[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
                   THE FINAL REPORT OF THE FINANCIAL
                       CRISIS INQUIRY COMMISSION

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 16, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                            Serial No. 112-6




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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
KENNY MARCHANT, Texas                BRAD MILLER, North Carolina
THADDEUS G. McCOTTER, Michigan       DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JOE DONNELLY, Indiana
BLAINE LUETKEMEYER, Missouri         ANDRE CARSON, Indiana
BILL HUIZENGA, Michigan              JAMES A. HIMES, Connecticut
SEAN P. DUFFY, Wisconsin             GARY C. PETERS, Michigan
NAN A. S. HAYWORTH, New York         JOHN C. CARNEY, Jr., Delaware
JAMES B. RENACCI, Ohio
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio

                   Larry C. Lavender, Chief of Staff


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    February 16, 2011............................................     1
Appendix:
    February 16, 2011............................................    59

                               WITNESSES
                      Thursday, February 16, 2011

Angelides, Hon. Phil, Chairman, the Financial Crisis Inquiry 
  Commission.....................................................     9
Born, Hon. Brooksley, Commissioner, the Financial Crisis Inquiry 
  Commission.....................................................    48
Georgiou, Byron, Commissioner, the Financial Crisis Inquiry 
  Commission.....................................................    51
Holtz-Eakin, Dr. Douglas, Commissioner, the Financial Crisis 
  Inquiry Commission.............................................    50
Thomas, Hon. Bill, Vice Chairman, the Financial Crisis Inquiry 
  Commission.....................................................    11
Wallison, Peter J., Commissioner, the Financial Crisis Inquiry 
  Commission.....................................................    47

                                APPENDIX

Prepared statements:
    Angelides, Hon. Phil.........................................    60
    Born, Hon. Brooksley.........................................    62
    Georgiou, Byron..............................................    68
    Holtz-Eakin, Dr. Douglas.....................................    70
    Thomas, Hon. Bill............................................    74
    Wallison, Peter J............................................   122

              Additional Material Submitted for the Record

Cleaver, Hon. Emanuel:
    Written responses to questions submitted to Hon. Phil 
      Angelides..................................................   140
    Written responses to questions submitted to Dr. Douglas 
      Holtz-Eakin................................................   143


                   THE FINAL REPORT OF THE FINANCIAL
                       CRISIS INQUIRY COMMISSION

                              ----------                              


                      Wednesday, February 16, 2011

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Lucas, Paul, Biggert, Miller of California, Garrett, McHenry, 
Bachmann, McCotter, Pearce, Posey, Fitzpatrick, Luetkemeyer, 
Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, 
Grimm, Canseco, Stivers; Frank, Waters, Maloney, Velazquez, 
Watt, Sherman, Capuano, Baca, Lynch, Miller of North Carolina, 
Scott, Green, Cleaver, Donnelly, Himes, and Carney.
    Chairman Bachus. Good morning. The hearing will come to 
order.
    In the interest of time, I will reserve my designated 3 
minutes to make an opening statement and submit my statement 
for the record. Without objection, all members' written 
statements will be made a part of the record.
    With that, I would like to recognize the gentleman from 
Massachusetts, who is recognized for 3 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    First of all, Mr. Chairman, I would like to thank you and 
the ranking member, Mr. Frank, for holding this hearing.
    I want to thank the members of the Financial Crisis Inquiry 
Commission for their testimony today, for helping the committee 
with its work, and for their public service to our country. The 
Commission's majority report has received a fair amount of 
praise I think for its honesty and clarity and for the ease 
with which it explains some very difficult and complex 
financial issues.
    I am pleased that the Commission identified over-the-
counter derivatives as one of the nine conclusions offered as 
the primary cause of the financial crisis. The majority report 
states that OTC derivatives ``fueled the mortgage 
securitization pipeline by allowing investors to protect 
themselves against the default of decline in value of mortgage-
related securities backed by very risky loans.''
    Additionally, the report notes that CDs were--credit 
default swaps were essential to the creation of synthetic CDO, 
CDO squares, products that I have been very concerned about and 
which amplified those losses from the collapse of the housing 
bubble and were just one example of the interconnectedness that 
brought down the system.
    I realize that the members of the Commission released three 
reports in total, but many have pointed to the similarities 
amongst the three rather than their dissenting views. I hope 
the Commission's findings will help this committee with its 
work, and Congress with its work, and I look forward to hearing 
from our witnesses.
    I yield back. Thank you, Mr. Chairman.
    Chairman Bachus. I would like to recognize the gentleman 
from California for 1 minute.
    Mr. Royce. Mr. Chairman, economists have already pointed 
out that there is little mention of the major role of the Fed 
in setting interest rates too low, setting negative real 
interest rates for 4 years running, causing very cheap money 
and massive speculation--one out of three homes were being 
flipped because of those negative real interest rates--nor the 
role of the politicians. I guess we shouldn't be that 
surprised.
    But for example, the fact that politicians muscled the 
market for zero downpayment loans to go to 20 percent down to 
zero down, the politicians backed the GSEs in this effort to 
allow arbitrage overleveraged at 100 to 1 and thus caused the 
collapse of the housing market to begin with.
    So it is the underlying factors, the other underlying cause 
here that was hit on by a few members of this Commission but 
does not end up in the final report.
    And I think the Wall Street Journal put it best: So the two 
companies that dominated the mortgage market, Fannie and 
Freddie, that bought or insured hundreds of billions in 
subprime loans that turbocharged the mortgage market with 
trillions in capital from around the world and that have cost 
taxpayers more than any other bailed-out bank, they are 
innocent.
    Chairman Bachus. I will give the gentleman from California 
an additional minute.
    Mr. Royce. Was their attorney Johnny Cochran, I ask?
    There has been risk-taking and speculation throughout our 
capital markets for decades but it has not caused a boom-and-
bust of this magnitude.
    It was the actions taken by the Fed and the GSEs that 
turned a boom into a bubble and led to the eventual collapse. 
And I think it is unfortunate that this Commission couldn't 
produce a more credible report.
    But I am glad to see the dissent most notably of Peter 
Wallison's report, which properly accounts for the government's 
role in this crisis, and that is what we should be looking at 
today. Thank you.
    Chairman Bachus. Thank you. Mr. Scott, for 2 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman, for holding 
this hearing today on the final report of the Financial Crisis 
Inquiry Commission.
    In its 633-page report, the Commission mentions massive 
failures of corporate governance and risk management at several 
important financial institutions. Many entities are deemed 
responsible for contributing to the crisis, whether through 
ineffective government policies or by a lack of proper 
oversight.
    The Commission further states in its report that failed 
policies under President Bush and under President Obama bear 
some of the blame for the crisis.
    In addition, government regulators and corporations are 
cited for missing key warning signs, including risky subprime 
lending and securitization and growth in financial firms' 
trading activities and a steady rise in housing prices.
    But perhaps the most troubling is that the report cited 
that several financial industry figures themselves appear to 
have acted illegally. Most importantly, the Commission states 
that the recent financial crisis could have been avoided. It 
contains to affirm that it occurred as a result of human action 
and human inaction and that it could happen again if lessons 
are not learned.
    So I find it difficult to disagree with this assertion. If 
those involved in the financial collapse had responded 
appropriately to market indicators and had refrained from 
unsound lending practices, we would not have experienced a 
crisis so severe. So it is my hope that we could continue to 
learn from the Commission's report and avoid a similar series 
of failures in the future.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Scott. The gentleman from 
North Carolina, Mr. McHenry.
    Mr. McHenry. Thank you, Mr. Chairman.
    The Financial Crisis Inquiry Commission was entrusted by 
Congress to conduct the most significant financial 
investigation since the Pecora investigation of the 1930s, and 
many were hopeful that it would result in a similar unified 
report with a unified narrative.
    But the FCIC has fallen well short of unity. In fact, it 
was no Pecora. The fact that 3 different opinions have emerged 
from a body of only 10 Commissioners brings into question the 
objectivity of the majority report.
    I am also concerned about the lack of new findings provided 
in the majority report, which reads like a clipping service of 
already published books, articles, and other works on the 
financial crisis.
    I look forward to speaking with our witnesses today, and I 
hope that they will be able to shed some light on their process 
and answer questions that have been left unanswered in this 
report.
    Chairman Bachus. The gentlelady from California, Ms. 
Waters, is recognized for 2 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I thank you for holding this hearing today. It is very 
important that we hear from our Commissioners what they 
discovered about our financial crisis.
    And I am so pleased that we have before us today two 
persons that I know very well: My former colleague, Mr. Bill 
Thomas, it is good to see you.
    And Phil Angelides, from the State of California, I am very 
pleased that you are here today.
    I appreciate the opportunity to listen to the Commissioners 
here today and hear the analysis of what caused this 
catastrophic economic meltdown in 2008. As we get further and 
further away from this crisis, my fear is that some of my 
colleagues will try to rewrite history and perhaps some in the 
public listening to their messages will begin to forget the 
true cause of how we got here.
    Of course, the purpose of trying to rewrite the causes of 
the crisis I believe could only serve to undermine the Dodd-
Frank Act and return the financial services industry to a 
nostalgic age of unchecked predatory lending, leverage, and 
risk.
    I consider one of my highest priorities during the 112th 
Congress to continue to reflect on what brought us to the brink 
in September of 2008 and to protect the work we did under the 
Dodd-Frank Act, and importantly, I am committed to pursuing 
what I believe is one of our largest pieces of unfinished 
business in this Congress, responding forcefully to the 
foreclosure crisis.
    I voted for the legislation that created TARP in 2008 
because I believed that the authority would be used to actually 
buy up toxic paper and in turn provide modifications to 
homeowners. As we all know, the Treasury plan changed, and that 
didn't happen.
    So I sought the bankruptcy protections for homeowners or 
loans for unemployed homeowners threatened by foreclosure, then 
I sought to strengthen and hamper any robosigning and other 
service abroad. Despite the efforts of many of us, we have 
never had a sincere robust effort to directly assist homeowners 
on any scale rivaling what we did for the banks.
    As some talk about the need for the market to bottom out or 
the need to end the few programs we do have, let's remember 
that so many of these foreclosures were avoidable, as the 
Commission points out in their report.
    Moreover, I believe that many foreclosures continue to be 
avoidable if we actually take the difficult steps needed to 
confront this crisis head on.
    So I am delighted to hear more about the findings of the 
Commission, and I look forward to being able to read the entire 
report at some point. I yield back the balance of my time.
    Chairman Bachus. Thank you, Ms. Waters.
    The gentleman from New Mexico, Mr. Pearce, is recognized 
for 1 minute.
    Mr. Pearce. Thank you, Mr. Chairman.
    I appreciate the opportunity to participate in this 
hearing. It is good to see Mr. Thomas here.
    The mortgage crisis that we found here, the banking crisis 
to me is fairly simple and straightforward. We just poured too 
much money into a market. We did not run the background checks. 
We didn't have the documentation for the loans. And then we 
built securities on those loans, and the whole system was built 
on thin air and began to collapse very readily.
    The fact that we couldn't get a report that actually 
clarified that completely with agreement among all the members 
talks about the politicization of that process.
    So I will be interested to hear the testimony of the 
panels. I thank the chairman and I yield back.
    Chairman Bachus. Thank you, Mr. Pearce.
    The gentleman from Illinois, Mr. Dold, for 1 minute.
    Mr. Dold. Thank you, Mr. Chairman.
    And I certainly want to thank the witnesses for their time, 
for their effort and service to the Commission and to our 
Nation.
    By my count, we have had 47 economic recessions or 
downturns since our Nation's first major economic contraction, 
the panic of 1797. That is an average of 1 economic recession 
or downturn every 4\1/2\ years in the last 214 years.
    Throughout our Nation's history, our national economy has 
regular and inevitable economic expansions followed by economic 
contractions. This business cycle is how our economy properly 
allocates resources, evolves and grows.
    And while business cycles are certainly inevitable, history 
proves that normal and necessary and healthy economic 
contractions are frequently exacerbated by misguided or 
excessive government regulatory, fiscal, trade, or monetary 
policies.
    We should certainly learn from each and every economic 
contraction, and we should do so in the most objective and 
nonpartisan way possible. Our investigation should not be 
manufactured to support preestablished political philosophies 
or positions, but instead, we should strive to learn what 
governments can do and, perhaps more importantly, what 
governments can stop doing to avoid aggravating otherwise 
normal and inevitable healthy business cycle contractions.
    In response to our most recent financial crisis, we 
established a financial Commission to investigate the causes. 
But many months before we even received the financial 
Commission reports, Congress passed a comprehensive legislation 
broadly affecting entire industries, including many that 
indisputably had little or nothing to do with the financial 
crisis. We should not be manufacturing legislation or 
regulatory solutions for problems before we adequately assess 
the actual problems.
    So I am concerned that, once again, Congress has 
overreacted without sufficient information and with a very high 
risk of creating unintended consequences that could result in a 
weaker economy, fewer jobs and overly burden some small 
businesses and diminish Federal competitors.
    We need regulation, not more regulation but smarter 
regulation.
    And again, I thank the witnesses for their time and I look 
forward to receiving their most objective and candid opinions.
    I yield back.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you, Mr. Dold.
    And that would--I am going to yield an additional minute to 
Mr. Dold.
    And at this time, I reclaim my time and recognize the 
gentleman from New York, Mr. Grimm, for 1 minute.
    Mr. Grimm. Thank you, Mr. Chairman.
    I thank everyone on the panel today.
    I have to say that I am disappointed. I am disappointed 
that the Commission was really unable to put together a unified 
report to accurately assess the root cause of the financial 
crisis. It has cost millions of jobs, and it has done 
fundamental damage to our economy.
    It seems that some members of this Commission were more 
interested in following an ideological agenda than producing a 
report that would assist Congress in developing a strong 
understanding of what occurred so that we can prevent such a 
grave situation from happening again.
    And with that being said, I am interested in hearing what 
the Commissioners have to say regarding their findings and 
their assessment of how Dodd-Frank will or will not stop 
another crisis, specifically noting the irony that Dodd-Frank 
was passed into law 5 months prior to this Commission's report.
    Again, thank you, and I yield back.
    Chairman Bachus. I thank the gentleman from New York.
    And I yield 1 minute to the gentleman from Texas, Mr. 
Canseco.
    Mr. Canseco. Thank you, Mr. Chairman.
    The crisis of 2008 resulted in a financial meltdown. 
Millions of job losses and trillions of dollars of debt piled 
upon our children and grandchildren. It left Americans wanting 
to know why it happened.
    The American people deserve an answer, not a history 
lesson. The Financial Crisis Inquiry Commission was created to 
give the American people that answer. On the 27th of January, 
the Commission delivered its majority report. However, they 
failed to provide an explanation for why the financial crisis 
happened.
    It seems that the Commission's report has produced only a 
step-by-step accounting of the crisis. The American people 
lived through this crisis. They know what happened. They don't 
need to be told the story over again. The American people 
deserve better.
    I hope to gather from our panel today some of the reasons 
for the crisis, and I look forward to hearing from each of you. 
Thank you.
    I yield back my time.
    Chairman Bachus. Thank you.
    And for the final minute on our side, I yield to the 
gentleman from Ohio, Mr. Stivers.
    Mr. Stivers. Thank you, Mr. Chairman.
    I would like to thank you for calling this hearing on the 
Financial Crisis Inquiry Commission's report. I am new to 
Congress, so I am not sure I understand the process here, 
because most problem solvers would recognize a problem, study a 
problem and then find a solution, and it seems only in Congress 
can we recognize a problem, pass a solution, and then study the 
problem.
    I am also concerned that the report didn't have detailed 
recommendations of how Congress can avoid a future crisis. In 
fact, Representative Thomas suggested in his dissent that the 
majority's report is too broad and provides an account of bad 
events as opposed to a focused explanation and how we move from 
here.
    Knowing that this report cost the taxpayers $10 million, I 
have higher expectations. And I look forward to hearing the 
panelists talk about recommendations of how we can avoid a 
future crisis and how our solution hopefully can solve the 
problem.
    It is my hope that we can learn from the past so that we 
don't have to relive it. Thank you so much.
    I look forward to hearing from the panelists.
    I yield back, Mr. Chairman.
    Chairman Bachus. I thank the gentleman from Ohio.
    And I yield the balance of the time on the minority side to 
the gentleman from Massachusetts, Mr. Frank.
    Mr. Frank. Thank you, Mr. Chairman.
    I am pleased to welcome an old friend back, Bill Thomas, 
who gives me some affirmation that there is life after 
chairmanship, and I appreciate that. Check his pulse.
    We just heard some criticism on the Republican side that 
the Congress should not have acted on the financial reform 
until the Commission finished. But the point is one very 
prominent commentator has argued that a significant part of the 
Commission's report is a justification of the rationale of the 
bill and, to some extent, of its substance.
    Let me read from Peter Wallison's dissent. We will hear 
from Mr. Wallison later: ``Second, by suggesting that a major 
cause of the financial crisis was the wholesale failure of bank 
and financial institution management, this section endorsed a 
policy foundation for more regulation as well as the underlying 
rationale for the Dodd-Frank Act. After all, if managements of 
virtually all the world's financial institutions cannot be 
trusted to manage their firms, then to protect the public, the 
government must oversee them.''
    This commentator thinks that is an implausible position, 
but he says that is exactly the rationale that Congress used in 
designing and enacting the Dodd-Frank Act, and unfortunately, 
it is the implicit policy message of this particular section of 
the report.
    The relevance of that is that the section of the report 
that is being discussed here is the dissent by the three other 
Republican Commissioners. In other words, according to Mr. 
Wallison, the other three Republicans whom he somewhat oddly 
refers to as the THH dissent--I actually was looking when I 
first came across that to see what disparaging initials those 
were; it turns out it is just their last names. But it did seem 
THH was an odd way to characterize your colleagues. Mr. 
Wallison says that the dissent went in that same direction.
    Obviously, that is I think somewhat unfair to them because 
there are some differences. But there is one very important 
point of similarity, and we ought to be clear: Yes, there was a 
6-3-1 vote, but on a number of issues, there was a 9-1 vote.
    For example, the Community Reinvestment Act: Mr. Wallison 
has long been a proponent, and there have been some members of 
this committee who believe that the Community Reinvestment Act 
is the substantial cause of the problems that have compelled 
mortgages to be given that shouldn't be. Of course, nothing in 
the terms of the Act says so. And if you compare mortgages 
granted by institutions which were not covered by the Community 
Reinvestment Act, they are far more likely to have failed and 
to have been inappropriate than those covered by the CRA.
    But it is clear that the ``THH group'', to adopt Mr. 
Wallison's terminology, his three fellow Commissioners 
specifically said that the CRA was not a major part of this 
problem. That is, 9 of the 10 Commissioners repudiate the 
notion that this was caused in substantial part, or even at 
all, by the Community Reinvestment Act. And that is very 
important I think for us to have online.
    It is particularly important because we are today 
continuing the debate on a financial reform bill in which the 
Republican version of the continuing resolution assaults three 
particular important aspects of the reform act. One of the 
things we did in that bill was to say that hedge funds should 
be covered by a registration requirement so that we will know 
what is going on out there. That is entrusted to the SEC, which 
under the Republican CR will not have the money to carry that 
out. Hedge funds will remain uncovered.
    We gave the CFTC the mandate to begin to regulate 
derivatives, including mostly including for end users, making 
public the price, not for end users in any other way regulating 
them.
    What we did then with both derivatives and with regard to 
hedge funds and private equity was to get some more 
information.
    People have been talking about the shadow banking system. 
One of the things we did in the bill was to try to bring that 
out of the shadows. But as a result of the Republican budget, 
neither the SEC nor the CFTC will have the money to do that. 
And so we will go back and from time to time and talk about old 
radio programs. I think we have another one. Who will know what 
risk lurks in the heart of the financial system? And the answer 
is, the shadow will know but nobody else. Because our efforts 
to put some light on the shadow banking system by having hedge 
funds register with the SEC and have them be able to calculate 
what is up and having derivatives regulated by the CFTC, those 
won't happen.
    When AIG needed money from the Federal Reserve, by the way, 
under a section of the Federal Reserve Act which we unanimously 
rescinded on both sides, what the Federal Reserve gave to the 
AIG won't be possible in the future. We have stricken that 
Section 13(3), but when they gave money to AIG, they came in 
the first week and told us they were giving them $80 billion 
and then they needed another $80,000 to $100,000, because no 
one knew how much they had.
    So I welcome 9 of the 10 Commissioners repudiating the 
notion that it was just the government trying to be nice to 
poor people and particularly the CRA that caused this problem. 
And I am regretful that we will be debating later today a 
budget which will leave hedge funds in the dark, prevent the 
regulation of derivatives, including price discovery for the 
end users, and will further reduce the role of the Consumer 
Protection Bureau. So credit cards, hedge funds, unregulated 
and unknown and in-the-shadows hedge funds and derivatives will 
all be the beneficiaries.
    And as I said, I do believe Mr. Wallison was right that 9 
of the other 10 Commissioners give support to the notion that 
we should go forward. I think the majority report in particular 
is a good argument for the bill going forward, and we will be 
fighting later today to prevent the re-deregulation of the 
financial economy which the Republican budget represents.
    Chairman Bachus. Thank you.
    We will note for the record that you agree with Peter 
Wallison on those issues.
    Mr. Frank. Yes, I agree with him that the initials of his 
three fellow Commissioners are in fact ``T,'' ``H,'' and ``H.''
    Chairman Bachus. All right. Thank you.
    I want to introduce the first panel and also acknowledge 
the second panel and associate myself with Mr. Dold's remarks 
that we thank you for your service to the Commission and to the 
country.
    Your compensation was very nominal so you did this I think 
out of a sense of patriotism and duty to your country, so I 
thank you.
    Our first panel consists of: the Honorable Phil Angelides, 
the Chairman of the Financial Crisis Inquiry Commission; and 
the Honorable Bill Thomas, the Vice Chairman of the Commission.
    Our second panel will consist of four Commissioners of the 
Financial Crisis Inquiry Commission: Dr. Douglas Holz-Eakin; 
the Honorable Brooksley Born; Mr. Peter Wallison; and Mr. Bryon 
Georgiou.
    So we thank the second panel.
    The first panel will be dismissed at noon.
    And without objection, your written statements will be made 
a part of the record, and you will each be recognized for a 5-
minute summary of your testimony.
    At this time, Mr. Angelides, I will recognize you.

