has changed dramatically, as
was detailed earlier in the testimony of Mr. Allison. What
started as a $700 billion effort to purchase and cleanse
books--toxic assets off the books of financial institutions has
evolved over time to 12 different programs that involve, when
combined with other Federal programs, of up to approximately $3
trillion.
As the TARP has changed, so has our office. When I started
on December 15, it was just me and my deputy, Kevin Puvalowski.
We have grown in that time to 86 strong and we conduct our
oversight through our two operational divisions, Audit and
Investigations.
Our Audit Division has been putting out audits recently
advancing our goal of achieving transparency and accountability
in the TARP program. We recently issued audits on use of funds,
on outside influences on the TARP application process, and on
executive compensation, and we have a number of audits coming
up in the next couple weeks, including Bank of America, the
initial funding, and the bonus payments to AIG. In the coming
months, we also have projects that we are doing with the
Congressional Oversight Panel on warrants and on corporate
governance with GAO.
I would like to talk very briefly about one of our audits,
which was our use of funds audit. That was the first audit that
my Audit Division put forward, and this was from late December,
when we made our first recommendations to Treasury that they,
in order to advance basic transparency, require TARP recipients
to report on how they are using TARP funding. The last
Administration refused this request, as did the present
Administration, so we took matters into our own hands.
And what we did is we sent out letters to the 364 financial
institutions, which at that time had received TARP funding and
asked them a simple question. What did you do with the money?
We got 364 responses, all of which are now posted on our Web
site and summarized in an audit report we put out over the
summer. And what we learned is that financial institutions did
a number of things with the money.
As to lending, some of them were able to use TARP funds to
increase lending and others reported that they decreased
lending less than they would have otherwise or were able to
maintain lending. But, of course, that is not all they did with
the money. As our audit report indicates, they reported that
some institutions used money to build up their capital cushion
to withstand future losses. Others used the money to acquire
other financial institutions. Still others used it to pay off
debt that they had or acquire mortgage-backed securities.
The point is that, as we proved, financial institutions can
and should be required to provide this basic transparency of
letting the taxpayers know what happened to their money.
Treasury still refuses to adopt this recommendation, and with
all due respect to Mr. Allison, the things that he is
describing that they are doing falls far, far short of meeting
this basic level of transparency.
Our Investigations Division has also been busy. Although I
can't comment on a lot of the investigations because they
involve confidential ongoing criminal investigations, several
things have become public. For example, we helped bring some
measure of justice to investor victims of Gordon Grigg down in
Tennessee, who was selling a fictional asset called TARP-backed
securities. He is now serving 10 years' imprisonment.
We have also worked with our civil partners, such as the
FTC, helping to shut down several scams that were targeting
struggling homeowners in the Mortgage Modification Program. We
also have other ongoing investigations that have been made
public, more complex investigations, like that of Colonial
Bank, a bank that had received preliminary approval to receive
$553 million of TARP funds. Following that approval, my office
took several law enforcement actions, including serving
subpoenas, and over the summer executing search warrants down
in Florida, including on Colonial's offices. That TARP money
never went to Colonial. It is now defunct and our criminal
investigation with the Department of Justice is continuing.
Similarly, we have been supporting the numerous
investigations into Bank of America, including the
investigations by the New York State Attorney General, the SEC,
and the Department of Justice, as we look into what happened
with the merger of Merrill Lynch and the circumstances
surrounding some of their disclosures, as well as the
circumstances surrounding their receipt of additional TARP
funds.
Mr. Chairman and Members of the Committee, as I said
before, it is an honor to be here before you. The support of
this Committee has been absolutely instrumental to us as we
carry out our role of providing oversight and I thank you for
that. I look forward to answering any questions you may have.
Thank you.
Senator Johnson. Thank you, Mr. Barofsky.
Mr. Dodaro.
STATEMENT OF GENE L. DODARO, ACTING COMPTROLLER GENERAL,
GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Dodaro. Thank you very much, Mr. Chairman, Senator
Johnson, Senator Corker, Senator Merkley. It is a pleasure to
be here today to assist your deliberations to take stock 1 year
after the Emergency Economic Stabilization Act was passed.
At this juncture, our overall assessment is that the TARP
program, in particular the Capital Purchase Program, made a
very important contribution to improving the situation with the
credit markets, but when you look at the full portfolio of
programs under the TARP umbrella, in many respects, they are
still a work in process, with many uncertainties and challenges
that lie ahead, and some of the ultimate return on the
investment remains very unclear at this point in time.
Now, on a positive standpoint, while it is very difficult
to isolate TARP's specific impact given the wide range of other
programs by the Federal Reserve and FDIC, overall indicators
that we have been tracking on interbank lending rates along
with interest rate spreads show dramatic improvement since
October 2008, when the Capital Purchase Program was announced,
along with other Federal initiatives.
And as you have heard, there have been repayments made for
the Capital Purchase Program by many institutions, $70 billion.
There has been $2.9 billion in warrants that have been
exercised and about $7 billion in dividend payments. However,
there are hundreds of other institutions that still have
received TARP funds and are still receiving them under that
program and it needs active management to ensure that they are
complying with all the requirements.
In other cases, there are investments that have been made,
particularly in the case of AIG and the auto industry, where
there is a clear need to have a very well-defined exit strategy
on the part of the Government that balances returning those
companies to private control while managing and making sure
that they are minimizing the potential losses to the Federal
Government. We are looking very carefully at that and
evaluating those exit strategies that are being contemplated by
the Treasury Department and others.
And as you have heard today, the Home Affordable
Modification Program is in its very early stages and a long way
from fulfilling the expectations that many people had for that
program, and other programs are just in the process of getting
off the ground.
So from a total standpoint and looking at TARP, it has had
some positive impact on the credit markets, but a lot of the
programs have very uncertain outcomes at this particular point
in time.
Now, in order to foster greater accountability and
transparency, GAO has issued about seven reports. We are
required to report every 60 days. We have had 35
recommendations in those reports to make sure that better
controls were put in place, that there was better oversight,
greater transparency and accountability. Treasury has agreed
with the vast majority of those recommendations and has
partially or fully implemented most of them.
However, many remain outstanding, including putting in
place a chief of the Home Ownership Preservation Office, which
we believe was very important to help give additional emphasis
to that program and to have a better communication strategy.
They have made some strides in this area, but this will be
really important going forward, particularly as it relates to
communicating whether or not they are going to extend or
propose to extend the TARP program for another year.
So those activities are really important. We are in the
process of completing the first annual financial audit of the
Office of Financial Stability's financial statements. We will
be reporting soon on that financial audit, which will include
valuation of all the investments that they hold to date, so I
think it will provide pretty good illumination on those points.
We have efforts underway to look a the automobile industry
in terms of steps that they have taken, GM and Chrysler, and
also with our newest statutory authority to look at the Federal
Reserve's oversight of AIG, we are going to look at that effort
along with the partnership efforts we have with Mr. Barofsky
and his team to look at how the Federal Government is pursuing
different corporate governance strategies and oversight
mechanisms across a wide range of entities, both within the
TARP program as well as Fannie Mae and Freddie Mac, for
example.
That concludes my opening statement, Mr. Chairman. I would
be happy to answer questions at the appropriate time.
Senator Johnson. Thank you, Mr. Dodaro.
Next is Elizabeth Warren.
STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL OVERSIGHT
PANEL FOR THE TROUBLED ASSET RELIEF PROGRAM
Ms. Warren. Thank you, Mr. Chairman, Senator Corker,
Senator Merkley. I appreciate the opportunity to be here today
to talk about the work of the Congressional Oversight Panel.
I always need to start with a disclaimer. I am the Chair of
the Congressional Oversight Panel, but it is a five-person
panel; and because I do not operate from a script, that means
my words have not been preapproved. So I speak on my own behalf
and not on behalf of my other four copanelists.
I want to start this, because you asked us to talk about 1
year later--many people have talked about where we were a year
ago, that we had major corporations that had failed either
through bankruptcy, others on the brink of collapse. We had
families that were concerned about the loss of savings. They
watched their home equity disappear. Chaos in the markets. And
TARP was offered as the centerpiece of the Government response:
a $700 billion program to stabilize the financial system.
From the outset, it was obvious that a system so large
would need very careful oversight. In the years since then, the
mission of TARP, the work of TARP has grown, and oversight has
had to grow along with it.
The Congressional Oversight Panel was your creation to help
in part with that oversight. We are the ones who are
responsible for issuing reports every 30 days to Congress. Here
is a stack of our reports. We have done 10 regular reports and
two special reports that were required by statute. I talk about
those more in my written remarks, and I am glad, obviously, to
answer any questions about them.
In addition to our reports, we also hold hearings, and so
we have so far had 11 hearings, including five field hearings
that have taken us to some of the areas around the country that
have been especially hard hit by the economic crisis.
In fact, as I am here today, the rest of the panel is in
Philadelphia in a hearing on the mortgage foreclosure
mitigation system. We are hearing from Treasury there and from
many people about various programs underway and how they are
working on the ground.
Of all the questions, though, that we get and I get as
Chair of the Oversight Panel about TARP, perhaps the most
frequent one is just the question: Is it working?
It is a simple question, but it actually is a very
difficult one to answer. And part of the reason starts with the
design of TARP. We said in the statute that there were five
specific goals: to restore financial stability, protect home
values and family savings, promote jobs and economic growth,
maximize return to taxpayers, and provide for public
accountability.
Now, any program under TARP that did all five of those
things I think we would all applaud and say that was a success.
But how do we evaluate programs that do only some of those?
What becomes even more difficult is how do we evaluate programs
that advance some of those goals at the cost of others of those
goals. And this is not merely a question that is hypothetical.
In fact, in February, the panel released a report
evaluating Treasury's largest acquisitions of bank equity and
warrants under the TARP program. Despite the assurances of
Secretary Paulson that the initial purchases of stock and
warrants of the banks were made at full value, our analysis
showed that Treasury paid substantially more for these assets
than they were worth. In fact, for every $100 spent by
Treasury, the taxpayer received assets that were valued at that
time on average at only $66.
Now, these capital purchases very likely helped stabilize
the markets. They achieved one of the key goals of TARP. But
Treasury paid substantially more for these assets than their
market value, thereby subsidizing the banks at a significant
cost to the taxpayers. So any discussion of success has to hit
this basic conundrum.
The Oversight Panel can contribute to this discussion by
investigating what is going on, assembling the data, and making
the recommendations. We can press Treasury, as we have, for
greater clarity, greater transparency, and greater
accountability. But ultimately the American people will decide
if the right balance between the banks and the taxpayers has
been struck.
In the last year, the apprehension that pervaded this
country has turned into something else: frustration and anger.
Today's fragile stability has come at an enormous cost to the
American people. Taxpayers have a right to know whether
anything fundamental has changed to prevent this crisis from
happening again.
This brings us back to a topic that the panel first
addressed in our special report on regulatory reform last
January. As we said then, we must change the rules of the
financial system to make certain this crisis is not repeated.
Thank you again, and I look forward to whatever questions
you may have.
Senator Johnson. Thank you, Professor Warren.
The clerk has asked to put 5 minutes on the clock.
For the entire panel, each of your organizations has
offered recommendations to improve the TARP program. How would
you characterize the TARP's receptivity and responsiveness to
your recommendations? And are there recommendations that have
not yet been implemented which all of you agree on or feel
should be implemented in the near future? Mr. Barofsky.
Mr. Barofsky. A number of our recommendations have been
implemented, particularly on the compliance side. But at its
core, our biggest frustration and I think the most significant
recommendations that have not been adopted have been related to
transparency.
Touching on something Professor Warren said, we believe
that a lot of this frustration and cynicism and anger comes out
of the lack of transparency in the TARP program. Taxpayers
really want to know and should have a right to know what is
going on with their investments. How are the funds used? What
are they worth on a more regular basis than the statutorily
required annual review that GAO does? With some of the new
programs they are rolling out, like the PPIP program, what is
being purchased with their money?
We believe these are fundamental aspects of transparency
that will make this a better program, a better understood
program, and a better run program, and Treasury's failure to
adopt these recommendations in my view has been one of the
great failings of the past year.
Senator Johnson. Mr. Dodaro.
Mr. Dodaro. In general, we have received good receptivity
to our recommendations. There are several outstanding ones. One
is to name the new head of this Homeownership Preservation
Office, which I think is very important given all the comments
that have been made and questions to Mr. Allison this morning.
But I share some of the frustration that Mr. Barofsky
mentioned early on. In the very first report that we issued on
the TARP program last year, there was a reluctance to adopt the
recommendation to disclose the total lending activities of the
recipients of the Capital Purchase Program. I think that got
the program off to a bad start. It created a lot of skepticism
about what the banks were doing with the money. And it was
difficult to come up with a baseline as to the lending
activities and whether or not--how to measure whether TARP was
achieving the objectives of the statute.
There has been significant progress since then due, I
believe, to active oversight on the part of the Congress, to
require the prior Administration to begin those reports, and
now that we have those reports, they are providing better
insight into the overall lending activities, not only for the
large institutions but for the small ones as well.
I would be happy to submit a detailed summary for the
record of all 35 of our recommendations and where things stand.
Senator Johnson. Ms. Warren.
Ms. Warren. Well, again, there has been some good news. We
have pushed for a long time for more transparency, more
accountability, more clarity on goals. And when I measured
against where we were last November, we are in a much better
place than we were before. However, we think there is still
room to travel along the transparency road.
We made some recommendations on mortgage foreclosure
mitigation that Treasury used and altered their plans somewhat.
I would like to think we had an effect on the warrants
repurchase program. They did not specifically adopt a
recommendation, but after we had identified that we were
receiving what we thought was too little money, the price
jumped up, and that was good for the American taxpayer. So
there has been some good movement.
I want to say, though, we have had some very specific
recommendations that at least thus far Treasury has not shown a
lot of interest in.
