[Senate Hearing 111-903]
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                                                       S. Hrg. 111-903



                               before the



                             FIRST SESSION




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                             Panel Members
                    The Honorable Ted Kaufman, Chair
                             Kenneth Troske
                           J. Mark McWatters
                           Richard H. Neiman
                             Damon Silvers

                            C O N T E N T S

Statement of:
    Opening statement of Hon. Ted Kaufman, U.S. Senator from 
      Delaware...................................................     1
    Statement of J. Mark McWatters, Attorney and Certified Public 
      Accountant.................................................     5
    Statement of Damon Silvers, Director of Policy and Special 
      Counsel, AFL-CIO...........................................    14
    Statement of Kenneth Troske, William B. Sturgill Professor of 
      Economics, University of Kentucky..........................    18
    Statement of Richard Neiman, Superintendent of Banks, New 
      York State Banking Department..............................    23
    Statement of Hon. Timothy Geithner, Secretary, U.S. 
      Department of Treasury.....................................    27


                  THURSDAY, DECEMBER 16, 2010

                                     U.S. Congress,
                             Congressional Oversight Panel,
                                                    Washington, DC.
    The Panel met, pursuant to notice, at 10:05 a.m. in Room 
SD-538, Dirksen Senate Office Building, Senator Ted Kaufman, 
Chairman of the Panel, presiding.
    Present: Senator Ted Kaufman [presiding], Richard H. 
Neiman, Damon Silvers, J. Mark McWatters, and Kenneth R. 
    Index: Senator Ted Kaufman [presiding], Richard H. Neiman, 
Damon Silvers, J. Mark McWatters, and Kenneth R. Troske.


    The Chairman. Good morning, Mr. Secretary. We appreciate 
your willingness to come down here and help us.
    It's easy today to forget the sense of panic that 
overwhelmed our economy in late 2008. Stock market was 
plummeting, employment was plummeting, home values were 
plummeting. I can remember turning on the television and 
flipping between news channels and seeing anchor after anchor 
looking scared and frightened and confused. The American 
financial system, the envy of the world, was never supposed to 
collapse in that way.
    Today, we know that the panic ended, and you played a key 
role in that turnaround. As the Panel has stated in the past, 
the Troubled Asset Relief Program provided critical support to 
the financial markets at a time when market confidence was in 
freefall. Combined with the Recovery Act, this restored a 
degree of stability to our markets and to our economy. The 
Congressional Budget Office recently estimated that, at the end 
of the day, the TARP will cost about $25 billion. And I notice 
you use the same thing in your opening statement. And it's an 
astronomical sum, to be sure, but far less than anyone expected 
even 6 months ago.
    As Treasury has conducted its work to repair the banking 
system, governments and business and private citizens across 
the country have done their part to help build the road to 
recovery. Thanks to their shared efforts, the economy is in a 
tremendously better place today than it was when the TARP was 
enacted. But--and it's a big ``but''--we must not forget the 
pain that continues to plague so many Americans.
    Fifteen million Americans still cannot find a job. As many 
as 13 million families will lose their homes in foreclosure in 
the next few years. The panic of 2008 has subsided, but it has 
been replaced by the gnawing pain of countless men and women 
who can't find work, who can't keep their homes, and who don't 
know whether their economic story will ever end in recovery.
    The TARP was never intended to be a complete solution to 
these problems. But, even now, your authority to make major 
changes to the TARP, even though your authority has changed, 
you still can make steps to help strengthen the broader 
    For example, the Panel's report this week on foreclosure 
prevention laid out a series of steps the Treasury can take to 
help more Americans keep their homes. You could make it easier 
for homeowners to receive a loan modification by allowing 
borrowers to apply online; you could focus on helping each and 
every homeowner who received a loan modification to avoid 
sliding backward into foreclosure.
    These steps will only make a modest difference in 
Treasury's efforts to prevent foreclosures, but they illustrate 
a larger point, that although TARP's broad legacy may already 
have been determined, the details remain to be decided, and 
these are important details. In fact, Mr. Secretary, you will 
decide them. You continue to manage $54 billion in the auto 
industry, $50 billion at a variety of banks, $48 billion at 
AIG, and $30 billion in authority to prevent foreclosures. That 
is a weighty obligation, and I look forward to hearing you 
describe how you will handle it.
    I really do hope we can use today's hearings to focus on 
the remaining opportunities to reshape the TARP to strengthen 
the economy for all Americans.
    Before we proceed, I'm looking forward to other panelists' 
comment. And we'll start with Mr. McWatters.



    Mr. McWatters. Thank you, Senator.
    And welcome, Mr. Secretary.
    Although the Congressional Budget Office has recently 
revised its estimated subsidy cost of the TARP downward to 
``only'' $25 billion, such metrics should not serve as the sole 
determinant of the success or failure of the program. We should 
remain mindful that the TARP's overall contribution to the 
rescue of the U.S. economy was relatively modest when compared 
along with a multi-hundred-billion-dollar bailout of Fannie Mae 
and Freddie Mac, the multi-trillion-dollar interventions of the 
Federal Reserve and FDIC, as well as the incalculable efforts 
of private-sector capital-market participants.
    It is particularly difficult to label the TARP, or any 
other government-sponsored program aimed at securing financial 
security, an unqualified success when the unemployment rate 
nears 10 percent, the combined unemployment and underemployment 
rate equals l7 percent, and millions of American families are 
struggling to modify their mortgage loans so as to avoid 
foreclosure. It is cold comfort to these individuals and 
families that the ``too big to fail'' financial institutions, 
aided by the TARP and other government-sponsored programs, are 
recording near-record earnings.
    In order to better assess the TARP, I offer the following 
recap of certain issues raised by the Panel and its individual 
members over the past year:
    Professor Troske and I noted, in our Additional Views to 
the Panel's September 2010 Oversight Report, that the repayment 
by TARP recipients of advances received under the program is a 
misleading measure of the effectiveness of the TARP and 
therefore should not serve as the standard by which the TARP is 
judged. The unlimited bailout of Fannie Mae and Freddie Mac by 
Treasury, and the purchase of $1.25 trillion of GSE-guaranteed 
mortgage-backed securities in the secondary market by the 
Federal Reserve under its first quantitative easing program, no 
doubt materially benefited TARP recipients and other financial 
institutions. These institutions were not--were not, however, 
required to share any of the costs incurred in the bailout of 
the GSEs.
    In effect, the bailout of Fannie Mae and Freddie Mac 
permitted TARP recipients to monetize their GSE-guaranteed MBSs 
at prices above what they would have received without the GSE 
guarantees and use the proceeds to repay their obligations 
outstanding under the TARP, thereby arguably shifting a greater 
portion of the cost of the TARP from the TARP recipients 
themselves to the taxpayers. Costs such as this should be 
thoughtfully considered when evaluating the TARP.
    With respect to the bailout of AIG, the Panel offered the 
following observations in its June 2010 report, and I quote, 
``The government's actions in rescuing AIG continue to have a 
poisonous effect on the marketplace. By providing a complete 
rescue that called for no shared sacrifice among AIG's 
creditors, the Federal Reserve and Treasury fundamentally 
changed the relationship between the government and the 
country's most sophisticated financial players. The AIG rescue 
demonstrated that Treasury and the Federal Reserve would commit 
taxpayers to pay any price and bear any burden to prevent the 
collapse of America's largest financial institutions and to 
assure repayment to the creditors doing business with them. So 
long as this remains the case, the worst effects of AIG's 
rescue in the marketplace will linger.''
    With respect to the robo-signing and other mortgage loan 
irregularities, the Panel offered the following observations in 
its November 2010 report, again quoting, ``Treasury has claimed 
that, based upon evidence to date, mortgage-related problems 
currently pose no danger to the financial system, but in light 
of the extensive uncertainties in the market today, Treasury's 
assertions appear premature. Treasury should explain why it 
sees no danger.''
    With respect to the HAMP and Treasury's other foreclosure 
mitigation programs, the Panel offered the following 
observations in the December 2010 report, which was released 2 
days ago, again quoting, ``While HAMP most--while HAMP's most 
dramatic shortcoming has been its poor results in preventing 
foreclosures, the program has other significant flaws. For 
example, despite repeated urgings from the Panel, Treasury has 
failed to collect and analyze data that would explain HAMP's 
shortcomings, and it does not even have a way to collect data 
for many of HAMP's add-on programs. Further, Treasury has 
refused to specify meaningful goals by which the--to measure 
HAMP's progress, while the program's sole initial goal, to 
prevent 3 to 4 million foreclosures, has been repeatedly 
redefined and watered down. Treasury has also failed to hold 
loan servicers accountable when they have repeatedly lost 
borrower paperwork or refused to perform loan modifications.
    In concluding, it is critical to note that, although the 
TARP has played a meaningful role in the rescue of the United 
States economy during the closing days of 2008, its enduring 
legacy may be to have all but codified the implicit guarantee 
of the ``too big to fail'' financial institutions, 
notwithstanding the profound moral hazard risk arising from 
such action.
    Thank you and I look forward to our discussion.
    [The prepared statement of Mr. McWatters follows:]
    The Chairman. Thank you.
    Mr. Silvers.

                        COUNSEL, AFL-CIO

    Mr. Silvers. Thank you, Mr. Chairman.
    Good morning. I would like to begin by thanking Secretary 
Geithner for appearing once again before our Panel. And I would 
like to also note that I, in general, appreciate and concur 
with my colleague Mr. McWatters' comments and summary of some 
of the issue that we have been concerned about.
    The story of the Troubled Asset Relief Program over the 
last 2 years is one that has two faces:
    On the one hand, looked at purely from the perspective of 
how much TARP will cost the American public, and the effect of 
TARP on the acute crisis, and severe crisis, we faced in 2008, 
the news keeps getting better and better.
    Recently, as my fellow panelists have noted, the 
Congressional Budget Office estimated that the total cost of 
TARP will be approximately $25 billion, less than a tenth of 
the original estimates. Certain individual investments, which 
were entered into on terms that were clearly unfavorable to 
taxpayers, in light of the risks involved, such as the 
preferred stock purchases and asset guarantees at Citigroup, 
have been skillfully managed by Treasury to produce significant 
    And I would like to commend you, Mr. Secretary, for--and 
your colleagues, the TARP directors, Herb Allison and Tim 
Massad--for what you have done to protect and recover the 
public's money in this regard.
    But, there is another and, frankly, more important way of 
looking at TARP. TARP cannot be held solely accountable for the 
state of the U.S. or the global economy. But, oversight of TARP 
requires that we look at two critical areas of our economy that 
TARP was designed to address: the availability of credit to the 
real economy, and the state of the foreclosure crisis. Frankly, 
on both fronts the news is grim. Witnesses have testified 
before our panel, in recent hearings, that we can expect 
between 8 and 13 million families to face foreclosure before 
the crisis is over; millions more than we have experienced 
already. Under the pressure of hundreds of thousands of 
foreclosures a month, housing prices have resumed their 
downward slide.
    On the credit to the real economy side of things, mortgage 
financing is available today, but entirely through the 
assistance of government-backed vehicles, like, but not limited 
to, the GSEs; but business lending remains hard to come by, 
other than for those companies that can access the public 
credit markets.
    Bank holding companies have over $1 trillion on deposit 
with the Federal Reserve System, while business lending remains 
stagnant by banks, at crisis levels.
    Unemployment levels today are above those projected as the 
worst-case scenario in the TARP bank stress tests undertaken in 
the spring of 2009.
    Asset deflation, banks that won't take normal banking 
risk--these are the signs of a financial system that remains 
unhealthy. I continue to believe that we made a fundamental 
mistake in our management of the financial crisis by not 
restructuring the major banks. By not following our own 
Nation's approach to similar crises in the past, we started 
down the path Japan took in the 1990s, and we are reaping the 
same outcomes: a sluggish and uncertain recovery, banks that 
can't restructure bad loans and won't lend to business to 
create jobs. But, because our financial crisis involves home 
mortgages, the decision to make preserving the banks' capital 
structure our highest policy goal has meant not just a weak 
economy, but the unprecedented human tragedy of millions of 
foreclosures. In the end, at worst, bank stockholders got 
diluted. Millions upon millions of American families have been 
dispossessed. And there is a difference.
    I hope today we will be able to explore the question of 
TARP and the mortgage crisis with Secretary Geithner and that--
and the--and explore the intersection of the mortgage crisis 
with issues of systemic risk and the overall health of our 
economy. I very much look forward to the Secretary's testimony.
    And, once again, thank you for appearing before us.
    [The prepared statement of Mr. Silvers follows:]
    The Chairman. Thank you, Mr. Silvers.
    Dr. Troske.


