[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
DOES THE DODD-FRANK ACT
END ``TOO BIG TO FAIL?''
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
JUNE 14, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-37
U.S. GOVERNMENT PRINTING OFFICE
67-932 WASHINGTON : 2011
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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
STEPHEN LEE FINCHER, Tennessee
Larry C. Lavender, Chief of Staff
Subcommittee on Financial Institutions and Consumer Credit
SHELLEY MOORE CAPITO, West Virginia, Chairman
JAMES B. RENACCI, Ohio, Vice CAROLYN B. MALONEY, New York,
Chairman Ranking Member
EDWARD R. ROYCE, California LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina GARY L. ACKERMAN, New York
JEB HENSARLING, Texas RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan JOE BACA, California
KEVIN McCARTHY, California BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee
C O N T E N T S
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Page
Hearing held on:
June 14, 2011................................................ 1
Appendix:
June 14, 2011................................................ 53
WITNESSES
Tuesday, June 14, 2011
Barr, Hon. Michael S., Professor of Law, University of Michigan
Law School..................................................... 40
Krimminger, Michael H., General Counsel, Federal Deposit
Insurance Corporation (FDIC)................................... 7
Lubben, Stephen J., Daniel J. Moore Professor of Law, Seton Hall
University School of Law....................................... 38
Romero, Christy, Acting Special Inspector General, Office of the
Special Inspector General for the Troubled Asset Relief Program
(SIGTARP)...................................................... 9
APPENDIX
Prepared statements:
Barr, Hon. Michael S......................................... 54
Krimminger, Michael H........................................ 64
Lubben, Stephen J............................................ 82
Romero, Christy.............................................. 86
Additional Material Submitted for the Record
Maloney, Hon. Carolyn:
Press statements on Moody's decision from Moody's Investors
Service, The New York Times, and The Wall Street Journal... 99
DOES THE DODD-FRANK ACT
END ``TOO BIG TO FAIL?''
----------
Tuesday, June 14, 2011
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 12:05 p.m., in
room 2128, Rayburn House Office Building, Hon. Shelley Moore
Capito [chairwoman of the subcommittee] presiding.
Members present: Representatives Capito, Renacci, Royce,
Manzullo, Jones, McHenry, Pearce, Westmoreland, Luetkemeyer,
Huizenga, Duffy, Canseco, Grimm, Fincher; Maloney, Gutierrez,
Watt, McCarthy of New York, Miller of North Carolina, Scott,
Meeks, and Carney.
Ex officio present: Representative Frank.
Chairwoman Capito. This hearing will come to order. I want
to thank everybody for coming this morning. I know there is a
lot of interest in the hearing and many members have opening
statements, so I will try to limit my remarks in the spirit of
expediency. My ranking member, Mrs. Maloney, is on her way so
we are going to go forward with our opening statements, and I
am sure she will be here shortly.
During the financial crisis of 2008, Federal regulators
were faced with the recurring challenge of determining whether
or not a financial institution was so interconnected in the
financial system that its failure would lead to a ripple effect
in the financial markets. Regardless of the outcome for each
individual institution, in the months following the crisis,
there was considerable agreement that we should end the
practice of the government picking winners and losers. The
financial regulatory reform debate of 2009 and 2010 provided a
forum for this change, but I believe it had a missed
opportunity for Congress, the large institutions continue to
grow, and I feel that we have done nothing but further embed
the idea of an institution being ``too big to fail.''
I know Mr. Krimminger and his colleagues at the FDIC
fervently believe that the Dodd-Frank Act ends ``too big to
fail,'' and we will hear his testimony on that. But I am
skeptical as to whether or not the markets will share his view.
The credit rating agencies, Moody's and Standard & Poor's, have
both indicated they are taking into account the prospect of
future government support when rating the largest institutions.
If these institutions receive a credit rating advantage over
smaller competitors because they have been designated as
systemically significant, then we have done nothing to resolve
the root cause of the financial crisis. The big institutions
will continue to get bigger, and excessive risk-taking will
return with the expectation of a government bailout.
I look forward to learning our witnesses' thoughts on the
process for designating an institution systemically
significant, and unfortunately, I don't think we really know
who is systemically significant until the next crisis is upon
us, and it will then be up to the new regime set forth for
resolving these institutions in Dodd-Frank.
The proponents of the Orderly Liquidation Authority (OLA)
now granted to the FDIC argue that the new regime ends
government bailouts. What they also fail to mention is that the
FDIC has the authority to borrow funds from the Treasury once
the FDIC is appointed the receiver of the failed institution.
Even if the money is returned to the taxpayer, this still
sends the message that the government will serve as a backstop.
I know that Chairman Bair sincerely believes that these new
powers effectively end ``too big to fail,'' and I sincerely
hope that she is correct. We must all work together to ensure
that the message is clear from the corner suites to trading
desks, account for risk accordingly, and there will be no
government bailout.
I would now like to recognize the ranking minority member,
the gentlelady from New York, Mrs. Maloney, for 4 minutes for
the purpose of making an opening statement.
Mrs. Maloney. I thank the gentlelady from West Virginia for
granting me the time and for calling this very important
hearing.
As the gentlelady said, we faced an incredible financial
crisis, and we really, our regulators really had only two
options and neither of them were very good. When large complex
financial institutions had, or if their financial security was
threatened, they could either fail, which happened with Lehman,
or they could be bailed out, which happened with AIG. Neither
alternative was a good one.
And without the tools to have an orderly wind-down, without
these tools, Treasury was unable to protect the economy as a
whole. When it became clear that AIG Financial Products was
going to fail, there was no choice but a taxpayer-funded
bailout, or to just let it fail, which many thought would be
too disruptive to our economy.
I think we have forgotten how close we came in late 2008 to
a complete financial collapse. Each of the largest financial
institutions confronted their own demise in an unprecedented
way, and for the most part, the regulators' hands were tied.
With the enactment of Dodd-Frank last year, we changed
that. We gave the regulators the tools they need to act swiftly
and efficiently if or when there is another crisis.
We created the Financial Stability Oversight Council which
fosters collaboration among the banking regulators to spot
threats to our financial security before they create systemic
risk, and we created an orderly liquidation process similar to
what the FDIC already has for the banks it regulates. And by
all accounts, the FDIC acted swiftly and effectively in many
cases. That will allow a failing institution to wind down and
its assets to be distributed to its creditors in a way that
does not take down the entire financial system.
FDIC Chairman Sheila Bair testified before the subcommittee
at the end of May, as she prepared to leave her position this
summer. Her testimony outlined the conditions that the
financial system faced leading up to the crisis, including
excessive leverage, misaligned incentives in financial markets,
gaps in the regulatory structure, and the undermining of market
discipline due to ``too big to fail.''
She further testified that she believes the Dodd-Frank Act,
if properly implemented, ``will not only reduce the likelihood
of future crises, but it will provide effective tools to
address large company failures when they do occur without
resorting to taxpayer supported bailouts or damaging the
financial system input.''
And just yesterday, Moody's indicated that it might
downgrade the investment ratings of the largest financial
institutions because it believes it is clear that the
government will no longer bail them out.
I would like to ask unanimous consent to place in the
record press statements on Moody's decision.
Chairwoman Capito. Without objection, it is so ordered.
Mrs. Maloney. There is a great deal of work that needs to
be done to take the Dodd-Frank tools and build a framework that
will be there for the system when the next financial crisis
hits. It is very much a work in progress. And as we approach
the 1-year anniversary of the signing of the Dodd-Frank Act, I
do think it is important to take a look at how far we have come
since the financial crisis, but still be aware of the great
deal of work that needs to be done.
I thank the chairwoman for calling this hearing, and, of
course, I welcome our panelists today and thank you very much
for being here.
Chairwoman Capito. Thank you. I would like to recognize Mr.
Royce for 1 minute for the purpose of an opening statement.
Mr. Royce. Thank you, Madam Chairwoman.
This should get our attention, the top 10 financial firms
today account for 64 percent of the total assets. That is up
from 25 percent in 1990. And because of their implicit
government support, or the anticipation of a backstop, many of
these firms benefit from lower borrowing costs than they would
otherwise have. The FDIC, I think, estimates that at 100 basis
points, so it is significant. And by definition, this implicit
subsidy is going to continue to erode market discipline until
we do something about it, and that is going to further weaken
our financial system.
We have a problem with Dodd-Frank. The truth of the matter
is, in times of crisis, regulators are always going to err on
the side of more intervention and more bailouts. The Orderly
Liquidation Authority under Dodd-Frank does little more than
facilitate this process. And as a result, ``too big to fail''
not only lives on, it is further compounded.
So I hope we take steps to correct this failure in the
coming months and reinstate market discipline by revisiting
this issue. Thank you. I yield back.
Chairwoman Capito. Thank you.
I would like to recognize the ranking member of the full
committee, Mr. Frank, for 3 minutes.
Mr. Frank. Thank you, Madam Chairwoman.
For people who do not fully understand what a self-
fulfilling prophecy is, pay clear attention to this hearing
because you will hear people try to do one. They will argue
that we are going to continue to bail out big institutions and
then complain that people perceive that we are.
In fact, let's go to the hard record. The argument is that
being considered systemically significant confers on a
financial institution an advantage that will translate to lower
borrowing costs because that institution will be seen as immune
from failure.
What do the institutions think? Every single large
financial institution thinks that is dead wrong. I have to say,
I and some others have been critical of some of our large
financial institutions for being a little bit too self-
interested at times. But apparently, some of my Republican
colleagues think they are the most selfless people in the
world, they are 9 Mother Teresas or 10 or 12 or however many.
Why? Because according to some of the Republicans, the bill
confers on these large financial institutions a great benefit
of being considered ``too big to fail.'' And every single one
of them is fighting against it.
Apparently, this is a gift that no one wants. The reason,
of course, is very clear. Before you would ever get to the
point of being faced with dissolution, not resolution, in fact,
but dissolution as the bill required before a penny can be
spent on your behalf, the firing of the CEO, the wiping out of
the shareholders, you are subject to much tougher regulation.
And what the financial institutions are saying is the prospect
of the tougher regulation that would be mandated by this bill
as it is carried out by the regulators who helped write it and
who will certainly be carrying it out would do away with any
perceived advantage. And it is for that reason, as the
gentlewoman from New York the ranking member, noted, that
Moody's is now beginning to get one right, not always, I must
say, Moody's record, but Moody's is starting to get it right,
and they are saying, no, they are not ``too big to fail.''
And, by the way, those who say there will be a bailout do
not seem to me to have been present in the United States
Congress in the past few years. Here is what they are
predicting. The law says that if one of these institutions
cannot meet its obligations despite having been subject to much
tougher capital controls etc., then the institution is
dissolved. That is where the death panels are. And the
shareholders are wiped out, the CEO is fired, and the
institution no longer exists, and the regulators may, at that
point, the FDIC, pay off some of the debts if it is necessary
to prevent a downward spiral, but any penny paid out must be
recouped from the large financial institutions.
Some of my colleagues say no, no, that won't happen.
Congress will rush in and allow it to be paid out of public
money, the people appointed by the President will say oh, no,
no, we are going to ignore the law. We are going to violate the
law, we are going to give them public money anyway.
In what universe? The fact is, there is now an overwhelming
national consensus not to do that.
And the only people who are arguing that despite what
happened in the past and despite the statute and despite the
views of all the large financial institutions, they are the
ones who are arguing that nothing will change, and that if a
large financial institution gets in trouble, the government
will step in and bail it out and let it continue, are some of
the Republican critics of the bill. They are the ones who are
creating that false perception. Reality is overwhelming.
And I close by noting we had every regulator here at a
hearing. And we asked--I asked every one of them, has any
institution--look, some institutions are automatically, the
banks, are going to be covered; some large institutions, some
insurance companies, some mutual funds, some others, it is not
clear whether they will be covered or not and a lot of factors
went into this, not just size, as it should.
I asked if anybody has lobbied to be given the great
advantage that my Republican friends say this bill confers on
them to be systemically significant. Not one, not one. Have any
lobbied not to be? Every one of them.
So, apparently, as I said, we have discovered what many
people were looking for, these selfless financial institutions,
the institution that says, despite my Republican friends saying
this is a great gift, please, we don't want it. We don't want
that extra advantage because it is not an extra advantage. It
is not a license; it is a red letter. It is a notion that you
will be subject to greater regulation. That is what the law
says. That is what people perceive. And it is only people who
are trying to make political points who are trying to undermine
that and create the very perception that they decry.
I thank the gentlewoman for the time.
Chairwoman Capito. Thank you. The gentleman from Georgia,
Mr. Westmoreland, for 1 minute.
Mr. Westmoreland. Thank you, Madam Chairwoman.
One of the biggest problems that I have with the Dodd-Frank
Act is that it does codify ``too big to fail.'' The problem in
2008 was that markets were conditioned to expect government
bailouts following Bear Stearns. This guarantee was then priced
into the market. Unfortunately, Dodd-Frank makes this
guarantee. The government will be there for big firms when they
are on the brink, just like Bear Stearns and just like TARP.
Regrettably, the American taxpayers and small businesses
will always draw the short end of the stick in this
arrangement. If your Wall Street firm is teetering on the
brink, the Dodd-Frank bill gives the FDIC the ability to
finance these companies with taxpayer money up front.
Considering this has not worked with Fannie and Freddie,
and taxpayers are still paying for those bailouts, I am not
hopeful that the Dodd-Frank bailouts will be repaid either.
Congress must learn from the mistakes of the 2008 bailouts.
I urge this committee and the chairwoman to work towards
repealing these provisions of Dodd-Frank because the taxpayers
cannot afford these perpetual bailouts anymore.
And with that, Madam Chairwoman, I yield back.
Chairwoman Capito. Mr. Canseco from Texas for 1 minute.
Mr. Canseco. Thank you, Madam Chairwoman. A critical factor
that has helped to make our economy the strongest in the world
is the allowance of failure, unlike other countries that create
false economies and prevent these failures. Companies fail for
a variety of reasons: they are poorly managed; the product they
offer is obsolete or the entrepreneurial idea fizzles out; or
there is a failure to shift in paradigm at the right time.
Failure, no matter how big or how small, is not a sign of a
weak economy. Corporate failure allows for the healthy
reallocation of capital to more productive companies and
sectors that are better positioned to create jobs and
contribute to economic growth.
When this natural rebalancing is artificially disrupted,
the result is confusion, moral hazard, a damaged economy, and a
false economy. No company or industry should ever be considered
too big or too important to fail. Unfortunately, there is
widespread belief that the Dodd-Frank Act carved into stone the
``too-big-to-fail'' label on some of our largest financial
institutions.
And despite what other Members of Congress may think, you
can't legislate failure out of existence. Thank you.
Chairwoman Capito. Mr. Grimm from New York for 1 minute.
Mr. Grimm. Thank you, Chairwoman Capito, for holding this
hearing and thank you to the witnesses for testifying today.
I believe that one of the greatest strengths of the United
States is our free market system. It made our country the
strongest and most prosperous in world history.
However, I am very concerned that system is under attack.
It is under attack by overregulation and overbearing government
bureaucracy.
It is imperative for our economy that strong firms can
thrive and weak ones fail and that new businesses replace those
that cannot compete. Therefore, I look forward to hearing the
witnesses' comments on whether or not Dodd-Frank allows a
capitalist free market system to run its natural course or
whether it short circuits it, ending with results that may be
favored by some government bureaucrats to the detriment of our
economy.
I yield back.
Chairwoman Capito. Thank you.
The gentleman from Tennessee, Mr. Fincher, for 1 minute for
an opening statement.
Mr. Fincher. Thank you, Madam Chairwoman.
The issue before us today is whether or not Dodd-Frank
adequately addresses the U.S. financial system's vulnerability
to future economic crisis. Dodd-Frank created a complex
bureaucracy with the goal of solving the problem of ``too big
to fail.'' But many in the financial industry are not convinced
that it does the job, including the many community bankers and
small business owners I represent in Tennessee. They are the
heart and soul of our economy and create new jobs. Simply put,
what will work on Wall Street will definitely not work on Main
Street.