We have recommended, for example, in our most recent report
on autos that the taxpayers' ownership, the shares that
Treasury now holds in Chrysler and General Motors should be put
into a trust to be better managed on behalf of the taxpayers.
We have argued for repeating the stress tests and extending
them past the 19 largest financial institutions. We have raised
deep concerns and made many recommendations about getting the
troubled assets off the books of the banks, where they remain.
And we have made recommendations about restarting small
business lending, where we are very concerned that there has
been inadequate work done.
We also are concerned that parts of the foreclosure
mitigation process are just--they are just ignoring big pieces
of the problem out there.
So we also have made about, I think--it is hard to count
these; we do long and complicated reports--roughly about 20 big
recommendations and probably about 20 more technical and
smaller recommendations. We would be glad to offer those to
you, Senator, in some detail and show you the extent of
Treasury's response, if that would be helpful.
Senator Johnson. Yes. Thank you, Ms. Warren.
Mr. Barofsky, are you prepared to delve into the lender
operations and check to make sure they are following the HAMP
rules correctly, training the staff adequately and generally
living up to the contractual arrangements?
Mr. Barofsky. We have an audit ongoing right now. A couple
of my auditors just got back from Texas. They are doing a site
visit on one of the mortgage servicers, and all of this is
going to be encompassed within that audit, which we hope to get
out late this year or early next year.
In addition, we have a hotline that is up and running. We
have received probably about 7,000--close to 7,000 inquiries on
the hotline. It is available on our Web site where we have had
about 26 million hits. And a lot of these are homeowners who
are complaining and letting us know their frustrations.
We put together a management report to Treasury identifying
a lot of the frustrations, which I heard were exposed at
Senator Menendez's hearing, as he described it, and brought
those to the attention of Treasury as well as to try to get
them to work with these servicers to make sure they are living
up to their end of the bargain.
Senator Johnson. Senator Corker.
Senator Corker. Thank you, Mr. Chairman, and I thank each
of you for your testimony, but also for what you are doing on a
daily basis. I do not think there is any question that having
folks do what you do certainly causes people to attempt to be
far more transparent, and it is a very good check and balance.
We had a witness earlier whom I talked with in the hallway
after the meeting, and, you know, there was not a lot of
illumination for many, many reasons, I think, as to the program
itself. And I know that you all have issued reports, and we
were able to read those, and your testimony kind of tells us a
little bit about where we are as far as the integrity of the
program goes.
But I would like to move more toward--we have some
decisions or there will be decisions made, I guess, in the next
several months. You all are out there on the ground, you know,
and in some ways auditors, as you are in some ways, have a
better sense of where things are in some cases than the folks
who are away from that.
Should we not go ahead and sunset TARP at the end of the
year? I really feel another moral hazard being created right
now, especially as it relates to commercial real estate, where
I think many institutions and investors are thinking that we
are going to ride to the rescue; and instead of getting their
balance sheets where they need to be by issuing stock, which
dilutes ownership, which they are resistant to do as long as
they think that the Federal Government is going to ride to the
rescue, they are missing a window of opportunity to rectify
what no doubt is going to be a problem down the road for them.
Professor Warren, I wonder if you might speak to that.
Ms. Warren. Yes, Senator. I want to start by saying
something that is very unpopular probably everywhere. I am very
concerned about the stability of our banks right now.
Notwithstanding the good news and how share price is up on Wall
Street for some financial institutions, I just want to remind
everyone that the toxic assets remain on the books of the
banks; the commercial real estate mortgages are a coming
crisis; small banks are continuing to fail. And we were talking
a year ago about ``too big to fail.'' We are now facing an
industry that is more concentrated than it was a year ago, and
``too big to fail'' is upon us now in a much larger sense.
Having said that, I also have deep concerns about the
impact that TARP has on this market. I share your concerns
about the effect of ongoing taxpayer subsidies and whether any
market functions so long as it believes that there is a
guarantor, that there is someone, the taxpayer, who will
continue to subsidize the decisions that are being made and the
operations, and stand in this ``too big to fail, we will take
care of you, so if you get out there and gamble you take all
the profits if you win, and we will take all the losses if you
lose.''
I just want to say I think it does have distorting effects
on capital investment. I am very concerned about the absence of
an exit strategy for how we are going to withdraw those
subsidies and whether we will have confidence that we will
continue to have a stable banking system afterwards.
Senator Corker. But some of the funds have been allocated--
thank you for your response. Some of the funds have been
allocated already for PPIP and other kinds of things. Those are
not just going to go away, and they are primers. And I know we
had some discussion earlier, and I agree with Senator Gregg
that the securitization market will come back as soon as the
people feel confident again in that market. There is nothing
really, I do not think, exceptional that we necessarily need to
do in that regard.
So those programs are not jut going to go away. I mean,
they are sort of going to wind down over time. So back to the
sunset issue.
I think as long as this cloud is out there--or this rainbow
for some is out there--I think we are going to continue to have
people not doing the things they could do today to get their
balance sheets in better order. And I am just wondering if you
have a recommendation regarding whether--I think it should be
sunsetted, and I know that we have numbers of banks that
probably are on the troubled list. I think there are resolution
mechanisms in place to deal with them, because they are
typically not the largest institutions. But I would just love
to have your response.
Ms. Warren. I appreciate it, Senator, and I am struggling.
I do not want to be nonresponsive to you on this, but I think
this one is a really tough question. I am less confident that
we have adequately arranged for the death of financial
institutions that need to fail. And so the absolute worst-case
scenario from my point of view is that we say, OK, this is it,
you are on your own. Whether we do this with TARP still alive
or not, if we let these banks exit the system and you say you
are out there, you are on your own, you go out, you make some
profits, you make some bad decisions; and then when they get
into financial trouble they race back to the taxpayer and say
you are going to have to bail us out again.
So I am concerned that TARP is part of this larger fabric
that is not only affecting investment, as you rightly identify,
but it is also just a part of this larger decision making and
risk taking and concern over whether or not the American
Government is now in a position to say with credibility: Your
business has failed. You failed. Your shareholders are wiped
out. Your debt holders are going to take that hit, and it is on
you. It is not on the taxpayer.
So I just think we have to be really clear in that place.
Senator Corker. May I ask one more question?
Senator Johnson. Yes.
Senator Corker. And, Gene, I know you may want to respond
to the last one, and you can do that in just a second.
There is not a resolution mechanism for the largest
entities, and I know Senator Warner and I have drafted a
mechanism that allows the FDIC to come in and do the same thing
with large, complex bank holding companies that they do with
most of the banks you are talking about now.
I assume that you would support having that type of
mechanism in place in lieu of what the Administration has put
forth as part of their financial regulation, which, in essence,
codifies TARP and gives them the ability in perpetuity to use
taxpayer monies for large entities.
Ms. Warren. Senator, I emphasize I speak only for myself
because others might not agree with me. But I believe that a
meaningful resolution authority is a central part of getting
this economy back on its feet, good decisions being made, and a
credible statement by the Government that when you go out there
and take risks, if you fail, you are on your own.
Senator Corker. Very good.
Gene, I do not know if you want to comment.
Mr. Dodaro. Yes. Relevant to your question about making a
decision on TARP's extension, I would make two points that I
think are very important.
Number one, TARP should not be looked at in isolation of
the other activities being carried out by the Federal Reserve,
FDIC, and others. As the program has unfolded, TARP has been
very much intertwined with joint activities--TALF being one
example, with Federal Reserve activities being on point, TARP
being the back-up for that activity, the PPIP program,
activities there with FDIC, et cetera. And with FDIC now we
have had 94 banks fail so far this year. There are over 400
banks on the troubled list that they publish. So that would be
my first point, number one. This ought to be looked at and
presented to the Congress as an integrated strategy on the part
of all actors that are relevant to dealing with this issue.
Second, there is plenty of time to have a good, analytical
basis for underpinning the decision. We are not in the same
type of emergency situation we were before where people are
rushing up within 2 weeks and asking for a lot of things. There
is plenty of time here, and there ought to be a good set of
indicators in place with clear expectations as to what will be
achieved and how we will measure progress going forward under
any extended program.
We are looking at that issue now as part of our detailed
anniversary report on TARP. We may have some recommendations on
that going forward.
Senator Corker. What would be the date of that?
Mr. Dodaro. That is going to be out early next month.
Senator Corker. Brilliant. Mr. Chairman, thank you.
Senator Johnson. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you for your testimony today. I wanted to start by inquiring
about the commercial and small business lending.
Mr. Barofsky, in your comments you note that it is becoming
more and more clear that the commercial real estate market
might be the next proverbial shoe to drop, threatening to
increase the pressure on banks and small business. And,
Professor Warren, you note that, ``The report raised concerns
about whether TALF was well designed to help market
participants meet the credit needs of households and small
businesses. It raised serious doubts about whether the program
would have a significant impact on access to credit.''
I have many, many small businesses and real estate
investors who are very, very concerned. On the real estate
side, many have 7-year balloon mortgages. The goal for them is
to roll those over. Many of the folks who have those loans have
paid consistently, but the value of their asset has dropped
from 7 years ago, and so even when they have longstanding
banking relationships, they are often being told, ``We are
sorry. Because your asset has dropped in value, we are not
going to roll over this loan.'' Well, obviously, if you have a
7-year balloon loan that you cannot roll over, you are in deep
trouble.
And then on the small business side, I just continuously
have a stream of small businesses that are saying whatever we
are doing for the big Wall Street firms, it is not help us as
small businesses.
Are these as serious as it appears at the ground level? And
how do we make progress?
Ms. Warren. Senator, yes, the problem is as serious as it
appears at the ground level. I will start by saying we need
better data in this area. We would like to track it with more
specificity. But the indicators we can find all say there is a
problem with small businesses.
The coming problem with commercial real estate mortgages is
exactly as you identify, not because the businesses are not
paying, but because when these resets come up, the value of the
assets will be sharply diminished, and as I understand it,
banks have also changed their lending standards. So what used
to be a 95-percent loan-to-value ratio mortgage is now a 65-
percent loan-to-value ratio mortgage on an asset that has
declined in value perhaps by a third. These are just numbers
that are impossible for the operator of the business who is
trying to pay that commercial mortgage.
Let me identify where I think at least a part of the core
of the problem is. It is disproportionately smaller banks--not
the behemoths but the intermediate size and smaller banks--that
do the small business lending and the commercial real estate
mortgages. That means that the health of this sector of our
banking industry is critical to that portion of the economy,
the commercial real estate and the small businesses.
But those small banks right now continue to have toxic
loans on their books. They hold these commercial real estate
mortgages that are quite problematic for them. They hold more
whole loans, which means they are not in the securitization
business nearly as much. They do not have the benefits of being
too big to fail. In fact, we are watching them fail in large
numbers. And the programs that Treasury has designed have
disproportionately gone to the largest financial institutions
and not to the smaller institutions.
So the problem is more systemic as we see it. We have
actually done a couple of reports on this and gathered as much
data as we have, but we have urged Treasury in our
recommendations to reconsider its allocation of its resources
to deal with the toxic assets that remain on the books of the
small banks, because as long as those toxic assets are there,
when money comes in they have a tendency to what to hold onto
it to offset future losses. So deal with those toxic assets and
have programs that will help directly jump-start small business
lending.
Senator Merkley. A number of the community banks have
called me to say the inspectors looking at their books are
basically telling them to hold onto their funds because of the
change in the value of these assets. So I wanted to not that
because I do not think it is just simply their internal
decision, but also decisions being driven by the very
inspectors that we are sending out to help restore solvency.
Ms. Warren. Indeed, Senator. I did not mean to imply that
they were doing anything wrong. They are doing what they are
told to do so long as we have not resolved the toxic assets on
their books.
I go back to where we were a year ago since that is today's
topic. We started this process saying--Secretary Paulson came
to this very room and said we need to get those toxic assets
off the books of the banks so that, in effect, we will have a
stable banking system. That means that when money comes in, it
is there to be lent out. And we have not done that.
Senator Merkley. I am basically out of time, but I want to
finish this thought, if I can. Does it make sense then, as some
businesses have proposed, that in a situation where there is a
7-year performing loan, that they have made all their payments,
that there be some facility that--and if it is not TALF, how do
we do it?--some way that banks can relend to those customers
who have been making good payments over 7 years, even if their
assets are not quite up to par because of the drop of the real
estate market, in order to not only directly assist those
folks, but to avoid the systemic risk imposed by the potential
collapse of commercial real estate?
Ms. Warren. Senator, if you will permit me a slight dodge.
Senator Merkley. Please.
Ms. Warren. I will say that there is no doubt in my mind we
are going to have to address the coming problems with
commercial real estate mortgages, and we are going to have to
be far more creative than we have been up to now. And if you
will let me, I will stop there because my panel has not gone
further.
Senator Merkley. Thank you.
Ms. Warren. Thank you.
Senator Johnson. Senator Bennett.
Senator Bennett. Thank you very much, Mr. Chairman, and
thank you all for what you do and for your being here.
I remember very clearly the discussion just a year ago
where we created you, because the first proposal from Secretary
Paulson did not include an Inspector General and did not
include a Congressional Oversight Committee. And I remember the
comments. Senator Corker and Senator Gregg were in the room. Of
course, Senator Dodd was presiding at that conversation, and
there was no reporter, so we are dependent on our respective
memories.
But I remember very clearly the Senator making the comment:
``I do not care who he is. I do not trust any Secretary of the
Treasury with $700 billion and no reporting relationship and no
oversight.'' And it was out of that conversation that we
created you, and we are delighted with the work you are doing.
Let me try to look into the future. One of the advantages
of being the last one is that I have seen all of my penetrating
questions already asked and either answered or dodged, as the
case may be. But let us look at where we stand now. We were
told by Secretary Paulson, ``I have to have the $700 billion
number. I will not have any credibility in the world if I
cannot stand up and the headline says in the Financial Times
and the Wall Street Journal, ``$700 billion.''
