[Senate Hearing 111-705]
[From the U.S. Government Publishing Office]
S. Hrg. 111-705
HEARING WITH SECRETARY TIMOTHY GEITHNER
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HEARING
BEFORE THE
CONGRESSIONAL OVERSIGHT PANEL
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
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HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010
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Printed for the use of the Congressional Oversight Panel
S. Hrg. 111-705
HEARING WITH SECRETARY TIMOTHY GEITHNER
=======================================================================
HEARING
BEFORE THE
CONGRESSIONAL OVERSIGHT PANEL
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010
__________
Printed for the use of the Congressional Oversight Panel
U.S. GOVERNMENT PRINTING OFFICE
62-218 WASHINGTON : 2010
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C O N T E N T S
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Page
Opening Statement of Elizabeth Warren, Chair, Congressional
Oversight Panel................................................ 1
Statement of J. Mark McWatters, Member, Congressional Oversight
Panel.......................................................... 5
Statement of Damon Silvers, Deputy Chair, Congressional Oversight
Panel.......................................................... 11
Statement of Kenneth R. Troske, Member, Congressional Oversight
Panel.......................................................... 14
Statement of Richard H. Neiman, Member, Congressional Oversight
Panel.......................................................... 19
Statement of Hon. Timothy F. Geithner, Secretary, U.S. Department
of the Treasury................................................ 23
HEARING WITH SECRETARY TIMOTHY GEITHNER
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TUESDAY, JUNE 22, 2010
Congress of the United States,
Congressional Oversight Panel,
Washington, DC.
The Panel met, pursuant to notice, at 10:03 a.m. in Room
SD-192, Dirksen Senate Office Building, Elizabeth Warren, Chair
of the Panel, presiding.
Present: Ms. Warren, Mr. Neiman, Mr. Silvers, Mr.
McWatters, and Dr. Troske.
OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Chair Warren. This hearing of the Congressional Oversight
Panel is called to order.
Good morning, Mr. Secretary. We appreciate your returning
here to testify before the Congressional Oversight Panel for
the fourth time.
Since your last appearance here, the panel has issued six
more reports, bringing our total to 20. Our latest reports have
covered a great deal of territory from the Government's
interventions in specific companies such as GMAC and AIG and
its broader efforts to shore up entire markets such as small
business lending and housing.
The breadth of our reports reflects in many ways the
breadth of your ambitions. Under your leadership, Treasury has
launched at least a dozen distinct programs to address
different aspects of the financial crisis. It seems clear that
these efforts have had an important impact: markets have calmed
greatly since the turbulent fall of 2008.
But the size and scope of these programs also reflects the
variety of severe strains on our financial system. About 3,000
banks and six of our largest financial institutions are
dangerously exposed to the faltering commercial real estate
market. Many more banks still have not digested the toxic
assets, the toxic mortgages on their balance sheets, and are
now facing new demands to pay off bad mortgages they sold to
Fannie and Freddie. The financial problems of these banks are
straining their ability to lend to small businesses that might
otherwise be driving the economic recovery and reducing
unemployment, and finally, it seems clear that Treasury's
efforts to reduce mortgage foreclosures is not working.
As the TARP's end date approaches, this panel must know
whether Treasury has carefully monitored the financial system
to assess potential risks. We must also evaluate whether
Treasury has diligently measured the impact of its efforts,
using credible metrics to measure the success or the failure of
its programs. Put another way: Has Treasury administered TARP
with the highest possible degree of transparency and
accountability?
After all, reasonable people may approve or disapprove of
your plan to stop foreclosures, but no one questions that its
progress should be measured against clear benchmarks for
success. Yet, Treasury has provided no such benchmarks.
Reasonable people may define financial stability in
different ways, but everyone agrees that we can best gauge that
stability by rigorously measuring the condition of our banks.
Yet, Treasury has refused to call for additional stress tests
in our financial system.
Reasonable people may disagree about how to help small
businesses gain access to loans, but no one doubts that the
solution must begin with a clear understanding of the problem.
Yet, Treasury has gathered only sparse data on the small
business credit crunch.
So the point is blunt: Without more candid data on bank
stability, on commercial real estate, small business lending,
and home mortgage foreclosure efforts, the shape and depth of
the risks facing our economy remain hidden. And without more
willingness to separate programs that have worked from those
that have not, it is not possible to build the best defenses.
The problems in commercial real estate, small business
lending, and home mortgage foreclosure grow more urgent by the
day. In only three months, your office will lose the capacity
to substitute better programs for those that have failed or to
develop new programs to deal with coming risks. I will be very
glad to see the TARP end. But I realize that time is running
out to make certain that we have used this money to assure the
stability of our financial system. Time is also running out to
make certain that TARP money is used to help families and small
businesses the way it was so quickly used to help Wall Street.
Before we proceed with the Secretary's testimony, I would
like to offer my colleagues on the panel an opportunity to make
their own opening remarks.
Mr. McWatters.
[The prepared statement of Chair Warren follows:]
STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. McWatters. Thank you, Professor Warren.
I very much appreciate the attendance of the Secretary and
I look forward to hearing your testimony.
It is my hope that Secretary Geithner will assist the panel
in addressing a number of interesting questions, including the
following.
Is Treasury contemplating the allocation of additional TARP
funds to any new programs or the allocation of additional TARP
funds to any existing programs?
Is Treasury contemplating the allocation of TARP funds to
any financial or nonfinancial institution, such as AIG,
Citigroup, Chrysler, GM, or GMAC?
Will the taxpayers receive repayment in full--in cash--of
their TARP investments in these institutions, as well as other
TARP recipients?
What is Treasury's exit strategy with respect to these
institutions, as well as the other TARP recipients?
Has TARP enshrined into our law the concept of ``too big to
fail''? In other words, has TARP established an implicit
guarantee from the Federal Government for the benefit of our
largest financial and nonfinancial institutions?
Will the pending financial reform legislation ratify and
codify the implicit guarantee standard?
Would Treasury yet again allocate additional TARP funds to
Goldman Sachs, AIG, Citigroup, Bank of America, and a group of
other systemically significant firms if they notified Treasury
today that they were experiencing a severe liquidity and
solvency crisis?
How would the answer change if these institutions
approached Treasury and the New York Fed after the pending
financial reform legislation is enacted? Would the FDIC proceed
to liquidate these institutions in an orderly and complete
manner? And if so, are these institutions too interconnected
with the global financial system to liquidate without
triggering a cascade of unintended consequences?
Is this not what we were told in the last quarter of 2008
with respect to Goldman, AIG, Citi, Bank of America, among
others, that certain institutions were simply too big to fail
and as such could not under any circumstances be permitted to
liquidate?
In such an event, is the resolution authority included in
the pending financial reform legislation merely a modified TARP
II bailout mechanism dressed up as resolution authority?
AIG was regulated by approximately 400 domestic and
international regulators and they, along with Wall Street, Main
Street, and most investment professionals completely missed the
vast systemic risks that were percolating within AIG. How will
the addition of one more regulator, a systemic regulator,
proposed under the pending financial reform legislation help to
solve this problem? Where do Treasury, the FDIC, the SEC, and
the CFTC expect to find these all-omniscient, sage-like, super-
regulators who are competent to cull out systemic risk that
others have missed?
Even if the super-regulators timely identify such a risk,
how will they convince Wall Street, Main Street, other
regulators, the global financial community, and Congress that
the risks are, indeed, legitimate and worthy of prompt action
at great cost to the taxpayers and the financial community?
Why did former Federal Reserve Chair Volcker in an
interview on CNBC, and as reported by the Huffington Post,
state that the resolution authority provided in the proposed
financial package is a ``workable proposition for anything
short of the biggest banks''? Does Chairman Volcker believe
that it will be all but impossible to liquidate in an effective
manner the ``too big to fail'' financial institutions during
the next financial crisis? Does he believe that TARP II will be
required?
Why did Treasury on June 11 issue a press release implying
that the TARP program has been profitable? Even the Treasury
itself expects the taxpayers to lose over $105 billion from
their investments in the program, and the Congressional Budget
Office expects the taxpayers to lose approximately $109
billion.
Why did Ed Whitacre, the CEO of General Motors, imply in a
television commercial that GM has repaid all of its TARP funds
even though the taxpayers have yet to receive repayment in cash
for approximately $40 billion of TARP funds advanced to GM? And
the Congressional Budget Office projects the taxpayers will
lose approximately $34 billion of their TARP-funded investments
in GM, Chrysler, and GMAC.
Thank you, Mr. Secretary, for joining us today. I look
forward to our discussion.
[The prepared statement of Mr. McWatters follows:]
Chair Warren. Thank you.
Deputy Chair Damon Silvers.
STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Mr. Silvers. Yes, good morning and thank you, Chair Warren.
Like my fellow panel members, I wish to express my great
appreciation to Secretary Geithner for his willingness to
appear before this panel on a regular basis to discuss the
progress of the Treasury Department's efforts under the
Emergency Economic Stabilization Act.
Today I think that the Treasury Department and Secretary
Geithner deserve significant credit for the overall course of
the performance of the assets the Government has acquired
through TARP.
As my colleague, Mr. McWatters, has pointed out in a
somewhat different tone, the cost of TARP continues to fall and
is now estimated to be less than a third of what Treasury
thought it would be a year ago. And while it is hard to know
exactly how to understand the full costs of the financial
bailout, combining TARP with other government interventions
such as the activities of the Federal Reserve, the public
should be aware that the real cost of TARP is not at this point
$700 billion or even the $300 billion that it was thought to be
a year ago, but rather something like $100 billion, and it is
falling pretty consistently.
However, there remain three very significant questions that
have been with us since the inception of TARP.
The first is, is TARP working to achieve its economic
goals, reviving credit markets, stabilizing the financial
system, and providing meaningful relief to homeowners facing
foreclosure? Projections of long-term double-digit unemployment
and continued high rates of foreclosure suggest we may not have
really repaired our business credit system or our housing
markets.
Second, are we continuing to manage TARP's assets
effectively, particularly in relation to the most troubled of
TARP's recipients and the riskiest aspects of the TARP
portfolio. I am here particularly addressing AIG, Citigroup,
and PPIP. I am recused from auto, so I am not raising that
matter.
Third, are we taking to heart in the process of regulatory
reform the lessons from TARP? As Congress' conference committee
takes up the Wall Street Accountability Act of 2009, I am
particularly mindful of the lessons of our panel's detailed
examination of the collapse of AIG in our June report, the
lessons for regulatory reform. That report on AIG is a powerful
brief for the wisdom of keeping government-insured liabilities,
whether that is insurance policies or bank deposits, away from
highly risky assets such as derivatives and leveraged equities
and for the need for a strong resolution authority for
systemically significant institutions, a need which you, Mr.
Secretary, have championed I think much to the public's
benefit.
It is a challenge for this panel to evaluate TARP really
against two different metrics, both of which are profoundly
important.
One is TARP as literally a set of investments that the
public has made in financial institutions and in certain other
firms, evaluated against much the same metrics that any
investment would be measured against.
The second is really the purpose of TARP, which was to
ensure that the financial system did not take our economy down.
We have moved, as our chair has noted, from an environment
where the threat really was acute to, I believe, a situation
where the threat from our financial system and the weaknesses
in it is chronic. And that, I think, is really what I hope we
can take up today, in addition to the other two subjects I
mentioned a moment ago.
Again, my thanks to the Secretary for his agreeing to once
again appear before us, and I look forward to his testimony.
[The prepared statement of Mr. Silvers follows:]
Chair Warren. Thank you.
Dr. Troske.
STATEMENT OF KENNETH R. TROSKE, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Dr. Troske. Thank you, Chair Warren.
So I would like to start again, as the other panel members
have done, by thanking Treasury Secretary Geithner for
appearing before us today.
As the newest member of the panel, I have not gotten a
chance to hear you testify before us, and I am looking forward
to hearing your thoughts about the financial crisis we have
just been through and what we can expect going forward.
In my opening statement today, I would like to focus on
questions I still have about why financial markets in this
country have not behaved as I believe they should have if they
were truly a well functioning, competitive market. I have spent
most of my professional life studying how markets function, but
there are several aspects about these firms, these markets, and
the recent financial crisis that I find both surprising and
confusing. I would not have expected to see the events that we
have seen if financial markets truly were well functioning,
competitive markets.