STATEMENT OF THE HONORABLE PHIL ANGELIDES, CHAIRMAN, FINANCIAL 
                   CRISIS INQUIRY COMMISSION

    Mr. Angelides. Thank you very much.
    Chairman Bachus, Ranking Member Frank, and members of the 
committee, thank you for the invitation to discuss the report 
of the Financial Crisis Inquiry Commission.
    First of all, I want to thank my colleague, Vice Chairman 
Bill Thomas, for his service to our country and to this 
Commission. And I want to thank our dedicated and excellent 
staff who worked with us.
    This committee requested that I address three subjects: the 
Commission's report; the inability to reach consensus on some 
conclusions; and the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.
    In 2009, Congress tasked the Commission to examine the 
causes of the current financial and economic crisis in the 
United States and to probe the collapse of major financial 
institutions that failed or would have failed if not for 
exceptional assistance from the government. We were true to our 
charge and fulfilled our mandates.
    Our task was to determine what happened and how it happened 
so we could understand why it happened. In doing so, we sought 
to answer this central question: How did it come to pass that 
in 2008 our Nation was forced to choose between two stark and 
painful alternatives--either risk the total collapse of our 
financial system and economy, or inject trillions of taxpayer 
dollars into the system and into private companies, even as 
millions of Americans still lost their jobs, their savings, and 
their homes?
    In the course of the Commission's exhaustive investigation, 
we reviewed millions of pages of documents, interviewed more 
than 700 witnesses, and held 19 days of public hearings in New 
York, Washington, D.C., and communities across the country.
    The Commission also drew from a large body of existing work 
developed by congressional committees, government agencies, 
academics, and others. The Commission's report contains six 
specific major conclusions.
    First and foremost, we concluded that this crisis was 
avoidable. The crisis was a result of human action, inaction, 
and misjudgment, not Mother Nature. Financial executives and 
public stewards of our financial system ignored warnings and 
failed to question, understand, and manage evolving risks 
within the system so essential to the well-being of the 
American public.
    Second, we found widespread failures in financial 
regulation that proved devastating to the stability of the 
Nation's financial markets.
    Third, our report described dramatic breakdowns in 
corporate governance and risk management at many systemically 
important financial institutions.
    Fourth, we detailed the excessive borrowing, risky 
investments, and lack of transparency that combined to put our 
financial system on a collision course with catastrophe.
    Fifth, we concluded that the key policymakers were ill 
prepared for the crisis and that their inconsistent response 
added to uncertainty and panic.
    And finally, we documented how breaches in accountability 
and ethics became widespread at all levels during the run-up to 
the crisis.
    Our report as well as two dissents can be found on our Web 
site, FCIC.gov. That Web site also contains approximately 2,000 
documents, public testimony in our hearings, audios, 
transcripts and summaries of more than 300 witness interviews, 
and additional information to create an enduring historical 
record of this crisis.
    In addition to the major causes we identify, the Commission 
also investigated among other things whether this crisis was 
caused by excess capital availability, the activities of Fannie 
Mae and Freddie Mac, and government housing policies. We 
concluded that excess liquidity by itself did not need to cause 
a crisis and that Fannie Mae and Freddie Mac contributed to the 
crisis but were not a primary cause. We determined that 
government housing policies were not a significant factor in 
this crisis.
    As we undertook our work, all 10 Commissioners were 
afforded the opportunity to fully participate. While we were 
not unanimous on all issues or on the emphasis we placed on key 
causes, there were in fact many areas of agreement among 9 of 
10 Commissioners. Importantly, setting aside conclusions and 
dissents, this report contains a valuable and accurate 
historical account of the events leading up to the crisis and 
the crisis itself.
    Finally, you have asked me to comment on the Dodd-Frank 
financial reform law. With our inquiry and report completed and 
the facts in evidence, I will now speak to this matter. I 
believe the law's financial reforms are strong and needed and 
that the law directly and forcefully addresses issues and 
conclusions identified in our report.
    I believe full implementations of its provisions is 
critical and will help prevent a future crisis. In conclusion, 
it is my hope that our report will serve as a guide post in the 
years to come as policymakers and regulators endeavor to spare 
our country from another catastrophe of this magnitude.
    Thank you and I look forward to your questions.
    [The prepared statement of Mr. Angelides can be found on 
page 60 of the appendix.]
    Chairman Bachus. Thank you. Congressman Thomas.