I look forward to hearing the testimony today. I met with
community bankers last week in my district, and they are just
to the point of, it is very, very bad at home when we are
restricting the flow of capital and we are trying to prevent
the guys who have been doing this right from doing their jobs.
Many of the community banks in rural America--I don't know
about Wall Street, but I know about rural America--are the
heart and soul of these rural communities. And we have to make
sure that we are not defeating the purpose of moving our
economy forward. So I yield back. Thank you.
Chairwoman Capito. Thank you. And that concludes our
opening statements. I would like now to go to the first panel
and introduce the witnesses for the purpose of giving a 5-
minute opening statement.
Our first witness is Mr. Michael Krimminger, General
Counsel of the FDIC.
Mr. Krimminger?
STATEMENT OF MICHAEL H. KRIMMINGER, GENERAL COUNSEL, FEDERAL
DEPOSIT INSURANCE CORPORATION (FDIC)
Mr. Krimminger. Thank you. Chairwoman Capito, Ranking
Member Maloney, and members of the subcommittee, thank you for
the opportunity to testify today on behalf of the FDIC on the
question of whether the Dodd-Frank Act ends ``too big to
fail.''
During 2008 and 2009, the U.S. financial system suffered
its most severe crisis since the Great Depression. This crisis
grew from an unevenly regulated and highly leveraged U.S.
financial system that proved to be anything but strong and
stable.
Regulatory gaps allowed risks to grow in the shadow banking
system of securitization trusts, CDOs and nonbank financial
companies. Many of our largest financial institutions packaged
and sold huge volumes of securities backed by mortgages that
could never be repaid.
The market, long before Dodd-Frank, had assumed that the
largest financial companies were ``too big to fail.'' These
nonbank companies could not be resolved under the FDIC's bank
resolution powers which have been used hundreds of times for
the orderly resolution of failed banks while imposing losses on
creditors and shareholders.
In contrast, nonbank financial companies could only be
closed under the Bankruptcy Code, and the market simply assumed
this would not happen.
The Lehman Brothers insolvency in the fall of 2008
illustrated the problems in closing a major financial firm
under the Bankruptcy Code. As a result, given the options in
2008 of a bankruptcy proceeding during the post-Lehman
financial turmoil or providing financial assistance,
policymakers in several instances chose to provide financial
assistance to prevent even more severe effects on the financial
system.
Title I and Title II of the Dodd-Frank Act are products of
the realization that this should never be allowed to happen
again. In combination, they provide the tools to end ``too big
to fail'' if properly implemented.
Under Title I, the Financial Stability Oversight Council is
responsible for designating systemically important financial
institutions, or so-called SIFIs, based on criteria that are
now being established. Factors to be considered in designating
a SIFI include size, leverage, off balance sheet exposures, its
importance as a source of credit and the concentration,
interconnectedness and mix of its activities. Related to all of
these is whether it can be resolved effectively through the
Bankruptcy Code without creating systemic consequences. That
must be a key consideration.
Once designated, SIFIs will be subject to heightened
financial supervision by the Federal Reserve. SIFIs must also
develop detailed resolution plans showing they are resolvable
under the Bankruptcy Code. Preparation of these plans will
require hard thinking about how to achieve a workable set of
resolution options. Given SIFIs current complexity, this
process should improve shareholder value by improving
efficiency as well.
Resolution plans are essential to ending ``too big to
fail'' because they will require a close working relationship
between the companies and regulators to achieve workable
options and between U.S. and foreign regulators to address the
complexities of cross-border operations.
These plans will provide the analysis, information, and
advance planning that was lacking in 2008.
Perhaps most importantly, Title II creates an alternative
process to be used if bankruptcy would create systemic
consequences. This new process, like the FDIC's bank
receivership law, allows prompt action to achieve operational
continuity through a bridge financial institution or a transfer
of operations to another private sector company. This would be
critical to avoid a future financial meltdown. But let's be
clear. This is no bailout. There is no statutory authority in
the Dodd-Frank Act for us to bail out a failed financial
institution. The company must be liquidated.
The statute imposes the losses on creditors and
shareholders and affirmatively prohibits any loss to taxpayers.
It requires removal of management and provides for a claw-back
of compensation received by senior executives or directors who
were substantially responsible for the failure. Like the bank
receivership process, the Dodd-Frank resolution process is a
transparent process defined by a specific structure for a
payment of creditors that allows access to the courts to decide
disputes. Notice in comment rulemaking will guide its
application and the FDIC will be subject, as it is today, to
Inspector General and congressional oversight.
This insolvency process is an essential tool to ending
``too big to fail.'' Today, credit rating agencies are
reassessing the likelihood of Federal support due to this new
power. Earlier this month, Moody's placed major financial
institutions' debt ratings under review for potential downgrade
based on reconsideration of this prior uplift for assumed
systemic support. According to Moody's, and I quote, ``The U.S.
Government's intent under Dodd-Frank is very clear. Going
forward, it does not want to bail out even large systemically
important banking groups.''
In summary, the Dodd-Frank Act creates a new, more
effective SIFI resolution authority that will go far toward
returning market discipline to our financial system. I will be
happy to answer any questions.
[The prepared statement of Mr. Krimminger can be found on
page 64 of the appendix.]
Chairwoman Capito. Thank you.
Our next witness is Ms. Christy Romero, Acting Special
Inspector General, Office of the Special Inspector General for
the Troubled Asset Relief Program. Welcome.
STATEMENT OF CHRISTY ROMERO, ACTING SPECIAL INSPECTOR GENERAL,
OFFICE OF THE SPECIAL INSPECTOR GENERAL FOR THE TROUBLED ASSET
RELIEF PROGRAM (SIGTARP)
Ms. Romero. Thank you. Chairwoman Capito, ranking member of
the full committee Frank, ranking member of the subcommittee
Maloney, and members of the committee, I am honored to appear
before you today.
SIGTARP was created to protect the interests of those who
funded TARP, the American taxpayers. And an important part of
SIGTARP's mission is to bring transparency to decisions that
were made in the wake of the financial crisis because there are
important implications for the future by examining the past; we
can take advantage of lessons learned to better protect
taxpayers in the future.
SIGTARP issued a couple of audits in which we determined
that Treasury and banking regulators made decisions related to
the use of TARP funds in order to bolster investor and consumer
confidence in the Nation's financial system. For example, we
issued an audit detailing the government's decision to inject
$125 billion into 9 of the Nation's largest financial
institutions.
And what we found were that these first TARP recipients
were chosen for their perceived importance to the greater
financial system. We also issued an audit detailing the
decision by the government to step in and provide additional
assistance to one of the nine, to Citigroup, and to deem
Citigroup to be too systemically significant to be allowed to
fail. The government gave that assistance to assure the world
that the government would not let Citigroup fail. There are
several lessons to be learned from the Citigroup bailout.
Although the government restored market confidence in
Citigroup, the decision that Citigroup had to be saved was
strikingly ad hoc. The consensus that Citigroup was
systemically significance was one based more on gut instinct
and fear of the unknown as opposed to objective criteria. The
absence of objective criteria for that conclusion raised
concerns as to whether there was selective creativity being
exercised in who was systemic and who was not. In addition, the
government's actions with respect to Citigroup also undoubtedly
increased moral hazard.
The mere enactment of the Dodd-Frank Act did not end the
concept of ``too big to fail'' in the market's eyes. The market
still gives the largest financial institutions competitive
advantages over their smaller counterparts. The Dodd-Frank Act
provides for regulators to designate institutions as
systemically significant and for requiring additional
supervision and heightened standards and requiring them to have
living wills for their orderly liquidation. Whether or not this
determination will provide a competitive advantage for those
institutions ultimately may be dependent upon the market's
perception of whether the government will step in again and
stand behind these companies. But as long as the financial
institutions themselves, their counterparties, and their rating
agencies believe there will be future bailouts, competitive
advantages that are associated with ``too-big-to-fail''
institutions will almost certainly persist and market
discipline will be reduced.
It is too early to tell whether Dodd-Frank will ultimately
be successful in ending ``too big to fail'' and that success
will be dependent on the market's perception of the
effectiveness of the actions that are taken by Treasury and the
regulators now. And as we observed with Citigroup stabilizing
after the government announced additional assistance, the
market will react to the words and actions that are taken by
the regulators.
In order to end ``too big to fail,'' the regulators must
take effective action using the tools that have been given them
under the Dodd-Frank Act.
Regulators have a benefit now that was missing during the
financial crisis, and that is the benefit of time. It is vital
that regulators use this time when the Nation is not in a
financial crisis to promulgate rules, and develop objective
criteria and a solid framework for applying that criteria so
that should the Nation face another potential financial crisis,
the road map is in place along with all the needed sign posts.
Rules, however, are only as effective as their application.
And in order to convince the markets, the promise of the
regulators and Treasury that to end ``too big to fail'' must be
matched with actions, actions that signal with certainty that
the government will not make future bailouts. The markets will
watch to see what a designation of ``systemically significant''
means. The markets will watch to see the level and type of
enhanced supervision that comes with that designation. The
markets will watch to see whether these companies are
restructured and simplified. Regulators have the authority to
shape the living wills of these companies and to compel
substantial changes to their structure and their activities.
These actions rely on the courage of the regulators to
protect our Nation's broader financial system against any
institution whose demise could potentially trigger another
financial crisis. Chairwoman Capito, Ranking Member Maloney,
and members of the subcommittee, thank you again for the
opportunity to appear before you. I would be pleased to respond
to any questions you may have.
[The prepared statement of Ms. Romero can be found on page
86 of the appendix.]
Chairwoman Capito. Thank you.
I want to thank you both and I will start the questioning.
Ms. Romero, in your statement, you talk about the process
of whether or not Citigroup was ``too big to fail,'' and
therefore, in need of a rescue as ad hoc. Then you went on to
say that whether this would continue into the future may be a
perception that the government would be willing to step in.
I am not sure if you are aware that we argued pretty
vociferously during ``too big to fail'' to have an enhanced
bankruptcy where there could be no perception that the
government could step in.
I guess what I am interested in is these both sound like
more esoteric terms, ``ad hoc'' and ``perception,'' and not a
definitive statement that a government bailout could not occur.
Do you see it that way?
Ms. Romero. SIGTARP, when we did our audits and we went and
looked at the past actions of the government during the
financial crisis, what we found was that a lot of the decisions
that were being made were being made to address the markets.
Citigroup itself said that it was healthy at the time that it
ended up needing the additional government assistance. But
there was devastated investor confidence in Citigroup which was
shown by a dramatic drop in its stock price and in a widening
of its credit default spreads.
So what we found in looking at the past so you can
determine the implications for the future is that what the
market perceives has an effect, and has an effect as to whether
the company is in trouble and whether that company will trigger
another financial crisis and what the interconnectedness is
with that company.
And so, ultimately, you do have to take into account the
market's perception.
Now, the market's perception could be affected by what
happens going forward. It could be affected in the case of if
there was going to be an enhanced bankruptcy proceeding under
the prior proposed legislation, the market could see that. The
market could see what is here with Dodd-Frank. But Dodd-Frank
just sets up the rules and the tools. It is ultimately going to
be up to the regulators and the strength with which they use
those tools and the objective criteria that they set out. Right
now, the market just does not know what it means to be
systemically significant.
Chairwoman Capito. So building on what you say then with
Mr. Krimminger as the regulator, let's take the Citigroup
example that she used. Citigroup said they were healthy at the
time. So now we are going to ask them, assuming they will be
systemically significant, which I think is a pretty good
assumption, they are going to be asked what they are doing
right now, creating a living will, which lets them predetermine
what their fate is going to be, that is what a living will is
for individuals, so their perception of themselves is different
from the perception of the market or the perception of the
regulator, and then I think we end up back to this ad hoc sort
of esoteric feel.
How does this Orderly Liquidation Authority that you now
have--will that eliminate that in your mind? I would like your
comments on that.
Mr. Krimminger. Thank you very much.
I think one of the things to remember is that I have never
met a financial institution that thought that it was in as bad
a condition as it actually is in.
So Citigroup's impression of where they were in the fall of
2008 might be a bit misleading. I think one of the key things
of Dodd-Frank is in Title I and that is in section 165(d),
which provides for the resolution planning process, as you
referenced. I think that is not something where Citigroup will
have the ability to predetermine its own fate. The statute
actually is very clear. Citigroup has to show they have a
credible plan for a rapid and orderly resolution under the
Bankruptcy Code, which seems to me to be totally appropriate
since the Bankruptcy Code, even after Dodd-Frank, will fully
remain the primary option for resolving any financial company.
I think one of the key things about that standard that is
set in the statute is it will require some really hard thinking
by the firms in order to develop resolution plans that show
that they could be resolved under the Bankruptcy Code without
creating systemic consequences. That is going to be a tough
standard because they won't have access to bridge financial
institutions or bridge banks that we use under the FDIC Act, so
they will have to come up with some real hard thinking about
what type of structures they will use, what types of liquidity
support they should rely on, and what types of processes they
should put in place in order to resolve themselves.
Chairwoman Capito. The other thing I would add is, and my
time is running short here, that they also wouldn't have the
ability to go into the Orderly--if they go into the Orderly
Liquidation Authority, the FDIC has the ability to access
taxpayer dollars, and I know Sheila Bair testified 2 weeks ago
that the first payback is those Treasury dollars, but that is a
big distinction between a bankruptcy and the Orderly
Liquidation Authority that I think does lend itself more
towards a reliance on the Federal taxpayer to begin this
authority and end the authority, and I am going to go to my
ranking member now.
Mrs. Maloney. To be clear, the Wall Street Reform Act
absolutely requires that a company whose failure threatens the
entire system be liquidated so that there cannot be a bailout.
It provides tools for regulators to stabilize the broader
system and specifically protects taxpayers.
So the Dodd-Frank bill ends ``too big to fail.'' It ends
government bailouts.
I would like to ask the panelists, do you interpret the
recent announcement that Moody's is considering downgrading the
largest banking entities to be based on reconsideration of the
extent to which they receive government support?
Do you see this as an indication that the market views the
Wall Street Reform Act as ending ``too big to fail?''
I would like both panelists to answer, starting with you,
Mr. Krimminger.
Mr. Krimminger. I will put it this way: We think that it is
important, as Ms. Romero just mentioned, that we look to how
the market is going to ultimately perceive this. The statutory
provisions are very clear that the firm has to be liquidated,
there can be no taxpayer losses, and that any losses in the
resolution have to be paid back first from the firm, and then
from an assessment against the industry if necessary.
I think the key thing is looking at how the credit rating
agencies will consider this. And in my discussions with several
of the credit rating agencies, I have asked them this question
pointedly. Is there any authority under Title II of Dodd-Frank
for there to be a bailout of the institution or to prop the
institution up, and they said ``No, any uplift that we are
providing to date for the credit ratings for these institutions
is based upon the idea that the law could be changed in the
future.'' So the law today, the rating agencies are telling me,
confirms that they can't be bailed out.
Mrs. Maloney. Thank you. Ms. Romero?
Ms. Romero. I think that the actions and the statements by
the government in late 2008 and early 2009 made this explicit
``too big to fail'' statement to the markets and Dodd-Frank
came in and there is an opportunity here depending upon the
actions taken by regulators in putting in strong heightened
supervision and strong requirements on these companies where
there would be an opportunity to send a strong message to the
market.
I think the credit rating agencies and their view of things
can be one indication of that.
Mrs. Maloney. The fact that they are downgrading it shows
that they think ``too big to fail'' has been ended. It is my
understanding that large institutions, complex, nonbank
financial companies, that they think that they possibly could
be designated as ``too big to fail'' are lobbying the Financial
Stability Oversight Council and other regulators not to
designate them. They don't want to be designated in that
category.
And doesn't that directly contradict the notion that the
financial industry perceives a funding advantage or a
``guaranteed bailout'' that some of my friends on the other
side of the aisle seem to claim that there even though it
clearly states in Dodd-Frank that there will be no bailouts,
that there will be an orderly liquidation, doesn't that show
that these large and complex companies that are subject to
stricter regulation that they don't want it, they don't want to
be a part of it, doesn't it show that they realized that they
will not be bailed out? Mr. Krimminger?