Now, I checked with economists whose judgment I trust, and
they said, ``You cannot shovel $700 billion out the door in
anything like the timeframe that we are talking about.'' And I
said, ``What is the fastest we can do it?'' And he said, ``$50
billion a month.'' So that is where the first 350 came from. I
said, ``Why don't we give him $250 billion for 5 months and see
how it works?'' And Secretary Paulson's response was, ``I got
to have the $700 billion headline.''
So we gave them the $700 billion headline, but the fine
print was you get 250 and then you get 100 and then you come
back to the Congress for the other 350. So you have got the
headline to tell everybody we are going to stabilize things,
but we are going to watch you as the money goes out.
All right. Now it is a year later, and as I understand it,
the total amount that is disbursed or committed, less the
principal repaid--and I will bypass the issue that Senator
Hutchison raised, because we expected as the stuff got repaid
that it would not be recycled. Indeed, we thought we wrote that
into the law, but the Treasury lawyers now say we did not and
tell us, ``No, this is what the law says.'' Well, you know, we
wrote the law, but all right, we will leave that one.
So $404 billion, either disbursed or committed, which
leaves $295, $296 billion available. Let us talk about what
that is going to be used for, and do you have any sense as to--
is it going to be the commercial real estate market that that
is going to be used for? Where is Treasury thinking that that
nearly $300 billion left out of the $700 billion that has not
been committed or disbursed and, looking forward, even though
this hearing is supposed to be retrospective, looking forward,
with those of you who are monitoring this, where do you see
that going?
And to your point, Professor Warren, you said, ``We were
urging Treasury.'' Did they listen to you? Does anybody at
Treasury respond, Inspector General, when you say you have got
to be more transparent about this, that, and the other? The GAO
shows up and says you have botched all of this kind of
accounting and analysis. Does anybody respond to what you are
doing?
So those two questions, if you would.
Mr. Barofsky. To the latter question, they do respond, and
although I have some great frustrations on the issue of
transparency, they have adopted a number of our
recommendations. If you take a look at where we were when I
first took office on December 15 compared to where we are now,
a lot of the aspects of this program, particularly from
oversight-enabling provisions and conditions in the contract--
remember, when we first started this, money was being pushed
out with virtually no conditions and no oversight-enabling
provisions and we made a series of recommendations, I think on
my eighth day, that have largely been adopted and the program
is less susceptible to waste, fraud, and abuse as a result of
those recommendations.
So there has been some progress, and I don't mean to
suggest that there hasn't. However, in certain areas,
particularly with respect to transparency, I think they have
got a long way to go.
With respect to the remaining funds, I mean, Treasury has
preliminarily indicated where a lot of that money they
anticipated might go, in programs that have been announced but
the money hasn't formally been obligated or committed. It is
just $15 billion to back up small business loan-backed
securities, still some headroom on the Capital Purchase
Program. There is a lot of money that they have allocated
toward the TALF and toward the PPIP program. Although Mr.
Allison said $40 billion is going to be committed, 30 of the
Treasury money, they have indicated that that program may grow
to larger amounts. So we have some guidance there.
And clearly, there is still some that they are holding back
to see what happens, if it is necessary or not, and I think
commercial real estate is something that we have all identified
as a major potential area where there may be a need for more
Government involvement.
Mr. Dodaro. In terms of the recommendations, they have
agreed with the vast majority of recommendations we have had,
and while it took some effort initially last year to get moving
on some of the reporting requirements for transparency, they
have taken that and adopted it and we are pleased with the
progress that they are making in that regard. We do have a few
open recommendations that they are still considering.
Now, with regard to the remaining funding, we have been
pressing Treasury to try to obtain the same type of answers
that have been tried to be sought after today and we will
continue to do that. As I mentioned in my response to Senator
Corker, we are planning to include some information about what
we think should be underpinning whatever decision is made. So
far, Treasury has mentioned they may focus on small banks and
small businesses with the remaining portion of the program. The
estimates that they have currently made about the potential use
of the funds are outdated and need to be updated.
And I would reiterate my point, Senator Bennett, about this
decision needs to be made in the context of what also the FDIC
and the Federal Reserve and the others who are having similarly
related programs. As you know, in the American Recovery and
Reinvestment Act, there was additional funding for small
businesses included in there and actions the SBA was supposed
to take.
So all these things, I think, need to be looked at on an
integrated basis, because the Federal Government, by and large,
is making a huge commitment and there needs to be clear
objectives if additional funding is going to be provided.
Ms. Warren. Senator, we continue to remain very concerned
about the toxic assets that remain on the books at the banks,
and I don't understand where Treasury is going next to deal
with that problem. We have indications that the housing market
and the resulting mortgage foreclosures are going to continue
to be a huge problem. Treasury speaks about meeting its goals,
but they are modest relative to the size of the number of
foreclosures that are coming in. The commercial real estate
mortgage market looks even more problematic going forward.
That means that the value of the assets on the books of the
banks may be headed down, not up. And until we find a way or
commit ourselves to a way to say, one way or the other, we are
resolving those assets on the books of the banks, whether the
banks have to be closed, whether their equity has to be wiped
out, whether their debt holders have to take the hit, whether
the American taxpayer is going to have to subsidize it, until
we get down to dirt, to something that is solid that we can put
our feet on, our financial institutions are standing in a
secure place, we can't rebuild and know that we are safely past
this crisis.
So I wish I had an answer, Senator, but I am at a loss. We
are in a better position than we were a year ago in two
meanings of that word. No one thinks we are going to wake up
tomorrow morning and everything will have crashed about our
ears. That is obviously a real advance. We are also in a better
position in dealing with Treasury and how they have dealt with
the $700 billion, and it that is it is more transparent than it
was before. The programs are more explained than they were
before.
But the big plan, the question about how we are going to
get these toxic assets out of here at a time when the real
estate mortgage market is still in trouble and the commercial
real estate mortgage market may be getting into more and more
trouble, I am not hearing the plan. So I don't know what they
are planning to do with this money or with any other money.
And as Gene said, and I really don't want to pass this by,
we talk about TARP. You created us to be oversight for TARP and
we certainly do that, but it is a larger financial context
here. The Federal Reserve has committed substantial assets of
the American taxpayers through guarantees and through loan
programs. The FDIC is part of the overall program. These pieces
all tie to each other, and at this moment, I can't say that I
have heard the plan for getting things resolved and getting out
of this crisis.
Senator Bennett. Thank you, Mr. Chairman.
Senator Johnson. Thank you for this testimony to this
panel, and you may be excused.
With that, this hearing is adjourned.
[Whereupon, at 12:47 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD
Good morning. A little over a year ago, Treasury Secretary Henry
Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris
Cox came to Congress with an urgent message: The American economy was
on the brink of total collapse. And they needed $700 billion of
taxpayer money to stop it.
Already, our Nation was in the midst of an economic crisis that
threatened small businesses' ability to make payroll, cost us more than
half-a-million jobs, turned the American Dream of homeownership into a
nightmare, kept students from getting college loans, and wiped out
hundreds of billions of dollars in savings that Americans were counting
on for their retirement.
With financial giants toppling what seemed like every day, and with
businesses large and small suddenly unable to access the credit they
needed to operate, we clearly needed to act.
But when the Bush administration's proposal emerged, it was clearly
unacceptable.
They were asking Congress for a blank check, with no protections
for the taxpayers on whose account it was being drawn.
Their proposal included no congressional oversight--and they even
wanted to prohibit judicial and administrative review of the
Secretary's decisions.
In short, the Bush administration asked Congress to put an
unprecedented amount of taxpayer money and executive power under the
unchecked control of one unelected individual, with no guidelines to
ensure that it would be used properly--without even so much as an
office with a dedicated staff to keep track of where it was going.
Doing nothing wasn't an option--but neither was this proposal.
The crisis demanded that we bring together members of the House and
Senate, Republicans and Democrats, and hammer out a better solution for
the American people.
So we fought hard to include taxpayer protections and meaningful
oversight.
We fought to ensure that if ordinary Americans who had done nothing
wrong were going to pay for this stabilization effort, they would get
to share in the benefits if companies became more profitable--an
initiative driven by Senator Reed.
We required Treasury to put homeowners and the financial security
of American families at the top of its agenda.
We established the three oversight bodies that are before us today.
And we made certain that we put first and foremost the principle
that with this assistance to the financial sector would come real
change so that a crisis like this wouldn't happen again.
Am I glad that we had to spend this money? No.
Do I share the anger and frustration that many Americans felt and
continue to feel that Wall Street greed and regulatory neglect left
taxpayers on the hook? Absolutely.
But I am also proud of the hard work we did a year ago to protect
taxpayers and introduce some accountability into the stabilization
program.
I am relieved that we have managed to bring our economy back from
the brink.
And I am more committed than ever to taking action so that the
American taxpayers who funded this effort aren't asked to clean up
another mess they didn't make in the future.
We need to take action to restore Americans' confidence--and their
financial security--by reforming a regulatory system that still
contains far too many gaps, loopholes, and redundancies.
The 20th century regulatory structure has been outpaced by 21st
century innovations in the financial services industry, and if we don't
fix it, we could be right back where we were a year ago, facing a
dreadful choice between a massive outlay of taxpayer dollars or an
unimaginable economic disaster.
I look forward to working with my colleagues on this Committee and
in both parties to make sure that doesn't happen.
______
PREPARED STATEMENT OF SENATOR SHERROD BROWN
One year ago, the American economy was teetering on the verge of
wholesale collapse. Credit had dried up for businesses, financial
behemoths such as Lehman Brothers and Bear Stearns vanished, insurance
giant AIG needed immediate rescue, and Fannie Mae and Freddie Mac
imploded.
Congress and the President had no choice but to act quickly to
stabilize the financial system. We did, and the Troubled Asset Relief
Program (TARP) was the result.
We enacted TARP legislation not only to stabilize the financial
system but also to preserve homeownership, promote jobs, and generate
economic growth. Now that we are nearing the 1-year anniversary of
TARP's creation, we are taking a look at whether TARP has worked.
I agree with those who say TARP has staved off an even bigger
financial catastrophe--a number of the big banks that have received
TARP funds are starting to reap profits and have even begun to pay the
Government back.
However, TARP has not been a success for everyone. Before we pop
the cork on the champagne, we need to consider what TARP has done for
jobs, manufacturing, and the foreclosure rate.
Unemployment is still way too high. In Ohio the July unemployment
rate was 10.8 percent, a full percentage point higher than the national
average. That represents 641,000 people who will need unemployment
benefits and other services just to make ends meet.
Small and medium-sized businesses in my home State of Ohio continue
to struggle mightily to get access to credit.
Although the rate of foreclosures appears to be slowing down
nationwide, there are still too many families losing their homes.
According to RealtyTrac, in August 11,368 Ohio homes were in some stage
of the foreclosure process. I applaud the Administration for creating
the Home Affordable Modification Program, but we must work to improve
it. Too many borrowers and housing counselors complain about
administrative hurdles and delays in processing applications.
TARP has certainly staved off an even more damaging recession, but
we have much more work to do to stabilize and strengthen our economy.
And we need to do it now.
______
PREPARED STATEMENT OF HERBERT M. ALLISON, Jr.
Assistant Secretary for Financial Stability (TARP), Department of the
Treasury
September 24, 2009
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for the opportunity to testify today. As we approach the 1-
year anniversary of the Troubled Asset Relief Program or TARP, I
welcome this chance to update you about the progress we have made in
restoring our financial stability.
A year ago, we were in the midst of one of the worst periods in our
financial history. Fannie Mae and Freddie Mac were taken into Federal
conservatorship; Lehman Brothers went bankrupt and AIG nearly followed;
Wachovia, Washington Mutual, and Merrill Lynch were sold in distress;
and weakness at a prominent mutual fund sparked a dangerous ``run'' on
money market mutual funds. Credit markets froze as banks refused to
lend, even to one another. Immediate, strong action was needed to avoid
a complete meltdown of the system.
On October 3, 2008, Congress rose to this challenge by passing the
Emergency Economic Stabilization Act of 2008. With the leadership in
particular of many of you on this Committee, Congress recognized the
need to take difficult but necessary action and gave the Treasury
Department unprecedented authority to stabilize the U.S. economy by
creating TARP.
Policy interventions executed last Fall by the Treasury Department
and the Federal banking regulators, succeeded in achieving the
critical, but narrow objective of preventing a catastrophic collapse of
our financial system. But when President Obama took office, the
financial system remained extremely fragile and the Administration
faced a rapidly evolving set of grave challenges.
In January 2009, what we faced was no longer just a financial
crisis; it was a full-blown economic crisis. In January alone, 741,000
Americans lost their jobs, the largest single month decline in 60
years. Home foreclosures were increasing at a rapid rate. Businesses
and families were struggling to find credit. It was feared that those
banks that remained standing had too little capital and too much
exposure to risky assets. Secondary markets for credit had essentially
come to a halt; and liquidity in a broader range of securities markets
had fallen sharply. In a matter of 3 months, American families had lost
$5 trillion in household wealth.
In short, the economy was in a free fall and there was increasing
concern we were headed toward a second Great Depression.
The Obama administration confronted this situation by taking
forceful action on several fronts. Again, with the leadership of many
of you on this Committee, a comprehensive strategy was put in place to
stabilize the financial system and the housing market, to stimulate
economic activity, and to provide help to those in most need. And as a
result, we have stepped back from the brink. We still have a long way
to go before true recovery takes hold, but we are now pointed in the
right direction.
TARP has been vital to our achievements to date, and it will
continue to be an important part of our recovery. Today, I want to
discuss what Treasury has done under TARP and how we have measured our
success or failure. I also want to discuss what we still need to do,
because our situation requires continued action and vigilance. The
recovery has just begun, the financial system remains fragile, and the
credit markets are not fully functioning. And with unemployment still
unacceptably high, home foreclosures still rising, and many Americans
still suffering through no fault of their own, we still have work to
do.
