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





                     THE COSTS OF IMPLEMENTING THE
                 DODD-FRANK ACT: BUDGETARY AND ECONOMIC

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                      OVERSIGHT AND INVESTIGATIONS

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 30, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-21








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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
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
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
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
MICHAEL G. GRIMM, New York           JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas













                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    March 30, 2011...............................................     1
Appendix:
    March 30, 2011...............................................    43

                               WITNESSES
                       Wednesday, March 30, 2011

Angel, James J., Assistant Professor of Finance, McDonough School 
  of Business, Georgetown University.............................    23
Elmendorf, Douglas W., Director, Congressional Budget Office 
  (CBO)..........................................................     9
Holtz-Eakin, Douglas, President, American Action Forum...........    21
Lacker, Jeffrey M., President, Federal Reserve Bank of Richmond..    11
Min, David K., Associate Director for Financial Markets Policy, 
  Center for American Progress Action Fund.......................    26
Overdahl, James A., Vice President, National Economic Research 
  Associates (NERA)..............................................    24
Sommers, Hon. Jill E., Commissioner, Commodity Futures Trading 
  Commission (CFTC)..............................................     8

                                APPENDIX

Prepared statements:
    Angel, James J...............................................    44
    Elmendorf, Douglas W.........................................    58
    Holtz-Eakin, Douglas.........................................    75
    Lacker, Jeffrey M............................................    81
    Min, David K.................................................   102
    Overdahl, James A............................................   111
    Sommers, Hon. Jill E.........................................   117

              Additional Material Submitted for the Record

Grimm, Hon. Michael G.:
    CBO estimates for Dodd-Frank.................................   121
    Written response to questions submitted to Dr. Douglas Holtz-
      Eakin......................................................   124
    Written response to questions submitted to Dr. James Overdahl   126
Himes, Hon. James A.:
    Written statement of the Financial Planning Coalition........   127

 
                       THE COSTS OF IMPLEMENTING
                          THE DODD-FRANK ACT:
                         BUDGETARY AND ECONOMIC

                              ----------                              


                       Wednesday, March 30, 2011

             U.S. House of Representatives,
                          Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:11 p.m., in 
room 2128, Rayburn House Office Building, Hon. Randy Neugebauer 
[chairman of the subcommittee] presiding.
    Members present: Representatives Neugebauer, Fitzpatrick, 
Posey, Hayworth, Renacci, Canseco; Capuano, Baca, Himes, and 
Carney.
    Ex officio present: Representative Bachus.
    Also present: Representative Green of Texas.
    Chairman Neugebauer. The subcommittee will come to order. 
Thank you for coming today.
    I wanted to announce, before we get too far in the hearing, 
that we are going to have a little bit of a change in schedule 
here. We are going to commence with the hearing. We are going 
to do opening statements from members.
    Then, as you know--some of you may know--there is a 
classified briefing for our Members of Congress that starts at 
2:30. We expect that to go for about an hour, and so we are 
going to--in agreement with the ranking member--recess from 
2:30 to 3:30 and then we will come back and resume the hearing 
at that time.
    There is a potential that we will have a vote somewhere in 
this process. That is yet to be determined.
    But it is the intention for us to continue with this 
hearing today. It is unfortunate that we had to have this 
little interruption here but I think it is important for 
Members of Congress to go and hear from the Secretary what is 
going on.
    So with that, we will begin. And I will begin with my 
opening statement.
    To kind of give you a visual of how large a piece of 
legislation that this Dodd-Frank legislation is, if we were to 
stack the Securities and Exchange Act of 1933, the Securities 
and Exchange Act of 1934, Gramm-Leach-Bliley, Sarbanes-Oxley, 
and all the amendments that were tacked onto those Acts, we 
would have to add 600 pages to that stack to equal the amount 
of legislation that is in the Dodd-Frank bill.
    And so this is no small piece of legislation; it has far-
reaching impacts on our markets and on the cost of doing 
business and on the cost of capital. And so a lot of what this 
hearing is about today is about analyzing those, and 
particularly analyzing the cost-benefit of this piece of 
legislation.
    One of the things that I think we should have done before 
we passed Dodd-Frank was to really go through the crash or the 
downturn of our financial markets and ascertain where the 
fallacies and where the holes in the existing system were 
before we threw this large blanket over those markets. But we 
didn't do that.
    But more importantly, what we also should have done was to, 
as we were beginning to put this piece of legislation together, 
begin to look at the cost-benefit analysis of what we were 
trying to accomplish, making sure we had--clearly defining what 
the goals were, what the cost of that was, both in 
implementation but also the cost in the economy, and I think we 
are going to hear from a number of witnesses today who have 
taken an opportunity to look at that.
    We are not talking about any small numbers here. We are 
talking about the potential of taking $27 billion out of the 
economy. And what we know is when we take money out of the 
economy, we take away the capital needed to create jobs in this 
country.
    So as we look at the implications and some of the 
consequences of this legislation, not only is it costing money 
but it also has the potential to cost jobs. And particularly at 
the time in our country right now where jobs are an important 
commodity to the American people, I think this deserves our 
closest attention.
    This is a great panel that we have today and I look forward 
to their testimony, and I think that we are going to have a 
very productive hearing because I think this is a process that 
Congress in the future must give more attention to; that it is 
easy sometimes to pass legislation. But sometimes I am not sure 
we give these votes the attention that we need to, and we 
aren't making decisions with all of the information. 
Particularly, I think, as these agencies are promulgating these 
rules, it is important that some kind of standardization tool 
would be available to them so that we will know truly what the 
cost and the benefit analysis of these transactions are.
    With that, I will yield to my good friend, Mr. Capuano, the 
ranking member of the subcommittee.
    Mr. Capuano. Thanks, Mr. Chairman.
    First of all, I want to thank the witnesses for being with 
us and bearing with us today. You are all familiar with 
congressional timetables, and I apologize, but I also know that 
you understand.
    I welcome this hearing as well, and I think that this 
committee has done too little oversight over the last--well, 
since I have been here, to be perfectly honest. I think 
oversight is an appropriate and a good role.
    As far as this particular piece of legislation, I never 
measure anything by its length or by its shortness; that is 
really secondary to me. It is whether it works or whether it 
doesn't work.
    And I think everyone who is in this room knows how 
legislation is passed. You start off with an idea and you keep 
adding things because you have to satisfy somebody somewhere 
along the line to get their vote, and you end up with a piece 
of legislation that no individual would pass in and of itself 
as a whole.
    There are things in the bill that I don't like. There are 
things in the bill that I think could have been stronger, could 
have been clearer. But overall, the legislation was a very good 
piece of legislation that will move this country forward and 
maintain a stable economy moving forward.
    That doesn't mean it will be done without bumps. There will 
certainly be bumps.
    There is a lot of need for oversight and continuing 
refinement as we go forward and working with the regulators, 
and I think that is why these hearings are very important. I 
look forward to the testimonies; I have read the testimonies 
and the other material related to this hearing.
    I think I agree with most of the things that are said in 
these testimonies, and I think that there is going to be a lot 
of ground for common understanding. And I look forward to that 
as well.
    So with that, Mr. Chairman, I yield back.
    Chairman Neugebauer. I thank the gentleman.
    And now the chairman of the full committee, Mr. Bachus, for 
2 minutes.
    Chairman Bachus. Thank you, Mr. Chairman. Let me say that 
much of what I am going to say is not criticism of anything you 
have done; it is criticism of Dodd-Frank and some problems I 
have with that. And I will associate myself with the remarks 
that you have made in your written testimony.
    When the House voted to approve Dodd-Frank, I asked the 
simple question on the Floor of the House, ``What does it 
cost?'' The bill's proponents did not have an answer to that 
question, because during committee consideration of the bills 
which would eventually be incorporated into the Dodd-Frank Act, 
Members never had a real opportunity to debate its costs or to 
weight those costs against the legislation's purported 
benefits.
    As Commissioner Sommers says, the derivative rules are 
tremendously complex and almost immediately after passage we 
heard that some of those requirements could take $1 trillion or 
more out of our economy and cost really hundreds of thousands 
of jobs, according to the Chamber. And those are costs of 
regulation.
    But then there is the cost to the taxpayers of actually the 
regulation itself, of enforcing the regulation. And I think 
yesterday we learned from the Government Accountability Office 
that it is going to cost about $3 billion to implement the bill 
over the next 5 years, and I think that is probably a low 
number. It normally is a low number.
    The Federal Government workforce will increase by 2,600 new 
full-time employees, and I think about 1,200 of those will be 
at the Consumer Financial Protection Bureau. One question I 
have about that is, we are going to have--prudential regulators 
are going to come in and if they are doing what they are doing 
today, they are going to ask, ``Why didn't you require a higher 
downpayment?'' or ``Why didn't you charge more of an interest 
rate?'' or ``Why did you make this loan?''
    And then they may be followed the next day by someone from 
a consumer financial protection agency who is going to ask, 
``Why did you set such a high interest rate? Why didn't you 
make this loan?'' or ``Why aren't you making these loans?'' or 
``Why didn't you give a better interest rate?'' And you are 
going to be getting two different government agencies with 
sometimes diametrically opposed advice to our community banks, 
which really were the collateral victims, in most cases, in 
what happened in 2004.
    The Federal budget and businesses of all sizes will have to 
contend with the cost of implementing and with complying Dodd-
Frank for years to come. One matter of great concern to me is 
that Congress will not be able to rein in some of the more 
substantial costs imposed by the Act.
    And Governor Lacker, one of those costs is to the Federal 
Reserve, right out of the budget. You have as much as $500 
million that can be given to the Consumer Financial Protection 
Bureau and then you have the Office of Financial Research, and 
I am not sure that I have found a figure there. It just says 
that they--there is no limit on its budgetary authority and it 
just asked the Federal Reserve to provide as much funding as 
needed for that office.
    So I don't know how you function with the $700 million hole 
and your increased duties under Dodd-Frank. That is going to be 
interesting.
    Commissioner Sommers, you mentioned the cost-benefit 
analysis. I think we are going to have to closely scrutinize 
the Dodd-Frank rulemaking process and the adequacy and accuracy 
of the cost-benefit analysis that will be submitted under these 
rules, or in some cases won't be submitted. We won't have them.
    And former and current SEC and CFTC Commissioners, 
academics, and business leaders have all gone on record to 
point out a lot of deficiencies in the agency's rulemaking 
processes and the inaccuracies of the agency's cost-benefit 
analyses. And some of this is just the speed. How could you 
possibly do a credible job in the little time you have?
    Because we all agree this is a tremendous, major reform, 
and we are doing it in lightning speed. It took 2\1/2\ years to 
do Sarbanes-Oxley, which had 16 rules. We are going to try to 
do this in a fourth of the time, with 300 rules. It just 
staggers the imagination.
    And I am afraid, just like on the highway, speed is going 
to kill. It is going to kill the economy; it is going to kill 
deployment of capital; and then it will--because capital is not 
there, the workforce won't be there.
    Let me close by saying, Governor Lacker, you point out 
something a lot of us ask about--what happens when one of these 
significantly important firms gets in trouble and they are--
what you said about the Fed, the Treasury can invoke orderly 
resolution for the firm, but use of funds to limit loss to some 
creditors by the FDIC and, what, are they going to loan them 
money? Are they going to--and is there going to be that 
expectation?
    So I appreciated your comments on that, and I think we are 
all wondering if they get in trouble what is it going to cost 
the taxpayers? And it is going to cause them to get in trouble 
because they are under this safety net.
    Thank you.
    Chairman Neugebauer. I thank the chairman.
    Mr. Baca?
    Mr. Baca. Thank you very much. I want to begin by first 
thanking you, Chairman Neugebauer, and Ranking Member Capuano 
for calling this hearing. The hearing is titled, ``The Cost of 
Implementing the Dodd-Frank Act.'' We should call it, ``The 
Cost of Not Implementing the Dodd-Frank Act.''
    Why? Because before the Frank-Dodd bank cost the American 
people 8 million jobs--I state 8 million jobs--and $17 trillion 
in retirement savings and net worth. Do we want that to happen 
again? The answer is no.
    I want to, again, by sharing some of the unemployment 
situations from March 2011, which is scheduled to be released 
on April 1, 2011. Americans, here is some good news: All in 
all, Americans just need more opportunities to work. Americans 
want jobs.
    Today's hearing is not moving us one step closer to 
increasing jobs. Yesterday's vote on the House Floor killed the 
HAMP. Not only does it do away with life-life, many Americans 
need to stay in their homes. The vote did not move us one step 
closer to increasing jobs.
    The recent CBS News poll found that 63 percent of Americans 
are saying creating jobs should be the priority now compared to 
26 percent who said cutting spending. Now, there is a 
difference between those who said cutting spending and those 
who want jobs.
    Why? Because families are hungry. Families are homeless. 
Families need jobs.
    The challenge we face now is how to build businesses and 
investor confidence. Does today's hearing topic build business 
and investor confidence? I say no.
    I voted in support of Dodd-Frank to help restore common 
sense--and I state common sense--to Wall Street, to end 
taxpayers' bailout of big banks, create consumer financial 
protection bureaus that protect consumers first. Working 
families in California and across the country have lost their 
homes--and I state, have lost their homes.
    You have to put yourself in their situation--those 
individuals who lost their home or lost their job. Put 
yourselves in that situation if you were the one who lost a 
job, and your retirement savings as a result of Wall Street's 
recklessness and greed that led to it.
    My friends on the other side of the aisle and the Bush 
Administration looked the other way as big banks made bucks at 
the expense of the average American. The Dodd-Frank provides 
the American people with an oversight--and I state, it provides 
us with an oversight necessary to prevent another collapse of 
our financial market. It protects consumers from predatory 
practice and holds--I state holds accountable those 
institutions which actions led to the greatest economic 
downturn since the Great Depression.
    Wall Street may be bouncing back but we all know from 
experience that they are not going to be policing themselves, 
and they haven't. CBO says that Frank-Dodd has the net effect 
of reducing the deficit by $100 billion over 5 years and has 
said a net effect of reducing the deficit--and I state, 
reducing the deficit by $3.2 billion over 10 years.
    As I stated earlier--I may take as much time as the other 
gentleman did, if you don't mind--as I stated earlier before, 
the Dodd-Frank bank cost the American people 8 billion jobs and 
$17 trillion in retirement savings net worth. Families are 
forced into foreclosure with job loss.
    In my district in California, the 43rd district, we have 
had double-digit unemployment for a long time and the 
foreclosure rate is around fourth in the Nation. My question to 
the panel today will be basic: Were you forced into 
foreclosure? Did you lose your jobs because of the meltdown?
    Because if you have, then you can speak to the American 
people in your testimonies. Then, you can talk about the costs 
of implementing Dodd-Frank. Because I have heard of the crises 
of hundreds of Americans who know and have felt the 
heartbreaking costs of not having something like Dodd-Frank.
    Again, I thank the chairman and the ranking member for 
their leadership, and I look forward to a productive discussion 
on this issue. And I yield back the balance of my time.
    Chairman Neugebauer. I now yield 2 minutes to the gentleman 
from Pennsylvania, Mr. Fitzpatrick.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I believe this entire committee is in agreement that the 
Dodd-Frank Wall Street Reform Act was the most ambitious 
overhaul of our financial institutions in 75 years. However, 
responding to Mr. Baca of California, I believe also that the 
problem with these massive comprehensive bills is that they are 
often fraught with unforeseen consequences and costs. And add 
to that the intended results of the bill, the massive new 
regulations of our financial system and the effects on our 
economy will be extensive.
    Certainly, the financial industry deserves serious scrutiny 
after the meltdown of 2008 exposed serious flaws in our 
regulatory system. But by overreacting and overreaching, we are 
absolutely going to continue to slow the economy.
    I am very concerned about the $27 billion clawed out of the 
economy, as outlined by the chairman in his remarks, and its 
impact upon job creation back home in Pennsylvania. So I thank 
the chairman for calling this important hearing.
    Chairman Neugebauer. I thank the gentleman.
    And now to the gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and thank you for 
allowing me to be a part of this hearing. I thank the ranking 
member as well.
    Mr. Chairman, I am concerned about unintended consequences 
and I am also concerned about intended consequences. There were 
some intended consequences associated with Dodd-Frank that were 
important to the American people.
    The American people wanted and intended that we pass 
legislation to deal with ``too-big-to-fail'' 3/27s, 2/28s. The 
American people were concerned about prepayment penalties that 
coincided with teaser rates. The American people were concerned 
about the whole notion that consumers were not being protected.
    So the intended consequences of Dodd-Frank have to also be 
measured, and as we move forward, I look forward to hearing 
from the witnesses so that if there are things that we need to 
change, I think we should change them. I think that we can 
reach a consensus about some things that have to be changed.
    But I don't think that we are at a point now where we can 
conclude without empirical evidence--and I haven't seen any to 
support this position--that Dodd-Frank is costing us too much 
to implement. I just have not seen empirical evidence to 
support this.
    All major legislation costs something. The CBO seems to be 
indicating, based on my latest intelligence, that Dodd-Frank is 
not going to be cost-prohibitive. They may not use that type of 
terminology.
    But I look forward to hearing from the witnesses, and I 
thank you again for the opportunity. I yield back.
    Chairman Neugebauer. And I thank the gentleman.
    And the gentleman from Texas, Mr. Canseco?
    Mr. Canseco. Thank you, Mr. Chairman.
    And thank you for coming here, witnesses. I look forward to 
hearing your testimony.
    The passage of the Dodd-Frank bill was more about making 
history than it was about making our economy stronger and more 
competitive. The previous Congress must have believed their 
primary responsibility was to draft as large a bill as possible 
without any regard to the economy or the U.S. taxpayer.
    A few days ago, the National Journal noted that as a result 
of Dodd-Frank, ``The U.S. Government may have become the 
guarantor of last resort for even larger global banks over 
which it has even less control and oversight than before.'' The 
CBO has stated that Dodd-Frank will extract $27 billion from 
the economy over the next decade.
    This is capital that cannot be used to lend in order to 
grow our economy and create jobs. Therein lies the legacy of 
Dodd-Frank: a piece of legislation that will have enormous 
costs both to the economy and to the taxpayer.
    Today, I am eager to hear from our witnesses an estimate of 
just how much this legislation is expected to cost our economy, 
taxpayers, and future generations.
    I thank you, Mr. Chairman, for having this hearing. I yield 
back.
    Chairman Neugebauer. Thank you.
    I want to remind all members that all of your opening 
statements can be made a part of the record if you desire to do 
that. As we mentioned before, now we are going to recess until 
3:30, and we will reconvene back here in this room.
    And I again appreciate the witnesses' tolerance in this 
issue. Thank you.
    [recess]
    Chairman Neugebauer. And so thanks again for your patience. 
We will probably have some more members join us here shortly, 
but we want to go ahead and start with the testimony from our 
witnesses.
    It is my pleasure to introduce the Honorable Jill Sommers, 
Commissioner of the Commodity Futures Trading Commission.
    Commissioner, I am glad to have you here, and thanks for 
coming.