Mr. Krimminger. I would just comment that I am not aware of
any of the companies seeking to be designated as systemically
important. The bank holding companies over $50 billion in size
are designated by the statute so they are already designated.
Mrs. Maloney. But aren't they lobbying to get out of the
designation?
Mr. Krimminger. They are required to be within the
designation by statute--
Mrs. Maloney. I have read press reports and I have had
people come to me who don't want to be designated.
Mr. Krimminger. I would agree. I am not aware of any
company that is not automatically designated seeking to be
designated.
Mrs. Maloney. Ms. Romero, could you comment?
Ms. Romero. Yes. No one knows right now what will happen
once someone is designated as systemically significant. And so
I think it is not surprising that companies who are being told
that they would be subjected to heightened supervision and
heightened requirements without even knowing what these
requirements are going to be would want to lobby against that.
And I think those institutions, as well as the markets, are
looking to see what happens, and so they are looking to see
what is going to be the heightened capital requirements, the
heightened liquidity requirements, and so you are certainly
seeing companies not wanting to be given a designation what
they don't know the outcome is.
Mrs. Maloney. I would say it shows that they don't see a
funding advantage or a guaranteed bailout that they realize
they are not going to be bailed out so there is no advantage,
they want to get out of it. Anyway, my time has expired.
Chairwoman Capito. Thank you. Mr. Renacci for 5 minutes for
questions.
Mr. Renacci. Thank you, Madam Chairwoman.
My colleagues on the other side, I believe, have said two
or three times now that Dodd-Frank ends ``too big to fail.'' If
I look at your testimony, first, Mr. Krimminger, you say the
three basic elements of the Dodd-Frank Act together help end
``too big to fail.'' You say it helped end ``too big to fail.''
Are the power to designate the subjects as SIFIs to heighten
prudential supervision by the Federal Reserve Board, the power
to collect information necessary to plan and prepare for or to
avoid the necessity of the resolution of SIFI including the
requirement for SIFI to prepare detailed resolution plans and
the orderly resolution authority to ensure that if necessary a
SIFI can be resolved without course to bailout.
So you have a tremendous amount of ``subject to's,''
especially the prepared detailed resolution plans which I want
to come back to.
Ms. Romero, in your testimony, you say it is too early to
tell whether Dodd-Frank will be ultimately be successful in
ending ``too big to fail'' and its success will be dependent on
the market's perception of the effectiveness of the actions
taken by regulatory and Treasury. You also say rules, however,
are only as effective as their application in order to convince
market promises of regulations to end ``too big to fail'' must
be matched with actions that signal with certainty that the
government will not make future bailouts.
Just a simple yes or no, in your opinion, Mr. Krimminger,
does the Dodd-Frank bill end ``too big to fail?''
Mr. Krimminger. There is no authority--yes, because there
is no authority to do a bailout as there was in 2008.
Mr. Renacci. But there are a lot of, if you will agree,
``subject to's'' in your testimony.
Mr. Krimminger. If I may elaborate. Certainly, my point
being on those ``subject to's'' is that Title I includes a lot
of authority to provide for resolution plans, the regulations
are still out for notice and comment, and we will be finalizing
those requirements very shortly. There are also the standards
for the heightened supervision and the capital requirements.
Those still need to be put in place, but as I said in my
testimony, Dodd-Frank provides the tools to end ``too big to
fail.''
The key thing in our perspective is that Title II for
Orderly Liquidation Authority precludes bailing out a firm and
requires it to go into liquidation and resolution.
Mr. Renacci. Again, ``subject to.'' And these detailed
resolution plans, again, I am a CPA; I have actually been hired
to go through bankruptcy filings. It is going to be interesting
how easy it will be to get detailed resolution plans.
Ms. Romero, you say, again, your comments, do you believe
Dodd-Frank ends ``too big to fail?''
Ms. Romero. It is too early to tell. The mere enactment of
the Dodd-Frank Act wasn't enough to take away the competitive
advantage that these large institutions realize now. But going
forward, what happens with the regulators in using the tools
and implementing some objective criteria and a sold framework
for applying that, that will be determinative of whether it
ends ``too big to fail.''
Mr. Renacci. Now, let me add the question, if there were
stipulations that there was a guaranteed no bailout and
bankruptcy was the alternative, wouldn't that bring the free
market system in and ultimately end ``too big to fail,'' Mr.
Krimminger?
Mr. Krimminger. That is what we had in 2008. The Bankruptcy
Code was the only resolution authority for these large, nonbank
financial institutions. And so the Treasury sought additional
authority from Congress to provide additional inputs of funding
in at the capital level, so I think that--
Mr. Renacci. I don't mean to interrupt you, but I did say
if there was no bailout and bankruptcy was the alternative,
would that end ``too big to fail?''
Mr. Krimminger. There is a no-bailout provision of Dodd-
Frank today. If bankruptcy is the only option, based upon the
experience in other countries where bankruptcy is the only
option, I don't believe it would because there would be an
incredible pressure to do something other than bankruptcy.
Mr. Renacci. But, again, I will go back to, I will go to
Ms. Romero, if those two options were there, would it end, if
you bring the private market back in with bankruptcy and you
had no bailouts, would ``too big to fail'' end?
Ms. Romero. I think the only way to end ``too big to fail''
is to ultimately have institutions that are not so
interconnected that their demise takes down the entire
financial system. So whether that is the situation that those
institutions are restructured and simplified so they are not so
interconnected or whether it is a situation where they are, it
is with certainty that they will have to suffer the
consequences of their own excessive risk-taking, that is what
is needed to end ``too big to fail.''
Mr. Renacci. Again, that is bankruptcy, but thank you.
Chairwoman Capito. Thank you. Mr. Frank for 5 minutes.
Mr. Frank. First of all, we have to draw a distinction. The
bill deals with the failure of large institutions in two ways,
first of all by significantly increasing the regulators'
ability to stop this from happening or make it less likely, for
example, by the regulation of derivatives, totally unregulated
derivatives without any requirement of margin or capital, that
was contributory. The bill outlaws the kind of mortgages that
were made that many of us tried to outlaw earlier. So we don't
simply wait as to whether or not there is failure. There is a
lot in here that prevents failure.
Secondly, in terms of bailouts, people haven't mentioned
one of the major things this law does that ends the bailout,
the largest single bailout per institution was of AIG. AIG was
bailed out by the Federal Reserve under statutory authority to
dating from the 1930s which the law abolished. Section 13-3 of
the Act, of the Federal Reserve Act, allowed the Federal
Reserve to advance all that money to AIG. We abolished that.
That was one very big example of bailout authority that no
longer exists.
Then the question is, and my colleague who spoke previously
asked for a yes-or-no answer, and he got a yes and he didn't
like it. I guess we now have not just a self-fulfilling
prophecy but an example of not taking yes for an answer. Yes,
our witness from the FDIC, does it end ``too big to fail,'' he
said yes. How does it do it? By making it illegal for
regulators to do this.
Now let's be very clear, under the law, no Federal official
may extend money to a large institution that is failing. It
can, after abolishing that institution, wiping it out, spend
some money on some of the debts.
So the question then is okay, it doesn't end ``too big to
fail.'' Do we assume that Federal regulators will then violate
Federal law and give money despite the law saying they can't
and keep the institution going? Or is it that Congress will say
oh, well, we didn't really mean it; we are going to vote the
money.
Neither one is likely. People ask the question. I don't
know what they mean. The law clearly says you cannot extend the
money in those circumstances, and you can't do what the Federal
Reserve did, they can no longer do it because we explicitly
took that away. Now, the dilemma is the question, can
bankruptcy handle everything? It was Henry Paulson, George
Bush's Secretary of the Treasury, who first told the Congress
in 2008 in the spring that the law was inadequate, that having
to choose--and this is Secretary's Paulson's argument at the
time--between bankruptcy and intervention that kept the
institution going was an inadequate set of choices. And that is
what happened in 2008. Lehman was allowed to go bankrupt with,
they thought, negative consequences.
It was the Bush Administration that came to Congress in
September 2008 and said, we have a disaster on our hands
because Lehman failed, and then AIG was about to fail. So one
option was bankruptcy, Lehman Brothers. The other option was
let the Federal Reserve give $80 billion right away without any
congressional involvement to AIG. What Secretary Paulson said
was, I have been begging you, give us an alternative. This is
the alternative. The alternative is--there are three aspects.
First of all, you regulate beforehand. You say, you are a
particularly important institution because you are so
interconnected, not just big, and I appreciate the Inspector
General mentioning it, it is the interconnection that makes it
particularly problematic. So we are going to give you a higher
capital charge because you have people complaining about a
higher capital charge. That is what makes it less likely to
fail. We are going to regulate derivatives in ways they weren't
before. We are not going to let you get all these credit
default swap obligations and not have the money to pay it back
like AIG. We are not going allow those kinds of mortgages to be
made and packaged and securitized with no risk retention. All
of those things go forward.
If, despite all of that, there is a failure, then the
regulators are told under Federal law that the institution is
gone. It is dead. They are fired. No more board of directors,
no more shareholder equity. At that point we may decide, this
is what Hank Paulson said, if it is bankruptcy, then if it was
an institution that was so interconnected and there is no way
to pay any of the debts, things may get worse.
By the way, this is not untested. It is what the FDIC has
been doing for years. That is why the FDIC is the authority
here. They step in, they get rid of the bank that has failed,
and they pay some of the debts to make it not get worse. So
that is what we are talking about.
And the only thing that is keeping alive the perception
that ``too big to fail'' is still there are Republicans who are
trying to make political points by denying the reality.
And again, I do want to emphasize, if you ask the financial
institutions that are the alleged beneficiaries of a ``too big
to fail'' designation that will allow them to get cheaper
capital, they all don't want it. They all say no, that is not
true. All this does for us is subject us to greater regulation.
And those institutions that have an option, the large
banks, the large financial houses don't, but those institutions
that have an option not to be covered want desperately not to
be covered, are lobbying us not to be covered, as The New York
Times mentioned on Sunday, because this is not a license to get
cheaper money; it is an eligibility for much tougher
regulation.
Chairwoman Capito. Thank you. Mr. Royce for 5 minutes.
Mr. Royce. I think one of the questions here is regardless
of what authority we give and what assurances we give in this
committee about whether or not that authority will be used by
the next FDIC regulator, I am just thinking back to a debate on
the Floor in 2008, I think it was July of 2008 as we were
debating the Housing and Economic Recovery Act, and the issue
then was, the authority is in the bill in theory to bail out
Fannie Mae and Freddie Mac, but no, argued those putting
forward that legislation, that will never be used. That
authority will never be used.
Let's examine some of the assertions that are being made
here right now. And I would like to go, if I could, to Mr.
James Wigand, I want to quote somebody from your shop, he is
the head of the FDIC's Office of Complex Financial
Institutions. And here is what he says.
He views the liquidation, in his words, that is a bit of a
misnomer. For him, the most important part of the FDIC's new
authority isn't liquidating failed firms. He views it as
preserving their franchise value so they can be sold to other
firms.
So I would ask you a question. Does Mr. Wigand's view
represent that of the FDIC that the Orderly Liquidation
Authority is not, in fact, a death panel as has been asserted
here, but, in fact, a form of life support so that these firms
can be sold off with taxpayer support presumably to other firms
just like the Federal Reserve did with Bear Stearns?
Mr. Krimminger. Congressman, the FDIC's position, as the
law requires, is that the institution, the company that fails
is put into a liquidation process. What Mr. Wigand is referring
to is that in any liquidation process or any resolution
process, you are selling the assets and operations of that firm
to other private companies. That is how those assets are
recirculated into or recycled into the private sector. So if
you can sell them while they are operating in a functioning way
rather than in a pure liquidation, which is what can occur in a
Chapter 7 bankruptcy, they will have more value. That is what
he means by franchise value. That is exactly the same thing we
do with failed banks today.
Mr. Royce. And your assumption here is that the taxpayers
will be made whole. But I am going to go back to another issue
which assumes that we will go back and get the money, get any
excess payments from these now weakened institutions which we
didn't put through a normal bankruptcy process, and following
up on the Chair's comments, the problem with the Orderly
Liquidation Authority is that it encourages regulators to err
on the side of more bailouts with the assumption that they are
going to go back and they are going to recover anything in
excess of what creditors would have received in bankruptcy.
I have laid out these arguments during the debate over
Dodd-Frank and in the conference with the Senate. I am sharing
with you, going back and getting that money will be a very
difficult task given that those creditors will also likely be
other ``too-big-to-fail'' banks. And that goes to the issue of
why there is this assumption that these institutions are going
to come out of this better the way we have structured this than
they would if they had to go through a bankruptcy?
So the question is, is there a way to overcompensate for
the error?
The amendment that I brought up that was defeated was to
have the FDIC, to have you estimate the likely payment under
bankruptcy, then take a haircut, take 20 percent off of that,
thus minimizing the potential for bailouts and encouraging
market discipline by putting them on the same status as their
smaller, ``too-small-to-save'' competitors out there in the
market.
I have yet to get any acknowledgement of what economists
are arguing here. And I would like just like to ask your
opinion and very quickly, Ms. Romero's opinion on that kind of
an offset in order to kind of at least try to mimic market
discipline in this.
Mr. Krimminger. Congressman, there is a minimum payment
today that a creditor receives that is limited by the Chapter 7
liquidation value. What we are talking about doing in Dodd-
Frank, as I said, is nothing more than we do with smaller
institutions today. The creditors receive payments based upon
whatever the sale of the assets will recoup. So that the amount
that the creditors in a Dodd-Frank resolution would receive is
based upon the sale of, the value of the sale of, the assets.
Mr. Royce. Ms. Romero?
Ms. Romero. No, I think what has to happen is that market
discipline has to be restored. What we have to have happen is
that to the extent that these institutions who took excessive
risk before and put our greater financial system at risk and
ended up having a bailout, that has to end. So market
discipline has to come back in so that the due diligence that
takes place by counterparties, the access to capital, the terms
of the credit, needs to equal the amount of risk.
What is the best way to bring back that market discipline?
The best way to bring it back is to make it very clear that
these institutions are not going to be allowed to be so
interconnected, so large, that they will take down the entire
broader financial system.
As to what is the best way to do that and whether it is
through your amendment, I haven't studied your amendment and so
I am not sure.
Mr. Royce. But clearly, the counterparties believe they
would be worse off under the amendment that I am proposing here
than they would be under this scenario, and that would help
drive it in that direction.
Chairwoman Capito. The gentleman's time is expired.
Mr. Gutierrez?
Mr. Gutierrez. Thank you very much, and thank you to the
witnesses. I didn't know we are in a legislative session making
amendments to Frank-Dodd, maybe Dodd-Frank, we do that later
on. Maybe I was mistaken.
So here is what we have to believe. We have to believe that
the Congress of the United States would appropriate billions of
dollars in order to bail out our financial institutions that
are significant and would pose a significant risk to the entire
system. Yet no one on that side will do it, because you have
all said you wouldn't do it. There isn't a Republican who said
they would step up and do it. I haven't heard anybody from this
side say they would do it, but we are all afraid of something
that everybody says no one will do.
I think my friends in the Republican Party should just be
very clear, they have always said they are the friends of big
business and financial institutions and they say they don't
want any regulations and they--
Mr. Royce. Will the gentleman yield because we, in fact,
say none of that.
Mr. Gutierrez. No. Please don't interrupt.
Chairwoman Capito. It is the gentleman's time.
Mr. Gutierrez. Thank you. And that is what they say. So
they should just be very, very clear about it. The fact they
get upset that I say it and repeat their mantra shouldn't
really bother them that much. They say they are the friends.
How do I arrive at that conclusion? Because you are always
saying we are the enemy. So if we are the enemy, you must be
the friend of the financial institutions.
And you should just be very clear. The fact is that a
Republican President came in before this Congress and a
Republican Treasury Secretary came before this Congress, and a
host of other big-time Republican Wall Street big shots came
before this Congress and said, ``Bail us out. The system is
going down.'' That is what happened; those are the facts.
