[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
THE ANNUAL REPORT OF THE FINANCIAL
STABILITY OVERSIGHT COUNCIL
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
FIRST SESSION
__________
OCTOBER 6, 2011
__________
Printed for the use of the Committee on Financial Services
Serial No. 112-70
_____
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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
C O N T E N T S
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Page
Hearing held on:
October 6, 2011.............................................. 1
Appendix:
October 6, 2011.............................................. 39
WITNESSES
Thursday, October 6, 2011
Geithner, Hon. Timothy F., Secretary, U.S. Department of the
Treasury....................................................... 3
APPENDIX
Prepared statements:
Paul, Hon. Ron............................................... 40
Geithner, Hon. Timothy F..................................... 42
Additional Material Submitted for the Record
Geithner, Hon. Timothy F. :
Financial Stability Oversight Council, 2011 Annual Report.... 46
Written responses to questions submitted by Representative
Posey...................................................... 226
THE ANNUAL REPORT OF THE
FINANCIAL STABILITY
OVERSIGHT COUNCIL
----------
Thursday, October 6, 2011
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 12:47 p.m., in
room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the committee] presiding.
Members present: Representatives Bachus, Hensarling, Royce,
Biggert, Capito, Garrett, Neugebauer, McHenry, McCotter, Posey,
Westmoreland, Luetkemeyer, Huizenga, Hayworth, Renacci, Hurt,
Dold, Schweikert, Grimm, Canseco, Stivers, Fincher; Frank,
Waters, Maloney, Gutierrez, Velazquez, Watt, Meeks, Capuano,
Hinojosa, McCarthy of New York, Baca, Lynch, Scott, Green,
Cleaver, Donnelly, Himes, Peters, and Carney.
Chairman Bachus. The hearing will come to order. Without
objection, all Members' written statements will be made a part
of the record. The Chair recognizes himself for an opening
statement.
Mr. Secretary, this morning you were quoted as saying that
the biggest risk we face is financial institutions not taking
enough risk. Secretary Geithner, with all due respect, I am not
sure you have a clear picture of reality as it relates to not
only the thousands of pages of restricting regulations that
have been imposed on financial institutions, but also the daily
drumbeat of the FDIC and other agencies directing the banks not
to take risks. If you want a dose of reality, sit in my office
or the offices of other members of this committee and listen to
the stories related to them by Main Street bankers talking
about the restrictive regulations imposed.
Who do you think has the responsibility to encourage the
banks to make more loans? Isn't it the regulators? Isn't it the
regulators who are part of the Financial Stability Oversight
Council (FSOC)? If those regulators who make up FSOC want to
consider who is creating systemic risk, they need to look in
the mirror. If in fact you are correct and banks are not taking
enough risk, I would submit to you that the problem doesn't lie
with the loan officers in the community and regional banks, it
lies in the regulatory approach of the very members of FSOC.
We have all been saddened by the news of Steve Jobs' death.
His life should remind all of us that it is entrepreneurship
and the private sector and innovation within the private sector
that creates jobs. He worked to make his company the most
profitable it could be, and by doing so enriched the lives of
people around the world through his company's innovative
products. Without those profits, Steve Jobs would not have made
Pixar a success, and could not have vastly improved the cell
phone, the iPod or the tablet computer. That is why many of us
were disturbed to hear President Obama questioning whether
businesses have a right to earn a profit. Mr. Secretary, I hope
you don't agree with the President on this point.
There is a very real and palatable concern among many
Americans that the increasing size and cost of government, and
especially the expansion of the regulatory state, makes it
harder and harder for the next Steve Jobs to come along, and
that more and more regulation stifles innovation and
productivity. Many of us on this committee have expressed that
same concern to you. Mr. Secretary, more regulations from
Washington and higher taxes do not encourage risk- taking,
business development, and growth.
Another successful entrepreneur, Charles Schwab, said
recently about our economic problems, ``We can't spend our way
out of this. We can't tax our way out of this. We can't
artificially stimulate our way out of this. We cannot regulate
our way out of this. What we can do and absolutely must do is
knock down all the hurdles that create disincentives for
investment in business.'' Mr. Secretary, I agree with this
statement. I hope you do, too.
I thank you for being here and I look forward to the
discussion we will be having today.
At this time I recognize the ranking member, Mr. Frank, for
an opening statement.
Mr. Frank. I note that in the chairman's statement, while
he discusses his objection to regulation in general, he cites
no regulation in specific to which he objects, and that is
because I think the basis of the argument that something in the
legislation that we adopted prevents community banks from
lending is fallacious. I wait for someone to show me anything
in there.
Now, I do agree we have had a problem with the loan
officers perhaps being shell-shocked, perhaps being too
restrictive. But there is absolutely nothing in the legislation
that restricts them. In fact, there are several things in the
legislation that empower community banks; that in fact raise
the deposit level to $250,000; that with regard to the FDIC
deposit insurance, gives them a break vis-a-vis the large
banks.
But let's talk about these regulations which are so
demonized in general. Is it the fact that we are now regulating
swaps and derivatives? Apparently my colleagues would like to
go back to the days of AIG, when the loan arrangers could ride
again roughshod over any kind of rules.
Yes, we do regulate derivatives. That was a great mistake
this government made 11 years ago in saying they wouldn't be
regulated. Yes, we do say that those who are advising people on
investments should have a fiduciary responsibility. The
chairman comes from a community that has had a serious problem
because they were advised to get into a financial investment
that was a disaster, and we put into the legislation a new
regulation. The regulation is that people in the future who are
advising Jefferson County or anyplace elsewhere would have a
fiduciary responsibility to that entity. And I am very proud of
that. I think that is a good thing.
So, again, I would like someone to tell me, what regulation
is it that keeps community banks from lending? And do people
want to deregulate or re-regulate derivatives? Do they want to
dismantle an independent consumer agency? I take it back. I
know that they do.
The chairman had said the regulators are there to serve the
banks. He said that was not exactly what he meant, but we did
have a situation where the bank regulators were the arbiters of
consumer issues, and they tended to be very pro-bank. And we
said no, no, that it will no longer be the case. There will be
an independent consumer regulator. There is a fundamental
difference here.
By the way, there were not new regulations in that
legislation over banks. There are new regulations over the
competitors with banks that is another thing we do for the
community banks, is to give them some protection against
competitors who are not regulated and put pressure on them to
do things that would be irresponsible. That is another area
where we have regulated.
In that law, we do what some of us had tried to do earlier,
including the chairman, and he was I think not able to get his
party leadership to agree with him--we put severe restrictions
on the kind of mortgage lending that got us into trouble.
Yes, we regulate mortgages in there. There are mortgages of
the sort that people should not have been granted and they had
trouble repaying that led to this problem, and we put that in
there. We also regulated the notion of securitization. It used
to be that you could make bad loans without any real
restriction and you could then sell them, count on the credit
rating agencies to overrate them and contribute to the problem.
Now, there will have to be some risk retention. That is a new
regulation. You cannot make loans without money that you have,
sell them to other people based on inappropriate credit
ratings, and then have those cascade through the economy in a
negative way.
So, yes, we regulate derivatives. We put fiduciary
responsibility on people who are advising municipalities. We
say you can't make those loans without any kind of repayment.
And I am very proud of those. If the Members think those are
somehow choking off legitimate activity, they ought to be
explicit about it.
Chairman Bachus. I thank the ranking member.
Mr. Secretary, you are recognized. Without objection, your
written statement will be made a part of the record, and you
are recognized at this time to summarize your testimony.
STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you. Mr. Chairman, Ranking Member
Frank, and members of the committee, thanks for giving me a
chance to talk about the Council's work.
In setting up this Council, the Financial Stability
Oversight Council, you asked us to provide each year a
comprehensive view of financial market developments and
potential threats to our financial system, so I am going to
give you a broad overview of our conclusions and
recommendations.
In early 2011, the world economy, still healing from
crisis, was hit by a series of very severe additional
challenges: higher oil prices; the disaster in Japan; the
ongoing crisis in Europe. And on top of that, we had this very
damaging debate in the U.S. Congress in the summer about
whether we as a country should meet our obligations, and that
debate caused a lot of damage to the basic fabric of confidence
among businesses and consumers across the country.
If you, as I did, talked to businesses in that period, July
and August, they would say to me, why would I make a new
investment today, why would I hire somebody new, if I don't
know whether Congress is going to allow the Administration, the
Executive Branch to pay our bills?
Some of these factors have eased in recent months: oil
prices have fallen; and Japan is coming back a bit. But the
cumulative effect of these pressures has resulted in slower
growth in the United States and around the world and much
slower expectations, significantly lower expectations for
growth over the next 18 months or 2 years.
The crisis in Europe presents a very significant risk to
global recovery, and we are working very closely alongside the
IMF to encourage European leaders to move more forcefully to
put in place a comprehensive strategy to stabilize that crisis.
And the critical imperative for them is to ensure that
governments, the governments in the financial systems that are
under pressure, have access to a more powerful financial
backstop that is conditioned on policy reforms, policy actions
that can address the underlying cause of the problem. In the
face of the situation in Europe and the general slowdown in
growth, the most important thing we can do, Congress can do, is
to take strong steps to strengthen our economy at home, and we
think the most effective strategy for doing that is to enact
steps now that would accelerate economic growth tied to long-
term reforms to restore fiscal sustainability.
The American Jobs Act provides a very substantial package
of tax cuts and investments that according to estimates by
independent economists would raise economic growth by 1 to 2
percentage points and help create one to two million new jobs.
In the President's proposal to the Joint Committee, we outline
a comprehensive package of reforms to both spending programs
and to our tax system that if enacted would bring our deficits
down to the level where our overall debt burden would fall,
begin to fall as a share of our economy.
This Council, established under the law, is composed of
each of the agencies responsible for oversight of the financial
system and the firms and markets that comprise this system and
it is the judgment of this Council that the U.S. financial
system is in a significantly stronger position today to
withstand the new risks we face in the global economy.
Because of the actions we took in the early stage of the
crisis to repair and reform our system, the weakest parts of
our financial system, the ones that took the most leverage, no
longer exist today; they were significantly restructured. The
19 largest banks in the country have increased their common
equity--this is the most important financial cushion we have
for financial stability--by over $300 billion since early 2009,
and these institutions and the system as a whole are funding
themselves much more conservatively, maintaining much larger
cushions of safe and liquid financial assets.
These are very significant improvements and together they
represent progress on the path to a more resilient, more stable
financial system than has been achieved in the other major
economies that were caught up in this crisis.
U.S. financial institutions, including our major banks and
the money market funds, have substantially reduced their
exposure to the economies of Europe that are under the most
pressure. Our direct financial exposure to those governments
and their financial institutions is quite small. Europe as a
whole is so large and so closely integrated with the U.S. and
the world economies that a severe crisis in Europe would cause
significant damage to growth here and around the world, but the
largest parts of Europe are strong enough to manage the
problems faced across the continent.
These pressures we are facing from Europe make it even more
important that Congress act to strengthen growth now and act to
put our fiscal position on a more sustainable path.
The economic and financial elements we have seen since the
release of the report I think reinforce the importance of the
recommendations we have presented to Congress. Let me just
summarize those very quickly.
First, the Council emphasizes the importance, as it always
will, of making sure that the core parts of the U.S. financial
system are moving to strengthen their financial position, their
financial resilience. We want the largest institutions to
manage their businesses so they have the ability to withstand
future economic environments that are much more challenging
without government assistance in crisis, and towards this
objective, the regulators will gradually phase in over a period
of several years the much tougher standards for capital and
liquidity that we have negotiated with the other major
financial systems around the world.