While I have not been closely involved in studying this
sector, you, Secretary Geithner, are someone who has played a
key role in dealing with the financial crisis and also are
trying to understand how to prevent a similar crisis from
occurring in the future. I feel that one of the main purposes
of the panel is to comment on the long-run implications of TARP
and to comment on the effectiveness of TARP in minimizing the
size of the financial crisis. So your insights are obviously
valuable as we try to accomplish these goals.
One of the aspects of the financial sector I find confusing
is the existence of systemically risky or ``too big to fail''
firms. The argument has been made repeatedly that the
Government needed to step in and bail out firms such as AIG or
Citigroup because the standard bankruptcy process is slow and
disruptive and if these firms had been allowed to enter this
process, it would have resulted in enormous disruptions in
financial markets.
Of course, U.S. bankruptcy laws have been in existence for
a long time, and numerous companies, both large and small, have
entered bankruptcy in the past. So market participants should
have been well aware of the difficulties large financial firms
would have faced if they failed. Given this knowledge, as firms
grew they should have faced increasingly higher costs of
capital because of the increase in the cost of potential
bankruptcy risk. By imposing higher capital costs on large
companies, the market would have placed a limit on the size of
financial firms below the ``too big to fail'' threshold.
Instead, it appears as if these large financial firms faced
lower costs for both debt and equity than smaller financial
firms. This allowed these firms to borrow enormous sums of
money which they then used to purchase a variety of
increasingly risky assets, and an upward cycle of growth,
access to cheaper capital allowed these firms to grow even
larger and break the ``too big to fail'' barrier. In a well
functioning market, this should not have occurred.
Another aspect of the financial crisis that I find
surprising is that while the market was sending clear signals
that the residential mortgage-backed securities were risky,
traders purchasing these assets seemed to simply ignore these
signals. Basic financial theory teaches us that in order to
earn an above-market return, one needs to purchase an asset
with above-average risk. This is simply a formulization of the
age-old adage that economists often use, ``there is no such
thing as a free lunch,'' which in turn is the formulation of
something mothers tell their children, ``if something seems to
be too good to be true, it is.''
Unfortunately, participants in mortgage-backed security
markets ignored what they were taught in econ 101 and what
their mothers warned them about. Since these securities were
earning an above-market return based on the level of perceived
risk, people who were purchasing them should have realized that
the historic returns were not supportable despite what they
were being told by credit rating agencies. Over time, people
learned that these assets were quite risky. The efficient
market hypothesis worked vigorously and many of these assets
are now worth much less than what was paid for them.
In addition, managers seemed to have done an extremely poor
job assessing the riskiness of the assets they purchased. Yet,
few managers have been penalized for their poor performance.
These financial companies were essentially purchasing boxes
filled with residential mortgages. These boxes were stamped on
the cover by one of the rating agencies. Managers then chose a
combination of boxes to buy, depending on the overall risk they
wanted to achieve. They threw these boxes in the corner and
just waited to cash dividend payments produced by these boxes
to arrive. It does not appear that they ever opened any boxes
to check to see whether what was stamped on the cover was an
accurate reflection of what was inside. Additionally, it does
not seem that they ever tried to assess the covariance between
boxes which is key for understanding the amount of risk faced
by their firms.
In other sectors, these managers would be out of a job. In
the financial sector, they seem to still be working. This is
hard to understand.
This all leads me to conclude that the financial sector is
simply not a well functioning, competitive market, and I am
trying to understand why.
One of the things I think we need to consider is that part
of the problem is that the Government has long backed up
creditors and insured them at 100 cents on the dollar. This has
then led creditors to be willing to lend money to these
financial institutions at a below-market rate.
[The prepared statement of Dr. Troske follows:]
Chair Warren. Thank you, Dr. Troske.
Superintendent Neiman.
STATEMENT OF RICHARD H. NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. Neiman. Thank you.
Mr. Secretary, thank you for being here again to speak with
the panel and to the public about important issues impacting
financial stability and economic recovery.
It has been over a year since our first hearing with you in
April '09, so it is perhaps fitting to briefly take stock of
where we stand in comparison to that period in history.
First, it goes without saying that progress has been made
in restoring financial stability. Although difficult challenges
remain, the crisis levels of last year have receded and capital
markets are beginning to function more normally.
Second, a significant amount of TARP funds have been
successfully repaid. This is an impressive accomplishment, as
many banks have been able to privately raise capital and
increase earnings in a market that is still constrained by
recession.
Finally, many of the causes of the financial crisis that
put American taxpayers on the hook in the first place are being
addressed in Congress as we speak.
However, in other areas, needed change has not come as
quickly as desired over the past year. And unfortunately, these
are some of the very areas where Americans are hit the hardest.
I may now be the panel's virtual broken record on foreclosure
prevention, but it is critical that families at risk of losing
their homes have options that work. I am particularly concerned
with yesterday's Treasury HAMP report indicating that there are
now far more families whose HAMP trial modifications have been
canceled than there are families whose trial modifications have
been converted to long term.
Further, I think we all agree that small business lending
is key to entrepreneurship and job creation. Yet, we continue
to hear that viable small businesses are unable to access the
credit they need. This was a recurrent theme from witnesses in
our recent hearing in Phoenix. I am encouraged that the House
recently approved the creation of the administration's proposed
small business lending fund. The fund would provide capital to
the community and regional banks that are at the heart of small
business lending. I would like to explore small business credit
access and other lending issues with you this morning.
Finally, with the financial reform work near completion,
the United States finds itself in a unique and, some critics
say, precarious position. Our country is doing our part in
setting an example as a world financial leader. But as you are
more aware than anyone, there are challenges we face within the
global community between balancing our role as a leader of
financial reform with the future of our international
competitiveness. Time permitting, I would like to discuss this
challenge with you so the public can more fully gain your
perspective on moving our Nation toward reform while at the
same time strengthening our position in a global economy.
I look forward to your views.
[The prepared statement of Mr. Neiman follows:]
Chair Warren. Thank you, Superintendent Neiman.
Secretary Geithner, I would like to recognize you for five
minutes. Of course, your written statement will be part of the
record. We will try to hold it to five minutes so there is
plenty of time for our questions and answers. Secretary
Geithner.
STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY,
U.S. DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you, Chair Warren and members of
the panel. A pleasure to be back up here again to review
progress and our challenges ahead.
You know, as you know in the fall of 2008, as we confronted
the worst financial crisis this country has seen in more than
70 years, Congress and the previous administration mobilized an
extraordinary financial response. Their actions started the
process of stabilizing a financial system that was on the verge
of collapse, and when President Obama came into office, he took
the necessary steps to start to finish that job, to start to
save the economy from what could have been a second Great
Depression.
Now, last December, I outlined for this panel an exit
strategy for the Government's emergency programs. This morning
I just want to update you briefly on the impact those programs
have had on our recovery, on the progress we have made in
shutting them down, and their ultimate cost.
First, because of the actions we took to put out the
financial fire, alongside actions of the Federal Reserve and
the Recovery Act, the economy is growing again, exports are
rising, manufacturing output is on the rebound, businesses are
investing, and so far this year, the economy has created half a
million jobs in the private sector.
Because of our actions, the financial system is in a much
stronger position, and because of that, the cost of credit for
homeowners, for consumers, for businesses has fallen
significantly. Rates for conventional mortgages and auto loans,
for example, are at historic lows. By acting quickly and with
overwhelming force, we were able to avoid a much deeper
recession, a much more costly recession.
Second, we are now in the process of ending our emergency
programs and recouping our investments. As you know, we have
shut down most of the programs that characterized that initial
phase of the emergency response, the capital purchase program,
Treasury's emergency guarantee for money markets, and the
Federal Reserve has wound down the vast majority of its special
lending programs. All those programs are on track to generate a
significant profit for the taxpayer.
We are making significant progress getting the taxpayers'
money back. To date, more than half of all the money disbursed
through the TARP has been repaid. TARP investments have
generated $24 billion in additional revenue for taxpayers. When
President Obama took office, nearly $240 billion of TARP funds
had been invested by the previous administration into our
Nation's banking system. Today we have recovered three-quarters
of that money, and we are making progress getting out of AIG
and out of GM and Chrysler.
Third, as many of you have pointed out, the expected
overall cost of TARP continues to fall. Last August, we
projected potential losses at $340 billion. Today that estimate
is down to $105 billion. We view that as a conservative
estimate. We expect it to fall further. And as you know, the
President has proposed a financial crisis responsibility fee to
make sure that the Nation's largest institutions that benefited
most from these programs bear the cost of any ultimate losses
on this program. That way we will be able to say to the
American people they did not have to pay a penny of their hard-
earned dollars to cover the losses that we may still face in
TARP.
We are on track to shut this program down as scheduled, and
we expect to do so without having used hundreds of billions of
dollars in authority that Congress gave us initially. To say it
differently, we are going to return hundreds of billions of
dollars of authority unused to the Congress to devote to
reducing our future deficits and meeting the long-term needs of
the country.
Now, as you said, we all look forward to the day when these
programs are history. It is important to recognize, though,
they did what they were supposed to do. There is no job growth
without economic growth, no economic growth without access to
credit, no access to credit without a stable, functioning
financial system. And our emergency programs played an
essential role in starting that process of recovery and repair.
Now, the damage caused by this crisis is still affecting
the lives of millions of American families and thousands of
businesses across the country, those struggling to find a job
still, to make a mortgage payment, finance their retirement or
their kids' education, or the small business owner who still
cannot find access to credit on affordable terms.
And that is why in these final months, we will commit to
use TARP authority--continue to use that authority to promote
and maintain stability in the housing market and to improve
access to credit for families and small businesses. That is why
we are working with Congress and I think are quite close to
getting Congress to adopt a new small business lending facility
to help meet the needs of small business on the credit side,
and that is why, of course, we are urging the Congress to act
quickly to enact financial reform.
We are not prepared to leave future generations of
Americans vulnerable to the devastating effects of the
financial crisis, and they should never again have to be asked
to bail out a financial system in crisis.
The House and the Senate are now very close--I am wrapping
up--very close to enacting the strongest set of reforms we have
considered as a country since the Great Depression. I would be
happy to talk about those in more detail, but it is now time to
provide the clarity and certainty about what the new rules of
the road will be. Doing so will help recovery, help strengthen
growth, help make sure that this financial system does a better
job in the future of meeting the needs of Main Street
businesses and families, and it will help restore confidence
that our financial system will be a source of stability, not
instability, for the U.S. economy and the global economy in the
future.
You began with excellent questions. I will be happy to
spend some time with you walking through the challenges ahead.
[The prepared statement of Secretary Geithner follows:]
Chair Warren. Thank you very much, Mr. Secretary.
I think your point about the accomplishments of TARP are
quite significant and your emphasis on the importance of a
stable, functional financial system is what I would like to
talk about. We have, obviously, made enormous progress in that
direction, but part of oversight is looking where the problems
still lie. I do not have to remind you that in just over three
months, Treasury will no longer be able to initiate or redesign
programs under TARP. What we do not do now we cannot do in the
future. So we need to make sure that we have a good assessment
of the problems that lie ahead and whether our proposed
solutions are working.
So I wanted to start with small banks. This panel has
written about the coming troubles in commercial real estate.
About half of the 1.4 trillion in commercial real estate loans
held by banks will be underwater by the end of this year, which
will make refinancing almost impossible for tens of billions of
dollars of loans. About 3,000 of the 8,000 intermediate and
small banks have lending portfolios that are heavily
concentrated in commercial real estate. We estimate that banks
could be facing $200 billion to $300 billion in losses on these
loans.
So, on the current course, that means that hundreds, or
even thousands, more small banks could capsize. What is
Treasury doing now to prepare for these coming problems? Do we
need to be reworking any of our current programs, Mr.
Secretary?
Secretary Geithner. Excellent question. And you are right
to emphasize, as I tried to do, that we are going to be living
for a long time with the lasting effects of this crisis. The
damage was extraordinary. It reached far and broad across the
American economy, and if you were in the real estate business,
if you were in parts of the country that have exceptionally
high unemployment rates, if you ran your business on access to
credit that got washed out in this basic crisis, it is still an
enormously challenging environment.
And as you are right to point out, the small banks too came
into this crisis, many much more conservatively managed than
their Wall Street competitors, but many of them got themselves
in a position where they had exceptionally high, regrettably
high, unacceptably high levels of exposure to commercial real
estate, and they still face a very difficult process of
adjustment ahead.