And now, who gave the most votes to do that? The Democrats
did. But now you come back and say, oh, well, this Dodd-Frank,
let's just get rid of that.
Let's go back to bankruptcy. Gentlemen, did you miss the
point of the failure of the fall of 2008 that bankruptcy didn't
work? That we brought our financial system to the precipice of
disaster and that we had to take action?
So why would you want to go back to something that didn't
work? I know why you want to go back to something that didn't
work: so that you can try to finagle another bailout once
again, after you take all the rules and all the regulations and
everything away from the financial institutions that have been
put in place by Frank-Dodd so that we can bail them out again.
Because there isn't an institution out there--I challenge
my friends on the other side of the aisle to tell me a major
financial institution that is ``too big to fail'' that wants
and supports the Dodd-Frank bill. Just name me one that sends
lobbyists here in order to get support.
I know what they come here to do. I think we should all be
transparent and clear with one another. They come here, the
financial institutions, after they had gotten bailed out, to do
one thing and one thing only, and that is to go back to the old
course of business that they were involved in before, and that
is no regulation whatsoever, so that they can get extreme
profits with virtually no risk, because then in the end they
will be ``too big to fail'' and cause a systemic risk.
That is what you want to do. I get it. You cashed in on the
one end, and you are trying to cash in on the other. But guess
what? There are going to be people here who are going to defend
the consumers and the small--and then they come and tell us,
``Oh, I met with my community bankers. They told me this was so
bad.'' This is not about your community bankers. 'Fess up. This
is about the big titans on Wall Street that you want to come
here to defend, trying to act as though you are here for the
people on Main Street. That hasn't been the case.
Mrs. Maloney. Will the gentleman yield?
Mr. Gutierrez. I certainly will.
Mrs. Maloney. And on the bankruptcy deal, the bankruptcy
has no specific taxpayer protections. Bankruptcy allows a
bailout. And bankruptcy does not have systemic effects and a
systemic impact on the industry.
You are doing a great job.
Mr. Gutierrez. No, wait a minute. It is just, it seems as
though everybody just forgot. I just want to make one last
point.
In the Dodd-Frank bill, I put in an amendment--many of us
supported it--that said that, much like the FDIC, all those
``too-big-to-fail'' institutions had to put money in a kitty.
In case one of them went errant, all of them would help pay so
that the taxpayers wouldn't be there. And guess what my
colleagues in the Republican Party said? Oh, no, we don't want
to do that to those big financial institutions.
No, your little banker and your little community financial
institutions have to pay the FDIC, but you don't want the Wall
Street titans to have to pay when they come and threaten our
economic system. I think it is wrong. And you should just tell
people you are for big banks and make it clear and simple.
Chairwoman Capito. The gentleman from New Mexico, Mr.
Pearce.
Mr. Pearce. Thank you, Madam Chairwoman. I am still trying
to get my breath after that.
If I could get the chairwoman to put up a chart there I
think that might be loaded in, I would like to make the point.
This is the government interpretation of how we would
administer health care. And Mr. Krimminger, on page 9, would
have us believe that the same government that developed that
organizational structure could bring a rational organizational
structure to private companies. I find that sort of
incredulous, that the government is going to work any
differently than it has in this chart here and give us that
rational organizational structure in firms that they are
sitting inside the rooms with, not participating.
So that is one of the disbeliefs that we on this side have,
at least this person on this side has, that government can
bring anything rational.
We are also being asked to believe that we are going to
bring financial stability and financial believability to the
firms in the financial institution, and the operational
structure is going to be provided by a government that, itself,
is in the process of having its debt downgraded. If the
government can manage the debt and the organizational structure
of the banks and the financial institutions, maybe it should
start with its own business first, because it is in the process
of being downgraded. And so I, for one, believe that the
government structures that are created here and that are being
so eloquently supported by Mr. Krimminger maybe are going to
fall somewhat short of their task.
I think, as I am going through the discussions today and
listening to them, I am thinking of a banking system, a
financial regulatory system that is going to be subject to
things that our other companies already do. I think, for
example, of the Shell Oil Company and the Alaska oil fields
that did a $4 billion study in order to provide an EIS, an
environmental impact statement. And I am going to see the
government develop these same sort of studies that are required
before they allow the institutions to move forward. And the
government just said, ``Well, I am sorry, you left a paragraph
out of that, and we are going to turn down the whole $4 billion
thing.''
Mr. Krimminger, when these resolution plans are not
presented, what is going to happen to the institution? In other
words, you say through here many times we got these resolution
plans. You simply shut their doors? You stop them from
operating? Tell me a little bit about that, if you would?
Mr. Krimminger. Congressman, the statutory provision,
section 165(d) of Dodd-Frank provides that the firms,
themselves, develop their resolution plans. I can't comment
on--
Mr. Pearce. No, I am saying, let's say that a firm does not
get that. Let's say that they don't have a resolution plan that
you consider adequate. So what is the penalty? Do you shut them
down? Do you stop them from expanding? Do you begin to pull
sections away from them, make them distribute part of their
assets?
Tell me a little bit about how you perceive it. You
obviously were on the inside of the room, planning this.
Mr. Krimminger. The statutory provisions, Congressman,
provide that if the resolution plan is not credible to provide
for a rapid and orderly resolution under the Bankruptcy Code,
then the firm would go back and try again. And if it tries
again or fails to submit a plan, then the Federal Reserve,
working with the FDIC, in discussion with the Council, could
require additional capital requirements, additional liquidity
requirements, because the firm has shown that it can't be
resolved under the Bankruptcy Code.
And then if the firm still, after another 2 years, fails to
provide a credible resolution plan with the additional capital
and liquidity requirements in place, then the FDIC and the
Federal Reserve, in consultation with the Financial Stability
Oversight Council, can require the firm to take some actions,
including selling some assets, if necessary, in order to make
itself more simple and more resolvable.
That is the statutory provision.
Mr. Pearce. And you feel like that is a plan that is going
to work?
Is the FDIC overseeing any part of the Lehman Brothers
distribution?
Mr. Krimminger. No. That is a bankruptcy resolution.
Mr. Pearce. Are you kind of watching it? Are you proving up
your concepts there? Are you taking a look at what all is
required? Are you all watching that closely?
It is a fairly complex institution that is being broken up.
It is a place for you to do a dry run. Are you all doing a dry
run with all of your concepts?
Mr. Krimminger. We take a very careful look at the Lehman
bankruptcy proceedings. We just released a paper a couple of
months ago, looking at how Lehman could have perhaps been
resolved under the Dodd-Frank provisions. So we obviously are
monitoring it because it is a very good--
Mr. Pearce. And you believe that your findings would have
stopped Lehman Brothers if they had been implemented?
Mr. Krimminger. I believe that the Dodd-Frank authorities
would have allowed Lehman Brothers to be resolved in a less
disruptive way to the financial system, yes.
Chairwoman Capito. The gentleman's time has expired.
Mr. Miller?
Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
Serving on this committee is a strange experience. Hearing
all of the statements on the other side, it sounds like
Republicans really pushed to make Dodd-Frank or make a
financial reform bill a really tough bill and Democrats watered
it down. That is completely at odds with what actually happened
in the last couple of years, where I think every provision that
would have made the bill tougher, that would have, as Ms.
Romero said, made for smaller, less interconnected firms that
were less of a risk to pull the whole economy down with them if
they collapsed, all of those provisions were unanimously
opposed by Republicans.
So, Senator Kaufman introduced an amendment on the Senate
side that failed, which would have limited the overall size of
banks to 2 percent of the GDP. That is still, like, a $300
billion company. That is a pretty big bank, big enough to do
pretty much anything. But it would have required that the 6
biggest firms be broken up into more than 30 banks. No
Republican support for that at all. I introduced the idea on
the House side, but the fight was really over in the Senate
side.
Mr. Gutierrez mentioned the idea of an up-front resolution
fund funded by the industry to make sure that taxpayers really
were not on the hook. It was absolutely opposed by the industry
and by Republicans, who pretty much said exactly the same thing
the industry said.
One of the issues in the last couple years, it was dimly
understood at the time of the crisis, was that there was--Mr.
Krimminger mentioned the shadow banking system, and there are a
lot of things that are considered to be part of the shadow
banking system. One is what is called the repo market, which is
an interbank, inter-financial-institution lending system that
was pretty much completely unregulated. And what happened in
the fall of 2008 was that there was a run in the repo system
that almost looked like the run in, ``It's a Wonderful Life,''
where everyone went down and took their money out and the whole
system froze up.
Chairman Bair did propose a solution to that to create some
market discipline. I introduced it with Mr. Moore on this side.
It went to the Senate, somewhat watered down. It then came back
as a study. And the study will apparently come out this summer.
Mr. Krimminger, what is the current status of the repo
market and the vulnerability of the repo market to another run
like what we had?
And we are talking about a lot of money here. I think Bear
Stearns was getting $70 billion a night in overnight lending
from the repo market. And when that dried up and went away, it
collapsed. Pretty much the same thing happened to Lehman
Brothers.
What is the current status of that?
Mr. Krimminger. Congressman, I would have to get back to
you with the statistics on the current repo market.
The repo market certainly has stabilized dramatically from
the fall of 2008. But you are correct that one of the
characteristics of the fall of 2008, following the Lehman
bankruptcy, was a dramatic shutdown of the commercial paper and
repo market at that time. And Chairman Bair and the FDIC had
expressed concern about an overreliance by some financial
institutions in the past on short-term secured financing.
While the study will come out this year, I think that is an
issue that we need to all look very carefully at, because that
can have the same effects as a deposit run without deposit
insurance. And neither I nor anyone else around would want to
have insurance for repos, for sure. So we need to find a way of
making sure that a repo run would be less likely in the future.
Mr. Miller of North Carolina. Before the FDIC, we really
haven't had a deposit run in 75 years, in three-quarters of a
century since the FDIC. Now, of course, at the time, the banks
pronounced that if the FDIC went into effect and there was
deposit insurance and safety and soundness regulation, no one
would ever put their money in a bank. And of course the
opposite happened because people realized they could put their
money in the bank and they would be able to get it back.
But before that, there were runs every few years. There
were crises in the financial system every few years. Is there
any reason to think that there won't be again?
Ms. Romero?
Ms. Romero. Again, as we looked at Citigroup and AIG and
other things that we examined sort of what happened, it was
runs that ended up causing the government to step in and do the
bailout.
So, the government before has taken action in response to
this lack of investor and consumer confidence, whatever the run
may be. And so it is really up to the regulators now in what
they do with these plans--they have authority to shape these
plans--and what they do with setting their requirements.
The markets are going to watch that. And they are not just
going to watch the words or the promises that the Dodd-Frank
Act ends ``too big to fail.'' It has to be matched up with
actions--actions that say for certain that the government is
not going to step in.
And that is the way--what you want to do is get into a
situation where, if there is a run on one of these companies,
that run does not cause--doesn't trigger the next financial
crisis. And that is going to be key.
Chairwoman Capito. The gentleman's time has expired.
Mr. Westmoreland?
Mr. Westmoreland. Thank you, Madam Chairwoman.
And I would like to remind our colleague from North
Carolina, at the time Dodd-Frank passed, I believe the Senate
had a 59-41 advantage and the House had a 252-183 advantage. So
I believe they could have passed anything that they would have
liked.
Mr. Krimminger, in your testimony, you say, ``Given the
absence of a nonbankruptcy auction to prevent a disruptive
collapse, government assistance was necessary to prevent the
effects of these failures from cascading through the financial
system, freezing financial markets''--and I am assuming that is
credit--``and stopping the economy in its tracks.''
Is that not what has happened?
Mr. Krimminger. I was describing, Congressman, in my
testimony that we believe, in the fall of 2008, since there
were no other options other than additional destabilizing and
disruptive bankruptcy proceedings involving the largest
financial institutions, that, without another option, the
government assistance was necessary to prevent further and even
more severe disruption of the financial markets.
There is no question that the fall of 2008 was a very dire
time for the financial markets and the financial system as a
whole.
Mr. Westmoreland. Did Lehman Brothers not go through
bankruptcy?
Mr. Krimminger. Yes, it is in a bankruptcy proceeding
today.
Mr. Westmoreland. Yes. So it was an orderly process.
Mr. Krimminger. I don't know that I--it followed the
Bankruptcy Code. It was a very disruptive process, because even
Alvarez & Marsal, who have been doing the liquidation, have
testified that the bankruptcy process probably cost over $75
billion in losses that could have been recouped had there been
the ability to continue some level of transactions in order to
achieve a better value for the creditors.
Mr. Westmoreland. Who were those losses to?
Mr. Krimminger. Those losses would be to all the creditors.
To date, there have been unsecured creditors in Lehman who have
not received a distribution.
Mr. Westmoreland. Okay.
Now, as you might know, Georgia has had 63 bank failures.
Do you believe that the same government assistance should be
extended by the FDIC to the community banks?
And let me explain. When you talk about cascading through
the financial system, it saved all the big banks, but when it
got down to the small banks, it spread out and has caused more
small banks to fail. So I guess ``too small to save.'' And what
has happened is, that is real money that is sucked out of these
communities.
What is being done to try to save some of these community
banks rather than putting the pedal to the metal and making
them go faster? Is there anything that the FDIC is doing to
look at these smaller institutions?
Mr. Krimminger. Congressman, we certainly participate, with
the Georgia Department of Financial Institutions, in
examinations of the State non-member banks. And other
regulators, of course, are the primary Federal regulators for
other types of banks in Georgia.
We are not trying to accelerate the closing of banks. We
certainly are trying to make sure we follow the law very
scrupulously. If a bank goes below the critically
undercapitalized level, then the statute requires us to give
them 90 days to correct that, and if they can't, then they have
to be closed.
We certainly agree with you that it was unfortunate that
the largest institutions benefited from a level of support that
the smaller institutions did not. That was a demonstration of a
long-held perception of ``too big to fail.'' That is why,
however, that we think we should never be put in the position
again where we don't have an option that will make sure we can
close the largest institutions while making the shareholders
and creditors bear the losses just as the small banks do.
Mr. Westmoreland. But it is the communities that it is
getting sucked out of. And, you say that these--
Mrs. Maloney. Will the gentleman yield? Because I support
your position completely.
Mr. Westmoreland. Sure.
Mrs. Maloney. I support his position completely. A great
number of small institutions that are serving communities and
are really the heart of these communities have been closed.
So I would like the gentleman to consider asking the
question, is there any leeway on the 90 days? This is a
financial crisis time, and these smaller banks need a little
more time to try to get the capital to keep their doors open.
Is there any leeway to allow them past the 90 days if they
don't meet your criteria to stay open?
I yield back.
Mr. Krimminger. There is certainly an opportunity to extend
the 90-day period if there can be a demonstration. And,
usually, it would be us working with the State regulator if it
is a State nonmember, or the Federal regulator if it is a
Federal regulator, to extend the period if there is a
demonstration that there is a plan in place to provide the
additional capital. I can assure you, we have tried to work
very closely with institutions to try to make sure they have an
opportunity to raise capital, to do a private-sector merger and
acquisition.
And I would just say, from the FDIC's perspective, we
certainly are not eager to close banks. We certainly would like
to see the banks get recapitalized and continue on to serve
those communities. I think there is a grave risk to the
community banks in the United States. They, unfortunately,
have--some have a substantial number of bad assets on their
balance sheet, which is making it impossible for them to merge
and avoid a failure. But we certainly agree on the importance
of community banks to the U.S. financial system.
Mr. Westmoreland. Let me make just one brief comment.
The reason they have some of these bad assets is because
some of these banks that were given TARP money went in and did
fire sales in these communities that undercut the values of the
assets that these banks were holding and, with the mark-to-
market, had to immediately write them down. This was through no
fault of their own. This was the fact that the government had
given these big banks the money to go in and fire-sell assets
of these banks that they had taken over. These acquiring banks
had plenty of money. They had the loss-share agreements that
gave them no incentive to save those loans.