Overview
Although much remains to be done, we believe that TARP has worked
to stabilize the financial system and lay the foundation for economic
recovery. Treasury used its authority under EESA to make investments
that have helped to stabilize our system, restore confidence in our
banks and restart markets that are critical to financing American
households and businesses. In addition, we have begun to stabilize the
housing market and help people avoid foreclosure. These efforts are
part of the Administration's Financial Stability Plan, designed to
recapitalize our financial system with as much private capital and as
little taxpayer funding as possible.
EESA authorized $700 billion for TARP. As of September 21, 2009,
Treasury has announced plans to provide $644 billion for specific TARP
programs. Of that amount, we have entered into commitments of $444
billion, and we have disbursed $365 billion.
A large part of the total activity to date occurred last fall under
the Capital Purchase Program (CPP) following the adoption of EESA in
October 2008. The more recent commitments include amounts extended
under the Obama administration's Financial Stability Plan.
Let me highlight some of the major support provided under TARP.
Capital Purchase Program
CPP was the first of the programs implemented under TARP. Through
CPP, Treasury has provided capital to 679 financial institutions across
48 States. This program was designed for financial institutions of all
sizes and has invested in over 300 small and community banks. CPP has
been essential to stabilizing our financial system. The capital
provided has enabled banks to absorb losses from bad assets while
continuing to lend to consumers and businesses. To encourage continued
participation by small and community banks, the application window for
CPP was reopened on May 13, 2009, for banks with fewer than $500
million in assets. In addition, we continue to invest in smaller banks
on a regular basis.
In addition to the CPP, Treasury also worked with the Federal
banking regulators to develop a plan for ``stress tests.'' This was a
comprehensive, forward-looking assessment of the capital held by the
largest 19 U.S. banks. The design of the tests and their results were
made public, a highly unusual step that was taken because of the
unprecedented need to reduce uncertainty and restore confidence. We
also announced that we would be prepared to provide additional capital
through the Capital Assistance Program.
Since the stress test results were released in early May, banks of
all sizes have raised over $80 billion in common equity and $40 billion
in nonguaranteed debt. Importantly, that capital raising has enabled
more than 30 banks to repay the TARP investments made by Treasury. We
have received over $70 billion in principal repayments, and over $6.5
billion in dividends, interest, and fees from CPP participants.
In addition, several banks have repurchased the warrants issued to
Treasury in connection with repaying the TARP investments. Treasury
obtained warrants with each investment in order to provide the taxpayer
with an opportunity to participate in the potential recovery of these
financial institutions. To date we have received almost $3 billion from
the repurchase of warrants. The rate of return to the taxpayer on the
investments made in all those institutions that have fully repaid the
Treasury and repurchased the warrants to date is approximately 17
percent. I should note that our returns to date are not necessarily an
indication of what our returns will be overall for this program, but
this is a good beginning.
When President Obama took office, the Treasury had outstanding
commitments to banks under the CPP and other programs of $239 billion.
Since mid-January, we have invested $11 billion in more than 350
institutions, while receiving the repayments noted above of $70
billion. Thus, since January, we have reduced the size of the
Treasury's investments in the banking system by $59 billion to $180
billion. We now estimate that banks will repay another $50 billion over
the next 12 to 18 months.
Public-Private Investment Partnership
To help clean up the balance sheets of major financial institutions
and restore liquidity to key markets for financial assets, we proposed
the creation of a public-private investment program for the purchasing
of legacy loans and securities. Since the announcement of the program,
nonagency mortgage-backed securities have gone up substantially in
price. Prime fixed rate securities issued in 2006 that traded as low as
$60 in March have increased in value by over 40 percent as additional
liquidity has come back to the markets. That improvement in financial
market conditions has created the positive backdrop to enable us to
proceed with the program at a scale smaller than initially envisioned.
Following a comprehensive application, evaluation, and selection
process, during which Treasury received over 100 unique applications to
participate in PPIP, in July, Treasury prequalified nine fund managers
to participate in the program. These managers have extensive experience
with legacy assets. In addition, these firms have committed to
utilizing small business and minority-owned firms in this process.
Treasury expects to provide approximately $30 billion in equity and
debt financing to special purpose entities formed by the fund managers
in the initial phase of PPIP. Initial closings are currently scheduled
for the end of this month.
Due to the possibility of actual or potential conflicts of interest
inherent in any market-based investment program, Treasury has worked
very closely with the Special Inspector General for the Troubled Asset
Relief Program (SIGTARP) to develop a robust conflicts and compliance
process.
Term Asset-Backed Securities Loan Facility
One of the many lessons of this crisis is the importance of a
properly functioning securitization market to the availability of
credit for consumers and small businesses. The Term Asset-Backed
Securities Loan Facility (TALF) has been a successful effort to help
restart those markets after the crisis. Opened in March 2009, TALF is a
lending facility operated by the Federal Reserve Bank of New York
(FRBNY) under which FRBNY provides term nonrecourse loans
collateralized by certain types of AAA-rated asset-backed securities
(ABS). Treasury has consulted in the design of the program and will
provide up to $20 billion for the purchase of ABS in the event of a
default.
I am pleased to report that, since March, a total of $79.6 billion
of new TALF-eligible ABS has been brought to market, of which $46.5
billion was funded using TALF loans. This aid to the securitization
market has had a decided impact on liquidity, spreads, and the
availability of consumer and small business credit.
Making Home Affordable Program
A central part of the President's Financial Stability Plan is our
effort to stabilize the housing market. Announced on February 18, the
Making Home Affordable Program (MHA) offers assistance to millions of
homeowners by reducing mortgage payments and preventing avoidable
foreclosures. MHA gives homeowners the opportunity to modify their
mortgages as well as an opportunity to refinance GSE loans, which in
each case can lower monthly payments and enable homeowners to avoid
foreclosure.
The mortgage modification program is known as Home Affordable
Modification Program, or HAMP, and is funded through TARP and the
Housing and Economic Recovery Act of 2008 (HERA). It is designed to
provide assistance to up to 3-4 million eligible homeowners before the
end of 2012. We have signed contracts with 57 servicers, including the
five largest. Between loans covered by these servicers and loans owned
or guaranteed by the GSEs, more than 85 percent of all mortgage loans
in the country are now covered by the program. As of September 9, more
than 360,000 trial modifications are underway and 570,000 trial
modifications have been offered under this program. We have frequent
contact with the servicers to discuss ways of increasing borrower
participation in HAMP. At a meeting with participating servicers on
July 28, servicers committed to reaching a cumulative target of 500,000
trial modifications by November 1, 2009. I am pleased to report that we
are on pace to meet this goal, potentially even ahead of schedule. The
participating servicers also agreed to work with Treasury to implement
actions designed to improve program effectiveness, including the
streamlining of application documents. In addition, we have focused on
transparency and servicer accountability by publicly reporting
servicer-specific results on a monthly basis. Treasury is also working
to establish specific operational metrics to measure the performance of
each servicer. We will be meeting with the servicers again next month
to review progress and address ongoing concerns. Treasury realizes that
the housing market is vital to the ongoing economic recovery and that
many people are still in dire circumstances. We will continue to work
to make sure that these programs provide relief to those affected.
Automotive Industry Financing Program
The Automotive Industry Financing Program (AIFP) was developed in
December 2008 to prevent a significant disruption of the U.S.
automotive industry, because of the risks such a disruption posed to
the financial system and the economy as a whole. To date, Treasury has
provided approximately $76 billion in loans and equity investments to
General Motors, Chrysler and their respective financing entities. After
the previous Administration provided initial assistance last year, the
Obama Administration required the companies to develop long-term
reorganization and viability plans before Treasury would provide
additional assistance. Moreover, Treasury rejected the initial plans
proposed by the automakers and required the companies to develop plans
to become leaner and more efficient. We believed this was the only way
the companies could become more competitive and the only way to protect
the taxpayers' investment. The assets of both GM and Chrysler were sold
to newly created entities through the bankruptcy courts in
exceptionally fast and efficient proceedings. The new companies are now
leaner and more efficient and poised to help further the ongoing
economic recovery and the competitiveness of the American automotive
industry.
Treasury's Role as Shareholder
As a result of the financial crisis, the Government has had to
intervene in the economy in unprecedented ways, and I know many people
have questions concerning the role of the Government as a shareholder
in private companies. The Obama administration has given this subject
careful thought, and I would like to explain the fundamental principles
that govern our actions as a shareholder.
First, the U.S. Government is a shareholder reluctantly and out of
necessity. We intend to dispose of our interests as soon as
practicable, with the dual goals of achieving financial stability and
protecting the interests of the taxpayers.
Second, we do not intend to be involved in the day-to-day
management of any company. Our responsibility is to protect the
taxpayers' investment. Government involvement in the day-to-day
management of a company might actually reduce the value of these
investments, impede the ability of the companies to return fully to
being privately owned, and frustrate attainment of our broader economic
policy goals.
Third, consistent with these goals, we will take a commercial
approach to the exercise of our rights as a shareholder. We will vote
only on four core matters: board membership; amendments to the charter
and by-laws; liquidations, mergers, and other substantial transactions;
and significant issuances of common shares.
Daily Concerns
I also want to discuss three concerns that I focus on every day,
that are central to our duty to protect the taxpayer. The first is, do
we have the proper controls in place to ensure accountability? Second,
are we being good stewards of the taxpayers' money? And third, are we
communicating what we are doing in a transparent and timely manner?
First, we know that proper controls are critical to protecting the
taxpayers' interest. In addition to review by this and other
Congressional committees, EESA provides for oversight of TARP by four
oversight bodies, and Treasury takes its responsibilities to these
oversight bodies very seriously. Treasury personnel spend a significant
amount of time meeting and communicating with these four oversight
bodies (the Special Inspector General for TARP (SIGTARP), the
Congressional Oversight Panel, the Financial Stability Oversight Board
and the Government Accountability Office (GAO)), as well as with
Congress. I meet weekly with SIGTARP to discuss our current activities
and their concerns, and my staff is in constant contact with the
SIGTARP staff. Treasury has fully or substantially implemented over 75
percent of the recommendations made by SIGTARP. We have also involved
them early in the process of design of a program or investment so that
we get the benefit of their suggestions at the outset.
Personnel from the Office of Financial Stability meet regularly
with the other oversight bodies as well, and Treasury has given careful
consideration to each of their recommendations. The GAO has
consistently noted the progress Treasury has made in meeting its
recommendations.
In the unusual cases where we have declined to implement a
recommendation, we have sought to reach the recommendation's objectives
by other means that we consider to be more practical, effective or
supportive of achieving financial stability, and have explained our
approach to the oversight bodies. In those unusual situations, we have
explained our reasons to the oversight body and to Congress in detail.
In addition, OFS is audited by the GAO and will publish its first
set of annual financial statements on November 16th.
Second, we have been both careful and assertive stewards of the
taxpayers' money. We do not make an investment unless it complies with
the statutory requirements, is necessary to restoring or maintaining
financial stability and is made on terms that protect the taxpayer.
Since the Obama administration took office, Treasury has provided
$144.42 billion in TARP assistance, and has received repayments,
dividends, interest and other payments in the amount of $70.56 billion.
In the attached report is a chart detailing TARP investments made by
month. You will note the general downward trend in the gross amount of
capital expended.
Third, as I committed in my confirmation hearing, we have taken
many steps to communicate in a fully transparent and timely manner. We
have never missed a deadline for a report. As of September 18, 2009,
Treasury has published 83 Transaction Reports, 10 Section 105(a)
monthly Congressional Reports, 7 Tranche Reports, 3 dividend and
interest reports and 2 MHA Program Reports, all of which are posted on
our Web site. We have recently completely revised the format of our
monthly Section 105(a) report, a copy of which is attached. As you will
see, it presents updates on our investments and programs as well as
background information in a far clearer, more concise manner. It
answers basic questions that many Americans have, such as: how are TARP
monies invested?
We have also published a monthly lending survey that contains
detailed information on the lending and other activities of over 500
banks that have received TARP funds, as well as separate information
for the largest 22 banks. These reports are intended to help the public
easily assess the lending and intermediation activities of
participating banks. More broadly, they also help answer the question
of what banks are doing with their TARP funds. We believe the detailed
quantitative information contained in these reports addresses the
fundamental concern underlying that question, which is whether TARP has
helped restore our banks to health so that they can lend to
creditworthy families and businesses. Beginning next month, we will be
expanding the report in response to suggestions from SIGTARP for
reporting on use of funds.
Additionally, we post program guidelines on our Web site,
www.financialstability.gov, within 2 business days of any program
launch. We also post for public review all obligations made under TARP
as well as all contracts with Treasury service providers involved with
these programs. We recognize that transparency is paramount when
managing taxpayer funds.
Exit Strategy
TARP was designed as an emergency response to a major financial
crisis, and I would like to address what Treasury sees as some of the
next steps for TARP. Because financial conditions have started to
improve, Treasury has already begun the process of exiting from some
emergency programs. But how and when we exit will vary by program. For
example, as I noted earlier, Treasury has received over $70 billion in
principal repayments from CPP participants. Treasury has also almost $3
billion in warrant proceeds from the repurchase of warrants by banks
that have already repaid the principal investment. For those banks that
have elected not to repurchase their warrants, Treasury intends to
begin auctioning those warrants later this year. It will, however, be
some time before all CPP participants have fully extinguished their
obligations to the taxpayers.
Certain TARP programs have a defined life. For example, new lending
under TALF is scheduled to cease in mid-2010, even though Treasury's
credit support of the TALF facility will continue for a number of
years. Although PPIP is just being launched, the investment period for
the fund managers is limited to 3 years.
The Administration has established clear principles to ensure that
our investments in the automobile industry and other companies that
have received exceptional assistance are limited and temporary.
Chrysler Financial has already repaid its assistance, and an initial
public offering for GM is expected next year.