    Dr. Troske. Thank you, Senator Kaufman.
    Mr. Secretary, I would like to thank you for agreeing to 
appear again before this Panel. I know your previous testimony 
has been quite helpful to us as we carry out our oversight 
responsibilities, and I am confident that this trend will 
    During my time on the Panel, I have become more and more 
concerned about the public's perception of TARP and the impact 
this perception has on the government's ability to adopt 
similar measures during any future financial crisis.
    As we indicated in our September report, the consensus 
among the academic economists and other experts that we 
consulted was that TARP played an important role in helping to 
end the financial crisis, a view I largely share. Yet, despite 
this consensus among the experts, I think it's fair to say 
that, to the general public, TARP remains one of the most 
vilified pieces of legislation ever enacted, viewed largely as 
an effort on the part of former Wall Street executives to bail 
out current Wall Street executives.
    I would argue that a large part of the public's disdain for 
TARP can be traced back to the original way it was proposed, a 
3-page bill submitted to Congress asking for the authority to 
spend $700 billion with almost no oversight, as well as how it 
was implemented, changing the focus of the program from one 
designed to purchase toxic assets to one where Treasury began 
to purchase equity in private-sector for-profit firms. I would 
argue also--I would also argue that previous--that the previous 
administration's decision to classify General Motors and 
Chrysler as financial firms in order to use TARP money to bail 
out these firms increased public skepticism even further.
    Let me be clear: I am not questioning the wisdom of these 
decisions; instead, I am focusing on the public's perception of 
these actions.
    I recognize--in short, I recognize that, in trying to 
overcome the public's hatred of TARP, you are forced to deal 
with these past actions. However, I think that there are a 
number of actions that Treasury could and should be taking 
right now to try and help turn public perception.
    One important way that any government can show its programs 
are effective is to periodically have independent researchers 
conduct thorough and rigorous evaluations of its programs. This 
is true whether the program is designed to retrain displaced 
workers, to rescue banks in financial crisis, or to assist 
struggling homeowners. When performing this type of analysis, a 
government needs to collect comprehensive data on both program 
participants and nonparticipants in order to have a meaningful 
comparison group. Yet, despite the Panel's repeated urging in 
various reports for Treasury to expand--significantly expand 
its data collection efforts, it does not appear that Treasury 
has made comprehensive data collection for TARP programs a 
priority. I would again urge you to do so, and I would also 
urge you to make these data available to outside researchers. 
Only by taking these key steps will we obtain the credible, 
independent research that is so vital in evaluating a program 
and convincing the public that TARP achieved the desired 
outcomes in a cost-effective manner.
    I would also suggest that we begin to recognize that there 
are two parts of TARP: one, the set of programs, designed to 
assist financial institutions in the midst of the financial 
crisis, the other, programs that were largely directed at 
stimulating the economy.
    As our September report makes clear, there is a much 
broader consensus about the effectiveness of the former than 
the latter programs. As part of this effort, I suggest that we 
need to take a careful look at how much money should have been 
initially allocated to TARP. Changes to TARP in the Dodd-Frank 
legislation indicate that Congress felt, in retrospect, that we 
could have gotten by with 450 billion instead of the original 
700 billion allocated. But, I am guessing that a more careful 
analysis would reveal that some of the programs not directly 
aimed at stemming the financial crisis may have been better 
part of alternative legislation. In my opinion, making this 
distinction would help generate more support for what I 
consider the more key components of TARP that we would 
certainly like to have at our disposal during future crises.
    Finally, as economist Kenneth Rogoff pointed out in written 
comments to the Panel for our September report, ``A proper 
cost-benefit analysis thus needs to price the risk taxpayers 
took during the financial crisis. Ex-post accounting--How much 
did the government actually earn or lose after the fact?--can 
yield an extremely misguided measure of the true cost of the 
bailout, especially as a guide to future policy responses.'' I 
would add to Professor Rogoff's statement that focusing on ex-
post accounting of this single program also fails to take into 
account the myriad of other costly government programs which 
provided significant assistance to major banks and financial 
    Again, I'm not questioning the wisdom of these programs; it 
is clear--but, I believe, it is clear that, by providing 
additional support to large financial institutions that 
received TARP funds, these programs made it possible for the 
institutions to repay their TARP funds and allowed some of the 
costs of TARP to be shifted to other less scrutinized 
government programs. I believe that, at an intuitive level, the 
American people recognize the costs of putting so much money at 
risk and the ability to shift costs across programs; therefore, 
the public remains justifiably skeptical of the claims that 
TARP was a success because of--most of the money will be paid 
back. That is why I believe we need a more comprehensive 
evaluation of the true costs of TARP and the overall financial 
bailout if we are ever going to convince the American people 
that any part of TARP can be considered a success.
    Mr. Secretary, as this Panel wraps up our oversight 
responsibilities in the coming months, I believe that these are 
the issues we are going to be grappling with the most: what 
parts of TARP were successful, and how can we demonstrate their 
effectiveness? As I indicated at the start of my comments, I am 
confident that your testimony today, and any future testimony 
you provide, will be of great assistance in our efforts. I look 
forward to your comments today, and I thank you again for 
appearing before us.
    [The prepared statement of Dr. Troske follows:]
    The Chairman. Thank you, Dr. Troske.
    Superintendent Neiman.

                    STATE BANKING DEPARTMENT

    Mr. Neiman. Thank you.
    Mr. Secretary, when you last testified before this Panel in 
June, the major regulatory reforms that might have avoided the 
need for a TARP had not yet passed Congress. Additionally, a 
small business lending fund was not established, and well over 
$100 billion of losses were expected for the TARP program.
    In the past 6 months, however, a Dodd-Frank regulatory 
regime is being implemented, and a new small business lending 
fund has congressional approval. The expected cost of TARP is 
much lower, with the CBO's projection of TARP's cost of $25 
    Given these developments, and that TARP successfully 
prevented a depression-like crisis, it might be fair to expect 
the public perception of TARP would be--have improved, and for 
the administration to get due credit for its management of the 
program it inherited.
    But, public perception remains negative, perhaps because 
first impressions continue to linger. The reason probably has 
more deep-rooted element. Many people simply feel their lives 
have not gotten better during this period, even as the 
financial system has stabilized and banks have returned to 
profitability. The government must continue to work to finally 
fill TARP's unchecked boxes; namely, to encourage bank lending 
and prevent needless foreclosures.
    It is my hope to discuss these two areas today. 
Specifically with regards to foreclosures, we must hold 
mortgage services fully accountable for the non-HAMP mortgage 
modifications they put homeowners into. These mortgage 
modifications must truly be helpful to homeowners, and 
sustainable. Non-HAMP modifications now outnumber HAMP 
modifications by about three to one.
    More importantly, looking forward, I believe Dodd-Frank's 
vision of an effective CFPB must be realized in the foreclosure 
area. In order to protect homeowners and promote future 
financial stability, the CFPB has been specifically empowered 
to write mortgage rules. This must include national standards 
for mortgage servicers, who are critical players in the 
foreclosure crisis. No such national standards exist today.
    Some States, like New York, have comprehensive servicer 
regulations in place that can serve as a model at the Federal 
level. Regardless, the CFPB cannot tackle mortgage servicing 
alone. The new agency will need the cooperation of the States 
and the Federal banking regulators to enforce any new rules, 
hopefully together in a new era of cooperative federalism.
    With regards to small business lending, the public wants 
and needs the small business lending fund to be successful. 
But, loan supply is not the only reason bank lending is down. 
Other reasons must be integrated into our collective solutions, 
such as loan demand, underwriting standards, regulation, and 
    Finally, I think, nearly 2 years after the establishment of 
this oversight body, it should be highlighted that you have 
been a valuable--and available to this panel. We have an 
important oversight job on behalf of Congress and the American 
public. You have appeared before us five times publicly and 
several times privately. Your openness has helped us to do our 
job better, and the public is better off as a result.
    I thank you. And I look forward to our discussion this 
    [The prepared statement of Mr. Neiman follows:]
    The Chairman. Thank you, Superintendent Neiman.
    I have to comment that each five panelists made up their 
remarks separately.
    The Chairman. I mean, as--I was just sitting here thinking 
about how incredible it is that five people come up with 
testimony that's so similar. Really, we all say the same thing.
    Thank you, Secretary Geithner, for coming today, and we're 
interested in your opening statement.