And I will tell you that I have counties in my district
that used to have three banks and now do not even have one
community bank. This is systemically significant to my district
and to rural districts all across this country. And I hope that
the FDIC will recognize this and try do something with it to
save some of these small lending institutions.
I yield back.
Chairwoman Capito. Thank you.
Mr. Meeks?
Mr. Meeks. Thank you, Madam Chairwoman.
And, okay, you hear it? Democrats and Republicans can
agree. And I think that is really where we need to head on
this.
I came down, and I have heard both sides, and I think that
there are just some basic philosophies that both sides have to
agree to. I think that the Republican Party has been known for
a long period of time as being the party of deregulation. I
think there was a joke that one of President Reagan's chief
economic advisors reputedly had said back in 1981, ``Don't just
stand there. Deregulate something.'' And I think that the
Democratic Party is the party that has been known probably to
overregulate. And people will say that then hampers the
opportunity to be competitive, etc.
So the key for us is to try to find out where that middle
of the road is. Because I think that we can agree that if you
do no regulation, if you are talking about deregulating
everything, then we are in big trouble. And I think that the
flip side of that is also true, that if you overregulate and
you stranglehold, then even the smallest of banks--because I
have talked to some of the community banks, and they are
concerned about, they can't continue to exist because of what
the costs would be for overregulation. So we have to try to
figure out as adults how we get this thing right.
One of the things that I know that we can't do is to repeat
what took place a few years ago, which created the need for
Dodd-Frank in the first place. What took place? We went from
one swing to the other, and we began to have mass deregulation,
and we lost some transparency. And, as a result of it, banks
bought other banks and got bigger and bigger and bigger. And
then, we had a panic here in Congress, because when a bank
began to fail, once we bailed out one--and then, because it
wasn't politically expedient, we didn't bail out the other. And
so, Lehman Brothers went down and went into bankruptcy. And the
markets started going, and everybody panicked up here.
Then, we decided that we are going to try to save this
institution. We hated to spend the taxpayers' money, but we
decided that was the best thing to do. But we also resolved
that we would never do it again. We didn't want it to happen so
that somebody becomes so big that it could systemically put
everything, our whole economic system, at risk. So we had do
something.
And what we tried to do, and I think we did a good job of
it, of coming up with something that ends ``too big to fail,''
so that we don't get back to where we are. And the best way
that I can see that we could end ``too big to fail,'' which
Dodd-Frank does, is by requiring risky firms to create,
basically, living wills, and subjecting them to periodic
stress-testing, with all of the information made public--that
is transparency--arming investors with vital transparency and
greater decision-making power.
It also explicitly ban bailouts. Nobody wants to see
bailouts again. Taxpayers don't want to do it. And it gives the
FDIC the power to wind down failing firms in an orderly manner
to avoid the chaos of the court-run bankruptcy system.
There is going to be chaos, because I can tell you, I am
still getting calls from people in New York and some who are
constituents about the perils of the system because the
bankruptcy with Lehman Brothers is still going on today. Their
money is tied up. Some of them have university endowments. I am
getting calls now, ``Help, save me. I have to get my money out
of that.'' So I don't want that system, where I am still
getting people today telling me their money is tied up in the
British system, and we have some problems there. So we don't
want do that again. We have to fix the system.
And so, I think everybody should oppose bailouts. And if
you oppose bailouts, then it seems to me that Dodd-Frank is the
best way to go because it prevents bailouts in the future, and
we make sure that we are not taken under by any huge and risky
enterprise that gets too big.
Let me quickly just ask some simple questions to the FDIC,
and they revolve around the allegation that ``too big to fail''
is perpetuated by designating a firm as a systemically
important financial institution, or SIFI, which claims
increases the likelihood of a bailout.
My first question is, if this is just for big firms,
getting bailed out, I haven't heard of any big firm--you can
correct me if I am wrong--that is lobbying to be classified
SIFI. Do you know of any firms that have lobbied to be
classified SIFI?
Mr. Krimminger. I am not aware of any, Congressman.
Mr. Meeks. And I see that I am out of time. So, all right,
I will yield back.
Chairwoman Capito. Thank you.
Mr. Canseco for 5 minutes.
Mr. Canseco. Thank you, Madam Chairwoman.
Mr. Krimminger, one of the major issues surrounding the
FDIC's new resolution authority is the requirement that the
Treasury Secretary appoint the FDIC as receiver should it be
determined that a bank is on the brink of failure and could
bring down the whole system.
If we go back to 2008, for a period of several months,
there was denial from bank executives and from regulators and
from politicians that a number of firms in the financial sector
were on the brink of collapse. If the next crisis were to
happen 10 or 15 years from now, we don't know who the Treasury
Secretary will be and how he or she will react during a market
crisis. My point is that the FDIC's authority has no chance of
being successful if the Treasury Secretary either continuously
denies to appoint them as a receiver or appoints them either
too late or too early.
This presents a problem. Unless the timing from the
Treasury Secretary is perfect--and there is no guarantee that
the FDIC receivership would then actually work if it is, or if
it were--the market will likely panic as a result. If the
Secretary waits too long or doesn't act at all, the problems of
the troubled financial institution will only grow. And if the
Secretary acts too early, he risks taking over financial
institutions that had a chance of surviving on their own. This
would destroy confidence in the markets and would prevent
private deals from being made for other firms that are in
trouble. And the resulting confusion would have everyone
asking, who is next?
So my question to you is, is the FDIC's resolution
authority an end to ``too big to fail'' just because it exists?
Or is it an instrument that can only work if actual problems in
the financial system are relatively contained and then
perfectly orchestrated, well-timed, and are taken by regulators
at the right time?
Mr. Krimminger. I think the answer is that, under Title II,
there is not the ability, there is no statutory power to bail
out the firm, so the firm would either have to go into
bankruptcy, which is the default option, or it would be placed
into an FDIC receivership under Title II.
You also have to go back to Title I, because it is not just
the Treasury Secretary's action at a particular point in time
that is the key thing. That is why the designation of a
particular institution for heightened supervision under Title I
is pretty critical, because that then triggers the obligation
of that firm to prepare resolution plans, which will go into
the analytical structures of the firm and how it could be
resolved under the Bankruptcy Code.
Our hope and our goal--because we have no interest in being
appointed the receiver for one of the largest firms if it can
be resolved under the Bankruptcy Code. But what Title II does
is provide an option so that, if the firm is at the edge of the
bankruptcy, and it may be going into bankruptcy, that the
Treasury Secretary, based upon the recommendation by the
Federal Reserve Board and our board, could recommend to the
President a decision that it would be placed into a Title II
resolution.
So a critical thing is to look at the relationship between
Title I and Title II as providing a solution.
Mr. Canseco. Thank you.
Failure of systemically important financial institutions
rarely happens in isolation. The FDIC's report on Lehman
Brothers assumes that Lehman was the only trouble spot back in
the industry back then. And even if the FDIC had the authority
to properly wind down Lehman back then, wouldn't the agency
have been distracted by Citigroup, Wachovia, Washington Mutual,
and other depository institutions that are the FDIC's primary
focus?
Mr. Krimminger. The FDIC has the responsibility of dealing
with insured depository institutions. We have set up a separate
office to look at the resolution and risk-monitoring
characteristics of the largest institutions.
But to get back to your initial premise for the question,
our paper was not based upon the idea that Lehman was a simple
blot on an otherwise clear canvas. It was based upon the facts
and based upon the evaluation and the valuations prepared of
the Lehman assets by those who actually were doing due
diligence at the time in 2008 based upon the circumstances
then. And the reality is that there was a bidder for part of
the broker-dealer assets both in the United States and England
at the time of the Lehman failure, but that bidder decided not
to participate pre-bankruptcy or pre-insolvency because of the
fact that the holding company itself was burdened with a
substantial amount of bad assets.
Structuring a resolution where you have a failure that can
be structured into a good-bank/bad-bank structure will allow
you to deal with the bad assets and can help solve that
problem.
Mr. Canseco. Thank you, Mr. Krimminger.
My time has expired.
Chairwoman Capito. Mr. Carney, for 5 minutes.
Mr. Carney. Thank you, Madam Chairwoman.
Thank you to the witnesses for coming.
The title of this hearing is really pretty simple and
straightforward, ``Does the Dodd-Frank Act End `Too Big to
Fail'?'' I think I have heard each of you answer that question.
Mr. Krimminger, you said, pretty simply, ``yes.''
And, Ms. Romero, you said, it depends, maybe, depends on
what the regulators do.
Is that an accurate summary of your answer to the question?
Mr. Krimminger. I will answer first.
I think I would agree, yes. But also I think it is
important to note that it is important what the regulators do
going forward with the resolution planning process and the SIFI
designation process and the supervision and capital
requirements.
Ms. Romero. And just to clarify my answer, the mere
enactment of the Dodd-Frank Act was not enough to end ``too big
to fail.''
Mr. Carney. So, not enough. So there were things in Dodd-
Frank that changed the tools, changed the playing field, really
changed the circumstances considerably or somewhat or--
Ms. Romero. Absolutely. There are a number of tools there.
I think the point is, just the mere enactment by itself was not
enough to end ``too big to fail.'' So it does provide
regulators the tools that the regulators said that they would
have liked to have pre-crisis.
Mr. Carney. Necessary tools that were suggested by
regulators that they didn't have when the crisis presented
itself in 2008?
Ms. Romero. That is right. And so then, it is up to the
regulators to use those tools and put it into action.
Mr. Carney. Right. So we have answered the question up here
on the dais, yes, it does; no, it doesn't; yes, it does; no, it
doesn't; yes, it does; no, it doesn't--both sides, not a very
intelligent kind of debate about that.
The question for me really is--and I think the other side--
or I heard the other side say, why don't we just let failing
institutions go through the normal bankruptcy process? And I
have heard the answer several times, ``Well, that is all we had
in 2008, and that is what led to big bailouts.''
Is that an accurate summary of those answers?
Mr. Krimminger. I would just respond for myself that,
certainly, being, if you will, living through 2008 and the
decisions that were being made, the conclusion was that
bankruptcy alone--we could not take the risk of bankruptcy
alone in the fall of 2008. Certainly, we had great trepidation
about some of the actions that were taken, but those actions
were necessary. It is important to have an additional option
that can provide for a more orderly resolution and liquidation
of a financial institution.
One thing I would want to note on that point is that the
reality is that the same types of powers we have in the Dodd-
Frank provisions for these institutions, with bankruptcy,
again, being the primary way you resolve financial firms--and
that is just the systemic ones we are talking about--that has
really become the international standard that other countries
are looking at. And it has actually placed the United States in
a leadership role by having those authorities in Dodd-Frank. We
are pushing very aggressively for other countries to adopt
similar types of powers. And it will take some time, but there
is progress being made.
Mr. Carney. So it would be accurate to say that it is a
more orderly, controlled bankruptcy process that might avoid, I
heard somebody say, $75 billion of extra losses in the Lehman
Brothers bankruptcy, that might avoid that kind of--and protect
creditors better?
Mr. Krimminger. The critical thing, from our perspective,
is that it would allow for mitigation of the systemic
consequences of the failure. It will have the additional
effect, we believe, of increasing value for creditors. But the
key thing is to make sure that we are able to address the
systemic consequences that we did not have the statutory
authority to address in the fall of 2008.
Mr. Carney. Ms. Romero, would you like to add anything to
that?
Ms. Romero. When we examined the past bailouts, we
definitely saw that the regulators felt like bankruptcy was not
an option. And so, looking forward, one of the things, when we
interviewed Secretary Geithner, he said to us--and this was in
relation to our audit that we did of the bailout of Citigroup--
``In the future, we may have to do exceptional things again.''
And you don't know what is systemic until you know what the
nature of the shock is.
Mr. Carney. So that is a good way of asking my last
question. I am sorry for cutting you off; I am watching my
clock. So are we better off to address--or are the taxpayers
better protected? Because, really, that is what is underneath
the question of whether Dodd-Frank has addressed ``too big to
fail.''
Ms. Romero. I think more needs to be done than just having
the tools there. The tools have to be implemented.
Mr. Carney. Sure.
Ms. Romero. To say--
Mr. Carney. And that process is under way. There are some
people who would want to curtail or hold that process up, stop
it, change it. That is not a good thing, to change it, to allow
that process to go forward and to do the additional things that
need to be done to really prevent ``too big to fail.'' Is
that--
Ms. Romero. The concept of ``too big to fail'' still exists
in the form of competitive advantages for the largest
institutions, who are now--the top 5 are 20 percent larger than
they were pre-crisis. So something has to change.
Mr. Carney. Thank you very much.
Chairwoman Capito. Mr. Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
I would like to follow up on your last comments there, Ms.
Romero, from the standpoint that we continue to encourage our
institutions to get bigger and bigger and bigger, and with that
size comes more risk. I think that we are winding up getting
into a position where we have more and more concentration, and,
as a result, whenever one of those institutions becomes
systemically interconnected with everybody else and is in big
trouble, then we are talking about how do we wind it down.
What happens when the whole group of all of these half a
dozen or dozen institutions now are all in trouble? How are you
going to wind them all down? This is the situation we were in
2008. This bill does not solve that problem. How do you respond
to that?
Ms. Romero. I certainly think that the concentration that
has happened in the banking industry puts our greater financial
system at risk.
Mr. Luetkemeyer. How do we solve that concentration
problem?
Ms. Romero. The only way to solve the concentration
problem--there are two ways: one, they have to be simplified,
whether they do it by themselves or whether they do it by
regulation; or two, there has to be a situation where if they
suffer financial distress, they are left to suffer the
consequences of the distress.
The problem is, if they are so interconnected with the
greater financial system, then them suffering financial
distress automatically puts the greater financial system in
stress. And so that is what needs to be addressed.
Mr. Luetkemeyer. The problem is, if you have one of these
big institutions that is in trouble, and you have narrowed it
down to just half a dozen, and they all are interconnected, one
infects the rest. So now, instead of one institution, you have
half a dozen in trouble. How do you solve that problem?
Because that is where we are going to be in 1 year, 2
years, 5 years from now. Because we continue to have more and
more of these institutions absorb the smaller institutions, and
you wind up with fewer and fewer institutions holding more and
more of the assets. And now, when one is sick, they are all
sick.
And if one can't be wound down in a reasonable amount of
time, what is going to happen? How are you going to react if a
September 2008 situation occurs again, where you have to be
able to make something within a few days' time of judgment to
get things going? You are talking here of 90 days to do
something on some of these institutions. You are not going to
have 90 days. If they are all infected with the same disease,
you are going to have about a week to solve this problem or the
whole thing collapses. How are you going to solve that problem?
Mr. Krimminger?
Mr. Krimminger. I think that is why we are doing advance
planning. That is why the resolution planning process is so
very important, for a couple of reasons. First of all--
Mr. Luetkemeyer. Mr. Krimminger, with all due respect, you
won't have time to resolve this problem, you won't have time to
resolve this process, because you are going to have about a
week to make the decision on how you rescue the institutions.
Mr. Krimminger. The resolution planning process is created
long before that week. The resolution planning process is
created for basically the bank holding companies now over $50
billion, it is in effect now. We are finalizing the regulation
very shortly to do that.
The second point about the resolution planning process is
that, ultimately, it is going to require the firms themselves
to look at simplification. There are parts of Dodd-Frank that
can require simplification. It is going to be important to move
forward with those, so that actually occurs. Because I would
fully agree with the Inspector General that simplification and
reducing concentration is important to the system, and we need
to move forward with doing that.
Mr. Luetkemeyer. Okay. How are you going to do the
simplification? Are you going to require them to sell assets
off, reduce size? Are you going to put a cap on deposits? What
is your suggestion for doing that?
Mr. Krimminger. That is going to depend upon how the
resolution plans for these firms come forward. If they can show
that they can be resolved under bankruptcy, then they can show
that, and that would be a very good thing. If they can't show
that, then they are going to have to take some hard decisions
about what steps next to take in order to address that
simplification issue.
Similarly, Title I of Dodd-Frank can impose, and should
impose, additional capital and leverage requirements on the
largest financial institutions so that they would have an
incentive then to not be so large and complex.