We have a set of programs still in place. The fuse on those
programs will last beyond the formal expiry of TARP because as
TARP was designed, we still preserve the capacity to implement
those programs after the formal expiry of TARP.
My view is the most effective thing we can do for the
credit problems still ahead in the economy and the challenges
still facing small businesses, small banks, because of the
pressures on small businesses, is for Congress to enact this
set of credit programs for small businesses.
The way these programs are designed--and it is worth
spending a minute on this--they do two very important things.
One is they provide a modest amount of additional resources to
States across the country that have programs in place to help
provide support to small banks and small businesses. But
alongside that, we propose a new small business lending
facility that small banks will be able to access by coming to
apply for investments from the Government, and the more they
increase lending, the lower the rate they pay on those
investments.
Chair Warren. Mr. Secretary, if I could just stop you there
to emphasize a different part of the question. And I understand
the reasons for supporting this when we talk about small
business lending.
But the question right now is that 3,000 of our 8,000 banks
across the country have heavy concentrations in commercial real
estate. As I read it, for example, the new initiatives on small
business lending, that is money that is not designed to go into
banks to help them repair broken balance sheets. It is money to
go into the healthy banks, the ones presumably that do not face
the serious problems associated with their commercial lending
portfolios.
So the question I want to ask and that I want to press on
is when you talk about the stability of the American banking
system, we have 3,000 banks at serious risk that may not
survive. What is Treasury doing about that? Or is the answer we
are going to let them go?
Secretary Geithner. As you know, Chair Warren, I cannot
associate myself with your basic numbers about the magnitude of
problems. That is an issue where really the FDIC's basic
framework is probably the most reliable reference we have. I do
not know what their numbers are, but----
Chair Warren. I am sorry, Mr. Secretary. Just so we are all
clear on this, the numbers about concentrations of commercial
real estate come from the banks' examiners. Those are not
numbers we generated. They have been generated by those who
examine their books on a quarterly basis.
Secretary Geithner. I am agreeing with you about the
challenges. I just did not want my agreement with you about the
challenges----
Chair Warren. Fair enough.
Secretary Geithner [continuing]. To be associated with your
numbers on the picture because that I want to rely on the
supervisors to paint that picture.
As you know, we have a very elaborate process, well
designed across this country that our supervisors run with the
FDIC for dealing with the challenges facing our Nation of 9,000
community banks and thrifts. That process was designed in the
wake of a series of past crises. It is a very well designed
process, in many ways the envy of the world, and that gives the
Government the ability to help those banks manage through, but
also for making sure that we can help facilitate the
restructuring ahead for that system.
Now, those banks who are under pressure have lots of
options. They can go raise capital. They can shrink lending to
bolster their balance sheet positions. And you are also right
to point out that the programs we designed from the beginning
for very important reasons are only available for banks that we
believe would be viable as an approach. But these are very
important programs because what they will help do is make sure
the banks face less need to shrink their balance sheets and
have more capacity to expand their lending to businesses. So
they could be very helpful as a complement to the basic
programs that the FDIC and the bank supervisors run.
Chair Warren. So I am over and I am going to take this off
my time on the next question, but I just want to make sure.
What I am hearing you say is, no reason to change anything. We
will stay steady on the same course.
Secretary Geithner. Well, you know, I am a very careful
person and a very pragmatic person, and I am open to any ideas
for how to make sure we are using our authority appropriately
to help the country still manage through the challenges ahead.
But at this stage, I believe that this suite of programs we
have in TARP, alongside the existing programs that the FDIC and
the supervisors manage, with this new small business lending
initiative the Congress is considering, is the best mix of
solutions that we have found at the moment.
Chair Warren. Thank you, Mr. Secretary.
Mr. McWatters.
Mr. McWatters. Thank you.
I will start with an easy question, a softball over the
plate. Does the Administration plan to ask Congress to extend
TARP beyond October of 2010?
Secretary Geithner. No.
Mr. McWatters. So TARP will be dead on October 3rd, 2010.
Secretary Geithner. This hearing should be a eulogy for
TARP.
Mr. McWatters. Yes. Fair enough. Fair enough.
Secretary Geithner. As I said many times, we are working
very hard to put this program to rest, put it out of its
misery. It is not going to solve all the problems facing the
country. It was not designed to. We are not going to use it
that way. We use it very carefully, but it has done the
essential thing it was designed to do and therefore our
expectation is it will be allowed to expire----
Mr. McWatters. Off to the sunset. Right? Okay.
Secretary Geithner. Mr. McWatters, can I just say--you said
one thing in your opening statement I just want to correct. You
referred to a June 11th press release where you said we implied
that the overall program would be profitable.
Mr. McWatters. Yes.
Secretary Geithner. I would never have done that. In fact,
in that press release, we were very explicit that the latest
cost estimates were in the $100 billion range. I think those
are a little high, frankly. But we have been very careful.
Now, for the bank piece of the program--you know, for many
Americans, the program was defined by the really incredible act
of the Government of the United States putting capital in banks
that represented three-quarters of our Nation's banking system.
That was a focus of most of the deep public outrage and anger--
that this country got itself in the position where, to protect
the economy, we had to put money in the institutions that
played such an important role in causing the crisis. It is very
important for Americans to understand these were investments.
They came with dividends, and on every estimate I have seen of
the bank piece of these programs, they will return a positive
investment for the American taxpayer.
But every time we say that, I always make clear to say--and
our numbers always show--that we still face a very substantial
risk of losses on the range of other programs that Congress
gave us the authority to enact, including the ones we inherited
from the previous administration, as well as the new
commitments we have made.
But I just want to make sure--I would never make that
mistake and will never make that mistake. We always make sure
that we tell people that we are still exposed to a very
substantial risk of loss on the programs we inherited----
Mr. McWatters. Right.
Secretary Geithner [continuing]. And on some of the things
we have done like in housing.
Mr. McWatters. But the metrics were sort of curious, the
$194 billion versus $190 billion. I mean, to a lot of people,
it looked like you were trying to say there was a $4 billion
profit there when, at the end of the day, there is really a
$105 billion loss according to your own numbers.
Secretary Geithner. One of the necessary, very important
things about the way we in the United States Treasury have done
these programs is we put out regular estimates, including by
independent analysts, of the potential cost of these programs.
It is very hard to find any country around the world that, in
the wake of this crisis, has explicitly identified and provided
regular, independent estimates of ultimate cost to the
taxpayer. And I am very committed to that and we will keep
doing that. People will come to their own judgments about
ultimately what it will cost. All we can say is----
Mr. McWatters. Sure, and the CBO does that and OMB does
that also.
Secretary Geithner. And they will change. You know, life is
uncertain. But these programs will cost a fraction of what the
critics feared and what the architects of the program thought
was likely, a very small fraction. And the best way to measure
this is to look at these projected costs relative to, for
example, the S&L crisis in the 1990s, a much more modest
crisis, much more simple to solve, still devastating for the
communities affected, but dramatically higher costs from a much
smaller crisis. But anyway, these are things that people are
going to be able to look at independently over history.
Mr. McWatters. But at the end of the day, $105 billion is a
lot of money.
Secretary Geithner. Absolutely, and that is why we are
working so hard to make sure we sure we bring those costs down
and we are doing everything we can to minimize our risk of
exposure to future losses.
Mr. McWatters. Well, let me ask you this. Is Treasury
contemplating the allocation of any TARP funds to any new
programs before October 3rd?
Secretary Geithner. No. As I said in response to Chair
Warren's question, at this stage we are not contemplating any
new programs using this authority. Again, we have got an
obligation of care and prudence in this. We are very reluctant
to do things unless we think there is a very, very high return
on the taxpayers' investment, and we think this is the set of
programs today that strikes that balance.
Mr. McWatters. How about additional TARP funds to any
existing TARP programs?
Secretary Geithner. No. We have no plans of adding to the
current estimates we have put out of these programs.
Mr. McWatters. Okay.
Secretary Geithner. First of all, for perspective, most
Americans think we went in and spent $700 billion, and we are
never going to see it again. In fact, we actually have put out
about half of that. We have got more than half of that back
already, and we have substantially reduced the estimates we
started with about how much we would ultimately commit to these
programs.
Mr. McWatters. Okay. My time is up.
Chair Warren. Mr. Silvers.
Mr. Silvers. Mr. Secretary, I hope I conveyed in my opening
remarks my sense that the analysis you just went through is
absolutely correct, and I think you and your team are to be
commended for getting where we have gotten.
With that intro, I want to shift to the question of the
interaction of TARP with the larger economy. I asked our staff
to give me an updated list of the metrics of lending. It
comports with your written testimony that we are continuing to
see declines in loan levels pretty much across all the
different ways in which they are measured. As our chair noted,
we think there are some deficiencies in how much data we are
collecting. We would love to see you all collect more.
My question to you is this. Given that data at a time when
I think the Administration's view is that we are in a recovery
mode, the economy is growing, it appears as though the private
credit system is acting as a lag on the growth of the economy.
That would appear to be not what we were trying to get out of
TARP. Can you give an analysis of that and what steps you think
need to be taken to address it?
Secretary Geithner. This is a very complicated question,
and you are right. It is the heart of any evaluation of the
effectiveness of any financial strategy like this.
But I have a somewhat different view, which is that I think
that if you look at most measures we can point to of the cost
of credit, of overall financial conditions, they do not suggest
that the financial system today is a source of weakness for the
overall economy. In fact, I would say the opposite. There is
not a chance that this economy would have started to grow again
in the second quarter of last year. There is not a chance we
would have had this level of economic growth and this early a
return to an economy still starting to create jobs again,
adding hours, incomes growing again, without the dramatic
actions we took, however unpopular, to bring down the cost of
credit and stabilize the system. Now, this is not something
that you can know for certain.
It is absolutely the case that in the housing market, in
the commercial real estate market, in the context of small
businesses that were unlucky in their bank or in parts of the
country that are still at the epicenter of the housing crisis
or have high unemployment rates, that credit is still very hard
to get. But I do not think on the available evidence today you
can say that the financial sector itself is operating as a
significant drag on the recovery.
One of the reasons why we decided--I am going to finish
quite quickly. Just give me one second.
Mr. Silvers. Yes.
Secretary Geithner. One of the reasons we decided to act so
forcefully to recapitalize the banking system early on in the
crisis was we wanted to make sure the system was going to be
able to finance recovery, finance growth, and would not operate
as a drag on growth. And I think we are in a very good position
to achieve that outcome, again acknowledging that there is
still a lot of damage out there that is going to take some
time----
Mr. Silvers. But, Mr. Secretary, I think maybe you are not
confronting what I was asking quite head on. I do not disagree
with you that it could have been much worse, that the situation
as it was in 2008 and early 2009 is significantly worse than
today. My concern is that the situation today is not what it
should be at this moment in an economic recovery in terms of
the behavior of the private credit system, not so much in
housing. But it is not clear we really have a private credit
system in housing at the moment with the level of Government
support that remains there on the Fed's side, but more on the
business side, which is where the job growth needs to come
from. And that brings us back to what I said in my opening
statement about a chronic problem replacing an acute one.
I wondered if you could focus more specifically on that
question.
Secretary Geithner. Again, let me try a slightly different
approach.
The best measure we have about whether the financial system
is a constraint on growth is what is the price of a loan,
credit. So look at the cost of municipal borrowing, mortgages,
business credit in almost any sector. They are not just lower
than they were at the peak of the crisis. They are very low.
Another example on this question is if you look at the
balance sheets, how much cash businesses have on hand across
the American economy--again, the averages mask lots of
variation, but the business sector as a whole has very, very
strong balance sheets and is sitting on a lot of cash.
Now, I completely agree with you about the basic risk,
which is we do not want to have a recovery that is constrained
by credit that is too tight. And credit is still too tight in
significant parts of the American economy.
But on those two measures, I would say I do not believe
that we face a risk of a chronic problem. I would not use that
word. But we are going to keep making sure that we are doing
things to make sure this economy is growing again as strong as
it can and that we are improving the process of repair that has
started across the system.
Mr. Silvers. I think most economists would say that the
fact that businesses are sitting on a lot of cash is not
necessarily a good thing in relation to our recovery. What is
your understanding----
Secretary Geithner. That I would agree with. But again, I
was saying as a measure of financial headwinds, it is a good
measure.
Mr. Silvers, I would say that, again, this economy--we
still have, I think, roughly eight million Americans still out
of work. People are still living with a basic level of
financial insecurity that they have not experienced in decades.