                  U.S. DEPARTMENT OF TREASURY

    Secretary Geithner. Thank you, Mr. Chairman, and all of 
you. I agree with much of what you've said in your opening 
remarks, not all of what you said, but I hope we have a chance 
to talk about the concerns you still raise ahead, and I'll be 
open with you about the things that I think are the challenges 
we face going forward.
    I want to provide, as you suggested, a broad overview of 
the impact of these programs on our economy and our financial 
system, and the challenges we face ahead.
    I think it's also very important to recognize at the 
beginning that it's very hard to separate the impact of TARP 
itself on the economy and the financial system from the 
combined impact of the broad strategy this government embraced. 
And, of course, as you know, that strategy included a very 
creative, powerful set of programs by the Federal Reserve, a 
set of very powerful actions by the FDIC, the substantial 
support, in terms of tax incentives and investments, that came 
in the Recovery Act, the support for Fannie and Freddie that 
was required to avoid a collapse alongside the TARP programs. 
None of them would have been as effective without the overall 
package. Monetary policy doesn't work without a functioning 
financial system. TARP would not have been nearly as effective 
without those other instruments. That's an important thing to 
    I think it's important to recognize that the shock that 
caused this great recession, that caused this crisis, was 
larger and more powerful and more dangerous, in the view of 
economic historians, than the shock that precipitated the Great 
Depression. And yet, despite that, 2 years after the peak of 
the crisis, and 2 years after TARP was first passed by the 
Congress, the economy has now been growing for 18 months; we've 
had roughly 1.2 million jobs created by the private sector, 
more and more quickly than for the last two recessions; 
household wealth has improved very, very substantially over 
this period of time.
    The tax package that was approved by the Senate yesterday 
and, based on the comments made by the House leadership--both 
Republicans and Democrats--that's likely to pass the House this 
afternoon, provides a very powerful package of support for 
middle-class families, for working families, for the 
unemployed, and a very powerful package of incentives for 
businesses, which we believe, and I think most economists 
believe, will add substantially to our prospect for getting the 
economy growing more rapidly and more people back to work in 
the coming 2 years.
    I think it's fair to say that the worst part, the most 
dangerous part, of this financial storm has passed us, but the 
crisis has left a huge amount of damage in its wake. Millions 
and millions of Americans are still out of work, at risk of 
losing their homes. Unemployment remains, on average 
nationally, at 10 percent, but much higher in many parts of the 
country. And it's going to take years, not months--it's going 
to take years to fully repair the damage caused by this crisis.
    Now, the government's financial programs, including TARP, 
but not limited to TARP, were not designed to and cannot solve 
all those problems, and cannot, on their own, solve all the 
damage caused by the crisis. But, these programs did what they 
had to do, what they were designed to do--which was to protect 
the value of America's savings, to restore a measure of 
stability to a financial system at the edge of collapse, to 
reopen access to credit, and to restart economic growth. And 
these programs did so much more powerfully, much more 
effectively, much more cheaply, much more quickly than I think 
really anyone, including the architects, thought was possible 2 
years ago.
    Now, you can see independent evidence of that conclusion--
support of that conclusion from a range of different sources, 
including the work of the Panel. Mark Zandi and Alan Blinder 
published, I think, the most definitive independent study of 
the effects of these programs over the course of the summer. 
And, as you know, they concluded that, without these programs, 
the economy would have fallen by another 3 and a half percent, 
would still be declining; unemployment would be above 16 
percent; we'd be at risk of a downward spiral of deflation.
    No one knows for sure how bad it would have been. But, as I 
said, if you look at the magnitude of the shock that caused the 
Great Depression and how that crisis turned out for this 
country, against the evidence of what these policies have 
provided in this brief period of time, I think it's a very good 
record so far. Acknowledging that, as I said, the damage caused 
by this crisis is overwhelming, still, and it's going to take 
years--years to repair the damage.
    Now, let me just review some of the other basic estimates 
we used to judge where we are today. As many of you pointed 
out, these programs achieved their objectives at a fraction of 
the cost that almost any observer predicted, even as recently 
as 3, 6, 9, or 12 months ago. The CBO estimates, which we all 
rely on because they're independent, initially estimated TARP 
would cost--TARP, itself, would cost $350 billion. Those 
estimates are now around $25 billion. They are too high, in my 
judgment. Ultimately, they'll be lower.
    The most important thing to point out, it is that the 
investment programs in TARP means the combined investments 
we've put in banks, in AIG, to support credit markets, in the 
automobile industry--those investments together will show a 
positive return. The losses will be limited to the amount we 
spend in our housing programs. The investment programs in TARP 
will show a positive return, not a negative return. The 
taxpayers will earn a positive return on those investments.
    Now, if you look more broadly, as many of you suggested, at 
the combined costs of everything the Fed did, everything the 
FDIC did, the losses we still face because of what Fannie and 
Freddie did before the crisis, and TARP, together, on 
reasonable estimates about the future, those total costs are 
likely to be less than 1 percent of GDP, which is less than 
one-third of the cost of the savings and loan crisis, which, as 
you know, was a much milder, much more limited financial 
crisis. And if you look at the costs of crises across many 
countries over time, the direct financial costs of these 
programs, all in, including the GFCs, the Fed, FDIC, and these 
programs, is likely to be a small fraction of what we have seen 
almost anywhere in history over this period of time.
    Now, we are moving very, very aggressively to exit from the 
government's investments, from the guarantee programs, from the 
emergency crisis response as quickly as possible. And we are 
way ahead of schedule in achieving that objective.
    We've recovered a very substantial fraction of the 
investments in banks. When I came into office, the government 
had invested--and they needed to do it, it was a necessary 
thing to do--it had invested in banks that represented about 
three-quarters of the entire American banking system. Our 
remaining investments today are in banks that represent only 10 
percent of the American banking system. That's happened in just 
over 20 months. As you know, we're--and I'm happy to go through 
these in more detail--we're substantially far along the road to 
definitive exit from the automobile industry, from AIG, and, of 
course, all the Nation's banks.
    Now, as many of you said, a key test of crisis response is: 
Are you leaving the system stronger than it existed before the 
crisis? And, in contrast to what you said, Mr. Silvers, the 
American financial system today is in a much stronger position 
than it was before the crisis. There's been a very dramatic 
restructuring of our financial system. The weakest parts of the 
system no longer exist today. The remaining institutions had to 
pass a very rigorous test for market viability. They have much 
stronger capital positions than they had before the crisis, and 
they are much higher capital positions than is true for their 
international competitors.
    And the Dodd-Frank bill gives us tools for oversight, for 
crisis prevention, for crisis resolution, to limit moral hazard 
risk, that I believe will be the model for the world going 
forward, and address the critical weaknesses that helped cause 
this crisis.
    So, for those reasons, because the system is in a much 
strong position today, if economic growth in the future proves 
weaker than we would hope, it will not be because of the 
remaining challenges in the financial system; it'll be because 
this was a crisis caused by millions and millions of people 
taking on too much debt, and it takes time to grow out of this 
crisis. It will not be because the financial system is 
providing a constraint on access to credit on a scale that 
would limit future growth.
    And, Mr. Chairman, you--could I just make a few final 
remarks then----
    The Chairman. Sure.
    Secretary Geithner [continuing]. I'll move into----
    The Chairman. We'd like--questions and then----
    Secretary Geithner [continuing]. I'll move into conclusion.
    The Chairman. Yeah.
    Secretary Geithner. Now, we face a lot of challenges ahead, 
and we're going to go through those. I just want to list what 
those are, in my perspective.
    Obviously, there are housing; small banks; access to 
credit, for small businesses in particular; the challenge you 
referred to, Mr. Chairman, of winding down prudently, 
carefully, protect the taxpayers' interest in what's a--still 
very complicated set of investments in the remaining financials 
in the system; implementing Dodd-Frank; and laying out a broad 
reform for the GSEs and the housing finance system. That is a 
lot of work.
    Overwhelmingly, though, the biggest challenge facing the 
country is how to get the economy growing at a more rapid rate 
so we can bring down the unemployment rate as fast as possible. 
That's the most important thing we can do for housing, for 
small banks, for access to credit more generally, and that's 
going to have to be the principal focus of the administration 
and the Congress's efforts.
    I want to just conclude briefly with two final remarks. I 
think it's very important that--you have been very gracious, 
but it's important to step back and give credit to my 
predecessor, Secretary of the Treasury Henry Paulson, to the 
Federal Reserve Board and staff, to the men and women of the 
New York Federal Reserve Board, and to Chairman Sheila Bair, 
and the architects of these programs at the Treasury, 
including--and I want to list them for you, principally--they 
are Lee Sachs, Herb Allison, Tim Massad, and Matt Kabaker. They 
designed a very complicated set of programs in a very short 
period of time, for which there had been no precedent, in 
modern financial history, which, as you have acknowledged, have 
been much more successful than almost anybody expected. And, of 
course, they did the necessary thing.
    And I want to conclude by just acknowledging how important 
the work of this panel and the other oversight bodies that were 
established to look at what we were doing.
    I think one of the great strengths of our country is that 
we subject the judgments of public officials to very difficult, 
rigorous, independent oversight. I don't agree with all the 
judgments that you have made or the judgments that the other 
oversight bodies have made, but you have--you play a necessary 
function. It's part of rebuilding confidence in public 
institutions of the United States. And we have been very 
careful, where you've made recommendations that we were 
confident would improve our programs, we have adopted those 
recommendations, and, of course, will continue to do that as we 
go forward.
    I welcome a chance to talk about these things with you. And 
I look forward to being able to respond to some of the other 
observations you made in your opening remarks.
    [The prepared statement of Secretary Geithner follows:]
    The Chairman. Thank you, Mr. Secretary. In your written 
testimony--and member of the panels have said this--discussing 
the CBO $25 billion number--are you comfortable with that 
number as being the total cost for----
    Secretary Geithner. I think it'll----
    The Chairman [continuing]. TARP?
    Secretary Geithner [continuing]. Be a little high. You 
know, these things are very uncertain. It depends hugely on 
what happens to the overall economy and to financial markets. 
But, based on the things you can observe today, where there's a 
market price for an investment, and based on what's reasonable 
to expect, I think, about the trajectory of our housing 
programs, I suspect the number will be high.
    The Chairman. You've talked in panels too, about how well 
things are doing right now in the financial system and 
corporations and things like that. What--you know, and the main 
reason for this hearing is kind of figure out, What do we do to 
finish this out and do the best we can, realizing October 3rd, 
limited modifications we can make? What's your thoughts on what 
you can do, in the rest of TARP, to get the banks to start 
lending more money?
    Secretary Geithner. TARP's contribution to the financial--
to the remaining challenges in our finances, is largely over. 
We have authority, still, to continue this set of housing 
programs to make sure they reach as many people as we can. 
Beyond that, TARP's contribution will be very limited. The 
principal thing we can do to help small banks manage through 
this, is to make sure that we're doing as much as we can to 
reopen access for small businesses to credit. The burden for 
that is going to fall on the small business lending facility 
that Congress passed in September of last year.
    The Chairman. So, just--I mean, you basically feel that, 
under TARP, there's--the fact that banks are--have all this--
trillions of dollars on hand, and not loaning, is something 
that has to be dealt with in a different way, other than under 
your TARP.
    Secretary Geithner. Yes. I think this is a really important 
thing to look at. What matters in crisis response is to get 
credit flowing again, because it's the oxygen that economies 
require to recover.
    How should you measure how effective these programs were in 
this context? The only real measure you can look at is what 
happens to the price of credit--how much it costs for somebody 
to borrow, a business to borrow, for a person to send their kid 
to college, for a municipal government to borrow to finance 
critical services, the costs of a mortgage. And all those 
measures of the costs of credit, as you know, were at panic 
levels in the----
    The Chairman. Sure.
    Secretary Geithner [continuing]. Fall of '08. And were at 
panic levels in early '09----
    The Chairman. Right.
    Secretary Geithner [continuing]. And then have come down 
dramatically. If you look at how much banks are actually 
lending, lending volumes are lower than they were before the 
    The Chairman. Yeah.
    Secretary Geithner [continuing]. But, that is no surprise, 
because this was a crisis brought on by the reality that people 
had borrowed too much. And when the economy shrinks, the actual 
outstanding volume of loans is going to fall. But, the test of 
whether credit is more available or not----
    The Chairman. Right.
    Secretary Geithner [continuing]. Has to be measured in the 
price of credit.
    The Chairman. I got it. And I understand. And that's a 
major objective of TARP. But, I think--a number of panels 
talked about perceptions, and I think one of the real problem--
when I travel around, I talk to people that go to banks and 
people--not just in the home-building market; small business 
people, everyone--it's like, ``The banks won't lend me the 
money.'' Now, again, they, many times, say it's the regulators. 
I don't--and many times I don't believe it is the regulators. I 
think they just don't want to loan the money. And so, I'm just 
saying--and I understand everything that you said--we--I may 
agree--I agree with most of it, I may not agree with all of it. 
But, in the next--you know, with the rest of the TARP--for the 
balance of the TARP, you do not feel there's anything really--
    Secretary Geithner. Not through TARP.
    The Chairman [continuing]. Under that----
    Secretary Geithner. Again, the----
    The Chairman That's a good enough answer.
    Secretary Geithner. Right.
    The Chairman. That's good enough.
    Now, how about--now, the other problem we have--again, it's 
not a perception, though; it's a real problem. People are out 
there not having jobs. And corporations have--earnings are up, 
Dow Jones is doing great. You know, you--and you have 
corporations with trillions of dollars on their balance sheet, 
in cash, and they're sitting there. And some corporations are 
going to the point of actually, you know, buying back their 
stock. And you're sitting there saying, ``Hey, man. This is 
like, `let 'em eat cake.' ''
    So, my point is, is there anything you can do, under TARP? 
And I--and the reason I raise this is because everyone here, 
all six of us, have talked about TARP successes, credit, all 
those things, but we've all said the same thing, and that is 
that the problem we have out there now is, people don't have 
jobs and people can't borrow money to get their house or to get 
their companies going. So, that's why I'm zeroing in on this.
    There may be--a perfectly okay answer is ``no,'' but I'm 
just saying, when you look at the corporations and where 
they're structured, is there anything you can think of that we 
can do? Because it's so important.
    Secretary Geithner. Well, I think the--again, the most 