At the same time, we must remember that our economic recovery has
just begun and significant parts of the financial system remain
impaired. Declining prices in the commercial real estate market could
put additional pressure on bank balance sheets and capital positions,
while continued downward pressure on housing prices could stall a
nationwide recovery. In this context, it is prudent to maintain
capacity to address new developments. By bolstering confidence, having
such capacity may actually reduce the need to use it.
As we look ahead, we must also not forget the lessons we have
learned from this period. Reforming our regulatory system in a way that
is stronger and better-suited to manage risk and ensure safety and
soundness must be our highest priority. The Administration has proposed
a number of measures in this regard that I know you are already
considering as you work to address this important issue.
Conclusion
Financial stability is a necessary precondition to the resumption
of economic growth. Treasury and other institutions of Government have
accomplished a great deal in a short amount of time to achieve this
goal. However, we recognize that we have more work ahead of us on both
the regulatory reform and economic fronts. TARP, the Office of
Financial Stability, and the Office of Domestic Finance have been
essential to President Obama's and Secretary Geithner's plans for
financial stability and economic recovery.
Ending the financial crisis is not primarily about helping banks,
but about restoring the flow of credit to consumers and businesses and
alleviating the real hardships that Americans face every day. Healthy
and vibrant financial institutions are critical for this, as they are
the key sources of a range of financial services that we depend on
every day. Without healthy banks, consumers cannot access the credit
they need to buy a home, finance an education, manage everyday expenses
or make other financial commitments. Small businesses cannot buy the
new equipment, raw materials, and inventory that they need to expand.
Larger businesses cannot make the continuous adjustments required to
function in a changing global marketplace.
It is with these goals in mind that we have created the programs
under the TARP and the Financial Stability Plan. As I work with my
dedicated colleagues in Treasury on these programs, I will strive to
continue to be a prudent investor on behalf of the American people.
Thank you.
PREPARED STATEMENT OF NEIL M. BAROFSKY
Special Inspector General, Troubled Asset Relief Program
September 24, 2009
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
I am honored to appear before you today to discuss the Troubled Asset
Relief Program (TARP) as we approach the first anniversary of enactment
of the Emergency Economic Stabilization Act of 2008 (EESA). I am
particularly honored to appear with SIGTARP's oversight partners,
Acting Comptroller General Gene Dodaro of the Government Accountability
Office and Elizabeth Warren, Chair of the Congressional Oversight
Panel.
Introduction
Originally envisioned as a large but fairly straightforward program
involving the purchase and management of ``toxic'' assets, TARP instead
has evolved into 12 separate initiatives that are, collectively, of an
unprecedented scope, scale, and complexity. From programs involving
large capital infusions into hundreds of banks and other financial
institutions, to a mortgage modification program designed to modify
millions of mortgages, to significant infusions into the automobile
industry, to public-private partnerships using tens of billions of
taxpayer dollars to purchase ``toxic'' assets from banks, TARP affects
significant portions of the financial system and the economy as a
whole.
From a policy perspective, any assessment of whether such a complex
enterprise is a success or failure, particularly in light of all of the
other Government efforts to stabilize the economy during the worst
economic downturn, is a difficult task and depends greatly on one's
perspective. With respect to whether TARP has succeeded in restoring
liquidity and stability to the financial system, for example, there are
without question significant signs of improvement in the stability of
the system. The causes for such improvement are no doubt many and
complex, but there is little question that the dramatic steps taken by
Treasury, the Federal Reserve and the FDIC through TARP and related
programs, in the face of what can only be described as panic
conditions, played a significant role in bringing the system back from
the brink of collapse.
Whether the other policy goals of EESA are being met, on the other
hand, is less clear. The progress on meeting the goal of ``maximiz[ing]
overall returns to the taxpayer'' is unclear. While several TARP
recipients have repaid funds for what has widely been reported as a 17
percent profit, it is extremely unlikely that the taxpayer will see a
full return on its TARP investment. For example, certain TARP programs,
such as the mortgage modification program which is scheduled to use $50
billion of TARP funds, will yield no direct return, and for others,
including the extraordinary assistance programs to AIG and the auto
companies, full recovery is far from certain. Similarly, Treasury's
original stated goal of increasing lending has not yet occurred,
although, as SIGTARP's recently issued audit on TARP recipients' use of
funds indicates, it is likely that lending from TARP recipients would
have decreased far more in the absence of TARP funding. Similarly, the
goals of ``preserving homeownership,'' ``promot[ing] jobs and economic
growth'' have not yet been met, and the ultimate success of meeting
these policy goals will depend on programs that are just now reaching
the implementation stage, such as the TARP's mortgage modification
program and the public-private investment funds. In the meantime, the
risk of foreclosure continues to affect too many Americans;
unemployment continues its rise to levels that Treasury has
characterized as ``unacceptable''; the so-called ``toxic'' assets that
helped cause this crisis for the most part remain right where they were
last fall--on the banks' balance sheets; and it is becoming more and
more clear that the commercial real estate market might be the next
proverbial shoe to drop, threatening to increase the pressure on banks
and small business alike yet again.
Viewed from an oversight perspective, the success of the program is
likewise mixed. With respect to imposing internal controls over TARP
programs, Treasury has steadily improved over time. When SIGTARP first
came into being in December 2008, Treasury was simply not equipped--
from a resource perspective or in terms of its approach--to provide the
kind of oversight and compliance functions that are necessary to manage
such a large and complex program effectively. Treasury rolled out early
programs with few meaningful conditions and little regard for internal
controls: in the Capital Purchase Program (CPP) investments, for
example, Treasury's overriding oversight strategy was apparently to
trust the banks to be responsible with the money. Over time, and in
response to recommendations from the oversight bodies represented at
this table, Treasury began to design programs with better internal
controls and more effective antifraud provisions. Just 8 days after I
was sworn in, for example, we made a recommendation concerning basic
internal controls that was adopted by Treasury and implemented into all
subsequent programs. Today, in response to our repeated
recommendations, the Office of Financial Stability has been devoting
the necessary resources to develop a professionally run Compliance and
Risk Management function, and while we do not always necessarily agree
with them, it is fair to say that, with each program, Treasury actively
engages with us with an eye to making the program better from a
compliance perspective and less susceptible to waste, fraud, and abuse.
Treasury's basic attitude toward transparency and Congress' stated
goal in enacting the TARP of providing ``public accountability'' for
the exercise of authority under EESA, on the other hand, remains a
significant frustration. Although SIGTARP understands Treasury's need
to balance the public's transparency interests, on one hand, with the
interests of the participants and the desire to have wide participation
in the programs, on the other, Treasury's default position should
always be to require more disclosure rather than less and to provide
the investors in TARP--the American taxpayers--as much information
about what is being done with their money as possible. While Treasury
has taken some steps in the right direction on this front, its
continued refusal to accept SIGTARP's basic transparency
recommendations on such issues as how TARP recipients are using TARP
funds and the disclosure of trading of toxic assets of banks in the
PPIP means that TARP largely remains a program in which taxpayers are
not being told what most of the TARP recipients are doing with their
money and will not be told the full details of how their money is being
invested.
TARP in Focus, and in Context
TARP, as originally envisioned in the fall of 2008, would have
involved the purchase, management, and sale of up to $700 billion of
``toxic'' assets, primarily troubled mortgages and mortgage-backed
securities (MBS). Very quickly, however, that framework was discarded
in favor of direct investments in financial institutions, and TARP
funds have subsequently been used, are being used, or have been
announced to be used, in connection with 12 separate programs that
involve a total (including TARP funds, loans and guarantees from other
agencies, and private money) that could reach more than $2 trillion, as
set forth in first column of Table 1 below. Treasury has announced the
parameters how the $700 billion may be spent for the 12 programs, as
set forth in the second column; of this amount, Treasury has legally
committed to expend or expended approximately $445 billion, as set
forth in the third column.
As noted in the chart, approximately $70.56 billion has been repaid
to the TARP by more than a dozen financial institutions, under the CPP.
Through September 11, 2009, the Treasury Department granted permission
to 41 financial institutions to repay $70.56 billion in Government-
bailout funds. Of the 19 largest bank holding companies selected for
stress testing under the Supervisory Capital Assessment Program, 9
institutions were approved to repay $66.6 billion. Several smaller
financial institutions also repaid the TARP investments both before and
after the 9 large institutions' repayments.
Oversight Activities of SIGTARP
Since it began operations in December 2008, SIGTARP has been
actively engaged in fulfilling its vital investigative and audit
functions as well as in building its staff and organization. To date,
SIGTARP has hired 86 employees and plans to grow to 160 employees.
SIGTARP's Investigations Division has developed rapidly and is
quickly becoming a sophisticated white-collar law enforcement agency.
As of June 30, 2009, SIGTARP had 35 ongoing criminal and civil
investigations. These investigations include complex issues concerning
suspected accounting fraud, securities fraud, insider trading, mortgage
servicer misconduct, mortgage fraud, public corruption, false
statements, and tax investigations. For example:
TBW and Colonial Search Warrants: On August 3, 2009,
SIGTARP, with the FBI, HUD OIG, and FDIC OIG, executed search
warrants at the offices of Taylor, Bean and Whittaker, formerly
the Nation's 12th-largest loan originator and servicer, and
Colonial Bank, which applied for assistance under the CPP.
Prior to the execution of these warrants, SIGTARP had served
subpoenas on Colonial after it had announced that it had
received preliminary contingent approval from the Treasury to
receive $553 million in TARP funding. The funding was never
made and this investigation, which is being conducted with both
the Department of Justice and the SEC, is ongoing.
Federal Felony Charges Against Gordon Grigg: On April 23,
2009, Federal felony charges were filed against Gordon B. Grigg
in the U.S. District Court for the Middle District of
Tennessee, charging him with four counts of mail fraud and four
counts of wire fraud. The charges are based on Grigg's role in
embezzling approximately $11 million in client investment funds
that he garnered through false claims, including that he had
invested $5 million in pooled client funds toward the purchase
of the TARP-guaranteed debt. Grigg pleaded guilty to all
charges and was sentenced to 10 years imprisonment.
FTC Action Against Misleading Use of
``MakingHomeAffordable.gov'': On May 15, 2009, based upon an
action brought by the Federal Trade Commission (FTC), a Federal
district court issued an order to stop an Internet-based
operation that pretended to operate
``MakingHomeAffordable.gov,'' the official Web site of the
Federal Making Home Affordable program. The FTC's action, which
was developed with the investigative assistance of SIGTARP,
alleges that the defendants purchased sponsored links as
advertising on the results pages of Internet search engines,
and, when consumers searched for ``making home affordable'' or
similar search terms, the defendants' ads prominently and
conspicuously displayed ``MakingHomeAffordable.gov.'' Consumers
who clicked on this link were not directed to the official Web
site, but were diverted to sites that solicit applicants for
paid loan modification services. The operators of these Web
sites either purport to offer loan modification services
themselves or sold the victims' personally identifying
information to others.
National Housing Modification Center: On September 16,
2009, the FTC filed a complaint against the Nations Housing
Modification Center (NHMC) and its principals in the U.S.
District Court for the District of Columbia. With investigative
support from SIGTARP and other Federal, State and local
enforcement partners, the FTC alleged violations of the FTC Act
and Telemarketing Sales Rules by NHMC by misrepresenting itself
as a Federal Government agency or affiliate and falsely
claiming that they would obtain mortgage modifications for
consumers for a $3,000 fee. SIGTARP's joint investigation is
continuing.
Bank of America: SIGTARP continues to play a significant
role in the investigations by the New York State Attorney
General's Office, the SEC and the Department of Justice into
the circumstances of Bank of America's merger with Merrill
Lynch and its receipt of additional TARP funds under the
Targeted Investment Program.
More than 50 percent of SIGTARP's ongoing investigations were
developed in whole or in part through tips or leads provided on
SIGTARP's Hotline (877-SIG-2009, which is also accessible at
www.SIGTARP.gov). Since the SIGTARP Hotline commenced operations, it
has received and analyzed more than 6,572 tips, running the gamut from
expressions of concern over the economy to serious allegations of
fraud.
SIGTARP remains committed to being proactive in dealing with
potential fraud in TARP. For example, the previously announced TALF
Task Force, which was organized by SIGTARP to get out in front of any
efforts to profit criminally from the Term Asset-Backed Securities Loan
Facility (TALF), has been expanded to cover the Public-Private
Investment Program (PPIP). In addition to SIGTARP, the TALF-PPIP Task
Force consists of the Inspector General of the Board of Governors of
the Federal Reserve System, the FBI, Treasury's Financial Crimes
Enforcement Network, U.S. Immigration and Customs Enforcement, the
Internal Revenue Service Criminal Investigation Division, the
Securities and Exchange Commission, and the U.S. Postal Inspection
Service.
SIGTARP's Audit Division has completed its first round of audits.
SIGTARP issued its first formal audit report concerning how recipients
of CPP funds reported their use of such funds based upon a February
2009 survey SIGTARP sent to more than 360 financial and other
institutions that had completed TARP funding agreements through January
2009. Although most banks reported they did not segregate or track TARP
fund usage on a dollar-for-dollar basis, they were able to provide
insights into their actual or planned future use of TARP funds. For
some respondents the infusion of TARP funds helped to avoid a
``managed'' reduction of their activities; others reported that their
lending activities would have come to a standstill without TARP funds;
and others explained that they used TARP funds to acquire other
institutions, invest in securities, pay off debts, or that they
retained the funds to serve as a cushion against future losses. Many
survey responses also highlighted the importance of the TARP funds to
the bank's capital base, and by extension, the impact of the funds on
lending. As I previously noted, Treasury has failed to adopt the
audit's recommendation that it require TARP recipients to report on
their use of funds.