Second, the Council recommends reforms to strengthen a
number of the key funding markets in the United States, markets
that were a critical source of vulnerability in the crisis. The
most important of these recommendations targets the tri-party
repurchase markets and the money market funds, and the essence
of the Council's recommendations in these areas is to make the
tri-party repo markets and the money funds less vulnerable to
the classic dynamic you see in crises in which an abrupt rush
for the exits forces a damaging spiral of asset sales,
deleveraging and broader contagion. We have made substantial
progress toward this objective but we have some more work ahead
of us.
Third, the Council recommends a comprehensive set of
reforms to the housing finance system, which I would be happy
to talk about.
Finally, the Council emphasizes the importance of much
closer coordination and cooperation in the implementation of
financial reform, both here in the United States, but also
around the world. This is important, of course, because if we
allow large gaps to emerge, as we did in the years before the
crisis, risks will migrate to those gaps, leaving all of us
more vulnerable to another crisis.
The most important challenge we face in building a more
level playing field is in the design and enforcement of these
new capital standards and the new reforms to the derivatives
markets.
Although our system is much stronger than it was before the
crisis, we have more work to do on reform. But we are going to
do this in a balanced way, weighing the benefits of regulation
against the costs of excess restraint. We need to move at a
pace that fully recognizes the fragility of the global economic
recovery, phasing in these reforms over time so that we limit
the risks to economic growth.
I want to thank the members of the Council and their staff
for all the hard work they have done in building this
institution for cooperation and for producing this report. And
I want to emphasize, as I always do, that I look forward to
continuing to work with this committee and the Congress as a
whole to build on the substantial progress we have already made
in creating a stronger financial system here in the United
States.
Thank you, Mr. Chairman.
[The prepared statement of Secretary Geithner can be found
on page 42 of the appendix.]
Chairman Bachus. I thank the Secretary.
Secretary Geithner, earlier this week President Obama said
that banks don't have some inherent right just to get a certain
amount of profit if your customers are being mistreated. It
appears as if he is equating profits with mistreating people.
Does it bother you that he connects the idea of profits
with mistreating people? Is there anything inherently evil
about profits?
Secretary Geithner. I don't think he did that. The
President believes, as I believe, that it is not the role of
government to determine how profitable firms are. But we also
learn, and we learned with tragic consequences for this
country, that if you don't put in place basic protections for
consumers and investors, apply those across the market, don't
prevent firms from taking the kinds of risk that could imperil
the economy as a whole, then you leave all of us much more
vulnerable. And so what we are trying to do is build a system
with better protections, give consumers better choice, more
transparency, and the basic protections against fraud and abuse
and predation and risk that were so damaging to us.
Chairman Bachus. Mr. Secretary, can you tell us some
practice that the financial institutions are engaging in, how
they are mistreating people today, that you don't have the
power presently to stop?
Secretary Geithner. Thank you for asking me that. There is
an excellent example, and I will just give you one.
Chairman Bachus. Okay.
Secretary Geithner. The reforms Congress enacted lay out a
much more comprehensive system of protection for consumers so
that we have rules that apply not just to banks, but to all of
the other institutions that are in the business of consumer
finance, from payday lenders to basic loan companies across the
country. And although the authority is there in the law, until
there is a Director confirmed for the new Consumer Financial
Protection Bureau, we do not have the authority to apply those
protections to non-bank financial institutions. And that makes
no sense.
Chairman Bachus. I would agree with that. But we are
talking about our banks, our regulated institutions, those that
are presently regulated. Now, are there practices going on, any
widespread practices which are mistreating customers?
Secretary Geithner. I think the most compelling example
today of behavior by the largest banks in the country that we
all worry about, and we are all living with and your
constituencies, is the mortgage servicing business. Just look
at what is happening in the foreclosure process or the mortgage
servicing business across the country. You have people who
still cannot get somebody on the phone who they can talk to
about how to figure out how they can stay in their house if
they have income, transition to better housing options, make a
catchup payment. And I think that is an example today where
because we don't yet have in place authority that allows us to
enforce national servicing standards, and because the basic
infrastructure of servicing is still so inadequate relative to
the scale of the crisis, we see systematic problems still.
Chairman Bachus. I think what we found is that there were
legal requirements that weren't complied with on many
occasions. Is that not true?
Secretary Geithner. You have seen some evidence of that,
but I think the problem is much bigger than that.
Chairman Bachus. I will acknowledge that there have been
problems. But let me ask you about the charges for debit cards.
That is the one the President picked out as an example of--
actually I think in his terminology, he represented that it is
almost a greedy reach. But do you think that Dodd-Frank and
particularly the Durbin Amendment had anything to do with the
banks charging for their services?
Secretary Geithner. Mr. Chairman, I am not going to comment
on any particular bank practice in the areas of fees, but I
will tell you what we are trying to do.
Chairman Bachus. Do you think it was wise for the President
to do that?
Secretary Geithner. I am not going to speak to that
question, but I will tell you what he said about this, which is
very important, that what the law does is try to make sure we
move this system to a place where there is much more
transparency and clarity about the fees Americans have to pay
to access a basic banking service or to borrow.
Chairman Bachus. And I absolutely agree with that, Mr.
Secretary. But that $5 disclosure was a pretty honest up-front
disclosure.
Secretary Geithner. And I think you are seeing some
improvements in transparency and clarity. But remember, you all
do banking, you all do banking services. Look at your
disclosure statements that come with the returns, and ask
yourself how good those look today. We have some work to do.
Chairman Bachus. But we are talking about a $5 disclosed
fee on debit cards, which I think if you will be forthright,
you will say is a result of the Durbin Amendment. That is what
restricted their ability to recover the costs.
Secretary Geithner. No, I didn't say that, and I don't
think you can justify that judgment. What you are seeing is--
Chairman Bachus. You don't think there is a connection
between the charges the banks are now making and the reduction
in their revenues based on Durbin?
Secretary Geithner. I will tell you what I think is
happening. We are, and we need to, we are trying to
fundamentally improve the quality of consumer protection,
clarity, transparency, disclosure, and we are doing things that
change fundamentally, because we are putting tougher rules on
institutions, how they manage risk and how they meet the needs
of their customers, and that is changing practice across the
system, changing how banks charge and pay for basic services.
And there is much more change ahead of us, and that is
necessary for us to do. Because, again, we are still living
with the scars of the damage caused by the failures.
Chairman Bachus. Thank you, Mr. Secretary. And I agree with
that. I just don't understand how there is anything misleading
about a $5 charge. I am not defending it, but it appears to be
very transparent.
The ranking member is recognized.
Mr. Frank. To begin, Mr. Chairman, as I heard you talk
about the President's quote, I think you misrepresented it very
substantially. He didn't say he was against them making a
profit. There was an ``if'' in there. As you read it, there was
no right to make a profit if there is mistreatment of the
customers. And that is saying not that there is no right to
make a profit, in fact it is clearly suggesting that there is,
but that if the profit came from mistreating the customers,
there is no right.
Now, I am not commenting on this particular controversy
here, because, as we all remember, the swipe fee thing was a
present to America from the United States Senate. It was never
in our bill, and I believe you and I talked, Mr. Chairman, if
the Senate had passed the Tester Amendment, which I strongly
supported, we would have put it through the House very quickly.
And I do not think consumers, I don't think that when they go
into the 7-Eleven the slushy is going to be any cheaper when
they don't do it. But that is not what the President said. He
said if, that there was no right to mistreat.
Let me go on to a couple of points I wanted to ask the
Secretary. One of the issues that people were concerned about
legitimately with regard to the financial reform bill was the
possibility that we would put our financial institutions at a
competitive disadvantage, and obviously we don't want to do
that. Money is pretty fungible. It moves pretty quickly.
What has been the experience so far with regard to, and I
know there have been serious negotiations, I have had them and
others with the European Union, with England, with Japan, with
Canada, what does it look like so far in terms of not having
any competitive disadvantage as a result of the implementation?
Secretary Geithner. I would say that we are reasonably
encouraged so far; that having set the standards for our system
here, that the world is going to move to those standards. And
based on what we have seen so far on capital and on liquidity
and even on derivatives, the most complicated area for making
sure there is a level playing field, we are very encouraged by
what the Europeans are saying and what they are doing. And, of
course, we are not focused just on Europe, but we are looking
at Asia, too, where you see very rapid growth in financial
activities.
So I would say we are modestly encouraged so far, but this
is going to be a real change challenge and we have a lot of
work to do.
Mr. Frank. Let me say, we put into the bill very
specifically, as you know, we consulted, a mandate to you and
to the Federal Reserve if there are countries that are taking
advantage of a gap, if they are deliberately underprotecting
the public interest here, they are to be excluded from our
financial system.
So, yes, it is important to work together. And I know
sometimes the Administration is reluctant ever to take action
against anybody, and I am for the China currency bill. But in
this case I think it is very important, and I don't think it
will come from the EU or Japan or the major entities, but if
there are some small countries that try to do that, we would
expect you to use that authority.
I want to turn to the other area that the chairman talked
about which was the regulation. And, again, I am waiting for
people to tell me which regulation they want to get rid of. I
will say this, and I agree with the chairman, we certainly want
to see productive activity. One of the problems I think is that
a good deal of the financial activity that we were seeing that
we tried to give people the authority to regulate contributed
very little to the real economy.
The role of the financial institutions is they are
intermediaries, that is, they are the connector of people with
money to invest and people who will take that money and use it
to produce goods and services in a productive way. That is a
fundamental role, and I think the bill did nothing to impinge
on that. I did think when AIG was playing credit default swap
games with other financial institutions, when we had
collateralized debt obligations squared, that we were not
helping the real economy. I think some of those things had as
much relationship to the real economy as fantasy football does
to what happens on Sunday afternoon. So I would hope we would
go at that.
In that regard, I was pleased to hear you say that--and we
don't want to just be looking at the past problems. One of the
things we tried to do in the legislation was to give the
regulatory authority the ability to go into new things.
You talked about some things that have people worried now
that weren't there before. First of all, repos. But, secondly,
and even more in the newness, the technologically produced
ones, exchange traded funds; very, very, very rapid trading.
Where are we on those? Because there is I think a legitimate
concern that there are dangers in those. And I am pleased to
say that we did I think give the regulators appropriate
authority to look at those.
What is the status now of looking at what the impact could
be going forward on exchange traded funds and on the very rapid
trading, for example, on the questions of stability?
Secretary Geithner. Mary Schapiro is taking a lead in the
Council and examining developments in both of the two areas you
referred to, and she has a process under way not just here but
around the world where there is much more rapid growth in
exchange traded funds to examine the risks in those. But she is
also looking at the market structure issues and the high-
frequency trading. I don't recall precisely when she expects to
come back to us and talk about it, but she is all over it.
You are right to emphasize again that one of the jobs of
the Council is to try to look at areas where we are seeing
very, very rapid growth and innovation, untested by the kind of
stress you need to kind of test these kinds of things to make
sure we can move a little more quickly than the system moved in
the past to try to contain these things.
Mr. Chairman, could I very briefly respond to one thing you
said in the beginning in your opening comments?
Mr. Frank. If the chairman allows it. I am over my time.
Chairman Bachus. Yes.