   STATEMENT OF THE HONORABLE JILL E. SOMMERS, COMMISSIONER, 
          COMMODITY FUTURES TRADING COMMISSION (CFTC)

    Ms. Sommers. Good afternoon, Chairman Neugebauer, Ranking 
Member Capuano, and members of the subcommittee. Thank you for 
inviting me today to testify in this hearing on the cost of 
implementing Dodd-Frank.
    My name is Jill Sommers, and I have worked in the 
derivatives industry for over 15 years, and I have been a 
Commissioner at the Commodity Futures Trading Commission since 
August of 2007. The views I present here today are my own and 
not those of the Commission.
    The Dodd-Frank Act is the most far-reaching financial 
reform effort we have seen since the 1930s. Its scope and 
complexity are unparalleled.
    Over the past 8 months, the CFTC has been busy. We have 
held 8 public roundtables, 12 open Commission meetings, and 
have issued more than 50 proposed rules, notices, or other 
requests seeking public comment on Dodd-Frank-related issues.
    This pace and level of transparency is a first for the 
Commission and it has been challenging for us and for the 
public. I constantly hear from interested parties that they do 
not have a meaningful opportunity to comment on the proposal. 
Their view is that with so many comment periods open at the 
same time for proposals from multiple regulatory agencies, they 
do not have the opportunity to provide meaningful comment on 
how various rules taken together will impact the market and 
market participants.
    I am sympathetic to that view for three reasons: first, 
this is a tremendous amount of complex materials to digest in a 
very short period of time; second, I take all comments very 
seriously and I want the commenters to provide me and the 
Commission with the highest-quality analysis for us to consider 
before we vote on final rules; and third, the Commission has 
not released proposed rules in a logical order. For instance, 
as we sit here today, we have proposed nearly 50 rules, yet we 
still haven't proposed a rule that defines what a swap is.
    Adding to our regulatory challenges, the Dodd-Frank Act 
requires us to promulgate final rules within 1 year, and in 
some cases earlier. It is our job to make the best decisions 
possible as we craft a regulatory regime that advances the 
public interest and protects these vital markets.
    Achieving these reforms will take time, and comprehensively 
changing the regulatory landscape in such a short period of 
time will not be easy. To help us evaluate our decisions, the 
Commodity Exchange Act requires the Commission to consider the 
costs and benefits associated with each of our regulations and 
orders.
    Section 15(a) of the Commodity Exchange Act requires that 
before promulgating a regulation or issuing an order, the 
Commission shall consider the costs and benefits of the action 
of the Commission. However, when promulgating regulation, the 
Commission typically does not perform a robust cost-benefit 
analysis at either the proposed rule stage or the final rule 
stage.
    We do not quantify in detail what the costs of complying 
with the rule may be. Instead, proposals usually contain a 
statement that the Commission is only required to consider the 
costs and not required to quantify them or determine whether 
the benefits outweigh the costs.
    While we do ask for comment from the public on the costs 
and benefits at the proposal stage, we rarely, if ever, attempt 
to quantify the costs before finalizing a rule. As we add layer 
upon layer of rules, regulations, restrictions, and new duties, 
my preference is that the Commission include in each proposed 
rule a thorough cost-benefit analysis that attempts to quantify 
the costs associated with compliance.
    This would give the public an opportunity to comment on our 
analysis. To me, that is good government. If we wait until we 
issue a final rule to conduct a thorough cost-benefit analysis, 
the public is deprived of the opportunity to comment on our 
analysis because there is no comment period associated with a 
final rule.
    Before I finish, I would like to say that I wholeheartedly 
agree with the President's Executive Order on improving 
regulation and regulatory review. In that Executive Order, the 
President called upon agencies to, among other things: use the 
best, most innovative, and least burdensome tools for achieving 
regulatory ends; propose or adopt regulations only upon a 
reasoned determination that its benefits justify its costs; 
take into account benefits and costs, both qualitative and 
quantitative; and specify performance objectives rather than a 
particular manner of compliance.
    Although as an independent agency, the CFTC is not bound by 
the President's Executive Order, I am hopeful that we will 
undertake this type of analysis before we get to the stage of 
finalizing rules in order to provide stakeholders with a 
meaningful opportunity to review and comment on the 
requirements.
    I recognize that it is imperative that we get this right. 
It is our goal as regulators to provide smart regulation. We 
can do damage to these vital markets without that goal, and I 
fully intend to do everything I can to make sure that we don't 
get it wrong.
    Thank you, and I am grateful for this opportunity to speak 
about these important issues and I am happy to answer any 
questions.
    [The prepared statement of Commissioner Sommers can be 
found on page 117 of the appendix.]
    Chairman Neugebauer. Thank you, Commissioner.
    And now, it is my pleasure to introduce Mr. Douglas 
Elmendorf, Director of the Congressional Budget Office.

  STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL 
                      BUDGET OFFICE (CBO)

    Mr. Elmendorf. Thank you, Chairman Neugebauer, and 
Congressman Capuano. I appreciate the opportunity to talk about 
CBO's cost estimate for the Dodd-Frank Wall Street Reform and 
Consumer Protection Act.
    My statement summarizes CBO's estimate for the legislation, 
as enacted last July. I will offer an even briefer summary now.
    As you know, the Dodd-Frank Act made significant changes to 
the regulatory environment for banking and thrift institutions 
as well as for financial markets and their participants. The 
Act expanded existing regulatory powers, granted new ones, and 
reallocated regulatory authority among several Federal agencies 
with the aim of reducing the likelihood and severity of future 
financial crises.
    Figure 1 summarizes CBO's estimate of the budgetary effects 
of the legislation during the 2010 to 2020 period. Certain 
provisions of the Act were estimated by us to increase direct 
or mandatory spending by $37.8 billion over that period. Most 
of those costs--$26.3 billion--would result from a new program 
created to resolve insolvent or soon-to-be insolvent financial 
entities, which would be financed through an Orderly 
Liquidation Fund, or OLF. Other provisions would increase 
spending by an additional $11.5 billion, we expected.
    At the same time, different provisions of the Act were 
estimated to reduce direct spending by $27.6 billion during the 
coming decade. The biggest share of those savings, $16.5 
billion, would result from changes to Federal Deposit Insurance 
programs. The remainder of the saving, or $11 billion, would 
arise from the decrease in authority for the Troubled Asset 
Relief Program, or TARP.
    In addition, we estimated that the legislation would 
increase revenues during the 2010 to 2020 period by $13.4 
billion. The extra revenues would stem primarily from fees 
assessed on various financial institutions and market 
participants.
    On net, CBO estimated that the changes in direct spending 
and revenues would reduce deficits by $3.2 billion between 2010 
and 2020.
    A different way to tote up these same figures is provided 
in the table, which groups budgetary effects by the aspects of 
the legislation that generate them. First, the Dodd-Frank Act 
created several new Federal organizations to regulate financial 
matters. We estimate the cost of the new organizations would 
widen deficits by $6.3 billion over the 2010 to 2020 period.
    Next, the legislation restructured the authority of 
existing financial regulators. Together, those provisions were 
estimated to add $0.1 billion to deficits on net through 
changes in direct spending and revenues over the period.
    Separately, the legislation provided additional funding for 
existing programs that provide mortgage relief, neighborhood 
revitalization, and grants. Those provisions were estimated to 
have a cost of $1.5 billion.
    The Act also modified Federal Deposit Insurance Programs, 
including increasing the maximum amount of deposits in an 
individual account that can be insured and directing the FDIC 
to increase the size of its insurance fund by 2020. Those 
changes would reduce deficits by $16.6 billion during the 2010 
to 2020 period.
    Still other provisions of the law created the Orderly 
Liquidation Fund and authorized the FDIC to resolve 
systemically important financial firms under certain 
conditions. Our estimate of the cost of those provisions, about 
$20 billion over the period, represents the difference between 
the expected values of the net cost to resolve insolvent firms 
and the additional assessments collected to cover those costs. 
Those expected values represent weighted averages of the 
outcomes of various scenarios regarding the frequency and 
magnitude of systemic financial problems.
    Additionally, as I have noted, the legislation reduced the 
spending authority of the TARP, saving $11 billion, and made a 
number of other changes to current law that would have a net 
reduction deficit of $3.8 billion with the same overall effect, 
of course, as the summary I offered a moment ago of a reduction 
in deficits of $3.2 billion.
    In addition to those changes in direct spending and 
revenue, we estimate that the Act will lead to an increase in 
discretionary spending of about $2.5 billion over the 5-year 
period ending in Fiscal Year 2015, assuming the Congress 
provides necessary appropriations in the future.
    Let me make two final points. First, once legislation is 
enacted the agency's involvement with that legislation is quite 
limited. New statutes join the body of existing law to form the 
basis for our baseline projection.
    We don't usually identify the effects of individual 
statutes at that point. In any event, we have learned nothing 
so far about the implementation of this Act that would cause us 
to significantly change the cost estimate we provided last 
year.
    And second and finally, depending on the effectiveness of 
the new regulatory initiatives and new authorities to resolve 
and support a broad variety of financial institutions, 
implementing the Dodd-Frank Act could change the timing, 
severity, and Federal cost of averting and resolving future 
financial crises. However, CBO has neither analyzed the 
regulatory impact of the legislation nor have we attempted to 
determine whether the estimated costs under this act would be 
smaller or larger than the costs of alternative approaches to 
addressing such crises.
    Thank you.
    [The prepared statement of Mr. Elmendorf can be found on 
page 58 of the appendix.]
    Chairman Neugebauer. Thank you, Mr. Elmendorf.
    And now, it is my pleasure to introduce Mr. Jeffrey Lacker, 
President of the Federal Reserve Bank of Richmond.
    Mr. Lacker, we are glad to have you here.