Mr. Luetkemeyer. You keep talking about the resolution of
the problem. I am trying to get to the problem before it
happens. Because my concern is, if we don't find a way to get
these banks capitalized or deconnected or be in less risky
positions, we are going to wind up with the whole system being
in a position where we can't save it unless you do another huge
bailout. And the bailout of 2008 is going to look like a little
bitty one compared to what is going to happen if we don't do
this right this time.
Mr. Krimminger. I would fully agree that higher capital
levels--in fact, that is part of the Basel III standard, to
have higher capital for the largest financial institutions.
I also fully agree that we need to take steps--the steps I
am talking about are far in advance of any resolution. The
planning process would be starting now, not waiting until there
is a resolution--
Mr. Luetkemeyer. My concern is, we are not going to have
time to do all this planning whenever the 2008 bomb hits us
again. I think we are being very shortsighted instead of being
long-sighted.
And if the Chair would just indulge me for 1 second, there
is a new movie out called ``Too Big to Fail.'' Have either one
of you seen it yet?
Ms. Romero. I have.
Mr. Krimminger. I have seen parts of it, yes.
Mr. Luetkemeyer. Is it a pretty accurate reflection of what
happened in 2008, in your opinion?
Mr. Krimminger. It is a fictionalized version.
Mr. Luetkemeyer. Ms. Romero?
Ms. Romero. I think it is a pretty sensationalized version,
but a lot of the same players and things that happened matched
up with what we audited.
Mr. Luetkemeyer. Okay. Just curious. Thank you very much.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Huizenga?
Mr. Huizenga. Thank you, Madam Chairwoman.
And just a general comment. I am shocked--shocked--that
anything would be sensationalized out of Washington or out of
Hollywood. So I am sure that is news to everybody.
But I have a general question. And I appreciate--and I have
to tell you, I have the utmost respect for my friend from
Missouri here, and his knowledge and background in it. And I
struggle to find anything more intelligent or as intelligent to
ask. But it seems to me that he is right, as we are heading
down this path of trying to make sure this never happens again.
I am curious if either of you believe that the notion, just
the notion of ``too big to fail'' has really been driven out of
the marketplace?
Mr. Krimminger. Not yet. Certainly, to date, the largest
financial firms do have something of an ``uplift,'' as it is
called in credit rating parlance, for the fact that they have
this expected potential future government support.
And as I mentioned earlier in my testimony or in response
to questions, the credit rating agencies have told me that it
is not based upon any statutory authority today, because they
agree that the statutory authority to provide a bailout doesn't
exist today. Their only concern is what could happen under a
future law adopted by a future Congress in a crisis?
That is why I think it is critical that we move forward
aggressively to try to provide that simplification and to
provide a more resilient and stable financial system through
higher capital and other measures.
Mr. Huizenga. Ms. Romero?
Ms. Romero. Absolutely not. These large firms are
definitely still ``too big to fail.'' They enjoy all the
competitive advantages: the enhanced credit ratings by Standard
& Poor's and by Moody's; cheaper access to credit that doesn't
take into account all the risk; the ability to raise capital.
These are all things that they currently enjoy. And, also,
there is a reduced market discipline.
Mr. Huizenga. Isn't that somewhat counter to what you were
saying earlier?
Ms. Romero. No, no, I believe it is the same thing. I am
saying, the enactment of Dodd-Frank itself did not change ``too
big to fail.''
Mr. Huizenga. Okay. And it seems to me--this was brought up
earlier by our colleagues on the side that is now empty--that,
in many ways, the unknown is worse than the known. And this
might be a case of the devil you know is better than the devil
you don't know.
And we are talking about SIFI and these systemically
significant institutions, but I had recently, as a freshman--I
am a freshman on this committee, so I wasn't here for those
debates. I am sorry that my friend from Illinois got duped
twice into voting for this. And as he was pointing out in his
diatribe--it wasn't a diatribe, close to, almost a question--
that, somehow or another, this was driven by people who love
big banks and who love Wall Street.
I had a visit up to Wall Street while I was here with a
couple of other freshmen. We sat down and had a meeting with a
CEO and a CFO from one of those major banks, not one of the
nine, but a major bank. And they looked at us, and one of the
statements was, ``Congressman, if we ever find ourselves in
this situation again, you simply are going to have to do the
bailout again.'' At which point, I said, ``No disrespect, but I
am curious. Where do you live?'' The answer was Westchester, of
course. I said, ``Do you know anybody--have any of your of your
friends or neighbors actually lost their job, much less their
home, over what happened?'' And the CFO kind of paused, and she
kind of looked up at the ceiling for a second, and she said,
``Well, honestly, no, I can't.'' I said, ``Here is the problem.
From Zeeland, Michigan, I can.'' I know people. My family is
involved in construction, all right? It has been a very, very
difficult time. And those ripple effects that my friend from
Missouri is talking about are huge.
And I am concerned--Moody's made note of this a year ago,
that this language was out there. I think part of the problem
is, the American people and the marketplace--and I am more
concerned about, frankly, the American people than I am the
marketplace--don't believe our actions match our words here.
So I am sure my friend from Illinois, who never dreamed he
would be coming here to bail out Wall Street but ended up doing
it twice, has every good intention. But this institution does
not have a good track record, regardless of party label, of
making sure that our friends back home in those small community
banks and in those credit unions and in those other areas that
are trying to provide that credit for those--whether it is
rural or suburban or even urban areas, that we don't have a
very good track record of following our own words. And it seems
to me that is a crucial element here, that we do not have the
markets that actually believe what we have been saying that we
are doing.
And it seems to me--and, Madam Chairwoman, I appreciate you
doing this hearing to underscore that and reiterate that for
us.
Thank you.
Chairwoman Capito. Thank you.
Mr. Grimm, for 5 minutes.
Mr. Grimm. Thank you, Madam Chairwoman.
Mr. Krimminger, just to follow up, and expand upon what Mr.
Luetkemeyer said, I guess I have a little trouble with the idea
of the premise that the FDIC will take a failed institution and
they will liquidate that institution. Is that correct?
Mr. Krimminger. That is what we have done, yes.
Mr. Grimm. And under Dodd-Frank, if we have one of these
situations where we have a large institution, we are going to
sell it off and we are going to try to get--obviously, if it is
functioning, you will get more money. So the sooner we are able
do that, the better. Is that correct?
Mr. Krimminger. Absolutely.
Mr. Grimm. Because there is only a handful of these very,
very large institutions, you have to assume that, say, out of
the nine, if one were to fall, the other eight are going to
pick up a vast majority of that business. Is that a strong
possibility?
Mr. Krimminger. There are a couple of options there. That
is one possibility. You can break up the institution in the
resolution process and sell some of the business lines, which
may be valuable to another firm.
Another option would be to put it into a bridge financial
institution and essentially recapitalize that bridge so that it
could be then offered off to the private market for
recapitalization itself. It would be close. All prior
shareholders would be zeroed out, so to speak, they would have
lost all their money. But it could be recapitalized so that you
wouldn't increase concentration.
Mr. Grimm. Right. That is my concern, is that we have one
or two of these large institutions in a situation where they
need to be liquidated, the market to absorb them is going to
make those other seven, eight major institutions that are going
to try to eat them up, probably be in a position to pay the
higher price, it is going to make them even more complex and
more interconnected, possibly compounding the problem.
Is that a concern? Is that something the FDIC is conscious
of, cognizant of, and considering?
Mr. Krimminger. It is a concern today in bank failures. It
would be a concern in the future in a resolution under Dodd-
Frank, because when one firm buys another firm, it does
certainly increase concentration.
Mr. Grimm. I just want to emphasize also, we have heard the
argument made 3 or 4 times today that none of these large
institutions want to be considered SIFIs. They are all lobbying
not to be and making it very clear that they don't want to be
subject to more regulations.
That, in and of itself, doesn't necessarily mean, though,
that is not conclusive evidence, that Dodd-Frank is doing what
it intended to do. Is that accurate to say, Mr. Krimminger?
Mr. Krimminger. I think that what--I am not going to
comment on what it does or does not mean, because it could mean
a bunch of different things, I think. But I think it certainly
is indicative of the institutions not wanting to have
heightened supervision and additional capital and liquidity
requirements.
Mr. Grimm. Have you known of any circumstance ever in the
history of banking where an institution wanted higher capital
and more regulation?
Mr. Krimminger. I will have to think about that, but I
can't recall, off the top of my head.
Mr. Grimm. It is going to be ``no.''
Ms. Romero, do you?
Ms. Romero. No. It is not surprising that the banks don't
want enhanced requirements and enhanced supervision.
Mr. Grimm. So I would conclude from that, that it is not a
reflection on whether Dodd-Frank is good, is bad, is
indifferent, or meets its goals. It is just simply, no
financial institution is ever going to opt in for higher
capital requirements or more regulation. That, to me, just
seems like common sense. So I wanted to say that, since that
argument was mentioned 3 or 4 times, that certainly is not
conclusive as to Dodd-Frank in any way, shape, or form.
Enforcement--I think we can talk about the best rules and
regulations ever promulgated in the history of the United
States, but they are only as good as the enforcement.
Mr. Krimminger, your FDIC banks now, don't they have some
type of leverage ratio requirements?
Mr. Krimminger. Yes. All U.S. banks today have leverage
ratio requirements, correct.
Mr. Grimm. The average approximately 12 to 1, give or take?
Mr. Krimminger. I would have to look at what the average
actually is, but that is probably reasonable.
Mr. Grimm. Probably in that ballpark?
Mr. Krimminger. Minimum.
Mr. Grimm. Right. Is there anything in Dodd-Frank that sets
an explicit ratio so that these financial institutions are not
overleveraged?
Mr. Krimminger. I do not believe there is a specific
leverage ratio in Dodd-Frank. Certainly, there are heightened
capital standards that are, we think, very important in section
171 of Dodd-Frank to set a floor so that you can't go below
those capital standards. But I don't believe there is a
specific leverage ratio per se in Dodd-Frank. That would be set
by regulation.
Mr. Grimm. Do you think that is something that should be
looked at or considered?
Mr. Krimminger. As you know, no doubt, the FDIC has long
advocated strict leverage ratio requirements for institutions.
Obviously, it would depend on what ratio would be set before I
could tell whether it would be something good from our
perspective or not.
Mr. Grimm. Fair enough.
My time has expired. Thank you.
Chairwoman Capito. Mr. McHenry, for 5 minutes.
Mr. McHenry. Thank you, Madam Chairwoman.
And to the witnesses, I certainly appreciate your
testimony, and I thank you for your service to our government.
Ms. Romero, thank you for your hard work taking over as
acting head of SIGTARP--as acting SIGTARP, I should say. And in
connection with that, your January report, quarterly report, in
the context of the Financial Stability Oversight Council, you
cite a quote from Secretary Geithner in which he says, ``You
don't know what is systemic and what is not until you know the
nature of the shock.''
And when you talk about systemic risk for non-bank
financial institutions, do you think the FSOC will be able to
determine properly, identify these firms that are systemically
important before the fact?
Ms. Romero. I think, now, one of the issues that we saw--
that interview with Secretary Geithner was in connection with
our audit of the bailout of Citigroup--was that the
determination that Citigroup was systemically significant was
really an ad-hoc decision, and it was really one based on some
gut instinct and fear of the unknown.
What they need to do now, what FSOC needs to do now is set
up some objective criteria. They have set out general
criteria--interconnectedness and size and liquidity. But they
do need to set some objective criteria. We understand that
there may be, in some cases, some need for some subjectivity
for different industries, for example. But they have to set not
only objective criteria but a framework in applying that
criteria. Because now, when someone says, ``The criteria is
size and interconnectedness,'' no one knows what that means.
And that is what FSOC is working toward, and that is what they
need do.
Mr. McHenry. And that has been in your quarterly
recommendations, right?
Ms. Romero. It has been part of our audit. It is part of
our work on the Council of IGs, CIGFO, that has oversight over
FSOC.
Mr. McHenry. Okay. And in connection with the Citi report
as well, you cite in that report, ``After the deal was
announced, the impacts on the market's perception of Citi was
immediate. Its stock price stabilized''--you mentioned this in
your testimony--``Its stock price stabilized, its access to
credit improved, and the cost of insuring its debt declined.''
So you think that designating firms as ``systemically
important'' will result in similar market perceptions and
actions?
Ms. Romero. I think that remains to be seen. Right now, no
one knows what it means--what is going to happen if there is
the designation. And so I think the markets are watching for
that. I think, right now, until there are some statements made
as to what it means to be systemically significant and the
enhanced supervision and if there is simplification that comes
from that, the markets are going to watch that.
Until the markets are convinced that what that means
doesn't include a future government bailout, all the
competitive advantages that normally are associated with ``too
big to fail'' are going to continue to persist and market
discipline is going to be reduced.
Mr. McHenry. Thank you.
Mr. Krimminger, in terms of the S&P's announcement that
they are going to make permanent the prospect of government
support in their ratings of these eight largest firms, and they
have received basically a ratings uplift with the notion that
there would be a Federal backstop to these largest
institutions, do you think that is a fair assessment?
Mr. Krimminger. I think that, as I had mentioned earlier in
my testimony, the uplift that these firms have gotten has been
in existence long before the crisis and long before Dodd-Frank.
Actually, just before the crisis, they began to be a little
more--the rating agencies, that is--began to be a little more
explicit about the basis for the uplift.
My discussions with the rating agencies indicated that the
reason for the uplift continuing is that they are looking at
the residual effects of the prior assistance that was provided
as well as, as they put it, the unpredictability of what a
future law could be. They agree with me, however, when I have
asked them the question pointedly, that the current law does
not allow for the bailouts done in 2008.
And I would just note in closing that Moody's has put these
institutions--or put the uplift under review for a downgrade
based upon their view that the statute says that there is not
going to be a bailout, so they should probably at least reduce
it, if not eliminate it.
Mr. McHenry. Moody's actually says in their report that it
is ``unlikely to withdraw all government support from the
ratings of these eight banking groups.'' So they even cite it
in their January-of-this-year report.
Ms. Romero, in your testimony, you say, ``Cheaper credit is
effectively a subsidy, which translates into greater profits,
giving the largest financial institutions an unearned advantage
over their small competitors.''
What are your thoughts on this development?
Ms. Romero. I think it still continues to exist. I think
the market still perceives these institutions as ``too big to
fail.'' They are bigger than they were pre-crisis. There is now
concentration in the industry. So that is what has to be
reversed that has not been reversed yet.
It is possible that if the regulators take action, that
could be reversed. But understand what I am saying. I am
talking about dramatic action that takes some significant
courage on the part of the regulators to try to protect the
greater financial system from one or two or others of these
systemically significant institutions from suffering a material
distress.
Mr. McHenry. Thank you.
Chairwoman Capito. Thank you.
Our first panel is concluded and dismissed. I would like to
thank both of the witnesses. I think we have had a very good
discussion.
At this time, I would like to call up our second panel of
witnesses. And I will introduce them individually once they get
seated.
I would now like to begin the second panel.
I would like to thank our witnesses for being here today
and for your patience with sitting through the first panel. I
appreciate that.
I will introduce you first for the purpose of giving a 5-
minute opening statement.
First, Mr. Stephen J. Lubben, Daniel J. Moore Professor of
Law, Seton Hall University School of Law.
Welcome, Mr. Lubben.
STATEMENT OF STEPHEN J. LUBBEN, DANIEL J. MOORE PROFESSOR OF
LAW, SETON HALL UNIVERSITY SCHOOL OF LAW
Mr. Lubben. Thank you for having me, Madam Chairwoman.
I thought that, rather than rehashing what I have written
in my prepared statement, I might just focus in on three
particular issues that I wanted to highlight.
First of all, especially since I am a bankruptcy person, I
think there is a tendency to focus on the Orderly Liquidation
Authority in isolation. And so, right up front, I want to make
the important point that I think there is a strong connection
between Title I and Title II of Dodd-Frank and, for that
matter, between Title II and all the preexisting regulations,
like prompt corrective action, so that, to some degree, what
happens with regard to the Orderly Liquidation Authority in
Title II is going to be driven by what happens beforehand in
Title I and by those regulations, how those regulations are
applied--for example, whether there are adequate capital
charges put in place for ``too-big-to-fail'' financial
institutions.