    STATEMENT OF THE HONORABLE BILL THOMAS, VICE CHAIRMAN, 
              FINANCIAL CRISIS INQUIRY COMMISSION

    Mr. Thomas. Thank you, Chairman Bachus, Ranking Member 
Frank, and members of the committee.
    You have asked that I address the Commission's findings, 
the Dodd-Frank Act in light of those findings, and why the 
Commission was unable to reach unanimous agreement.
    I joined a dissent from the majority's report with 
Commissioners Hennessey and Holtz-Eakin. In our dissent, we 
describe what we believe are the 10 essential causes of the 
financial crisis.
    Our thesis is that the crisis was at its core a global 
financial panic precipitated by concentrated correlated 
housing-related losses at large and midsize financial 
institutions in the United States and Europe.
    Let's examine three areas where our findings and 
conclusions differ from those of the six-member majority. 
First, our explanation of the crisis begins with a global 
credit bubble fueled by international capital flows. We do not 
think that you can understand what happened in the United 
States without first understanding what was going on in 
international capital markets.
    There were a series of credit bubbles occurring at the same 
time in a variety of asset classes around the world. This fact 
undermines, we think, the thesis that it was something about 
U.S. capital markets or the U.S. housing market in particular 
that was the primary cause of the bubble.
    We focus on the role that economic forces played in causing 
the crisis, whereas the majority focused on individual firms 
and actors. This difference is highlighted in an article by 
Robert J. Samuelson, entitled, ``Rethinking the Great 
Recession.'' It is in the winter issue of the Wilson Quarterly. 
Samuelson's main thesis is, ``There is a political, 
journalistic and intellectual imperative to find out who caused 
the crisis, who can be blamed, who can be indicted, either in 
legal courts or the court of public opinion, and, if found 
guilty, be jailed or politicly humbled. But in embracing a 
victims-and-villains explanation of the recession, Americans 
are missing important lessons about the future of the U.S. 
economy.''
    Second, as you can see from the chart in my testimony, 
housing bubbles occurred in a number of large countries with 
very different systems of housing finance. No two were quite 
alike, and none looked anything like ours. Therefore, we had a 
hard time placing too much emphasis on the structure of our 
mortgage finance system in explaining the boom-and-bust and 
focused more on factors common to all of the countries, that is 
the broader credit bubble.
    Third, we observed financial firm failures across a variety 
of different firm organizational structures in the United 
States and Europe. For us, this supported the conclusion that 
the organizational form of a financial firm or its specific 
regulatory regime was secondary in importance to common 
factors; that is, concentrated exposure to the housing market 
and poorly managed solvency and liquidity risk.
    When we look at the multitude of different types of firm 
failures in the United States and around the world, it casts 
doubt on the majority's thesis that a particular feature of the 
American regulatory regime, a specific type of financial 
institution or an individual firm and the people who ran it was 
an essential cause of the crisis.
    However, when you are looking for villains and victims 
rather than essential causes, it is easy to examine the same 
set of facts and arrive at diametrically different conclusions.
    This leads me to the central question of why we were unable 
to reach unanimous agreement among the Commissioners. From the 
beginning, I thought that the Commission was created for 
political purposes with a partisan structure and a partisan 
agenda. It called for six of us to be appointed by Democrats 
and four by Republicans. And any six votes were all that was 
needed to transmit the report to the President and the 
Congress. The math is simple.
    Let's be clear, the Commission was not created by Congress 
to write a 500-plus page commercially produced book. The 
Commission was created to determine why we had a financial and 
economic crisis.
    In our dissent, we conclude by focusing too narrowly on 
U.S. regulatory policy and supervision, ignoring international 
parallels, emphasizing only arguments for greater regulation, 
failing to prioritize the causes, failing to distinguish 
sufficiently between causes and effects, the majority's report 
leads to incorrect conclusions about what caused the crisis.
    I think we had the money, the time, the staff, and the 
resources necessary for our work to have been a success. But 
when you have the votes, what else really matters?
    And finally, regarding the Dodd-Frank Act, I believe our 
work has shed light on a number of problems in our financial 
markets that have not been sufficiently addressed, as well as 
cases of regulatory overreach in the Act where the financial 
and economic crisis was used as a cover to regulate activities 
that really had little to do with the financial crisis. I look 
forward to your questions.
    [The prepared statement of Mr. Thomas can be found on page 
74 of the appendix.]
    Chairman Bachus. Thank you.
    Congressman Thomas, in your testimony, you spoke about the 
crisis being used as a cover to regulate activities that had 
little to do with the financial crisis. Can you tell us a 
little more about the regulatory, what you described as 
overreach of the Dodd-Frank Act and the use of the financial 
crisis as a pretext to regulate activities that didn't cause or 
had nothing to do with the crisis?
    Mr. Thomas. Yes. Thank you, Mr. Chairman.
    I am pleased to say that one of the ``H's'', Douglas Holtz-
Eakin, will be on the second panel. He is a professional 
economist and, some of you may know, was the former head of the 
Congressional Budget Office. And he is much more conversant 
with many of the provisions of the Dodd-Frank Act.
    However, a couple of things are fairly obvious. One is the 
whole question that this Congress, at least a portion of the 
Congress, stressed during the Dodd-Frank Act that the so-called 
GSEs, Fannie Mae and Freddie Mac, really needed to be dealt 
with. And I thought it should have been an integral part of the 
legislation.
    The government bailouts, when you look for overreach, the 
enhanced supervision, I really disagree with the majority that 
there was information that was available to regulars. In 
hindsight, it is always easy to explain what happened, even if 
it is wrong. And as Samuelson, and I do urge you to read this 
recent article by Samuelson, because it is so easy to focus on 
villains and victims, and unfortunately, that is the direction 
we tend to go politically. And that is why our conclusions 
looked at we think more fundamental causes, and if we don't 
focus on those, we are going to be doomed to repeat, 
notwithstanding a number of regulatory measures that were put 
in effect, especially a portion of the derivatives legislation.
    I am not saying that there weren't certain kinds that were 
clearly part of the problem, but there are many others, and we 
are just now discovering as we are getting testimony recently 
reported in the paper, about firms that use the derivatives to 
truly hedge against their input costs in producing products. 
That is a long-time honored procedure for derivatives, in fact, 
a historical use. And this has to be revisited to be able to 
allow them to use this in a way that is sound and appropriate 
and was never a cause, in my opinion, in any way of the 
financial crisis. Those are a couple of examples.
    For example, eating your own cooking, the idea that you are 
going to hang onto your own stuff, and therefore, you will be 
more sober. It was rather frightening for me to hear the 
testimony from Lehman in which a number of the major 
executives, in fact the top executives actually put into their 
basic portfolio the derivatives that were synthetic in a way 
that they thought they were actually worth what they were 
supposed to be worth because they were Triple A rated. Rating 
agencies obviously is another area that needs to be dealt with. 
But that they seemed to be coherent of the fact that they had 
to make margin calls if in fact the numbers changed relative to 
what they were holding. That was fairly frightening to some of 
us who thought that these people, at least in some way, earned 
the amounts of money that they were receiving. But that was so 
fundamental as to be shocking.
    So I do think there are some areas that were frankly just 
gathered up, not unlike the stimulus bill, that had been 
desired regulatory moves for some time and plugged into the 
Dodd-Frank Act, and there are clearly areas that were left out. 
Of course, it would have been nice to wait for our report to be 
able to analyze it, but frankly, that was not of concern to me. 
I was pleased that we didn't have to come up with solutions, 
just to try to analyze the cause. If we were supposed to come 
up with solutions, I wouldn't have volunteered to be on the 
Commission. And we thought it was important to try to look at 
the causes.
    As I said, with a 6-4 vote, especially near the end, 
Ranking Member Frank responded to the fact that there were some 
9-1 decisions. Yes, those were early on. I would love someone 
to ask me about all the 6-4 decisions that occurred once it was 
clear that the former majority was no longer going to be the 
majority and then, after the election, what occurred in late 
November and December on a number of 6-4 decisions which wound 
up producing a rather what I consider to be an unfair and 
bizarre situation on this Commission as opposed to the many 
other Commissions that I served on, especially the bipartisan 
Commission on Medicare and several others.
    Chairman Bachus. Are those Commissions 5-5 or equal 
numbers?
    Mr. Thomas. I can't hear you, Mr. Chairman.
    Chairman Bachus. Are those Commissions 5-5 as opposed to 6-
4?
    Mr. Thomas. No, they were always, well, rather larger. But 
the point was, look at the President's debt Commission. That is 
a good example. You require a supermajority; it is very 
difficult to do. That is what we did, we had as a requirement 
on the bipartisan Medicare Commission. There were co-chairs, 
not a chair and a vice chair. Senator Breaux was a co-chair, 
and I was a co-chair. We worked in an absolutely level 
relationship. I will say that Chairman Angelides allowed me far 
more ability to be involved than the Act required. But at the 
end, when you wind up with a series of 6-4 votes, and I can go 
into it if somebody wants to ask me the detail, clearly the 
decision to move forward was I think a function of two things.
    Senator Dodd decided to retire. And whenever anyone spends 
that much time in Congress and wants to move a product, it is 
very difficult to say no. I am not saying the product was 
fatally flawed; I am just saying that there was a desire to get 
it done before he left Congress. That is a pressure that 
produces a product that perhaps wasn't as well established.
    My friend from Massachusetts' name is on it, and I think 
all of the good parts that are in it are attributed to him. The 
rest of them are to those who have left the place. And we can 
agree on that structure.
    But when you have a 6-4 structure, and if I might be able 
to go on for a minute, just to give you a couple of examples, 
or I will wait for other questions.
    Chairman Bachus. If we have unanimous consent--the ranking 
member says that is fine as long as you keep complimenting him.
    No, he actually didn't say that.
    Mr. Frank. My problem is just with the new deadline. It is 
okay with me, but there are other members.
    Mr. Thomas. I would just like to say that is not hard to 
do. We worked as well as could be expected together given the 
odd fellows that both of us are.
    Chairman Bachus. Thank you.
    Mr. Thomas. Is that a compliment?
    Chairman Bachus. Yes.
    Mr. Thomas. Let me give you a simple example of 6-4 votes. 
This is a commercially commissioned book. On a 6-4 vote, the 
whole relationship that I have known for the 28 years that I 
was in Congress dealing with majority/minority and reports was 
turned on its head. A congressional report is the majority and 
the minority's positions. That is the report. What happened 
here on a 6-4 vote was dissents in the report, i.e., the 
congressional model, was changed to dissents with the report. 
Dissents were not part of the report.
    And that is why I would say to my friend Mr. Lynch in his 
description of three reports, no, there was one report; that 
was the majority. The others clearly were dissents.
    I put blue for the Democrats the way all the people--
    Mr. Frank. Mr. Chairman, I am for the other members with a 
new deadline.
    Chairman Bachus. And the ranking member will let someone 
else--
    Mr. Thomas. Thirty seconds. The blue is the Commissioner's 
findings in the report. The red are the minority's dissents. 
They are separated by 400 pages that could easily have been 
placed together so that you could judge the two. Those 400 
pages are a political decision decided on a 6-4 vote.
    Chairman Bachus. Thank you.
    I thank the Congressman.
    And Ranking Member Frank will be recognized for an 
additional minute.
    Mr. Frank. Thank you, Mr. Chairman.
    I guess maybe I, based on this example, can look forward to 
a certain mellowing in retirement. I appreciate the nice words 
of my former colleague.
    I do note that his familiarity with the notion if you have 
the votes, you go ahead; I don't think this is the first time 
he encountered that philosophy. I just wanted to begin by 
saying the typography doesn't seem to me to be very 
significant. If the material is out there for people to read, 
whether it is called with the report, or from the report, or 
over the report, I think is irrelevant; the information is out 
there.
    And I do want to begin with one of the accusations, Mr. 
Angelides, because I am impressed by what seemed to me the 
fairness and the openness. In Mr. Wallison's dissent from--the 
dissent from the majority, he talks about Mr. Pinto and says 
that you were not fair to Mr. Pinto's information. Will you 
respond to that? That is a fairly serious charge.
    Mr. Angelides. Yes, Mr. Frank.
    Yes, Mr. Wallison in his dissent said that Mr. Pinto, who 
is a housing expert, provided information to the Commission 
that was never distributed to the Commission, never analyzed, 
and that Mr. Pinto's testimony was never taken.
    Let me just point out that Mr. Wallison distributed that 
information to all Commissioners, including members of the 
Housing Working Group. Our staff met 6 times in person and by 
phone with Mr. Pinto, and his July interview is posted on our 
Web site. The staff undertook an analysis of Mr. Pinto's work 
and provided that to the Commission. In fact, Mr. Pinto 
commented on that analysis. And on pages 219 through 221 of the 
report, you can find a discussion of Fannie Mae, Freddie Mac, 
Mr. Pinto's analysis, and the staff's analysis. And if someone 
would like to read the staff's analysis of Mr. Pinto's work, it 
is footnoted, Chapter 11, footnotes 17, 13, and 19 and posted 
on the Web, so I am a little surprised by that.
    Mr. Frank. Thank you. Let me just say with regard to the 
scope of the bill that came up, I don't just acknowledge, I am 
inclined to brag about the fact that the Financial Reform Act 
included more than what we thought were the causes of the 
crisis. It would have been irresponsible not to have dealt with 
other issues.
    I don't understand when the philosophy came that when 
Congress is legislating, it should only look backwards; it 
should not anticipate potential future problems. Of course, we 
did things that were not necessarily part of the past problem. 
We tried to take a comprehensive view, and we looked at things 
that might be happening in the future or other factors.
    So I am stunned that it is a criticism that the bill on 
financial reform, and you don't do those very often, did more 
than simply respond to the crisis.
    I will say, I will dissent from one thing Mr. Thomas said. 
No, this wasn't hurried because of Chris Dodd; this was hurried 
because a whole range of people, beginning with Hank Paulson 
and Ben Bernanke, the Bush appointees who initiated our efforts 
here, said you really need to get this done quickly; because we 
were told by the financial community correctly that uncertainty 
was a problem and to prolong this for another year or so would 
have added to that uncertainty. So, yes, those were the reasons 
why we did more.
    Finally, as to not including Fannie Mae and Freddie Mac, my 
view is that we were not ready at that point to do that, that 
the responses hadn't been formulated. And I now accept 
graciously--people say you should take ``yes'' for an answer. I 
have learned how to do that, because last year the Republicans 
offered what they said was the solution to the Fannie Mae and 
Freddie Mac problem in the conference. We did not accept it. 
And they said, this is a big mistake.
    Now that the Republicans are in power, that solution 
appears to have become a dissolution. It is dissolved. It is 
not here anymore. We had a hearing on Fannie Mae and Freddie 
Mac, and that wasn't even the subject of the hearing. So what 
we now have is retroactively the Republicans acknowledging that 
while we had put them in the receivership, the conservatorship, 
we had stopped the bleeding; we were not yet at a consensus as 
to how to replace them. And indeed, I was struck that the 
Republicans, oddly to me, criticized President Obama's 
Administration for not giving them more specific advice about 
how to fix Fannie Mae and Freddie Mac. I was not aware that 
they were in the habit of waiting for the President to tell 
them what to do.
    So they have in fact acknowledged by their action or 
inaction that we are now in the process of trying to figure out 
what to do next, and that is why we hadn't moved on it.
    The last point I want to say is, I will go back to Mr. 
Thomas, and I do think there were some who blamed Fannie Mae, 
Freddie Mac, and the CRA; others who blamed other aspects of 
the American situation. I am struck by the three-member dissent 
disagreeing with both. But I do, particularly for those who 
thought it was Fannie Mae and Freddie Mac or people who thought 
it was the American system in general, Mr. Thomas I will just 
ask you to comment briefly as I read from your testimony: 
``This fact undermines the thesis that it was something about 
U.S. capital markets or the U.S. housing market in particular 
that was the primary cause of the bubble. It undermines that 
thesis. That is a repudiation of the notion that it was the 
U.S. housing market in particular that was a primary cause.''
    And then you say two pages later, ``We observed financial 
firm failures through a variety of different firm 
organizational structures in the United States and Europe. This 
fact supported the conclusion that the organizational form of a 
financial firm or its specific regulatory regime was of 
secondary importance to common factors that concentrated 
exposure to the housing market and poorly managed salvage and 
liquidity risk.''
    Now, I realize that is a difference from both what had been 
the majority view, but it is also very much a difference from 
the view that it was Fannie Mae, Freddie Mac, and the CRA 
because those were particular American institutions managed in 
a particular way. Is that an inaccurate summation of your view?
    Mr. Thomas. No. I thought the Commission was charged with 
looking at the fundamental causes of the crisis. I really want 
to recommend to you the Samuelson article that has just been 
written.
    Mr. Frank. I thank you. And let me just say--
    Mr. Thomas. Because he is worried that we are going to go 
off on the tangent of investigating villains and victims and 
not understand the fundamental lesson of what happened, 
international capital, its interrelatedness, lack of 
transparency. The CRA was a cause. Fannie Mae and Freddie Mac 
were causes. There were multiple causes, but they weren't the 
reason for what happened.
    We can look at the loosening up of credit under Greenspan, 
the area of moderation. You can look at all of the sovereign 
funds that came in. There are a lot of reasons, and a lot of 
them have been written about. But if our job was to go to the 
court and try to explain what happened, that is what we 
thought--
    Mr. Frank. Okay. Let me interrupt you. Let me emphasize 
again, and that is true for the Commission. I do want to 
differentiate, that was not the mandate of the legislation. So 
the fact that we consciously included in the legislation things 
that were not necessarily the cause or not the cause is not a 
criticism of legislation. Our mandate is to go beyond that.
    The other thing I would say is that I did appreciate it, so 
on this question, the notion that it was Fannie Mae and Freddie 
Mac and CRA that were causal, it is one thing to say they were 
exacerbating factors once the problem started, and I think that 
is a very important--
    Mr. Thomas. And are they a problem and a problem today? 
Yes.
    Mr. Frank. Yes. And I await the Republican solution now 
that they are in the majority. I yield back.
    Chairman Bachus. Thank you.
    Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman.
    I think in response maybe to this argument about primary 
causes and factors, clearly, one of the underlying factors I 
think was missed in this report. And I remember the British 
magazine, The Economist, making the argument in 2002 that our 
Federal Reserve had set an interest rate that effectively was 
below zero if you included inflation into the calculation.
    Mark Zandi, in his book, ``Financial Shock'', and I see, 
Barney, you have had a quote in support of some of his 
conclusions--but I had a chance to have dinner with him and 
talk to him about this particular factor and how, in my view, 
and I think in the view of many economists, the fact that for 4 
years in a row you had interest rates which were below zero. 
And every time that that has happened--and here is what The 
Economist said at the time, they said you are going to have 
asset bubbles in real estate. And because the Fed has done this 
in the United States, other central banks are going to follow.
    I just want it understood that when you eliminate or erase 
market discipline--as clearly we did with government 
intervention into the market, with the pressure to get those 20 
percent downpayments down to zero, Congress did that with what 
we did with the GSEs--all of that helps create a bubble. 
Underlying that is this massive infusion of credit. And he goes 
through the argument, the extraordinarily easy money policies 
pursued by the globe's central banks helped pump up the U.S. 
credit and housing market.
    As I read the report, yes, there is a mention on page 5--
there are maybe three different mentions through the report--
about interest rates being low. But I think what you missed is 
something that the Federal Reserve and Mark Zandi--at least in 
the majority report here, the thing that you missed was the 
crucial role it played. And I wanted to ask you about that and 
how you have been criticized. This argument has been made by 
many journalists and economists since the report came out. I 
wanted to ask you about that.
    And the other point I think is that I don't think you can 
debate the issue with respect to the role of the GSEs, given 
the losses, which are probably going to be $350 billion to the 
taxpayers, and given the fact that those institutions were at 
the heart of the collapse of the housing market. More 
importantly, the Federal Reserve came here in 2004 and 2005 and 
warned us that unless we regulated the GSEs for systemic risk 
and gave the regulator the ability to bring down those mortgage 
portfolios, that this would create a systemic financial crisis, 
and here we are.
    And so I wanted to ask you, Mr. Angelides, about those two 
points.
    Mr. Angelides. Great. Thank you very much. I appreciate the 
questions.
    First of all, we did look at international capital flows. 
We looked at excess liquidity. We looked at monetary policy. In 
fact, in the book, I think it is on page 83, there is a whole 
section on credit expansion. We also have parts in the book 
where we discuss what happened in terms of other countries' 
housing bubbles. But let me say this: On that issue, the 
Commission concluded that, yes, there was excess liquidity, but 
in and of itself, that need not have caused a crisis, that 
there could have been--recognizing that excess liquidity, 
regulators, market participants should have exercised 
discipline.
    And in particular, let me just give you the example of the 
Federal Reserve. Knowing that there was that kind of excess 
liquidity in the global economy, it was incumbent on the 
Federal Reserve to use its power under HOEPA to set reasonable, 
prudent mortgage lending standards.
    And by the way, as someone who comes out of the real estate 
business, we should have recognized those asset bubbles. We 
should have had tighter mortgage lending standards. And I think 
that was at the heart. It was our failure to grapple with those 
capital flows. I think if we take the position that 
international capital flows are detrimental to this country, 
that is very damaging. We want to have capital flowing, and we 
want to put it to productive uses, not merely--
    Mr. Royce. You cannot regulate the idea that you are going 
to make money so cheap that it is less than zero, that for 4 
years you are going to flood the market with that, and that 
somehow you are going to be able--this is what economists would 
call the fatal conceit--that somehow you are going to be able 
to overcompensate for the fact that that much money is flooded 
into the market. And on top of it, you have erased market 
discipline by what you have done with government intervention 
with Fannie and Freddie and gone to zero downpayment loans, the 
idea that some regulator is going to be able to tamp all that 
down or keep that under control when the government has 
unleashed, by bad decisions, all of that liquidity into the 
market I think is a fantastic belief.
    I can't understand in this day and age how people, unless 
you have central planning able to control every aspect of 
decisions made by people, how could you possibly undo the 
damage that those kinds of decisions create in an economy?
    Mr. Angelides. I am sorry, I don't mean to interrupt you, 
sir.
    Mr. Royce. But even if we concede that some way you could 
overregulate for all of what has been unleashed, why not a real 
discussion on Fed policy in the majority report in terms of how 
this underlies the problem. And I have read the report, and--
    Mr. Angelides. I would urge everyone to read--I am sorry, 
sir.
    Chairman Bachus. Let me say this, let the gentleman respond 
and then--
    Mr. Angelides. Quickly. I would urge everyone to read--and 
I hope as many Americans as possible--the report. We do detail 
monetary policy. We do detail the excess liquidity in the 
marketplace. But I will say that when you take degrading 
lending standards, when you take leverage ratios of 40-1, when 
you take a shadow banking market of $13 trillion that exceeds 
the regular banking system with no transparency, the 
combination of cheap money and excesses in the marketplace and 
dramatic failures of regulatory control, I think you have a 
formula for disaster.
    Mr. Royce. The GSE ratios were 100-1.
    I yield back.
    Mr. Angelides. In fact, they were the kings of leverage, 
yes, sir.
    Chairman Bachus. The gentlelady from California is 
recognized.
    Ms. Waters. Thank you very much, Mr. Chairman.
    I would like to thank the co-chairs of the Commission. I 
take to heart the recommendation that Mr. Thomas is making 
about Samuelson and what he is explaining about Samuelson, 
villains and victors.
    There is a fundamental debate that is going on in the 
Congress of the United States today. This fundamental debate is 
about regulation. On this side of the aisle, we believe that we 
understand and recognize the cause of the meltdown and what 
brought us to the brink of a depression. And we have also heard 
from our regulators who are agreeing that they need to be 
supported, they need more funds, they can do a better job, and 
the Dodd-Frank bill helps to do that.