So you are absolutely right about that, and we are still at the
early stage of fixing what was broken in this economy. That is
going to take more time.
Mr. Silvers. The Chair was kind enough to give each of us
the same time she took. So I am going to use it.
What I am pushing on is that if you look at those reserves
of cash, although you may have data I do not have, I believe
that they are weighted toward those companies that have access
to public credit markets where the recovery has been more
dramatic. If that is not so, I would appreciate hearing about
that. Our anecdotal experience doing hearings and the like, and
our reports, suggests that if you have to deal with the banks
as your source of credit, you have got a much tougher situation
as a business person and the fact that the price of credit--let
us put it this way. I think the testimony we have heard from
small business people is that the bank may post a rate at the
window, but it is not available to them. The money is not
available at that rate. And that feels like a serious problem,
does it not?
Secretary Geithner. Well, I agree with you it is a serious
problem. I totally agree. That is why we have asked Congress to
enact a set of legislation that would help mitigate that
problem. So I am not sure that we disagree.
I would just say that on your basic question about whether
on the available evidence you have a financial system today
that is a source of restraint on growth, I do not believe that
would be a fair characterization of the overall average of the
American economy. Absolutely, in parts of the country, in
particular sectors, that is the case. And it would be
surprising if it were not the case, given the extent of this.
Chair Warren. Thank you, Mr. Secretary.
Dr. Troske.
Dr. Troske. Thank you.
So I guess I would like to start off by getting your
thoughts on or have you respond to concerns expressed by many
that for large financial institutions and their creditors, the
Federal Government has essentially privatized profits but
socialized the losses. I think that seems to be one of the main
frustrations that a lot of people feel about the TARP program.
So maybe you could give me your thoughts on that.
Secretary Geithner. I thought your opening statement was
very interesting. I listened very carefully and it is worth
going back to let me just answer a little bit of what I think
about why we got into this mess.
Dr. Troske. Okay.
Secretary Geithner. You are absolutely right. Market
discipline failed. The market failed to constrain risk-taking
by financial institutions. That had two causes.
One was a classic moral hazard risk, the expectation that
the Government would come in and insulate private creditors
from losses. That was acute and conspicuous in the case of the
GSEs.
But the crisis had another cause and it was much more
powerful in the moment, and that was that the market, financial
markets had financed a huge growth in leverage in a set of
institutions that were allowed to operate outside the
constraints of regulation on capital and leverage. For example,
in AIG and many of our investment banks and a vast range of
nonbank financial companies, some of whom called themselves
thrifts, those institutions were able to operate outside the
set of constraints and in overwhelming cases without any
history or expectation of government support.
Now, that is not something you can attribute to moral
hazard. That was just a classic lack of judgment by people
financing these firms that we might face a recession with acute
losses in housing prices.
But the key thing is, do we have a set of reforms now in
prospect that will address that risk? And what these reform
bills do--and this is fundamentally important--is to make sure
that those institutions that essentially operate like banks,
whatever you call them, and take risks as banks are important
to the functioning of the economy. We will constrain their
risk-taking. Whether you call them AIG or you call them Goldman
Sachs or you call them J.P. Morgan Chase, we will constrain the
leverage and risk they can take on. And this is very important.
And if they mess up in the future, if they end up getting
themselves in a position where they cannot survive on their
own, then we will step in and dismember them safely, minimize
risk of loss to the taxpayer, make sure that they can be broken
up by a quasi-bankruptcy type mechanism. That is what this
reform bill does.
The absence of that authority to constrain risk-taking in
the crisis prevention context and the absence of tools to
manage their unwinding is what forced us to take those
exceptionally offensive measures in the fall of 2008 and the
first half of 2009 to put out the financial fire.
Dr. Troske. Well, I guess the example of Long-Term Capital
Management would be one of a financial firm and not a bank
where the Government did come in and backstop the firm. Now,
they did not provide taxpayer money, but they did arrange a
rescue of that firm which perhaps would lead one to think that
that is what the Government was going to do for these other
firms as well, that rescue became an expected norm in this.
There are entities out there, presumably credit holders and
equity holders, who are supposed to be regulating these firms.
The creditors who do not experience the upside gain are the
ones that have the most to lose and should have been the ones
doing it. It is not a large stretch to think that they were
failing in that role because they felt that they were going to
be guaranteed a return regardless of what happens.
Secretary Geithner. I think you are right that all
financial systems have this expectation, this risk of moral
hazard, this expectation that in the extreme event it is
possible the government would act. And that is the job of
oversight and policy and government, to make sure that because
of that risk, you have tough, well designed constraints on
leverage that are imposed and enforced across the system ahead
of the crisis. So none of us run a system and no country runs a
system on the expectation that market discipline alone is
adequate to constrain risk-taking. All countries constrain
leverage through capital requirements. Some do better than
others. We did it quite well in some parts of the system, but
did it very poorly or inadequately or not at all in large parts
of our system, and that is something we are going to change.
Dr. Troske. And you have mentioned this, the systemic risk
regulator or whatever you want to call it. I mean, under the
current system there was the President's Working Group on
Financial Markets which was supposed to be assessing overall
systemic risks to the economy. At least, that is my
understanding. You would certainly know more about it than me.
So what is the difference between what we are setting up
going forward and what we have now--because it is the same
players as far as I can tell--many of the same players. What
powers will they have that are different than what they have
currently?
Secretary Geithner. Excellent question, and both you and
Mr. McWatters have made the basic point. I will tell you what I
believe.
We are not going to design a system that depends on the
foresight and wisdom of officials sitting in Washington in
those agencies to come in and preempt--act preemptively to
diffuse all future sources of risk and crises. We hope that
will happen in the future. Maybe it will happen, but that is
not the premise on which we are reforming the system.
What we are doing is to make sure there are clear, public,
enforceable constraints on the types of risks that can imperil
a system through constraints on leverage and capital and
liquidity. We think that is the most realistic way to make sure
that the system runs with much greater cushions against future
sources of loss, shocks, uncertainty, stress. We will not know
where those are going to come from.
And I agree very much with the premise of both your
questions that if we design the system to work only if
regulators are perfectly wise and brave and preemptive, then we
will be consigned to a fate of future crises like this, and
that is not the reforms we are supporting. And I agree with
your skepticism about that approach.
Dr. Troske. One more. I guess ultimately if the Government
is faced with another crisis in which several institutions are
failing simultaneously, is there anything that will prevent
them from enacting a TARP II in the situation in which there is
a Bear Stearns and an AIG and a Lehman, and everybody is
failing at approximately the same time? Nothing that I have
seen would change anything from what happened in the past.
Secretary Geithner. Excellent question. That was the system
we had, and that is what put the Government of the United
States in the outrageous position of having no choices but to
come in and commit an extraordinary amount of resources to put
out that financial fire. That was the necessary, unavoidable
situation, given the system we had.
But the reforms that are on the verge of enactment here
really do help fix that problem because again, apart from the
crisis prevention authority that they give the Government,
which the Government did not have--it did not have the ability
to constrain risk-taking across vast swaths of the American
financial system because they did not call themselves banks,
and we let them operate like banks. It fixes that problem, but
it also--and this is very important--makes sure that if, in the
end, an individual firm gets itself in the mess like so many
did in this crisis, we will be able to let them fail, ensure
they fail, dismember them safely, wind them down, not to give
them the chance to survive again, operate again, but to put
them out of their misery without the taxpayer being forced to
absorb these losses or the businesses and families across the
country left with all the collateral damage of their basic
mistakes.
These are not great metaphors. But what you want in a
crisis is you want to have the ability to step in. There is
fire in a firm or a set of firms because they were imprudent.
You want to be able to ensure you can draw a line around that
fire, prevent the fire from jumping the fire break and
infecting and imperiling the stability of the rest of the
system. And that is what this reform does.
Chair Warren. Mr. Secretary.
Secretary Geithner. Thank you.
Chair Warren. Thank you.
Superintendent Neiman.
Mr. Neiman. Thank you.
Mr. Secretary, I would like to start off with the HAMP
program and foreclosure prevention. In the Treasury report
issued just yesterday, trial modification cancelations nearly
tripled from March to May. The number of families that have
received permanent modifications under HAMP at 350,000 is now
surpassed by the number that have been pushed out of the
program, almost 430,000. It is deeply troubling that the
homeowners who relied on and trusted this Government program
may be left out in the cold. From the report, of those who were
dropped out--the 150,000 in May alone--over 70 percent of those
individuals have been making timely payments for 6 months or
more.
First, we need to really understand why these hundreds of
thousands of modifications were canceled. And while the report
issued yesterday cites several reasons, can you share with us
the primary reason that people were dropped out and what
assurances can we give them that they were appropriately
considered?
Secretary Geithner. The overwhelming reason is they were
unable to prove income and therefore unable to demonstrate that
they were eligible for the program. We made a conscious choice
last summer in putting this program in place, which is that we
would do everything we could to maximize the number of families
who were potentially eligible for this program to get immediate
cash flow assistance. Because of that strategy, we had roughly,
at the peak, 1.2 million Americans benefit from temporary loan
modifications that, as you know, substantially reduced their
monthly payments. But we let them do that on stated income,
knowing that we would have to go back and be able to
demonstrate that they were truly eligible for that.
Now, that inevitably put us in the position where we are
today, which is that by erring on the side of speed, we put
ourselves in the position where we were inevitably vulnerable
to the possibility that many of those homeowners who thought
they were eligible, said they were eligible, were unable to
prove income. Therefore, we are in a position today where we
are, as you said, canceling some of those modifications.
Now, more than two-thirds, I think, of those people who, as
you said, are in that category of canceled modifications are
benefitting from other modification programs that their banks
offer that we are not supporting. So that helps temper a little
bit the consequences of not being eligible for this program.
But again, we have a careful balance to strike, which is to
make sure that we are devoting these scarce resources to people
that are able to prove they are eligible for the benefit.
Mr. Neiman. So what kind of verifiability, audit compliance
can we provide to document this? We hear anecdotal information
about documents being lost, and servicer error in verifying
income and processing other documentation. How can we assure
and provide that level of comfort that servicers are acting
properly?
Secretary Geithner. I think it is very important to say
that servicers have done a terrible job of making sure that
they are doing everything they can to meet the needs of their
customers who are facing the possibility of losing their home
and the most important part of their financial security. They
still have some distance to go to try to make up for that
series of basic--how should I say it--mistakes, inadequacies in
performance.
So what we have tried to do is simplify and reduce the
documentation burdens. And we have put enormous pressure on
servicers by putting out very detailed public metrics of
performance so that people can judge for themselves who is
doing a good job on the service side of meeting the needs of
their customers and who is lagging behind in that case, and we
will continue to put as much pressure as we can on them to
improve the quality of service they are giving their customers.
Mr. Neiman. Now, you made reference to the fact that a
majority of those who have dropped out of the program--whose
trial modifications were canceled--were offered non-HAMP
modifications, these proprietary modifications by the servicer.
But is it not true that the true test will be whether the
borrower is better off? Until we see the statistics on those
non-HAMP modifications to--see if there has been an increase in
the cost or the monthly payment--will we know whether those are
truly sustainable?
Secretary Geithner. I completely agree with you, and that
is a very hard thing to measure, but I completely agree with
you.
I think I would say the following. Unlike the situation two
years ago before the Government put out this basic standard for
modifications, most of the private modifications out there did
not meet that test. They left the borrower with as much debt,
if not more debt than they had coming in.
But since then--again, the general impression I have is
that the Government standard has improved and raised the
standard of those private mod programs, and that helps, a
little bit, mitigate that risk. But you are right about the
basic----
Mr. Neiman. Do you expect that the public will be seeing
any data? Has the Treasury been requesting, even if on a
voluntary basis, some of the key elements of those non-HAMP
modifications?
Secretary Geithner. We are continuing to look for ways to
do that and would be happy to try to be responsive about
explaining what we think is achievable in that area.
Mr. Neiman. You know, another surprise that we keep hearing
from borrowers who are now being presented who have been
dropped from the program is that they are responsible now in
some cases for lump sum payments for the discounted amount of
principal and interest that was foregone during that trial
modification. And even some borrowers are being assessed late
payments for the six, seven, or eight months they were in the
program.