The second point I was going to make is just to lay out my
cards on the table as to why I don't think a pure bankruptcy
system will work, despite some of the comments this morning.
And so, in this regard, I may be somewhat on the same page as
Professor Barr.
First of all, speed and liquidity. As I say in my written
testimony, I think that as fast as cases like Lehman and
General Motors went, ideally, it would be even faster. So one
good aspect of the Dodd-Frank Orderly Liquidation Authority is
that the sale or the transfer can happen on the very first day
of the case.
The other one is liquidity. You do not want the financial
institution to collapse on the first day. Maybe some people do
want it to collapse on the first day, but if you don't want the
financial institution to entirely collapse on the first day,
then you need some sort of liquidity to back that up. And the
unfortunate reality is that probably in any financial crisis,
it is going to be the government. So I think, rather than
focusing on whether or not that liquidity exists, it is better
to focus on how do we either make sure that the industry pays
for it or that the government gets paid back when they do have
to pay it out.
In connection with this point, I will just say, too, that I
think we need to be very careful about drawing lessons from the
Lehman Brothers bankruptcy case and what that tells us how
about how Chapter 11 works with regard to large financial
institutions. The Lehman Brothers bankruptcy case, as the FDIC
is fond of noting, had no preplanning whatsoever, but that is
not typical for most large Chapter 11 cases. So we have to be
careful about that.
So if that is the case, then I get to my third point, and
this is where I probably diverge here. One of the problems I
see with the Orderly Liquidation Authority, it is the
overriding question of, will it work?
And the reasons why I wonder about whether it will work is,
first of all, there is uncertainty about when it applies. And
this was referred to in some of the earlier questions today. It
would have been a lot simpler, if we wanted to go down this
road with Orderly Liquidation Authority, to say it applies to a
set of financial institutions, period. Instead, we have this
odd system where Chapter 11 applies unless the Treasury
Secretary decides it doesn't apply, and then Orderly
Liquidation Authority applies.
I am not sure that is a very workable thing. There is the
scope of the Orderly Liquidation Authority. The analogy is
often drawn to what the FDIC has done in the past with regard
to bank resolution. The FDIC has full control over the entire
bank. The FDIC will not have full control over a financial
institution under the Orderly Liquidation Authority because it
doesn't apply to the bank part, it doesn't apply to the
insurance company part; it only partially applies to the broker
dealer part.
And then there is the final question of transparency, which
I think gets to a question of legitimacy. Certainly, in the
financial community, the people that I have talked to, there is
just some real concern about the FDIC's ability to resolve
these complicated financial claims in a timely manner, and the
way that they are going to do it, since they don't have any
obligation to do so publicly.
And when we get to the question of ability, there is also
the question of staffing, which I think was alluded to also in
the first panel today. Does the FDIC have the ability to staff
the resolution of multiple large financial institutions
simultaneously? I think there is some real skepticism on that
point.
So, despite what the FDIC has occasionally said about me in
the past, I am not a bankruptcy fanatic, but, rather, I think
the Orderly Liquidation Authority could be improved from what
it is.
[The prepared statement of Mr. Lubben can be found on page
82 of the appendix.]
Chairwoman Capito. Thank you.
Our next panelist is the Honorable Michael Barr, professor
of law, University of Michigan Law School.
Welcome.
STATEMENT OF THE HONORABLE MICHAEL S. BARR, PROFESSOR OF LAW,
UNIVERSITY OF MICHIGAN LAW SCHOOL
Mr. Barr. Thank you, Madam Chairwoman.
Over 2\1/2\ years ago, the United States and the global
economy faced the worst economic crisis since the Great
Depression. The crisis was rooted in years of unconstrained
excess on Wall Street and prolonged complacency in Washington
and in major financial capitals around the world.
One year ago, President Obama signed the Dodd-Frank Act,
which tackles the key problems that led to the crisis and will
help to end the perception of ``too big to fail.'' The Act
provides for supervision of major firms based on what they do
rather than their corporate form. Shadow banking is brought
into the daylight. The largest firms will be required to build
up their capital and liquidity buffers, constrain their
relative size, and restrict their riskiest activities.
The Act comprehensively regulates derivatives with new
rules for exchange trading, central clearing transparency, and
margin. The Act creates a new Consumer Financial Protection
Bureau. And the Act creates an essential mechanism for the
government to liquidate failing financial firms without putting
the taxpayers or the economy at risk.
With respect to resolution, before Dodd-Frank, the
government did not have the authority to unwind large financial
firms that failed, such as Bear, Lehman, and AIG, without
disrupting the broader financial system. When the financial
crisis hit, that left the government with the untenable choice
between taxpayer-funded bailouts and financial collapse.
Today, major financial firms will be subject to heightened
prudential standards, including higher capital and liquidity
requirements, stress tests, and living wills. These standards
will force firms to internalize the costs that they impose on
the system and will give them incentives to reduce their size,
complexity, leverage, and interconnections. Should such a firm
fail, there will be a bigger capital buffer to absorb losses.
These measures will help to reduce the risk that any firm's
failure will pose a danger to the stability of the financial
system.
But as Lehman's collapse showed quite starkly, there are
times when existing tools were simply not adequate to deal with
the insolvency of a large financial institution in times of
severe stress. That is why the Act permits the FDIC, in limited
circumstances, to resolve the largest financial companies
outside of bankruptcy, consistent with the approach long taken
for bank failure.
This is the final step, in my view, in addressing the
problem of moral hazard, to make sure that we have the capacity
to unwind major financial firms in an orderly fashion that
limits collateral damage to the system.
Under the Orderly Liquidation Authority, the FDIC is
provided with the tools to wind down a major financial firm at
the brink of failure. Shareholders and other providers of
regulatory capital to the firm will be forced to absorb losses,
and culpable management will be terminated. Critical assets and
liabilities of the firm can be transferred to a bridge
institution, while any remainder is left in the receivership
estate. Any required funding for the FDIC to provide liquidity
can be obtained through Treasury borrowing that is
automatically repaid from the assets of the failed firm or, if
necessary, from other ex-post assessments on the largest
financial firms. Taxpayers are not on the hook. The resolution
authority allows the FDIC to wind down a firm without putting
the financial sector and the economy as a whole at risk.
The objectives of resolution differ from those of the
Bankruptcy Code. The purpose of the Bankruptcy Code is to
reorganize or liquidate a failing firm for the benefit of its
creditors. The resolution authority is structured to manage the
failure of a financial firm in a manner that protects taxpayers
and the broader economy. This purpose is explicitly different
from the Bankruptcy Code, and that is why the Act is narrowly
tailored to situations in which there are exceptional threats
to financial stability.
In the future, major financial institutions would have
prepared a living will embodying a liquidation strategy and
would have been subject to comprehensive supervision. Such
firms would have larger capital buffers and stringent
conditions imposed on them.
But we need to have some humility about the future and the
ability to predict any financial crisis. In a severe crisis, if
one or more financial firms fail and prudential measures are
insufficient, a receivership should be available.
This has three key advantages over the past: first, the
FDIC could swiftly replace the board and senior management;
second, a temporary stay of counterparty termination and
netting rights, during which the FDIC could transfer qualified
financial contracts to a third party or a bridge institution;
and, third, the ability to set up a bridge firm with financing
from the FDIC to fund necessary liquidity.
In my view, the Dodd-Frank Act puts in place the key
reforms that were necessary to end the perception of ``too big
to fail'' and to establish a firm foundation for financial
stability and economic growth in the decades ahead.
Thank you.
[The prepared statement of Mr. Barr can be found on page 54
of the appendix.]
Chairwoman Capito. Thank you.
I would like to begin the questioning.
Mr. Barr, in your 5-minute statement there, you made two--
and you might have made others that I missed--but you talked
about Dodd-Frank being able to constrain--would work to
constrain the relative size of the institutions and that
through further Dodd-Frank regulations, there would be
incentives to reduce size. We just heard--and I think we know
this to be true--that the bigger institutions are actually
bigger than they were several years ago.
How is that working? We have had Dodd-Frank for almost a
year, and, obviously, neither one of these constraints of
relative size or incentive to reduce size--how is that going to
change here in the next year or 2 years, in your mind?
Mr. Barr. Madam Chairwoman, the increase in size of these
institutions occurred during the financial crisis, prior to the
passage of the Dodd-Frank Act. What we have seen since the
passage of the Dodd-Frank Act and the implementation of the
BASEL III capital rules is that those firms are building bigger
capital buffers and, at least in several instances, reducing
balance sheets, shedding off riskier sets of activities. And I
think we are going to continue to see that--
Chairwoman Capito. So, would I take that to mean that that
is constraining their size, if they are shedding their balance
sheet? Is that the main thing, in your mind?
Mr. Barr. Madam Chairwoman, the phrase that I used in my
testimony and that I believe is the case is that the Dodd-Frank
Act will constrain their relative size--that is, as a share of
the financial sector as a whole. So, in particular, I was
referring in my remarks and in my longer testimony to the
provision in the Dodd-Frank Act that limits the liabilities of
any one large financial firm to no more than 10 percent of the
liabilities of the financial system. If they reach that level,
then they are constrained in their ability to acquire or merge
with other financial firms. They can continue organic growth.
That is a relative constraint on relative size.
I also believe that the implementation of the BASEL III
capital rules, the Collins amendment, the FDIC's new assessment
system, will all have the effect of providing a kind of tax on
firms as they continue to grow, particularly on the short-
funded liability side of the system. So what you will see over
time--and this will take time--is a relative constraint on the
growth of any one firm as a share of the overall financial
system.
Chairwoman Capito. But a relative growth of one firm--and
then when you look at the SIFIs in whole, that continues to
grow and have a larger share, market share, in the country.
We have heard a lot about regulations for our community
banks. The gentleman from Georgia talked about the failures of
banks in his home State, and that is a concern. I would like to
ask Mr. Lubben if he would like to comment on that point.
Because, in my mind, ``too big to fail'' is a lot of things,
but ``too big to fail'' is getting so big that you can't fail--
that you can't be permitted to fail.
Mr. Lubben?
Mr. Lubben. It seems to me that Dodd-Frank really has only
an indirect effect on this issue. It has an indirect effect in
the sense that it--and this is somewhat what Michael was
speaking about--that it puts a kind of tax on the bigger
financial institutions, so that to the extent that smaller
institutions are more nimble and more competitive, they may
eventually take market share away from the bigger financial
institutions. But that strikes me as a kind of a glacial way of
going about solving that problem.
On the other hand, I do have my doubts about whether
anybody has the political fortitude to try to tackle the issue
of financial institutions being too big head-on.
Chairwoman Capito. And the SIGTARP, when she was here at
the first panel, she kept going back to that, in terms of a way
to assure that the bigness is not part of the problem. She
talked about the systemic--did you want to make another
comment?
Mr. Barr. Just to that point, if I might. I don't think
that it is purely a question of the size of the institution.
You also want to know, what is the size of the capital buffer,
what are the other protections built into the system?
We have very large institutions in the United States. They
are a fraction of the size of our GDP of our economy. They are,
in comparison, quite small, say, with respect to U.K. or Swiss
firms, which are many multiples of their economy.
I think what we want in our system is exactly what you
said, which is a diversity of kinds of financial institutions.
We need to have a system that is strongly supportive of
community banks and credit unions and thrifts around the
country. I think that is one of the great strengths of the
American system that we need to preserve and protect.
Chairwoman Capito. Mr. Lubben, really quickly, do you think
it is plausible under the current law that the government will
refrain from bailouts in times of severe financial crisis?
Mr. Lubben. It depends. The phrase ``bailout'' is subject
to multiple interpretations, so it depends what precisely you
mean by that.
I think the government will refrain from bailing out the
failed financial institution itself. What the Orderly
Liquidation Authority does allow them to do, though, is bail
out the counterparties to that financial institution, so not
unlike the treatment that Goldman got with regard to AIG.
And in the sense that the financial institution that fails,
I think as was--the point that was made repeatedly this morning
was right--that financial institution has to fail and under the
law. What the Orderly Liquidation Authority does allow, though,
is the funding of the counterparties to that financial
institution. So, in some sense, that is a bailout, a bailout of
the counterparties of the failed financial institution.
So that is a long way of saying ``no.''
Chairwoman Capito. All right, thank you.
Ms. Maloney for 5 minutes.
Mrs. Maloney. I want to thank both of the panelists for
coming. And thank you, Professor Barr, for coming all the way
from the University of Michigan.
A great deal of the debate today on both sides was about
the modified bankruptcy versus the Dodd-Frank resolution
authority. And I want to point out that during the debate and
work on Dodd-Frank, at no time did my colleagues in the
Republican Party propose regulatory reforms to prevent a
company from endangering the system by becoming ``too big to
fail.''
And, specifically, many people have argued today that the
Republicans would say that alternative uses of a variant
reorganization bankruptcy would have allowed the company to
survive, instead of mandating its liquidation. Could you go
into greater detail?
I will note that we had the bankruptcy authority during the
crisis. Lehman is still in bankruptcy; it hasn't been resolved.
And in the bankruptcy proceeding, there is no provision that
you don't use taxpayers' money to help them out.
Could you--you were here during the hearing, and you saw
the arguments back and forth. And I wish that you would go
forward with why the proposal that is in Dodd-Frank is superior
to bankruptcy in terms of the overall economy and safety and
soundness and the taxpayer.
Mr. Barr. Thank you, Representative Maloney. I would be
happy to start.
There are a number of key changes that are put in place in
the Dodd-Frank Act that will make the financial system more
resilient in the future: higher capital requirements,
particularly for the largest, most complex firms; higher
capital requirements at the holding company level--holding
companies before were largely ignored and now they are a
central feature of higher standards in the system; greater
limits on interconnectedness among firms; limits on loans to
one borrower; limit on inter-financial-institution credit
exposure; limits on the riskiest activities of firms related to
proprietary trading and hedge fund investment; limits on the
ability of financial institutions to use loopholes in the law
to evade regulatory requirements; the moving of a savings-and-
loan holding company into the same structure as a bank holding
company and their supervision at the holding-company level by
the Federal Reserve; increased assessments based on total
liability in the system for the largest firms by the FDIC; a
much greater move to consolidated, uniform supervision
standards; annual and transparent stress tests of all the major
institutions so there is a horizontal review of the safety and
soundness of those institutions; a requirement of living wills
for those institutions that have the ability and the
requirement to simplify their organizational structure and
better align them. That is all before you get to the question
of resolving a firm. Those are all measures designed to make
the financial system more resilient.
With respect to resolution, the Dodd-Frank Act made several
key changes. It eliminated the ability of the Federal Reserve
under 13(3) to provide assistance to an individual failing
institution. It removed the prior authority of the FDIC to
issue a similar approach in the form of open bank assistance to
a failing firm. And it provided the liquidation authority that
has been the central topic of discussion today that provides
that the firm that is failing will be put out of its misery, or
our misery; culpable management will be fired; and shareholders
and regulatory capital will be wiped out.
And then there is a provision in there that permits the
FDIC to continue the firm in a bridge firm or to sell it using
a liquidity provision that I think all four of your speakers
this morning believed is an essential element of any system
that is designed to preserve financial stability at a time of
great economic stress.
Mrs. Maloney. Could you comment on bankruptcy and the
alternative? They keep saying bankruptcy would work. Obviously,
it didn't work; we are still mired in Lehman. But could you
specifically address the bankruptcy alternative as not being
appropriate going forward?
Mr. Barr. I think that the entire package of reforms that
Dodd-Frank put forward are essential for ending the problem of
``too big to fail.'' I don't think that tweaking the bankruptcy
system alone would resolve the problem.
If you had decided--if the Congress decided, instead of
providing special resolution, to go through the bankruptcy
route, I believe that Congress would have found itself
recreating the entire regulatory structure and calling it
bankruptcy.