    On the opposite side of the aisle, we are hearing we need 
less regulation. My colleagues on the opposite side of the 
aisle are claiming that regulation is a job killer. And so this 
debate is so important because it is about which way America--
are we going to have regulatory agencies that turn a blind eye 
or that are not supported with their technological capability, 
or are going to be intimidated? Or are we going to have a 
regulatory system that is going to do the job that they expect 
it to do, not only to protect the public and the consumers, but 
to help regulate what happens in this economy? That is what it 
is all about.
    Now Mr. Angelides, you said in your statement that the 
crisis was a result of human inaction and misjudgment, not 
Mother Nature. Financial executives and the public stewards of 
our financial system ignored warnings and failed to question, 
understand, and manage evolving risk within a system so 
essential to the well-being of the American public. You found 
widespread failures in financial regulation that proved 
devastating to the stability of the Nation's financial markets, 
and on and on and on. And basically, that is the conclusion 
that some of us have come to.
    In your discussion, did you find that there was indeed a 
consensus about what you have just identified here in some 
shape, form or fashion about the failure of our regulatory 
agencies to do their job?
    Mr. Angelides. Let me just say that, certainly speaking for 
the Commission's conclusions, we really found there was a--
first of all, that we believe this was avoidable. There were 
plenty of warning signs along the way. You don't create $13 
trillion worth of mortgage securities and have no one notice. 
You don't have the FBI warn about rampant mortgage fraud in 
2004 and 2005 and have no one notice. You don't have 
unprecedented escalation--and I guess Mr. Royce talked about in 
terms of asset bubbles and housing prices. And there were 
plenty of warnings, for example, at the Federal Reserve about 
egregious and predatory lending practices. Mr. Greenspan said 
regulation was not the answer; the answer was law enforcement, 
but from 2000 to 2006, the Federal Reserve made only three 
referrals to the Department of Justice.
    But there was a twin phenomenon here. There was a breakdown 
in regulation, and we detail that. And I might add--I don't 
want to speak for my other members, but I think there was an 
acknowledgement, we may differ on the cause, but the SEC had 
the ability to curb excesses at the investment banks; they did 
not. The Federal Reserve Bank of New York had chances to curb 
the excesses at Citigroup; they did not. The Office of Thrift 
Supervision, which oversaw AIG, didn't even understand that its 
mandate--and it had signed a directive with the European Union 
to oversee the whole company.
    So there were dramatic breakdowns, but they were also 
accompanied by dramatic corporate governance and risk-
management breakdowns at companies. At Citigroup, this was an 
organization that did not know that it had $55 billion worth of 
exposure to subprime mortgages. They represented to the public 
all through 2007 that they had $13 billion. They had about $25 
billion in what are called liquidity puts off balance sheet 
that executives themselves did not learn until the fall. And 
they represented still to the public that they had $13 billion 
on the same day that their board was being told our exposure is 
$55 billion.
    At AIG, they wrote $79 billion of credit default swaps 
protection on subprime securities. The CEO, Mr. Sullivan, the 
CFO, Mr. Bensinger, the chief risk officer, none of them knew 
that there would be collateral calls made on AIG if the market 
value of those securities fell. So when Goldman Sachs makes 
their first collateral call in July of 2007, they were shocked. 
And of course, as everyone knows, what happened after that is 
the collateral calls accelerated, ultimately leading to the 
collapse and the taxpayer bailout.
    So it was a twin phenomenon of deregulation, gaps in 
regulation, and failures of regulators to use the powers they 
had. And I want to be clear to all members here of both 
parties, there were a lot of powers that went unused. I believe 
Dodd-Frank has helped close a lot of the gaps that existed, but 
the fact is there was a twin phenomenon here where there were 
clear breakdowns in corporate governance and management.
    Chairman Bachus. Thank you.
    Ms. Waters. Thank you very much.
    I yield back the balance of my time.
    Chairman Bachus. Mr. Garrett.
    Mr. Garrett. I thank the chairman.
    And to the Congressman, it is interesting that the ranking 
member says that this is what he has to look forward to in 
retirement, the mellowing that we see here, so I don't know 
whether we hear some pronouncement from the ranking member with 
regard to his retirement. If not, I guess we will proceed. I 
thought this would be the committee hearing of the week then, 
in which case--in any event, to the Congressman, you began your 
issue with regard to the lack of bipartisanship nature of the 
committee.
    I am thinking back a couple of years ago when we had the 9/
11 Commission. You mentioned some other Commissions where it 
was done in a truly bipartisan manner. So can you just comment 
very briefly if you will, did the majority give you complete 
bipartisanship with regard to the staff and to the resources, 
and also to the areas that you were going to, as a Commission, 
study and investigate and file a report upon? I guess that is 
one or two questions.
    And third, you had some sort of comment you wanted to make 
with regard to the final vote as well.
    Mr. Thomas. I thank the gentleman.
    Mr. Garrett. Sure.
    Mr. Thomas. I thought it was pretty obvious, when the move 
was made at the beginning of the Congress to create a committee 
which was structured along partisan lines--six and four--the 
Democrat side got the chairman and the minority side got the 
vice chairman, rather than co-chairman, that my friend from 
Massachusetts' argument that I am very familiar with the 
partisan environment was one of the reasons I decided to go 
into this because it was clear from the beginning it was a 
partisan environment. I was going to try to make sure that it 
didn't wind up a partisan environment. And as we began, it was 
clear that there was an attempt to try to get a broader base.
    However, as the Commission went on and decisions needed to 
be made--and more importantly, the use of the Commission 
started to shift, I have no question that this body and the 
Congress should not have held up in passing legislation. I just 
think a lot of the legislation was off-the-shelf stuff that 
people wanted to do with derivatives in general, they hadn't 
been able to do--as I said, a lot like the stimulus bill, here 
is a chance to dump some stuff in that we wanted to do for a 
while--and became part of the Dodd-Frank fresh and new 
movement.
    What can you do with a Commission that is created, and less 
than a month after it was created, the President offers his 
solutions and the Congress moves forward with their solutions? 
There are a lot of things you can do with it, especially, I 
believe, because the former majority thought they were going to 
be a majority in this Congress as well. It is very difficult. I 
will tell you, when Republicans were in power and the 
Administration was Republican, we could not go back to the 
Dingell playbook and go after the Administration because they 
were Republican, and we were Republican. Democrats did a great 
job of oversight for decades because the Republicans were in 
the Presidency and the Democrats were in the Congress.
    So when you look at what you can do with this Commission, 
one, you can use it to go after the villains and help the 
victims if that is the result and you are in the majority. You 
can use it, even if you are in the minority, to hold hearings 
about those issues. And so when you wind up with a series of 6-
4 votes that literally, in my opinion, split the Commission on 
a partisan basis, the result is a partisan conclusion. And I 
have no qualms about that. I thought that was what it was going 
to be to begin with. I just was trying to overcome it.
    Mr. Garrett. So let's go into a little bit of detail. As 
far as the things that were done and that were not done--and 
both of you can answer this--what was done, I guess, is case 
studies of 10 specific financial institutions and finding the 
problems or lack thereof in the financial institutions but not, 
I understand, any specific case studies with regard to the 
regulatory failures. Can you comment on why it wasn't done? And 
how then can you come up with the conclusions if you are not 
going to do it in that same fashion, the conclusions that you 
came up with?
    Mr. Thomas. Is that a question for me or the chairman?
    Mr. Garrett. I will go first to the chairman, and then you 
can respond as well.
    Mr. Angelides. Yes, we did the following, and this is 
important to understand.
    First of all, let me just say very quickly that I really do 
stand on the report and the integrity of the report. The facts 
are in it. The facts themselves have not been challenged. And 
everyone can draw their own conclusions, but that 400-some 
pages Mr. Thomas talked about--
    Mr. Garrett. We were looking at you for the conclusion 
really.
    Mr. Angelides. And we laid them out. But I want to say that 
every member had a full opportunity to participate. All members 
had an opportunity to attend hearings all over the country. In 
fact, I went to Bakersfield. I had a great chance to go with 
the vice chairman to Bakersfield for a very informative hearing 
about what had happened at the community level. All materials 
and interviews were made available to all Commissioners. All 
drafts of all the reports and all the chapters were made 
available to Commissioners for comments; some chose to, some 
did not. And all staff were jointly approved by Mr. Thomas and 
me.
    What we did as a general kind of approach to our work is we 
did a look at overall research, the large picture. And because 
of our timeframe, we then did 10 case studies of financial 
institutions, including a very deep scrub on Fannie Mae. We 
also looked at other institutions at a lesser level, but we 
looked very specifically at the roles of policymakers and 
regulators. We looked at the FDIC, the Federal Reserve, the 
Federal Reserve Bank of New York.
    And let me just speak to the nonpartisan nature of this. If 
you look at this report, sir, we were very critical of the 
Federal Reserve Bank of New York's oversight of Citigroup when 
Mr. Geithner was in charge of the Federal Reserve Bank of New 
York. We looked at HUD, its affordable housing goals. We looked 
at the role of the Office of the Comptroller of the Currency 
and the Office of Thrift Supervision.
    So we looked at both financial institutions and regulators, 
and I think you will find that we found, without regard to 
party, without regard to private sector or public sector, that 
this crisis was avoidable, both in failures of regulation and 
failures in corporate risk management.
    Chairman Bachus. Thank you.
    The gentlelady from New York.
    Mr. Garrett. Did Mr. Thomas want to respond?
    Chairman Bachus. Thirty seconds. It is hard to get 
Congressman--
    Mr. Thomas. Look, Warren Buffett came before us in New York 
and said he didn't think housing prices would go down the way 
they did. People who are supposed to be gurus in this said they 
weren't aware of it.
    You have to read a clever book by Michael Lewis if you 
haven't, ``The Big Short,'' because he winds up writing a book 
about those three or four people who actually made money on it. 
I asked him, well, what about John Paulson? And he said, ``John 
Paulson has been around for a long time; he was a joke.'' We 
all laughed at him. He had this view of what was going on.
    It turns out he was right, but it was after the fact. If 
Warren Buffett didn't know it was coming, how can you say very 
nonchalantly that it all could have been avoidable?
    Chairman Bachus. Thank you.
    Mrs. Maloney is recognized for 5 minutes.
    Mrs. Maloney. Thank you very much.
    And I welcome the panelists, particularly my former 
colleague, Congressman Thomas; it is very good to see you 
again.
    I would like to mention that one of my constituents is 
here--Brooksley Born. We are very proud of her and I thank her 
for her public service and her courageous leadership in 
pointing out reforms that need to take place.
    I would like to say, first of all, that I thought it was an 
excellent report, and my biggest disappointment in it was that 
it was not more bipartisan. I truly believe one of the best 
actions of this Congress was the 9/11 Commission report that 
was totally bipartisan, and we worked together to implement 
their charges and their suggestions of how to make this country 
safer.
    Republicans and Democrats lost their jobs. Republicans and 
Democrats lost their savings. Republicans and Democrats lost 
their homes. And they are both suffering, Republicans and 
Democrats, in the worst recession that we have ever had in this 
country. So when a house is burning down, it would have been 
helpful if everybody could have come together and worked 
together in a positive way with concrete solutions and 
analysis.
    I would like to begin by asking Mr. Angelides, can you 
elaborate on the role of unprecedented liquidity and your 
response that it doesn't have to be a problem; in fact, we 
should welcome it if it is used responsibly?
    Mr. Angelides. Yes. And this is a follow-up to Mr. Royce's 
question.
    Clearly, as we detail in the report, there is monetary 
policy made for cheap money; there are capital inflows into 
this country. But in the end, the availability of capital need 
not be the maker of a crisis. The fact is that, as I said 
earlier, the Federal Reserve could have set tougher mortgage 
lending standards. They allowed a tragic deterioration of 
mortgage lending standards, notwithstanding all the information 
they had.
    Companies levered themselves up. The investment banks were 
levered to about 40-1. Take Bear Stearns, for example, they had 
about, in 2007, $11 billion in equity; about $380 billion in 
liabilities; and they were borrowing up to $70 billion in the 
overnight markets. That is like a small business that has 
50,000 equities borrowing $1.6 million, with about $300,000 due 
every day. So, in this environment, you have to be careful for 
excesses.
    But this idea that reasonably priced capital is necessarily 
the maker of the crisis I think is a flawed one. It can be 
channelled into productive uses. Unfortunately, where the money 
went was to create $13 trillion in mortgage securities, many of 
which were wholly defective. Institutions either didn't care to 
know, didn't examine, or knew they were defective but still 
moved them in the marketplace. And instead of building the 
economy, we built a house of cards built on financial 
engineering.
    As to the matter of consensus, I do want to say that there 
were a number of areas, if you look, where in fact 9 of the 10 
Commissioners did find common ground. And the dissent, which I 
would say by Mr. Thomas, Mr. Holtz-Eakin, and Mr. Hennessy 
noted that we find areas of agreement with the majority's 
conclusions: Fannie Mae and Freddie Mac did not by themselves 
cause the crisis, but they contributed significantly, and that 
is our view also. These organizations were poorly managed. They 
were seeking market share. They were seeking profits and big 
compensation for their executives. But I want to point out, 
yes, they added helium to the housing balloon, but they never 
represented a majority of the purchase of mortgage securities, 
they followed Wall Street. They didn't lead it.
    And finally, this is important to note, the value of GSE-
backed mortgage securities from January of 2007 to the day 
before conservatorship never dropped, so they did not cause the 
financial losses at the big financial firms. They caused huge 
losses to the taxpayers, that is a fiscal issue, but they were 
not the cause of the big financial losses that happened at 
Merrill Lynch, at Citigroup, that began the cascade that led to 
the bailouts in September.
    Mrs. Maloney. Could you comment on the lack of knowledge or 
understanding in AIG? You touched on it, but I recall the 
hearing we had here and Treasury and many others came, and they 
asked first for $50 billion; that is all they needed--$80 
billion, that is all they needed, then they came back 2 days 
later, they needed $50 billion, and they kept coming back, 
showing that they clearly did not understand the exposure or 
the problem. There was no understanding. And the head of AIG 
didn't understand the exposure for the $79 billion in credit 
protection. And furthermore, the Office of Thrift Supervision 
didn't understand. Even the chief credit default swap salesman 
at AIG did not know about the terms he was selling with. No one 
seemed to understand anything about it except for the 
counterparties when they started calling it in.
    Can you discuss the extent to which this lack of knowledge 
by regulators, by leaders, by salespersons, by everyone 
contributed to this? I believe it is astonishing. Some were 
saying, buy the product, others were saying--within the same 
company--that it was a problem. There was a total lack of 
knowledge. And could you comment on it and what you think--
    Chairman Bachus. Mrs. Maloney, your time is up. But I 
will--
    Mr. Angelides. I will try to deal with it in 1 minute. I 
will be very quick.
    Chairman Bachus. Absolutely.
    Mr. Angelides. I will try my best.
    Three items. First of all, as I noted earlier, AIG sold $79 
billion worth of credit protection to holders of subprime-
related securities. There are conditions in those contracts 
that said that AIG would have to post collateral--by the way, 
AIG had no cash reserves. They had nothing set aside, no 
reserves. They had a model that showed that there was a 99.75 
percent chance they would never lose a dime. The contract said 
that they would have to post collateral if AIG was downgraded, 
if there was an actual economic loss on those subprime 
securities, or if the market value declined. The market value 
of those securities started plummeting in 2007. Not the CEO, 
the CFO, or the chief risk officer knew anything about these 
collateral provisions related to market value. They were 
stunned.
    Second, in about 2006, the people actually writing credit 
protection began to look at the quality of these subprime 
loans, and they start to stop writing. They kept writing a few 
more new protection. At the same time, though, AIG ramps up its 
securities lending program and starts buying tens of billions 
of dollars more of subprime securities on behalf of their 
insurance subsidiaries.
    Finally, as to regulation, the Office of Thrift Supervision 
signed an agreement with the European Union to become a 
consolidated supervisor. Mr. Reich, who was the head of OTS, 
told us that he wasn't aware that they had the authority over 
the holding company. He said they had no understanding of these 
credit default swap provisions, and in fact, he said, having 
the OTS regulate AIG was like having a gnat on an elephant.
    Mrs. Maloney. Thank you.
    Chairman Bachus. Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman. And thank you for 
calling this hearing.
    I certainly think the establishment of this Commission was 
an important act.
    I do still find it somewhat ironic, somewhat perplexing, 
and somewhat amusing that we ended up passing the entire Dodd-
Frank Act before we even had the conclusions of the Commission 
in the first place. So the whole reason for being I am not sure 
if it hasn't passed.
    Having said that, before I get into the conclusions of the 
majority, I did have a couple of process questions, something I 
am somewhat sensitive to since I served on the Congressional 
Oversight Panel for the TARP Commission. I know that one of the 
minority members held the 9/11 Commission up as a model of 
bipartisanship. If I recall right, there were an equal number 
of Democrats and Republicans that served on that Commission, 
and I believe the resources were equally shared.
    So I would like to ask you, Mr. Mayor, a couple of 
questions under your chairmanship. Number one--or actually, 
Chairman Thomas, let me go to you first. And welcome, it is 
good to see you, sir.
    Were the minority representatives of the Commission, what 
type of access to the resources of the Commission were they 
granted?
    Mr. Thomas. As I said--
    Mr. Hensarling. I am sorry, I missed your testimony. I was 
not here.
    Mr. Thomas. As I said, I don't think the problem was a lack 
of money. I don't think it was the staff. I think we reached a 
point--and it is very easy to do when you have the kind of 
makeup that you have. And remember, the charge to the 
Commission were 22 specific agenda items which were reached in 
a partisan way in this committee. I, early on, was contacted by 
folks who said we wanted to get these particular items on the 
list and we weren't allowed to. So that what we were guided to 
look at was structured from a partisan point of view.
    Now why in the world would I, if I know anything about 
that, go into this situation with my eyes wide open? I went 
into it with my eyes wide open. We were asked to get to the 
fundamental causes, and I thought that was really, really 
important. And I was concerned about this business, as 
Samuelson calls it, looking at villains and victims.
    Just let me run a quick analogy. It is like this budget 
right now. We are spending all this time on discretionary 
spending; it is a dime. Nobody is moving to the fundamentals, 
which is the entitlement reform area. I was hopeful we could 
move as a Commission to the fundamental causes and understand 
them. We got side-railed in a partisan, political way.
    I will tell you that the chairman says, well, we shared 
leadership. Of course, we did. Look at the early agendas, there 
is the chairman's report, and the vice chairman's report. Look 
at the last few agendas; there wasn't even a vice chairman 
mentioned on the agendas. It turned partisan at the end on a 6-
4 vote--multiple 6-4 votes that drove the structure.
    Mr. Hensarling. Mr. Chairman, I think I get that.
    I also heard, in this vein--I just want to ask you, Mr. 
Mayor, if this is true or not. Was it true that the majority--
    Chairman Bachus. The mayor? Who is the mayor?
    Mr. Angelides. I was treasurer, but--
    Mr. Hensarling. I am sorry.
    Mr. Angelides. That is okay, don't worry about. I don't 
think my own town would elect me mayor, Mr. Hensarling.
    Mr. Hensarling. Mr. Treasurer, Mr. Chairman--whatever the 
appropriate title is--I understand the majority report is 400 
pages long. I have read summaries. I have not read the entirety 
of the report. Is it true that in the authorized addition, the 
dissenters were limited to 9 pages apiece; is that correct?
    Mr. Angelides. Sir, first of all, let me comment. The 400-
and-some pages is actually the report of our investigation. Our 
conclusions, the Commission's conclusions, are actually shorter 
than the published dissent, and here is how it worked. I think 
our conclusions are about 20-some pages, it reminds me of the 
Mark Twain line--
    Mr. Hensarling. Weren't the minority limited in their 
dissent in the authorized addition?
    Mr. Angelides. In the authorized addition, any Commissioner 
could give an additional or dissenting view of up to 9 pages, 
people could combine. But let me add, in the government report 
and on the Web, folks were unlimited. Mr. Thomas, Mr. Holtz-
Eakin and Mr. Hennessy chose not to use that additional space.
    Mr. Hensarling. If I could, I see, unfortunately, my time 
is running out here.
    You did say in the report you determined government housing 
policies were not a significant factor in the crisis.
    Mr. Angelides. Correct.
    Mr. Hensarling. Clearly, there was strong dissent. So be it 
the affordable housing goals of Fannie and Freddie, HUD's best 
practices, CRA, you found no significant factor in the crisis.
    Mr. Angelides. Sir, let me talk about each of these very 
quickly.
    Let me tell you about Fannie and Freddie. And I just want 
to say very quickly that a deeply flawed business model, this 
publicly traded corporation with the implicit backing of the 
government, was a bad model. The fact is that those entities 
used their political power to ward off effective regulation. We 
conclude that they did contribute to the crisis, but they were 
not primary.
    They did add helium to the housing balloon, but keep in 
mind, they never represented a majority of the purchases of 
subprime securitizations that were emanating out of Wall 
Street. They did ramp up dramatically their purchases and 
guarantees in 2005, 2006, and 2007, but one of the most--
    Mr. Hensarling. I am sorry; I am running out of time.
    Can I get a quick comment out of you, Chairman Thomas?
    Mr. Angelides. There is one important point I would like to 
add if we have time.
    Mr. Thomas. Look, the majority, six votes, owned over 400 
pages. At the end of each chapter, our Commission conclusions 
on chapter 14, Commission conclusions on chapter 15, they owned 
the 400 pages. We were given, on a 6-4 vote, 9 pages each total 
out of this entire document. They had 400 pages to do whatever 
they wanted with. What they did was what they wanted. You can't 
explain away the fact that on a 6-4 vote, I was given 9 pages. 
That is why the three of us came together so we could have 
almost 30 pages to try to explain our fundamental concerns. 
That is partisan.
    Mr. Hensarling. Mr. Chairman, I will yield back just on 
this note: I think it is sad that such an important work is 
hard to take seriously when it was conducted on such a partisan 
basis. It is going to be hard to take the nature of this work 
seriously.
    I yield back my time.
    Mr. Angelides. Sir, could I make one comment very quickly? 
I just would say that I would stand on the facts of the report. 
And the facts are truthful. They have withstood scrutiny. I 
guarantee you every financial institution, every--
    Mr. Hensarling. Apparently, not the scrutiny of several of 
the dissenting opinions.
    Mr. Thomas. Could I briefly respond, just 25 seconds? 
Because I have been sitting here very quietly--for me.
    Mr. Congressman, again, in my opening statement, I said 
when you are looking for victims and villains rather than 
essential causes, it is easy to examine the same set of facts 
and arrive at diametrically different conclusions. It isn't the 
facts; it is the conclusions that we should be focusing on.
    Thank you.
    Chairman Bachus. Thank you.
    I will say that this has been a very informative hearing. 
It has been rather loose, but I think we have learned quite a 
lot. And I think it has been very thought-provoking.
    With that, Mr. Lynch, what we are going to do now, with 
your permission, the panel's permission, is we are going to 
extend your panel 30 minutes, which will take care of all the 
27 minutes that we have gone over and give some of our very 
talented younger members an opportunity to ask questions.
    Mr. Watt. Does that exclude me, Mr. Chairman?
    Chairman Bachus. I was talking about the talented members.
    Mr. Watt. I am neither talented nor young. I think I have 
just been excluded on both criteria.
    Chairman Bachus. You would be included under talented, but 
probably excluded under new.
    Mr. Miller of California. We are matching ends of the dais.
    Chairman Bachus. Mr. Watt, you are recognized.
    Mr. Watt. Oh, I am both talented and young now. Hey, I got 
in at a good time.
    I am not sure I want to take time to ask a lot of 
questions. I actually have looked at the report and will look 
at it more thoroughly.
    I want to use my time really to comment more on a couple of 
things that I thought were important because it is ironic that 
I got beat up a lot back in 2007 because I was the chairman of 
the Oversight Subcommittee of this full committee. I got beat 
up by people who said the Oversight Subcommittee ought to be 
doing what you all ultimately got tasked to do. And it was 
bipartisan because a lot of folks wanted me to have hearings 
that would blame the meltdown on the past Administration; a lot 
of folks wanted me to--and I just said, look, I think it is 
more important for this committee to be focusing on how do we 