Secretary Geithner. Well, as I said, I do not believe that
any of the banks that are at the center of this problem are
doing an adequate job now of making up for the mistakes they
made and helping their customers get through this problem. And
we are going to continue to, as I said, put enormous pressure
on them to try to make sure they are doing a better job day by
day in meeting those basic obligations to their customers.
Mr. Neiman. One provision that I think would be extremely
helpful--I have been calling for this for a while--is the
creation of a homeowners advocate within the Treasury. Senator
Franken has proposed an amendment that has passed the Senate,
and I would hope with the Administration's support, we would
see a provision like that and seek your support that it would
be adopted.
Secretary Geithner. I am happy to consider that.
We are fortunate to have some very talented people who know
a lot about housing involved in essentially designing these
programs. We do so alongside the excellent people at HUD led by
Shaun Donovan, and we have a series of hotlines, appeal process
to try to--again, we are moving in that direction. But I would
be happy to consider that.
Mr. Neiman. Having an appeal process that people know they
can reach out to Treasury would be a critically important part
in my opinion.
Thank you very much.
Chair Warren. Thank you.
So, Mr. Secretary, I want to go back to this question about
stable, functional financial systems. We talked about the small
banks, the 3,000 out of 8,000 that have these potentially
dangerous concentrations in commercial real estate.
I want to look at the top end. Six of the 19 stress-tested
banks hold commercial real estate loans that exceed 100 percent
of their tier one capital. As you know, the stress tests that
were performed in February of 2009 calculated possible losses
only through December of 2010, but the commercial real estate
losses, because of the way they are set up, are likely to be
much larger in 2011, 2012, and on into 2013.
How can you be confident about the stability of these
financial institutions without re-running the stress tests to
account for the coming troubles in commercial real estate
lending?
Secretary Geithner. As I said, these loans and losses and
assets are going to be an ongoing source of challenge to these
institutions, absolutely. But I think overall it is fair to
say, although this is really a question for the supervisors,
that actual losses on the books of the institutions that were
subject to the stress test are coming in significantly under
those estimates on average overall. And that is really the
ultimate test of this stuff.
We are able to say today--but again, this is a question we
look at all the time on an ongoing basis--that based on what we
have seen so far, the losses are doing better than projected
and therefore the capital positions of these institutions are
even better than we thought we were achieving at the time of
the stress test.
Chair Warren. But at the time of the stress tests, we only
accounted for losses through 2010, and we know that the losses
on commercial real estate, because they were on five-year
resets unlike the subprime residential mortgages, are coming up
for major resets in 2011, 2012, and 2013. That is outside the
range of the original stress test.
So I am glad that you think the numbers look better that
you had anticipated for 2010----
Secretary Geithner. I would say even projected losses----
Chair Warren. Does this mean you are running a mini-stress
test?
Secretary Geithner. Well, again, what our supervisors have
done--and they did this, again, on a plan that we designed--is
they have put in place a much higher level of disclosure on the
exposures the U.S. banking system retains, subjected them to
much more rigorous estimates of potential losses in an extreme
scenario than was true for any of the countries that went into
this crisis. And you are seeing now countries move to adopt
that basic framework. And the virtue of this approach was we
pushed a lot more capital into the financial system at an early
stage. And again, the best way to measure this is to look at
how the market is judging the adequacy of capital levels here
relative to potential risks. I think that, again, relative to
expectations, is better than we would have expected. There is
still a lot of challenge ahead though.
Chair Warren. I have a feeling I am going to hear the same
answer, but let me just try it again with second liens. Big
banks are still carrying second liens on their books at
inflated values. Many analysts believe there should be a large
portion of these loans should be written off.
As of March 31st, 2010, the four largest banks held $444
billion in second mortgages and had total tier one capital of
only $505 billion.
Do you have any concerns about what this means? Now we are
doing commercial real estate. Now we are moving on to second
mortgages?
Secretary Geithner. Well, of course, banks have on their
balance sheet still--even though they have produced assets to
some extent, they still have a lot of exposure to the
challenges ahead facing the American economy. The question is
how much capital are they holding against those potential
losses?
Again, in the judgment of our supervisors--and I think you
can see this judgment validated by the financial markets today,
although as many of you pointed out, they are an imperfect
measure of risk and loss. The general sense is that projected
losses are less than they were expected, and therefore more
capital is now held against those losses than we thought would
be the case back a year ago, and that is a good thing.
Now, of course----
Chair Warren. Let me try one more. Fannie and Freddie are
pushing mortgages back to these large financial institutions
because they say that the mortgages that were sold to Fannie
and Freddie were not of the quality that they was represented,
that there are some serious problems with them. Fannie does not
disclose the requested buy-backs, but Freddie alone requested
another $5 billion in buy-backs at the end of March.
So the first question is, does Treasury have a good
estimate of what the total exposure is to our large financial
institutions from the requests from Fannie and Freddie to buy
back bad mortgages?
Secretary Geithner. I do not know the potential scale of
that again, but I think it is very unlikely to change this
basic judgment that our supervisors have that the major banks
of the country now hold a level of capital against potential
risks that puts them in a much stronger position than we
expected even a year ago when we included this process. And
that goes to each of the things you pointed out, each of the
sources of potential loss still ahead.
Now, again, this is an uncertain world still. We want to be
very conservative in making these assessments, as we were a
year ago. And our supervisors will--and this is a great
strength of our system--they continue on a regular basis--one
of you say in your opening remarks that we do not contemplate
stress on an ongoing basis, but that is absolutely not the
case. A centerpiece of the basic reform design that we
contemplate--and again, I hope this will be a global standard--
is to say regularly--regular, quarterly--difficult,
challenging, forward-looking assessments of potential losses at
least for the major banks that dominate our financial systems.
Chair Warren. So are you saying that those are ongoing now
or they will be ongoing if regulatory reform passes?
Secretary Geithner. Both.
Chair Warren. Thank you, Mr. Secretary.
Mr. McWatters.
Mr. McWatters. Thank you.
Mr. Secretary, earlier you said there would be no new TARP
programs, but with respect to existing TARP----
Secretary Geithner. I said right now, we do not contemplate
putting in place new programs or adding resources beyond the
amounts we initially identified.
Mr. McWatters. Okay. So that means there will be no more
money going to AIG or GMAC.
Secretary Geithner. Again, I will answer your question
again. We do not anticipate at this stage putting more money
into those existing programs or into those institutions beyond
the levels that are out there that are subject to public
knowledge now.
Mr. McWatters. And the same would apply for Chrysler and
GM.
Secretary Geithner. Yes. Again, let me tell you--let us do
the other side of your question. We are now on a path to exit
from those companies much more quickly at a much lower estimate
of losses than any of us anticipated. We are starting that
process. AIG--we are bringing down the risks very dramatically,
we already have sold successfully significant parts of that
company. We are going to continue to move as aggressively as we
can to get the Government out of those investments, which we
only took, of course, under extreme duress extremely
reluctantly. We are making the same basic strategy in GM and
Chrysler. Again, those are commitments we inherited. We are
trying to reduce them as quickly as we can at as low a risk of
loss to the taxpayers as we can.
Mr. McWatters. If there was a double-dip recession and
Goldman and Citi and Bank of America and the usual group of
``too big to fail'' institutions came to your office and said
we are experiencing a liquidity crisis, would you advance them
money under TARP until October 3rd?
Secretary Geithner. I do not ever answer those kind of
questions just because they are sort of unanswerable, but if
financial reform is in place, then we will have the benefit of
a very well designed quasi-bankruptcy process and a set of
emergency measures to contain the risk of a panic that we did
not have in place in the fall of 2008. And that would give us
better choices at that stage.
Mr. McWatters. So assuming those are not in place and we
have the last quarter of 2008 again----
Secretary Geithner. You are talking about in the 12 weeks
remaining----
Mr. McWatters. Yes.
Secretary Geithner [continuing]. Of this program?
Mr. McWatters. Yes.
Secretary Geithner. Well, again, our job and my
responsibility is to make sure we are safeguarding the basic
strength of the American financial system, but again, our
system, because of the actions we took, is in a much stronger
position still to manage through these challenges ahead than
any of us expected, and I think that is a remarkable thing and
a very important thing. And we are going to do everything we
can to safeguard that.
Mr. McWatters. Okay. Let us say financial reform is in
place. The same people come to you and say, you know, there is
a systemic regulator. The systemic regulator was supposed to
look into a crystal ball and see stuff and----
Secretary Geithner. Mr. McWatters, that is not what this
reform does. And as I said--I will say it again--we are not
designing a financial reform program that rests on the ability
of supervisors to look into some early warning system and have
perfect foresight and judgment and be able to come in and
preemptively--we are not designing a system that requires that.
We will do our best at that, but we have fundamentally
different strategies to say that we are going to force the
system to run with less leverage, less risk of funding, less
exposure to catastrophic risk than was true before. And that is
the best protection we have against systemic financial crises.
Mr. McWatters. Yes, but the problem with that is that AIG
was not a mystery to people. Most people on Wall Street
understood that AIG was writing trillions of dollars of credit
default swaps. Most people understood that AIG was purchasing
billions of dollars of residential mortgage-backed securities.
The problem was, even though people recognized it, they did not
recognize it as a risk. They did not look at that as risky
behavior.
Secretary Geithner. I do not agree with that. I think this
crisis is littered with examples of people failing to foresee
risks that end up causing catastrophic damage.
The AIG failure is just a different--and it is a more
simple failure. There was nobody responsible with the authority
and the capacity to constrain risk-taking by that institution.
There were, as you said, tens and tens of regulators across the
United States and across the country, but none of them were
responsible for constraining the risks that AIG as a group took
on, and that was an avoidable mistake, easy to avoid frankly.
Mr. McWatters. Yes. AIG had 400 regulators throughout the
world.
Secretary Geithner. A remarkable thing.
Mr. McWatters. But, I mean, you are saying if there is one
more--there is a systemic regulator----
Secretary Geithner. You said something else in your remarks
that is not quite not right. We are not adding new regulators.
We are actually reducing the number of regulators in our
system. All we are doing, frankly, is making sure that the
people whose job it is to manage financial stability for the
country have the authority to constrain risk-taking where those
risks could cause catastrophic damage. That did not exist
before this crisis. It is why we had the crisis, and that is
not something we are prepared to live with in the future.
And AIG is the perfect example but it is not the only
example because you can look at Lehman or Bear Stearns or
Merrill Lynch or a whole raft of non-bank financial companies
who were taking substantial risks. The tragic feature of our
system was nobody had the tools and responsibility for
constraining those risks ahead of time. And when they messed
up, we did not have the tools or the choices to be able to let
those failures happen without catastrophic damage.
Mr. McWatters. But that assumes you know what the risks
are----
Secretary Geithner. No, no.
Mr. McWatters [continuing]. That you can look into the
future.
Secretary Geithner. Again, the great virtue of capital-
constraining leverage is to recognize the fact that we live in
an inherently uncertain world. No one will know with confidence
what the risk is or probability is of potential losses
associated with some future recession. You do not know that.
The only thing you can do--and this is a fundamentally
conservative instinct--is to force these institutions to run
with less risk against the unlikely but possible risk of
another great recession. And that is an effective tool of
constraining risks. Firms that run with less leverage in a
crisis do much better than those that run with more leverage.
That is an achievable object of reform.
Mr. McWatters. If you define a risk appropriately, and you
enforce the rules appropriately, that is the only way.
Secretary Geithner. Well, again, we think the basic lesson
of this crisis is simple, an objectively measurable set of
basic constraints on leverage. Banks should fund more
conservatively. They should not be exposed to the possibility
that overnight people would withdraw tens of billions of
exposure and leave them with the choice of liquidating or doing
massive liquidation and deleveraging that can put huge pressure
on the rest of the system.
So I mean, you should judge these things by the
alternative. I am not aware of any credible argument that there
is a more effective basic tool than constraints on leverage
through capital requirements and liquidity funding as a
safeguard. Now, they will not prevent all firms from failing,
and we are going to run a system where firms can still fail.
That is an important part. It helps improve market discipline.
But I do not know of any credible alternative and no other
fundamental feature of financial oversight that does not begin
with well designed, measurable, simple constraints on leverage.
They will not prevent all crises. They will not prevent
countries from taking too much risk, but they will protect the
system from the kind of damage we saw in this crisis.
Mr. McWatters. Okay, thank you. My time is up.