Secretary Geithner. Mr. Chairman, you quoted something
slightly off from what I said this morning in the Senate--
Mr. Frank. I assume by ``Mr. Chairman,'' that was a
cultural lag and you meant me. Okay.
Secretary Geithner. I said this morning in the Senate that
one of the big challenges for the economy as a whole, and I
mean the economy as a whole now, is the risk that after a
period where people took too much risk in a real crisis, people
aren't going to take enough risk. And I wasn't commenting
beyond that. But I think it is true. The natural thing you see
after a crisis is you see a period of people pulling back, too
much excess caution, and that tends to make growth weaker than
it is, and we have to be worried a little bit as we go through
this.
So I was just making a general observation that we want
people to take responsible risks, and that will be helpful as
we recover. There is still a lot to be worried about, a lot of
challenges out there. But as I also said, we have been very
careful to make sure that as we design these tougher rules, and
they are much tougher rules for our system, that we are
designing them sensibly and that we are phasing them in over
time so that we don't hurt the recovery.
Chairman Bachus. Thank you. Mr. Secretary, what you are
saying is the quote, if you look at the U.S. economy today I
would say the biggest risk we face is institutions not taking
enough risk.
Secretary Geithner. Think about it this way: Consumers
still have too much debt. They are bringing down debt. They are
raising savings rates, they are being more cautious.
Supervisors, you said it, examiners, having been a little
burned, are being tough now. You see banks being cautious, too.
And I was making a sensible observation that those things tend
to work against growth in this case and you want to make sure
people aren't overdoing it, you don't want to see too much
tightness following too much looseness, laxity.
Chairman Bachus. No, and I acknowledge that, but I believe
the fault lies mainly with the regulators who are restraining
the banks and actually questioning many of their loans.
Mr. Frank. Will the chairman yield briefly, because I tend
to agree with that, although not with the top regulators. I
think we have had--the problem is a lot with the people in the
field. But I have asked people to point to anything in the
statute that we adopted that does that. I don't think that is
compelled or even influenced by the statute. I do agree that
there is a mindset among some of the people in the field that
has been problematic.
Chairman Bachus. I think we are all three agreeing with
that.
Mr. Royce?
Mr. Royce. Thank you, Mr. Chairman.
Secretary Geithner, you and I agree about the need for
higher capital standards as part of the solution to the
problem. We have talked about that in the past and agree on
regulating derivatives for transparency, Hernando De Soto's
arguments, the importance of that in terms of being a component
of the equation.
I think my concern, as I have expressed to you before, is
that we are taking our eye off the ball and instead pursuing
this course of micromanaging the financial sector without the
international community really buying into the approach that we
have laid out. And you are right to say that the regulatory
community in Europe says that they will buy into the approach.
But that is not what is happening in this country.
I think the concerning comments by the CEO of the large
foreign bank who called the U.S. approach to derivatives a
terrific opportunity, he said it is one of the biggest own-
goals in financial market history. And he says that the Asians
don't need to do anything to gain an advantage. This is the
type of press, if you pick up The Financial Times, the kinds of
advertisements basically that are being made. Then when you
think about the Fed Chairman's own comment on this point, he
says portions of the proposed derivatives rules, I think he is
talking about extraterritoriality here, could create a
significant significant competitive disadvantage for U.S.-based
institutions.
So the further we get from passage of Dodd-Frank, the less
likely it seems that Europe is going to blindly follow us. And
I don't see that on Asia's part. They have already flat out
rejected many of the reforms that we have instituted.
What I want to ask you is, will Treasury commit to ensuring
that if we can't get that concurrence, we hit the pause button
on some of this micromanagement until we bring them online so
that everybody is on the same playing field and we don't have
to worry about that competitiveness issue that the Fed Chairman
is bringing up?
Secretary Geithner. Let me just say, the Fed Chairman is
right to point out there are provisions of the law that because
of how they treat the foreign operations of U.S. affiliates,
could cause that problem that we are worried about. But I would
say in general, based on what our counterparts around the world
are saying, I am more encouraged than I thought I would be at
this point. It is not just what they are saying, but how they
are drafting their rules.
I will just give you one example. We have had 3 decades or
4 decades of experience with global capital standards, not an
excellent experience, frankly, they were set too low, but we
started 30 years ago designing a global standard for capital.
No such regime existed on derivatives. But we proposed after
regulation was passed that we negotiate a global regime on
margin for derivatives, and we found very strong support not
just from the European systems but from the Asians too to the
same basic principle.
So we are going to keep working on it, and we are making
sure that we try to sequence and design the rules in the United
States so we are not in the position of landing ours before we
are confident that the others are going to land theirs in a
sensible place. We are not going to do this on trust. We are
going to verify and make sure we are all over it.
Mr. Royce. I think I am going to lay out another argument
here that I think would give you and I both pause because I
think we agree on this both, too. It is no surprise that the
international community really is pushing back on this because
they look at us and they say it eludes the United States, they
can't even get their international coordination right between
the CFTC and the SEC, right? So there are wildly divergent
views here.
Secretary Geithner. No, I wouldn't say it quite that way.
But I would say you are right and I will reinforce your point.
We left in place in the American financial system a very
complicated set of independent agencies with overlapping
jurisdictions and different responsibilities, and that makes
the coordination challenge much harder, but much more
important, because you are right to say if we don't--
Mr. Royce. It was a mistake.
Secretary Geithner. I am not sure it was a mistake, but you
guys decided to do it. If you don't have alignment among them,
then you are right to say how are we going to convince the rest
of the world--
Mr. Royce. Right. And we are out of alignment on 50
different items at the moment.
Secretary Geithner. No, that overstates it. But we want
them, where Congress--where the statute permits it, we want
them to be fully aligned.
Mr. Royce. And we are not there.
Secretary Geithner. We are not there yet.
Mr. Royce. And until we get there, it is going to be hard
to figure out how you get the Europeans there. And that is why
you have to be very cautious here. There is a competitiveness
problem, to quote a former Fed Chairman, if the capital markets
march off to London. That is the problem when you reading the
Times.
Secretary Geithner. You are right. We are not going to let
that happen. I am reasonably encouraged at this point that we
are going to be able to prevent that. But we are working very
hard at it. And again, part of that is making sure that where
we can, we have alignment here at home. And you are exactly
right to point out that if we are sort of off a little bit
here, it is harder to get the world to come to a common
standard. But you are right to emphasize that we care about it
as much as you do, and we are, and the SEC and the CFTC and the
Fed are working to the same objective.
Mr. Royce. Thank you, Secretary Geithner.
Chairman Bachus. Thank you, Mr. Royce.
Ms. Waters?
Ms. Waters. Thank you very much.
Mr. Geithner, we are delighted to have you with us again
today. I would like to draw your attention to something that is
going on in this country that I think is extremely important
and needs to be addressed or recognized.
There is an occupation on Wall Street in New York that is
taking place by protestors and the protestors are growing every
day. Today, here in Washington, D.C., we have an organized
protest. In Los Angeles, they have set up camps on city hall
steps. And in many other cities across the country.
They are basically reciting their concerns. They are very
concerned that 1 percent of rich Americans do not pay their
fair share of taxes. They are really angry about the banks that
we bailed out, the too-big-to-fail banks that were bailed out
and they are not reinvesting in this economy with small
businesses, they are not giving mortgages, and they are not
modifying loans, these mortgages.
In addition to that, they talk about the $1 trillion that
the Feds used to bail out banks and other well-connected
businesses and institutions. They are really agitated about the
Bank of America announcing that they are going to charge a $5
monthly fee for these deficit cards. Citibank has announced
that it is going to charge up to $20 a month for checking
accounts. They are saying no one has gone to jail as a result
of causing the financial crisis.
What do you say? Have you said anything about the
protestors? Do you support them? Do you recognize them? Do they
have a real beef here? You are the treasurer. They are angry at
all of us. And I am not just saying they are angry at you. But,
you represent the money systems of our government. So what have
you said about the protests? Do you support them?
Secretary Geithner. I have been asked this several times
over the last couple of days when I was in New York on, I think
it was Tuesday, and I will tell you what I said in response to
those questions, which is I think you see reflected there, like
you see reflected across the country, a deep sense of concern
about the fact that we have 9 million Americans out of work. We
have seen a huge increase in inequality, a huge rise in
poverty. I don't know if many people know this, but I think 40
percent of Americans born in the United States today, children
born this day, are born to families eligible for Medicaid. I
think one in eight Americans are eligible for food stamps
today. You have seen a dramatic change, deterioration, in
people's basic confidence in the ability of this political
system to do a better job of meeting the needs of middle-class
families. We are still living with the scars of the worst
financial crisis in generations. So that is what I say to them.
I think that is why it is important, so important that we
are working to improve confidence, not just in the quality of
public institutions, but in the safeguards we provide,
protections we provide Americans in the financial system, but
also that we can find a way to get Congress to demonstrate that
we can do things to help the economy now. And if Congress does
not act this fall to do things to help growth, help get more
Americans back to work, then you are going to be causing much
more damage to an economy already--
Ms. Waters. I don't want to interrupt you, but some of us
have been wondering for a long time what you are saying about
principal writedown? That is a big issue in this debate. What
can you do to get the banks and the financial institutions that
caused the subprime meltdown to do something about keeping
people in their homes? That is a big issue. Where do you stand
on principal writedown, Mr. Geithner?
Secretary Geithner. That is a very good question, and thank
you for asking about that. The programs we put in place in the
housing system have helped directly and indirectly about 4
million Americans get their mortgages restructured and their
payments reduced significantly. As part of our programs, we
have also created a targeted program for principal reduction,
which, to be frank, has had very little take-up to date, in
part because we don't have the power to compel the biggest
parts of the mortgage market. FHA is prohibited by law, and
Fannie Mae and Freddie Mac, we can't compel them to do it, and
they have been unwilling to move in that direction to support
targeted principal reduction where it makes sense. But we have
been supportive of it. We have put a fair amount of care and
effort and resources into it, but we don't have the authority
now to compel the largest parts of the system to move.
Ms. Waters. I don't want to interrupt you. My time is up.
Would you like to send a message to the protestors while you
have national attention right now?
Secretary Geithner. I would just say what I said, which is
that--
Ms. Waters. You support them.
Secretary Geithner. We all need to do a better job of
demonstrating that the responsible bodies in the United States,
and for the economy today it requires Congress, are able to act
to do more things to help get the economy stronger today. And
without that, you are going to be living with more pain, more
poverty, more fear, and more insecurity about the future.
Chairman Bachus. Thank you. Congresswoman Waters and
Secretary Geithner, I do agree with you that the demonstrators
probably ought to be demonstrating in front of Congress and the
White House and the Secretary over at Treasury. Maybe they
misdirected their protests at the wrong city.
Secretary Geithner. I didn't imply that.
Mr. Frank. But I am sure the banks will appreciate it.
Chairman Bachus. I was talking about all these job-killing
regulations.
Mr. Hensarling?
Mr. Hensarling. Thank you, Mr. Chairman.
Good morning, Mr. Secretary. I noticed in your testimony
you work in a reference to the President's latest economic plan
where you speak about the tax relief. I do think it is
important from one perspective. According to the job creators I
speak to in the Fifth Congressional District of Texas, number
one, when you combine temporary tax relief with permanent tax
increases on the other end you are unlikely to create too many
jobs. And at the same time I would point out that the payroll
tax relief in the President's plan, although perhaps it could
be meritorious in a certain context, without a simultaneous
plan to deal with the insolvency of Medicare and Social
Security by borrowing from the payroll tax for this program,
you are frankly hastening the bankruptcy of programs that we
already know are going bankrupt for our seniors.
