[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



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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

                              ----------                              
                                                                   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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