get out of this mess, rather than spending the resources of our 
committee looking backwards trying to figure out how we got 
into it.
    That doesn't mean, and I didn't mean at that point, that it 
was not an important undertaking to look retroactively at it, 
but we were trying to focus more attention on how to move 
forward. And I am glad we did, but now we can take a look back.
    To the extent that the report contradicts anything we did 
in Dodd-Frank, I think it is worthwhile for us to do that. To 
the extent that it reaffirms some of the things we did in Dodd-
Frank, I think that is important.
    But what is most important is we need to try to avoid this 
kind of economic meltdown in the future. And I heard one of the 
opening statements over there saying we go through these cycles 
periodically, that cycles are inevitable. They may be 
inevitable, but they are incredibly painful. And if there is 
anything we can do to avoid them, I think we need to be trying 
to avoid them. I think you all's work perhaps will have a very 
important salutary effect in that, and I appreciate all of the 
work that all of the Commission has done.
    My good friend, Mr. Thomas, who wasn't always my good 
friend when he was here, but--
    Mr. Thomas. No, we were good friends; we just disagreed on 
a lot of things, but that is how it works.
    Mr. Watt. You know I am joking.
    Mr. Thomas. I hate to keep repeating this on a small 
article in the winter addition of the Wilson--
    Mr. Watt. Yes, I heard that part of your testimony. I will 
go back, and I will look at the article. You know I will.
    Mr. Thomas. No, this is on a different point. That is, he 
said that in looking back at what has happened, where we got 
complacent because we thought we did control the universe--
which was one of our problems--that maybe--no one could get 
elected standing up and saying I think we should have a lot of 
little recessions, but had we had a few more little recessions, 
we wouldn't have necessarily had the great big one that we had. 
And he wants us to focus on the belief that if you can 
control--just need a few more regulations, just need more this, 
more that--that you are kidding yourself about some of the 
dislocations, not just in this country, but in the 
international--
    Mr. Watt. I understand that, but you can have a bubble in 
the international capital market and still people have to make 
decisions about how to use that capital.
    That is why I had a major disagreement with what you were 
saying. Maybe that did create the environment for this to 
happen, but somebody had to make some decisions. And the 
industry made some bad decisions. The regulators made some bad 
decisions, and to the extent that we can incentivize people to 
avoid those decisions in the future, we need to do it.
    Mr. Angelides.
    Mr. Angelides. Yes, very quickly. We do not believe you can 
repeal the business cycle, but we don't think you need to end 
up with 26 million Americans out of work, who can't find full-
time work, who stopped looking for work. We don't think we 
needed to end up with 4 million families losing their homes--
that may go to 13 million--or $11 trillion worth of life 
savings and retirement wiped away.
    As to where we go from here, again, I hope our report--I 
hope everyone has a chance to read it, and draw their own 
assessments. If we stir a healthy debate, that is healthy. But 
where we go from here is an important question. I very 
studiously with Mr. Thomas focused on the work in front of us, 
but my belief is we need to fully implement the new law and 
provide the resources to do it. We need regulators with 
backbone, will, and capacity. One of the things I talked to 
Federal Reserve Chairman Ben Bernanke about is, Wall Street is 
a little like a greased pig; they keep moving fast. We need 
regulators. We need to give them the resources. We need to have 
the talent there. I believe we need to stay vigilant because 
the financial system is constantly evolving very, very quickly.
    I do think there has been an absence of self-reflection on 
Wall Street, partly because the U.S. taxpayers bailed out Wall 
Street, but I do think the--
    Mr. Hensarling. [presiding.] The time of the gentlemen has 
expired. If you could wrap up the answer in 30 seconds, please.
    Mr. Angelides. I will.
    A new ethos of responsibility, and if laws have been 
broken, prosecutors should pursue where civil and criminal 
violations have occurred. There ought to be a sense of 
fairness.
    Mr. Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina 
for 5 minutes.
    Mr. McHenry. Thank you, Mr. Chairman.
    Mr. Angelides, the accusation has been made that the 
Commission failed to conduct an objective investigation. And I 
know you discussed this immediately with Mr. Frank, his 
question to you about Edward Pinto's report on housing. And you 
referenced page 219 to page 221. You are being a bit generous. 
You used three paragraphs to rebut--to explain Mr. Pinto's 
report.
    And the crux of what Mr. Pinto is saying is that there 
were--49 percent of the mortgages out in 2008 in America were 
Alt-A or subprime or equivalent to that. Of these, Mr. Pinto 
counts 11.9 million or 45 percent that were purchased or 
guaranteed by GSEs. In contrast, the GSEs categorized fewer 
than 3 million of their loans as subprime or Alt-A.
    Did you verify Mr. Pinto's work?
    Mr. Angelides. Yes. And let me just say one more--
    Mr. McHenry. Why is that not included in the report?
    Mr. Angelides. First of all, it is discussed in the report, 
and the staff's analysis of Mr. Pinto's work, full analysis--
    Mr. McHenry. Where is that?
    Mr. Angelides. --was placed on the Web. It is footnote 
numbers 17, 13, and 19 in this chapter. So you can see--first 
of all, everyone can see--first of all, the staff did an 
analysis. The staff put together a database of 25 million loans 
to see how loans purchased and guaranteed by the GSEs 
performed, how those guaranteed by the FHA performed, how those 
created by Wall Street and other private lenders performed. And 
the fact is that we did that analysis and an analysis of Mr. 
Pinto's work. And here is something that is very important: You 
can't just lump all those loans together; they perform 
differentially.
    Mr. McHenry. Obviously, sure.
    Mr. Angelides. Look, the GSEs were a disaster, but can I 
point something out, sir?
    If you take, for example, loans purchased and guaranteed by 
the GSEs versus those created by Wall Street and private 
lenders, for similar loans to borrowers with FICO scores below, 
credit scores below 660, by the end of 2008, the default rate 
in GSE-guaranteed or purchased loans was 6.3 percent; for the 
Wall Street or other private firms it was 28 percent.
    Mr. McHenry. Okay. Reclaiming my time, I certainly 
appreciate that.
    Mr. Angelides. But the information is more fully available.
    Mr. McHenry. I read that in your report, and you outline 
that very well. But the GSEs are saying that it is 3 million; 
Mr. Pinto is saying it is closer to 12 million that are at 
these lower quality. Did you analyze the GSEs' portfolio?
    Mr. Angelides. Yes, we did.
    Mr. McHenry. And where is that?
    Mr. Angelides. We had a staff analysis, a high-quality 
staff analysis prepared for the full Commission, and again, on 
the Web. I don't have it handy at this moment.
    Mr. McHenry. Sure. Okay. I have a brief amount of time. I 
will say you two gentlemen are fantastic at filling the time, 
so I do want to ask short questions here.
    Can you give me a specific example, Mr. Angelides, where 
you changed your mind after doing research, after a lot of 
input and looking at the facts, where you changed your mind 
about this financial crisis? Give me an example. Is there one?
    Mr. Angelides. Yes. I didn't come in with a predisposition 
about Fannie and Freddie's role, and frankly, when I looked at 
Fannie, their management practices, how they operated, I was 
taken aback.
    Mr. McHenry. Is there a preconceived notion that you had 
that was changed?
    Mr. Angelides. The other was that I did not necessarily 
assume that this crisis was avoidable, but when I looked at all 
the facts--because a lot of the narrative is, no one saw it 
coming. What changed my mind was when I saw the full record, 
for example, of what was before the Federal Reserve, what they 
knew about predatory lending, what they knew about lending 
standards from the late 1990s, and yes, I changed my mind and I 
came to the conclusion that the Federal Reserve fell down badly 
on the job.
    Mr. McHenry. Reclaiming my time.
    Congressman Thomas, look, there is this sort of notion that 
you were there just to sort of battle it out, that at the end 
of the day, they were going to go their own path and it was 
going to be a 6-4 vote. Walk us through this. At what point did 
things turn where you realized that you were not going to have 
a unified narrative, that they didn't really care about that?
    Mr. Thomas. To me, it was very difficult from the beginning 
because I chaired a number of conference committees in my 28 
years in the House, and the only way you can get to almost a 
near unanimous or unanimous position is frankly accommodation 
and compromise, and there virtually was no real accommodation 
and compromise.
    There will be any number of indications where we were able 
to do this or do that. I invite you to listen to Peter Wallison 
in terms of his level of frustration--and frankly, my level of 
frustration--in trying to direct where we might be going in 
terms of the investigation.
    This was a top-down structure from day one. He was the 
chairman. I was the vice chairman. So I tried to deal with it 
as best I was able to create a broader willingness to share. 
Early on, it was easy. It is easy to share on all the easy 
stuff.
    Mr. Hensarling. Chairman Thomas, the time of the gentleman 
has expired.
    Mr. Thomas. But when it came down to the crunch, all the 
votes were 6-4.
    Mr. Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    I don't find the lack of unanimity in this report as 
troubling. I find it as a strength, especially with respect to 
the position of the dissent that asserts that derivatives were 
not a major factor. I don't want the majority to cave on that 
issue. I don't want you to. I don't believe it. And the reason 
I don't believe it is because I have been sitting here for the 
past 10 years.
    I had an opportunity to listen to Secretary Paulson and 
Chairman Bernanke sit at that same table you are sitting at 
right now, and they were unable to tell us when the meltdown 
started to occur--the first meeting they had with us, they 
said, we have a problem; it is not a major problem. We have a 
good sense of the size of it, and we are going to take the 
necessary steps to stop this meltdown. Then, 3 weeks later, 
after the meltdown continued to occur, they would come back in, 
and they would say, well, we have it contained; it is worse 
than we thought, but we have it contained. And then we would 
have them in 3 weeks later or a month later.
    The problem they had, as brilliant as they are, we had a 
completely dark market for derivatives. They could not tell the 
exposure. They could not tell the range of counterparties that 
were out there. At one point, if it wasn't so disastrous, it 
would be laughable. We had E. Stanley O'Neill come out and 
report a $4 billion loss. Then, 9 days later, he comes out and 
says, sorry, it is a $14 billion loss. And then 20 days later, 
he comes out and says it is a $21 billion loss. The reason that 
he couldn't tell us or the markets was because he didn't know 
his exposure because the markets were so dark. There was no 
need to register. We didn't know who the counterparties were.
    Derivatives, if you read--and I am not just--although I 
have read everything that is out there in terms of, including 
your report, on this crisis, you listen to Warren Buffett, 
someone that both sides respect, calls derivatives ``financial 
weapons of mass destruction.'' You read Michael Lewis' 
excellent book, ``The Big Short.'' Gretchen Morgenson, another 
writer whom I greatly respect; Hank Paulson; Alan Greenspan who 
said, sitting here before the committee, he made a mistake.
    So there is an abundance of consensus out there about the 
danger that derivatives presented, not only because of the 
opacity there, a dark market, but also the leverage. It allowed 
us to have this massive leverage. It allowed banks to reduce 
their capital requirements. And it provided the impact for this 
financial crisis. I liken it to the economy being the Titanic 
and derivatives being the iceberg. That is what brought this 
economy to the bottom because of the uncertainty it created, 
the leverage, the impact, and because it was beyond the ability 
of our leaders in the financial industry to understand the 
impact and the implications that were at hand. So I am glad in 
this report that we have a difference between the majority and 
the minority as to the play of derivatives here.
    And Mr. Angelides, I know you cited the $79 billion in 
credit default swaps in your report. There was also $150 
billion that the U.S. taxpayer had to contribute to AIG to 
cover collateral calls on AIG's derivatives, collateral debt 
obligations. A lot of that money went over to--direct pay over 
to Goldman Sachs at 100 cents on the dollar. But I just wanted 
to hear from you as to the majority's assessment regarding the 
impact of derivatives on this crisis.
    Mr. Angelides. Yes. Very quickly, let me just say that Ms. 
Born, of course, can speak in more detail on this, but we found 
that there were three principal impacts. First of all, credit 
default swaps enabled the creation of a lot of the mortgage-
backed securities. So that is one way in which they 
contributed. And of course, AIG and others wrote those with no 
capital behind them, and so when that market went south, it 
created a huge wave of collateral calls.
    Second, they allowed for the creation of synthetic mortgage 
securities, which were merely bets, as you know, on real 
mortgage securities. So, instead of having one investor 
investing or betting, so to speak, on a mortgage security, this 
was amplified many times over. The bets on the housing market 
were multiple-fold because you had synthetic securities.
    Mr. Hensarling. The gentleman's time has expired.
    Could you please wrap up your answer in 30 seconds?
    Mr. Angelides. Yes. Finally, at the end, there was such 
confusion and chaos and lack of knowledge about derivative 
positions. It is only 4 weeks before the crash of Lehman that 
the Federal Reserve and the Federal Reserve Board of New York 
are trying to figure out what exposure is created by 900,000 
Lehman derivatives contracts. This was a completely opaque 
market and therefore contributed to the panic.
    Mr. Hensarling. The time of the gentleman from 
Massachusetts has expired.
    The Chair now recognizes the gentleman from New Mexico for 
5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Mr. Angelides, I am trying to get some understanding. You 
are saying that CDS's pushed through, the MBS's, mortgage-
backed securities, that was a key to the problems that were 
going on; is that correct? I just want a yes or no answer 
because we really have a long way to go on that.
    Mr. Angelides. Yes. I believe that they helped create the 
collateralized debt obligations that made it possible for 
senior--
    Mr. Pearce. So you have mortgage-backed securities that 
don't have much value. Those mortgage-backed securities that 
don't have much value are based on a combination of individual 
loans that have very little value; is that correct? Just yes or 
no.
    Mr. Angelides. What the CDS did is give the purchasers the 
``assurance'' that if these things went bad--
    Mr. Pearce. No, I understand. But mortgage-backed 
securities were basically packages of loans that had almost no 
capability to repay. They were worthless.
    Mr. Angelides. They were highly defective, yes, sir.
    Mr. Pearce. And they were worthless because we had reduced 
the underwriting standards for the loans.
    Mr. Angelides. Terribly.
    Mr. Pearce. And the underwriting standards that were 
reduced were accelerated by the Federal Reserve trying to prop 
the system up. In other words, the ability to repay is based on 
our income and the price of the house combined. And so the 
Federal Reserve was driving the price of interest down to where 
people could dedicate a larger stream to the principal payment 
and keep the illusion alive, so we are moving lower and lower. 
And Mr. Greenspan, in testimony, said we are having a little 
bit of a problem with this housing bubble, but we are going to 
work it out.
    And so I am seeing this sequence where underwriting 
standards generated bad mortgages, which generated bad bonds, 
which generated bad CDS's. At the heart of it is the decline in 
underwriting standards. And when I pursue that upstream, then I 
find an aggressive affordable housing policy to be a culprit. 
And I am amazed then that you draw the conclusion on page 3 
that says, ``We determined that government housing policies 
were not a significant factor in the crisis.'' I am amazed at 
that conclusion. Can you help me understand why the 
government's position--they could--the government as the 
regulators, they are achieving a position right now that is not 
allowing bad loans to be made. And the government, therefore, 
could have done this 2 years ago. We didn't pass any new law 
saying that you can't do this. It was an option on the part of 
the government. And for you to draw that conclusion is amazing.
    Mr. Angelides. Yes. So we were speaking here about the 
Community Reinvestment Act and the affordable housing goals at 
HUD. I agree with you that the Federal Reserve fell down on 
mortgage standards.
    Mr. Pearce. I am glad you said that. But I am asking about 
the policy that says we are going to lower the underwriting 
standards and--
    Mr. Angelides. Let me just take, for example, the one 
reason we found the Community Reinvestment Act didn't have an 
impact. Most of these lenders or many of the subprime lenders, 
the Ameriquests of the world, the New Centurys of the world, 
many of those lenders, they were not regulated thrifts or 
commercial banks, they were not governed by government housing 
policy, they weren't Fannie, they weren't Freddie. The most 
aggressive loans, the worst loans in the marketplace were being 
made by nonbank financial institutions. They were supported by 
bank financial institutions.
    Mr. Pearce. Just reclaiming my time, isn't it correct that 
eventually most of those loans were repurchased by someone, and 
about 50 percent of the Community Reinvestment Act loans were 
purchased by Fannie and Freddie who were getting a wink and a 
nod from the regulators saying it is okay? And so, again, I 
drive at the point of your conclusion that the government 
policies had nothing to do--they didn't get in your top six. 
You write out your top six complaints, but government policies 
didn't make the top six list, and I find that amazing.
    Mr. Thomas, do you have a comment?
    Mr. Thomas. Yes. You are right.
    Mr. Pearce. Thank you. That is enough. If I get that from 
you, I am ready to go.
    Mr. Thomas. But I still have 30 seconds. When I talked 
about the overreach in Dodd-Frank, I didn't mean that there 
wasn't a need to deal with some derivatives. The synthetic CDOs 
absolutely were a major problem. The move in terms of originate 
to hold as a mortgage pattern, to originate to sell was a major 
problem. Transparency was a major problem. Through Republican 
and Democratic Administrations, the desire to get people into 
houses as part of the American dream definitely was part of the 
problem. The cheap money from the Fed was part of the problem.
    But if you go out looking for villains and victims, you 
miss some of those fundamental shifts that we ought to be 
focusing on. I spent more than 3 decades in government. I will 
tell you, if you want to bet on conspiracy versus incompetency, 
incompetency wins every time. We need to look at the 
fundamentals and not point fingers at various folks. Yes, some 
derivatives too much.
    Mr. Hensarling. The time of the gentleman has expired.
    Mr. Pearce. Mr. Chairman, I yield back the rest of my time.
    Mr. Hensarling. The rest of your nonexistent time. The 
Chair now recognizes the gentleman from Calilfornia, Mr. 
Sherman, for what I hope will be 5 minutes.
    Mr. Sherman. Thank you, Mr. Chairman. I think you have 
produced a high-quality report in both sections. I realize 
there are some differences, and that is what the press is 
focused on. And they focused on arguments amongst the members. 
Whether you guys had a good time preparing this report is an 
absolute irrelevancy to anyone other than yourselves. My own 
belief is, if I was writing this report, it would have been 
much shorter, because I focus on one thing as the ultimate 
cause and that is the credit rating agencies.
    Senator Franken and I were able to get something in the 
bill which is not as artfully drafted, but, if properly 
interpreted, I think will solve the problem within a year or 
two. And perhaps one of the more brilliant aspects of the 
report is that both the dissent and the report in chief say 
pretty much the same thing. The report in chief says: ``We 
conclude that the failure of the credit rating agencies were 
essential cogs in the wheel of financial destruction and point 
out that Moody's was giving its Triple A stamp to 30 mortgage-
related securities every working day and had to downgrade 83 
percent.''
    And I see our friend, Mr. Thomas, nodding his head. I don't 
know if he embraced those exact words, but his part of the 
report said much the same thing by saying: ``The credit rating 
agencies assigned overly optimistic ratings and this 
contributed to the creation of toxic financial assets.''
    One thing I didn't spot in the report is that not only did 
it create the toxic assets, but it created a housing bubble. 
Providing all this ``no questions asked'' capital to anybody 
who would sign the papers to move into a home greater than they 
had ever dreamed of, let alone could afford, creates a housing 
bubble such that good mortgages become bad mortgages.
    Now, the credit rating agencies gave Triple A to Alt-A. And 
we have had testimony here that says, it is up to the investor, 
it is up to the portfolio manager, to see through the false 
ratings. What happens to a portfolio manager short term if he 
or she gets 20 or 30 fewer basis points on their portfolio 
investing in bonds with a lower rating than the portfolio 
manager down the street? Can a portfolio manager be highly 
respected getting a lower rate of return on lower-rated 
instruments and expect to attract additional capital? Mr. 
Angelides.
    Mr. Angelides. Could you just repeat the last part of that, 
Mr. Sherman, very quickly?
    Mr. Sherman. Can a portfolio manager who had the brilliance 
to recognize that the credit rating agencies are wrong, and 
therefore invests in different instruments, instead of seeking 
the best rating with the best return says, the ratings aren't 
worth anything, I am just going to try to get the best return 
investing in things that may be lower rated by the credit 
rating agencies but in my own analysis are better, and then 
presents to the investors saying, instead of investing in 
Triple As, I invested in Double As and I am getting 30 basis 
points less than the guy across the street, but trust me, it is 
a better portfolio.
    Mr. Angelides. Certainly, investors have a responsibility 
to do their own due diligence. And I think one of the important 
things about Dodd-Frank is it removes a lot of the statutory 
requirements that people have to rely on rating agencies. It 
makes the rating agencies produce for public view their models.
    Mr. Sherman. But let me interrupt. Let's say I have $50,000 
to invest and you would advise me to diversify that by 
investing in a portfolio of 100 different debt instruments, 
perhaps through a mutual fund. How many minutes am I supposed 
to spend of my life to invest that $50,000 looking at the 100 
different debt instruments, not to mention the 400 or 500 that 
I reject and don't include in my pool of 100? Is there any way 
I can invest $50,000 except by relying on the credit rating 
agencies?
    Mr. Angelides. On financial advisors who have fiduciary 
duties to you. The ratings are important, and therefore the 
oversight, the exposure of models in Dodd-Frank, the provisions 
that you worked out with Mr. Frank to take away issuer pay, so 
that these aren't biased, these are all important reforms.
    Mr. Sherman. It is not so much issuer pay, it is issuer 
select.
    Mr. Angelides. Yes.
    Mr. Hensarling. The time of the gentleman has expired. If 
the witness has completed the answer, the Chair will note that 
there are five remaining members in the room who have not had a 
chance to question. It will be the Chair's intent to allow--
    Mr. Sherman. Mr. Chairman, is there a way that our former 
colleague could have 20 seconds?
    Mr. Hensarling. Yes, after I finish my announcement that we 
will allow the five members who haven't asked questions to 
question the witnesses so that we may dismiss this panel at 
approximately 12:30. We will give Chairman Thomas 30 seconds 
before going on to the next member. Chairman Thomas.
    Mr. Thomas. Thank you very much. Big, big, big problem. In 
our New York testimony, we had people who were former 
participants in the ratings tell us that they changed their 
business model or they were going to lose business. We haven't 
focused on the short-term financing, the commercial paper, the 
repo paper, repurchase paper, overnight financing. Based on the 
ratings, people would accept or they wouldn't.
    What scared me was the first regulation coming out of Dodd-
Frank was on the rating agencies, and they said they wouldn't 
do it and you guys blinked. And it scares me to death in terms 
of getting on top of what I think, as we said in our dissent, 
one of the major problems--transparency, the rating agencies, 
and the willingness to accept three letters versus factual 
investigation of what happened.
    Mr. Hensarling. The Chair now recognizes the gentleman from 
Missouri for 5 minutes.
    Mr. Luetkemeyer. Thank you very much. In your report and in 
the summaries that I read, you talk about the different causes. 
I have yet to see in there community banks, credit unions, 
insurance companies, household lenders were the cause of this 
debacle.
    Mr. Angelides. I do not believe that community banks were a 
driving cause of this. They had large real estate portfolios. 
But the primary losses that set off the cascade in 2007 were 
driven by the larger, first of all, nonbank financial 
institutions; then it went into other areas of the shadow 
banking. But they have suffered greatly, I might add, tons of 
community banks and--
    Mr. Luetkemeyer. Let's just run then with the question. Mr. 
Thomas.
    Mr. Thomas. Community banks, basically when you move from 
that model of originate to hold to originate to sell, got 
pushed out of the home mortgage market pretty significantly. 
They wound up in the commercial market. And although a number 
of local community banks have failed hanging on to that, it was 
the depreciation of property and not the similar problem with 
synthetic CDOs and that sort of thing.
    Mr. Luetkemeyer. So basically you agree that the list that 
I gave you, they were not the root causes of what happened.
    Mr. Thomas. Certainly not root causes or fundamental.
    Mr. Luetkemeyer. Even though they were, as a result of 
Dodd-Frank, more grafted into that and other regulations put 
onto them.
    Mr. Thomas. Yes. That is a prime example of overreach, in 
my opinion.
    Mr. Luetkemeyer. Okay. That is where I am headed. One of 
the things, as a former regulator myself, to me as I go through 
this process, what you detailed, the number of things that you 
listed here as causes over and over again, it is not 
necessarily the lack of regulation, of a regulation that is 
there; it is the lack of enforcement of the regulation. And 
then when we go to Dodd-Frank, we create a new bureaucracy of 
the Consumer Financial Protection Board, which, in my mind, it 
is kind of like at home if you have a fire department that 
doesn't work, is not answering your fires, instead you have a 
chain of firing everybody and putting a new group in charge who 
will do the job. We put another fire department in place, so we 