But the question I have is, you assert in your testimony
that the President's economic plan, according to outside
economists, would raise economic growth by 1 to 2 percentage
points and help create one to two million new jobs. My question
is, are these the same outside economists who told us the
President's original economic plan would ensure that
unemployment never went past 8 percent and that it would create
three to four million jobs?
Secretary Geithner. Congressman, it is always a pleasure to
debate these deep questions about tax policy and economic
policy.
Mr. Hensarling. I knew you looked forward to the
opportunity.
Secretary Geithner. I was looking forward to it. Let me
respond this way, and I will make some arguments that many on
your side have been making for some time. If Congress does not
act on the tax front now or on investment, what happens? What
happens is the taxes every person with a job in this country
pays go up by roughly $1,000 at the end of this year. The taxes
every business pays will go up. Now, what we propose to do is
to extend and expand those tax cuts and to tie them to long-
term reforms that give people confidence that we are going to
go back to living within our means.
Mr. Hensarling. But, Mr. Secretary, if I could, I am really
curious, because I haven't seen the estimates of these outside
economists, if you would be able to share them with me.
Secretary Geithner. Oh, they are in the public domain, but
I would be happy to do it. If you look at the broad range of
views, and there is a range of views, economists disagree on
everything, but the broad consensus is in that direction. They
are not our estimates, they are their estimates.
Mr. Hensarling. If I could, because unfortunately, the time
is running out here, and specifically I was trying to figure
out about which economists were saying this. At least when I
speak to a number of people, small business people, and I think
you mention it in your testimony, there does seem to be a lot
of uncertainty, frankly, a lack of confidence, part of this
does have to do with regulatory uncertainty, and I do know that
there has been a dizzying array of rulemakings that have to
take place of which FSOC certainly has some, frankly a fair
amount of oversight.
As I understand it, 64 new rules have been finalized, and
126 deadlines have been missed. And, believe it or not, I am
not actually trying to ascribe blame, I would rather it get
done right than get down quickly, and we still have another 210
rules to come, as I understand it. I guess the question I have
is that there still appears to be so much lack of specificity
and certainty within a lot of the community financial
institutions I speak to, what is it that FSOC can do to move
this particular process forward? Because I believe, again, it
is the uncertainty of the rulemaking process and frankly the
certainty of bad rules that is inhibiting a lot of our job
creators today.
Secretary Geithner. I disagree with you on that, but I will
respond in the following way, and I just want to repeat some of
the comments made earlier, if you talk to community bankers
across the country as I do, most of them will say the
following: They will say they recognize that they were largely
and almost completely left out of, if not privileged and
advantaged in the Dodd-Frank Act, but they are concerned, some
of them, that they are under too much pressure from examiners
to tighten standards beyond what they think is necessary.
It is hard to know how much of that is true, but that is
what they say. They don't complain about the regulatory
framework. As you know, the people who represent community
banks supported the bill and they were very successful in
convincing you to carve them out of most of the protections,
and they are privileged in many ways. But they say they are
concerned they get a lot of heat from examiners that they think
goes beyond what is necessary. It is hard to justify that.
Examiners are trying to do their job.
Mr. Hensarling. Mr. Secretary, I see I am running out of
time. I would just say it is clear that we are speaking to a
different universe of community bankers. But I appreciate your
testimony.
I yield back.
Chairman Bachus. I thank the gentleman.
Mrs. Maloney is recognized for 5 minutes.
Mrs. Maloney. Thank you.
First of all, I would like to say thank you, Mr. Secretary,
for your service. You probably understand more than anyone how
close we came to a total collapse in 2008, and your leadership
has been a great part of helping us to dig out of that
challenge.
I also want to join the comments of our ranking member who
said the swipes was a gift from the other body. But a gift from
this committee and this Congress on this side of the aisle was
the CARD Act, the Credit Cardholders' Bill of Rights. In that,
they had many of the principles of Dodd-Frank, of transparency,
a level playing field, and really making life better for the
working men and women in our country. It stopped many of the
most abusive practices, such as raising rates any time, for any
reason, retroactively on balances.
I want to note that many issuers were not following these
unfair deceptive practices as prescribed by the Fed, but others
were. A report that came out recently from the Pew Foundation
said that this bill alone saved consumers over $10 billion last
year. So this is an effort that the President signed into law,
that you championed and many members of this committee on both
sides of the aisle championed, and I want to say thank you for
that.
Yesterday, I was in New York, and I met with some of the
protestors. They were very angry, and I can understand their
anger. They were angry about what has happened to them
financially, about their prospects for the future. So my
question to you is, what would you say to the protestors if
they were camped out in this room today about what has happened
to them, what have we done to change their prospects for the
future, what has this FSOC report said to the possibilities of
the future? Certainly, stabilizing our markets, bringing in
balanced and fair regulation that protects their deposits, that
protects their work in the future is something that is really
important.
I want to share with my colleagues, many of whom treat
Dodd-Frank like it was a horrible thing, I call that mentality,
let's forget that the financial crisis ever happened.
When President Obama came to Wall Street and spoke to Wall
Street, it was the day after the Senate vote and he pulled out
a press clipping and he said, I want to read this to you. And
he said, it passed out of the Senate yesterday. And many
leaders in the financial industry were aghast. They thought
this was going to be the ending of the capitalist system, of
the opportunity to grow and expand capital and jobs. He went on
and on. And then he said, this came out in 1929, 1930, after we
created the FDIC, which performed, I think, so brilliantly in
helping us confront this financial crisis.
So I would like to hear what the FSOC report says about
what Americans can hope for and plan for a more stable future
financially, and thank you for your service.
Secretary Geithner. I don't think I can improve on how you
said it. What the financial reform law does is establish the
basic protections we did not have to prevent Americans from
being victimized by not just fraud and abuse and predation, but
from the type of risk-taking that we saw that almost brought
down the American financial system.
I am very confident that with these reforms, we are going
to build a much better system, a much more stable system. It
will be to the benefit of not just the average working family
who needs to borrow to put their kid through college or to buy
a house, but for businesses that need to raise capital. And we
have all seen what happens when you get that basic balance
wrong. It hurts everybody, not just the imprudent. It hurts the
innocent victims in that sense.
What I would say generally, and I would say this to the
American people generally, is that you should be demanding
better results from Washington in things that can help the
economy now. Because even with the strength of those reforms on
the financial system and the progress we have made, we still
have an economy that is not growing fast enough, millions of
Americans are out of work. And we have seen these new shocks
from Europe, and we have to act to protect ourselves from those
things and do things to make the economy heal more fastly.
I think this argument you have heard that what is hurting
the economy now is an excess of regulation is without
foundation. I want to quote to you a concluding paragraph from
an article that Bruce Bartlett published on October 4th. Bruce
Bartlett held senior policy roles in the Reagan and Bush
Administrations and served on the staffs of Representatives
Jack Kemp and Ron Paul.
These are his words. ``In my opinion.'' It is a pretty
thoughtful article, and he goes through the evidence, and he
says, ``In my opinion, regulatory uncertainty is the canard
invented by Republicans that allows them to use current
economic problems to pursue an agenda supported by the business
community year in and year out. In other words, it is a simple
case of political opportunism, not a serious effort to deal
with high unemployment.''
And he cites in this context--I will tell you what he cites
because it is useful. What he looks at is the level of
unemployment and the rate of growth and profitability in the
sectors of the economy where we are trying to put in place
better protections: health care; energy; and financial
services. And he cites an academic in that context and he says
that there is no evidence you can find to support the
proposition that our efforts to design better protections in
those areas are damaging growth. What is damaging growth, what
is damaging confidence is that growth is slower than we would
like because we are still healing from a terrible financial
crisis and we face the cumulative burden of these other
shocks--oil, Japan, Europe, etc.--and that is why we have some
more work to do.
Mrs. Biggert. [presiding]. Thank you. The gentlelady's time
has expired. The gentlewoman from West Virginia is recognized
for 5 minutes.
Mrs. Capito. Thank you, Madam Chairwoman, and welcome, Mr.
Secretary.
My first question is, one of the principal mandates of the
FSOC was to look at the systemic connectedness of our larger
institutions, because obviously that was a big problem with
what happened in 2008. Would you say today that our
institutions are more or less systemically connected than they
were pre-2008?
Secretary Geithner. They are obviously very closely tied,
but the most important thing we have seen is they hold much
more capital against risk and they are funded much more
conservatively, with much longer-term sources of funding. In
addition to that, there has been dramatic progress in trying to
make sure there is much more conservatism in the derivatives
markets where people come together and the funding markets that
join them. For those reasons, it is much less likely that a
particular shock would damage the strong, not just the weak,
and much less likely that pressures on a weaker institution
would spread to the stronger.
Mrs. Capito. Would you say that the effects, and we are
seeing you address this in some of your statements, the effects
we are seeing from the European situation, which is billowing
over and affecting our markets and our financial institutions,
doesn't that kind of play into this systemically connected
issue? In my speaking with some of these institutions, they are
sort of saying one of the problems was we were too systemically
connected. Why is the FSOC not saying, unwind your systemic
relationships and maybe that would alleviate any kind of
possible collapse such as we saw?
Secretary Geithner. I think we are moving in the same
direction, but just to be realistic, banks and markets are
always going to be terribly closely connected. There is no way
to separate them, disentangle them, separate them--you can't
put them in silos like that.
What you need to do is to make sure that the firms have
much bigger cushions against risk, again, are much less
vulnerable to funding pressure, and that the markets where they
come together, like tri-party repo and money market funds and
derivatives, have a much stronger financial cushion. If you do
that, then you have much less risk of contagion, which is the
risk you were referring to.
But in a competitive market--and we are going to run a
market-oriented financial system--you can't disentangle those
things or otherwise, we wouldn't have a financial system that
worked.
Mrs. Capito. How close are you, as the FSOC, to designating
the SIFIs?
Secretary Geithner. On Tuesday, I think, next week, the
Council meets to consider approving new guidance that we would
give to the market on the criteria we are going to use to
determine--
Mrs. Capito. So when will that occur? After you do the
guidance, then you have another year, so you are really 2\1/2\
years into--
Secretary Geithner. No, I don't think so. But we are doing
what people asked, really, which is--what people asked is for a
little bit more clarity in the criteria we use before we
designate. And we were trying to do something that is sensible,
which is to give people a chance to look at those criteria,
give us feedback on them, comments on them, so that we come out
with judgments that people understand and respect and people
can plan for those and adapt to them.
So we are trying to be responsive to the concern many have
expressed that we give people more guidance.
Mrs. Capito. Okay. And once those are designated, whenever
that is, 2\1/2\ years from now, will they--the living wills
that they are creating, when are they due in to the FSOC?
Secretary Geithner. I can't speak to that. I would be happy
to get back to you in writing. I am not sure exactly when. But
I don't think you are right about the 2\1/2\ year thing. I hope
we can move more quickly--
Mrs. Capito. I just know how slowly these things move. You
know that, too.
Secretary Geithner. Let me say one more thing on that. We
are moving more slowly than some of the deadlines required. But
I want you to know that, where we are slower, it is because we
are trying to get them sensible and get them right, and we are
trying to get everybody to move together, not separately with
different standards. And it is a complicated thing to do.