STATEMENT OF JEFFREY M. LACKER, PRESIDENT, FEDERAL RESERVE BANK 
                          OF RICHMOND

    Mr. Lacker. It is an honor to speak to the subcommittee 
about the Federal Government's financial safety net and how the 
Dodd-Frank Wall Street Reform and Consumer Protection Act seeks 
to address it.
    To start, I should note that within the Federal Reserve 
System, the Board of Governors has sole authority to write 
rules implementing the requirements of the Dodd-Frank Act and 
Reserve Banks supervise financial institutions under authority 
delegated to them by the Board of Governors. And in keeping 
with Board of Governors guidance to us, I will not address the 
specifics of any current or potential Federal Reserve 
rulemaking.
    My views have been informed both by my leadership at the 
Federal Reserve Bank of Richmond over the last 7 years and my 
experience as a research economist, having studied banking 
policy for the prior 25 years. I should note that my comments 
today are my own views and do not necessarily reflect those of 
the Board of Governors of the Federal Reserve or my colleagues 
at other Federal Reserve banks.
    The Dodd-Frank Act was a response to the most dramatic 
financial turmoil in our country's experience in generations. 
In my view, this crisis resulted from a mismatch between the 
regulatory structure designed for the explicit safety net 
consisting mainly of deposit insurance and the extent of moral 
hazard induced by the much broader implicit safety net. Given 
precedents dating back to Continental Illinois in the 1980s and 
beyond that, market participants made inferences about what 
government protection might be forthcoming in future instances 
of financial distress--that is to say, which institutions were 
likely to be viewed by authorities as ``too-big-to-fail.''
    This lack of clarity about the safety net grew in decades 
leading up to the crisis and came about because policymakers 
hoped that constructive ambiguity would dampen the markets' 
expectations of bailouts but preserve their option to intervene 
if necessary. Other factors contributed to the crisis, but I 
believe that ambiguity of safety net policy was the major 
driver.
    Researchers at the Federal Reserve Bank of Richmond have 
estimated, based on conservative assumptions, that the implicit 
safety net covered as much as 40 percent of all financial 
sector liabilities by the end of 2009. When combined with the 
explicit protection in place for depository institutions and 
other firms, the broad Federal financial safety net now covers 
62 percent of the financial sector, compared to about 45 
percent a decade earlier. For additional information, I would 
refer you to the table at the end of the written statement that 
I have submitted to the committee.
    Dodd-Frank contains provisions that will help close the gap 
between the scope of prudential regulation and the scope of the 
implicit safety net. It allows the Financial Stability 
Oversight Council to designate large non-bank financial firms 
as ``systemically important,'' and subjects those firms to more 
rigorous constraints on risk-taking. The Act also seeks to 
limit the implicit safety net by empowering the FDIC to 
liquidate troubled non-bank firms and placing new constraints 
on the Fed's lending powers.
    But the FDIC retains considerable discretion in the use of 
funds to limit losses to some creditors, and the Treasury can 
invoke orderly resolution for firms that have not been subject 
to enhanced regulation under the systemically important 
designation. The Fed also retains some discretionary powers to 
lend to non-bank entities. This creates continued uncertainty 
about possible rescues as well as impediments to our ability to 
provide clear, credible constraints on the safety net.
    In the near term, I believe regulators have a firm grasp on 
the industry and are taking strong steps to tighten risk 
management at regulated firms, but there are significant risks 
in the long term because firms seen as enjoying broad safety 
net protection will have strong incentives to take on excessive 
risks and firms will have an incentive to bypass regulation if 
they can still enjoy some degree of implicit protection. This 
desire to operate just outside the perimeter of regulation but 
within the implicit safety net will present ongoing supervisory 
and regulatory challenges and may make it difficult to prevent 
or limit the magnitude of future crises.
    Continued ambiguity would thus pose risks to financial 
stability and the economy, including risks of new costs to 
taxpayers. But I believe the risks to the effectiveness of our 
financial system are even more significant. Over time, the 
devotion of resources to bypassing regulation can create new 
sources of financial instability and can divert resources from 
the pursuit of financial innovations that are genuinely 
beneficial to consumers. In the long run, economic growth and 
job creation would likely suffer.
    Creating clear and credible safety net constraints is 
likely to be a difficult task. One approach is to tightly limit 
discretion, including the discretionary use of public funds to 
shield creditors. The Act takes important steps in that 
direction, yet as I said, substantial discretion remains around 
the preferential treatment for certain creditors.
    A far more challenging course is for regulators to retain 
discretion but establish a credible commitment on their own to 
following clear, pre-announced rules in times of crisis. For 
example, limiting FDIC resolution authority to firms that are 
regulated as systemically important, designated so by the FSOC, 
would help block regulatory bypass. The credibility of such a 
commitment, however, would require policymakers to allow 
significant creditor losses in cases in which they otherwise 
might have provided support.
    Some believe that without intervention, the economy is too 
vulnerable to spillover damage from the financial system. I 
have argued that such spillovers are, in large part, the 
consequence of ambiguous government rescue policy. If we can 
establish clear expectations about the Federal financial safety 
net and live up to our commitment to limit rescues then we can 
have more confidence, I think, that the financial system will 
contribute positively to economic growth.
    Thank you, and I would be pleased to take your questions.
    [The prepared statement of Mr. Lacker can be found on page 
81 of the appendix.]
    Chairman Neugebauer. Thank you.
    And without objection, your written statements will be made 
a part of the record as well.
    Commissioner Sommers, I want to start off with you because 
you alluded to the President's recent Executive Order about--
where the President said we should propose or adopt regulations 
only upon a reasoned determination that its benefits justify 
its costs and take into account the benefits and the costs both 
quantitative to and qualitatively. And I heard you say a couple 
of things. One is that you don't think that the CFTC is really 
quantifying that.
    And when you think about some of the provisions that the 
CFTC is supposed to make rules on, it can have a tremendous 
impact on our capital markets moving forward. What is the 
appropriate posture and process that the CFTC should be going 
through now, with particularly the importance and the number of 
rules that are coming out of that agency?
    Ms. Sommers. Thank you, Mr. Chairman. I think that I will 
address that by saying that the President's Executive Order, I 
think, gives regulatory agencies an appropriate blueprint to--
and some of the most important things we should be looking at 
before proposing regulations.
    A cost-benefit analysis--a thorough and meaningful cost-
benefit analysis--is not an argument for or against a specific 
regulation; it just gives us a good basis to be able to justify 
the regulations and the benefits that those regulations can be 
weighed against the costs. It is my view that before we 
finalize any of our rules that we have proposed, we allow the 
public to have an opportunity to comment on both a qualitative 
and quantitative cost-benefit analysis in a meaningful way.
    In the proposals that we have put out so far, we have asked 
for comment from the public, and I am hopeful that we will get 
real cost estimates from the public with regard to our 
proposals, but we haven't given them any substantive analysis 
to comment on. We are looking for the public to give that back 
to us.
    Chairman Neugebauer. So in your opinion, is the Commission 
not in compliance with 15(a)?
    Ms. Sommers. I think that we are complying with 15(a). 
However, 15(a) does not prevent us from going further than just 
considering costs or benefits; 15(a) gives us the flexibility 
to decide if a thorough and meaningful cost-benefit analysis is 
appropriate, and I believe that in many of the rules that we 
have proposed under Dodd-Frank, it is incumbent upon us to 
provide that kind of information for the public.
    Chairman Neugebauer. And recently--I also sit on the House 
Agriculture Committee, and so it is kind of hard to get away 
from these financial issues, but Mr. Gensler said that he 
believes that you all are doing suitable quantitative and 
qualitative analysis. Do you agree with that statement?
    Ms. Sommers. It is not something that we have included in 
our proposal so far, and I believe that that is where we are 
lacking--giving the public the ability to comment on any kind 
of analysis that we may have done or that we intend to do for 
the final rule stage, we should put out and allow the public to 
comment on that.
    Chairman Neugebauer. And in fact, I have heard those very 
statements, that in many cases what we are finding is some of 
the people are finding it hard to respond to some of the rules 
because they understand exactly the logic or the benefit that 
is going to be derived. And so I think that is a problem.
    Before my time is up, Mr. Lacker, I want to go to something 
that--it was in your testimony in both written and oral, and 
that is this issue of FSOC and whether--we said there wasn't 
going to be a list when we were putting together Dodd-Frank. 
How do you have an operation of determining which of these 
entities are going to be systemically risky without having a 
list and treating them differently than you are treating people 
who ``aren't on the list?''
    Mr. Lacker. I think it is really hard for there to be 
clarity about what safety net policy is without some 
designation of what firms are going to benefit from the type of 
support that is available in the orderly liquidation authority 
and what firms are not. And I think it is most natural to pair 
that set of firms--the ones who could benefit from the orderly 
liquidation authority--with the set of firms that are subject 
to more rigorous scrutiny. And that goes back to the problem of 
mismatch that really drove this crisis, where the safety net 
was broader than our regulatory reach.
    Chairman Neugebauer. I think the other is is it is going to 
be hard to determine--and I think you used the terminology of 
bypass--it is going to be interesting to see if it is good to 
be inside the box or outside the box and what are the 
consequences of each. Because if you are outside the box, you 
may not be subject to the same regulatory scrutiny as those 
people inside the box, but there also may be continued--and I 
agree with you, that there continues to be somewhat of an 
implicit thought there that we--these are systemically risky 
entities and that there is, in fact--we just heard Mr. 
Elmendorf said he budgeted for the taxpayers to get involved in 
that.
    Mr. Lacker. I think that is a definite issue. I think that 
there is going to be a clear tension. I think firms are going 
to want to be benefiting from the lower short-term funding 
costs that would come from being perceived as eligible for the 
orderly liquidation authority but I think they are going to 
want to escape the FSOC designation if they can do that.
    Chairman Neugebauer. Thank you.
    Mr. Capuano?
    Mr. Capuano. Thank you, Mr. Chairman.
    Again, I want to thank the panelists for being so 
understanding of today's limitations and timeframes.
    Mr. Elmendorf, I just have a very simple question. I want 
to make sure that I am reading your documents correctly. As I 
read your document, I think the words are pretty clear, but I 
need to hear the words underlined and bold.
    When everything is said and done, the Dodd-Frank Act will 
actually reduce the deficit by $3.2 billion. Am I reading this 
correctly?
    Mr. Elmendorf. That is our estimate of the effects of the 
changes in direct spending and revenues on the deficit--$3.2 
billion over the 2010 to 2020 period.
    Mr. Capuano. So the 20 million pages of bill actually 
reduces the deficit by $3.2 billion?
    Mr. Elmendorf. You are reading the table correctly, 
Congressman.
    Mr. Capuano. And ``billion'' has 12 zeros?
    Mr. Elmendorf. Quite a few, Congressman, yes.
    Mr. Capuano. That is what I thought. I just wanted to make 
sure I was reading correctly, that is all. Because I have heard 
lots of different things and some of the opening statements 
have made me believe that maybe it was ruining the country.
    Ms. Sommers, honestly, I just--I don't disagree with 
anything that is in your testimony but I want to be clear: I am 
not terribly familiar with the CFTC--a little bit, but not too 
much because it is not in the purview, directly, of this 
committee. Is there anything in the law that prohibits or 
prevents the Commission from doing the things you suggest?
    Ms. Sommers. No, sir.
    Mr. Capuano. So that you could do in your own--so have you 
or anybody else made those suggestions as part of the procedure 
or the rules of the Commission?
    Ms. Sommers. Absolutely.
    Mr. Capuano. Okay. Because I think that is important. I 
don't know enough about the Commission to know whether you are 
right or wrong and I would be happy to listen to others. It 
certainly sounds right to me--a cost-benefit analysis is pretty 
normal; we do it all the time.
    I know we can get into a debate of what is a cost and what 
is a benefit. That is another argument for another day. But the 
concept is 100 percent correct and I look forward to hearing 
from some of the other Commissioners to see what they think.
    Governor Lacker, honestly, it is my problem with the Fed. I 
love you guys, but I have a hard time reading or figuring out 
exactly what any of you are saying at any given moment. So I 
just want to understand.
    I read some things here and I heard you say some things 
that actually sounded like you like the concept of Dodd-Frank; 
not the specifics, but the concept of what the Dodd-Frank bill 
is trying to do. Is that a fair read or an unfair read of what 
you were saying?
    Mr. Lacker. The Dodd-Frank bill does a lot. Some of what it 
does is try and address the mismatch between the scope of 
regulation and the scope of the implicit safety net. So to the 
extent that it addresses that, and it has in some areas, I 
think that is good.
    It also limits Fed lending power--discretionary Fed lending 
power--and I think those measures are good. I think it could 
have gone farther and I think it is--what I was highlighting in 
my testimony was the extent to which there is a residual amount 
of discretion that is going to make life hard for us going 
forward, I think.