important thing for the government, in terms of economic policy 
now, is to put in place things that'll help raise the rate of 
economic growth and speed the path of getting more Americans 
back to work. TARP itself now has done what it had to do----
    The Chairman. Right.
    Secretary Geithner [continuing]. Which is to get the 
markets to reopen for credit. But, the burden for achieving a 
more rapid pace of growth, getting more investment back to work 
in the United States today, is going to have to come through 
other policy instruments.
    The Chairman. Oh, to Mr. McWatters. I'm sorry.
    Mr. McWatters. Thank you, Senator.
    Mr. Secretary, when you consider the potential legal and 
economic consequences of the following five things, and I'll 
read them:
    One is the foreclosure documentation irregularities; the 
robo-signing problem; the failure of some securitization trusts 
and others to obtain properly endorsed mortgage loan notes and 
properly assigned mortgages and deeds of trust, as required by 
local law; the challenges presented by the Mortgage Electronic 
Registration, or MERS, System; the exercise of put, or 
repurchase, rights by securitization trusts, as well; number 
five is the filing of wrongful foreclosure suits and other 
legal actions.
    Are you concerned that any of the largest financial 
institutions will experience a solvency, liquidity, or capital 
crisis as a result of these items?
    Secretary Geithner. No. I think they pose very substantial 
challenges to the system, still. And I should be careful to 
acknowledge that, because of the seriousness of these problems 
we have a task force, chaired by myself and Sean Donovan, that 
includes 11 Federal agencies, bank supervisors, FHFA, the FHA, 
the Department of Justice, the FTC, that is undertaking a very 
careful, comprehensive look at all those concerns so we can get 
a better handle on their potential risk, but, more importantly, 
so that we can fix them and make sure that people who were 
disadvantaged by the mess are provided some relief, to make 
sure that, looking forward, homeowners still at risk are given 
a better chance of staying in a home they can afford, and to 
make sure we fix the system for the future. Very substantial 
challenges, still. That task force is likely to be in a better 
position to provide an evaluation of where we are, what's next, 
sometime in the first quarter; I hope early in the first 
    Mr. McWatters. But, do you foresee having to implement a 
program to purchase distressed RMBS or trouble loans from the 
financial institutions themselves?
    Secretary Geithner. I do not.
    Mr. McWatters. Okay. So, as far as you can tell now, no 
    Secretary Geithner. No.
    Mr. McWatters. Okay.
    What about rating agencies? Do you believe that rating 
agencies themselves may take a different perspective? And once 
these, particularly, put-rights are exercised and a judgment or 
two comes down--and the judgments may very well be large--do 
you think the rating agencies will react properly, overreact, 
downgrade the stock?
    Secretary Geithner. I would never want to predict that 
rating agencies will react appropriately. Rating agencies, by 
their nature, because the future is uncertain and these are 
complicated, are--you know, not to be unfair--react slow and 
late on these things. So, I wouldn't make any judgment on 
whether they're going to be prescient or wise or early or late 
on those things.
    Mr. McWatters. Okay. So, to recap, there may be some 
systemic consequences, but they do not rise to the level of 
needing a TARP-2 or needing an across-the-board repurchase 
    Secretary Geithner. No. I didn't use the word ``systemic.'' 
I just said they would--they're going to present--these are 
going to present serious challenges to the system, as they have 
for a long time. You know, we're not in the first inning of 
this housing crisis. This started and peaked at the end of 
2006. And it's going to take some time, still, for investors, 
for rating agencies, for creditors to fully evaluate the 
financial implications of this for individual institutions. The 
market is finding its way now to feel a little more comfortable 
about how to dimension the potential risk, but it's going to 
take--that's going to take a little more time.
    Mr. McWatters. Do you anticipate that the Federal Reserve 
may use part of the funds in QE2 to purchase some of these 
distressed assets off the books of these financial 
institutions, much as the Fed did in QE1?
    Secretary Geithner. You know, I'm very careful not to talk 
about monetary policy anymore. I respect the basic tradition 
that the Secretary of Treasury should never talk about monetary 
policy. So, you should direct that to them. But, I would not--
well, I shouldn't go further. You should direct that question 
to them.
    Mr. McWatters. Okay, because my concern is, what I said in 
my opening remarks, that the reason the Fed was able to 
purchase a trillion-250-billion dollars of government-backed-
mortgage-backed securities was because of the bailout of Fannie 
Mae and Freddie Mac. If that had not--if Fannie Mae and Freddie 
Mac had been left to fail, then the Fed could have still done 
QE1, but it would have purchased at a market price, which would 
have been below face. So----
    Secretary Geithner. Well, can I--could I respond to that? 
Because I think----
    Mr. McWatters. Sure.
    Secretary Geithner [continuing]. That, without talking 
about the Fed, I--because I'm not sure they understand your 
suggestion. I believe--and just because I believe it doesn't 
mean it's true--but, I don't think there was any plausible 
argument to suggest that the U.S. economy could have withstood, 
or could withstand today, the effects of letting those 
institutions, with $5 trillion in guarantees and portfolio 
outstanding, default on those obligations.
    And that is why a conservative Republican President decided 
it was in the interest of the Nation, and Congress gave him the 
authority to intervene to prevent that outcome, and to allow 
those institutions to be managed down more gradually over time. 
And to suggest--and maybe you're not suggesting this--that we 
would have been better off, as a country, financially, 
economically, if we had chose an alternative path, I think, is 
not a credible argument. And the idea that the overall cost to 
the economy and to the taxpayer would have been less because of 
that is not a judgment I would support.
    Mr. McWatters. No, that is not the point I'm making. The 
point I'm making is that the bailout of Fannie Mae and Freddie 
Mac should be considered when we judge the TARP program.
    Secretary Geithner. Yeah, that I totally agree with you.
    Mr. McWatters. Right.
    Secretary Geithner. And that's why I said it as I did. And 
I think this is very important to recognize. When you look at 
the overall cost of this crisis, you have to look at two 
things. One is the direct financial costs of all these 
programs--FED, FDIC, Fannie/Freddie, TARP, Money Market 
guarantee fund, et cetera. Now, you have to look at the 
economic costs, too, and the overall fiscal costs of lost 
revenues, the cost of unemployment insurance, things like that. 
But, on that broad measure of direct financial costs, including 
the interventions in Fannie and Freddie, the overall costs will 
be incredibly small in comparison to almost any experience we 
can look at, in the United States or around the world, even in 
much milder, much less damaging crises. And that's because of 
the effectiveness of the overall response.
    Mr. McWatters. Okay. I agree, all factors should be 
considered, but sometimes those factors are not mentioned in 
the sound bites.
    That's all.
    The Chairman. Thank you, Mr. McWatters.
    Mr. Silvers.
    Mr. Silvers. Thank you, Mr. Chairman.
    And before I--Mr. Secretary, before I ask my first 
question, I think you mischaracterized my opening remarks, to 
make me more of a critic of your work than I am.
    Secretary Geithner. Didn't mean to.
    Mr. Silvers. I don't think the financial system is weaker 
today than it was in 2007 or 2008. I think it's clearly 
stronger. I think it's, nonetheless, weak.
    Now, Mr. Secretary, at our last hearing, your colleague 
Phyllis Caldwell appeared before us. And it gave me some 
concern about the administration's policy around foreclosures. 
I think I perhaps took that concern out on her more than 
perhaps was warranted, given that you--it may be more warranted 
to be taken out on you.
    Secretary Geithner. I would welcome that. And she's really 
excellent at what she's doing. And--but, she can take it, too.
    Mr. Silvers. Well, Mr. Secretary, I concur with your 
judgment on Phyllis. And I--but I wanted to make--to raise 
these matters with you directly.
    In her testimony, Ms. Caldwell stated in--that slowing down 
foreclosures--and this is in the context of the debate about a 
foreclosure moratorium--slowing down foreclosures, quote, ``May 
exert downward pressure on overall housing prices both in the 
short- and longrun.'' Now, Mr. Secretary, I would like you to 
respond to the question, a very simple question, which is: In 
the view of the administration, do more foreclosures equal 
lower housing prices or higher housing prices?
    Secretary Geithner. Could I ask you a question first?
    Mr. Silvers. Sure.
    Secretary Geithner. Just for context. Do you support a 
compulsory national moratorium?
    Mr. Silvers. Do I? I personally support a moratorium as 
part of a larger solution. I think, by itself--and here, we may 
agree--I think, by itself, a moratorium is not an answer. Like 
any kind of delay, for instance, it doesn't get you where you 
need to go. I have felt, for years, going back to 2007, since 
you mentioned 2007, that a moratorium would be a helpful 
incentive to the parties to reach private solutions.
    But, Mr. Secretary, the question is--I'm happy to answer 
your question, but----
    Secretary Geithner. No, I--that's----
    Mr. Silvers [continuing[. This is my turn to ask questions.
    Which way--more foreclosures--which way do housing prices 
go, up or down?
    Secretary Geithner. Well, I don't think that's quite the--
    Mr. Silvers. All other things being equal.
    Secretary Geithner. I don't think that's quite the way to 
think about it. You're absolutely right; if you could prevent--
if you can slow the pace of avoidable foreclosures, as we did, 
effectively, through these programs, that was one factor that 
contributed to bringing a measure of stability to house prices 
at a time when house--most people thought house prices were 
going to fall another 20 to 30 percent.
    But, that's not really the right question to ask, in terms 
of this debate right now. The right question to ask now is: 
Would a broad, comprehensive, compulsory moratorium----
    Mr. Silvers. No, Mr. Secretary, that's not the question I 
asked. Because, actually, I don't see that--I don't see the 
moratorium as the--the moratorium is a subset of a basic 
question that I think the administration's statements over the 
last few months have clouded, which is: Are foreclosures good 
for our country, or not?
    Secretary Geithner. No, foreclosures are not good for the 
country, but----
    Mr. Silvers. And are they not good for the country because 
they lower or raise housing prices?
    Secretary Geithner. Well, again, I'm not trying to really--
let me--well, maybe try it this way. If you were to stop 
foreclosures from happening and suspend the process nationally 
for an indefinite period of time, what would that do to house 
prices? It could hurt house prices, because it would--it might 
mean that demand for housing slowed, people are unwilling to 
buy, and people sitting in neighborhoods in homes where--at the 
epicenter of the foreclosure prices, might see their house 
prices fall further because the markets would recognize that it 
was going to take a much longer time to work through this 
process. So, there's a reasonable economic----
    Mr. Silvers. Mr. Secretary, isn't that only true if you 
assume that, in the end of the day, everyone gets foreclosed 
    Secretary Geithner. No. I don't think that's true at all. 
No, I think that--well, let me say what I think the right 
approach is to this. I think that--and we have made this very 
clear, and I think we will be successful in achieving this. We 
do not believe that banks should move to initiate a foreclosure 
process, or continue it, if they cannot be certain that they 
have the legal basis for doing so, and if they have not given 
that homeowner every opportunity to participate in a mortgage 
modification program.
    Mr. Silvers. Right.
    Secretary Geithner. Now, that approach will----
    Mr. Silvers. But, Mr. Secretary----
    Secretary Geithner [continuing]. Slow the pace of 
    Mr. Silvers. But, Mr. Secretary, that approach--it would 
appear to me, perhaps naively, that approach would appear to be 
founded on a belief that foreclosures--all other things being 
equal, more foreclosures are bad for our society and bad for 
our economy. I don't understand why the answer isn't simply 
yes, that they're bad. And one of the reasons that they're bad 
is because they lower housing prices. And if I were--might 
refer to Phyllis Caldwell's testimony again, in her testimony 
she said that 25 percent of current home sales are out of 
foreclosure. That would appear to be a potent downward force on 
housing prices. Do you disagree?
    Secretary Geithner. I disagree with your assessment of the 
impacts on it and the merits of that approach as an 
alternative. Yes, I do disagree with that.
    Mr. Silvers. Well, you disagree with the notion that 25 
percent of the total sales in the housing market being forced 
sales under foreclosure----
    Secretary Geithner. I don't think that's the----
    Mr. Silvers [continuing]. Forces the prices----
    Secretary Geithner. I don't think that's----
    Mr. Silvers [continuing]. Housing prices down? How can you 
possibly disagree with that?
    Secretary Geithner. I don't think that's right way to think 
about it. Look, the----
    Mr. Silvers. I don't understand why this administration 
can't answer the simple question of whether or not foreclosures 
drive housing prices up or down. It seems to me that you're 
covering for something.
    Secretary Geithner. [Laughing.]
    Mr. Silvers. And my time is expired.
    Secretary Geithner. Mr. Chairman, may I just offer one 
    The Chairman. Finish, absolutely.
    Secretary Geithner. You know, Mr. Silvers, you're asking a 
interesting economic financial question. It's a question for 
economists. You know both sides of that argument. I think it's 
pretty good on one side. But, I understand your position on it. 
But, I think that's not really the question we face. The 
question we face is, What is the most effective, responsible 
thing we can do, as a country, to make sure that people who are 
at risk of losing their home, but have a chance of staying in 
their home, have that chance to do so? That is our basic 
objective. Now, we have a lot of other things to worry about, 
too, because we have to worry how to clean up this mess for the 
future, make sure we don't get into this kind of mess in the 
future again. But, our overwhelming preoccupation now is, What 
can we do to make sure that we're helping people stay in their 
homes, who can afford to, and make sure we get through the 
damage remaining at least risk to the innocent people that have 
suffered so much in this crisis?
    Mr. Silvers. We'll take that up in the next round.
    The Chairman. Thank you, Mr. Silvers.
    Dr. Troske.
    Dr. Troske. Mr. Secretary, so in my opening statements I 
read a quote from Professor Kenneth Rogoff about how a proper 
cost-benefit analysis would be conducted and that ex post 
accounting can--that it's important to take--that needs to 
price the risk taxpayers took during the financial crisis.
    So, given that, I guess I'd like to get your thoughts on 
what Professor Rogoff said, the importance of understanding--we 
put a lot of--the entire financial--you know, all of the 
financial risk--you put a lot of taxpayer money at risk. And 
how do we assess that and think about that as a cost?
    Secretary Geithner. Well, I have a huge amount of respect 
for Professor Rogoff; I've worked with him in the past. And, of 
course, what he says is fundamentally right; you have to 
measure--as any investor would do, you have to measure return 
against risk. And there's a very thoughtful set of questions 
you--one should ask about whether we price these investments 
appropriately. And looking just at the financial return, 
independent of that, is not a fair way to evaluate whether we 
got that balance exactly right. But, I believe we did.
    And let me tell you the basic theory of the approach we 
offered, and some evidence for that suggestion. And this is 
not--this is oversimplifying a little bit, but in a financial 
panic--in a financial crisis,--what you want to do, where you 
have to make emergency assistance available, you have to price 
it below the cost of credit in the market at that time. Because 
credit is not available--or is at a prohibitive cost--this 
would be below that--but it has to be more expensive than 
credit would cost in normal conditions. And the virtue of doing 
it that way is, as things normalize, you're more easily able to 
wean the dependence of the market from those programs, because 
your credit--your investments will then become expensive, 
relative to the market.
    Now, there's no perfect place between those two things. 
But, you can't say, ``Because we've priced our investments 