And we recognize that, in some ways, slow is bad, but slow
is better in the service of a better outcome with smarter
rules.
Mrs. Capito. Thank you.
And then just one thing about the regulatory--obviously,
this is a big issue that is coming up--the regulatory burden of
Dodd-Frank. And your previous answer--I wrote you a letter--and
you responded to it, and I appreciate that--about what types of
regulations after the President's Executive Order 1 and 2
asking you to weed out old regulations, streamline. And,
basically, your final point here is that, ``I will seek ideas
from council members on concrete ways in which agencies can use
the council as a vehicle to improve coordination.''
I write these kind of letters, too. So, you are really
saying that you haven't really done anything here.
Secretary Geithner. Not quite. But you are right, we
haven't made much progress yet. And it is hard, but I am very
committed to this.
When I first went to the New York Fed a long time ago, I
remember looking at the bulk of accumulative stuff that had
been built up over the years in the regulatory process, well-
motivated stuff--Bank Secrecy Act, consumer protection things--
Mrs. Capito. Right.
Secretary Geithner. --and what we generally don't do is go
back and look at those when we do the new things to clean up
the ones that don't meet their objectives in the past. And it
is very important we try to do that, because we are trying to
get a smarter system and a tougher system, not just more muck
piled onto the current system.
Mrs. Capito. I would encourage you to--
Secretary Geithner. But I want to give you two examples. In
the area of consumer--
Mrs. Capito. I think my time is up. Sorry.
Secretary Geithner. --mortgage disclosure--
Mrs. Capito. Right.
Secretary Geithner. --credit card disclosure--
Mrs. Capito. That was in your letter.
Secretary Geithner. --and there are two examples I can't
refer to you in detail but I would be happy to write you about
in the Bank Secrecy Act where we have started to simplify
things in a way that help.
But we are just at the beginning of this process. We have a
lot more work to do.
Mrs. Capito. Thank you.
Mrs. Biggert. The gentlewoman's time has expired.
The gentleman from Illinois, Mr. Gutierrez, is recognized
for 5 minutes.
Mr. Gutierrez. Thank you very much.
And welcome, Secretary Geithner.
I want to go back to TARP and see if we agree on something:
$700 billion for banks and $30 billion for homeowners under the
HAMP program; is that correct, Mr. Secretary?
Secretary Geithner. No. We--when I took office, the
President took office--
Mr. Gutierrez. I didn't ask you when you took office--
Secretary Geithner. No, no. I--
Mr. Gutierrez. --but according to TARP. How much money was
there in TARP?
Secretary Geithner. No, there was $700 billion authorized
for the system as a whole, but--
Mr. Gutierrez. And how much was authorized under HAMP?
Secretary Geithner. Hold on, I am coming to you. I am going
to respond to your question.
Mr. Gutierrez. It is only--it is already half a minute.
Secretary Geithner. Roughly $350 billion.
Mr. Gutierrez. $700 billion authorized. And how much was
authorized for HAMP?
Secretary Geithner. Roughly $350 billion was disbursed to
banks.
Mr. Gutierrez. Okay.
Secretary Geithner. Fifty authorized for HAMP. Thirteen-
billion-dollar profit on the investments in banks.
Mr. Gutierrez. But I am--
Secretary Geithner. Hold on.
Mr. Gutierrez. I am not--those aren't the questions. See,
we ask the questions. I know it is uncomfortable, but every now
and then, we ask questions, you answer questions. You have
answered other people's questions. You are answering questions
I haven't even asked. So you might be getting ahead of yourself
here a little bit, Mr. Secretary.
So let me just ask, so there was $50 billion for HAMP,
right? Is that what you just stated?
Secretary Geithner. Authorized for HAMP.
Mr. Gutierrez. Authorized for HAMP. How much of that $50
billion was spent?
Secretary Geithner. A very small amount.
Mr. Gutierrez. A very small amount--$2 billion.
Secretary Geithner. We have committed substantially more.
Mr. Gutierrez. I know. How much has been spent?
Secretary Geithner. Very little.
Mr. Gutierrez. Very little, okay. So you won't agree to $2
billion, but I know it is $2 billion. You can write me a
letter--and you are going to write me a letter that says it is
$2 billion.
Secretary Geithner. You have to look at the Hardest Hit
Fund, the whole package of it.
Mr. Gutierrez. That is okay. It could be $3 billion, but it
is still a miserable amount of money.
Secretary Geithner. It is not $50 billion.
Mr. Gutierrez. Even if it is $4 billion, it is not very
much. It is terrible.
And so we authorized $700 billion. The banks got $350
billion. We authorized $50 billion so that people could stay in
their homes. So the banks got quite a bit of money to stabilize
themselves, and the money that we put forward so that
homeowners could stay in their homes really wasn't utilized
that much. Isn't that a fair--
Secretary Geithner. If you want me to respond to your
point, I am happy to do it?
Mr. Gutierrez. But isn't that fair, though?
Secretary Geithner. First of all, it is true that we have
spent a very small fraction of the money authorized under the
housing programs. And that is because the number of people who
are eligible through those programs are a fraction of those
that we thought would be eligible. But--
Mr. Gutierrez. Okay. So, in other words--
Secretary Geithner. But one more thing.
Mr. Gutierrez. --Mr. Secretary, you are going to blame, as
the Republicans do, Freddie Mac and Fannie Mae. And we--
Secretary Geithner. Nope.
Mr. Gutierrez. --hear from them all the time how terrible
they are. And they won't do anything because they are under
receivership, and there is nothing you can do with the money.
So--
Secretary Geithner. No, I am not going to say that. I am
just saying--
Mr. Gutierrez. But the fact is--let me ask you a question.
So, you said to us--first, you said mortgage-servicing
business, you said that was really big. All right? And you said
to us earlier, you said, huge increase in poverty and
inequality. You said that to us, and that we should speak more
clearly and more boldly, you said.
So I guess my point is, when the regulations were
established as to how you could use the HAMP program, were
there regulations established so that you could reduce the
principal amount of the loan, which you and your Assistant
Secretary have agreed would be very helpful in keeping people
in their homes?
Secretary Geithner. Yes. As I said in response to your
colleague's question, we did establish--at the beginning, we
had authority to do it. And we were providing assistance for it
with the taxpayers' money, both through the State programs and
directly, programs that support targeted principal reduction.
Yes.
Mr. Gutierrez. So why hasn't more money been used?
Secretary Geithner. For the reasons I said. Because our
programs directly only reach--
Mr. Gutierrez. Okay. Mr. Secretary, forgive me if I fail to
grasp this. I am not the Secretary of the Treasury. I didn't
work at the Federal Reserve in New York, and maybe I don't
understand. But it seems to me that, as I see people out there
on Wall Street and I see this conversation that we are having
here, look, I think it is pretty natural to say, hey, there was
hundreds of billions of dollars in TARP money, there was a
sense of urgency both by your predecessor, Mr. Paulson, and you
and others to come here to the Congress of the United States
and say, let's stabilize our financial system, it is in
gridlock, it is going to fail, we need to give them the money.
And, indeed, they got hundreds of billions of dollars to
stabilize that system. But, basically, the homeowners didn't
get very much from the HAMP program which was established.
And I just want to state for the record, I voted for it,
primarily because I thought, well, at least there will be some
money so that people can stay in their homes. I think that is
why people are a little angry.
And then, Mr. Secretary, to be quite honest, when you come
and say to us, there are a lot of people in poverty and then
you say, I don't want to talk about the $5 fee, look, Mr.
Secretary, people pick up the newspaper and they read stories
that you talked to JPMorgan Chase and Morgan Stanley and all
the boys and girls on Wall Street first thing in the morning
and at the end of the day, but you can't comment when they put
a $5 charge at Bank of America. They want you to speak, because
they pick up the phone, Mr. Secretary, all the time to those
same banks, and those banks won't return their phone calls so
they can get their mortgage mediated.
Secretary Geithner. Can I say one thing in response, Mr.
Chairman?
Chairman Bachus. Absolutely.
Secretary Geithner. Congressman, I just wanted to say
that--and I tried to say this at the beginning, but you didn't
let me--this Administration, at my recommendation, with the
President's support, put hundreds of billions of dollars into
the housing market, not directly through HAMP but through the
GSEs and through the direct purchase of mortgages, that had a
dramatic effect in lowering mortgage rates for everybody,
helping people refinance, stay in their homes--made a huge
difference in easing the pain.
But our programs have dramatically underperformed what we
thought. But why did they do that? It is because there were far
fewer people eligible for our programs than we estimated
originally. We have tried to reach as many as we can, and we
are going to keep doing it for exactly the reasons you said,
and we should keep doing it. And we are very disappointed and
frustrated by it, and we have a lot of challenges ahead.
But we did not--the HAMP authorization of $50 billion does
not capture the full scale of the resources we put into the
housing market. We put much more into the housing market, in
total, than we did for the banking system as a whole.
Mr. Gutierrez. I just want to say, the next time they have
a crisis, don't call me.
Chairman Bachus. Thank you.
And thank you, Mr. Secretary, for that response.
At this time, I am going to recognize Mr. Garrett. Then I
will go to Ms. Velazquez. And then Mr. Neugebauer will have
voted, and we will go to Mr. Neugebauer. He may be in the Chair
at that time. And if Members wish to go vote and come back, Mr.
Meeks, we can keep the questioning going on.
The Secretary has agreed to be here until 3:45. Originally
5:00, but he was going to come at 2:00, but we had agreed on 3
hours, Mr. Secretary.
Secretary Geithner. No, Mr. Chairman, I am sorry--
Chairman Bachus. Two hours, that is right, 2 hours.
So, as long as the questioning goes on, we will have a 2-
hour stop. If it is interrupted, we will extend to the point it
is interrupted, but hopefully we won't interrupt it.
Mr. Garrett?
Mr. Garrett. I thank the Chair.
I have to say I am taken aback by some of the comments by
our witness today. The uncertainty being a canard, with regard
to a weight on the pressures on the markets today?
Secretary Geithner. Not my--not my words. I was just--
Mr. Garrett. No, but I know you were quoting from them
favorably. But if there is anything more of a pressure on the
markets than uncertainty, it is the certainty that this
Administration would take this view and take the view that the
over 2,300 pages of regulation, the 400 of statute, the 400
regulations that are coming from it, is not a burden and the
uncertainty that creates is not a burden on this marketplace.
Just as an aside, I would very much appreciate if you could
provide me with even half a list of those community bankers who
you have talked to who say that they are privileged that they
don't come under Dodd-Frank. Because I have not met one.
Secretary Geithner. Again, they supported the law because--
Mr. Garrett. They have supported the law, but if you are
saying that they appreciate not being under it, I would like
the individual names of those bankers.
And to the ranking member, to say that he has not seen
anything in the legislation specifically articulated that would
either raise the intermediation costs or the costs on
businesses, obviously the ranking member has not been listening
to any of the testimony we have had before and after Dodd-Frank
has gone into effect and he is not listening to what the
markets are saying right now.
Mr. Frank. Will the gentleman yield?
Mr. Garrett. No, I will not yield.
Mr. Frank. Big surprise.
Mr. Garrett. The other uncertainty in this, of course, Mr.
Secretary, is in a couple of other areas--GSEs.