    Mr. Capuano. I actually agree. I think clarity is 
critically important as best you can. I would--a little bit 
that there has to be some degree of ambiguity in any more 
regulation because you never know what is going to happen 
tomorrow that you can't foresee, so it has to be some degree. 
But as much clarity as you can provide on any law or 
regulation, I generally agree with that concept. So I tend to 
agree with your comments today.
    I guess I also want to be clear: It is my belief that no 
matter--even if you are as clear as you think you can be on any 
given item, there will always be somebody who tries to get 
around whatever that might be. We existed for 40, 50 years 
with, I think, relatively clear banking rules, and what that 
ended up in was non-bank banks--ended up in the creation of 
hedge funds; it ended up in the creation of mortgage brokers 
and everybody who could find any way they could--Goldman Sachs 
was created to get around regulation.
    And so therefore, my expectation always is, whatever 
regulation we create, or laws followed by regulation, there 
will always be somebody there ready to find a way around it, 
and that is why it is an ongoing, living process. So I don't 
disagree at all. I actually agree with your concept.
    I would also ask, do you believe that the Fed and other 
regulators are sufficiently empowered under the Dodd-Frank Act 
and other current laws? I actually think that a lot of the 
Dodd-Frank Act probably wasn't necessary. I think a lot of it 
we are just kind of making you do this stuff that you already 
had the power to do.
    I would argue that the Fed currently has the power if they 
choose to do it--not just the Fed, but others as well--to be a 
lot more clear than the law is. And I think that is the way 
regulation generally works. Do you think that is a fair read of 
the law? It may not be able to fill every gap, but conceptually 
the law is a little bit broad-brushed, but the idea being that 
the regulators are then the ones who kind of fill in more gaps, 
therefore tightening everything up? Is that a fair--
    Mr. Lacker. It is a fair reading. So I distinguish between 
the regulatory side and the orderly liquidation authority. 
Liquidation authority, Congress provided flexibility for the 
FDIC to use if they so chose in writing rules. And the way they 
have written the rules, they have reserved a substantial amount 
of that discretion to themselves going forward, that 
flexibility. But that flexibility, the flip side of that is 
ambiguity about just where they are going to draw the line in a 
crisis and going into the next crisis, which firms will benefit 
from support--
    Mr. Capuano. So your concern is less with the specifics of 
the law than the way the FDIC has interpreted it and submitted 
regulations pursuant to it. Is that a fair--
    Mr. Lacker. As I said, there are two approaches to 
achieving that clarity. One is to tie regulators' hands; the 
other is to give them a free rein but hope that they can 
achieve clarity on their own.
    Mr. Capuano. Thank you very much.
    Chairman Neugebauer. Quick followup: Mr. Elmendorf, if you 
had taken out the TARP offset, what would the impact have been 
on your calculation?
    Mr. Elmendorf. The TARP offset, as I said, was $11 billion. 
If that $11 billion had not been there, then you can just take 
the $3.2 billion reduction that we estimated and put the $11 
billion back in and we will end up with an increase in deficit 
of $7.8 billion.
    Chairman Neugebauer. Thank you.
    Mr. Capuano. Mr. Chairman, would you yield for 1 second? I 
would like to ask Mr. Elmendorf another question.
    Mr. Elmendorf, if monkeys could fly, what do you think 
would be the relevance to that? The law is the law, is it not?
    Mr. Elmendorf. I don't think the monkeys flying would be 
relevant, Congressman.
    Mr. Capuano. I didn't think so either.
    Chairman Neugebauer. Mr. Fitzpatrick?
    Oh, he is not here. Okay.
    Mr. Posey is not here. Okay.
    Mr. Renacci? Sorry.
    Mr. Renacci. Thank you, Mr. Chairman.
    It is interesting because I was going to ask that question, 
too, on the budget deficit, because it is--sometimes down here 
in Washington we add and subtract, but ultimately you have 
given us a cost of--what was it again, to the budget deficit?
    Mr. Elmendorf. So from the changes in direct or mandatory 
spending and revenues we estimate a $3.2 billion reduction in 
deficit over the 2010 to 2020 period.
    Mr. Renacci. But if you did not have the TARP offset--
    Mr. Elmendorf. Yes. Then you would have a net increase in 
the budget deficit.
    Mr. Renacci. Exactly.
    Mr. Elmendorf. But as the testimonies show and as you 
discussed in terms of the complexity of the bill, there are an 
awful lot of moving parts--
    Mr. Renacci. I understand.
    Mr. Elmendorf. --and we try to put them all together for 
you, but you can envision particular pieces of them as you 
would like.
    Mr. Renacci. Thank you.
    And again, thank you all for testifying. I am a CPA so I do 
understand that sometimes you can present things certain ways 
and that is why I re-asked the question again, because there is 
a cost to Dodd-Frank, no question, and that is one of my 
concerns.
    I do want to go to--President Lacker, you said in your 
testimony, ``Creating clear and credible safety net constraints 
is likely to be difficult.'' Do you see the implementation of 
Dodd-Frank--and you had some percentages there and I just want 
to make sure I understand them. You went from 42 percent to 62 
percent. Was this in comparison to adding Dodd-Frank or just--
go ahead and answer that.
    Mr. Lacker. The explicit part of the safety net includes 
deposit insurance, and the changes that Dodd-Frank made were 
taken into account; they are raising the deposits permanently. 
On the implicit safety net side our estimates are based on 
official statements and action, and there the main driver are 
two things. One is the GSEs, which, you know, back in 1999 when 
we did that estimate, were included in the implicit safety net 
because they were widely regarded as likely to benefit from 
government support should they fail. And then the other part is 
in the new estimate--they are in the new estimate, too, the 
2009 estimate.
    In the 2009 estimate, it includes all the holding company 
liabilities of the 19 banks that were part of the so-called 
SCAP stress test in 2009 because the government announced that 
should any of them be deemed to be holding insufficient capital 
it would be supplied by the government through a capital 
injection and we interpreted that as an implicit promise of 
government support for those institutions to support the 
creditors. So that precedent having been set, we count the 19 
largest holding companies as part of the implicit safety net 
even though their liabilities don't benefit from explicit 
government support of insurance.
    Mr. Renacci. Okay.
    We have all talked about the cost of Dodd-Frank, and I know 
you have indicated some of that from the CBO's standpoint, but 
can all three of you kind of give me your thoughts on the 
indirect costs of Dodd-Frank, if you have some thoughts on 
that--the cost of jobs, the cost for these financial 
institutions, whatever they are, to ramp up? What are your 
thoughts on--because we know there is a cost.
    Any time you add legislation of this mass there is going to 
be a cost. What are some of your thoughts on the costs when it 
comes to jobs, jobs creation, and the opportunity for some 
financial institutions to do those things? If any one of you 
would like to comment.
    Ms. Sommers. Congressman, I can't comment directly on an 
impact to jobs. What I can say is the proposals that we put out 
we get comments back from market participants that we regulate 
and they give us estimates with regard to what it would cost 
them to comply with the regulations.
    There are assumptions that you can build into that that if 
those market participants are paying an increasing amount of 
money to comply with the regulations, there is a chance they 
will pass that on to either their customers--
    Mr. Renacci. So you are getting that feedback. Because I 
am, too, from the banks and many institutions, the number of 
dollars it is costing them to ramp up.
    Ms. Sommers. We are getting feedback from commenters in 
their comment letters to our proposals. It is just that we 
haven't provided them with an estimate that we have personally 
done at the CFTC.
    Mr. Elmendorf. So Congressman, I am sorry, we have not 
tried to evaluate the broader economic effects of the 
legislation. You are raising very important questions but we 
just haven't had the resources to go beyond the budget cost to 
the Federal Government in the cost estimates that I have talked 
about already.
    Mr. Lacker. I am very worried about the distortions to 
economic activity that will--that could result from 
implementation of Dodd-Frank. As Doug Elmendorf said, there are 
a lot of moving parts here.
    The safety net, which is what was the focus of my remarks, 
has the potential--not necessarily that it is going to happen, 
but the potential to distort credit flows and give rise to 
things analogous to the housing boom and bust, which arguably 
just had devastating costs and consequences for the American 
economy.
    Mr. Renacci. Thank you.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    Now the gentleman from Texas, Mr. Canseco?
    Mr. Canseco. Thank you, Mr. Chairman.
    I want to follow up, Commissioner Sommers, on the jobs 
issue, but I want to come at it from a different angle. The GAO 
has estimated that about 2,600 new Federal jobs will be needed 
in order to implement Dodd-Frank. How many staff has the CFTC 
had to hire in order to implement the new rules?
    Ms. Sommers. Sir, as you know, we are currently operating 
under our 2010 budget of $168.8 million. We currently have a 
staff of approximately 675 full-time employees, but that is not 
with the additions that were included in the President's 
request for either Fiscal Year 2011 or for Fiscal Year 2012, of 
course, that included additional FTE to implement Dodd-Frank.
    Mr. Canseco. And before the end of the year, 2011, how many 
more of those positions are you going to have to fill?
    Ms. Sommers. We currently are under a hiring freeze, so--
    Mr. Canseco. Okay.
    Ms. Sommers. --we are not filling any.
    Mr. Canseco. What type of positions are being filled or 
created at CFTC with--
    Ms. Sommers. I think typically we hire attorneys and 
economists at the CFTC to surveil the markets and to implement 
the law.
    Mr. Canseco. Okay.
    Let me switch subjects on you right now, Commissioner, 
while I have you here. Sarbanes-Oxley resulted in a dramatic 
decrease of public offerings in the United States. Companies 
that would have listed or raised capital in the United States 
began to do so in other countries because regulation became too 
burdensome here.
    Do you have an opinion whether or not Title 7 of Dodd-Frank 
will have a similar effect on derivative markets?
    Ms. Sommers. I think, Congressman, it is a very important 
issue for us to make sure that what we are implementing in the 
United States is on a consistent level with what the rest of 
the world is implementing. These markets are global markets. 
The derivatives markets are--the same markets trade all over 
the world.
    And because the G-20 countries made the same commitment to 
mandatory clearing and trade execution of over-the-counter 
derivatives we are working very closely with our global 
counterparts to make sure that there is not going to be 
regulatory arbitrage. But we are currently in the middle of 
that at this point.
    Mr. Canseco. Do you think that the American businesses will 
find the derivatives tradings and hedges--and hedging in the 
United States overly burdensome and therefore begin trading in 
places like Europe or Singapore?
    Ms. Sommers. I hope not.
    Mr. Canseco. Let me call your attention to something that 
came out yesterday in the Financial Times. It is an op-ed piece 
written by Alan Greenspan, published yesterday, March 29, 2011, 
and it is titled, ``Dodd-Frank Fails to Meet Test of Our 
Times.''
    I am not going to read the whole article, but in some 
portions here he says more recently concerns are growing that 
without immediate exemption from Dodd-Frank a significant 
portion of the foreign exchange derivatives market would leave 
the United States. The U.S. Treasury is pondering an exemption 
but some bank regulators insist the statute be implemented as 
is.
    And then he concludes that the Act may create the largest 
regulatory induced market distortion since America's ill-fated 
imposition of wage and price controls in 1971, and concludes by 
saying, and pressing forward the regulators are being entrusted 
with forecasting and presumably preventing all undesirable 
repercussions that might happen to a market when its regulatory 
conditions are importantly altered. No one has such skills.
    Now, do you agree or disagree, in general, with what Alan 
Greenspan says in that op-ed--
    Ms. Sommers. I think taking it in two parts, the first part 
with regard to the Treasury Department's decision that they are 
making, that is a concern for a lot of market participants, and 
I agree that is an important decision that people would like to 
have certainty with regard to how those products will be 
regulated. I think on the second part of the question, for 
regulators it is important for us to understand that 
overregulation can lead to unintended consequences, so we have 
to be very careful when we are crafting the regulation that 
helps us achieve the goals that were in Dodd-Frank, and that is 
to increase transparency and reduce systemic risk. So we have 
to keep those goals in mind every time we are looking at a 
proposal.
    Mr. Canseco. One more question: Do you believe that a rule 
requiring so-called end users to post collateral and 
derivatives transactions would result in job losses for those 
employed by end users?
    Ms. Sommers. I think that if the Commission were to impose 
capital and margin on end users it could have a devastating 
effect, but I am under the impression that is not where the 
Commission will head.
    Mr. Canseco. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Neugebauer. I thank the gentleman.
    I want to thank this panel. What I would like to do, with 
your indulgence, is since we kind of had to do this in--
convoluted afternoon here, and with that, I will--about 5 
minutes away from missing that vote, so we are going to run 
over there, have these votes, and when we return we will start 
with the second panel.
    Mr. Elmendorf. Thank you, Mr. Chairman.
    [recess]
    Chairman Neugebauer. We will reconvene the hearing. I want 
to say to our second panel, thank you very much for being very 
patient and fluid here. One of the things I learned when I got 
to Congress is that it is hard to plan up here. Even the best 
plans sometimes go awry.
    But we are glad to have you here, and I have had a chance 
to read your testimony and I am excited about hearing your oral 
testimony. I want you to know that your full text of your 
written testimony will be, without objection, made a part of 
the record.
    And so with that, we will start with our panel, and Dr. 
Douglas Holtz-Eakin, president of American Action Forum, you 
are recognized for 5 minutes.

 STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, AMERICAN ACTION 
                             FORUM

    Mr. Holtz-Eakin. Thank you, Mr. Chairman, and Mr. Capuano. 
I appreciate the chance to be here today. You have my written 
statement.
    In discussing the costs, there are really three kinds of 
costs that have come up today. One is budget costs, which, 
while very important, I think for the Dodd-Frank bill will end 
up being the least central aspect of discussion.
    The second would be compliance costs visited on the private 
sector, where there are really a couple of points that I wanted 
to make. The first is that in some cases the flip side of 
budgetary impacts are the compliance costs--fees paid by firms 
and the like. The second is that those compliance costs end up 
being transmitted, in large part, to customers outside the 
financial sector, and thus are the impetus for a lot of the 
larger economic costs that I want to focus on.
    The third is that these are often the costs that are the 
hardest to project. And the example I used in my written 
statement was the cost of compliance under Sarbanes-Oxley, 
where they were radically underestimated, and where my concern 
is that the same could happen with the Dodd-Frank legislation.
    And then the last is then those are the costs that are 
going to be most affected by the ongoing rulemaking process and 
where I believe this committee has the greatest opportunity to 
make sure that the costs don't become excessive, given the 
goals of the legislation. So I am encouraged to have this 
hearing.
    And then the last, which I tried to scope out in the 
written testimony, is the larger economic implications of a 
piece of legislation as large as Dodd-Frank. You are going to 
have substantial budgetary and compliance costs, but you also 
have significant economic costs.
    And the way I tried to get a handle on those was to 
recognize that the financial services industry that will bear 
the direct impacts acts as an intermediary between savers, 
investors, and those wishing for hedging operations and 
provides these services. And then ultimately I think the 
economics are, these costs will be transmitted to those 
activities in the economy, whether they be saving, investing, 
hedging, whatever.
    I used some estimates from Standard & Poor's for the larger 
of the bank holding companies that suggested that the direct 
impacts would lower their rate of return by 18 percent, and 
that is not going to survive in competitive markets so they 
will be forced to pass those costs along. A rough estimate is 
they will have to pass along a 20-odd percent increase in, if 
it is a loan, interest rates, if it is an operation like a 
hedge, of--fees. But broadly, they are going to have to push 
forward their costs.
    If it is all interest rates, which means a 4 percent 
interest rate turns into a 4.9 percent, and so forth. And then 
I used some estimates done by Macroeconomic Advisers about what 
happens if you have an exogenous--an increase in interest rates 
that comes from a non-economic source, not just from a recovery 
or tightening of credit, but from a policy move. That suggested 
economic growth slows in very substantial ways, especially 
early, and that this translates, if you believe the 
Congressional Budget Office estimates of growth and the links 
to jobs, into something that looks like 900,000 jobs over the 
near term.
    And so that gives you the ballpark win. Given the slow 
recovery and the millions of people out of work, I think this 
is worth careful attention. The economic costs can be 
substantial.
    Now, that estimate will be both too high in some ways and 
too low in others. It will be too high because I think the 
large banks will get the least of the impacts because they are 
viewed as ``too-big-to-fail'' and can borrow on preferential 
terms. I am not sure that is a good thing but they are not 
going to be the most affected.
    And it is going to be too large in some cases because--or 
too small in some cases because we will have differential 
impacts which are actually in and of themselves not beneficial 
to the economy. The fact that we have differential regulatory 
impacts means we are moving activities strictly on the basis of 
policy, not on the basis of economic merit. That is, in any 
other circumstance, an economic bad and a cost that ought to be 
counted toward the legislation.
    So given the late hour, I see no point in a long-winded 
economics tutorial, but I would stress to the committee that 
this merits closer investigation. These are potentially 
significant costs. They are costs at a time that matters in our 
economic history, and that if we can hone this legislation to 
have minimal economic drag that would be much more desirable 
than to hone it in the other direction.
    I thank you for the chance to be here and look forward to 
your questions.
    [The prepared statement of Dr. Holtz-Eakin can be found on 
page 75 of the appendix.]
    Chairman Neugebauer. Thank you very much.
    Dr. Angel, it is good to have you back again.

 STATEMENT OF JAMES J. ANGEL, ASSISTANT PROFESSOR OF FINANCE, 
      MCDONOUGH SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY

    Mr. Angel. Thank you very much. It is an honor to be here, 
and I am very grateful that your committee is looking at these 
very important issues because they have huge ramifications for 
our economy.
    As you well know, the Dodd-Frank bill is a very complex 
piece of legislation, and unfortunately, our regulators do not 
have a perfect track record in implementing complex pieces of 
legislation. And we have hundreds of rulemakings coming down 
the line, and the possibility for a misfire is pretty large.
    I think the history of Sarbanes-Oxley Section 404 is a 
classic example. It seemed like a good idea at the time. Tell 
us how good your controls are.
    The SEC at the time didn't think it was a big deal, and yet 
it turned into an inordinately expensive mandate that has 
really raised the burden of being a public company. This and a 
number of other factors in our economy really raised the burden 
of being a public company, and the result is we have far fewer 
U.S. public companies.
    There is a graph in my testimony, which, if you look on the 
monitor, shows you the number of exchange-listed companies on--
that are U.S. companies, not foreign companies--listed on our 
exchanges over the last 15 years, and you can see there has 
been a steady decline. We have gone from nearly 8,000 public 
companies down to approximately 4,000 exchange-listed U.S. 
companies.
    This is a crisis in capital formation. We are losing our 
public capital markets, and these provide important capital to 
young and growing companies. It provides important exit 
strategies for the venture capitalist who helped support the 
growth of our technologically-innovative company. And if we 
don't do something about this, we are in serious trouble.
    The Dodd-Frank bill has many features which could turn into 
another Sarbanes-Oxley 404, and a lot of them sound like good 
ideas but if they are implemented badly, they could turn into a 
disaster. For example, the pay-it-back provision--who could 
argue with the idea that somebody should be able to pay back 
their mortgage? But if the regulators set the standards too 
high, even people with good credit who can pay it back won't be 
able to qualify for a mortgage.
    Things like the over-the-counter derivatives--again, if the 
regulations are too burdensome, businesses--good, operating 
businesses--will be deprived of the risk management tool they 
need to reduce their risk. The risk retention features in the--
with regard to securitization sound like a great idea, but if 
implemented badly could actually increase systemic risk in our 
economy.
    I could go on for a long time about that. And, I am 
somewhat pessimistic that our regulators have the human 
resources they need to really implement this law in an 
intelligent manner. They just don't have enough people who 
really understand markets. They have plenty of lawyers, but 
very few chartered financial analysts and other people with the 
kind of industry experience and know-how to really understand 
the impact of what their proposed rules are going to do.
    So what can you do about it? First of all, you are starting 
right now by doing the right thing. This requires a lot of 
congressional oversight.
    Regulation is not a set it and forget it kind of deal, and 
I think that was the big mistake in Sarbanes-Oxley. Many 
Congressmen expressed the attitude, ``Well, we passed the law; 
we will see how it works,'' and as the Section 404 debacle was 
unrolling, there was a lack of oversight to sort of stop the 
train wreck before it was too late.
    So you really do need to be watching carefully because I 
can't predict which of the 2,300 pages will be the Section 404, 
but there are so many of those moving parts at least one of 
them will be, and prompt congressional action will be 
necessary.
    Another thing you can do is realize that our regulatory 
structure has to evolve with the markets, and the markets are 
evolving rapidly. Even if we came up with the absolutely 
perfect structure this year, in a few years it will be 
obsolete.
    So we should have 5-year reauthorizations not only for the 
CFTC but also the SEC and the new CFPB to come back, look at 
the agencies, say what is going right and what is going wrong, 
and then fix it.
    And I have plenty of other ideas, which I will be happy to 
share with you and your staff at any time. And once again, I 
want to thank you for the opportunity.
    [The prepared statement of Dr. Angel can be found on page 
44 of the appendix.]
    Chairman Neugebauer. Dr. Overdahl, thank you for being 
here, and you are recognized for 5 minutes.

   STATEMENT OF JAMES A. OVERDAHL, VICE PRESIDENT, NATIONAL 
              ECONOMIC RESEARCH ASSOCIATES (NERA)

    Mr. Overdahl. Thank you. And thank you to the committee for 
the invitation to appear here today.
    I am going to speak in more general terms about the 
rulemaking process at the SEC and the CFTC. These two agencies 
combined will be implementing approximately 150 rules under 
Dodd-Frank, and so I think that process is important to 
understand. And I will be doing this based on my experience as 
a former chief economist of these two agencies and describe 
some of the obstacles that are limiting the effective 
application of economic analysis to the rulemaking process and 
offer some suggestions on how this process might be improved.
    It is important to note that neither the SEC nor the CFTC 
has a formal requirement for including economic analysis in 
their rulemaking procedures aside from the cost-benefit 
requirements of the Paperwork Reduction Act. However, the 
outcome of recent court decisions have turned on the adequacy 
of economic analysis that is considered by the SEC when 
adopting new rules, and this has forced the Commission to pay 
more attention to how it conducts this analysis.
    The message from the courts is that the SEC's economic 
arguments need to be adequately supported and that vigorous 
assertion is not a substitute for rigorous economic analysis. 
And even though the court cases have dealt with the SEC, I 
think the same reasoning would apply to any regulatory agencies 
subject to the Administrative Procedure Act, including the 
CFTC.
    Economic analysis can be used for more than satisfying 
procedural and court requirements; it can help improve 
regulatory decision-making. I have found that Commissioners at 
both the SEC and the CFTC welcome rigorous, data-driven 
economic analysis. Such analysis enhances the ability of 
Commissioners to ask better questions, better understand the 
tradeoffs and consequences associated with the proposed rule, 
and make more informed decisions.
    In my view, economic analysis encompasses more than what is 
typically called cost-benefit analysis. Under my 
interpretation, economic analysis goes beyond what is readily 
quantifiable, such as out-of-pocket compliance costs, and 
includes consideration of tradeoffs, potential effects, and 
unintended consequences of regulatory actions, including 
identifying potential changes in behavior by market 
participants. It can be helpful at the very earliest stages of 
the rulemaking process by helping frame the problem that is 
being addressed by a proposed regulatory action.
    Although there are currently no formal requirements for 
including economic analysis, there have been many attempts in 
the past to formalize such requirements. These attempts have 
foundered because they have been up to the preferences of 
individuals chairmen, and when these chairmen have left these 
requirements were discontinued or forgotten.
    I believe that one obstacle to effectively applying 
economic analysis to the rulemaking process has been the lack 
of relevant data. The SEC and the CFTC have often relied on 
public comments to supply the data analysis, and although 
public comments can be extremely valuable for providing some 
types of information they rarely include the type of data and 
analysis that can serve as substitute for the Commission 
conducting its own analysis.
    And I will note that the quality of information supplied 
through the public comment has improved in response to recent 
court decisions. I have found that parties affected by proposed 
rules now regard the notice and comment period as if it were a 
legal proceeding.
    Affected parties are placing on the public record factual 
information about likely compliance costs and offering studies 
and analysis to help inform regulators. They are doing this 
because of the potential for litigation and directing their 
comments not only to the members of the regulatory Commission 
involved but also to judges who may be reviewing the public 
record if these rules are challenged in court.
    In closing, I would like to offer just a few suggestions 
about how economic analysis can be better utilized by the SEC 
and the CFTC. First, I believe that some type of formal 
requirement is necessary to institutionalize economic analysis 
at these two agencies. Experience has shown that good 
intentions alone are not sufficient to sustain a consistent 
role for economic analysis.
    Second, economic analysis needs to be included in the 
rulemaking process at an early stage, and I believe it would be 
useful to include some type of high-level economic review of 
both the rule and the problem that the rule is aimed at 
addressing. This is important for allowing the economic staff 
to gear up to gauge the complexity of the problem and to begin 
gathering data that would be helpful in analyzing the proposed 
rule.
    Third, the collection of data for analyzing proposed rules 
must be improved. One way to do this would be to streamline the 
process by which regulators can survey firms for information 
about potential compliance costs.
    Fourth, I believe that it would be helpful for some type of 
regulatory guidance along the lines of what, for instance, the 
FSA has, and what I referred to in my written testimony.
    Finally, I think that economic analysis needs to become a 
higher priority at both the SEC and the CFTC. Economic analysis 
at these two agencies is necessary because it enhances the 
ability of these Commissions to make informed decisions, and an 
added benefit is that it will also help the overall 
transparency and accountability of the rulemaking process.
    Thank you, and I look forward to your questions.
    [The prepared statement of Dr. Overdahl can be found on 
page 111 of the appendix.]
    Chairman Neugebauer. Thank you, Dr. Overdahl.
    And now, Mr. David Min, associate director of financial 
markets policy for the Center for American Progress Action 
Fund.
    Mr. Min, welcome.