below the cost of credit that was available in the market, in a 
time of a financial panic, that we underpriced those 
investments.'' That would not be a fair way to evaluate it or a 
sensible way to run a financial emergency. In that case, I 
think we passed what, you know, the central bankers would call 
a classic ``lender of the last resort'' classic doctrine. And 
the best test of that is how quickly we've been able to get out 
of these investments; how quickly, for example, the Fed's 
emergency credit programs were wound down; how quickly we were 
able to get out of the other emergency guarantee programs. They 
were--they proved to be expensive, as growth started recovering 
and credit markets started to reopen.
    Dr. Troske. Next, I--I certainly--I guess I agree with 
you--I certainly agree with you, that the Zandi-Blinder study 
is the most comprehensive study out there on the impact of the 
financial crisis. I guess my own reaction is, I consider that 
to be very disappointing, given that I would--I feel that it's 
a fairly cursory study, a fairly short 9-page paper. I usually 
make students write much longer papers. It's hard to see how, 
in 9 pages, you could do a fair job evaluating, you know, this 
complex situation. I think it's--they provide very little 
documentation of the methods that they use, make some fairly 
strong assumptions, and consider what I feel to be a fairly 
faulty methodology.
    And so, in my opinion, we need a much more comprehensive--
we need--we still are--we're looking for much more 
comprehensive studies. And again, I think that part of that is 
going to be function of the information that's out there that 
is made available.
    In my opening statements, and as we've said a number of 
times, we've pushed Treasury to provide more data and more 
data, and collect more data. The most recent report does--
continues that.
    I guess, you know, give me your thoughts about the--your 
efforts to do that, and to do a comprehensive--or to allow a 
comprehensive analysis of the financial situation to be done.
    Secretary Geithner. First, I completely agree that a 
necessary condition for people to evaluate is better data. You 
know, we've been very transparent with all the financial terms 
of our programs. You can judge their market impact very easily. 
And I'm happy to continue to look at ways to get more data out 
there. The financial reform legislation does establish, within 
the Treasury, the Office of Financial Research, with very broad 
authority to improve the overall data available to markets, 
going forward. And again, I'm happy to look at other ways we 
can get better data out there.
    I think we've--there's much more out there than was there 
before we came in, on all these programs; that provides a rich 
body of evidence for you to evaluate their effectiveness, but I 
am happy to try to do better.
    Dr. Troske. My time is up.
    The Chairman. Thank you, Dr. Troske.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    Mr. Secretary, as you could tell in my opening statement, I 
spend a lot of time focusing on the non-HAMP modifications, 
those proprietary mods performed by banks and servicers outside 
of the HAMP program. In fact, 6 months ago, when you were here, 
we discussed the same topic and you agreed this was an 
important part. And I think, because of the additional 
information that the Treasury has shared since that time, we 
now know it's even more important. In fact, 70 percent of the 
modifications are now in non-HAMP mods, really three to one.
    What is--do you agree that--what's your assessment? Are 
these the way forward? Are they sustainable? And what's your 
assessment on these proprietary modifications?
    Secretary Geithner. I've actually spent quite a bit of 
time, in preparation for this hearing, asking this--very 
similar questions. How much do we know about those 
modifications? And the quality of debate is not so great, so 
far. But, I think the general sense of my colleagues is that 
the majority of those modifications are lowering monthly 
payments quite substantially. And the--one of the most valuable 
things we did, in setting an industry standard for 
modifications, was set a bar that people could strive to. But, 
I would like more data on that. And we're going to look at ways 
to do that.
    Mr. Neiman. So, because--and you're right, I think the 
information that's coming out about the reduction in 
modification payments is out there, generally, with respect to 
non-HAMP mods. But, isn't the heart of the issue the 
sustainability and the length of those modifications? Under 
HAMP, those modifications are 5 years; and then reset to the 
historic low rates of today, we don't know the information, 
with respect to the non-HAMP mods.
    Secretary Geithner. I agree. I think that the three 
measures you want to look at are: What is the magnitude of the 
payment reduction? How long is it in place? And what is left, 
in terms of the remaining balance of obligations, after the 
modification period expires. And, as I said, we're--we'll look 
for ways we get better information out there to assess those 
    Mr. Neiman. And the HAMP monthly reports have really been 
improving month over month, and have, now, greater information 
distinguishing the performance by servicer. Last week, in the 
New York Times, in a big story focused on large servicers, non-
HAMP modifications, and highlighting the differences. So, in 
the cases of borrowers who were denied a HAMP modification, 
only 14 percent, for example, received a non-HAMP mod at B of 
A, but over 40 percent received a non-HAMP mod at Wells Fargo. 
How do we explain these differences?
    Secretary Geithner. I don't actually know. I think--but, 
it's a very good question. And again, I'm happy to pursue that 
with my colleagues and see if we can give you a better sense.
    Mr. Neiman. Yeah. I--to the extent that this type of data--
and we had the same discussion with Phyllis Caldwell. She said 
a lot of this data is held by supervisors. And when we talk to 
the supervisors, it's supervisory material. So, to the same 
extent that this data has been voluntarily provided, with 
respect to the HAMP modifies, I think the information, with 
respect to the non-HAMP mods, would be extremely important to 
assessing the program.
    Secretary Geithner. Yes, I agree. And again, we're happy to 
take suggestions. As you noted, one of the things we have 
done--and we did it early, in successive waves--is put out very 
detailed metrics of performance by individual servicers on 
modifications under HAMP, but also on a whole range of other 
measures of customer service, which, as you know, has been 
abysmal. And if there are other ways we can improve the quality 
of information out there, that would be good. And it's 
valuable, not just because it gives a chance for people to look 
at it, it's valuable because it changes behavior.
    Mr. Neiman. Yeah.
    Secretary Geithner. It's a--it serves as a form of 
    Mr. Neiman. Because I think even the data that I cited, 
with respect to the Times article, may be misinterpreted. It 
doesn't necessarily mean that Wells is three times better than 
B of A. The portfolio itself may have characteristics that 
drive those. So, I think--we've talked about, in the past, also 
the need for a mortgage performance data system, similar to 
what we have on the origination side, under HMDA. Do you have 
a--you know, a view as to the need at this point? Do these 
types of data needs demonstrate the need for a--national 
reporting requirements for performance data?
    Secretary Geithner. Well, I completely agree that we can do 
a much better job of having much better data out there for the 
world at large. And again, I'm happy to look for ways we can do 
    Mr. Neiman. Thank you.
    The Chairman. Thank you, Superintendent Neiman.
    Looking forward and, you know, trying to figure out what we 
can do in the remaining days. In your written testimony, I was 
interested that you talked about both the second lien program 
and the unemployment program. The second lien program is 
something that I have become more and more convinced is a 
major, major problem, especially where you have a servicer that 
has a second lien and the bank has a first lien and the 
servicer doesn't want to make a modification. And so, I think 
the second lien's a program, but it's been around for a while 
now, and it's kind of, you know, based on the data we see, not 
as--not what we'd all like to see--and I think I can say all--
    So, do you have any thoughts about how we can get the 
second lien program up and running and funded and moving and--
    Secretary Geithner. It took a very long time to get up and 
running. It's only been in place for a very short period of 
time. But, I think it's very promising, in the sense that it 
achieves the simple imperative: If the first lien is modified, 
the second has to be modified.
    The Chairman. Right.
    Secretary Geithner. We now have the capacity to do that, we 
have better incentives to do that. And so, I think it's very 
promising, but it's going to take a little more time to 
evaluate the full extent of it.
    The Chairman. Do you have any idea how much money you're 
going to be able to spend on that program--be able to invest in 
the program?
    Secretary Geithner. I thought you might ask me about new 
estimates of----
    The Chairman. Yeah.
    Secretary Geithner [continuing]. How much we spend, and----
    The Chairman. Only because I'm trying to get--you know, is 
this--I mean, I really look at this as a way--and I think the 
panel does, if you look at the report--this is a big problem.
    Secretary Geithner. Right.
    The Chairman. And so, the extent that we can get--and I 
know--and I also realize this is an incredibly complex problem, 
so getting up to speed's going to take a long time.
    Secretary Geithner. Yeah.
    The Chairman. And I'm just trying to get a feeling, Is 
there anything we can do, or you can do, or anybody, to get 
this program to be all that it can be?
    Secretary Geithner. We're doing everything we can. I 
really--we have a tremendously talented group of people, who 
know a lot about the financial markets and about housing, who 
are on this all the time. And so, we'll do everything we can to 
do that. We'd like the reinforcement. And again, the more we 
can shine a light on relative performance of servicers, the 
better we can do.
    On the cost estimate, I don't know how much we'll end up 
spending on this. And, you know, we're in the process of 
looking at doing another reevaluation of how much we expect to 
spend across these programs. We probably won't be in a position 
to reveal that until the budget. But, you'll have a chance, at 
that point, to look at the estimates.
    The Chairman. Good. And the unemployed program, too. While 
the--you know, right now it's not budgeted for any money, 
because there are no incentives.
    Secretary Geithner. Right.
    The Chairman. But--yet clearly we start out on the HAMP 
program, we weren't going to have any unemployed. And now--I 
mean, it just shows the difficulty of the problem. So, now we 
have some--when you look at the debt-to-income ratio on many of 
these people that need modifications, the reason is because 
they're unemployed. So, an unemployed program, like a second 
lien program, is really key to making this whole thing work. 
So, what are your thoughts about the unemployed program?
    Secretary Geithner. I totally agree. And, you know, under 
our programs, servicers are required to provide a period of 3 
months forbearance. Usually, that comes later in the 
unemployment period of an individual; it comes, you know, 
probably months 5 to 8 in their period of unemployment. So, it 
has more value than people think, when they just think about 3 
months. The other program we have, of course, is our program 
with a variety of State housing finance agencies; we're 
providing resources to help them run programs that help the 
    And you made the central point, which is that the principal 
factor which is driving foreclosures today is not what was at 
the heart of foreclosures at the beginning of the crisis, which 
was, as you know, a set of broader lending practices. Now it's 
really about unemployment. And that's why I think it's very 
important to emphasize that the most important thing that's 
going to affect the trajectory of house prices, the overall 
number of foreclosures, ability of people to stay in their 
home, is what the government is able to do to get the 
unemployment rate down much more quickly.
    The Chairman. And a remaining question: Since now HAMP is 
the--TARP's ramping down, HAMP's ramping down--do you have any 
thoughts about programs--I mean, this is such an important 
issue and so much has been learned and--on this--is there some 
suggestions that you could come forward--don't have to do it 
right here at the table, but--I think, more and more, that this 
should be the subject of legislation, that, you know, a new 
program funded--this is still going to be a problem. You said 
it, and I agree, that this is a program that's--years out. This 
is absolutely key to the recovery and, you know, we've earned a 
lot in the TARP program. But, now we're stymied, in that you 
can't make any modifications. So, if you would think about--if 
you have any thoughts, I'd like to have those, but also some 
kind of a statement on paper.
    [The information referred to follows on p. 77]
    Secretary Geithner. I would be happy to think about that 
and come back to you, and I'm sure my colleagues would be happy 
to talk about that in more detail. But, could I just make one 
point in response----
    The Chairman. Sure.
    Secretary Geithner [continuing]. To that? Because I think 
it's important to recognize. There have been a lot of people, 
very capable people, that spend a lot of time looking at 
different strategies to address the housing crisis. And there 
are people in this room and people around the country who have 
suggested much more dramatic departures of approach in the 
past. Of course those would all require legislation, and some 
would require substantial additional resources.
    But, I think the fundamental question really is a different 
question, which is: How many people do you think you can reach? 
And the principal gap between the roughly 5 million Americans 
today that are delinquent in their loans and the number of 
people that are likely to get a modification ultimately is 
really about the following. And, let's just look at those 
numbers in broad terms. Of that 5 million, roughly 2 million 
are now potentially eligible for HAMP and the FHA modifications 
programs. The other 3 million Americans that are currently 
delinquent on their loans fall into a bunch of different 
categories, but many of them are individuals who took out loans 
for houses that are really quite expensive, above $625,000, or 
whose mortgage burden today is below 31 percent of income, 
meaning they can afford to stay in their house, or were 
investors, or who had a second home. Now, that's not all the 3 
million. Some of that 3 million are loans with servicers who 
aren't--don't participate in our program. Some it is people 
who--there's no economic case for helping them stay in their 
home, it's better to help them, in other ways.
    But, if you're going to think about a more dramatic change 
in approach, that would reach millions more Americans, you have 
to fundamentally decide whether you want to extend the benefits 
of these programs, using taxpayers' money, to those classes of 
Americans that fall into those categories. And that's something 
we looked at very carefully. We did not think that was a 
reasonable public policy choice, not a good use of taxpayers' 
money, because, again, a very substantial fraction of those 
people were investors who had a second home, bought an 
expensive home, or who can clearly afford to meet their 
    The Chairman. But, there's still--and I'll just touch base 
for a second--there's still--you talk about 3 million people 
out there who are not in that situation, who need help, who 
we've learned a lot about how to deal with them, we've learned 
about the servicers and the problem----
    Secretary Geithner. Right.
    The Chairman [continuing]. With servicers, we've learned 
about second liens; we've learned about the unemployed; we've 
learned about all these things to kind of get those 3 million. 
And they are extremely important to whether we're going to deal 
with what everybody on the panel and you have said, and that 
is: How are we going to get out of this thing? We've stabilized 
things. How do we move to the next step? And if housing doesn't 
start being more productive, we--we're in deep trouble.
    So, you've got a combination here of people that--the kind 
of moral obligation to help people that were not subprime 
people, people that--exactly what you said, people that did it 
right, they were in the thing, now they've been unemployed, 
through no fault of their own, and they're about to go belly-
up. We have an obligation to help those people, morally. But, 
what really makes it binding is, we also have an obligation to 
do it economically, to get the economy moving, so all of us can 
move on and move on to the next step.
    So, that's why it's going to be--no one's--you know, my 
mother used to have a saying, ``Nothing in life that's 
worthwhile is easy.'' This is very, very, very, very, very 
difficult, but it's also very, very, very important.
    Secretary Geithner. I agree with that. And I think that, as 
I said, our work is not done.
    The Chairman. Right.
    Secretary Geithner. We're--the government is not done. The 