Mr. Secretary, do you remember we had a meeting back in
April and we said, ``We want to work with you.'' You did a
White Paper, you had three plans, and we sincerely want to work
with you. And you asked us to let you have a little bit of
time, and you will have your staff work on it--give you a few
weeks, and then you will get back to us.
That was back in April. This is--May, June, July, August,
September--October. And now I understand you may have just told
Senator Vitter on the Senate side, or you may have told someone
else, that you are now working on coming up with it still.
In a nutshell, when can we have a response to our April
request as to what the Administration's exact details are and
not another White Paper?
Secretary Geithner. I meant what I said when I said it to
you in April, which is that we are looking at options and we
are happy to discuss them with you. But, as you know, we have
been a little busy. We had a little crisis in Europe. We had a
little debt limit debate--
Mr. Garrett. I understand that, but when--that is 6 months,
so--
Secretary Geithner. So, soon. I don't know when yet, but
soon.
Mr. Garrett. It was a couple of weeks back in April--6
months. By the end of the year? Because this is important.
Isn't GSE reform very important, that we should be tackling it?
Secretary Geithner. It is. It is. And I am glad to hear
that the debate seems to be moving in a constructive direction
on your side--
Mr. Garrett. It is constructive over here in the House. It
is not constructive from the White House and from yourself.
Secretary Geithner. But we are not stopping you. If you
want to come up with ideas, it is fine.
Mr. Garrett. But we would like to work--the President is on
TV today saying that we are not working with him. We are all
about working with him, as long as we have something specific
from you or the Administration.
Secretary Geithner. I took you at your word when you said
you wanted to work with us. And I also said, and I said it
publicly today again, that I think the burden is on us to
propose a detailed plan. And I would like to do that.
Mr. Garrett. And, on that note, I will just say, we are
still waiting.
And, also, we sent you a letter that was also a reference
to FSOC--and this just went to you, so I am not asking for an
immediate response. But our letter basically asked, with regard
to all the regulations out there, can't we have a roadmap,
basically, in place, directed by FSOC, as for a timetable for
the regulations to come out, and put it in the Register by
FSOC? Can we--
Secretary Geithner. I read your letter, and--
Mr. Garrett. Good.
Secretary Geithner. --I have to confess to you, I had the
same basic instinct at several times over this process, because
it is a very complicated, confusing path of uncertainty on
timing, and we are trying to resolve it. So we are going to try
to get as much clarity as possible from the regulators--
remember, they are independent of us--about what the timeframe
is going to be.
Mr. Garrett. But they are independent of--if FSOC put it
out and put it in the Register as the timeframe that you wanted
to go by--right?
Secretary Geithner. As I said, it would be great to have a
little more clarity out there about actual sequencing, and--
Mr. Garrett. Two more quick questions. Now, I will switch
over to other uncertainty, not here but over in Europe. I
understand that you have urged the Europeans to leverage their
$400 billion European financial stability facility--their
facility--to issue euro bonds.
Secretary Geithner. No, that is not quite right. But go
ahead.
Mr. Garrett. No?
Secretary Geithner. No, not precisely. But go ahead, I will
let you finish your question.
Mr. Garrett. Okay. So, basically, if they were to do that,
these would be euro bonds that would be issued by the EU, which
would be backed by member states, who basically can't print
their own money because member states can't do their own money
anymore. Some would connote that, then, to be some sort, if you
will, a CDO sort of thing, a sovereign CDO to try to infuse
capital into those marketplaces.
My question on that is, if they were to do that, can you
assure us that this Administration, the Fed, would not be
looking to buy any of those euro bonds?
Secretary Geithner. I don't think we would have the
authority to do it. So I don't think you have anything to worry
about.
Mr. Garrett. And so, nothing through the Fed. Okay.
Secretary Geithner. I don't think so. I can't envision a
circumstance like that.
As you know, they are members of the IMF. So they have the
right, as members of the IMF, to borrow from the IMF if they
meet the conditions.
Mr. Garrett. That is my next quick question, in 6 seconds,
is that the Fed has swap lines where we--
Secretary Geithner. They do have swap lines, that is right.
Mr. Garrett. --and these go back to those banks over there,
and those banks get--and, in return, is they are backed by the
social security of what? Of the other banks over in those
countries or the sovereign debt of those countries?
Effectively, we are put on--by the swap lines, we effectively
are connected, if you will, through the Fed and through those
swaps, to the potential for a contagion of the failure over in
the EU.
Is that something that is good for us to be in the position
of?
Secretary Geithner. Absolutely. And there is no risk to us
in this country. These are the swap lines extended to the ECB.
Mr. Garrett. Yes.
Secretary Geithner. And they are swaps of euros for
dollars. There is no risk in them. We have used them once at
enormous scale. And there is no risk to the United States.
And they are very much in our interest to do because we run
a dollar-based international financial system. And those
institutions, when they need dollars, have nowhere to go except
from us, and we are trying to meet that need.
Chairman Bachus. All right. Thank--
Mr. Garrett. But the ECB is backed by--
Chairman Bachus. Thank you, Mr. Garrett.
Mr. Garrett. Thank you.
Chairman Bachus. Ms. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
I yield to Mr. Frank.
Mr. Frank. First, Mr. Garrett, as he often does, won a
debate with a straw man. ``The Wizard of Oz'' must be his
favorite movie.
The fact is that I never said there was nothing in the bill
that would restrain businesses. I am very proud that we
restrained the kind of credit default swaps that AIG engaged in
with no ability to repay. I am very glad we restrained people
from making the kind of mortgage payments they shouldn't make
in selling them. So, of course there were things that
restrained some activity that was not productive.
What I said we did not do in that bill, and no one has
pointed to me, was anything that would increase the lending
standards for banks on conventional loans. Nothing in that bill
tightens them.
But, secondly, as the gentleman leaves, I have to say, his
blaming the Administration because we haven't done anything
about GSEs--have people forgotten he is the chairman of the
subcommittee that has jurisdiction over the GSEs? When he
blames the Administration for the fact that this committee has
not gone beyond subcommittee on the GSEs, he makes Pontius
Pilate look like a standup guy.
The fact is that there has been the greatest inability to
focus on this. And the notion that they can't do it without the
Administration has to be the least credible excuse I have ever
heard. It is not that the dog ate my homework, it is that the
unicorn ate my homework. Because what we have here are people
who have been very critical of the Administration, who have
never asked the Administration's permission to do anything, but
when it comes to the GSEs, because there is this great gap
between their ideology and reality, all of a sudden the poor
dears can't do anything without the Administration's telling
them to.
I thank the gentlewoman for yielding.
Ms. Velazquez. Mr. Secretary, last month, the Treasury made
its final round of investment in the Small Business Lending
Fund, bringing the program's total to just $4 billion, just 13
percent of the $30 billion that was set aside. And only 332
banks across the country were able to access the funds.
Mr. Secretary, I truly personally believe that the Small
Business Lending Fund's error was that it wasted today's
resources on yesterday's problems. It was in 2008-2009 when
small businesses were not able to secure access to capital, but
we didn't do anything. Then it wasn't until 2010, a year after
we passed the legislation, that the program was up and running.
So, at the height of the financial crisis, small businesses
struggled to find credit, but today they struggle more with
depressed sales. So you put a solution to a problem that didn't
exist, because basically you bring a solution to the banks.
With interest rates effectively at zero and deposits at all-
time highs, banks have ample capacity to lend.
So, still, now, small businesses are struggling. And when
people try to explain why is it that in the 1990s, we created
3.6 million jobs, small businesses did it, why is it that we
are not doing that today?
Secretary Geithner. I agree with much of what you said, but
I want to just change one thing. This President and this
Congress did a dramatic, with your leadership, huge number of
things in the early stages of the crisis for small businesses
through the SBA and even through the TARP program at the
beginning and, in addition, did very substantial tax cuts for
small business at that early stage in the crisis.
Ms. Velazquez. Ye, but I am talking about this bill.
Secretary Geithner. And this bill, although it took a long
time to design it by Congress, time to implement it, it was
also very well targeted to help make sure that there are no
more credit constraints across the country.
But you were right to say that the biggest problem facing
small businesses across the country is weak growth and weak
growth in sales. The best thing we can do about that, in
addition to making sure they can get credit, is to make sure
that we make the economy stronger. And that is why this mix of
tax cuts and infrastructure spending that the President has
proposed is so important.
If Congress were to enact those things, there would be more
demand for products small businesses create and services they
produce across the country. But you need the credit, too,
because, as you know--this is your life's work--they need the
oxygen in this context.
And the reason why you saw relatively limited participation
in this program was, in part, because, as you said, some banks
have plenty of capital, and we only had applications for about
one-third of the authorized assistance, but only half of those
banks met the standards in the law, and it is less than we
thought. We were a little surprised by the takeup.
But you are right to point out that the most important
thing we should do is to make sure we get growth stronger so
demand is greater, and more demand for the products and
services small businesses create.
Chairman Bachus. Thank you, Mr. Secretary.
Mr. Dold from Illinois is recognized for 5 minutes.
Mr. Dold. Thank you, Mr. Secretary, for taking the time to
be with us. And I certainly know, I guess, one of the
advantages of waiting while there are votes is that we get to
ask questions.
So I am concerned and wanted to talk to you about the China
currency bill that currently just got passed, actually, by the
United States Senate. As somebody who represents a district
that exports over a billion dollars over to China, I am
obviously concerned about what kind of ramifications this has.
Currently, we have had little word from the Administration
about what their plans are. A lot of other bills, we hear that
the President is going to put his veto threat out there. If
this were to pass through, would your recommendation be to the
White House to veto the bill or to sign it?
Secretary Geithner. As the White House said yesterday--and
I will just repeat their language just to be careful--if this
bill were to advance, then Congress would, or should, address
the concerns that have been raised about the consistency of
some provisions with our international commitments.
But let me just say, we--
Mr. Dold. Specifically with the world trade obligations; is
that correct?
Secretary Geithner. Yes.
We have a problem, though, which is that I think we all
need China to let their currency rise more rapidly, and we need
to find a bit more effective way to address a whole range of
practices the Chinese continue to do to subsidize and
disadvantage U.S. companies--stealing offshore property,
forcing transfer technology. And we are very concerned about
that, working very hard to address them. And we have not made
enough progress. We want to build on that progress.
Mr. Dold. If the bill were to go--sometimes you have the
opportunity to say, ``We want you to address those things,''
and sometimes they do and sometimes Congress doesn't--in its
current form right now from the United States Senate to the
President's desk, your recommendation would be what?
Secretary Geithner. As I said, if this bill were to
advance, we would want Congress to address the concerns that
exist about the design of those provisions that would violate
our international commitments. That is what I would say. I
won't go beyond that, for reasons you can appreciate.
Mr. Dold. All right.
If I can, I will just jump to something else. Overseas
regulators have made it clear that they will potentially not
follow the lead of the United States on a number of provisions
that are a prominent feature of our regulatory reform,
including the Volcker Rule and swaps push-out, more
specifically with Section 716.
Shouldn't this make you skeptical that they will not
harmonize their rules with those of the United States on other
important provisions, as well?
Secretary Geithner. I am a little worried about that. But,
we never could expect that the world would match us identically
for specific provisions we thought were in our interest of
protecting our system.
But I think we have a very good chance, as I said earlier,
on the fundamental things that determine the economics of
finance here and around the world--in capital liquidity
derivatives, margin, etc.;--we are going to work very hard to
make sure we come to a common position so we don't see that
material shift in activity outside of the United States to the
disadvantage of U.S. firms.