I will just close by saying I am not sure, with 400
regulators with volumes of regulations, that adding a few more
regulations or another regulator is necessarily going to solve
a problem which will come in the future from creative
investment bankers and an investment community that will derive
new types of instruments that, for example, 10 or 15 years ago
we did not see. So I will leave it at that.
Secretary Geithner. But, Chair Warren, let me just say
maybe we agree more than you think.
But again, the feature of our system was not that AIG was
crawling with supervisors with the authority to constrain their
risk-taking. That was absent not present in our system. Now,
you are right. If it was present, then you are right. Then
changing the deck chairs in the supervisory community would not
be an effective response and we are not going to do that. That
is not our proposal. It is a much more simple prescription
which is to say institutions that take risk to play this
important role of fundamentally banking in our system need to
be subject to conservative constraints on leverage and risk-
taking. AIG was not. We will make sure it is.
Chair Warren. Thank you, Mr. Secretary.
Mr. Silvers.
Mr. Silvers. Well, I cannot resist continuing this line of
discussion.
Let me observe first, Mr. Secretary, that I think that your
fundamental observations about this set of questions are
absolutely correct. Our report on AIG showed two fundamental
things. One was that the lines of business that led to the
collapse of AIG were those that were unregulated despite the
presence of the 400 regulators. The 400 regulator number is, in
fact, just an indication of the fact that AIG was a global
insurance company and there are insurance regulators in every
country they operate in.
The second thing that I think our report showed was that
although I think that we as a panel may disagree with you, Mr.
Secretary, about some aspects of what you did with the choices
you had, it is very clear that the choice you did not have in
your former role at the Federal Reserve Bank in New York--your
predecessor at the Treasury, the Fed Board of Governors--the
choice you did not have was to access a resolution authority
that would have enabled you to pick and choose what to do with
different creditors in a systemic crisis.
So I just want to observe that I think your analysis of
those two matters is spot on.
Now, I want to take it a little further from there, though.
We learned as a panel--and it is reflected in our report on
AIG--how powerful certain aspects of AIG's structure as a
holding company, what a powerful force they exert on the
choices available during the crisis, in particular, the way in
which the unregulated, unguaranteed subsidiaries were tied to
the regulated guaranteed subsidiaries of AIG. That is, the
derivatives arm and the insurance companies were tied together
by credit rating considerations and by interlocking default
terms in the various credit agreements in that big, complicated
firm.
That seems to me to be a powerful argument for making sure
that in the future financial firms that have government
guarantees behind them, insured deposits, insurance companies
are not so tied up with very risky lines of business,
derivatives, proprietary trading, hedge funds and the like, and
thus is a powerful argument for two items currently being
debated in the financial reform bill.
The first is the Volcker Rule, the notion that we ought to
basically say bank holding companies cannot do proprietary
trading, cannot invest in hedge funds, cannot invest in private
equity firms because it gives rise to this kind of problem.
The second is section 716, the section that essentially
requires that derivative dealers not be within bank holding
companies or, as some have proposed, that they at least be a
separate entity within bank holding companies.
In the spirit of that analysis, I would like you to explain
what the Treasury Department's view is on those two issues
today.
Secretary Geithner. Excellent question. And as you know,
the members of the Commerce Committee and the chairmen
involved, including Chair Lincoln and Chairman Dodd, are
carefully going through those provisions to try to figure out
how to make sure we come to an appropriate balance. I am very
confident, on the basis of our conversation with them, that
they are going to come to the right place in this stuff. I
think I would just highlight the following key objectives that
are guiding our approach to this stuff.
One, as you said, we want to make sure that institutions
that own banks are not able to take risks, like through
proprietary trading or in derivatives, if they use derivatives
for proprietary trading, that could either imperil the
stability of the bank or allow the firm to benefit from the
access to the safety net that banks enjoy as a privilege and
extend that benefit to those activities that we do not believe
are central to the functions of banking.
On the other hand, it is very important to point out that
the basic business of banking requires banks having the ability
to hedge risks, and a central part of banking is helping their
customers hedge their risks, whatever those are. And we want to
make sure that the bill ultimately preserves that ability for
banks to hedge the risks they take on as banks and are able to
help meet the needs of their customers in hedging their risks.
As I said, I am very confident we are going to come to a
good balance on these provisions, and this bill will do an
exceptionally important thing of bringing comprehensive
oversight and restraint to derivatives markets that still have
enormous benefits to the economy as a whole but, as we saw in
this crisis, present enormous risks and would still present
enormous risks if we were unable to enact these reforms.
Mr. Silvers. Mr. Secretary, there are press reports that
efforts are being made with respect to both measures I
indicated to essentially weaken them through ``de minimis''
exceptions. And you spoke for a moment about that issue in the
area of section 716 in derivatives.
Can you speak to the question of whether banks will be
allowed, in the guise of a de minimis rule, to put meaningful
amounts of capital into sponsored hedge funds and private
equity funds.
Secretary Geithner. For reasons you will understand, just
out of deference to the legislative process, I am not going to
comment on the details of those provisions.
Mr. Silvers. Oh, no. I am talking about Treasury's view,
not on what the members of the committee will do.
Secretary Geithner. Still, I think we need to let this
process work, and the members of the committee are doing a very
difficult--they are facing a very difficult job still trying to
find a set of measures that will command broad support. But
again, I am very confident this bill will do the necessary
thing of making sure that we are constraining risk-taking by
these institutions, bringing derivatives markets under
comprehensive oversight, and establishing the type of quasi-
bankruptcy process for institutions that are so important.
Mr. Silvers. I would just observe--and my time has expired,
but I would just observe that when you are talking about
leveraged investments under a bank logo, that a de minimis
exception could very easily blow up a capital structure and
that it would seem to me that the lesson of our AIG report is
do not allow that.
Secretary Geithner. We are not going to support an outcome
that would create that risk, and we are also--could I just
elaborate on this for one second? We also do not want to
support an outcome that will recreate the basic balance of
risk-taking we saw in this system where people put a bunch of
risks in separate affiliates with no capacity to constrain
those risks, and that was not a good outcome for the system.
Chair Warren. Dr. Troske.
Dr. Troske. I would like to talk a little bit about the CPP
program and the use of that program for the small, or the non-
stress-tested banks. I guess I would like to hear sort of your
rationale for why liquidity was invested in this part of the
banking system, why this program was--what the goals were from
this program.
Secretary Geithner. Sorry. For the?
Dr. Troske. The use of these funds for the small, the non-
stress-tested banks.
Secretary Geithner. Excellent question. Two simple reasons.
The first of these just guided everything we did in the crisis.
Again, the central rationale for the Government's emergency
actions were to make sure that credit, which did not exist at
that time, was going to be open again to American businesses
and families because without that, there would be no recovery,
no growth, no job creation.
So for that reason, small banks, as you know, get about
half of their credit from--small businesses get about half
their credit from small banks. For that reason, we thought it
made sense and it would seem fair to make sure that they had
the same access to the capital programs that were initially put
in place to stabilize the system. So for the reason of fairness
and for the pragmatic reason that they play an important role
in the provision of credit to businesses, we thought it was
important to make sure they had the same access to these
programs as did the major Wall Street institutions.
Dr. Troske. So staying with the smaller parts of the
banking sector, our understanding--well, I did not work on the
report but I did read the panel's May report. It seems like
many of these banks suffered some significant stigma associated
with taking these funds. Large banks also seem to suffer from
perhaps rules that they did not know that they were going to
face going into the program, the rules regarding the payment of
dividends and the payment of their executives, leading them to
scramble rather quickly to get out of the program. And clearly
this was an effort to inject liquidity into the system,
something that is important to be able to do in a financial
crisis.
Looking forward, if we ever have another financial crisis,
have these programs impaired our ability to inject liquidity
into the system given the reluctance of many of these banks
to--the seeming reluctance of many of these banks to
participate under this current program?
Secretary Geithner. I hope so in the sense that, again, the
central challenge you face in designing reforms over the
financial system is to reduce expectations that the Government
will be there to protect you from your mistakes in the future.
And that is why these reform bills are so important because
they give us the tools to definitively alter those
expectations, and that is very important because of the things
that we had to do in the crisis to put out the financial fire.
Dr. Troske. I guess I would make a distinction between
injecting liquidity into the system and providing support for
failing institutions. They are very different roles, as you are
well aware. So I think it is important to maintain the ability
to inject liquidity into the system because I view the support
that was given to small banks as more of an injection of
liquidity since presumably, as you indicated already, they were
healthy banks. They were not failing institutions.
Secretary Geithner. I, of course, completely agree with you
that a necessary part of the arsenal tools you need in a
financial crisis is to make sure that institutions that are
solvent can fund themselves. Without that, nothing is possible
and the system will come crashing down, as our system almost
did. Back in September 2008, we were on the verge of a classic
run on a banking system, something we had not seen since the
Great Depression. So for that reason, I completely agree with
you that a central part of the arsenal of response is to make
sure that governments have the ability to meet the funding
needs of solvent institutions.
But, again, in doing that, preserving that flexibility, you
will also have to make sure that people do not make judgments
about how much they lend to institutions, how much risk they
take on the expectation the Government will be there again if
they were mistaken or imprudent in their judgments. And that is
the classic vital challenge of reform.
Dr. Troske. Let me change gears just a little bit and turn
to the housing market, which has been mentioned a couple times
before.
For almost 30 years, between 1965 and 1995, the rate of
home ownership in this country was stable at 65 percent.
Starting in 1995, it grew quite dramatically through actions of
a variety of different people to about 69 percent.
My own view of the housing market is, one, we are not going
to return to stability until we return to a rate in which 65
percent of households own their own homes. We are currently
somewhere between 68 and 67 percent.
Many of the programs that have been enacted seem to sort of
simply extend this process through which we get back to a rate
of home ownership that is more sustainable. Would a better
program not be one which was designed to move people into a
more appropriate housing situation as opposed to keeping them
in one that is just not sustainable over the long run?
Secretary Geithner. I think you are describing exactly the
objectives that have shaped this program, which is why it is
subject to so much criticism from people who had hoped that the
program would be designed to keep a much larger fraction of
Americans in their homes. Our program was designed exactly as
you said, to make sure that those Americans--and there are
many--who have a realistic prospect of staying in their home,
who can afford to stay in their home in that context, have the
option and the chance to do that. But this program was not
designed to prevent foreclosures. It was not designed to
sustain home ownership at a level that would be unachievable
and imprudent to try and do. There is no perfect way to strike
that balance, but we have tried to do something that is very
close to the test you laid out.
Dr. Troske. Thank you.
Chair Warren. Superintendent Neiman.
Mr. Neiman. Mr. Secretary, I would like to come back to
your recent remarks about community and regional banks as a key
source of credit for small businesses, because much of the
public focus and our prior COP reports have been on the largest
TARP recipients that were part of the stress tests. Our July
report that we are working on at this very moment will provide
a unique kind of window into the performance and health of the
hundreds of banks participating in the program and to attempt
to assess the effectiveness of the TARP program for those banks
below the top 19.
So to help us to focus on that--and before assessing
Treasury's effectiveness--we need to understand the clear
goals. I think you just referenced two: one, fairness and
providing small banks with the same access to capital as the
larger banks and two, lending.
Do you want to expand upon that or are those the two
critical issues? Was the focus on lending? Was the focus on the
health of the community banks together, maybe as too many to
fail as opposed to too large to fail?
Secretary Geithner. Basic objectives of our strategy again
are to make sure we are safeguarding the financial security of
Americans and that we have a financial system that is able to
meet the credit needs of Main Street America. So everything we
did was shaped by those two basic objectives.
Now, because as you said, you know, we are a Nation of
9,000 banks, not 12 banks, not 25 banks, 9,000 banks and most
small businesses get most of their credit from small banks.
Mr. Neiman. And as I recall I think we had only about 700
community banks participating in that program.
Secretary Geithner. Exactly. Right now we have roughly $11
billion of investments remaining in banks that are below $10
billion in assets. Somewhat less than 600 banks meet that test.
Again, we did that for the simple reason of fairness. We
thought they should have the same access to this set of
investments that we gave the major institutions, and we did it
because we thought it would be important to try to make sure
that their business customers and individual customers had a
better chance of getting through this with access to credit on
affordable terms. It is a simple, pragmatic rationale. But as
you said, it is still a challenge for many of those banks and
therefore for many of their business customers.
Mr. Neiman. What would be your assessment of the program in
meeting those goals and particularly how those banks utilized
that capital?