damage is still profound and tragic in its dimensions. And it's 
going to take a long period of time. And again, the most 
important thing for governments to understand in financial 
crises is that you have to keep at it, you have to keep working 
on it, you can't stop----
    The Chairman. Right.
    Secretary Geithner [continuing]. Too early. And, as you 
know, just in looking at the foreclosures at risk still, and 
unemployment at 10 percent, we got a lot of work to do as a 
    The Chairman. That's right. And I--but I think the thing 
is, what we're going to do--and one of the things to do in the 
next 3 months is put it together so that next time this 
happens, God forbid, there's a much--and, as Dr. Troske said, 
you know, some way--and as you said--some way to approach the--
to deal with the whole thing. But, in the interim, you know, 
we're still here, as you said, and we----
    Secretary Geithner. Right.
    The Chairman [continuing]. We're in a deep hole.
    Secretary Geithner. Exactly.
    The Chairman. And, you know, anything that we can use, from 
what you've learned and what your people have learned from 
HAMP, we shouldn't just, you know, say, ``Okay, it's now April 
3rd, goodbye,'' in terms of anything.
    Secretary Geithner. No, no. We're going to be at this, in 
HAMP, for a much longer period of time than that.
    The Chairman. But, I think we're going to need something 
more--as you said, there's lots of things that HAMP is not 
going to be able to do----
    Secretary Geithner. Right.
    The Chairman [continuing]. Based on the way it's presently 
structured. And I am sorry for taking so much time.
    Mr. McWatters.
    Mr. McWatters. Thank you, Senator.
    Mr. Secretary, in your opening statements, you said that 
the financial institutions are basically stronger today than 
they were a few years ago; that they have stockpiled around a 
trillion dollars, at the Fed and excess reserves, earning 25 
basis points. So, when we approach the question of lending, 
when it's not a really question of insufficiency of supply, 
there's a trillion dollars they can loan tomorrow, if they 
wanted to, so there has to be a problem with demand.
    Why is there a problem with demand? I mean, from my 
perspective, over the last 2 years there's been a great amount 
of uncertainty interjected into the economy; to people, who sit 
around their offices, drinking bad coffee out of Styrofoam 
cups, who really make decisions on hiring one person or two 
people at a time, have simply said, ``You know, I think we'll 
hold off on that decision.'' What's going to change in that 
perspective over, say, the next 6 months to a year?
    Secretary Geithner. I think the principal source of 
uncertainty remaining is uncertainty about what is going to be 
the pace of growth and demand for someone's products. That is 
principally a question about, How fast is our economy and the 
global economy going to grow?
    There is more uncertainty about that than is typical 
because of the scale of the damage caused by the crisis and the 
basic shock provided to confidence in the depths of the panic. 
And the scars of that panic last a long time; I mean, it's just 
understandable. People are much more--are still more 
economically insecure or uncertain today than they were, 
really, anytime in generations in this country, because the 
crisis was so severe. That's going to take some time to heal, 
but it is healing.
    Now, the best measure of whether this is getting better 
again is what's happening to the underlying pace of demand, 
what's happening to the forecasts for demand. And those show 
gradual healing. And if you look at how companies are behaving, 
it also suggests a little bit of growing confidence and 
optimism. I'll just give you one--a couple measures of that:
    As I said, the private-sector job growth is faster, 
stronger than happened in the last two recoveries. And business 
investment spending in equipment and in software ran at a rate 
of about 20 percent, the first 6 months of this year; about 12, 
15 percent in the third quarter; and still looks quite strong. 
So, businesses are spending again, because they want to make 
sure they have the ability to participate in the recovery 
that's coming. And that's encouraging.
    And again, that's going to take a little bit of time to 
heal, still. But, I'd say the best thing to say is: gradual 
healing, gradual improvement in confidence. But, ultimately 
what's going to generate more confidence is just the reality of 
growth getting gradually stronger.
    Mr. McWatters. Okay. Thank you.
    November 17th, the Federal Reserve announced another round 
of stress tests, but, for reasons which I'm not sure if I fully 
understand, these stress tests will be kept secret, they will 
not be disclosed. I doubt if you made that decision, but can 
you comment on it?
    I mean, I guess I'm troubled that, somehow, transparency in 
this is not complete.
    Secretary Geithner. Well, I think, as you know, I am a very 
strong advocate and, of course, was the principal architect of 
the decision, back in early '09, to force our major 
institutions to go through the stress test, and to disclose the 
results in enough detail so investors could assess on their own 
whether they were realistic and appropriately conservative. And 
that was a remarkably effective approach, because it allowed 
these firms to go out and raise a lot of capital much earlier.
    And if you contrast that experience with what Europe is 
still going through, you can see the benefits of having a very 
detailed level of disclosure on conservative assumptions about 
potential losses. It's a very good strategy. And I am very 
confident that a regular part of risk management and 
supervision in the future for our system will be regular public 
disclosure of stress tests by major institutions. I can't speak 
to any of the specific things about what the Fed announced 
recently, but I'm very confident that, looking forward, we, as 
a country, will go through regular publicly disclosed stress 
tests of our major institutions.
    Mr. McWatters. Yes. I know, though, but every day we read 
in the papers about putback rights, lawsuits, MERS, robo-
signing, and a lot of these stress tests, I think, were 
initiated based upon that. So, I think it would be helpful to 
    Let me ask one other quick question. Do you believe that 
Fannie Mae and Freddie Mac should ride down the principal of a 
large number of their underwater mortgages through 
participation in the FHA's short refinance program?
    Secretary Geithner. There are--you know, we have a 
principal reduction program in our--Treasury's housing 
programs. And we--and the FHA's--what's called, in shorthand, 
their ``short Refi'' program--both those things, we think, have 
a lot of benefits. And we think there's a pretty good economic 
case for Fannie and Freddie to participate in those programs. 
And we're in the process of talking to the FHA about those--
about the merits of those programs, about their concerns. And I 
can't say, at this point, whether I think they're likely to 
adopt them, or not. Again, we're trying to make sure we 
understand their concerns, and they've got a different set of 
objectives; in some ways, different constraints. But, I'm 
hopeful that they're going to find a way to participate in many 
of these programs as possible.
    Mr. McWatters. Okay. I need to finish up here.
    But, if you are successful in encouraging them--and I think 
some news reports have said, the Treasury's actually 
``pressuring''--that's not my word--what's your projected cost 
of doing this, riding down those loans?
    Secretary Geithner. Well, the--you--there's two ways to 
think about the costs in this. You remember the--Fannie and 
Freddie and the government own all this risk today. So, if you 
do things that improve the odds that house prices will be 
higher in the future, that defaults will be lower in the 
future, then you're going to improve the overall quality of the 
portfolio of these entities of government, and reduce the 
overall losses to the taxpayer. So, we have to link it--look at 
the financial implications of these programs through that 
broader prism, which is what we do, of course, and we want to 
encourage the individual agencies to do, as well.
    Mr. McWatters. Okay. My time's up. Thank you.
    The Chairman. Thank you, Mr. McWatters.
    Mr. Silvers.
    Mr. Silvers. Mr. Secretary, first let me say, I appreciated 
very much your answers to Mr. McWatters' questions. I thought--
on both the macro part and your final answer about the FHA/GSE 
issues, I think you're spot on.
    I'd like to follow up some more on the question of--that my 
colleague, Superintendent Neiman, raised about non-HARP--non-
HAMP modifications.
    But, first let me ask you this. The CBO, in the--as part of 
their $25-billion number, is projecting a--only a $12-billion 
expenditure out of a potential 75. Do you agree with that 
projection? And do you think that--is that good news or bad 
    Secretary Geithner. I think it's bad news, but I think it's 
a little low, based on what we know today. I think it's too 
low, too pessimistic. What we set aside was more like 45 or 50. 
They expect we will spend only 12. I think it's too low. But, 
as I said, we're going through a comprehensive assessment now 
of what we think we're likely to spend in these programs. And 
we'll probably be able to share that with you sometime in the 
first quarter.
    Mr. Silvers. So, you're not satisfied with the type of 
overall impact that that projection would sort of--it would 
appear to presume.
    Secretary Geithner. Look, my obligation is to make sure 
that these programs reach as many people as possible. And the 
more people we reach, the more we will be spending. I think 
it's a good use of the limited resources we have as a country, 
because the returns, in helping the country through this 
housing crisis, are very high, overall.
    Can I just say one quick thing, Mr. Silvers? I want to say 
one thing in response to the question about how you evaluate 
risk and return on these things. And I think this is 
straightforward. You have to look at, not just whether you got 
a--you know, we got a 20-percent return on some of these 
programs. You could ask, ``Relative to what risk?'' But, you 
know, we're the government, we're not a investor, we're not a 
hedge fund, we're not a vulture fund. And the impact of these 
programs should be judged by, What did you do to overall 
economic growth, access to credit, as a whole? So, when you 
think about the return to the taxpayer, the most important 
return is not the financial return to the Treasury and 
investments, it's about the broad impact of these programs.
    Sorry, Mr. Silvers.
    Mr. Silvers. No, in fact, Mr. Secretary, that--your remark 
is very helpful to me, because I wanted to ask you about 
precisely that issue, in relationship to your--the--a term you 
used several times, around foreclosure--around mortgage 
modifications, which is the question of what the homeowner can 
    What exactly do you mean by that term? Do you mean what the 
homeowner can afford--consistent with what? Because, if the--to 
try to be more precise about this, the--we know what the 
homeowner can--it may be that there's a gap between what the 
homeowner can afford--all right?--and what a financial 
institution views as the point at which they would start to 
lose money on the mod.
    Secretary Geithner. Well, I----
    Mr. Silvers. Why don't we think about that gap, in light of 
what you just said about the larger negative externalities of 
foreclosures, which is what I was trying to get at in my 
earlier questions.
    Secretary Geithner. Right. Well, the--no perfect answer to 
this--the standard we've used in our programs is to say that we 
want people's payments to be reduced to 31 percent of income.
    Mr. Silvers. Right.
    Secretary Geithner. Why 31 percent of income? Because, on a 
bunch of evidence, that's something that suggests that people 
can sustain over time----
    Mr. Silvers. But, Mr. Secretary, that's not what I'm 
asking. I mean, I know what the number is. But, when that 
number supports a payment that's ``here''--right?--and the NPV 
model, which is essentially a model of the economics to the 
banks, supports a payments that's ``here,'' that the homeowner 
can't afford--right?--but--so then there's a gap between what's 
in the bank's interest and what's in the homeowners' interest.
    If that gap--right?--means that you go to foreclosure, then 
all that negative stuff that comes down on our economy, you 
were describing earlier, happens. Now, if--in order to close 
that gap, you've got to hit--you've got to take a hit to 
principal--all right?--and the bank takes a hit, which they 
don't like--all right?--which--is that a--it seems like we're 
basically saying--when that gap opens up, we, basically, let 
the bank make the call. Am I right about that, or--and why does 
that make sense? Why shouldn't we be asking--and I think Mr. 
McWatters sort of gets at this a number of different ways, as 
well--Why should we be asking the banks to take something of a 
hit, so we get more of a--across a whole real estate market, 
better outcomes?
    Secretary Geithner. It's a very good question. And, you're 
right that part of the difference between the number of people 
we've reached through permanent modifications and those we 
haven't is where there's a--but it's a relatively small number 
of people--are where the--to use the technical term, ``the NPV 
return is negative.''
    But, let's think about the implications of what you're 
suggesting. I think to decide that we're going to take the 
taxpayers' money so that people can afford to stay in a home 
that is really beyond their capacity to afford, because we want 
to avoid the broader negative consequences, collateral damage 
of more foreclosures, is asking, really, Is that a fair use of 
the taxpayers' money? And how do you feel about----
    Mr. Silvers. But, Mr. Secretary, I wasn't asking about the 
taxpayers' money. I'm asking about the banks' money.
    Secretary Geithner. Well, you--I think, as you know--but, 
again, this is a broader question that goes to the question 
that your Chairman raised earlier, is--we do not have the legal 
authority to compel certain types of performance by banks in 
this stuff. Now, Congress could decide to give it to us; I 
suspect they would not. They could. But, that option is not an 
option available to us at this time. It was not available when 
we designed the programs themselves.
    Mr. Silvers. But, then--Mr. Secretary, can I just--I mean, 
I disagree with your characterization of the leverage you have 
around this question, because I--which I think is implied by 
your statement about not having legal authority. I think the 
web of relationships that exist with the GSEs, with the Fed, 
and the like, give you, I think, a fair amount of ability to 
open that question up.
    But, I want to take you to one last place, with the 
Chairman's permission. Given this--given the fact that this is 
a difficult problem, and given, I think, the--what is clearly, 
as a matter of numbers, the increasing reliance on non-HAMP 
mods across the market, to drive the mods, I am puzzled by what 
I read--and maybe I read incorrectly--to be Treasury's 
opposition to having the State agencies, among the uses of the 
money that they've gotten from HAMP, use that money to help 
homeowners get counsel so that they can then have a better shot 
at negotiating mods. I----
    Secretary Geithner. Are you referring to----
    Mr. Silvers [continuing]. I think I'd like to----
    Secretary Geithner [continuing]. Legal aid?
    Mr. Silvers [continuing]. Understand that----
    Secretary Geithner. Are you----
    Mr. Silvers. Yeah, legal aid. Yeah.
    Secretary Geithner. It's a good question. We've looked--
we've spent a lot of time looking at this. And, of course, we 
do provide resources to help homeowners determine eligibility 
for the program and participate in the programs. The specific 
question a number of Members of Congress have raised is, Can we 
use these this authority to help provide more financial 
assistance to legal aid itself? And the way the laws of the 
land are written, we cannot legally use TARP or HAMP resources 
for that purpose. There's some amendments pending before the 
Congress--there's some laws--legislation pending that would 
change that----
    Mr. Silvers. How did you come to that conclusion, that----
    Secretary Geithner. Very carefully----
    Mr. Silvers. No, I meant specifically under whose advice?
    Secretary Geithner. Oh, we consulted with, of course, a 
broad range of lawyers across the government. And I'm very 
confident their judgment is right. And I think that's 
recognized in the fact that some Members of Congress have 
proposed to----
    Mr. Silvers. The press reports that you relied on outside 
counsel with significant conflicts. Is that----
    Secretary Geithner. No.
    Mr. Silvers [continuing]. True?
    Secretary Geithner. No, absolutely not. We--well, first, we 
would never do that. We have, like, plenty of lawyers at the 
Treasury and in the Justice Department to make those judgments.
    Mr. Silvers. So, you did not ask--it's a false report that 
you asked a particular law firm--if you give me a moment, find 
the name of it. It's a--it's just false that you asked----
    Secretary Geithner. I think I can help you.
    Mr. Silvers. Yeah, you can help me. What's the name of the 
firm that I'm trying to find?
    Secretary Geithner. I have no idea. I'm sure we asked 
people for advice across the--as you expect us to do----
    Mr. Silvers. Right.
    Secretary Geithner [continuing]. But we don't rely on 