SIGTARP has also completed an audit examining undue external
influences over the CPP decision making. This audit addressed the
extent to which Treasury and the banking regulators have controls to
safeguard against external influences over the CPP decision-making
process and whether there were any indications of external parties
having unduly influenced CPP decision making. SIGTARP found no
information indicating that external inquiries on CPP applications had
affected the decision-making process, but gaps in the internal controls
by the Government agencies conducting the CPP application process makes
it impossible to determine if all attempts to influence TARP decisions
were captured by the audit. Of the 56 institutions SIGTARP identified
that were the subjects of external inquiries, three institutions did
not meet all the CPP quantitative criteria but were approved based on
mitigating factors considered by Treasury and banking agency officials.
Among these three, one institution stood out. SIGTARP's analysis
indicated that discretion afforded this applicant in its approval was
greater than that afforded other applicants. In connection with the
audit, SIGTARP made recommendations regarding the improvement of
internal controls and record keeping, which Treasury has adopted.
SIGTARP also issued an audit examining executive compensation
restriction compliance. This audit examined the efforts of TARP
recipients' to comply with executive compensation restrictions in place
at the time of SIGTARP's survey of banks use of funds. The audit was
set against a background of the evolving rules on executive
compensation for TARP recipients. Although recipients expressed
frustration with changing compensation guidance, they were able to
report the actions that they have been taking.
SIGTARP also has audits nearing completion examining the selection
of the first nine participants for funds under CPP (with a particular
emphasis on Bank of America), AIG bonuses, AIG counterparty payments,
and an update on SIGTARP's use of funds survey. In addition, SIGTARP is
undertaking a series of new audits, as follows:
CPP Warrant Valuation and Disposition Process: The audit
will seek to determine (i) the extent to which financial
institutions have repaid Treasury's investment under CPP and
the extent to which the warrants associated with that process
were repurchased or sold; and (ii) what process and procedures
Treasury has established to ensure the Government receives fair
market value for the warrants and the extent to which Treasury
follows a clear, consistent, and objective process in reaching
decisions where differing valuations of warrants exist. This
audit complements a July 10, 2009, report by the Congressional
Oversight Panel examining the warrant valuation process.
Governance Issues Where U.S. Holds Large Ownership
Interests: The audit will examine governance issues when the
U.S. Government has obtained a large ownership interest in a
particular institution, including: (i) what is the extent of
Government involvement in management of companies in which it
has made sizeable investments, including direction and control
over such elements as governance, compensation, spending, and
other corporate decision making; (ii) to what extent are
effective risk management, monitoring, and internal controls in
place to protect and balance the Government's interests and
corporate needs; (iii) are there performance measures in place
that can be used to track progress against long-term goals and
timeframes affecting the Government's ability to wind down its
investments and disengage from these companies; and (iv) is
there adequate transparency to support decision making and to
provide full disclosure to the Congress and the public.
Status of the Government's Asset Guarantee Program with
Citigroup: The audit will examine the Government's Asset
Guarantee Program with Citigroup. Specifically, the audit will
address: (i) how was the program for Citigroup developed; (ii)
what are the current cash flows from the affected assets; and
(iii) what are the potential for losses to Treasury, the
Federal Deposit Insurance Corporation, and the Federal Reserve.
Making Home Affordable Mortgage Modification Program: The
audit will examine the Making Home Affordable mortgage
modification program to assess the status of the program, the
effectiveness of outreach efforts, capabilities of loan
servicers to provide services to eligible recipients, and
challenges confronting the program as it goes forward.
Auto Dealership Terminations: The audit will examine the
process used by General Motors (GM) and Chrysler to identify
which automotive dealerships should be maintained or
terminated. GM and Chrysler reportedly have announced plans to
terminate more than 2,000 automotive dealerships as part of
their restructuring process.
SIGTARP's Recommendations on the Operation of TARP
One of SIGTARP's responsibilities is to provide recommendations to
Treasury so that TARP programs can be designed or modified to
facilitate effective transparency and to deter fraud, waste, and abuse.
SIGTARP has now made dozens of such recommendations, and the reader is
referred to SIGTARP's July Quarterly Report starting on page 188 for a
full listing of the recommendations and Treasury's responses to them.
Four recommendations concerning transparency are detailed here.
Transparency in TARP Programs
Although Treasury has taken some steps toward improving
transparency in TARP programs, it has repeatedly failed to adopt
recommendations that SIGTARP believes are essential to providing basic
transparency and fulfill Treasury's stated commitment to implement TARP
``with the highest degree of accountability and transparency
possible.''
Use of Funds Generally: One of SIGTARP's first
recommendations was that Treasury require all TARP recipients
to report on the actual use of TARP funds. Other than in a few
agreements (with Citigroup, Bank of America, and AIG), Treasury
declined to adopt this recommendation, calling any such
reporting ``meaningless'' in light of the inherent fungibility
of money. SIGTARP, nonetheless, continues to believe that banks
can provide meaningful information about what they are doing
with TARP funds--in particular what activities they would not
have been able to do but for the infusion of TARP funds. That
belief has been supported by SIGTARP's first audit, in which
nearly all banks were able to provide such information.
SIGTARP's report noted that most firms reported multiple and
sometimes interrelated uses of the funds. For example:
More than 80 percent of the respondents cited the use of
funds for lending or how it helped them avoid reduced lending.
Many banks reported that lending would have been lower without
TARP funds or would have come to a standstill.
More than 40 percent of the respondents reported that
they used some TARP funds to help maintain the capital cushions
and reserves required by their banking regulators to be able to
absorb unanticipated losses.
Nearly a third of the respondents reported that they used
some TARP funds to invest in agency-mortgage backed securities.
These actions, they claimed, provided immediate support of the
lending and borrowing activities of other banks and positioned
the banks for increased lending later.
A smaller number reported using some TARP funds to repay
outstanding loans--some because the TARP funds were a more
cost-effective source of funds than their outstanding debt, and
some because of pressure from a creditor to use the funds for
that purpose.
Several banks reported using some TARP funds to buy other
banks. One reported that this was a cost-effective way to
acquire additional deposits that, in turn, would facilitate an
even greater amount of lending.
Some banks reported that they had not yet allocated funds
for lending and other activities due to the short time elapsed
since the receipt of funds, the weak demand for credit, and the
uncertain economic environment.
In response to SIGTARP's recommendation, on September 16,
2009, Treasury informed SIGTARP that it was expanding its
Quarterly CPP Report to include two additional categories of
information that the TARP recipients indicated in the SIGTARP
survey responses as a way that they used TARP funds. Treasury
said this expansion will begin with the next Quarterly CPP
Report, scheduled to be released during October 2009. Although
this expansion should provide some additional information on an
aggregate basis, it falls short of meeting the goal of basic
transparency regarding the use of TARP funds. For example, it
will only include aggregate data and will not report on each
institution. It will not capture the broader range of use of
funds depicted in SIGTARP's report, nor will it reflect how
they may be changing over time. It also will not reflect the
financial institution's view of what steps it was able to take
that it otherwise would not have been able to take absent its
receipt of TARP funds. While SIGTARP is encouraged that
Treasury has apparently abandoned its prior position that it is
impossible to measure and report on TARP recipients' use of
funds, we remain puzzled as to why Treasury refuses to adopt
our recommendation to report on each TARP recipient's use of
TARP funds.
Valuation of the TARP Portfolio: SIGTARP has recommended
that Treasury begin reporting on the values of its TARP
portfolio so that taxpayers can get regular updates on the
financial performance of their TARP investments.
Notwithstanding that Treasury has now retained asset managers
and is receiving such valuation data on a monthly basis,
Treasury has not committed to providing such information except
on the statutorily required annual basis.
Disclosure of TALF Borrowers Upon Surrender of Collateral:
In TALF, the loans are nonrecourse, that is, the lender
(Federal Reserve Bank of New York) will have no recourse
against the borrower beyond taking possession of the posted
collateral (consisting of asset-backed securities (ABS)). Under
the program, should such a collateral surrender occur, TARP
funds will be used to purchase the surrendered collateral. In
light of this use of TARP funds, SIGTARP has recommended that
Treasury and the Federal Reserve disclose the identity of any
TALF borrowers that fail to repay the TALF loan and must
surrender the ABS collateral. To date, Treasury has refused to
implement the disclosure.
Regular Disclosure of PPIF Activity, Holdings, and
Valuation: In the PPIP Legacy Securities Program, the taxpayer
will be providing a substantial portion of the funds
(contributing both equity and lending) that will be used to
purchase toxic assets in the Public-Private Investment Funds
(PPIFs). SIGTARP has recommended that all trading activity,
holdings, and valuations of assets of the PPIFs be disclosed on
a timely basis. Not only should this disclosure be required as
a matter of basic transparency in light of the billions of
taxpayer dollars at stake, but such disclosure would also serve
well one of Treasury's stated reasons for the program in the
first instance: the promotion of ``price discovery'' in the
illiquid market for MBS. Treasury has indicated that it will
not require such disclosure.
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
I want to thank you again for this opportunity to appear before you,
and I would be pleased to respond to any questions that you may have.
PREPARED STATEMENT OF GENE L. DODARO
Acting Comptroller General, Government Accountability Office
September 24, 2009
PREPARED STATEMENT OF ELIZABETH WARREN
Chair, Congressional Oversight Panel for the Troubled Asset Relief
Program
September 24, 2009
Chairman Dodd, Ranking Member Shelby, and Members of the Committee,
thank you for the opportunity to testify today about the Troubled Asset
Relief Program (TARP) and the work of the Congressional Oversight
Panel.
I should begin by noting that, although I am the Chair of the
Panel, the views I express today are my own, as I cannot speak on
behalf of all of the other Panel members.
As we examine the year since the passage of the Emergency Economic
Stabilization Act (EESA), it makes sense to consider where we were 12
months ago. By last October, major financial institutions that had
stood strong for decades were wiped out of existence in a wave of
acquisitions and bankruptcies. Others had been bailed out by the
Government or were teetering on the brink of collapse. The stability of
the American financial system was in serious question. The Secretary of
the Treasury said that business credit was frozen.
Americans were deeply concerned. Home values were dropping, sending
shock waves throughout the economy. Families had seen their savings
evaporate, their home equity disappear, and their retirement account
values plunge as the Dow continued to fall. The fear was compounded by
uncertainty: confusion as to what had just happened, what would happen
next, and how policymakers would respond.
TARP was offered as a centerpiece of the Government response: a
$700 billion program, proposed by then-Secretary of the Treasury Henry
Paulson, to stabilize the financial system. For a short while Treasury
aimed to use TARP to purchase mortgage-backed securities and loans--
which many came to call ``toxic assets''--from major financial
institutions. Before Treasury completed a single purchase, however, its
strategy shifted to buying a wide range of financial instruments
through at least 10 different subprograms. Using TARP funds, Treasury
has now made significant investments in several hundred financial
institutions, bought significant stakes in Chrysler and GM, and
provided incentives for home loan modifications, reinvigoration of the
market for asset-backed securities, and purchases of loans and real-
estate based securities from banks.
From the outset, it was clear that such an enormous program would
require enormous oversight. In the year since TARP began, the scope of
oversight has only grown. Each of Treasury's new initiatives may serve
a role in helping to restore financial stability, but each also raises
questions about its design, its effectiveness, the clarity of its
goals, and its mix of public costs and benefits.
The Congressional Oversight Panel, along with SIGTARP and GAO, was
your creation to provide that oversight. You charged our Panel to
``review the current state of the financial markets and the financial
regulatory system'' and to report to Congress every 30 days.
The Panel works closely with GAO and the Special Inspector General
to ensure that our efforts complement rather than duplicate one
another. We all want to ensure that the whole of our work is greater
than the sum of its parts. The unique contributions of the
Congressional Oversight Panel are that we are the only one of the three
oversight bodies authorized to hold hearings, we submit monthly
reports, and we are responsible for taking a big-picture view of the
markets and the financial system. So far we have released 10 monthly
oversight reports and two special reports on regulatory reform and on
farm credit, as required by law. We have held 11 hearings so far,
including six field hearings that have taken us to areas of the country
hit hard by the financial crisis. As I testify to you today, other
members of the Panel are continuing this work at a 12th hearing in
Philadelphia, where they are exploring the effectiveness of current
foreclosure mitigation efforts at helping homeowners stay in their
homes.
Of all the questions that TARP raises, one that I am frequently
asked as the Chair of the Panel is straightforward: ``Has TARP
worked?'' It may be a simple question, but it has no simple answer.
Partly this is because there is no single way to measure the health of
our economy. EESA listed five specific objectives for TARP: to restore
financial stability, protect home values and family savings, promote
jobs and economic growth, maximize returns to taxpayers, and provide
public accountability.
If a TARP program advances all five of these objectives at once,
then no one would hesitate to call it a success. But what if a program
advances only some of these goals, or even advances certain goals at
the expense of others? How should we gauge a program that achieves
greater financial stability by taking money from taxpayers? Should we
consider a program successful if it stabilizes the financial markets
but produces no measurable gains in the broader economy?
The experience of the last year has demonstrated that these are not
merely hypothetical questions. For example, on February 6, 2009, the
day after my last appearance before this Committee, the Panel released
a report evaluating Treasury's largest acquisitions of bank equity and
warrants under TARP at that time. Despite the assurances of Secretary
Paulson that the initial purchases of stock and warrants of the banks
were made at full value, our analysis of the numbers showed that
Treasury paid substantially more for these assets than they were worth.
In fact, for every $100 spent by Treasury, it received assets then
valued, on average, at only $66.
These capital purchases very likely helped to stabilize the
financial markets, thereby achieving one of the key goals of TARP. But
Treasury paid substantially more for the assets than their market
value, subsidizing the banks at the direct expense of the taxpayer. Any
discussion of success requires balancing these sometimes contradictory
effects.
The Panel can contribute to this discussion by assembling the data
and making recommendations. We can press Treasury for greater clarity,
transparency, and accountability, but ultimately, the American people
will decide if the right balance has been struck.
I would like to briefly expand upon these broad themes by
describing each of the Panel's reports since my last appearance here,
as they have explored a wide range of important topics.