  STATEMENT OF DAVID K. MIN, ASSOCIATE DIRECTOR OF FINANCIAL 
    MARKETS POLICY, CENTER FOR AMERICAN PROGRESS ACTION FUND

    Mr. Min. Thank you, Chairman Neugebauer, Ranking Member 
Capuano, and members of the subcommittee. As you mentioned, I 
am with the Center for American Progress Action Fund, and I 
appreciate the opportunity to testify today on the important 
topic of the costs of Dodd-Frank implementation.
    I think it goes without saying that in analyzing costs, we 
also need to look at the benefits. In this case, I think we 
need to note that the Dodd-Frank Act was, itself, intended to 
address some fairly large costs associated with financial 
instability and systemic risk.
    In case we have forgotten, I will just recount a few of 
these costs: over $10 trillion in household wealth destruction; 
nearly 10 million lost jobs; 12 million expected foreclosures 
and the associated costs of those on families and communities; 
and the opportunity costs, of course, of providing trillions of 
dollars in TARP and Federal Reserve support to restore and 
maintain liquidity in the financial markets.
    It is also important to recognize that if we do not 
implement Dodd-Frank or something analogous, we can expect to 
incur these types of costs on a regular basis going forward. As 
experts across the ideological spectrum have noted, leaving a 
status quo in place will almost certainly lead to regular 
recurrences of this type of financial crisis. That factor must 
be considered in any legitimate analysis of Dodd-Frank 
implementation.
    Indeed, prior to the New Deal, when we did not have 
meaningful regulation of financial markets, we experienced such 
crises every decade or so. The regulatory costs during this 
period were de minimis, but in fact the associated costs of the 
resulting volatility were exceedingly high.
    The last of these crises, of course, was the one that 
preceded or triggered the Great Depression. And in response to 
that, your New Deal Era predecessors established a system of 
strong regulatory oversight for banking and capital markets 
that essentially established the modern U.S. financial system 
that we take for granted.
    At the time, many of these reforms were heavily criticized 
for being too costly, creating too large a Federal bureaucracy, 
and potentially stunting capital formation. Critics warned that 
these types of reforms would deter financial investment and 
stunt economic growth. And in fact, what the United States 
actually experienced was an unprecedented period of financial 
stability and prosperity, which lasted for roughly 50 years.
    This Golden Age or Quiet Period of banking, as it was 
known, was marked by extraordinarily high economic growth--in 
fact, the greatest in our Nation's history--and the notable 
absence of any major financial crisis. As David Moss, a 
professor at Harvard Business School, has noted, this was also 
a period of significant financial innovation, with U.S. 
financial institutions quickly becoming the envy of the world.
    This, in fact, was true in the SEC capital markets as well 
as investor confidence reached unprecedented heights due to 
regulatory uncertainty and the knowledge that there would not 
be fraud in U.S. capital markets. Unfortunately, as time passed 
we forgot the lessons of our past and allowed large areas of 
unregulated financial activity to develop through a combination 
of deregulation and regulatory inaction.
    Unsurprisingly, this led, over time, to a major bubble-bust 
cycle and the financial crisis of 2008. Obviously, it was in 
this context that Dodd-Frank was passed through Congress.
    Without going into all the details of this very 
comprehensive bill, I would essentially describe it, as I think 
it was done on the earlier panel, as an attempt to extend 
meaningful prudential regulation to all parts of the financial 
system and increase financial transparency. While there has 
obviously been considerable debate as to whether Dodd-Frank is 
a silver bullet that solves all of the problems revealed by the 
financial crisis, there should be no question that by 
significantly reducing leverage and increasing transparency, it 
will meaningfully reduce systemic risk, provided that it is 
fully and effectively implemented.
    So returning to the question posed by this hearing, what 
are the costs of implementing Dodd-Frank and how do they 
compare to the costs of not implementing Dodd-Frank, I believe 
our Nation's economic history provides a very clear lesson--one 
that I would urge the members of this subcommittee to heed: The 
costs of good financial regulation are far outweighed by the 
benefits of financial stability. Or to put this in a modern 
context, an ounce of regulation is worth a pound of bailout.
    This is even more true when we recognize that the various 
agencies created by or given new mandates by Dodd-Frank can 
easily be self-financed with extremely small assessments on the 
many trillions of dollars that flow through the financial 
system. For example, the CFTC's entire proposed budget of $312 
billion amounts to approximately one one-hundred-thousandth of 
the notional amount of credit default swaps alone, which is 
obviously just one part of the broad mandates the CFTC has. To 
put that in context, for a household making $50,000 a year, 
that is the price of a cup of coffee, and not at Starbucks but 
at the local store.
    In fact, I think that Dr. Angel makes a good point about 
the CFTC and the SEC not having enough resources. I think that 
this would be one easy way to adapt that.
    In this light, I think that Dodd-Frank appears 
extraordinarily cost-efficient. The most pessimistic cost 
estimates for implementing Dodd-Frank constitute just a small 
fraction of a percentage of the probable benefits in financial 
stability.
    Even if one does not believe that Dodd-Frank solves all of 
our financial market issues, it is clear that by reducing 
systemic risk and thus the likelihood of financial crises, 
Dodd-Frank pays for itself many times over.
    In closing, I would like to commend the chairman and the 
other members of this subcommittee for holding this hearing. I 
think today's discussion should clearly demonstrate the 
excellent return on investment that we as taxpayers receive 
from the relatively few dollars we spend on financial 
regulation.
    I hope that the facts generated out of this subcommittee 
today encourage Americans to avoid taking a penny-wise, pound-
foolish approach to financial regulation and support the full 
funding and effective implementation of Dodd-Frank.
    Thank you.
    [The prepared statement of Mr. Min can be found on page 102 
of the appendix.]
    Chairman Neugebauer. Thank you, Mr. Min.
    I now recognize myself for 5 minutes.
    I think one of the things, when we talk about Dodd-Frank, 
that I think even Mr. Min acknowledged, is we are not sure 
whether this is going to prevent any future financial crises 
from happening again. And what we don't know either is if we 
had Dodd-Frank in place, whether we would have foregone the 
downturn that we just experienced in this country.
    And I think one of the things that seems to be an 
overriding theme, we had Ms. Sommers here, and Dr. Overdahl, 
she is a Commissioner, and you are a former chief economist for 
the agencies for which she is a Commissioner, and she said she 
could make better decisions as a Commissioner if she had better 
economic analysis of what is at stake and what the consequences 
are.
    I was thinking about this as I have been listening to this 
testimony today, and I was thinking how interesting it is that 
when we want to introduce a new drug in this country, we 
require an extreme amount of analysis because we want to make 
sure that if we issue or we approve that drug, if we put that 
drug on the market, it is going to do what it says it is going 
to do with the least amount of consequences to the people.
    Yet, we have thrown out a huge piece of legislation that 
has far-reaching consequences with really very little, if any, 
analysis from a legislative standpoint, and now we are seeing 
that same scene play out at the regulatory level. And I think 
this is probably something--and I don't want to speak on behalf 
of my colleagues--but I think this is something that there 
should be bipartisan support in that we may disagree on the 
policy, but what we have to have is well-documented data to 
make these decisions on and not whims of people, thoughts of 
``This might be a good idea.'' There are a lot of good ideas 
out there, but what we need to do is make sure that we road-
test, or at least analyze some of these ideas.
    Dr. Holtz-Eakin, I wanted to ask you a question. When I 
think about all of the parameters and the consequences of Dodd-
Frank and the implementation and the fact that we have not done 
analysis and some people think that this could hurt job 
creation, raise the cost of capital, as has been mentioned, do 
you think there is a potential here that the Dodd-Frank bill 
will hamper the economic recovery in the next few years?
    Mr. Holtz-Eakin. That is my deep concern. Mr. Min framed 
the decision-making correctly. In the benefit-cost analysis, 
there are benefits to better financial regulation, but there 
are costs. And my deep concern is that this has the potential 
to hamper the recovery in a way that the costs exceed what we 
gain in the way of prudential financial regulation.
    Chairman Neugebauer. Dr. Angel, do you agree with that?
    Mr. Angel. I agree with that. It is not a question of 
regulation versus no regulation; it is a question of more 
intelligent regulation. Many of the good-sounding ideas in 
Dodd-Frank have some merit, but if they are not implemented 
well, it could be a disaster.
    Chairman Neugebauer. Dr. Overdahl?
    Mr. Overdahl. I think to your point about getting data, 
many times you will find that the data simply are not there at 
that moment, which I know in other instances where it is 
appropriate, you can sometimes do pilot programs to try to 
generate that data and then evaluate whether it is worth 
proceeding on a more permanent basis. That may be one way to 
get at the problem.
    Chairman Neugebauer. The other issue about some of these 
rules and rulemaking processes, and the cost-benefit analysis--
and as the President said, we need to make sure they make 
sense, basically was--to paraphrase his--is I worry about the 
scalability for some of these regulations and the ability of 
smaller--and when I think about Sarbanes-Oxley, that was one of 
the things and we look at those charts and we see that a lot of 
very--small number of small companies now can afford to go 
public, and so we have kind of frozen them out of the market.
    What I worry about is scalability of compliance with a lot 
of these issues and what that does to the smaller capital 
providers versus the larger ones, and as you pointed out, the 
model of replacing that income.
    And I think what the little secret here that nobody ever 
really says is ultimately the consumer of financial products 
pay for whatever things that we do. And when we look at--we had 
the CBO folks in here earlier and what they don't tell you is 
that we are taking $27 billion out of the economy. Yes, it is 
revenue-neutral, but we are using some Washington gimmicks to 
get to that point. But the bottom line is we took--we are going 
to take $27 billion out of the economy, and that is capital 
that we could create jobs with.
    Thank you.
    Ranking Member Capuano?
    Mr. Capuano. Thank you, Mr. Chairman. Mr. Chairman, I 
actually agree with many of the things you said. No one wants 
to run willy-nilly into important things like this. I agree 
with you.
    But there is also a balance. It has been 2\1/2\ years since 
the fiscal collapse, and in 2\1/2\ years, we have all thought 
about this a lot. And now whether what we are about to do or 
not is a fair question. I have concerns like everybody else 
does. But concern doesn't mean the fear of trying something 
new.
    There is no question that what we had did not work. It is a 
fair question about whatever we do whether it will work, and if 
it doesn't work, hopefully we will change it again. And I have 
always agreed that all regulation, all laws should be reviewed 
on a regular basis because the world changes. I think all those 
things are very fine.
    Mr. Holtz-Eakin, on compliance costs, I totally agree with 
you. There are absolutely compliance costs to everything, 
including when I drive my automobile, there is a compliance 
cost to meet safety standards. There is a compliance cost to 
the SEC. There is a compliance cost to the FDIC.
    So the concept of compliance cost in and of itself, I 
presume you were not suggesting that the fact that there is a 
compliance cost means we should never do anything. That is 
not--
    Mr. Holtz-Eakin. Not at all.
    Mr. Capuano. I didn't think so, but I wanted to be clear on 
that. It means it is a factor to be considered and I think a 
fair factor to be considered.
    Mr. Angel, I just want to point out a couple of things. I 
actually appreciate, and I think somebody from the other panel 
said it too, the fact that we are doing oversight. As I said 
earlier, I think this committee didn't do enough oversight, and 
I want to be very clear: This committee did not have a 
Subcommittee on Oversight until Chairman Frank took over, so 
this is a new subcommittee in the last 4 years, I think it is. 
I think it is long overdue and I think so far the chairman is 
doing a great job getting us started in this new session.
    There is something in your testimony that I wanted to ask: 
You made a comment that the SEC--and I would actually say this 
about all agencies--you want capable, thoughtful, professional 
people in those jobs. Yet, are you familiar that the continuing 
esolution that was passed for the remainder of Fiscal Year 2011 
would have--if adopted by the Senate and signed by the 
President--cut the SEC's budget by almost $50 million?
    Mr. Angel. I haven't been following the exact details but I 
understand that yes, that those are some of the proposals 
coming forth.
    Mr. Capuano. Do you think that is a wise move?
    Mr. Angel. I think we need to be very--the SEC needs more 
resources but we need to make sure they are spent properly.
    Mr. Capuano. That is a fair point.
    Mr. Angel. So if all they do is hire lawyers fresh out of 
law school, that would be a waste. If they hire people with 
market experience who know what they are doing, they are badly 
needed.
    Mr. Capuano. So do you think the--if I were to make you the 
SEC czar tomorrow--though I know ``czar'' gets all my 
Republican friends worked up--if I were to make you the SEC 
czar tomorrow and said to you what would be your budget, would 
it be the same budget as you have now or to be able to hire 
whomever you thought was the appropriate person to hire?
    Mr. Angel. What I would try to do is to hire more people 
with market experience, more people who have MBAs--
    Mr. Capuano. Do you think you could get them at the 
salaries we currently pay SEC employees?
    Mr. Angel. I would look carefully at the budget and work 
very hard also, since in the civil service environment, it is 
very hard to lay people off, what I would do--
    Mr. Capuano. The SEC is not subject to civil service. So 
are you telling me that--
    Mr. Angel. In a government environment, what I would try to 
do is to upgrade the skill level of the people that we have.
    Mr. Capuano. And I agree. If you upgrade the skill level, 
you think you can get them for the same salary as somebody less 
skilled?
    Mr. Angel. We are going to have--we have been penny-wise 
and pound-foolish--
    Mr. Capuano. So basically, you are telling me I should call 
the SEC Chairman tomorrow and have her call you and offer you 
the same $50,000 a year that we are paying most people who work 
there, and you will take that job?
    You are a good man, Mr. Angel.
    Mr. Angel. My students at Georgetown would miss me.
    Mr. Capuano. I appreciate that.
    I totally agree with the concept, but in order to get those 
people--I am fortunate enough to represent a lot of people who 