I think the essential elements include supervision, capital
requirements, the ability to intervene before a firm fails, the
ability to have a stay of netting rights under the contract,
the ability to fire culpable management, and the ability to
fund through liquidity in that crisis period. So that whole
package of reforms was essential.
I think the bankruptcy process, unfortunately, has a
different set of purposes, and it achieves those purposes, I
think, reasonably well. But they are not the same purposes that
the Congress is trying to achieve in making the financial
system more resilient.
Mrs. Maloney. Yes, and preventing. Thank you so much.
My time has expired.
Chairwoman Capito. Thank you.
Mr. Renacci for 5 minutes.
Mr. Renacci. Thank you, Madam Chairwoman.
And thank you, gentlemen, for being here.
I think we would agree today that the Orderly Liquidation
Authority is better than bankruptcy because bankruptcy doesn't
have some of the things that are available to the Orderly
Liquidation Authority. So the question would be, if we were
able to change the Bankruptcy Code so that some of the
attributes of the Orderly Liquidation Authority were there,
would it not be better?
Let me tell you why I am saying that. I have actually sat
in the chair and had to take seven companies--I was hired--
seven companies through the bankruptcy system. So I see it as a
good way. It protects creditors, it protects assets. The only
difference, from what I see, is that it doesn't have--and, Mr.
Lubben, you said this earlier--the ability for speed and
liquidity.
So if we were able to change the Bankruptcy Code to ensure
speed and offer liquidity, tell me why you don't believe the
bankruptcy system would not offer the same opportunities as the
Orderly Liquidation Authority. And it would take government out
of liquidation and put the courts system into the liquidation
process.
Mr. Lubben first, and then Mr. Barr.
Mr. Lubben. I do think that if you modified the Bankruptcy
Code you could achieve, probably, a better solution than either
pure bankruptcy or the Orderly Liquidation Authority. I think,
to be clear, it would create a new kind of system that would be
neither bankruptcy nor bank resolution; it would be some sort
of hybrid of the two. But I think that is doable and, in some
ways, might be preferable.
Speed, liquidity--I would add the additional criteria that
you would want to have the regulators have the ability to
commence a case, not just the company itself. I think, given
those conditions and echoing what was said about the needs to
also address the safe harbors--but I know that is not
necessarily this committee's jurisdiction--if you can do all
those things, then I think you can get to the same place. And I
think it would probably be preferable because it would, I think
in many respects, be more transparent and more legitimate to a
lot of people in the market.
Mr. Renacci. Mr. Barr?
Mr. Barr. I think that you could make changes to bankruptcy
law that would make it more effective than it currently is. I
agree with some of the suggestions that Professor Lubben made.
I still think it would be an inferior solution to the one
that Congress has already enacted. Because what Congress has
enacted is an overarching system of supervision, capital
requirements, and resolution authority that work together as a
whole to improve the resiliency of the financial system. You
have the ability of regulators to intervene, to supervise the
institution, to increase capital requirements, to increase
liquidity requirements, and to intervene on an early basis if a
firm gets into financial trouble, so that the resolution aspect
of Dodd-Frank is at the tail end of a supervisory process.
And I would suggest that is the more useful frame to think
about resolution in than as a separate matter akin to
bankruptcy.
Mr. Renacci. But, again, you would have government
intervention versus court intervention on both sides. And I am
trying to keep the government out of this, by the way, as much
as possible, although I know we need regulations and we need
supervision. And I think if the regulators would have stepped
up in 2008, maybe some things would not have occurred.
So the question is, what is better?
Mr. Barr. I would agree with you that the key is having
supervisors supervise and regulate and impose capital
requirements and be involved. There is no way around that.
I think what we had in the lead-up to the financial crisis
in 2008 was a failure of supervision, regulation, and legal
structure that was corrected in the Dodd-Frank Act and needs
now to be implemented to be effective. And I think that is
really where our energies ought to focus in the coming years.
Mr. Renacci. One other quick question. Living wills, I know
we talk about this as an advance opportunity. As a CPA and a
business owner, putting living wills out there and having--I am
not too sure how long they would last, because a living will
could actually have to be updated daily, if not weekly,
depending on what the entity was going into.
So we are all running on a premise that the living will
could be the answer. But would both of you comment and tell me
whether you would agree or disagree that a living will, if not
changed on a weekly basis sometimes, would not really be
capable of handling the track of which direction these
companies have gone.
Mr. Barr. I will start, and then others can join in.
I agree that a living will is not a silver bullet, to mix
our metaphors. It is not the sole answer to how the system
needs to work in the future. I think it is an additional useful
tool in the supervisory process and will facilitate early
resolution.
I also agree with you that, to be effective, living wills
have to be updated almost on a continuous basis. That is, a
living will is a document that helps the firm track its
business risk against its legal organizational structure. It is
going to need to be updated and should be updated, I think, on
a continuous basis.
Mr. Lubben. Just to chime in on that, I am deeply skeptical
of the living wills. I think they have some potential, but you
are right, they have to be updated almost continuously. And I
think you also have to expect that both regulators and boards
will have much more foresight than they did in the past to be
able to see the problems before they develop.
And as somebody who also has experience in the bankruptcy
area, I know that boards of distressed companies routinely
suffer from what we refer to as ``terminal optimism.'' And, it
is hard for me to get to the point where I will trust that that
system is going to work as designed. Theoretically, it sounds
nice, but I am skeptical.
Mr. Renacci. Thank you.
Chairwoman Capito. Thank you. The gentleman's time has
expired.
Mr. Canseco?
Mr. Canseco. Thank you, Madam Chairwoman.
Let me ask a very brief question with regards to Title II,
section 210, sections (a)(9)(D), limitation on judicial review.
This provision severely limits creditors' right to appeal any
decisions. And I don't want to quote from it because it will
take too much of our time.
But doesn't that, in fact, impose an additional burden on
our economy, if creditors have no right of appeal from any
decisions of--
Mr. Barr. If I might begin with an answer, that provision
is the same kind of provision that has long existed in the bank
failure law. And it is interpreted by the FDIC and by the
courts to permit claimants to bring, not an appeal of an
administrative ruling, but an actual de novo case in district
court to adjudicate their claims. So they have full right to
say that the claim that has been disallowed should, in fact,
have been permitted.
Mr. Canseco. It says in subsection (i), ``Any claim or
action for payment from, or any action seeking a determination
of rights with respect to, the assets of the covered financial
company for which the Corporation has been appointed receiver,
including any assets which the Corporation may acquire from
itself as such receiver.''
So it cannot go out there to Federal court and even bring
it up de novo, because they will throw subsection (d) in their
face.
Mr. Barr. Again, I am happy to discuss this with your staff
and counsel for the committee at any time, but that provision
has been interpreted by both the FDIC and the courts to permit
de novo review of claims. And that would be the same under this
procedure. And, in addition, there are other judicial
protections, as you know, built into the Act.
Mr. Canseco. Okay. Thank you.
Recently, economists at the Richmond Federal Reserve
published a paper estimating how large the Federal safety net
for the financial sector has become. A study earlier this
decade shows that, in 2002, approximately 45 percent of
liabilities in the financial sector had some kind of government
backing. The recent paper completed by the Fed from Richmond
showed that, by the end of 2009, nearly 60 percent of financial
sector liabilities had either an explicit or implicit
government backing. This includes everything from FDIC-insured
deposits to pension guarantees to the debt of Fannie Mae and
Freddie Mac.
So we are at a point today where nearly two-thirds of all
the liabilities in our financial sector are guaranteed by the
government, and most of these liabilities are concentrated in
the largest financial institutions.
I would be interested to hear your thoughts on how this
contributes to moral hazard, but also how it threatens to
perpetuate ``too big to fail,'' given that large institutions
are benefitting the most from these guarantees.
Mr. Barr. I would agree with the idea that the government
needs to reduce its exposure in the financial sector. I think
the Dodd-Frank Act makes it much easier for the government to
do that.
The kinds of expansions that occurred during the financial
crisis were extraordinary actions that the Congress, the FDIC,
the Federal Reserve, and two different Treasury Secretaries
felt were essential to preserve financial stability. But they
ought to have been on a temporary basis, and they ought now to
be wound down.
Mr. Canseco. Mr. Lubben, do you want to comment?
Mr. Lubben. In part, again, this goes back to the question
of the size of some of the ``too-big-to-fail'' institutions and
what we want to do and what we have the political will to do,
regulatorily speaking, with regard to those institutions. They
are what they are, and I think we have to face up to that
reality.
Mr. Canseco. Thank you. My time has expired, and I yield
back.
Mrs. Maloney. May I clarify?
Chairwoman Capito. The gentlelady, yes, from New York.
Mrs. Maloney. I am looking at the Public Law. And the
limitation on judicial review, when you read the item, ``Any
claim or action for payment from, or any action seeking a
determination.'' Before, it said, ``except as otherwise
provided in the Title,'' and it clearly provides in the Title
``de novo review.'' And we can get you that paperwork.
Thank you.
Chairwoman Capito. Okay. Thank you.
Mr. Luetkemeyer for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman.
As we look at this Orderly Liquidation Authority, how
effective do you think it is going to be, from the standpoint
that a bank is a unique institution--it is a unique business
entity from the standpoint that much of its business is
transacted on the basis of confidence, the belief that if I
loan you money, I am going to get it back; or if you invest
money with me, you are going to get it back from me. And with
the Orderly Liquidation Authority, we are sort of again
believing that business is going to kind of go on, everybody is
going to be okay.
And, Professor Lubben, you made the statement that the FDIC
is even not in full control of the liquidation, because there
is going to be a lot of it that is going to be outside their
purview.
Would both of you like to comment on how it is going to, in
reality, work? Is this really going to be able to be something
we can actually do because of the uniqueness of a banking
institution?
Mr. Lubben. Maybe I can start with that.
I have serious concerns about how an actual orderly
liquidation case would go, particularly if you start to think
about an institution like Citibank or Citigroup. Part of that
will be an Orderly Liquidation Authority; part of it will not.
Especially if you imagine, purely hypothetically, a time when
they still own an insurance company, it becomes even more
complicated.
I think the best I can say about Dodd-Frank in this regard
is, we can hope that the Title I provisions prevent us from
ever getting to that point in the first place. And so, in that
sense, I think that Dodd-Frank does do something good.
But I think there are real concerns about how an Orderly
Liquidation Authority case will run, what kind of litigation
will spin out of such a case. Because I think, while I agree
that there are rights to court review, they are kind of
cumbersome and they may not really get us to a place that is
really any better than we are with regard to Lehman Brothers
today.
And there is this question of, does the FDIC have the staff
and the capability to handle multiple resolutions
simultaneously? Because, again, I don't think they are going to
happen in isolation. I think they are going to come in bunches.
Mr. Luetkemeyer. This was my concern a while ago, if you
listened to my questions, that I think that, as they get bigger
and bigger, they are all systemically linked together,
therefore if one is in trouble, the whole outfit is in trouble
and our whole system is in trouble. And now, while this sounds
like a wonderful program to try and get this situation under
control, I think that this bill has exacerbated our situation
by allowing them to get bigger, and we don't have the kind of
controls in place that we need to be able to hold these folks.
Mr. Lubben. Again, in part, that will depend on how the
Title I provisions are implemented.
Mr. Luetkemeyer. Right. Okay.
Professor Barr?
Mr. Barr. If I could, I think it is a good idea for all of
us to have a great deal of humility about our ability to
predict the future. And I think being skeptical about that is a
good thing.
I think that the Act takes that as the right approach, in
the sense that the Act, the Dodd-Frank Act, attempts to build
in bigger buffers into the system, more resiliency into the
system, higher levels of capital, greater liquidity
requirements--
Mr. Luetkemeyer. If I can interrupt just a second?
Mr. Barr. Yes, please.
Mr. Luetkemeyer. My time is running out here.
And you made the comment a while ago, to follow up on your
point right there with regards to the type of investment, the
type of risk that you are taking on, you made the comment a
while ago with regards to derivatives. It is a huge problem for
a lot of these bigger institutions. A couple of them don't have
a lot of involvement in it, but many of them do.
And the derivatives market--I was listening to somebody the
other day, and they were telling me that the derivatives market
now is 10 times the GDP of the world. That scares the heck out
of me. It just boggles my mind. It scares me to death, because
we have these institutions involved in this, and we have them
all linked together, and here we go.
So where are we with Dodd-Frank with regards to sort of
divesting ourselves or minimizing our risk along that line?
Mr. Barr. The Dodd-Frank Act, I think, fundamentally
changes the basic system of oversight and regulation in the
derivatives market. I think it is one of the essential reforms
that the Dodd-Frank Act put in place.
Mr. Luetkemeyer. We are not there yet, are we?
Mr. Barr. No. With respect to all the provisions of the
Dodd-Frank Act, as is typical under any law, you need to
implement it through rules. And the rule-writing is proceeding
quickly, but it is not done.
Mr. Luetkemeyer. Right. Okay.
One more quick question here is--I guess my concern is
that, again, we go back to the foundation of where we are at
with this, with the bigger guys getting more risky. Are you
comfortable with this bill having solved the problem? Or do you
think it is going to exacerbate it? Or do you think we are
headed down the road with--or, should we do more, I guess is my
question.
Mr. Barr. I think the bill and the changes that are being
made to capital requirements are the right framework to proceed
on. I think when those are fully done, when those are fully
implemented, we will have a much more safe, resilient financial
system in the future. Is it going to prevent every financial
crisis in the future? No way.
Mr. Luetkemeyer. Dr. Lubben, really quickly?
Mr. Lubben. I would agree with what was just said, but I
would note that the focus is all on before-the-hand regulation.
And you really do need to think about the what-if scenario of
resolution, also, ahead of time. And I think that is the big
unfinished aspect of Dodd-Frank. It strikes me that Orderly
Liquidation Authority is kind of a job half-done. And I would
hope it would be improved, but we will see.
Mr. Luetkemeyer. Thank you very much.
Thank you, Madam Chairwoman.
Chairwoman Capito. Thank you.
Mr. Canseco, did you want to make a clarification?
Mr. Canseco. Madam Chairwoman, if I may just ask a follow-
up question.
Gentlemen, both of you seem to be law professors and very
much knowledgeable of the Dodd-Frank Act. Where in the Act does
this de novo review for creditors--where is it specified?
Mr. Barr. I apologize; I don't have my Act or section in
front of me. Perhaps Professor Lubben can.
But I can assure you that the Act and the way that the
provision that you read has been interpreted in the past by
both the FDIC and the courts permits parties to proceed for
their claims, for de novo review of their claims.
And as I indicated before, I would be happy to follow up
with your staff and committee staff with the particular
specifications.
Mr. Canseco. But, Professor, this law isn't even a year
old. And where has a court ruled on Dodd-Frank and on the issue
of creditors?
Mr. Barr. I apologize. The provision I am talking about is
the provision that is equivalent to the provision that has been
interpreted by the courts and the FDIC in the past consistent
with what I just said.
Mr. Canseco. Thank you.
Mr. Barr. And I would be happy to follow up with you after.
Mrs. Maloney. If the gentleman would yield, we have the
exact section of the law right here. We can--
Mr. Canseco. Would you cite it to me, please?
Mrs. Maloney. Okay. It is on page 1466, Public Law 11203.
And it is section 4, under (d).
Chairwoman Capito. I think we can take this discussion
maybe--
Mr. Canseco. All right.
Chairwoman Capito. --behind and let our witnesses go.
I would like to express my gratitude for your patience and
for your intellect and for your ability to really answer some
very in-depth questions. So I appreciate that.
The Chair notes that some members may have additional
questions for this panel which they 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.
At this point, I will close the hearing.
I would like to say just one final comment for myself. I
think my big takeaway here: Best-laid plans, all good
intentions to try to figure out how to avoid what happened. We
are really not going to know unless we have to use this
mechanism again. Let's hope we don't have to use this
mechanism. I think that would be the best takeaway we could
have today.
Thank you very much.
[Whereupon, at 12:50 p.m., the hearing was adjourned.]
A P P E N D I X
June 14, 2011
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