got it paid for, that actually unless we give them the right 
tools and the right job and do the job they are supposed to do, 
we are not going to improve ourselves.
    And so I guess I ask the question, in Dodd-Frank do you see 
solutions to our problems not from the standpoint of more 
regulation but from the standpoint that we will enforce--do you 
see a reason to believe that this is a true solution from the 
standpoint that you see a willingness to enforce from all the 
different agencies that you haven't seen before?
    Mr. Angelides. Very quickly, in our conclusions we did say 
that there were powerful regulations on the books that were not 
enforced. And I would hope that the regulators would have the 
backbone, political will and your backing to enforce.
    But I do believe that there were big gaps that Dodd-Frank 
does fill. It cuts off regulatory shopping, it does create 
oversight over nonbank financial institutions that kind of 
escape scrutiny. So I think it filled some important holes. But 
I will say that there were powers there. Dodd-Frank helps make 
sure that the gaps were closed, derivatives, shadow banking 
markets, credit rating agencies.
    Mr. Luetkemeyer. Very good. Thank you, Chairman Thomas, and 
if you could add to that, do you see some gaps of things that 
we need to put in there as well? Very quickly.
    Mr. Thomas. Yes. We can fill every gap. And the next time 
it will be something we hadn't anticipated. So when you talk 
about overregulation, I think this Commission especially, and 
others in the Congress, have an enormous responsibility in the 
oversight.
    Yes, Dodd-Frank has become law. But as the Administration 
begins to move in the direction of regulations, you ought to 
bring them in and examine it again, because I think many of 
them overreach. I think some of them were off-the-shelf 
concerns that people have been worried about, literally for 
decades, that may not directly apply to the concerns that you 
might have. Yes, you do need to have oversight and regulation. 
But if you have so much that nothing bad goes on, you don't get 
the dynamic financial flow which has made this country what it 
is. And it is always going to be a judgment question.
    Mr. Luetkemeyer. I apologize here. I have one more question 
to ask. With regards to all the hearings we have had so far, 
and as we go through the review of Dodd-Frank, I have yet to 
see anything that says something about pre-approval of any of 
the new financial products.
    Through the last 20 years, we have had a whole lot of new 
financial products that have come to the marketplace, most of 
them without regulation, most of it beyond, in fact, with the 
derivatives market, beyond regulations we found out.
    Do you believe in your discussions in 3-year findings that 
we need to have some sort of mechanism in place to pre-approve 
new financial products, or are you going to allow the market to 
continue to develop all these new products and then, after the 
fact, regulate them?
    Mr. Hensarling. Thirty seconds please.
    Mr. Thomas. I think the most valuable thing, rather than 
try to set up pre-approval, is to have transparency, to let the 
marketplace see what the upside and the downside is, and then 
make sure people can get the information. So that if you have 
full disclosure and transparency, I do believe most of the 
problems that we face will be at least moved to minor items.
    Mr. Luetkemeyer. Thank you.
    Mr. Hensarling. The Chair now recognizes the gentleman from 
North Carolina for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. Mr. 
Angelides, just one quick question in response to Mr. Pearce's 
questions just a few minutes ago.
    Did you compare how well mortgages perform that were 
originated by depository institutions, subject to the CRA, to 
the kind of borrowers that the CRA would encourage lending to 
that were purchased by Fannie and Freddie, versus mortgages to 
the same kind of borrowers originated by nondepository 
institutions, not subject to CRA, bought by investment banks, 
private label securities, government policy, having nothing to 
do with that?
    Mr. Angelides. So do we compare the performance of loans 
made under CRA?
    Mr. Miller of North Carolina. Bought by Fannie and Freddie 
versus loans of the same kind of borrowers.
    Mr. Angelides. I can't speak to that specifically. I will 
have to get back to you. I do know that we looked at studies 
that showed that of the high-cost loans under HMDA, which is a 
good proxy for CRA, approximately 6 percent of the high-cost 
loans were made under CRA. And they looked at neighborhoods and 
found that to similar borrowers, CRA loans performed better 
than those loans made by non-CRA-regulated institutions. But as 
to your specific question, I will have to get back to you, sir.
    Mr. Miller of North Carolina. I don't have much time, but 
if you have a quick answer.
    Mr. Thomas. Just a quick response to that. The overall 
portfolio wasn't all that bad for a period of time compared to 
some of the newer stuff coming on. But once Freddie and Fannie 
became actually market commercial structures, there was a drive 
to please their shareholders and they had to maintain not only 
the government number but a high enough number in terms of 
mortgages. So in essence, they were partially forced to go into 
some of these other areas. And they were the insurer of last 
resort.
    And frankly, when you look at the relationship between 
Countrywide and its willingness to provide Fannie and Freddie, 
and Fannie and Freddie's willingness to use Countrywide, that 
really pulled that whole structure down. They were still buying 
even after we realized the market was as bad as it was.
    Mr. Miller of North Carolina. Mr. Thomas, you mentioned 
Michael Lewis earlier and his book, ``The Big Short'', but Mr. 
Lewis has actually been pretty complimentary of the Commission. 
He said it did an excellent job. He said it found some nuggets 
of facts that were not available earlier because you had 
subpoena power, but he said really to have a complete story you 
needed not just subpoena power but waterboarding power. So he 
thought there were some natural limitations to what could be 
gained voluntarily.
    Mr. Thomas. As a Republican, I assume that is a positive 
comment.
    Mr. Miller of North Carolina. Without getting into that 
whole debate, allow me to move on. One thing that most people, 
and certainly the rules of evidence allow you to consider in 
whether to believe a witness is, is it consistent with what 
they said before? And we are now hearing or have been hearing 
since September of 2008 that government policies made banks 
make all these bad loans, and the banks would never have made 
those.
    I was right here as part of that debate. I remember very 
clearly what everybody said. I don't remember anybody saying a 
word about that before September of 2008. I don't remember 
banks sitting in our office or sitting at that table or saying 
in the popular press, we shouldn't be making these loans; 
please, please, let us stop. Do any of you remember--what I 
heard from the banks, from the industry, was that subprime 
mortgages were a great thing.
    Mr. Thomas. One of the real values of this Commission, 
notwithstanding any differences we might have, is that we 
agreed early on to create a repository of all the information 
that we gathered. It is now going to be held at Stanford, and 
there is going to be an interactive relationship. And my hope 
is that we use it as a resource and expand it so we can do 
exactly that; this is what was said back then in terms of the 
in-depth testimony. And Congress needs to realize that there is 
help in getting data that will lead you to the best 
conclusions, and one of those resources will be the 
Commission's Web site location is going to be located at 
Stanford University.
    Mr. Miller of North Carolina. Mr. Angelides, do you 
remember anything like that?
    Mr. Angelides. I was a private citizen at the time, but I 
will say this. We did look at, for example, the affordable 
housing goals set by HUD. We interviewed I believe 46 people on 
this subject. Only two folks said that the affordable housing 
goals is what pushed Fannie and Freddie to do what they did. 
The overwhelming majority of evidence we gathered--documents, 
witness testimony--said it was their drive for profit, 
therefore compensation, regaining market share, catching up to 
Wall Street, that drove their activities.
    But we did conclude that the affordable housing goals that 
went up above 50 percent, I believe in 2005, did marginally 
contribute to Fannie and Freddie, was called their targeted 
loans, that they did contribute to some of their losses; that, 
in fact, when you did move the goals above 50 percent it did 
have a marginal impact.
    Mr. Hensarling. The time of the gentleman has expired. The 
Chair now recognizes the gentleman from Ohio for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman.
    I thought Mr. Thomas' comments on transparency were a very 
important lesson. And I assume Mr. Angelides agrees that 
transparency was an important cause here. I think a lesson that 
we can take in any market is that investors need transparency 
about what is going on with--whether it is counterparties or 
what is going on in the marketplace. Is that correct, Mr. 
Angelides?
    Mr. Angelides. I absolutely concur, and to have 
transparency, you can't have dark markets; you have to have 
reporting. And that didn't exist for the repo market, the 
derivatives markets. And so there is a correlation between 
regulation derivatives. You have to start by asking for 
disclosure. That is very important. Yes, I think we agree on 
transparency is a very key factor here.
    Mr. Stivers. Thank you. Mr. Thomas?
    Mr. Thomas. And with the rating agencies, who today would 
design someone to provide a gold standard or a Good 
Housekeeping Seal of Approval in which they earn their money by 
having people pay them for those ratings.
    Mr. Stivers. I am glad you went there. That is my next 
question, actually.
    Mr. Thomas. And a failure to appreciate how little they 
were worth.
    Mr. Stivers. I think that is something we still haven't 
addressed, and it kind of takes off on what Mr. Sherman talked 
about.
    But I do have a concern about issuers being able to pick 
their own credit rating agency. And in fact, I prefer a blind 
draw. I don't prefer the method that the Senator from Minnesota 
proposed, which creates a big-government structure. I would 
just create a trust essentially, and they pay into the trust 
and there is a blind draw. It doesn't create more government, 
it is a more efficient system.
    But I do want to ask both of you, quickly, about the 
current rating agencies, because I think that there is a view 
on some in this committee, and I think other places, that we 
need to reduce our dependence on the credit rating agencies. 
And while I believe that is partially true, I think it is also 
we can't go too far with that because so many things in our 
investment structure in this country and worldwide are based on 
credit rating.
    So if we took away the conflict of interest and created 
something like a blind draw, how would both of you view that as 
creating a system that would work better? And please be brief, 
because I have one more question.
    Mr. Angelides. Okay. One quick question. I think one of the 
most important things--and Dodd-Frank is exposing the 
methodology--we had to play, ``Where's Waldo?'' We had a whole 
team trying to figure it out. It wasn't until 2006 that Moody's 
actually had a model to analyze subprime lending. I will tell 
you, having sat on two pension boards, that a lot of pension 
boards don't have the capacity, so ratings will be around.
    Mr. Stivers. And they always will be.
    Mr. Thomas. Ratings are easy and they had a history. And 
what they gained, that positive history, overlooked nothing 
like what they were rating at the time that the world fell 
apart.
    I don't think you can create a government structure. I 
happen to agree with you. It will always be a dollar short and 
a day late in trying to cover it. But creating a system where 
people can't link up on their payment versus their rating is 
fundamental, and you can do that fairly easily.
    Mr. Stivers. And I believe that, too. Thank you.
    I have just one more question for Mr. Angelides. How is the 
book selling?
    Mr. Angelides. I think there is--let me just say something. 
Here is what has been surprising. There has been a tremendous 
hunger in this country to have answers. And while we have a 
debate going on, I don't say this as a matter of hubris for 
this Commission, but I guess this weekend it will be listed as 
number 10 on the New York Times best seller nonfiction 
paperback. But I think what that speaks to is still a lot of 
anger, confusion, people in this country wanting to know why so 
many people are out of work, why they lost their homes. I think 
that is really a credit to all the Commission's work that we 
put forward facts and we have put forward a debate.
    Mr. Stivers. Thank you.
    Mr. Thomas. I have been told by a number of people that the 
36 pages, 400 pages in, are definitely worth the price of the 
book.
    Mr. Angelides. Yes, I always go to the back.
    Mr. Stivers. I do hope the taxpayers get their $10 million 
back, so that is why I asked about--
    Mr. Angelides. Very quickly, though. From the day we 
announced this report to 2 weeks after, there were 330,000 
unique visits to the Web site, so people are going there.
    Mr. Stivers. That kind of access is important, too. And I 
do want to thank both of you. I think the fact that even though 
there is competing ideology in the report, there is always 
going to be that. And I think people get to see both and choose 
for themselves. So it doesn't bother me that it was a partisan 
system, our country is a partisan system. But I appreciate the 
fact that both of you were willing to be involved, and that the 
taxpayers and the citizens of this country are getting more 
information.
    Thank you, Mr. Chairman. I yield back the balance of my 
time.
    Mr. Hurt. [presiding.] I thank the gentleman. The gentleman 
from Texas, Mr. Green, is recognized for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the chair and 
the vice chair for the service that you have rendered. I would 
also like to thank the other members of the committee because 
they, too, labored long and hard. And I think it is worthy to 
note that they should be appreciated as well.
    I would like to for just a moment peer through the vista of 
time and harken back to that era before 1977 when we had in 
this country something known as redlining. Redlining, for 
edification purposes, simply means that there were areas in the 
country wherein lending institutions would not lend, 
notwithstanding credit worthiness, they would not lend to 
people simply because of perhaps the location and, to a greater 
extent, who they were. Redlining was a dastardly, ugly thing to 
have perpetrated upon you. It usually happened to people of 
color. Usually. My suspicion is that it happened to some others 
as well.
    But in 1977, the CRA was enacted, and the purpose of the 
CRA was to address redlining. For some of us, when we talk of 
the CRA, there is a much deeper meaning because of how it 
impacted us directly or indirectly.
    And so today, I approach the CRA from the perch of a person 
who saw the actual devastation that was created by virtue of 
something known as redlining. And I do not believe any other 
persons who are antithetical to the position that I approach, I 
don't believe that any of them occupy their positions with 
malice aforethought. I believe them to be honorable people who 
have a different opinion.
    But I know why my opinion exists, because I saw the 
devastation. So when I hear people make an effort to blame the 
CRA for the crisis, it has a greater impact on me than it may 
have on some others, because I knew what the CRA meant when it 
was enacted, and I know now what it means to people of color 
who try to have equality of opportunity: Not to get more than 
you deserve, but to do what others do, to succeed on their 
merits or fail on their demerits and have their 
creditworthiness be appraised just as everybody else's 
creditworthiness is appraised.
    So I ask now this simple question: Was the CRA the major 
cause of the crisis?
    Mr. Thomas. A large part of the debate, or one of the 
fundamental causes, in my opinion it clearly was one of the 
causes, but not a fundamental cause. And let me hasten to tell 
you that I agree completely with those early days.
    Mr. Green. Permit me for just a moment, Mr. Vice Chairman, 
because time is of the essence. And I do beg that you forgive 
me. I don't mean to be rude, crude, and unrefined, but I do 
have to move forward and ask this. Given what you said about it 
not being a fundamental cause, would you eliminate the CRA 
because of what happened with this crisis?
    Mr. Thomas. I would talk about going back to what the CRA 
was earlier. What happened between both--
    Mr. Green. My question, though, is--I do have to intercede 
because my question is, would you eliminate it? And I have the 
yellow light. Would you eliminate it, would you do away with it 
completely?
    Mr. Thomas. I would modify it.
    Mr. Green. Okay, thank you.
    Now, let's move to the chairman, if I may. Mr. Chairman, do 
you believe that the CRA was the cause of the crisis?
    Mr. Angelides. No, I do not believe it was. We found that 
it was not significant in subprime lending. We found, 
therefore, it was not significant with the crisis. Many of the 
subprime lenders were not even regulated by the CRA. Only 6 
percent of the high-cost loans, which is a proxy, those are 
under HMDA data, were even originated by CRA lenders. And 
studies show that CRA loans, loans made by CRA-regulated 
institutions in neighborhoods to similar borrowers, the non-
CRA-regulated institutions performed better. So the answer from 
my perspective is no.
    Mr. Green. Thank you, Mr. Chairman.
    Mr. Thomas. Mr. Chairman, can I ask unanimous consent for 
30 seconds to respond outside the question structure?
    Mr. Hurt. Thirty seconds.
    Mr. Thomas. One of the reasons I would talk about modifying 
it, Mr. Green, is that we have a fundamental problem with our 
Tax Code, that if you are able to own a home you have many, 
many advantages under the Tax Code. We need to change the 
relationship between renting and ownership.
    There was much political thrust, both Republicans and 
Democrats, to get people into their own home for the tax 
advantages, and that shouldn't be the case. That is how I would 
change it in terms of modification.
    Mr. Green. Mr. Chairman, if I may, Mr. Chairman, may I be 
recognized, please, for a question?
    Mr. Hurt. Thirty seconds.
    Mr. Green. May I please ask that the chair respond to the 
comment that was made by the vice chair? Thank you.
    Mr. Angelides. This comment?
    Mr. Green. Yes, sir.
    Mr. Angelides. First of all, I started my career in the 
affordable housing arena. And I do think we have to pay 
attention to the needs of renters in this country. And I want 
to say one important thing. Here is the tragedy of this crisis. 
It was supposed to be about creating new homeownership. The 
homeownership rate peaked in this country in the spring of 
2004. From then on, it was all about financial engineering, 
mortgage-backed securities, CDOs, not about putting Americans 
in homes. That is the real tragedy of this crisis.
    Mr. Hurt. I now recognize myself for 5 minutes. The 
question I would like to ask--and let me first thank you all 
for being here, and I appreciate your testimony today--but it 
goes to the heart, I think, of what has been discussed. I think 
Mr. Miller from North Carolina was talking about this as well.
    It seems to me that irresponsible lending certainly has 
played a role in where we are, for sure. And so, I find it 
interesting that in your report and in your testimony, Mr. 
Angelides, that you say that government housing policies were 
not a significant factor in the crisis.
    And so my question is: Are there any housing, government 
housing policies that you think should be changed? And how do 
you defend that statement in light of what I think we would all 
agree, at least a significant--I think a significant part was 
caused by irresponsible lending. And so I would like to ask 
that question to you, and then I would like to have a comment 
from Mr. Thomas and then another question.
    Mr. Angelides. Let me be very specific. We looked at the 
affordable housing goals of HUD and believe they contributed 
only marginally to Fannie Mae and Freddie Mac's massive losses. 
We looked at the Community Reinvestment Act and found that it 
was not a significant factor in subprime lending, therefore the 
crisis. Clearly, Fannie and Freddie were publicly traded 
corporations but with an implicit government guarantee which 
became explicit with many subsidies from the Federal 
Government, and clearly that model is flawed and broken and 
ought not to be returned to. And we did say, I will say 
majority of the Commission, and the dissent by Mr. Thomas et 
al., that they did contribute significantly. We say that and we 
say it clearly.
    Mr. Hurt. But are there any specific housing policies that 
you can recommend to this committee that we look at to help 
prevent this from happening again? You said that this was 
avoidable, and I think we want to avoid this in the future.
    Mr. Angelides. I think the most important, at least 
homeownership policies, is to make sure we are always studying 
reasonable mortgage lending standards. And anything that the 
government backs ought to be on strongly underwritten loans in 
terms of quality. That was a major failure and we should never 
let that happen again. I believe Dodd-Frank helps in that 
regard.
    I would have to give some thought--I spent a lifetime on 
this, but I agree with Mr. Thomas that we do have to pay 
attention also to rental housing as an option, so that we are 
not stretching to put people in homeownership who can't quite 
reach it by virtue of income. I think that is a very legitimate 
comment by Mr. Thomas.
    Mr. Hurt. Just briefly, Mr. Thomas.
    Mr. Thomas. Government housing policies did contribute to 
the problem. Government tax positions also contributed to the 
problem. The real difficulty is that owning a home was ``the 
American dream.'' But it was also the source of what people 
believed were their primary savings by virtue of the inflation 
associated with the value of the home and the so-called equity. 
We failed in the Tax Code to not let them cash in on that 
equity.
    So for someone who had been in a home for 20 years and you 
had the downturn, they had virtually no equity in it because of 
the tax structure. But ultimately everyone contributed, because 
it had been so long since we had a difficult time and it was 
easy to make money. But there is no question that a number of 
government policies, including the drive at all costs to get 
everybody in a home of their own, was one of the contributors.
    Mr. Hurt. Thank you, Mr. Thomas.
    I would like to yield the balance of my time to the 
gentleman from New York, Mr. Grimm.
    Mr. Grimm. Thank you, Mr. Chairman. I will be very brief. 
Chairman Angelides, you mentioned earlier that the Federal 
Reserve could have done things; they had the power and 
authority, but they didn't act, specifically, relating to 
overleverage. What could they have done?
    Mr. Angelides. First of all, I was commenting specifically 
on their failure to adopt mortgage lending standards, which 
they have the full authority to do, that would apply to all 
institutions, and in that regard they failed miserably.
    In 2001, they adopted some regulations. Our regulatory 
bodies had the ability, bank holding companies, other 
institutions, to control leverage and didn't. And as you know, 
these institutions levered up tremendously such that, for 
example, the investment banks--which, of course, was the SEC's 
purview--a 2 or 3 percent drop in values could wipe out all 
equity.
    Mr. Grimm. But isn't it--and I understand there are 
multiple reasons that lead to this crisis--but would it be fair 
to say that an absolute major part of this crisis was 
overleverage?
    Mr. Angelides. Absolutely. Oh, yes.
    Mr. Grimm. So doesn't that beg the question, then, that it 
really is not a complete lack of regulation but a lack of 
enforcement and proper oversight? And that is why I am a little 
perplexed by the overreaching of Dodd-Frank, because a lot of 
this could have been avoided simply by enforcing rules we have 
had on the books for years.
    Mr. Angelides. But here is what we said in our conclusions. 
We said there was a lot of power and it wasn't used. However, 
we also note that there were significant gaps that were opened 
up, and there was regulatory shopping. Take Countrywide. You 
can read here how they decide. They don't want to be regulated 
by the Fed, they don't want to be regulated by the OCC, they 
want to go to the OTS because they are the weakest.
    Mr. Grimm. My time is up, so I just want to make a point, 
and I concede. However, doesn't prudence and common sense--
let's forget we are in the government now and let's actually 
try to apply common sense. Doesn't it make sense to first fix 
the problem where rules and regulations exist, so that we 
enforce that before we go ahead and go to the next step, which 
I would think would be logically, then add any additional rules 
or regulations that are needed at that point? But to have a set 
of rules we didn't listen to because of for whatever reasons, 
and then add more on top of that, I would think they are not 
going to listen to the new rules either.
    Mr. Angelides. Quickly, I think you need both. And I will 
just say that more than most of my career has been in the 
private sector, and so I come at this with a belief in free 
markets. But the financial sector is so central, it is like the 
heart of our system; we don't want arrhythmia, we want to make 
sure there is--you don't want to kill innovation, but I think 
there are two problems. We said very clearly here, by the way, 
that we don't accept the view that regulators didn't have 
power, but we also say there were big gaps open. I think it was 
a dual problem.
    Mr. Hurt. Mr. Thomas, just very briefly.
    Mr. Thomas. I think there is a real opportunity because, 
clearly, Dodd-Frank was passed in a very partisan environment. 
And we have an opportunity, you folks do in the House, to 
review the proposed regulations in another partisan environment 
and make sure that some of the clear overreaching is tempered.
    So I really think this committee is absolutely fundamental 
to getting it right. Because yes, there were regulations that 
should have been carried out. Have we gone overboard in dealing 
with them? You are seeing testimony now about certain types of 
derivatives. Some derivatives need to be transparent and 
regulated. Some are going to be killed, a useful financial 
tool.
    You folks now in the majority have the chance to go back 
and revisit those proposed regulations, bring them in here, 
make them explain why they need all the bells and whistles, 
because, frankly, my bigger concern is going to be a choking up 
of the financial structure in various ways. It is going to 
force creativity, because creativity will move to areas that 
you haven't anticipated. It is best to keep them comfortable 
but under a structure. Thank you very much.
    Mr. Hurt. Mr. Thomas, thank you. The Chair notes that some 
members may have additional questions for this panel which they 
may wish to submit in writing. Without objection, the hearing 
record will remain open for 30 days for members to submit 
written questions to these witnesses and to place their 
responses in the record.
    I want to thank Mr. Angelides and Mr. Thomas for being 
here. We appreciate the dialogue. With that, the first panel is 
dismissed. And the second panel will quickly take their place 
at the table.
    Mr. Angelides. And by the way, I want to thank the 
committee for your courtesy, and thank my colleagues, all my 
colleagues on the Commission and the staff, who did an 
excellent job. So thank you very much, Mr. Chairman.
    Mr. Thomas. And I want to echo my comments as well. Thank 
you very much for your leniency.
    Chairman Bachus. Mr. Wallison, you are recognized for 5 
minutes for your opening statement.