Secretary Geithner. The available evidence on how they use
the capital is quite favorable. Just to give you one basic
measure, if you compare small banks that took TARP capital
against those that did not, the former category increased
lending at about twice the rate of banks that did not take TARP
capital. That is a pretty good, simple measure. We are happy to
share with you all the details of that assessment.
And of course, for many banks, access to TARP capital meant
they did not have to reduce lending to meet their capital
requirements. So you have that test again.
Again, the best test is what has happened to the cost of
credit, but it is still hard to get. But I think that it has
been available.
Now, having said that, fundamentally this program did not
meet our objectives because, as many of you have pointed out,
because of concern about the conditions that might come in the
future, because of concern about the stigma of the appearance
that you participated in these programs out of weakness and not
out of strength. We had banks by the hundreds I think pull back
their applications from the Treasury and from their primary
regulator for capital because they did not want to be subjected
to either the stigma or to the fear of conditions, which is why
we have legislation now pending before the Congress--it has
been pending now for six months--to build outside of TARP and
outside of those risks a very carefully designed set of
programs at the State level and the federal level to help small
banks get through this.
Mr. Neiman. And your level of confidence that that program
will overcome the TARP stigma and attract demand?
Secretary Geithner. Very high. But, again, you have to
judge it relative to the alternative. We looked at a whole
range of alternatives. This seemed to offer the best prospects
of breaking that set of constraints.
Mr. Neiman. We have a program in New York that you may well
remember from your days at the Fed, the New York Business
Development Corporation. It is comprised of member banks which
not only provide equity but wholesale funding and it acts as a
lending consortium for loans to small businesses, and it makes
loans that were marginal credits that the individual funding
banks may not have made. So we have raised this on a number of
occasions and would offer it to you as a suggestion maybe for
consideration at the national level because of not only taking
second looks at loans passed up by member banks but also
spreading risk and providing expertise in a particular business
lending. I do not think it is clear under the SBLF that the
banks could utilize this capital to leverage investments or
lending to bank consortiums.
Secretary Geithner. Well, I actually think we have this
thing we call the State option that exists in this draft
legislation alongside the small business lending facility, and
that option is designed to provide support for exactly those
types of programs. There is a great diversity of those programs
across the country with a long history people can look at to
figure out what makes the most sense. Again, the virtue of the
way we designed this is you have a new Federal program designed
so that if you increase lending, the rate of dividends you pay
the Treasury goes down. That is a pretty good incentive for
using it to increase lending, but also we are providing a
significant amount of assistance to States across the country
that have those programs so that we are, in a sense, financing
a greater diversity of programs as well.
Mr. Neiman. Great. Thank you.
Chair Warren. Thank you.
I was surprised by your answer to Dr. Troske about the
metric for success on the home mortgage foreclosure program. So
I had not intended to ask you about this, but I want to go
back. I pulled out some numbers and looked at this.
Over the 15 months that the program has been in effect,
there have been 347,000 so-called permanent modifications.
Fitch now has come out with an analysis that says about two-
thirds of those are going to fail. So that means that over 15
months, at least by their estimate--and correct me if you think
you have a better estimate--but over 15 months, the HAMP
program may save 120,000, that is, permanent modifications,
people who do not slip and lose again. That is against about
186,000 every month that are newly posted defaults and
foreclosures.
So now I am caught in the question of what is your metric
for success here.
Secretary Geithner. Let us step back for just one second
and look at the basic strategy that the President put in place
alongside the Fed.
First, we acted to bring down mortgage interest rates. That
was very important to put some floor under house prices, and we
acted to make it more likely and more possible that millions of
Americans would be able to refinance their homes to take
advantage of lower interest rates.
Chair Warren. Mr. Secretary, I am familiar with all that
you think you have done to support housing overall.
Secretary Geithner. Right. But the----
Chair Warren. The question is HAMP is designed to deal with
families facing foreclosure. More than a million families this
year will lose their homes to foreclosure. The best estimates
are that will happen next year and the year after. We are
talking about literally millions of families who will lose
their homes to foreclosure. HAMP is it, by and large, for them.
Secretary Geithner. No. Well, again, what HAMP does and
what HAMP is designed to do--it was not designed to prevent all
foreclosures. It could not be designed to do that.
Chair Warren. I understand that. So my question is what is
the metric for success?
Secretary Geithner. What HAMP is designed to try to do is
to make sure that a set of people facing the risk of
foreclosure have the chance of being able to afford the
challenges of staying in their home.
Again, on the numbers, more than 1.5 million were offered
trial modifications. 1.2 million received trial modifications.
As you said, only part of those are being converted to
permanent, but a substantial fraction of those that are not are
being able to take advantage of other loan modification
programs and therefore have a chance to stay in their homes.
Chair Warren. Well, as Superintendent Neiman said--and we
will find out what the consequences of that are, whether they
are good or bad--we know that the early modification programs
actually got people into more trouble, raised their overall
payments, had them owing more principal than they had started
out with. This is HAMP. You set aside $50 billion and what do
you have to show for it?
Secretary Geithner. Well, again, what we have is 1.2
million Americans who got an average of a $500 reduction in
their monthly payments at an early stage in this crisis that
was critical and therefore a chance to keep their homes. That
was enormously effective.
Chair Warren. And passed up other opportunities they might
have had to deal with their home--they might have fought their
foreclosures. The point is they ultimately lost their homes.
Secretary Geithner. No, no.
Chair Warren. What is the metric for success here? Is it
120,000 families saved over 15 months at a time when 186,000
are posted for new defaults and foreclosures every month? Is
that a successful program? How do we decide when the program is
working?
Secretary Geithner. You look at its results family by
family, foreclosure by foreclosure, change in monthly payments
by change in monthly payments, but recognizing that--and on
this, I think we agree--these programs were not designed and
could not have been designed responsibly to try to prevent a
set of foreclosures that tragically were probably unavoidable--
--
Chair Warren. Then help me with a metric. The question I
want to understand, are you telling me that preventing one
foreclosure would have been enough for our $50 billion?
Secretary Geithner. No, no. I am just----
Chair Warren [continuing]. No. So what is an appropriate
metric? Did you have an estimate when you started this of how
many families you could save?
Secretary Geithner. Our challenge is we have tried to reach
as large a fraction of eligible homeowners as we could, and we
are still working toward that objective. And again, the virtue
of the approach we have laid out is we have given everyone
detailed numbers that they can look at not just on----
Chair Warren. Forgive me, Mr. Secretary, but you say we
designed the program from the beginning, in effect, you are
saying, not to save everyone. I understand that point. But you
designed it around servicers. You designed it around servicers
who--I wrote it down when you said it. Servicers have done a
terrible job. You designed it around voluntary participation,
relying on these servicers.
We only have three months left with hundreds of thousands
of families facing foreclosure. Is it time to rethink whether
or not a mortgage foreclosure prevention program that is based
on a group of servicers whom you describe as having done a
terrible job is a program that perhaps should be redesigned?
Secretary Geithner. As I said, these programs will outlast
the expiry of TARP. Because the way TARP was designed, we have
the ability to continue to execute these programs going
forward, and we will do that. And as you have seen, we have
added to the basic framework of the loan modification scheme a
series of additional programs, again, to help improve the odds
that we reach as many people as we can reasonably expect to
reach to meet at this point. We are going to keep working on
that.
And, Chair Warren, I will never stand before this body or
any other body and over-claim for what this program is
delivering. And, again, the reason why we have put out these
numbers is because you can see, therefore, where servicers are
getting better. You can see----
Chair Warren. We must stop, Secretary Geithner. I am
running over and it is not fair to my colleagues.
Mr. McWatters.
Mr. McWatters. Thank you.
Mr. Secretary, if you could turn back the clock to the last
quarter of 2008, what changes would you make to EESA and the
TARP legislation? What can we learn from your experience?
Secretary Geithner. I do not feel in a position today to
answer that question thoughtfully enough. Again, the best thing
I can tell you today is that the reforms we proposed, that
Congress is on the verge of enacting, would give us a much
stronger set of tools for preventing these crises from
happening and managing them with less cost to the taxpayer and
the economy in the future. And what we are focused on doing is
getting that passed and enacted and making sure it is followed
by a set of well-designed constraints on risk-taking so that we
can, again, tell the American people that we have a reasonable
chance of preventing this from happening again. And that is
what I am focused on at the moment.
On the details of how you design financial crisis rescue
programs, the basic framework in that reform bill is a very
strong framework, much better than what we had coming into this
crisis.
Mr. McWatters. Okay. By unanimous vote of the panel--it was
a 4-0 vote, completely bipartisan with the recusal of
Superintendent Neiman--two weeks ago, the panel adopted its
report on the bailout of AIG. Even though the report exceeds
300 pages, allow me to read five of the key conclusions reached
by the panel.
``The Government failed to exhaust all options before
initially committing $85 billion in taxpayer funds to the
bailout of AIG.
``The rescue of AIG distorted the marketplace by
transforming highly risky derivative bets into fully guaranteed
payment obligations.
``Throughout its rescue of AIG, the Government failed to
address perceived conflicts of interest.
``Number four, even at this late stage, it remains unclear
whether taxpayers will ever be repaid in full.
``Number five, the Government's rescue of AIG continues to
have a poisonous effect on the marketplace.''
I think it is only fair that you be permitted to respond.
Secretary Geithner. Well, I do not agree with those
conclusions except perhaps for the fourth which says, as I say
all the time, that the Government is still exposed to
substantial risk of loss in AIG.
But it is worth just making the following observations.
This mess that we were handed in the peak of the crisis
ultimately required, to stabilize the firm, commitments of, I
think if you add them up together, something in the range of
$180 billion. On the basis of the independent estimates of CBO
and others, the ultimate risk of loss now has come down
dramatically--it is still significant--but dramatically, a tiny
fraction of that ultimate exposure because we have been so
successful and careful in managing this process to lower the
risk of the taxpayer in this case. And we are going to be
continually focused on trying to make sure that we are bringing
down the risk, we are selling off these companies to maximize
the return and minimize the risk of loss. And we are working
very hard, as you know, to make sure that we have a set of
reforms in place and financial reforms that would prevent that
from happening again and give us better choices.
And I am very confident, based on the strength of the
provisions on derivatives, on risk-taking, on resolution
authority, the basic package of these protections, that we will
be in a position to both prevent and better manage mistakes
like that that AIG and its shareholders, its board of
directors, its executives made.
Mr. McWatters. On a slightly different, but I think related
note, when does the Administration plan to return Fannie and
Freddie to the private sector?
Secretary Geithner. I am not sure I would frame it quite
that way, but let me answer it this way.
We are deep into a process of examining what set of reforms
should replace the current system we have in the housing
finance market. Those will require fundamental changes to the
GSEs, but we are not going to stop there because, as you know,
the range of things that contributed to this mess went well
beyond the basic incentive problems, moral hazard problems that
pervaded the GSEs. I expect that after we pass this first wave
of financial reforms, that we will be able to turn quickly, as
will the banking committees, relevant committees in Congress,
to examine those sets of options. And I have said publicly that
we expect to recommend a set of broad reforms sometime early
next year, which means roughly six months from now.
Now, it is very important to point out that the losses that
we still face in these institutions are losses we inherited.
They are the product of the judgments made before the
Government stepped in. At our insistence, they have put in
place much more conservative underwriting standards. They are
charging more for their guarantees to remedy some of the
mistakes they made. They are bringing down risk in the rest of
the institution quite significantly. So the institutions today
are being run much more conservatively, as you would expect.
I think we are going to find--I hope we will find--quite
broad support in Congress, Republicans and Democrats, for
putting in place the kind of fundamental reforms that these
institutions and the housing market obviously needs.
Mr. McWatters. Thank you, Mr. Secretary. My time is up.
Chair Warren. Thank you.
Mr. Silvers.
Mr. Silvers. Mr. Secretary, I want to take you back for a
moment to your response to a question from my fellow panelist
who cited home ownership levels from 1965 to 1995 as something
we ought to be aspiring to. And you responded something to the
effect of that is exactly where we are trying to get to.
I want to give you the opportunity to modify that answer.
Secretary Geithner. To rephrase my response?
Mr. Silvers. Yes, because from 1965 to 1995, that flat
number reflected essentially the systematic denial of credit to
communities of color. That cannot be our goal to return to that
time.