judgment--we--the judgment we rely on is the judgment of the 
responsible people in executive branch. And I think that legal 
judgment is the correct judgment, although I'm not a lawyer.
    Mr. Silvers. The letter from your counsel says that, 
``Legal aid services are not necessary or essential to the 
implementation of the loan modification program.'' Is that the 
core of your finding?
    Secretary Geithner. No. And I don't think you were quoting 
the letter in full. And again,----
    Mr. Silvers. No, I'm not.
    Secretary Geithner [continuing]. I'd----
    Mr. Silvers. If I read it in full, it would take a long 
    Secretary Geithner. I'd have to go back and read the letter 
again. But, I think it's a--can I make a more simple legal 
argument, which I think----
    Mr. Silvers. Well----
    Secretary Geithner [continuing]. I'm not going to do----
    Mr. Silvers [continuing]. I'd like you to address why--I 
mean, we know----
    Secretary Geithner. If Congress, by statute, authorizes and 
provides funding for a particular function of government, then 
the general judgment of lawyers is: we cannot use another 
source of funds to supplement or enhance those--that separate--
    Mr. Silvers. But, isn't----
    Secretary Geithner [continuing]. Authorization. This is an 
understandable judgment by lawyers.
    Mr. Silvers. But, wasn't that particular authorization 
passed after the initial decision not to fund?
    Secretary Geithner. I don't believe that's----
    Mr. Silvers. Not to allow funding?
    Secretary Geithner. I don't believe that's the case. But, 
in any case, Mr. Silvers, I'd be happy to respond in writing to 
any more questions about the legal basis for it.
    [The information referred to follows.]
    Secretary Geithner. I want to say that I think you were 
right that there's a very good public policy case for using 
resources to help people take advantage of government programs, 
manage through a very complicated, difficult modification 
process. There's a very good case for doing that. And I have 
been, personally, very, very supportive of more government 
resources for counseling, for legal aid, generally. And, where 
we had a legal authority to do that, we have made TARP funds 
and HAMP funds available to help reinforce that objective, for 
the reasons you support. But, there's a legal constraint on the 
amount--our ability to use TARP for legal aid directly, that 
law would have to be changed to rely on.
    Mr. Silvers. Mr. Secretary, it puzzles me that when hedge 
funds get TARP money, under PPIP, I believe they get to pay for 
lawyers. And it puzzles me that a vast amount of TARP money has 
been expended on legal counsel for the benefit, obviously, of 
the government. It seems as though lawyers are understood to be 
a necessary and essential component of all the transactions 
that TARP--that HAMP and TARP under--that TARP undertakes, 
except when homeowners need the lawyers. It----
    Secretary Geithner. It puzzled----
    Mr. Silvers [continuing]. Troubles me.
    Secretary Geithner [continuing]. Me and troubled me, too, 
when I first was confirmed. And I spent quite a lot of time 
trying to figure out how we could fix it, but I'm very 
confident that the legal judgment our lawyers and Justice made 
is the right one. And we'll figure out--see if we fix that 
through legislation.
    Mr. Silvers. Well, I appreciate your engagement with me on 
that. Thank you.
    The Chairman. Dr. Troske.
    Dr. Troske. Mr. Secretary, I--I think I'm going to switch 
gears here a little bit. I mean--and we'll maybe talk about 
cars for a little bit.
    So, as you're aware, in December of 2008 the decision was 
made to use TARP funds to provide financial support to the--
General Motors and Chrysler. Would you have done that? Would 
you have made--reached the same decision, if you had been 
Secretary at the time?
    Secretary Geithner. It was not my decision to make, as you 
implied. But, I was aware of the--the merits of the choice at 
the time. And I thought what my predecessor did was the right 
    Dr. Troske. So, I guess--I mean, and essentially this was 
for them to avoid going into bankruptcy, with--I think that was 
the alternative at the time. In--and you made the--you alluded 
to the estimate that a million jobs would have been lost 
through bankruptcy. So, firms as large, if not larger than 
General Motors and Chrysler, such as Texaco, United Airlines, 
Delta, American, and Polaroid have gone through bankruptcy, as 
did Lehman Brothers, and our economy survived. So, would the 
world really--would the world today really have looked much 
different, had General Motors and Chrysler gone through 
bankruptcy in December of 2008? How different would the 
unemployment picture be? And so--and tell me why--whether you 
think that's true, and what you based that decision on. You 
know, what are your thoughts on why it would look different? 
What's different?
    Secretary Geithner. Look, market economies require failure. 
They don't work unless you allow firms to be--to fail when they 
cannot make things people want to buy. And, in normal 
recessions even, not just in normal expansions, bankruptcy is a 
central part of the functioning of a market economy. But, 
everything is different when you're in a financial crisis like 
what we faced in the Great Depression or what we faced in this 
basic crisis. And, in those circumstances, bankruptcy itself 
cannot provide an effective way to protect the economy from the 
collateral damage of, for example, the failure of major 
financial institutions, or in--even in the auto case, the 
failure of a concentrated number of major providers. And I 
think that--so you have to think about those two different 
    In a crisis, you have to do things you would never do in a 
normal recession, and certainly would do in an expansion. And I 
think that bankruptcy never works, of course, without there 
being a source of lending that is in a position with financing 
to help facilitate a reorganization, because companies need 
funding to go through that. And in a financial crisis, there 
will be no source of Debtor-in-Possession financing on 
significant scale. And so, in some cases, the government has to 
step in to provide that temporary financing. But, what matters 
most--and this is true in the auto case--is, if you do that, 
you have to do it on the condition that you bring about a 
restructuring that will allow the firm to emerge profitable 
without government assistance. And that's what the auto piece 
of our strategy was able to achieve. And I think there's no 
doubt that unemployment would have been much higher, there 
would have been millions more jobs lost, if we hadn't gone 
through that. And I thought that was a very well-designed use 
of government resources in an acute crisis.
    Dr. Troske. Let's talk about GMAC a bit, and the exit plan. 
The government's relatively speedy exit from General Motors 
contrasts with the lack of clear exit strategy from the 
government stake in GMAC. The GMAC management team has 
discussed publicly the idea of a 2011 IPO. Given that the 
company has reported three consecutive quarters of profits, 
what is the current thinking on a timetable for an IPO?
    Secretary Geithner. As quickly as we can do it. I think 
you--if you look at what we've done across the board, and if 
you--again, we're way ahead of anybody's expectations--we are 
going to move as quickly as we can to replace the government's 
investments with private capital, take those firms public, 
figure out a way to exit as quickly as we can. And we're 
working very hard with the management and board of GMAC to 
achieve that outcome. I don't quite--I don't know how quickly, 
but it's going to be much sooner than we thought 6 months ago.
    Dr. Troske. To change subjects again and talk about 
executive compensation a bit, when Mr. Feinberg testified 
before our panel, he stated that if the culture of pay on Wall 
Street is not changed in the wake of the TARP, then I think our 
work has not been successful and it's not being--and, if it's 
not being followed, it is a problem. Do you agree with him?
    Secretary Geithner. I would agree with that. If that were 
the case, I would completely agree with that.
    Dr. Troske. And do you think that's not the case?
    Secretary Geithner. Very good question, and a good time to 
be asking that question. And I guess I would say the following:
    We did two things over the last 6 months or so, one in the 
Dodd-Frank Reform Act and one in a set of standards that the 
Fed is responsible for enacting--for enforcing, to try to bring 
about very substantial changes in compensation practice, 
looking forward. The first was a requirement for disclosure and 
to give shareholders the right to vote on compensation 
packages. That's the SEC's responsibility. And the second is a 
set of standards on the design of compensation incentives that 
that Federal Reserve and the bank supervisors are responsible 
for enforcing. And we'll know more about the results of both 
those things on behavior in the early part of next year.
    To date, what you can say is, there's been a substantial 
shift in compensation. So, there's less in cash, more in 
equity. It vests over time. It's more at risk of being clawed 
back if firms don't end up performing as well as people had 
hoped. That's very good. But, I would say, you cannot say 
today--I would not claim that we have seen enough change yet in 
the structure of compensation. And that's a very important 
thing for us to achieve, because, as you know, those incentives 
were so skewed to encouraging risktaking that they played a 
material role, I think, in what caused the crisis itself.
    The Chairman. Thank you, Dr. Troske.
    Superintendent Neiman.
    Mr. Neiman. Thank you.
    Mr. Secretary, I think you may have anticipated my 
questioning around servicer performance, because you may have 
preempted me by characterizing servicer performance as 
``dismal'' during our last exchange. But, I do believe, you 
know, it deserves further discussion.
    In fact, Speaker Pelosi, who appointed me to this panel, 
made public a letter that she sent, along with other members of 
the delegation, to the Department of Justice, to the Fed, and 
to the OCC, a letter that describes, in 20 pages, excruciating 
detail of examples of real stories from homeowners in dealing 
with servicers. It demonstrates their frustrations and clearly, 
despite good-faith efforts on the part of the homeowners, 
failures of--by the servicers. You know, it highlights areas of 
failures to respond in a timely manner; the timeliness of 
proceeding with foreclosures while at the same time proceeding 
with modifications; as well as a continual evidence of losing 
and misplacing documentations.
    Do we need national standards for mortgage loan servicers?
    Secretary Geithner. I think we do.
    Mr. Neiman. Do you--you know, there are a number of States, 
including New York, that have models out there. We, over 2 
years ago, have put in place, not only a registration of 
mortgage loan servicers, but one of the most comprehensive in 
the country, that imposes ``duties of care,'' specific conduct 
of business rules around fair dealing with customers, with 
homeowners, in requiring modification, requiring trained 
personnel, and requiring data reporting requirements. Is this 
something that could serve as a model at the Federal level?
    Secretary Geithner. I think it could. I'm not familiar, in 
detail, with what you've done in New York, although I know a 
number of people think very highly of it. But, we'll look at 
that model and others. But, I think you're making the right 
    Mr. Neiman. In the--in your efforts to stand up the CFPB, 
do you see this as an early priority, this as one of the 
mortgage areas, one of the mandated statutory responsibilities 
for rulemaking?
    Secretary Geithner. I'm not quite sure how early that will 
come, realistically. And, of course, as you know, right now 
we're focused, overwhelmingly, on trying to make sure we're 
fixing the existing problems in servicer performance and making 
sure enough people--that we reach as many people as we can, in 
terms of modification programs. But, it'll be a very important 
priority. You know, as you know, we have a whole set of 
complicated work on defining new underwriting standards, 
defining what's a qualified residential mortgage, what should 
be the basic future of the housing finance system, more 
generally. You have to look at these things all together. Not 
that we want to take too much time to do them, because it's so 
consequential, but we have some time. This is--we got this 
terribly wrong, as a country; we want to make sure we get it 
right; and we're going to do everything we can to make sure we 
have a durable set of fixes.
    Mr. Neiman. So, how do we proceed with national standards 
to avoid 50 States proceeding down the road, requesting data 
from servicers in 50 different formats? Does not this have to 
be a priority? If not----
    Secretary Geithner. Oh, it will be a priority. I just don't 
know yet--I can't be honest with you and tell you whether it's 
something where we'll have a proposal in 6 months or 12 months. 
Just can't tell you. But, it's absolutely very important. And 
again, we'll look to the model in New York and other States to 
see what's the best way to proceed.
    Mr. Neiman. With respect to the CFPB, do you see a new era 
of cooperation? My reference to a cooperative federalism, 
particularly between States and the agencies----
    Secretary Geithner. I----
    Mr. Neiman [continuing]. Particularly the CFPB?
    Secretary Geithner. I think we do. And, you know, we're 
going to have a test of that in the--in how we deal with this 
broad--these broad set of mortgage documentation problems that 
have been the subject of many of your earlier comments, where 
we have a broad task force of agencies looking at this and 
working very closely with the State AGs. We've got a standing 
mechanism we call the ``financial fraud task force,'' that 
works very closely with the State AGs. The council, that the 
Congress established by law to look at financial stability, 
gives a seat at the table to representatives of State 
securities regulators, insurance regulators, and banking 
regulators. You know, we're a country, and we have a national 
financial system, and so, if we're going to do a better job, in 
the future, of preventing future crises, we have to make sure 
that these entities are working much more closely together.
    Mr. Neiman. Well--thank you, my time is expired.
    The Chairman. Thank you, Superintendent Neiman.
    Just a big question. What's the current systemic risk from 
troubled assets remaining in banks? Do you think it's just--how 
do you see it?
    Secretary Geithner. I believe that the U.S. banking system 
has very substantial capital on their books today, in the form 
of common equity against the assets they hold and the risks 
they're taking. And I am much more confident today that we made 
the right judgments in forcing enough--that much capital into 
the system earlier, and that that'll give us a--very reasonable 
prospect of coming out of this stronger. So, I think that what 
matters is the capital, relative to the potential exposure 
still. But, firms are working down those assets. And most 
measures you see of performance of those assets now are 
improving, have been improving for some time, even in 
    The Chairman. The financial system may be stronger, but we 
still have more concentration, in terms of the banking system. 
What are your feelings today on, you know, Dodd-Frank, 
resolution of authority, if in fact one of--because what's 
happening more and more is people are just saying--
discussions--what--in our hearings here and everything else, 
it's like it's just assumed we'd be in big trouble if one of 
these bank fail. So, what's your feeling, right now, based on 
the increasing concentration of the big banks?
    Secretary Geithner. Of course, you're right that the system 
is more concentrated today than it was before the crisis. And 
that's sort of an unavoidable consequence----
    The Chairman. Right, exactly.
    Secretary Geithner [continuing]. In a financial crisis. 
But, I--we're much less concentrated than anything other major 
economy, in the banking system. You know, we still have roughly 
8,000, 9,000 banks, and that's a great strength to our system; 
we want to preserve that. But----
    The Chairman. But the vast--you--we've got a few banks that 
are just extremely big.
    Secretary Geithner. We do, but they--again, not to 
    The Chairman. Yeah.
    Secretary Geithner [continuing]. The consequences of this 
stuff, but they are much smaller, as a share of our economy, 
than is true for any other country, too. So, if you look at the 
comparison--you look at Canada, the U.K., Western Europe, 
Japan--even our largest banks are much smaller, relative to the 
size of our economy, than is true for them, as a whole. If you 
look at a list of top 50 financial institutions in the world, 
in terms of overall size today, the U.S. banks are not 
distinguished on that list, in terms of their relative size. 
So--now, that's not to say that it's not a big problem for----
    The Chairman. But----
    Secretary Geithner [continuing]. The system----
    The Chairman [continuing]. In many of these countries, the 
banks and the government are so closely aligned. I mean, we did 
have--like the Scotland Bank--we did have a----
    Secretary Geithner. We would not want to be like them.
    The Chairman. Right.
    Secretary Geithner. I agree with you.
    The Chairman. Exactly.
    Secretary Geithner. Yeah.