would be qualified in your criteria, and they would require a 
significant change in salary. And I appreciate that.
    Mr. Overdahl, again, your concept--there is nothing in the 
current law that prohibits the things you suggest because all 
the things you suggest to me, early analyzing, more detailed--
there is nothing there that prohibits either the SEC or the 
CFTC from doing that now is there?
    Mr. Overdahl. No, there isn't. And in the past, there have 
been attempts to do this. It is just that it hasn't been 
sustained.
    Mr. Capuano. Because I read your testimony and I agreed 
with pretty much everything you said. They all made sense and I 
would agree with you.
    Mr. Min, I guess I just want to be clear: You are not going 
to sit there and tell me you are 100 percent satisfied with 
everything in Dodd-Frank or everything that has been discussed 
or potential from it at the moment are you?
    Mr. Min. No. I agree with many of the comments of my fellow 
panelists. I think we could have gone further. There are 
certainly parts of it that could have been done differently.
    As I think you mentioned earlier, with a bill like this, 
there is obviously a lot of compromise in place. I think the 
general principle was sound, though, and it is extending 
prudential regulation to parts of the market that didn't have 
it and including transparency.
    Mr. Capuano. I guess I would also ask the panelists--
because I have actually made this point myself--Mr. Min made 
the point the period, give or take, from 1940 to give or take 
1990, that 50 years, did you see a problem with the American 
financial system then? A serious systemic problem such that we 
had to throw the whole thing out and start from scratch because 
it was terrible and somebody was eating our lunch?
    Mr. Angel. We experienced the beginning of the great 
inflation and we had the savings and loan crisis, which--
    Mr. Capuano. I know there were problems, but did you think 
that we had such serious problems that we had to adopt the 
Japanese model? Because it is my impression that during that 
50-year period, the entire world was trying to copy us and get 
ahead of us, as opposed to us copying them and trying to get 
ahead of them.
    And during that period we had--that was kind of--most of 
that period, as I understand the history, and I will be happy 
to be corrected--in general, most of the financial institutions 
that were big players were relatively regulated and there 
weren't hedge funds of any significant nature. There weren't 
sovereign wealth funds of significant natures. There weren't 
non-bank banks.
    They were there, but they just weren't significant players. 
They didn't become significant players until after that period 
of time, and therefore--and that is what got to the systemic 
risk. That is, again, my general read. I am just--a matter of 
history, and I am just wondering, do you see the history any 
differently than I do?
    Mr. Holtz-Eakin. I would see the history slightly 
differently. I think if you look back at that period, the 
macroeconomy--the real economy--experienced several recessions, 
some of them quite sharp, and that was real distress, many of 
them attributed to what you used to call disintermediation, the 
failure of capital markets at different points in time. We had 
Regulation Q, which was viewed as a real impediment to getting 
funds flowing in the correct way.
    So it is easy to look back and say, ``Gee, we didn't have a 
great disaster. It was perfect.'' But I think if you look back 
in time, we had lots of problems with exposures to Latin 
America and our large money secure banks. We had lots of 
problems with the real economy and lots of problems that are 
less, I think, benign than looking back seems to suggest.
    Mr. Capuano. Do you think those problems would have been 
better addressed with less regulation than we had at the time?
    Mr. Holtz-Eakin. I think it is, again, it is not a matter 
of more or less regulation. I was on the Financial Crisis 
Commission and we tried very clearly, in at least what I wrote, 
to talk about, it is not a more or less regulation question. It 
is about the appropriate nature of the regulation, and I think 
we really made some mistakes then and I believe we are also 
making some mistakes now.
    Mr. Capuano. So it is not an all-or-nothing thing. It is 
trying to get it right.
    Mr. Holtz-Eakin. It is more complicated than that.
    Mr. Capuano. I agree with that.
    Thank you very much.
    Mr. Renacci. Thank you, Mr. Chairman.
    Thank you, gentlemen, for your testimony. It is kind of 
interesting from a business perspective, which is where I was 
the last 30 years--we have to do with the dollars we have. And 
it seems like down here in Washington, whenever we have a 
problem we add dollars, thinking that if we throw a bigger 
blanket over it, we are going to fix things.
    The problem is, when I hear some of the testimony or I hear 
some of my colleagues speaking they always--there always seems 
to be an indication that, ``Well, if we just threw more people 
and more dollars at it we would fix it,'' but some of the 
things I am hearing from you is that it is not about the 
dollars, sometimes it is about how the dollars are spent. Is 
that correct? Right.
    Mr. Angel. Correct.
    Mr. Renacci. Mr. Min, you said something at the end of your 
testimony, or maybe it was in an answer to my colleague, that 
we could have gone further. And I am a little concerned because 
we haven't even gone--we haven't gone anywhere yet and all of a 
sudden you are talking about how we could have gone further.
    Can you explain that a little bit? Because one of the 
problems we have is we are trying to justify what we are doing 
and the cost return and all of a sudden I am hearing, ``We 
could have gone further.''
    Mr. Min. What I meant by that is I think there is a general 
concern about large, systemically important financial 
institutions, and I think there are some people, including 
myself, who believe the Dodd-Frank bill could have gone further 
as far as penalizing being large and systemically important.
    I believe that those firms enjoy a subsidy of cost 
advantage as a result of their size and systemic importance, 
and I think we could have, through heightened capital 
requirements, perhaps breaking them up, or other measures, 
tried to address that problem more aggressively. I also believe 
that we could have had a resolution fund to help allow these 
funds to fund this--prefund something that I believe already 
exists, which is the promise that if they are on the verge of 
failure the government will bail them out regardless of who is 
in charge.
    Mr. Renacci. You also made the comment, a penny-wise, 
pound-foolish approach, and I agree with that. The question 
is--and I don't know if anybody on this panel could answer 
this--if we are spending a penny to get a pound or are we 
spending a dollar to get a pound? Because the interesting thing 
is that is one of the things that is concerning of me. I am 
having banks, financial institutions coming to me saying that 
we are gearing up--we are putting $200,000, $300,000 in new 
people and personnel to try and gear up for all these 
regulations.
    How much is the right amount for the financial institutions 
to spend to be prepared? I don't expect you to answer that 
question, but it is the debate that we keep going back and 
forth on, and it is a concern for banks in my district, 
financial institutions in my district--the concern is if the 
dollars are being spent, then let's spend the penny, let's not 
spend the dollar.
    Mr. Min. In response to that, I would simply note that I 
think from the period of the 1940s to the 1980s, financial 
services made up a small percentage of GDP and of corporate 
profits. I think that was an efficient model of directing 
capital to productive investment. Currently, I think it makes 
up 40 to 60 percent in any given year of corporate profits.
    I think the question is, should finance be the primary 
source of job creation or should the capital that it directs to 
productive investment be the primary source of job creation? I 
tend to favor the latter approach.
    I think that if we simply focus on jobs in the financial 
sector and profits in the financial sector, we are ignoring the 
point of finance. We accept a certain level of systemic risk in 
finance because we want it to direct capital to places where it 
can be used efficiently.
    Mr. Renacci. But you would admit capital out of the 
financial markets is a necessity to job creation?
    Mr. Min. I think that a well-regulated financial market 
serves the purposes that it is intended to efficiently, and I 
think that is what was missing in the last 2 decades.
    Mr. Renacci. Dr. Angel, you had a chart here on Sarbanes-
Oxley, and I had the opportunity to deal with many clients as a 
CPA with Sarbanes-Oxley. Do you think the chart will look like 
this when it comes to the opportunity for business growth in 
the country when it comes to being able to get financing with 
all the restrictions? Do you think there will be a chart 
someday that will look, based on the costs and the expenses or 
providing capital, that will have less ability to finance and 
create jobs?
    Mr. Angel. I hope not, but if we do what we have always 
done, we will get what we have always gotten. And if we 
continue to load disproportionate costs on public companies, we 
are going to have fewer public companies.
    Mr. Renacci. It is an interesting concept because public 
companies were in--over the last 25 years for me were the 
driver of job creators, and when I see a chart like this it is 
very concerning that we are losing the ability for IPOs, public 
companies, and it sounds like you would testify that Dodd-Frank 
will also lead to some of this less growth, less public 
companies, it will add to the Sarbanes-Oxley problem.
    Mr. Angel. Correct. For example, if you look at the 
conflict minerals section--now, what is going on in the Congo 
is a horrific abuse of human rights and I am glad Congress was 
concerned about this. But we have put a potentially costly 
disclosure on public companies but not on the private companies 
doing deals in the dark.
    Now, it sounds innocuous, just like Sarbanes-Oxley 404 did, 
``Oh, give us a report that tells us what kind of conflict 
minerals you use from the Democratic Republic of the Congo.'' 
It sounds like another little boring report. But things like 
copper and cobalt are in virtually every electronic device.
    If badly implemented, this could turn into another 
Sarbanes-Oxley 404. There needs to be some common sense to say 
that, for 95 percent of public companies, their use of conflict 
minerals is de minimis, and there needs to be some intelligence 
among the regulators to say, ``Okay, we need to make sure that 
this can be implemented in a cost-effective manner.''
    Mr. Renacci. Thank you.
    Thank you, gentlemen.
    I yield back.
    Chairman Neugebauer. I thank the gentleman for his 
questions.
    Now the gentleman from Texas, Mr. Canseco?
    Mr. Canseco. Thank you, Mr. Chairman.
    And thank you, gentlemen, for participating in this panel 
for our subcommittee. I just have some follow-up questions that 
have already been brought up.
    Beginning with you, Dr. Angel, in your testimony you bring 
up something very interesting and point out some fundamental 
flaws in the SEC. The agency is staffed primarily by lawyers, 
not financial experts, and in recent years has been less than 
excellent in regulating our Nation's securities market.
    The SEC also does not have a great track record in 
considering economic costs when drafting rules. For example, 
when the SEC went about implementing Section 404 of Sarbanes-
Oxley, they did not understand at the time the tremendous 
impact the rule would have on small companies.
    From your viewpoint, Doctor, has there been any significant 
change in the way the SEC considers economic costs in the rules 
it is writing for Dodd-Frank versus the rules it wrote for 
Sarbanes-Oxley?
    Mr. Angel. I actually have a high opinion of many of the 
current people at the SEC. I think they have a number of 
intelligent, hardworking, honest people. But I don't think they 
have enough of the right people to do the job.
    So my fear is that with the hundreds of rules they are 
dealing with, one or more of those rules will turn into another 
Section 404.
    Mr. Canseco. And who would those right people be, in your 
opinion?
    Mr. Angel. You need people who understand markets, who 
understand technology, who understand economics. And rookies 
fresh out of law school don't necessarily fit that bill.
    Mr. Canseco. Dr. Holtz-Eakin, one of the main concerns 
about overregulation in the financial market is that market 
participants will choose to do business in countries that do 
not have stringent rules. As a result of Dodd-Frank, do you see 
other nations going a different route than the United States in 
order to attract business and capital to their economy?
    Mr. Holtz-Eakin. I think it is a real concern. I think the 
basic structure of the intent was to build a more extensive but 
safer financial system, and the end users are going to try to 
avoid that expense if they can. They will go elsewhere.
    And one of, I think, the big mistakes in the diagnosis of 
the crisis was to forget that it was global in its scope and 
the kinds of failures we saw in the United States, whether they 
were large financial institutions or housing bubbles, occurred 
elsewhere under very different regulatory regimes. And so it is 
not obvious that it was the regulatory regime that caused the 
problem.
    So I would expect us to see capital flow to Canada. I would 
expect us to see some of these transactions move offshore quite 
quickly to those other regimes. And I think it is a 
misdiagnosis of what caused the problem.
    Mr. Canseco. Is there a way that we can measure the costs 
of business lost in the United States due to all of this 
overregulation?
    Mr. Holtz-Eakin. It is one of the hardest things to measure 
because it is the thing you don't see. My concern about these 
cost issues are the budget costs are going to be trivial here, 
compliance costs can be measured--you can count what a business 
spent. But sometimes it is the things you don't do and you can 
never measure that are actually the greatest costs.
    My preferred diet is Diet Coke and Twizzlers. I believe I 
could live on that forever. But if they had a regulation that 
said I could only eat the ones that were individually wrapped, 
I am too lazy to open them, and I would go eat something else.
    I wouldn't incur any measurable cost because I wouldn't 
actually be buying the thing, but I would be--my life would be 
diminished. That is what we are going to do. We are going to 
regulate things; we won't see the costs, they won't be 
measured, but we will have foregone some hedging, some growth, 
some investment, and that is the concern I have about the 
regulatory structure.
    Mr. Canseco. Thank you, sir.
    Mr. Overdahl, you note in your testimony that in the past, 
the SEC has attempted to include economic analysis in an early-
stage term-sheet review. However, this type of review was never 
institutionalized. In your opinion, why was it never 
institutionalized?
    Mr. Overdahl. It really was the preference of individual 
chairmen who always will control the resources of the 
Commission and direct them, and to institutionalize it would--
in the first instance, I think having a policy statement would 
go a long ways toward it and it could always be changed. But 
perhaps even at some stage a more formal requirement that--
right now the requirements on independent agencies are not 
there; it is really up to the individual agency and the 
individual Commissioners at that time on what they do.
    Mr. Canseco. And just a follow-up question, what can be 
done to make the SEC more conscious of the economic costs of 
the rules of rights?
    Mr. Overdahl. I think one thing that has happened in the 
last few years has been some of the challenges in court that 
have made them more conscious of the economic impact of their 