I would also like to give you an opportunity to modify your
response in light of what has troubled me about our discussion
about housing throughout this morning, which is that the shift
to unemployment-driven foreclosures, which I think is evidenced
in your exchange with Superintendent Neiman, around the
question of people's ability to pay. It cannot be our policy
that we think that people who are the victims of long-term
unemployment should be thrown out of their homes. So I would
like you to----
Secretary Geithner. Excellent questions.
Mr. Silvers [continuing]. Give yourself some time to
clarify these matters.
Secretary Geithner. Excellent questions. And I agree with
the way you characterized that little history of evolution in
our financial system and how it met the broader needs of the
country.
What I want to say is this. Our policies are not designed
to sustain home ownership rates at a level that we think is not
sustainable. It should not be our objective, cannot be our
objective. And I think it is true that although there have been
huge gains from the broad evolution of our financial system in
meeting the needs of not just low-income and minority
communities, but more generally across this country, it played
a huge role in financing innovation among small businesses too.
We are going to do our best to preserve those gains but not
leave the country and our financial system and the economy
vulnerable to the excesses that we saw.
Of course, as you pointed out, those big gains in access to
credit that our system generated also came with huge
opportunities for predation and fraud and abuse. That happened
not because of the presence of regulation. It happened because
of the absence of regulation on a whole range of institutions
that were allowed to provide credit without basic protections.
One of the virtues of this reform bill is it protects that.
Now, we do not have a perfect judgment about what is a
sustainable rate of home ownership. What we do know is we had a
whole range of incentives across the American financial system
that were designed to encourage home ownership. And I think
those, probably on balance, went a little too far.
What I think is important to recognize in our broad housing
policies--and this will be true for our reforms to the GSEs and
the housing finance market--we are going to try to remedy some
of those problems in balance, try to preserve what is fair and
important in trying to make sure that Americans have access to
affordable housing programs, but not try to sustain or recreate
a level of investment in housing that was part of this basic
crisis.
Now, having said that, I have forgotten your second
question.
Mr. Silvers. Unemployment.
Secretary Geithner. Yes. Thank you for doing that.
We have done a continuous series of innovations and changes
to these programs from the beginning, as you heard me describe.
And one of the things we did, starting earlier this year, was
introduce programs that are designed to directly help the
unemployed reduce the risk that they would lose their home, but
also to shift the balance of benefits in this program to
encourage greater principal reduction.
And also, much like what I said to Mr. Neiman on the small
business credit side, we have introduced a program where we
give States hardest hit by the crisis, States with the steepest
drops in house prices, highest levels of unemployment, or a
combination of those two factors, access to significant
resources to finance a range of programs to help the unemployed
in their States, to help encourage greater principal reduction,
a range of other types of innovative programs at the State
level.
That is a sensible use of public policy, a sensible use of
resources again, because as you said, unlike the early stage of
the foreclosure crisis, the principal driver we see today is
the result of the fact that unemployment is still so high.
Mr. Silvers. Two points in response, Mr. Secretary. One is
I think there is an issue of scale in relation to the
unemployment problem. The scale of the resources simply is not
adequate. I think we have models, the HEMAP program in
Pennsylvania, for how to do that at scale. You have got three
months. I hope you are thinking about that.
Secondly, in relationship again to the question of the
level of homeownership, I think the data shows very clearly,
contrary to I think what some of my colleagues would say, that
we made significant progress in reversing decades of redlining
during the 1990s, and that starting around 2002-2003, we saw a
set of unsustainable and exploitive practices take over. I
think that kind of gives you a way of marking what constitutes
a sustainable level of home ownership and what does not.
Secretary Geithner. I think that is a very good
perspective, and that is one good way to think about it.
But you also have to look at the combination of all sorts
of other incentives we created and it is hard to find the right
balance.
Can I correct one other thing I said, Ms. Warren?
Chair Warren. Yes, Mr. Secretary.
Secretary Geithner. I said at some point in my remarks
earlier that 8 million Americans were out of work because of
the crisis. The number is about double that, but roughly 8
million have lost their job in this crisis.
Chair Warren. Thank you, Mr. Secretary.
Dr. Troske.
Dr. Troske. I guess I would like to clarify that I
certainly do not believe that we should have a process which
denies people ownership of a home or financing for a home by
any reason other than income. But I do think it is important to
point out that no one should be homeless. But those are two
different things. And I think it is also important to recognize
that not everyone needs to own a home. Renting a home is a
perfectly viable option. And I think it is important to match
people correctly to the ownership situation that best fits
their financial situation.
So one of the things I was suggesting is that maybe
programs that help move people out of a situation which is not
appropriate, given their financial situation, into one that is
appropriate, even if it is not owning a home, but instead
renting, which seems like a perfectly viable option in a number
of other places in this world. What might be a better use of
resources than trying to keep people in their homes, especially
since our experience with loan modification and programs
designed to keep people in their homes in the Great Depression
suggests that they are not particularly effective? So maybe you
could comment on that.
Secretary Geithner. I have some sympathy for that
perspective, and we do have a set of programs that we are
supporting that are consistent with that basic recognition and
reality.
But I think it is important to step back for a second and
recognize the things we got wrong in this area because they
should guide how we think about reform going forward. Again,
not to oversimplify it, but the two most damaging mistakes that
Washington made in this crisis were, one, not to constrain
risk-taking in the mortgage finance market by the GSEs, and the
other was not to provide Americans basic protections against
predation, fraud, and abuse in the credit market. Those were
devastating in their consequences. We are still living with the
consequences of that. We are going to be living with them for a
long period of time.
And a fundamental responsibility of Washington is to try to
help make sure that we are repairing those mistakes and helping
people who were damaged by those mistakes have a chance to
repair their lives in that context. And that is a responsible,
good use.
Now, we recognize that we cannot reach everyone, and
different solutions are going to be appropriate for different
people, and that we have got a lot of challenges ahead in that
area, but those two mistakes are things that we have to make
sure we fix in financial reform and I am very confident we are
going to be able to do that.
Dr. Troske. So maybe we will stay on the housing market for
a minute to build on some of the comments that have been made
previously.
Do you think the Federal Government should be involved in a
significant way in the future of financing in the mortgage
market? Does the Federal Government have any particular
advantage over the private sector which would suggest that the
Federal Government needs to maintain a role in that sector?
Secretary Geithner. Excellent question. I have testified on
this before and I do not want to change or alter the basic
framework I have laid out in that context. So I would say it
this way.
I think there is going to be a good public policy case for
the Government still promoting the objectives of access to
reasonable housing options for low-income Americans. That is an
important objective. I believe in that objective. We are going
to make sure we are doing it as carefully as we can going
forward.
I also believe it is likely that we will determine that it
is going to be an appropriate role for the Government in
providing some form of guarantee to help make sure that their
broader housing finance markets are able to provide credit to
housing in recessions and downturns. That is a very important
basic debate. We are going to have that debate when we talk
about reforms. But having looked at a variety of different
models in our experience, I think that we are likely to
conclude that there is going to be a reasonable case for
retaining a limited role for the Government providing that kind
of basic guarantee. How to do that is a challenge. We want to
make sure that where you do that, firms have to pay for that
guarantee and that the firms that provide that guarantee run
with adequate capital against risks. But I want to be careful
not to add to anything I have said in the past about this, and
these are the kind of questions that we are looking at in the
context of reform.
Dr. Troske. So maybe I can finish up with one more
question.
You seem to be much more positive about the effectiveness
of TARP than the American public. Could you tell me why you
think that is? What do you know that the American public is not
aware of, and why has that not been conveyed to the American
public?
Secretary Geithner. I think that the American public was
left with the impression that the Government of the United
States came in and wrote checks for $700 billion to our
Nation's largest financial institutions and that they will
never see that money again. And that initial perception that
was created by the critics of this program hardened and has
been a challenge, as you on this committee have found,
particularly those who were here from the beginning.
The reality, of course, is very different. As I said, we
have only put out about half of that authority. We have more
than half back. This administration came into office, did not
write a single check to our Nation's largest banks. We wrote $7
billion of checks to small community banks across the country.
And as I said, this program on the bank side is generating a
very substantial, positive return to the American people, and
we are going to return hundreds of billions of dollars of
authority--how often does that happen in Washington--to the
Congress so they can help reduce our future deficits and meet
our long-term needs.
Those are the facts and realities of this program, and if
you compare that record, not just against the expectations of
the critics, not just against the expectations of the
architects, but against the experience of this country in past
crises or the experience of almost any major country in a
crisis, it is a remarkably effective program, highest return on
the use of a dollar of taxpayers' money than I think almost
anything the Government has done in this crisis.
Now----
Chair Warren. Mr. Secretary, this is your time, and we are
over the time. I still want to give Superintendent Neiman a
chance for a last round of questions. So if you will bear with
us. We are past the time. It is your time.
Secretary Geithner. But acknowledging that this caused a
huge amount of damage, we are going to be living with the
aftershocks of that for a long time, and we are still in the
beginning of repairing that basic damage and it is going to
take more time.
Chair Warren. Thank you, Mr. Secretary.
Superintendent Neiman.
Mr. Neiman. As I mentioned in my opening statement,
Congress is finalizing financial reform that will have
implications for decades, both domestically and
internationally. Many of us are glad to see the U.S. acting as
a first mover in regulatory reform. I have been told on a
number of occasions by foreign government officials how they
are very pleased that we are moving ahead, though they probably
are not saying this as publicly as they should.
I am especially proud of particular areas where we are
ahead of the rest of the world, things like the Volcker Rule,
like proper alignment of executive pay and risk. However, we
all know that acting as a first mover does raise issues around
global competitiveness, regulatory arbitrage, and regulatory
gaps around the world.
Would you mind sharing with us the standard that you apply
when determining when the U.S. must lead and when the U.S. must
act in global concert?
Secretary Geithner. We are trying to do so together. We are
acting, as you know, to fix the things we got wrong, but at the
same time we laid out our basic objectives for reform, we
negotiated internationally a broad consensus on a set of broad
objectives internationally that would parallel very much the
basic strategy we adopted here. And you are going to see when
the G-20 leaders meet in Toronto on Saturday and Sunday a
remarkable commitment across the major economies to that set of
basic principles for providing better oversight, better
transparency and disclosure, better protections against risk-
taking on a more even standard across the major institutions
and markets.
We could have decided to move here and then try to put in
place high standards here and try to pull the world to those
standards over time. We decided to move together so we would
reduce the risk that risk would just move from the United
States to those other countries.
Now, we have a very difficult challenge ahead in
negotiating a new set of capital standards for the globally
active banks, and that will be the critical test of our
capacity again, to pull the world to higher standards. But we
come to that with a remarkably strong position because we were
able to move so quickly in the United States to recapitalize
our system with private capital to replace the Government's
investments early and, therefore, our firms on most measures
have less leverage, more capital, more of the kind of capital
that you need, common equity, against future losses. And that
gives us a very strong position in those discussions.
But again, the best way for us to shape that consensus is
to make sure that we come to the table, having acted to fix the
things we got wrong in the United States--and I believe that
the reforms Congress is about to enact will be a good model for
the world and will give us enormous credibility in trying to,
again, pull the world to those higher standards.
Mr. Neiman. Are there other examples like capital where the
U.S. has to act as a first mover if there is not global concert
in that particular area?
Secretary Geithner. Again, we are going to try and make
sure we are moving in parallel. Derivatives is another good
example. Any financial product of consequence today can move
very quickly to seek the weakest regulation. In the basic
standards of disclosure and transparency that have been such a
source of interest for this committee over time, again, we want
to make sure that all these firms and all these markets are
operating under much more rigorous standards for disclosure and
transparency. Otherwise, the risk will move to where it is dark
and that will leave us with more risk in the future.
Mr. Neiman. My time has expired.
Secretary Geithner. There are many other examples, though,
but you are right about the basic imperative.
And again, we are going to try to make sure that we
dramatically strengthen the competitiveness of the U.S.
financial system by, as we have done well in the past, making
sure that we put in place very high standards for protection
for investors in the U.S. marketplace. And we are going to do
everything we can to make sure the world joins us in that
cause.
Chair Warren. Thank you. We now bring to a conclusion our
21st hearing of the Congressional Oversight Panel. We want to
thank you, Mr. Secretary, for being with us today.
The record will be held open for any additional questions.
With that, this hearing is adjourned.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
[The responses of Secretary Geithner to questions for the
record from the Congressional Oversight Panel appear on the
following pages.]