Mr. Dold. I had some other questions with regard to the
FSOC specifically and derivatives, but Congressman Royce went
over those, so I will just jump on to something else.
The SIFI designation, which you are in the process right
now of trying to take a look at those, about how many U.S.
companies do you think would fall under that SIFI designation?
Secretary Geithner. Can't tell yet.
Mr. Dold. Rough estimate?
Secretary Geithner. Don't know yet.
But I will tell you what we are trying to do. We are trying
to define the mix of size and risk that we think requires us to
take a closer look about whether those institutions should be
subject to the type of constraints we put on banks in terms of
capital and leverage. That is the motivation for this. It is a
very important thing to do because in our crisis, we had a huge
buildup of risks outside the system, alongside banks, doing
basically what banks are doing--
Mr. Dold. Sure.
Secretary Geithner. --and that was devastating. And so we
are trying to make sure the scope of that authority will extend
to institutions that fell outside of those safeguards but need
to be under them.
Mr. Dold. If I could just go out--and we don't like to deal
in hypotheticals, but if we can, I know there are specific
companies out there that have actually filed Chapter 11, that
have gone through a bankruptcy reorganization. Wouldn't that,
by sheer definition, make them outside of a SIFI designation?
Secretary Geithner. We have had centuries, decades of
experience with banking and financial crisis, and--
Mr. Dold. And I certainly don't mean to say that you don't.
Secretary Geithner. No, no, I know--``we''--as a country,
unfortunately.
And what we learned as a country in that context is that
banks, or institutions that are like banks--they take on
leverage, they borrow short, lend long, assets are liquid,
vulnerable to runs--those institutions require a modified
bankruptcy regime to deal with them because of the risk that
you suck the oxygen out of them and they come crashing down.
And, the way bankruptcy works, normally under the corporate
context, you need somebody to be able to lend in the financing
role, and you need to adapt that model, as we did after the S&L
crisis in particular, to give a special way--and Dodd-Frank
did--to make sure you can adapt that same basic principle to
institutions that are structured with that mix of leverage and
liquidity risk.
Mr. Dold. I appreciate that my time is now up, but I do
want to just mention that I was up and met with a company that
actually has gone through the bankruptcy process, did not suck
that oxygen out of the air, and yet they are considered under
that SIFI designation, as of right now. And I would simply
argue--
Secretary Geithner. Nobody is under it yet.
Mr. Dold. They fear--
Secretary Geithner. They fear.
Mr. Dold. --they fear, and I think rightfully so, that they
will be put under these constraints. And I would just certainly
like to caution you and those who are making these decisions
that, if there is an organized way already existing in the laws
that they would not fall under that SIFI designation, we want
to make sure that we are not casting as wide a net and more of
a narrowly tailored net if possible.
Secretary Geithner. Fair point. We are going to try to get
that balance right. And I think if the Council adopts this
guidance, people will have a lot more clarity about the
criteria we are going to propose and another chance to comment
on that criteria.
Mr. Dold. Mr. Secretary, thank you for your time.
Mr. Neugebauer. [presiding]. I thank the gentleman.
The gentleman from Georgia, Mr. Scott.
Mr. Scott. Thank you very much.
And welcome, Secretary Geithner.
Certainly, as you recall when you were last down in
Atlanta, we had an opportunity to visit and have a chat. Let me
just say at the outset, I would like for you to pass on a
couple of words of commendation to members of your staff: Mr.
Tim Massad, who is, I think, your Assistant Secretary of the
Treasury for Stability; and Ms. Alvina McHale, who worked--as
you know, we have decided to go in and approach this whole home
foreclosure situation as a ground war. We put together home
foreclosure prevention workshops.
And I just want to commend your staff and those folks. And
please pass the word along to Ms. McHale and Tim Massad, Carol
Lambert and Andrea Risotto and Troy Clair, who works with
Massad--all. We couldn't have done it without them. We were
able to get over 6,000 folks there, and we were able to help
save 2,565 homes. And we are planning for the next one, and our
goal is 10,000 homes that we can save.
But I want to talk about this, because in getting there and
working on this, I learned a lot, as I mentioned to you, and
that we can correct some things. We are losing homes that we
shouldn't.
One of the areas that we found--one of the reasons we were
successful was because Bank of America, for example, brought
their underwriters with them. That means they could go ahead
right there on-site when we had the person there and write down
that loan and be able to do modifying.
If we could work and incorporate that with all of the other
banks and all of the others that would come to such events--
because I am not the only one that Treasury works with. You do
this. This is something that you are to be commended for.
Because I think that this is the way we are really going to win
this war in helping people stay in their homes, is to get right
down there on the ground with them and get the banks, get them
face-to-face, with our encouragement, to make sure this
happens.
But, in your comments, you mentioned that what you needed
was greater authority and enforcement with mortgage servicing.
And let me just ask you to respond to that. Would that mean how
we could work to make the HAMP program more successful? Because
what I found out with HAMP was, the reason why that is not
working as it should--and as Mr. Gutierrez was pointing out,
only $2 billion--is because it is basically voluntary; the
banks are not there.
So could you comment about that? That might be helpful to
us.
Secretary Geithner. Let me just start by thanking you for
commending the people who are working so hard on this. And I
agree, you need to do it homeowner by homeowner, because it is
such a tough thing to do. And I appreciate your suggestion for
how to make it work better.
This requires a longer conversation, but we have all been
living with the limitations of what HAMP can do. And there are,
really, three types of limitations we discovered. One is, as I
said, the number of people we thought would be eligible for the
assistance is a fraction of what we thought--the number
actually is a fraction of what we thought--meaning there are
far more people than we thought where the home is an investor-
owned home, it is a second home, it is a jumbo mortgage, where
the people can really meet their payment, or they really just
have too much debt. That is one factor.
The second is, in our programs we don't have the power to
compel Fannie and Freddie to come alongside us. They have been
willing to come on some things, but we can't force them on the
rest. That is one limitation. The fact that it is voluntary I
am not sure is a fundamental constraint, but it is another
constraint there.
We are still looking for ways to expand the reach of these
programs, and we are going to keep at it. And the fact that we
still have resources available gives us an opportunity, but we
have some constraints on how much we can spend those. And we
have proposed, as part of the Jobs Act, asking Congress to
appropriate substantial additional sums of money to the
Department of Housing so they can get more resources into
communities where you have had such terribly concentrated
foreclosures. And we think that would be helpful, too.
We expect to move forward in the next couple of weeks with
FHFA to make it much easier for Americans to refinance even if
they are somewhat underwater. That will be helpful.
We are trying to get the huge amount of vacant property
that is still on the market into the hands of people who can
rent. That will be helpful, too.
We have a lot of work to do, and we are going to still use
all the authority we have to try to reach as many people as
possible. And I am happy to get suggestions from you on how
best we can do that on the ground.
Mr. Scott. Yes. And getting more authority, what
specifically, what would you say you absolutely need in terms
of that authority for the--
Secretary Geithner. To help with the neighborhoods that are
facing just--there are just thousands of concentrated vacant
property across these neighborhoods. You need resources. And
that is why the Jobs Act has this proposal to give the
Neighborhood Stabilization Fund substantially more resources.
To substantially broaden the authority we have over the
program, you would have to give us authority over Fannie and
Freddie.
Mr. Scott. Right. Now, one of the things that might be in
there that we found out in these prevention workshops that we
were able to be successful with was, in having FHA there and
having Fannie and Freddie there, we are able to get the banks
who would be able to work closer with the HAMP program to
interact and go right to the table where the FHA is because we
had them there. And that might be an area where we can improve
upon, so--
Secretary Geithner. That makes sense. I agree with that.
That makes sense.
And, again, I just want to point out that, although we have
only had a little over 800,000 people with permanent
modifications under HAMP, if you look at the broad range of
modifications, it is closer to 4 million across the financial
marketplace.
Mr. Scott. Right.
Secretary Geithner. And that is a lot of people. And that
is a big reduction in the monthly payment. And that is 4
million foreclosures avoided.
We have a lot more risk we need to try to work to avoid.
And, we are going to do everything we can to do that.
Mr. Scott. Thank you so much. And I appreciate your letting
Ms. Alvina McHale and Mr. Tim Massad know how much we
appreciate the job that they are doing. Great job.
Secretary Geithner. Thank you again.
Mr. Neugebauer. I thank the gentleman.
Mr. Secretary, welcome. It is good to have you back.
Secretary Geithner. Nice to see you.
Mr. Neugebauer. Back in April, Secretary Goldstein
testified before our Oversight Subcommittee. And one of the
things he said is that, as the Chair of FSOC, you would make it
a top priority to make sure that the regulation process was
well coordinated. And, in fact, I think you said this morning
that failure to coordinate rulemaking will be enormously
expensive to the economy and create opportunities for
regulatory arbitrage.
So, as the overseer of that process, what are you doing to
go above and beyond to get these agencies to coordinate?
Secretary Geithner. Under the law that the Congress passed,
I was given the responsibility to try to coordinate but not the
authority to enforce it. So I am doing what you would expect me
to do, which is try to get them together, encourage them to use
the discretion they have to be more closely aligned, and make
sure it is being sequenced in a sensible way and make sure they
are looking at the full scope of the things we are imposing on
the system.
Of course, the things we are imposing on the system have
costs. And we are trying to make sure that it is done in a way
that everybody knows what everybody else is doing. And, as you
can see, it is a challenge.
But you did not give me the authority to compel them to
work closely together, and they exist with independent
statutes, independent mandates, and they are going to be
protective of that. But where they have the flexibility under
the law to be more aligned, they are moving closer to being
aligned.
Mr. Neugebauer. Because I think an example of that, and it
was brought up a while ago, about the CFTC and the SEC,
particularly on derivatives--in other words, business conduct
standards and margin and capital requirements and clearing--
there is obviously not coordination or mutual agreement on
those. And obviously, those are very important issues to the
economy.
And I think you make a good point, that you were not given
the authority to compel these agencies. So is this a flawed
process? Because, as you say, this is maybe the most important
thing that can happen here, important to the economy. And if
the process isn't going to work and we are not going to have
harmonization between this rulemaking, then what direction
should we be going?
Secretary Geithner. It is a dramatic improvement in the
system we had before the law was passed--dramatic improvement.
They are working very closely together.
They recognize, if you had them here with me, the people
who run the CFTC, the SEC, and the Fed, they would commit to
the same basic objective, because they recognize it is
important. They have a very elaborate, closely coordinated
process to try to make sure that they are doing this in a
sensible sequence.
And, you are going to want to see, like we are, where they
land the stuff, how closely they get to that stated commitment.
But they are committed to it, and I think they are doing a
reasonable job. It is a little messy to look at, I agree with
that. We just have to keep emphasizing the importance of it.
Mr. Neugebauer. If it is not working or if it is--what is
the alternative here? Should we elevate this to another level?
I hate to bring another bureaucracy in there, but if the--do we
need a referee here? A working group?
Secretary Geithner. I don't think you are going to pass a
law. You don't need another committee, that is for sure. You
have enough committees. You are not going to pass a law, I
don't think, that gives me authority to tell them what to do.
And I wouldn't seek that authority.
So what we are doing is the best we can with the authority
we have. And I think it is working; it is just not--we can't be
certain yet it is going to work well enough. But I take a more
optimistic view.