  STATEMENT OF PETER J. WALLISON, COMMISSIONER, THE FINANCIAL 
                   CRISIS INQUIRY COMMISSION

    Mr. Wallison. Thank you, Mr. Chairman. Chairman Bachus, 
Ranking Member Frank, and members of the committee, by June of 
2008, there were 27 million subprime and Alt-A mortgages in the 
U.S. financial system. That was half of all mortgages. These 
weak and risky loans had begun to default in unprecedented 
numbers when the 1997-2007 bubble began to deflate. And by 
2008, many financial institutions that held these mortgages, or 
mortgage-backed securities based on them, were in trouble.
    No one doubts that it was the failure of these mortgages, 
what was known at the time as the mortgage meltdown, that 
caused the financial crisis. Nothing like this had ever 
happened before. In previous bubbles, the number of subprime 
loans was very small and losses, when they deflated, were 
generally confined to local areas. In this bubble, the mortgage 
losses were large and the losses were international.
    In light of these facts, the question the Commission should 
have answered--and did not--was why there were so many bad 
mortgages outstanding in 2008. Obviously, there had been a 
serious decline in underwriting standards, something else that 
had never happened before. Neither the Commission nor the other 
dissenters advanced a plausible explanation for the decline in 
underwriting standards. Both seemed to assume that easy credit 
automatically produces subprime loans, but this is far from 
obvious.
    Before the 2008 crisis, the United States had frequently 
experienced periods of low interest rates, large flows of funds 
from abroad, and housing bubbles. We also had the same 
regulatory structure and relied on financial institution 
management to anticipate risks. None of these conditions or 
factors, separately or together, had ever before resulted in a 
mortgage-based international financial crisis.
    Under these circumstances, it is logical to focus on the 
one unprecedented element in the U.S. financial system before 
the crisis: the large number of subprime and other risky loans.
    My dissent focuses on the only plausible explanation for 
the buildup of these loans, and that is U.S. Government 
policies, specifically housing policies. Beginning in 1992, 
with the imposition of affordable housing requirements on the 
GSEs, mortgage underwriting standards began to erode. HUD 
caused this erosion by raising the affordable housing goals 
through the Clinton and Bush Administrations, until more than 
half of all loans the GSEs had to buy were required to be made 
to borrowers at or below the median income where they lived.
    In addition, the GSEs were put into competition with FHA, 
with insured banks under the Community Reinvestment Act, and 
with subprime lenders, all of whom were looking for borrowers 
who were also at or below the median income. Prime loans were 
difficult to find among these borrowers, so to acquire the 
loans the government was demanding, underwriting standards had 
to be reduced.
    By 2000, for example, Fannie was offering to buy mortgages 
with no downpayment. My dissent details how these weak 
government-mandated loans caused the growth of the bubble, how 
the bubble created the private label market for securities 
backed by subprime loans, and how the failure of all these weak 
loans destroyed the value of the mortgage-backed securities and 
thus weakened financial institutions around the world.
    Finally, the Commission's majority report propagates the 
false idea that the GSEs bought these risky loans not because 
of the affordable housing requirements but to regain market 
share, or for profit.
    My dissent documents that this is not true. For example, 
this quote from Fannie's 2006 10-K report: ``We have made and 
continue to make significant adjustments to our mortgage loan 
sourcing and purchase strategies in an effort to meet HUD's 
increased housing goals and new subgoals. These strategies 
include entering into some purchase and securitization 
transactions with lower expected economic returns than our 
typical transactions. We have also relaxed some of our 
underwriting criteria to obtain goals qualifying mortgage loans 
and increased our investments in higher risk mortgage loan 
products that are more likely to serve the borrowers targeted 
by HUD's goals and subgoals, which could increase our credit 
losses.''
    Fannie and Freddie are deeply insolvent, and will cost the 
taxpayers almost $400 billion as a result of the kinds of 
decisions they made to comply with the affordable housing 
goals.
    Now, could anything be clearer than that statement in their 
10-K? I don't think so. The deterioration in underwriting 
standards was caused by U.S. Government policy, and this caused 
the financial crisis, not a lack of regulation or a failure of 
risk management. In my view, then, the Dodd-Frank Act was not 
soundly based and will not prevent a future financial crisis. 
Thank you.
    [The prepared statement of Mr. Wallison can be found on 
page 122 of the appendix.]
    Chairman Bachus. I don't mean to rush anybody, but we will 
have votes at about 1:00. And I enjoyed your testimony. I 
wasn't trying to cut you off, but I would like to get to, as 
rapidly as possible, the questions.
    Ms. Born, I recognize you for 5 minutes.

 STATEMENT OF THE HONORABLE BROOKSLEY BORN, COMMISSIONER, THE 
              FINANCIAL CRISIS INQUIRY COMMISSION

    Ms. Born. Thank you, Chairman Bachus, Ranking Member Frank, 
and members of the committee. Thank you for inviting me to 
appear before you to discuss the report of the Financial Crisis 
Inquiry Commission. As a member of that Commission, I voted to 
adopt the report and I agree with its conclusions which have 
been discussed by former Chairman Angelides in his testimony.
    In my testimony, I will describe several conclusions of the 
Commission about three specific components of the financial 
system that contributed significantly to the financial 
meltdown. First, the Commission concluded that collapsing 
mortgage lending standards and the mortgage securitization 
pipeline lit and spread the flame of contagion and crisis. Many 
mortgage lenders became so eager to originate loans that they 
took borrowers' qualifications on faith, often with a willful 
disregard of the borrower's ability to repay.
    The Federal Reserve and other regulators were aware of the 
increase in irresponsible lending, including predatory and 
fraudulent practices, but failed to act effectively to restrict 
such behavior. The securitization process led lenders and 
securitizers to believe that they were able to pass the risk of 
these toxic mortgages to investors in mortgage-backed 
securities and collateralized debt obligations. However, the 
financial crisis revealed that in fact a number of systemically 
important institutions remained significantly exposed to them.
    Second, the Commission concluded that over-the-counter 
derivatives contributed significantly to the crisis. After 
being deregulated by Federal statute in 2000, the OTC 
derivatives market grew exponentially to almost $673 trillion 
in notional amount on the eve of the crisis in June 2008. This 
unregulated market was characterized by uncontrolled leverage, 
lack of transparency, lack of capital and margin requirements, 
rampant speculation, interconnections between firms, and 
concentration of risk in systemically important institutions.
    Derivatives known as credit default swaps fueled the 
securitization frenzy by encouraging investors in mortgage-
related securities to believe that they were protected against 
default. Credit default swaps were also used to create 
synthetic collateralized debt obligations, or CDOs, which were 
merely bets on real mortgage securities. Such bets 
significantly amplified the losses from the collapse of the 
housing bubble.
    Insurance giant AIG's sale of these credit default swaps 
without adequate capital reserves brought it to the brink of 
failure and necessitated its rescue by the government, which 
ultimately committed more than $180 billion because of concerns 
that AIG's collapse would trigger cascading losses throughout 
the financial system.
    In addition, the existence of millions of contracts of 
other kinds of OTC derivatives created interconnections among a 
vast web of financial institutions through counterparty credit 
risk, exposing the system to contagion and helping to 
precipitate the government bailouts.
    Third, the Commission concluded that the failures of the 
credit rating agencies were essential cogs in the wheel of 
financial destruction. Without the high ratings issued by 
credit rating agencies, the mortgage-related securities at the 
heart of the crisis could not have been marketed and sold in 
such vast quantities. The credit rating agencies issued top 
ratings to tens of thousands of mortgage securities, which 
reassured investors and allowed the market to soar, and then 
downgraded them wreaking havoc across markets and firms.
    The agencies' rating failures resulted from pressures by 
financial firms that paid for the ratings, the use of faulty 
computer models, the desire to increase or maintain market 
share, and the absence of meaningful public oversight.
    Thank you.
    [The prepared statement of Ms. Born can be found on page 62 
of the appendix.]
    Chairman Bachus. Thank you.
    Mr. Miller of California. [presiding.] Dr. Holtz-Eakin.