In March, the Panel examined the causes of the foreclosure crisis
and developed a checklist that provides a roadmap for foreclosure
mitigation program success. Among the questions on our checklist: Will
the plan result in modifications that create affordable monthly
payments? Does the plan deal with negative equity? Does the plan
address junior mortgages? And will the plan have widespread
participation by lenders and servicers? The Panel plans to release an
update to this report in October, using these metrics to examine how
well the program has performed.
In April, the Panel looked back on the first 6 months of Treasury's
TARP efforts and offered a comparative analysis of previous efforts to
combat banking crises in the past. We found that the successful
resolution of past financial crises involved four critical elements:
transparency of bank accounting, particularly with respect to the value
of bank assets; assertiveness, including taking early aggressive action
to improve salvageable banks and shut down insolvent institutions;
accountability, including willingness to replace failed management; and
clarity in the Government response. Without those elements, a financial
crisis is likely to create long-term economic problems.
In May, we surveyed the state of lending for small businesses and
families and examined the Term Asset-Backed Securities Loan Facility
(TALF). The report raised concerns about whether TALF was well-designed
to help market participants meet the credit needs of households and
small businesses. It also raised serious doubts about whether the
program would have a significant impact on access to credit.
In June, we examined how effectively Treasury and the Federal
Reserve conducted the stress tests of America's 19 largest banks. The
Panel found that, on the whole, the stress tests were based on a
solidly designed working model, but that serious concerns remained,
including the possibility that economic conditions could deteriorate
beyond the worst-case scenario considered in the tests. The Panel
recommended that, if the economy continued to worsen, stress testing
should be repeated. I should note that the 2009 average unemployment
rate now appears likely to exceed the stress test's worst-case
scenario, but so far Treasury has declined to call for a repeat of the
stress tests. In light of the impact of unemployment on bank losses and
the possibility of future large losses from commercial real estate,
repeated stress tests may yet be necessary.
In July, the Panel examined the repayment of TARP funds and the
repurchase of stock warrants. At that time, 11 banks had repurchased
their warrants from Treasury. Once again, our analysis of the numbers
indicated that the taxpayer had received only 66 percent of the Panel's
best estimate of the value of the warrants. In order to ensure that
taxpayers would receive the maximum value as banks exited TARP, the
Panel urged Treasury to make its process, reasoning, methodology, and
exit strategy absolutely transparent. We are pleased to note that since
our July report was published, an additional nine large institutions
have repurchased their warrants, generating receipts to Treasury of
$2.9 billion, representing more than 94 percent of the Panel's best
estimate of their values.
In August, we reported that substantial troubled assets backed by
residential mortgages remained on banks' balance sheets and presented a
potentially serious obstacle to economic stability. The risk to the
health of small and midsized banks was especially high. The Panel
recommended that Treasury and the bank supervisors carefully monitor
the condition of the troubled assets held by financial institutions and
that Treasury should move forward with one or more initiatives aimed at
removing troubled whole loans from bank balance sheets.
This month, the Panel examined the use of TARP funds in support and
reorganization of the domestic automotive industry. We recommended that
Treasury provide a legal analysis justifying the use of TARP funds in
the auto industry. We further recommended that, in order to limit the
impact of conflicts of interest and to facilitate an effective exit
strategy from ownership, Treasury should consider placing its Chrysler
and GM shares in an independent trust.
Since EESA was enacted 1 year ago, the apprehension that pervaded
this country has turned into something else: frustration and anger.
Taxpayers have committed over $531 billion through TARP, and although
there is no doubt that the financial system has begun to stabilize,
families are still feeling the pain of rising unemployment, rampant
foreclosures, higher bank fees, and limited access to credit.
Today's fragile stability has come at an enormous cost to the
American people. Taxpayers have a right to expect full clarity, full
transparency, and full accountability in Treasury's use of their money.
They also have a right to know what has fundamentally changed to
prevent this crisis from ever happening again. It is time for our
focus, which has been fixed upon avoiding short-term disaster, to
expand to include this long-term thinking. We should explore ways to
change the rules of the financial system to make certain that this
economic crisis is not repeated--a topic that the Panel first
considered in our special report on regulatory reform.
Thank you again for the opportunity to explain the work of the
Congressional Oversight Panel. I look forward to answering your
questions.
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM HERBERT M. ALLISON, Jr.
Q.1. The Special Inspector General for the TARP has recommended
to Treasury that all TARP recipients should publicly disclose
their uses of the TARP funds they receive. His office indicates
that Treasury has not agreed with this recommendation. Would
you explain Treasury's response to his recommendation? What
measure of transparency do you feel the public deserves?
A.1. Treasury is committed to transparency with respect to
programs established under the Emergency Economic Stabilization
Act (EESA).
We have carefully considered the SIGTARP's recommendation,
and will issue reports that we believe will address the issues
raised by SIGTARP. Specifically, our expanded quarterly report
will cover, on both an aggregate basis and for each bank
participating in CPP, all of the significant categories of uses
reported in SIGTARP's Use of Funds Survey Responses, including
lending, investments, capital cushion, repayment of debt and
acquisitions. Moreover, our report will be based upon detailed
financial information collected by bank regulators, and will
specify the actual levels and changes of assets and liabilities
related to each use of funds rather than simply identifying
categories. Further, our report will be updated each quarter
and will show how uses of capital by each CPP bank and by all
CPP banks in the aggregate are changing over time. Finally, we
continue to consider, evaluate, and discuss with SIGTARP
additional ways to collect and report information about how
banks are using TARP funds.
Q.2. It has been reported that Treasury's General Counsel
sought advice from the Department of Justice as to whether
Treasury was obliged to turn over certain documents to the
SIGTARP. Subsequently, Mr. Barofsky said Treasury had withdrawn
its request and that ``We view such withdrawal as Treasury's
acknowledgment that SIGTARP is an independent entity within
Treasury, and that my office and I are not subject to the
supervision of the secretary.'' Would you describe your
understanding of the independence of the SIGTARP?
A.2. I am not an attorney, and have not formed my own views as
to the proper interpretation of the relevant statutes. I can
assure you, however, that Treasury has never refused to turn
over any documents requested by SIGTARP, and that Treasury will
continue to cooperate fully in SIGTARP audits and
investigations.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM NEIL M. BAROFSKY
Q.1. During the past year, each of you has overseen the
Government's financial assistance to numerous financial
institutions that nearly failed as a result of their
mismanagement, assuming excessive risk, and being poorly
regulated.
From this experience and your perspective, what advice
would you give personally to the Committee about what
legislation or additional reforms are needed to prevent future
crises?
A.1. Although it is beyond SIGTARP's role to take specific
positions with respect to the thorny policy questions facing
the Congress on the issue of regulatory reform, it is clear
that the existing system, whether in design or in application,
failed to protect the American people from their responsible
risktaking of systemically important firms.
One specific issue that has arisen repeatedly throughout
SIGTARP's oversight work is the considerable power of credit
rating agencies and their role in our financial system, in
Government and in the current financial crisis, particularly
with regard to ratings they provided for securities based on
subprime mortgages. SIGTARP's latest Quarterly Report discusses
some of the inherent conflicts of interest that the issuer-pay
business model presents and describes the lack of meaningful
regulation in this area. SIGTARP's report also discusses in
detail how the U.S. Government reinforces the power of rating
agencies by including in laws and regulations a reliance on
high ratings. Further, SIGTARP's recent audit concerning the
AIG credit default swap counterparty payments stands as a stark
example of the tremendous influence of credit rating agencies
up on financial institutions and up on Government decision
making in response to financial crises. In the lead-up to the
crisis, the systemic over-rating of mortgage-backed securities
by rating agencies was reflected in the similarly overrated
collateralized debt obligations that underlied AIG's credit
default swaps. Once the financial crisis had come to a head,
the credit rating agencies downgrades of AIG itself and of the
underlying securities played a significant role in AIG's
liquidity crisis as those downgrades and the related market
declines in the securities required AIG to post billions of
dollars in collateral. The threat of further rating agency
downgrades due to the onerous terms of the initial FRBNY
financing, among other things, led to further Government
intervention, including the TARP investment in AIG and the
necessity to do something with the swap portfolio, i.e., Maiden
Lane III. And the concern about the reaction of the credit
rating agencies played a role in FRBNY's decision not to pursue
a more aggressive negotiating policy to seek concessions from
counterparties. All of these profound effects were based upon
the judgments of a small number of private entities that
operate on an inherently conflicted business model and that are
subject to minimal regulation.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM NEIL M. BAROFSKY
Q.1. TARP's Effect--Inspector General Barofsky, you stated in
your testimony that ``there is little question that the
dramatic steps taken by Treasury, the Federal Reserve and the
FDIC through TARP and related programs, in the face of what can
only be described as panic conditions, played a significant
role in bringing the system back from the brink of collapse.''
How much of the rescue was actually attributable to the
TARP program, which was dwarfed in size by other Federal
Reserve and FDIC emergency relief programs?
A.1. It is impossible to state with any mathematical precision
what portion of the solution to the panic conditions in
financial markets in early October 2008 were attributable to
TARP. As the question correctly points out, the TARP programs
are just a portion of the overall Government efforts to
stabilize the financial system. Indeed, to put TARP in to
proper context, SIGTARP's July Quarterly Report lists and
describes dozens of those non-TARP programs, amounting to
trillions of dollars of support. That being said, TARP
certainly played a significant role in restoring some
confidence to the financial system, particularly in conjunction
with the explicit message that the Government would not allow
the largest financial institutions to fail. On October 14,
2008, for example, there were multiple press releases
announcing the Federal Government's intent to protect the U.S.
economy and restore confidence and stability in our financial
system. These press releases announced (a) the FDIC initiatives
to temporarily guarantee the senior debt of all FDIC-insured
institutions and certain holding companies as well as deposits
in noninterest bearing deposits transaction accounts and (b)
the TARP investments in nine large financial institutions had
agreed to accept TARP funds. These announcements had a dramatic
effects at the time on reducing the cost of credit, freeing up
credit markets and fostering confidence in the financial
system, key objectives for the initial expenditure of TARP
funds. The longer term effects of the TARP program are
continuing to unfold and may not be fully understood for some
time.
It is particularly difficult to quantify how much of the
rescue was attributable to the TARP program because Treasury
does not require TARP recipients to report how they used
taxpayer funds, which is the recommendation that I made to
Treasury within my first 2 weeks of taking office and which I
continue to make. Although the failure of Treasury to adopt
this recommendation ultimately is a failure of transparency,
SIGTARP conducted its own survey of how the first 364 TARP
recipients used TARP funds. The results of that survey show
that 80 percent of the recipients used TARP money for lending
or to avoid further reductions in lending. More than 40 percent
of the respondents reported that they used TARP funds to help
maintain capital cushions and reserves. Other uses reported
include paying down debt, purchasing other banks and investing
in agency-backed mortgage backed securities.
Q.2. Comingling of TARP Funds--Inspector General Barofsky, a
substantial portion of TARP funds have been comingled with
funds supplied by the Federal Reserve to create several bailout
programs.
Do the various taxpayer protections of the TARP--including
your own investigatory authority--cease to apply when TARP
money is used as part of the Federal Reserve's bailout
programs?
A.2. The taxpayer protections that are set forth in EESA, in
the regulations promulgated under EESA and in the contracts
with participants in TARP programs generally speaking only
apply to the TARP programs themselves and do not extend to non-
TARP programs. SIGTARP's authority applies, with only limited
exceptions, to any actions taken under EESA and as a result
SIGTARP asserts oversight authority, for example, over any
instance in which TARP funds are involved in a program (whether
Treasury runs the program or not) and in instances when the
TARP investments are part of a broader Government bailout.
Accordingly, SIGTARP is actively engaged, among other things,
in the oversight of the Term Asset-Backed Securities Loan
Facility Program (TALF) (which involves Federal Reserve lending
backed by TARP funds) and in AIG (in which TARP funds were
expressly used to refinance the Federal Reserve infusions).
SIGTARP is committed to investigate fraud, waste, and abuse
anywhere in which it could affect taxpayer interests in TARP
funds. Programs that do not involve EESA or impact TARP funds
would not be within SIGTARP's oversight authority.
Q.3. Will you ensure that the Federal Reserve fully complies
with all of TARP's provisions when it uses TARP funds?
A.3. As noted above, TARP funds are involved in the TALF
program. More specifically, TARP funds were used to invest in a
special purpose vehicle that will purchase and manage any
collateral surrendered by TALF borrowers. To date there has
been no surrender of collateral.
From SIGTARP's inception, SIGTARP has been active in
working with Treasury and Federal Reserve staff over fraud
prevention and compliance and control provisions related to
TALF. In SIGTARP's first Report to Congress, for example, we
made a series of recommendations about the design of the TALF
program; further recommendations were made in our subsequent
reports as well. SIGTARP has met regularly with the Federal
Reserve, with FRBNY and with Treasury about the design of the
program, and the program has been improved dramatically as a
result from a compliance and fraud prevention perspective.
Moreover, SIGTARP has formed a multiagency law enforcement task
force to address any instances of wrongdoing with respect to
the TALF program.
Q.4. Bank of America/Merrill Merger--Inspector General
Barofsky, you are taking part in the efforts to investigate the
circumstances surrounding the merger between Bank of America
and Merrill Lynch.
Have you come to any conclusions about whether Treasury
conditioned Bank of America's receipt of additional TARP funds
on Bank of America proceeding with its merger with Merrill and
whether this was inappropriate?