Mr. Neugebauer. I think one of the things you said earlier,
too, is you are worried about the cumulative burden of the
regulations. I am worried about the cumulative effect of all
these regulations. Just the first 102 regulations that came out
of Dodd-Frank, for example, according to the regulators
themselves, will take 10.8 million hours of compliance.
And we did a press conference not too long ago, and you may
or may not know this, but you have a little--you did a little
stint in New York. They built the Empire State Building in 7
million manhours. And so, this is just the first 102 rules.
How are we not just suffocating the financial markets? And
we have just begun.
Secretary Geithner. I think you are too worried about the
cumulative impact of these financial reforms on the basic
business of finance in the United States.
Now, we are not going to get it perfect, but we saw what
happens when you get it wrong, when they are too weak, they are
poorly designed, there are huge gaps, we leave a huge amount of
stuff to operate in the shadows. We have a chance to fix that
now.
As I said--and I say this over and over again in public--as
we fix it, we want to make sure we don't overdo it. And where
we have to get tougher standards in place, like on capital over
time, we are going to make sure they are phased in over time so
we are not going to hurt the recovery.
And I do not believe--I do not believe there is credible
evidence to support the conclusion that the rules, as they are
now being designed, are doing material damage to the basic
objectives we seek, which is to create a more stable system.
Now, they have consequences. They will raise costs of business
for financial institutions. That is their objective, in some
ways, or that is the necessary outcome of that stuff. But we
have to get the balance right, and we are being careful to do
it.
Mr. Neugebauer. I think that is the reason that
coordination is extremely important, because not only are we
seeing a lot of those regulations coming out by multiple
agencies, but when we talk to people in the regulated
community, they tell you that more coordination is needed.
And so I would encourage you, Mr. Secretary, even though
you may not be able to compel, but that you spend a tremendous
amount of energy to make sure that process is moving along,
because I think it is extremely important to the economy.
Secretary Geithner. Thank you for emphasizing the
importance of that. And I share your view about the importance,
and I am spending more time than you can imagine.
Mr. Neugebauer. Thank you.
Mr. Schweikert?
Mr. Schweikert. I wasn't sure someone else wasn't in the
queue to go ahead of me. Thank you, Mr. Chairman.
Mr. Secretary, I assume a day like this becomes a long day
for you. You were in the Senate this morning?
Secretary Geithner. Not so bad. Sort of a good debate to
have. Fun to be with you again.
Mr. Schweikert. Hopefully, it is not necessarily a debate;
it is an opportunity for us to learn. And hopefully, you are
well caffeinated.
I want to go off on a side issue. I have been trying to
learn more about Basel III and what it affects and how it
affects our capital requirements. First question: I see in some
articles a discussion of what will be counted as Tier 1, Tier
2, Tier 3 types of capitals. Am I under the impression in Basel
III that bonds from Fannie and Freddie would be Tier 2?
Secretary Geithner. I don't think I can answer that, but I
would be happy to get back to you in writing.
The fundamental thing we did in Basel III is to basically
say, for the core minimum capital requirement, we are going to
require you to meet it with common equity, not with a bunch of
other stuff. That is for the Tier 1 capital requirement. But we
do still--regulators do still allow you to use other forms of
capital to meet the additional--
Mr. Schweikert. Within that Tier 1?
Secretary Geithner. No. In Tier 1, we are essentially
limiting it to common, for all practical purposes.
Mr. Schweikert. Okay.
Secretary Geithner. But I would be happy to respond to you
in writing on the details.
Mr. Schweikert. Look, this is why I am trying to educate
myself, because my understanding is, sort of like in FSOC, some
of the additional premium out there is a couple hundred billion
dollars of additional, even beyond what would have been a Basel
III requirement?
Secretary Geithner. I have read those reports and the
letters and concerns about that, and I do not believe that
those estimates are accurate. But I have to talk to the Fed
about it.
But you are correct to say, in addition to the Basel III
threshold, we have proposed--and the law asks us to do this,
and I fully support this--that the largest institutions in the
world should hold an additional buffer of capital. And the Fed
is in the process of negotiating those details with our
counterparts around the world.
Mr. Schweikert. And I appreciate that. I am still trying to
hunt for, sort of, the math that tells me what creates a level
of safety, where at the same time holds so much capital out of
the markets that we actually inhibit economic expansion and
growth. And my fear is, are we heading toward a layering where,
well intended, but we may be starting to pull too much of that
capital away?
Secretary Geithner. I don't think so. And I will cite--you
are right to say there is--first of all, there is no science to
that basic choice.
Mr. Schweikert. Yes, but there is always someone willing to
make up a formula.
Secretary Geithner. There is. And, you can go too far. I
agree with that.
But all we know is that they were way too low and they
weren't applied far enough across the system. And we are trying
to get them more conservative so there is much lower
probability of failure, of default, of financial crisis in the
future, without going too far.
If we go too far, what is the consequence of going too far?
You are right, you say you put additional burden on the
economy. But you also have the effect of just shifting the risk
outside the banking system in ways that don't necessarily make
us better off. So we are trying to get the balance right for
those reasons.
My basic sense is that, first of all, U.S. firms, on
average, are very far along to meeting those requirements
already and that it seems, on the basis of the available
evidence and what analysts have said independently, that since
the remaining requirements will be phased in over a long period
of time that they will be able to earn their way into those
higher requirements. And because of that, we think we can
manage this in a way where we will have limited effect on the
recovery that is still sort of fragile.
Mr. Schweikert. Two other quick things, because I only have
about a minute and 20 seconds.
In my running back and forth to vote, I was hearing some of
your comments and discussions about mortgages and foreclosures
and those. I happen to be one of those people who believe we
don't drive health back to our residential real estate market
until we actually get the glut of nonperforming paper but also
of vacant homes. What is it? The estimate is 13 percent of
residential units in the country are functionally vacant. In
some places like I represent in Arizona, Maricopa County, it
could be 16 percent of our residential units.
A lot of well-meaning mortgage-foreclosure moratoriums and
abatements and those things, in many ways, have actually made
the problem worse and last longer. I know that doesn't feel as
warm and fuzzy, but, ultimately, if we are going to bring back
our home values--I was somewhat happy to hear the
understanding, saying, look, we have to grind through this,
what isn't performing we have to move into some status of
performing. Am I hearing you correctly?
Secretary Geithner. I think much of what you said is right,
that we won't do the system any good if we leave those broader
foreclosure systems as broken and frozen as they are. And, in
many ways, the best thing you can do for those communities is
to get those vacant properties into better hands, into rental
or other uses. That would help as a whole.
But there is still a very strong argument, economic
argument, financial fairness argument, that you want to make
sure that people who have income and can afford to stay in
their homes if they are given a chance are able to do that. And
we are trying to help that. And I think, in helping that, I
don't think we are getting in the way of the necessary
adjustment for this to happen in the marketplace.
Mr. Schweikert. I know I am a little bit over time, but you
have hit on something that concerns me. And, actually, this is
one I actually give Fannie and Freddie some credit for. Some of
their servicing best practices they have put out in the last
couple of months actually seem to do that mechanic. If we can
get you there, if we can keep you in the home and work those
out, we are going to get you there. If we can't, then we cannot
let this slow decay of foreclosure linger.
Secretary Geithner. Right.
Mr. Schweikert. And it is sort of--you have to hit a
decision point and actually make that tough decision, but you
have to make it.
Secretary Geithner. What we try to do is to say that some
people need to be given some help through a short sale or a
deed in lieu of sale to transition in some ways. And so, we
have had a mix of approaches across the system. But, as you
know, the servicing framework is still fundamentally broken,
and the securitization system makes it much harder for that to
happen on the scale you need to.
Mr. Schweikert. And, Secretary, actually, I would love if
you also have a staffer--you hit on one thing. I am a fan and
we have been trying to write now for a couple of months the
concept of deed in lieu to a lease-backed, maybe even a
downpayment IRA, so in the future you could actually buy the
property back--some of those mechanics. And, actually, believe
it or not, we keep running into, sort of, regulatory hurdles
within those concepts, because you are having to do three or
four very different things all at once. If you have someone who
intellectually has been working on that, I would love to spend
some time--
Secretary Geithner. I would be happy to do that.
Mr. Schweikert. Mr. Chairman, thank you for your tolerance.
Chairman Bachus. Thank you.
Mr. Secretary, we appreciate your testimony today.
I want to end on a positive note. You made a speech in June
of this year, when you said there is a very strong case for
requiring the largest firms to hold more capital relative to
risk than smaller institutions. And I agree with that.
But you also asked that day how much, which is, I think, a
very important question. You said, ``In making this judgment,
the central banks and supervisors need a balance between
setting capital requirements high enough to provide strong
cushions against loss but not so high to drive the re-emergence
of a risky shadow banking system.''
And my question is, with, say, Basel III capital rules
combined with all the rules imposed by Dodd-Frank, whether they
are good or bad or neutral, will there be at least a tendency,
a shift from the banking system or the banking sector to a less
regulated, what we call a shadow banking system?
Secretary Geithner. We always have to be worried about that
risk, but I don't believe that is likely, on the strength of
the rules we see coming into place today. But we are going to
be very attentive to that, for the reasons you said.
Chairman Bachus. All right. Great. I appreciate that.
A significant move away from financial activity and highly
regulated financial institutions into less-regulated sectors,
how would that affect financial stability, or how could it?
Secretary Geithner. It could be very damaging. As we saw,
what some people call the shadow financial system or the
parallel financial system, these are entities that were
effectively doing what banks do but they operate outside of the
prudential constraints on capital. They grew to be larger than
the traditional banking system.
And when that happens, you leave the economy at risk and
the banking system at risk, because when the storm came and
funding ran from those institutions, they collapsed, had to
sell assets, put a huge amount of pressure on the economy. So
if you get that balance wrong, you can do enormous damage.
Chairman Bachus. Thank you.
Mr. Secretary, there have been 3,700 new regulations in the
last year that have been enacted by the Congress and signed by
the President. But there are actually--actually, by
regulations, the regulators, in response to laws. But there are
almost 4,300 regulations still in the pipeline, many of those
in financial services. And, as you know, we have been asking
for cost-benefit analysis. And 219, our best estimate, of those
have an economic impact of over $100 million or more.
And I would just close this hearing by asking--I think
maybe the most important policy that you could adopt, the
regulators and this Congress, is to promote, not restrain,
policies which create capital, investment, jobs, what we
sometimes refer to as wealth growth. The American people are
actually 8 times richer than they were in 1820. And while there
are actually countries that are--their populations are no
richer.
So I would simply urge you to look--and we have sent you a
letter on--because the President did say he was going to look
at all the different regulations and rules and see if those are
restraining economic growth. And we would ask you to do that
and make that a priority. We want to encourage and promote
growth and wealth creation because that creates jobs.
I thank you for your attendance. I thank you for working
with us to start this hearing early. And I think we worked with
you so you would be free to go to the White House at 4 o'clock.
So, with that, I will discharge you.
The Chair notes that some Members may have additional
questions for you, and they will submit those in writing.
Without objection, the hearing record will remain open for 30
days for Members to submit written questions to you and to
place your responses in the record.
And you could also, your written statement if you wish to
clarify that in any way, or your responses, you are welcome to
do that.
This hearing is adjourned.
I thank you for your attendance, Mr. Secretary.
Secretary Geithner. Thank you, Mr. Chairman.
[Whereupon, at 2:35 p.m., the hearing was adjourned.]
A P P E N D I X
October 6, 2011