regulatory activities. If you have looked at some of the 
decisions, there have been now--I cite them in my written 
testimony--I think five different rules that have been sent 
back to the Commission on the grounds that they have not 
adequately considered economic analysis. That has gone a long 
way to getting their attention.
    Mr. Canseco. Thank you very much. My time has expired.
    And Mr. Min, I am sorry I couldn't have a question for you.
    Thank you.
    Chairman Neugebauer. I thank the gentleman.
    I think we are going to do just kind of a little lightning 
round here for some follow up and then we will let you go. And 
by the way, when we get through here go ahead and take the rest 
of the day off. You have earned it.
    [laughter]
    But a couple of things--I think one of the things that was 
brought up when we see the number of companies that are going--
that aren't going public that--and the listings going down and 
we look at the--for example, the Facebook example here just the 
other day, and where we had companies--and I hear this a lot, 
and I think it is one of the reasons we have seen a lot of 
growth in private equity companies is because people are just 
finding it less competitive, or more friendly to go private 
than to go public.
    Dr. Angel, do you want to comment on that just a little 
bit?
    Mr. Angel. Yes. We have made the public market so 
unattractive for raising capital that small growing companies 
have no alternative but to go to private equity shops, but 
private equity is a lot more expensive than public capital 
should be. If you look at almost any valuation text they will 
say the big discount for illiquidity, so when entrepreneurs go 
to sell their companies they get a lot less for them. When they 
try to raise capital they get a lot--they get it on much more 
expensive terms, and so this is a major loss for our economy.
    Chairman Neugebauer. And I want to go back to something 
that Mr. Min said, and I wasn't sure I agreed with it. I wanted 
to get the panel's--but he suggested there was too much money 
in the financial sector, and our--if I understood you, that all 
of the investment in the financial sector was draining money 
from other sectors of the economy.
    Mr. Holtz-Eakin, what is your response to that?
    Mr. Holtz-Eakin. I have no idea what the right amount of 
money in any sector of the economy is. In an efficient, 
functioning market economy we see that shift over time. So I 
have no idea how to make that judgment.
    I am concerned that in the end we will produce a financial 
sector that doesn't meet what we really want, which is the 
finance--the risk management and investment needs of the 
underlying economy. Its scale is less important than that.
    Chairman Neugebauer. That is my--
    Mr. Min. --I actually did not mean too much money in the 
system. That is obviously just an amount of stored wealth 
because that needs to be invested.
    But if you look at the percentage of corporate profits, 
that obviously indicates how much the intermediaries are taking 
as their take. How much are they taking for doing credit 
default swaps or private-label securitization, etc.?
    When you have that much money what is existing is 
inefficient markets and perhaps the growth of the shadow 
banking system. And so, yes, I don't think the financial 
sector, when we look at it, should be the source of jobs but I 
think an efficient financial sector would be directing capital 
to other industries, such as construction, or housing, etc., in 
a way that doesn't create bubble-bust cycles.
    Chairman Neugebauer. Dr. Angel?
    Mr. Angel. Yes. I would like to add that in the late 20th 
Century, we had a technological revolution in financial 
services, and just as we had a technological revolution in 
information technology so now we are spending a lot more money 
on IT because there are more things to spend money on. We 
developed a number of very useful risk management tools. Now 
you can say, ``Oh, they don't do anything,'' but when real 
companies can reduce their risk they are likely to produce 
more.
    When a farmer sees the price fluctuating of crops and says 
it is too risky, but if they can lay off the risk with a 
forward contract then they can lock in the price they know they 
are going to get, they know they will cover their cost of 
production, and they can plant that wheat or that corn. Or that 
oil company can drill that well because they know what they are 
going to get paid for it.
    So yes, we have put a lot more resources into finance in 
recent years, but we have a lot more financial tools to deal 
with and many of these tools are extremely useful to the 
economy.
    Chairman Neugebauer. Yes, and haven't we--because we have 
had such a robust financial system, haven't we been an importer 
of capital because people have been attracted to our markets? I 
think one of the things that I get concerned about here is 
something that has been a major economic engine for our 
country. We are trying to kind of throw a little water on that 
fire in the sense that it is going to dampen the 
competitiveness in a very global, fluid financial marketplace.
    With that, I am going to yield back my time so we can--does 
the ranking member want to take a follow up?
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Angel, I just want to clarify--your testimony and 
everything you said except for one thing is your concern about 
what could happen--all very on point. But at one point you said 
something about--I don't remember exactly what you said, but 
the Dodd-Frank bill will result--you say--is your testimony 
today that the Dodd-Frank bill as it is should not have been 
passed?
    Mr. Angel. I would have preferred to have seen it passed in 
a--
    Mr. Capuano. No, no. Excuse me. That is not my question. I 
would have preferred different things too.
    Mr. Angel. Yes.
    Mr. Capuano. The bill that we had is the bill that we had. 
Should we have passed that bill or should we have done nothing? 
Should that bill have voted yes or no as it was, knowing that 
if you voted no, it would be nothing else?
    Mr. Angel. Sometimes, you have to go back to the drawing 
board. There are some--
    Mr. Capuano. So you would have voted no and let nothing go 
on, which is fine. It is a fair answer.
    Mr. Angel. Yes. Correct. I would have voted no because if 
you look at what we did in the New Deal, or I should say our 
parents' generation--
    Mr. Capuano. No, no, no, Mr. Angel, you don't get it--
    Mr. Angel. --they did it year after year--
    Mr. Capuano. I am not asking you--I didn't make you the 
emperor. Believe me. Maybe I wouldn't mind--
    Mr. Angel. That is good for this planet.
    Mr. Capuano. It may not be. I wouldn't mind being emperor. 
I would have a different bill as well. But that is not the 
world I live in. I live in the world where you have an 
imperfect bill--
    Mr. Angel. I would have kept working on it to get it right.
    Mr. Capuano. I would have, too, if I could have passed 
something. But the option of doing something versus nothing, 
you choose nothing?
    Mr. Angel. No. I would have continued to work on it because 
if it hadn't passed in July--
    Mr. Capuano. Maybe you should pay a little more attention--
    Mr. Angel. --it could have been passed in August or 
September.
    Mr. Capuano. --we don't get that choice. The choice is 
something or nothing. That has been my choice for 12 years and 
1,000 different bills.
    Sometimes I choose something; sometimes I choose nothing. 
In this case I chose something, and I understand if you would 
have chose nothing. That is fine. But you would have nothing 
today.
    So the past regulations would currently be in place, and 
that is why I--
    Mr. Holtz-Eakin, the only thing that you said that I want 
to be clear on, there are some things we forego with 
regulation. That is what we are trying to do. There are certain 
things we don't want to happen.
    In this case, for me it was excessive systemic risk. No, I 
don't want that here. Yes, excessive systemic risk also brings 
some rewards, but I think it is not worth it.
    So yes, that is a judgment call and there are certain 
activities that I do not want, and that is what regulation is 
always about. So I don't think--I am not that far off in the 
concept of it of foregoing something. The question is, what are 
we foregoing?
    I guess I do want to ask--maybe I am wrong, but I am under 
the impression that the European markets are heading in similar 
directions that we are. Not exact; we are never in lockstep.
    But they are doing things that are quite similar to what we 
are doing. I am not going to get into details. Everybody at 
that panel knows more about the details than I do.
    But am I reading this wrong that the European markets are 
similarly trying to tighten things up, trying to move things 
around, trying to limit excessive systemic risk? Is that a 
wrong read, or do you read the European markets differently? 
Does anybody?
    Mr. Min. I don't. In fact, I think Europe learned the same 
lesson that we learned, that if there was excessive risk, you 
need to regulate more. That is what Basel 3 is about. Some 
countries are obviously going further than Basel 3.
    One note I would make on Dr. Angel's testimony, I think 
that London in particular attracted more stock market IPOs. One 
lesson they are learning was that the race to the bottom in 
regulation is not a good idea.
    They are trying to aggressively regulate. They view the 
United States and Dodd-Frank perhaps as being too weak. I think 
that is a lesson that is learned in other countries as well.
    Mr. Angel. And my point is not more or less regulation, it 
is the fact that, let's face it--Dodd-Frank is the law. Chances 
are it won't be overturned. So now we have to make it work; we 
have to fix the parts that are broken--
    Mr. Capuano. I totally agree.
    Mr. Angel. --and we have to make sure the regulators have 
the right kind of people to make it work.
    Mr. Capuano. I agree with everything you have said on those 
issues. And the concerns you have expressed? I have similar 
concerns.
    Even though I voted for the bill, you don't think I am 
concerned with certain aspects of it or how it is going to be 
implemented? There are lots of concerns I have. But again, my 
choice was something or nothing. That is always my choice and 
something was better than nothing, in my opinion.
    I guess the last point I want to make, we heard it a couple 
of times tonight--this afternoon--maybe tonight, whatever--the 
term overregulation, I want to be really clear: I am not afraid 
of regulation. I am not in favor of overregulation.
    However, I am also not in favor of underregulation. I agree 
with you, Mr. Angel. The right amount of regulation is the 
goal.
    And it is a moving target because things change and people 
can disagree, and you try to do something and it doesn't work 
and you change the law. But is there anybody here who thinks 
that underregulation is a good thing?
    So we all agree that some regulation is desirable.
    Mr. Holtz-Eakin. Sometimes your regulation--but 
underregulation would be even less than that, so it is a hard 
question to answer, sir.
    Mr. Capuano. Fair point.
    Do you think that the financial markets should be totally 
unregulated, the Federal Government should just walk away, turn 
its back on the financial markets and let everybody do whatever 
they want to do?
    Mr. Angel. No. The first thing I teach on the first day of 
Finance 1 is that financial markets are creations of our legal 
system. You cannot have an unregulated financial market because 
it is the law and the regulation that actually defines what our 
financial products are.
    Mr. Capuano. So is it a fair statement to say that we are 
all sitting here trying to find the right balance for a 
thoughtful regulated system that will help all of us continue 
to have this country be a lead and maintain stability in the 
market? I am under the presumption that--maybe I am making a 
false presumption--that a stable market--a relatively stable 
market is a good thing and a desirable thing. Is that a fair 
generalized statement?
    Mr. Overdahl. Yes.
    Mr. Angel. Yes.
    Mr. Holtz-Eakin. I guess I am the only one who disagrees. I 
don't care if financial markets are stable and if Wall Street 
loses their hair every day as long as the real economy serves 
the American public well.
    Mr. Capuano. I don't care what Wall Street--but Wall 
Street, unfortunately, impacted my life in the last couple of 
years, and that is when I--I don't want to regulate it just for 
the fun of it. I want to regulate it because they have found a 
way to interfere in my life even though I don't play there.
    Mr. Holtz-Eakin. If prices and volumes don't change, which 
looks like instability, financial markets aren't doing their 
job. Worry a lot about the basic mentality that says 
instability is bad.
    Mr. Capuano. Fair point. I don't think we are that far off.
    This is a great hearing because I have agreed with 99 
percent of everything that has been said. Good job.
    Chairman Neugebauer. I appreciate that.
    Oh, by the way, just for the record, we did have an 
Oversight Subcommittee before Mr. Frank--
    We will go back to it.
    We will go to the gentleman from Texas again, Mr. Canseco?
    Mr. Canseco. Thank you, Mr. Chairman. I just have one very 
brief question.
    Dr. Holtz-Eakin, you say that Dodd-Frank imposes a set of 
taxes on the economy?
    Mr. Holtz-Eakin. Yes.
    Mr. Canseco. Who ultimately pays these taxes?
    Mr. Holtz-Eakin. Consumers.
    Mr. Canseco. In your estimation, how big will the tax 
burden get under Dodd-Frank?
    Mr. Holtz-Eakin. This, I think, is the crucial question, 
and it is not one that I can easily answer. I tried to, in my 
testimony, show the growth and jobs impact, because that is the 
measure that matters.
    It is not compliance costs. It is not any of the things 
that are easily measured. It is the overall economic impact.
    It is the notion that we now have financial innovations in 
recent years that allow us to do risk management that was 
unheard of a decade ago, and if we lose the next generation, 
that is the real cost and that is the tax on the economy. And 
because we may never see it, it is very difficult to measure, 
but I worry it is substantial and I think it deserves careful 
scrutiny.
    Mr. Canseco. Thank you very much.
    And I yield back my time.
    Chairman Neugebauer. And I thank the gentleman.
    I think this has been a very good hearing, and again, I 
wanted to say to the witnesses, we appreciate you accommodating 
us today because we were--we didn't want to cancel this hearing 
because you have gone to a lot of work and done a good job on 
your testimony.
    I would make a couple of observations here with the ranking 
member, is, I think what we have heard overriding today is that 
evidently within the institutions there is either not the will 
or always the desire to have the kind of analysis and study 
going on inside the rulemaking process. And possibly, as much 
as I hate to talk about putting any more legislation out there, 
but possibly there are some things that Congress can do to 
encourage that kind of behavior, because it becomes a check to 
us because in many cases people either vote for or against a 
piece of legislation and they believe if they vote for it they 
believe that they are doing the right thing, and if--as the 
ranking member said, if it is not implemented properly, then we 
have defeated the purpose.
    And so I think we may want to look at some things down the 
road that possibly encourage--there are ways to encourage that 
kind of behavior that Congress can use and we may want to do 
that.
    The Chair notes that some members may have additional 
questions for the 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.
    If there is not any other business to be brought before the 
committee, this hearing is adjourned.
    [Whereupon, at 6:10 p.m., the hearing was adjourned.]




                            A P P E N D I X



                             March 30, 2011




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