A.4. In SIGTARP's recently released audit entitled, ``Emergency
Capital Injections Provided To Support the Viability of Bank of
America, Other Major Banks, and the U.S. Financial System,'' we
detailed information indicating that Treasury officials
pressured Bank of America to proceed with the merger. Former
Treasury Secretary Henry Paulson told Bank of America CEO
Kenneth Lewis that the Federal Reserve could remove Bank of
America's management and the board of directors if Bank of
America abandoned the merger. Mr. Paulson explained to SIGTARP
that he was justified because of the risk to the financial
system and that investors would perceive Bank of America
abandoning the merger as poor judgment. In a deposition taken
by the New York Office of the Attorney General, Mr. Lewis
confirmed that Secretary Paulson made statements about removing
Bank of America's management and board of directors. However,
Mr. Lewis told SIGTARP that he independently came to the same
conclusion that the potential failure of the merger would be
harmful to the bank and that it was in the best longterm
interest of the shareholders to complete the merger. Although
in the audit SIGTARP does not opine as to whether Treasury's
actions were appropriate, by bringing transparency to these
events, the American public and this Committee can use these
details to inform any conclusion about the appropriateness of
Treasury's actions.
In the interests of protecting the integrity of the
process, SIGTARP respectively requests that it be permitted not
to comment upon any pending criminal investigation.
Q.5. Bank of America SEC Action--Inspector General Barofsky,
one of the areas that you have focused on is the use of funds
by TARP recipients.
Do you know whether or not Bank of America planned to use
TARP funds to pay its proposed $33 million settlement with the
Securities and Exchange Commission prior to the court rejecting
that settlement?
A.5. We do not know whether Bank of America planned to use TARP
funds to pay the settlement with the Securities and Exchange
Commission announced on August 3, 2009. In response to a survey
SIGTARP sent to the first 364 TARP recipients asking how they
used TARP funds, Bank of America's March 9, 2009, response
stated, ``[t]he initial TARP investment was not segregated from
other funds on Bank of America's balance sheet. Since all TARP
investment funds are part of our operating capital, they cannot
effectively be segregated.'' Bank of America included in its
response that the TARP investments had been and would continue
to be used to originate loans, conduct other financial
business, increase capital position, and invest in other
initiatives. Although this statement appears to set forth Bank
of America's intention on use of the funds, this statement
predates the announcement of the settlement with the SEC.
Q.6. Would this be an appropriate use of TARP funds?
A.6. Treasury placed very few restrictions on the appropriate
use of TARP funds, particularly with respect to the first
capital infusions made under the Capital Purchase Program.
Paying a settlement with TARP funds would not appear to violate
any aspect of Bank of America's agreement with Treasury.
Q.7. Public-Private Investment Partnership--Inspector General
Barofsky, earlier this year, you made a number of
recommendations to Treasury with respect to the operation of
the Public-Private Investment Program. Among the
recommendations rejected by Treasury was a recommendation that
investment managers participating in the program set up walls
to prevent them from managing the program funds in order to
benefit the firm's other clients or proprietary accounts.
Another rejected recommendation related to public disclosure
about all transactions.
Does Treasury's rejection of your recommendations raise
questions about whether the program will benefit the fund
managers rather than the U.S. taxpayer?
A.7. SIGTARP continues to be concerned that Treasury did not
require walls by PPIP fund managers because it leaves taxpayers
vulnerable to the effects of the significant conflicts of
interest facing fund managers. Although Treasury did not
require a wall, Treasury did implement a series of important
conflict of interest rules, many of which SIGTARP recommended,
that are designed to address, in some part, the risk that the
program will benefit fund managers rather than the U.S.
taxpayer. SIGTARP's position remains that a strict ethical wall
in addition to these measures would provide better taxpayer
protection. At least one fund manager has enacted their own
wall. SIGTARP also continues to recommend that Treasury
publicly disclose PPIP transactions subject to reasonable
protections to avoid dissemination of any confidential
information that could harm taxpayers' investment.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM GENE L. DODARO
Q.1. During the past year, each of you has overseen the
Government's financial assistance to numerous financial
institutions that nearly failed as a result of their
mismanagement, assuming excessive risk and being poorly
regulated.
From this experience and your perspective, what advice
would you give personally to the Committee about what
legislation or additional reforms are needed to prevent future
crises?
A.1. Preventing future crises will entail addressing various
weaknesses in our current regulatory system, in particular
improving the oversight of risk management at large, complex
financial institutions. Under the current system, no regulator
has a clear responsibility to look across institutions to
identify risks to overall financial stability. As a result,
both banking and securities regulators have traditionally
assessed risk management primarily at an individual
institutional level. For example, as we reported in March 2009,
even when regulators performed horizontal examinations across
institutions, they generally do not use the results to identify
potential systemic risks. \1\ The Federal Reserve analyzed
financial stability issues for systemically important
institutions it supervised, but did not assess the risks on an
integrated basis or identify many of the issues that later led
to the near failure of some of these institutions and to severe
instability in the overall financial system. In addition,
although financial institutions manage risks on an
enterprisewide basis or by business lines that cut across legal
entities, primary bank and functional regulators have generally
overseen risk management at the level of a legal entity within
a holding company. As a result, regulators' view of risk
management has been limited or overlapping or duplicative of
those of other regulators including the holding company
regulator.
---------------------------------------------------------------------------
\1\ GAO, Financial Regulation: Review of Regulators' Oversight of
Risk Management Systems at a Limited Number of Large, Complex Financial
Institutions, GAO-09-499T (Washington, DC: Mar. 18, 2009).
---------------------------------------------------------------------------
In addition to improving oversight of the large financial
institutions whose activities and size and most likely to
precipitate a crisis, we reported in January 2009 that the
current U.S. regulatory system has important weaknesses that,
if not addressed, will continue to expose the Nation's
financial system to serious risks. \2\ In that report we
offered a framework of nine characteristics that if embodied
into a new regulatory system for the United States, should
reduce the likelihood of future crises. These characteristics
include:
---------------------------------------------------------------------------
\2\ GAO, Financial Regulation: A Framework for Crafting and
Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory
System, GAO-09-216 (Washington, DC: Jan. 8, 2009).
goals that are clearly articulated and relevant, so
that regulators can effectively conduct activities to
---------------------------------------------------------------------------
implement their missions;
appropriately comprehensive coverage to ensure that
financial institutions and activities are regulated in
a way that ensures regulatory goals are fully met;
a mechanism for identifying, monitoring, and
managing risks on a systemwide basis, regardless of the
source of the risk or the institution in which it is
created;
an adaptable and forward-looking approach allows
regulators to readily adapt to market innovations and
changes and evaluate potential new risks;
efficient oversight of financial services by, for
example, eliminating overlapping Federal regulatory
missions, while effectively achieving the goals of
regulation;
consumer and investor protection as part of the
regulatory mission to ensure that market participants
receive consistent, useful information, as well as
legal protections for similar financial products and
services, including disclosures, sales practices
standards, and suitability requirements;
assurance that regulators have independence from
inappropriate influence, have sufficient resources and
authority, and are clearly accountable for meeting
regulatory goals;
assurance that similar institutions, products,
risks, and services are subject to consistent
regulation, oversight, and transparency; and
adequate safeguards that allow financial
institution failures to occur while limiting taxpayers'
exposure to financial risk.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
FROM GENE L. DODARO
Q.1. Auditing the Fed's TALF Program--Mr. Dodaro, your
testimony claims that the GAO is prohibited from auditing the
Federal Reserve's actions with respect to its Term Asset-Backed
Securities Loan Facility (TALF). You also identify legislation
that was passed in May of this year giving GAO authority to
audit the Federal Reserve's actions with respect to TARP.
However, you do not seem to believe that this legislation
provided you with the authority to audit the TALF.
I believe that all interested parties came to an
understanding that the May 2009 legislation gave the GAO the
authority to oversee the joint Federal Reserve and Treasury
actions taken with respect to the TALF. Why is it your belief
that you do not already have the authority to audit the TALF?
A.1. We would welcome any additional authority the Congress
believes is appropriate. The TARP legislation tasks GAO with
overseeing Treasury's TARP program and reporting on TARP's
performance in meeting the purposes of the statute. Among other
things, section 116(a)(1)(E) of the legislation requires us to
oversee TARP's efficiency in using funds appropriated for the
program's operations, which uses include TALF. Under TALF, the
Federal Reserve Bank of New York will lend up to $1 trillion,
if needed, to help the securitization markets, and Treasury
will provide up to $20 billion of credit protection. Because
the TARP legislation already requires us to oversee all of
Treasury's TARP activities, including its participation in
TALF, and because of the unusual joint Federal Reserve/Treasury
nature of TALF, we believe we require audit and access
authority with respect to both the Federal Reserve's and
Treasury's TALF activities in order to carry out our existing
responsibilities most effectively. However, GAO lacks authority
to audit the Fed's TALF activities; the Federal Reserve
believes these are part of its ``monetary policy'' activities
that GAO is prohibited from auditing under the Banking Agency
Audit Act, 31 U.S.C. 714. Legislation enacted in May 2009
gives GAO new authority to audit certain recent Federal Reserve
emergency actions--actions taken to assist ``a single and
specific partnership or corporation,'' which thus far has
included three entities also receiving TARP assistance, namely,
Citigroup, AIG, and Bank of America. However, the Federal
Reserve's TALF is not a ``single and specific partnership or
corporation'' and thus is not covered by this new authority. We
therefore would support legislation giving GAO authority to
audit the Federal Reserve's TALF actions, together with
appropriate access, as well as any other authority Congress may
provide us.
------
RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD
FROM ELIZABETH WARREN
Q.1. During the past year, each of you has overseen the
Government's financial assistance to numerous financial
institutions that nearly failed as a result of their
mismanagement, assuming excessive risk, and being poorly
regulated.
From this experience and your perspective, what advice
would you give personally to the Committee about what
legislation or additional reforms are needed to prevent future
crises?
A.1. In January 2009, the Congressional Oversight Panel
produced a Special Report on Regulatory Reform as required by
Congress. The report describes how to limit the risk of future
crises and is available on the Panel's Web site at: http://
cop.senate.gov/documents/cop-012909-report-
regulatoryreform.pdf.
In my view, two proposals from this report are critical to
protecting the American financial system and preserving the
ability of families to build wealth.
First, it is important to remember that this financial
crisis began one household at a time. Bad mortgages, combined
with high household debt loads overall, were the central
trigger for the financial meltdown. In effect, if high-risk
products are fed into the financial system, those risks can
aggregate and bring down the entire economy. Congress should
establish a Consumer Financial Protection Agency (CFPA) to
ensure the basic safety of consumer credit products. The CFPA
would require clear, transparent, and comprehensible
disclosures of consumer credit products so that customers can
make informed decisions on their use of credit. Lenders could
no longer trick and trap consumers with obscure fees buried in
dozens of pages of fine print. The CFPA would also streamline
and coordinate consumer protection by combining under one roof
the regulatory authority that is now spread across seven
Federal agencies. Just as importantly, the CFPA would
demonstrate that consumer protection is a key goal of financial
regulation--that it is not a minor objective to be subordinated
as a means to other ends, but rather that the protection of
consumers is an end in itself.
Second, Congress should end the era of ``Too Big to Fail''
by restoring a credible threat of failure for the largest
financial institutions. America's market economy depends on the
notion that, when people make mistakes, they must bear the
price--up to and including the ultimate economic price of
bankruptcy. This threat of failure hangs over every small
business, every small bank, and every individual in this
country, and the constant threat of bankruptcy forces them to
handle their money with appropriate caution. Unfortunately,
``Too Big to Fail'' has signaled to the marketplace that
America's largest banks no longer face the threat of
liquidation, and this perception distorts markets and promotes
irresponsible risk-taking. Before any taxpayer money can ever
be used to stabilize a failing company, it must be clear that
the company's shareholders will be wiped out, their management
team replaced, and their debt holders forced to take their
losses. Taxpayer dollars must never be used again to prop up
failing companies that are then allowed to profit at taxpayer
expense. Congress should create a strong resolution authority
and make it clear that no institution, no matter how large, can
dodge the consequences of its own bad decisions.
Other, further reforms are also critical. As detailed in
the Panel's report, lawmakers should also take steps to align
executive pay with long-term corporate interests, regulate
derivatives and hedge funds, and reform the credit rating
agencies.
Q.2. In a recent report the COP panel outlined its concerns
with regard to the use of TARP funds to support the domestic
automobile industry. In particular the panel noted that
Treasury has not provided a legal justification for this use of
TARP funds or ``clearly articulated its investment
objectives.''
Has Treasury responded to your request for clarification?
Could you explain your concern with regard to legal
analysis justifying the use of TARP funds? As you see it now,
what are the legal limitations on the use of TARP funds to
bailout other nonfinancial industries?
Why is it important for the Treasury to outline investment
objectives for car companies? Are you satisfied that the
Treasury is being a diligent and prudent investor while not
interfering in the affairs of the car companies? Is it possible
to do both?
A.2. Treasury has declined to provide the Panel with a detailed
analysis of its legal authority to use TARP funds to invest in
the domestic automotive industry and has not provided a
response to our concerns regarding the absence of clearly
articulated investment objectives.
The Congressional Oversight Panel found that Treasury's
authority for its use of funds under the Troubled Asset Relief
Program (TARP) to support the domestic automobile industry was
``unclear.'' We further noted that the Panel is unaware of any
court before which the issue is currently pending and there are
no parties that would appear to have standing to challenge the
issue. In order for Congress and the American public to
understand the potential for Treasury to use TARP funds to
assist other struggling industries, we urged Treasury to
provide a legal analysis of its authority.
The Panel found although taxpayers may recover some portion
of their investment in Chrysler and GM, it is unlikely they
will recover the entire amount. Absent clearly articulated
investment objectives, it is impossible for the American public
to determine if this indeed represents a failure of Treasury's
strategy.
Treasury has acted in a commercial manner in negotiating
the auto deal, but it has not managed the resulting shares in
Chrysler and GM the way a commercial shareholder would do.
Instead, because of the potential conflicts, it has announced
its intent to remove itself from influencing the management of
the companies, leaving, in the case of GM, the minority
shareholders in control. To limit the impact of potential
conflicts of interest and to facilitate an effective exit
strategy, the Panel recommended that Treasury consider placing
its Chrysler and GM shares in an independent trust that would
be insulated from political pressure and Government
interference.