    STATEMENT OF DR. DOUGLAS HOLTZ-EAKIN, COMMISSIONER, THE 
              FINANCIAL CRISIS INQUIRY COMMISSION

    Mr. Holtz-Eakin. Acting Chairman Miller, Acting Ranking 
Member Green, thank you for the chance to be here today. I want 
to begin by acknowledging and thanking the staff of the FCIC 
for their superb work throughout the Commission. And the fact 
that the Commissioners failed to come to a consensus report 
should not diminish their efforts in any way.
    The committee asked me to discuss three things: the 
findings of the majority and minority reports; the issue of 
lacking the ability to come to consensus; and the implications 
for Dodd-Frank. Let me briefly discuss each of those.
    In the dissent that I filed with Vice Chairman Thomas and 
with Commissioner Hennessey, we differed in three important 
ways:
    First, we felt that you could not describe the causes of 
the financial economic crisis, the mandate which Congress gave 
to us, through a simple narrative that relied either on the 
greed of Wall Street or the failure of government policy but, 
instead, there would be 10 specific and essential pieces that 
led to the crisis. And we detailed those in our report and 
would be happy to expand on those.
    Second, it is is not U.S.-centric. Much of the evidence 
about the cause of the financial crisis can be gleaned by 
looking around the globe. This was a global phenomenon. We had 
housing bubbles and a credit bubble around the globe, in 
Australia, the United Kingdom, Spain, and other places, even 
though they had very different mortgage finance systems and 
very different regulatory structures. And we had large 
financial institutions fail around the globe, again, in the 
presence of very large differences in regulatory structure. So 
it struck us that focusing on U.S.-centric regulatory 
phenomenon missed the point.
    And third, we tried to focus on deep underlying causes, 
without an emphasis on institutions and individuals, as we saw 
in the majority's report. In particular, again, we did that 
because we thought it was closer to answering the truth.
    On the second point of a failure to come to agreement, I 
think in many ways this isn't surprising. I have been studying 
economics since 1978, and among my professional colleagues, we 
have yet to agree on the causes of the Great Depression.
    I believe we will continue to disagree on the causes of the 
financial crisis of 2008. Particularly given the scope and the 
timetable the Commission was handed, I think it is in many ways 
an unsurprising outcome, and I don't feel that it enhances the 
report for us to disagree, but it is not entirely a shock. And 
I am disturbed that late in the game, it appeared to become 
partisan in nature when, in fact, what I saw during the vast 
majority of the Commissioners' deliberations were 10 
individuals with views that did not agree and a willingness to 
look at the data and try to work that out.
    Finally, in terms of implications for the legislation that 
was ultimately passed, if you look at our dissent, we found 
around the globe credit in housing bubbles in these various 
regulatory environments. While we certainly acknowledge that 
bad people did bad things, and there is tremendous evidence 
that mortgage organization standards declined in the United 
States, we don't find the broad mandate for erecting, for 
example, a Consumer Financial Protection Agency. There was 
never any quantitative evidence brought to bear by the majority 
in the Commission about the extent of fraud or its contribution 
to the crisis, and outside of mortgages there is no evidence 
whatsoever.
    The second is that we found no real role for the repeal of 
Glass-Steagall or proprietary trading in the crisis. And so 
efforts to impose, for example a vocal role, appear to be 
misguided.
    And then in the interest of time, let me just close with 
the last I think implication, which is the crisis itself was a 
tribute to the financial sector spilling over into the real 
economy, the Main Street economy, and it doesn't exist in 
isolation. And as this committee and the framers of the 
legislation go forward, it is useful to remember that the costs 
imposed by that legislation are going to spill over to the real 
economy as well.
    The scale of the rulemaking is enormous. It takes place at 
a time when the Affordable Care Act and the EPA's activities 
are also leading to record Federal Register pages for 
regulations, and I have a deep concern that this will inhibit 
the growth that is necessary for the 8 million Americans who 
are out of work. Thank you.
    [The prepared statement of Dr. Holtz-Eakin can be found on 
page 70 of the appendix.]
    Mr. Miller of California. Thank you, Doctor, for your 
testimony.
    Mr. Georgiou.

STATEMENT OF BYRON GEORGIOU, COMMISSIONER, THE FINANCIAL CRISIS 
                       INQUIRY COMMISSION

    Mr. Georgiou. Thank you, Acting Chairman Miller and Acting 
Ranking Member Green. I am pleased to join my colleagues today. 
I would like to join Dr. Holtz-Eakin's commendation of our 
staff who worked under incredibly strenuous circumstances and 
extraordinary hours and contributed enormously to this process, 
and thank my fellow Commissioners.
    We concluded that the financial and economic crisis was 
caused by widespread failures of financial regulation, 
breakdowns in corporate governance, a volatile mix of excessive 
borrowing and risk-taking, key policymakers who were ill 
prepared for the crisis, and systemic breaches in 
accountability and ethics at many levels in the private sector. 
There were many warnings, and the Commission concluded that the 
crisis could have been avoided.
    I will address three key areas we investigated. These 
matters included: the roles of excess capital availability and 
liquidity; the Government Sponsored Entities Fannie Mae and 
Freddie Mac; and government housing policies.
    First, the Commission agreed that the availability of well-
priced capital, both foreign and domestic, is an opportunity 
for economic expansion and growth if encouraged to flow in 
productive directions. Excess liquidity by itself did not need 
to cause a crisis.
    The Commission determined that low interest rates, widely 
available capital, and international investment were 
prerequisites for the creation of the credit bubble, creating 
increased risk that should have been recognized by market 
participants, policymakers, and regulators. However, with 
proper safeguards in place, such as prudent lending standards 
and adequate attention to risk in the private sector, excess 
liquidity need not have led to a crisis.
    Second, the Commission investigated the role of Fannie Mae 
and Freddie Mac, using Fannie Mae as its in-depth case study. 
We concluded that they contributed to the crisis but they were 
not a primary cause. These Government Sponsored Enterprises had 
a deeply flawed business model. As publicly traded corporations 
with the implicit backing of and subsidies from the Federal 
Government and with the public mission, their $5 trillion 
mortgage exposure and market position were significant. And 
they used their political power for decades to ward off 
effective regulation oversight, spending $164 million on 
lobbying from 1999 to 2008.
    As you know, through the third quarter of 2010, the 
Treasury Department had provided $151 billion in financial 
support to keep them afloat. Still, GSE mortgage securities 
essentially maintained their value throughout the crisis and 
did not contribute to the significant losses seen at other 
financial institutions that were central to the financial 
crisis. The Commission report explains how prices of Fannie Mae 
mortgage-backed securities actually increased slightly in the 
2007-2008 time period while the prices of private label 
mortgage-backed securities have dramatically declined. And the 
purchases of non-GSE mortgage-backed securities added helium to 
the housing balloon, but their purchases never represented a 
majority of the market. The GSEs participated in the expansion 
of subprime and other risky mortgages, but they followed rather 
than led Wall Street and other lenders.
    In 2005 and 2006, they ramped up their purchase and 
guarantee of risky mortgages in order to meet stock market 
analysts' expectations for growth. The evidence shows that they 
did so to regain market share and to ensure generous 
compensation for executives and employees.
    We sampled about 25 million mortgages. Some of our data 
indicated that subsets of borrowers with credit scores less 
than 660, those GSE mortgages were far less likely to become 
seriously delinquent than were private label securitized 
mortgages to the same types of lenders, 6 percent on the part 
of the GSEs, 28 percent on the private label.
    Third, the Commission studied government housing policies 
and concluded that they did not cause the crisis. Based on the 
evidence and interviews with dozens of individuals, the report 
describes how the Department of Housing and Urban Development's 
affordable housing goals for Fannie and Freddie contributed 
only marginally to the GSEs' participation in risky mortgages. 
And we concluded that the Community Reinvestment Act, enacted 
in 1977 to expand safe and sound lending to creditworthy 
borrowers in certain neighborhoods, was not a significant 
factor in subprime lending or the crisis.
    On the matters of Fannie Mae, Freddie Mac, and the CRA, 
there was considerable common ground among the Commission's 
conclusions and the so-called ``dissent''--which I would 
characterize really more as a concurring opinion authored by 
Commissioners Hennessey, Douglas, Holtz-Eakin, and Thomas.
    As to the Dodd-Frank law, I haven't studied it in 
considerable depth, but I do think that its full and effective 
implementation is important to helping this country avert a 
future crises.
    Thank you for your courtesy.
    [The prepared statement of Mr. Georgiou can be found on 
page 68 of the appendix.]
    Mr. Miller of California. Thank you. I have really enjoyed 
the testimony. Even my good friend, Mr. Thomas, who has come 
back, I served with him for a number of years and he has always 
been a lot of fun.
    I really enjoyed the testimony. The problem I have had in 
recent years is who is getting blamed for this problem out 
there. Everybody keeps pointing to Fannie and Freddie. And yes, 
they have been involved in some problematic issues. I remember 
when Secretary Jackson first took over. The first meeting I had 
with him, I was concerned about their raising requirements on 
their affordable housing goals; I thought they were problematic 
and could lead to trouble. It didn't do any good at the 
meeting. I remember introducing amendments in 2000 and 2001 to 
define ``predatory'' versus ``subprime.'' I got it to the 
Senate numerous times, but couldn't get it back.
    But the data I received, and it is bothersome, is that we 
are pointing just to Fannie and Freddie. I think it is much 
broader than that; I think it is global, too, but definitely 
systematic and industry-wide in the United States.
    Between 2002 and 2006, Freddie's mortgage-backed securities 
share of the marketplace dropped from 70 to 40 percent. Only in 
effect, non-agencies went from 20 to 60 percent. At that point 
in time you had a lot of groups like Countrywide and Washington 
Mutual and Ameriquest HSB Finance putting out a lot of 
predatory subprime loans, I believe, and then backing them into 
mortgage-backed securities and selling them off. In fact, I 
believe that what took Countrywide down was the inability to 
basically bundle those and sell them off to the marketplace.
    But when you look at the current numbers out there and 
default rates, I think we have a systematic problem. And Dr. 
Holtz-Eakin, I think you addressed that. Non-agency loans in 
the subprime ARMs, serious delinquent, are 38.7 percent today. 
Subprime loans, seriously delinquent, are 26.5 percent today. 
Prime loans, seriously delinquent, are 5.4 percent. On GSEs 
Freddie and Fannie, serious delinquency is 4.2 percent. Freddie 
Mac's serious delinquency is 3.1 percent. Now, those are both 
high, but when you compare them to the industry, you think they 
are performing better than the rest of the industry. So to 
shine a light on them and just say they are the problem, I 
think we are missing a lot in what is going on out there. And I 
think that is a problem.
    A lot of the losses that Fannie and Freddie have taken are 
because of the way they bundle their mortgage-backed 
securities. If you have a nonperforming loan, they take it 
back, they eat the loss, and replace it with a performing loan, 
where in the private sector and all these other groups, many of 
which are not in business today, they are bundling them to 
where you can't debundle those loans. And if anybody loses 
money, it is the person who invested in the mortgage-backed 
security. That is basically where the loss is today, because 
the GSE mortgage-backed securities are very safe and sound, 
investors are making the return they were promised.
    So I am looking at that and I am hearing some say that it 
is just the GSEs. Now, yes, there is a problem. And a lot of 
the problem I believe was being encouraged to change your 
underwriting standards to be able to make more loans and 
broader-based loans. But the question has never been answered.
    The last time I think Fannie Mae lost money was 1995; 
Freddie Mac has never lost money. From 1986 to 2005, the only 
years I can see that they were making bad loans that were 
really causing the problems were from mid-2005, 2006, and 2007. 
Does anybody have any data different than that showing how the 
loans in previous years performed when the downturn occurred? 
And I open it to anybody.
    Mr. Wallison. I would just add that up until 2002, Fannie 
and Freddie made subprime and Alt-A loans or bought private 
label securities that were backed by such loans, equal to $1.2 
trillion. That is far more than the private market did after 
that point. The private market in 2002 exceeded $100 billion 
for the first time that year. So Fannie and Freddie were 10 
times the size of the private market before that. This is very 
significant.
    Now, what you can't do exactly is tell when those 
particular loans were purchased and what their particular 
delinquency rates were. We know what the delinquency rates were 
at the end, but we don't know the vintages of those particular 
loans so we can't really pinpoint what the losses were for 
those particular years.
    Mr. Miller of California. But your current subprime loans 
make up about $1 trillion to $1.5 trillion of an $11 trillion 
market is all, and much of that is the private sector.
    Mr. Wallison. I am sorry, I couldn't hear--
    Mr. Miller of California. The subprime loans make up about 
$1 trillion to $1.5 trillion total of an $11 trillion mortgage 
market today. And Freddie and Fannie did not own the bulk of 
those.
    Mr. Wallison. Right.
    Mr. Miller of California. The bulk of those were in the 
private sector.
    Mr. Wallison. No, I don't think that is correct.
    What I was saying was the number of subprime loans that 
were bought--subprime and Alt-A loans that were bought between 
1992 and 2002 were $1.2 trillion. Now, the point here is simply 
that they were buying subprime and Alt-A loans all along.
    Mr. Miller of California. My time is up, so I will let one 
of the witnesses respond.
    Mr. Georgiou. Mr. Acting Chairman, let me just say one 
thing. Nobody, I think, can defend entirely the activities of 
Fannie Mae and Freddie Mac in these circumstances, and I 
certainly would not do so. But I think it would be an enormous 
mistake if we came out of this crisis and attributed the crisis 
exclusively to the problems with those institutions. It would 
let the major difficulties of failure of accountability in the 
private sector completely off the hook.
    In the private sector we had mortgage brokers who were 
incentivized and paid at the front end to originate mortgages 
which they knew were not likely to be paid back, and they had 
no economic consequence when they weren't paid back. We had 
financial institutions--
    Mr. Miller of California. I am going to have to have you 
conclude because my time has run out. But my whole statement 
was, based on default rates today, the GSEs are outperforming 
the private sector by--
    Mr. Georgiou. They are outperforming them extraordinarily.
    Mr. Miller of California. But that is not an excuse.
    Mr. Georgiou. Right.
    Mr. Miller of California. And the former chairman, Mr. 
Frank, is recognized.
    Mr. Frank. I thank you.
    I would like, on the GSEs--and I appreciate that because 
there has been a lot of talk about the urgency of GSEs, but the 
point is, as a result of the legislation that passed this 
committee in 2007 and in the Senate in 2008, putting them under 
conservatorship, the GSEs today are very different institutions 
than they were before. In fact, there is some hope that we may 
even be able to recover some money.
    So we ought to be clear. And I only say that because 
obviously we need to reform that, but I think the urgency is 
not as great, they are not now bleeding, and we need to figure 
out how to replace the function. But it is important to note 
that as of today, these are very different institutions.
    Mr. Wallison, I just wanted to ask a couple of questions. I 
noticed in your testimony--and I appreciate this--you talk 
about HUD's role and you state that HUD was part of the 
problem. And you list three statements from HUD in which you 
say they are in effect saying it is a good thing what happened. 
But I did want to note, of the three--and to make clear that 
this is an across-the-board problem--the first statement came 
in 2000 under the President Bill Clinton. The second two that 
you quote come in 2004 and 2005 under President Bush.
    Mr. Wallison. Right.
    Mr. Frank. And I would note in 2004, it was under the Bush 
Administration that Fannie Mae and Freddie Mac were instructed 
by the regulators to increase the percentage of loans they 
bought from people below median income. And I criticized that 
at the time. I thought that was a bad idea. But I did want to 
get back to efforts to deal with that.
    The gentleman from California mentioned that in 2004 and 
2005, the Federal Reserve came to the Congress and they asked 
for action and were pointing out the problems with Fannie Mae 
and Freddie Mac. Of course at the time, the Republicans were in 
the majority. And in 2004, Mr. Oxley began an effort to do 
legislation. And in 2005, the House actually passed a bill--I 
voted for it in committee; I voted against it on the Floor 
because of things that they did with regard to the Low Income 
Housing Trust Fund, not Fannie and Freddie. But there was an 
effort, under Republican majority rule, under the chairmanship 
of Mr. Oxley, to respond.
    What is your evaluation of what the House produced in 2005 
in this committee of that bill which actually did pass the 
House?
    Mr. Wallison. Let me go back first, if I may, to the point 
you made, which is that HUD was responsible for the 
deterioration in mortgage underwriting standards beginning in 
1992 when they took over authority for the affordable housing 
requirements. Those three quotes are only three of many, many 
statements by HUD as they gradually increased the affordable 
housing requirements over time. And they were very pleased with 
the fact--
    Mr. Frank. I understand that, and that is in the record. 
But Mr. Wallison, we only have a limited amount of time. You 
are simply repeating what we all agree to. Please get to the 
point.
    Mr. Wallison. I want to get into the point you were, I 
think, trying to make, which is that somehow the Republicans--I 
am trying to excuse the Republicans for something. In fact, I 
am not. I think HUD, through both the Clinton Administration 
and the Republican Bush Administration, was--
    Mr. Frank. I understand that. I was acknowledging your 
doing that and I appreciated that, but I am now talking about 
the legislative history because that was the executive history.
    In 2005, I asked specifically for your evaluation of the 
bill that this committee passed under Mr. Oxley, and the House 
then passed, that was a response to this notion that we needed 
to do something.
    Mr. Wallison. I am happy to do that. That bill was very 
weak, and the Bush Administration opposed it because it was so 
weak. And in one respect, it was weak because it did not deal 
with the holdings, the portfolios that mortgage companies--that 
is, Fannie Mae and Freddie Mac--were acquiring at that point. 
They had over $1 trillion in mortgages in their portfolio. That 
was the danger, and that bill didn't deal with it.
    The Senate bill did deal with that, but that Senate bill 
never got anywhere because of the failure to get the 60 votes 
that you need--
    Mr. Frank. Right. At that point, the Senate Democrats were 
supporting the House bill and the Senate Republicans were 
supporting the Administration bill, but it was Republican 
control of both Houses.
    Mr. Wallison. This was not a partisan issue.
    Mr. Frank. Mr. Wallison, please, I am asking you specific 
questions and I appreciate your answers.
    Now, we then passed a bill in 2007 that was then modified 
and adopted in 2008. What is your evaluation of the bill?
    Mr. Wallison. I thought that was an excellent bill. In 
fact, when I have been asked by the media about your activities 
in that connection, Mr. Frank, I supported them wholly. I said 
that you made a wonderful compromise with Secretary Paulson, 
and as a result of that we got a bill that we needed very 
badly.
    Mr. Frank. I thank you, Mr. Wallison, I appreciate that. I 
have been told there are 4 minutes left on the vote, and that 
isn't a bad note to end on.
    Chairman Bachus. I recognize Mr. Schweikert for as long as 
he can try. We have 4 minutes left on the vote.
    Mr. Schweikert. Great. Give the freshman the opportunity. 
Thank you, Mr. Chairman.
    Commissioners, first, thank you for what you have done. 
Congratulations. Rumor has it you may have almost a best 
seller, though now I am really questioning Americans' reading 
habits.
    One of the things--and this may be a conversation we are 
going to have to have later, if we get beyond the typical 
repartee back and forth of who sinned, who didn't, which 
Administration was this. I am new, but when I read through the 
dissents, when I read through everyone giving me the history of 
what went wrong, I keep coming back to, okay, systemically--
    Chairman Bachus. The gentleman, you have 5 minutes, but 
there are 2 minutes left in the vote. You can take as long as 
you want.
    Mr. Schweikert. Price of money, price of risk. Isn't the 
ultimate failure we have seen up and down the system that, 
whether it be through regulations, whether it be through 
incentives, whether the way it has been done, we are failing to 
price risk; and because of that we are now trying to regulate 
mechanics to create risk pricing? And those who have incentives 
are always going to find a way around that.
    Mr. Georgiou. I think you are absolutely right. But one of 
the problems, of course, is that in our financial system, as a 
general rule, when you take excessive risk with inadequate 
capital and you fail, then you go bankrupt and your assets are 
distributed and you get to go on. The problem here is that we 
had systemically important institutions, so that when they took 
extraordinary risk, they put themselves in a situation where 
they had the upside to themselves and they had the possibility 
of turning to the taxpayers for protection on the downside. And 
that was--
    Mr. Schweikert. Mr. Chairman, I am about to do something 
horribly rude. I am going to get up because I need to go vote, 
but really I think there may be a much simpler way to get what 
we need to protect ourselves in the future than some of the 
things we are doing right now.
    Chairman Bachus. Mr. Schweikert, thank you. I apologize for 
the lack of time.
    The Chair notes that some members may have additional 
questions for this panel which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for members to submit written questions for these 
witnesses and to place their responses in the record.
    I want to thank each of you for your testimony. We had a 
tremendous number of questions that we were not able to ask, 
and I know you had the answers for each of them, but thank you 
for your testimony. The hearing is adjourned.
    [Whereupon, at 1:15 p.m., the hearing was adjourned.]


                            A P P E N D I X



                           February 16, 2011


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