    The Chairman. So, I mean, just--under the resolution 
authority, these are still----
    Secretary Geithner. They are, but----
    The Chairman [continuing]. Banks.
    Secretary Geithner [continuing]. The--you know, the most 
important things----
    The Chairman. Right.
    Secretary Geithner [continuing]. That Dodd-Frank did were 
to give us the authority----
    The Chairman. Right.
    Secretary Geithner [continuing]. To force these large 
institutions to hold much more capital, recognizing----
    The Chairman. Right.
    Secretary Geithner [continuing]. The significant risk they 
pose to the system as a whole--we have achieved that; to give 
us the authority to apply those requirements for capital, those 
constraints on leverage, to institutions that are banks, even 
if they don't look like banks, like AIG or investment banks or 
a range of other institutions that were not regulated as banks 
before; and, as you said, resolution authority, which is like a 
bankruptcy authority for banks, so that, in the event, in the 
future, a bank like that makes mistakes that cause it to fail, 
the government can step in and unwind them, put them out of 
their misery, break them up, without the risk of collateral 
damage to the taxpayer or to the rest of the economy as a 
whole. So, I think we're going to be in a much better position 
in the future to prevent crises of these magnitude, and to 
manage them more carefully. We will have crises in the future, 
but the reform bill, to the credit of the architects in 
Congress today, will help us fix the fundamental failures that 
caused this crisis.
    The Chairman. But, as you said earlier, when you're in a 
situation of a financial crisis, bankruptcy or anything like 
bankruptcy is something you really want to avoid.
    Secretary Geithner. You cannot--you can't have liquidation 
be a solution to a financial panic; it just doesn't work.
    The Chairman. So, it's better to do it when it's not.
    Secretary Geithner. Yeah, that's right.
    The Chairman. Thank you.
    Mr. McWatters.
    Mr. McWatters. Thank you. I'll keep this short, because I 
know time is fleeting.
    To follow with what the Senator said, there's a trillion 
dollars of distressed mortgages on banks' balance sheets today. 
If those mortgages were mark-to-market and the losses booked 
and the capital impaired, would we have a systemic problem? 
And, if so, is this thing being--basically being held together 
today by accounting convention?
    Secretary Geithner. No. That's what the stress test did. 
The stress test--what the stress test did was to disclose to 
the market the scale of potential losses that banks might face 
in the event we had a much worse recession then we ultimately 
did, and to force those institutions to hold capital against 
those potential losses. And because of that, because we brought 
a level of disclosure and reality to those balance sheets, 
those firms, on balance, were able to go raise a very 
substantial amount of capital from private investors. And 
that's the best measure of the risks banks face, looking 
    Mr. McWatters. So, if those assets are mark-to-market, the 
losses were booked, there would not be a systemic problem.
    Secretary Geithner. The major banks in this country have 
the capacity to manage the remaining risks they face on their 
balance sheets that they took on in the crisis.
    Mr. McWatters. Okay. Fair enough.
    That's all for me.
    The Chairman. Thank you, Mr. McWatters.
    Mr. Silvers.
    Mr. Silvers. Just briefly.
    The firm I was looking for on the foreclosure issue, on the 
legal aid issue, is Squire Sanders and Dempsey. You did not ask 
their advice?
    Secretary Geithner. I have no idea who they are. But, I'm 
sure we've asked lots of people for advice, as we do all the 
time. But, that's not really the relevant question. The 
question is: On whose judgment and what quality of judgment do 
we make those decisions? And the judgments are--of course, I'm 
accountable for those judgments, but they're made by the 
government's lawyers.
    Mr. Silvers. Mr. Secretary, I'd--I would appreciate knowing 
whether or not you asked that firm for advice. Not now----
    Secretary Geithner. I'll be happy to----
    Mr. Silvers [continuing]. Obviously, but if you could----
    Secretary Geithner [continuing]. Get that to you.
    Mr. Silvers [continuing]. Pursue that.
    Now, secondly--and this is, I think, much in vein of the 
Chair and the prior--and Mr. McWatters' question--there's a lot 
of numbers in our banking system. I watch one of them, because 
I feel like I understand it. And that is the value of second 
mortgages on the books with Wells Fargo. And there's about $100 
billion on the--on its books, and that number hasn't changed 
very much over the last 2 years. That makes me wonder a lot 
about (a)--the fact that that number's there and the size of 
Wells's service--first mortgage servicing portfolio makes me 
wonder about two things.
    One is, Does that number bear any relationship to economic 
reality, per Mr. McWatters's question? And, more broadly, do 
similar numbers on the balance sheets of the other major four 
banks bear any relation to economy reality? And (b), if you 
take that number and the putback risk number, and the 
continuing inability of at least this panel to understand what 
the underlying holdings in toxic first-mortgage assets are--
going back to our August 2009 Report--take those three things 
and add them up. They seem to represent a threat to the capital 
levels of the four large banks. You seem to be quite confident 
they don't. Can you explain why? And I don't mean with respect 
to Wells, in particular, but with respect to the picture as a 
    Secretary Geithner. I mean, there's no certainty about 
judgments. And they're all a probabilistic judgment, and they 
depend a lot on what is going to be the path of the economy in 
the future. But, we helped--what we helped do--and this is a 
necessary thing for any system to function--is put enough 
disclosure in the market about the composition of those assets, 
their quality, the losses you may face on them, how they're 
performing, so individuals across our financial marketplace, 
credit agencies or creditors, can judge for themselves whether 
the capital the banks hold is sufficient against those losses. 
And again, I would say the judgment I'm reflecting is the broad 
judgment of most people, that these banks all hold very 
substantial amounts of capital against the risks they still 
hold, they took on in the crisis. But, you can look at 
extraordinary detail every quarter, if not more frequently, 
about how that stuff is performing and make your own judgments 
about how it's likely to perform in the future.
    Mr. Silvers. If I might be allowed one final comment, Mr. 
    Do you then feel--do you disagree with--the thing that 
haunts me about those numbers in relation to the question of 
the strength of our banks is that when you then take that and 
connect it to mortgage modifications--and while the--and there 
seems to be just a very fundamental question there, which is: 
Are we in a zero-sum game between the strength of those banks--
all right?--and our ability to modify mortgages, and thus, both 
the well-being of the American public and the strength of our 
housing markets? And I know you--and I can clearly tell, by 
your gestures, that you don't believe we're in a zero-sum game. 
But, the evidence that I--that comes before this panel strongly 
suggests we are. Can you explain why you think we're not?
    Secretary Geithner. It would require a little more time 
than I have. And I think it's a fundamental question, I agree. 
And I think there is a broad perception, you share, that the 
principal barrier to reaching people we should be able to reach 
through modifications is weakness, in some ways, among the 
Nation's major banks. And----
    Mr. Silvers. Can I just say----
    Secretary Geithner [continuing]. I know, Mr. Silvers----
    Mr. Silvers [continuing]. I'm sorry.
    Secretary Geithner [continuing]. But the----
    Mr. Silvers. My Chair is----
    Secretary Geithner [continuing]. Can I----
    Mr. Silvers. I----
    Secretary Geithner. Maybe we should pursue this in more 
detail subsequently. But, you have to come back and look at, 
What's the source of the difference between people who are 
being reached through modifications today and those who are 
not? And, as I said earlier, it's principally about how we 
define eligibility, not about the incentives problem banks 
    The Chairman. Thank you.
    Thank you, Mr. Silvers.
    Dr. Troske.
    Dr. Troske. Mr. Secretary, I want to return to a comment 
you made, or, you know, expand a little, get you--push you a 
little on a comment you made earlier about executive 
compensation and risktaking. And I guess I would argue that a 
major part of the excessive risktaking was the result of a 
perception of ``too big too fail,'' which, you know, after a 
certain point, firms simply didn't worry about what the left 
tail of the distribution looked like. And so, I guess I'd like 
to--do you think we've fixed--have we put situations in place 
that are pushing firms--that are going to require firms to 
actually start thinking about what the left tail of the--you 
know, the likelihood of an extremely bad loss?
    Secretary Geithner. I think you're exactly right, which is 
that the two sources of financial crises, classically, are 
moral hazard, the perception the government will insulate you 
from the consequence of your mistakes, and a fundamental 
uncertainty or excessive optimism about how dark the future 
might be, how you--using the technical term, how adverse the 
tail is in the extreme event.
    I think, in this crisis, both were at work. Of course, 
moral hazard was the central part of what happened, what went 
wrong in the GSEs.
    But, the failures across the system, in my view, were not 
principally about moral hazard, they were a much more 
systematic failure of people to anticipate what might happen in 
the event we had a deep recession, where house prices actually 
fell very substantially, because that was not in the memory of 
most people alive today. Most people ran their banks, their 
businesses, their personal finances on an expectation that 
house prices would not fall. House prices fell dramatically, as 
you saw; and that failure to anticipate and plan for the 
potential adverse risk was fundamental to that. In parts of the 
system, moral hazard made that worse, like the GSEs; but the 
failures were much more systemic from that.
    Now, have we fixed that? We'll never fix that completely. 
But, what the Dodd-Frank bill does is allow us to constrain 
risktaking with constraints on leverage to offset moral hazard 
risk and set up a system where, in the event these large 
institutions are at the risk of failure again, we cannot save 
them, all we can do is dismember them safely, break them up 
with less collateral damage. And that will help reduce the 
expectation in the market, that is pervasive in any financial 
system, that in the future, when there's a risk of failure, the 
government will insulate the firm from the consequence. And so, 
you can't correct it completely, but we're in a much better 
position to reduce that risk, going forward.
    Dr. Troske. So, let me--I mean, just--and so, one final 
question, just building on that. Until that actually happens--I 
mean, until we see that situation and we see--firms, businesses 
see how the government's going to deal with that, do you think 
that--I mean, do we need to see that before they start 
believing that that's the case? Or do you think that they 
actually have started responding to it with just--on the belief 
that, okay, now----
    Secretary Geithner. We're----
    Dr. Troske [continuing]. All the--everything's changed?
    Secretary Geithner. Remember, you can't run the system on 
the hope that they behave or market discipline works that way. 
You have to be--you have to do two things. You have to 
constrain risktaking, force firms to hold more capital against 
the risk of a very deep shock. That's a function of government; 
the government failed to do that. You have to do that, as well 
as make sure you have the ability to let firms fail without 
causing collateral damage. The reform bill gives us those two 
authorities. That's fundamental.
    Now, again, we're going to have crises in the future, and 
how they are managed in the future will depend on the overall 
cost of them, but we're in a much better position to prevent 
them being this severe than we were before.
    The Chairman. Thank you, Dr. Troske.
    You also have to anticipate where problems may develop with 
particular firms, right? I mean, that's the----
    Secretary Geithner. That's really important.
    The Chairman [continuing]. The third part of the----
    Secretary Geithner. Right. And I think that obviously, you 
want people running the institutions, running the central bank, 
running supervision, that have that capacity to anticipate. 
But, you have to recognize the reality that we don't know what 
the future is----
    The Chairman. But, it----
    Secretary Geithner [continuing]. And that----
    The Chairman [continuing]. It is one of the three things--
    Secretary Geithner. It's one of the key things. But, 
fundamentally, you have to make sure your system is strong 
enough to compensate for the failures of individuals to 
anticipate. Because that will happen. And that's why capital is 
so fundamental.
    The Chairman. I know. But, I--it's a three legged stool.
    Secretary Geithner. Yeah.
    The Chairman. If you don't anticipate--because, as you 
said, when you get to a bankruptcy, it's a totally different 
deal if you're in the middle of a crisis than it is if they're 
    Secretary Geithner. That's right.
    The Chairman. Right.
    Thank you, Dr. Troske.
    Superintendent Neiman.
    Mr. Neiman. Two quick questions. Mr. Secretary, we both 
mentioned, in our opening statements, the unfinished work in 
bank lending, particularly by smaller banks. Over 50 percent of 
the loans to small businesses are made by banks under 10 
billion, even though those banks only hold 20 percent of all 
bank assets. Could you give us an update on the status of the 
implementation of the Small Business Lending Fund?
    Secretary Geithner. We are working very hard to put out a 
term sheet in public very quickly so that we can get capital to 
banks on a large scale as quickly as we can. And we're very 
close to being able to do that.
    Mr. Neiman. Very close. Will you--be any more specific?
    Secretary Geithner. Soon.
    Mr. Neiman. Soon.
    Secretary Geithner. As soon as possible.
    Mr. Neiman. And then, finally, you know, in June, when you 
were here and talking about the fund, you were relatively 
optimistic about bank participation. What's your assessment 
today on bank participation? Will it--will the structure of 
that program, as you envision it, overcome the TARP stigma that 
was of concern?
    Secretary Geithner. I hope so, but I can't tell for sure. 
There's two types of deterrents--discouragement for banks to 
participate. One is the stigma that it's a sign of weakness.
    Mr. Neiman. Okay.
    Secretary Geithner. It's hard to correct, because, you 
know, people aren't going--getting capital from the government. 
The other source of deterrence was the fear of conditions, 
actual perspectives, that would make the assistance uneconomic 
or not attractive. That was the principal reason why a 
relatively small amount of the Capital Purchase Program went to 
small banks; why hundreds of banks withdrew their applications. 
I think we've probably fixed that problem. I can't be sure we 
fixed the other problem.
    Mr. Neiman. And I think that's the concern we're hearing. 
And, you know, I think of it in two buckets: those that are 
currently in--those 600 or some banks that are already in the 
TARP and--will they view this as a Refi?--or the banks who are 
not in the TARP program. And I think the question they have--
and I'd appreciate your assessment--it--will that loan demand 
be there for them to utilize that capital?
    Secretary Geithner. The--you know, the question of what's 
going to happen in loan demand is an excellent question. I 
think it's worth--it is worth noting that, if you look at the 
balance sheets of the American private sector, nonfinancial 
corporate sector, it's not just the big firms; people have a 
lot of cash. Now, that's not--the averages mask a lot of 
differences and, of course, lots of small businesses are not 
sitting on a lot of cash. But, what happens to the loan demand 
will depend on, not just how quickly the economy recovers, but 
how quickly people start to work through those balances of cash 
that they accumulated before the crisis, and built up--many of 
them built up, even in the early stage of recovery.
    Mr. Neiman. Thank you.
    The Chairman. Mr. Secretary, thank you for coming today.
    I just want to say that, you know, we have 4 months more to 
go. And, in light of the problem out there--the problems out 
there, which you talked about and every panel member, we are--
we were looking forward to working for you for the last 4 
months, right up to the very end, to do what we can to see if 
we can get one more person employed and one more person into a 
house without a foreclosure.
    So, I want to thank you for your service. And I want to 
thank you for your testimony here today.
    The record of the hearing will be open for 1 week so that 
the panel may submit questions for the record.
    This hearing is adjourned.

    [Whereupon, at 12:02 p.m., the hearing was adjourned.]

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