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





                    INVESTOR PROTECTION: THE NEED TO
                 PROTECT INVESTORS FROM THE GOVERNMENT

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

                                HEARING

                               BEFORE THE

                  SUBCOMMITTEE ON CAPITAL MARKETS AND

                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 7, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-135



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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

           James H. Clinger, Staff Director and Chief Counsel
  Subcommittee on Capital Markets and Government Sponsored Enterprises

                  SCOTT GARRETT, New Jersey, Chairman

DAVID SCHWEIKERT, Arizona, Vice      MAXINE WATERS, California, Ranking 
    Chairman                             Member
PETER T. KING, New York              GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             RUBEN HINOJOSA, Texas
DONALD A. MANZULLO, Illinois         STEPHEN F. LYNCH, Massachusetts
JUDY BIGGERT, Illinois               BRAD MILLER, North Carolina
JEB HENSARLING, Texas                CAROLYN B. MALONEY, New York
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
JOHN CAMPBELL, California            ED PERLMUTTER, Colorado
THADDEUS G. McCOTTER, Michigan       JOE DONNELLY, Indiana
KEVIN McCARTHY, California           ANDRE CARSON, Indiana
STEVAN PEARCE, New Mexico            JAMES A. HIMES, Connecticut
BILL POSEY, Florida                  GARY C. PETERS, Michigan
MICHAEL G. FITZPATRICK,              AL GREEN, Texas
    Pennsylvania                     KEITH ELLISON, Minnesota
NAN A. S. HAYWORTH, New York
ROBERT HURT, Virginia
MICHAEL G. GRIMM, New York
STEVE STIVERS, Ohio
ROBERT J. DOLD, Illinois
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 7, 2012.................................................     1
Appendix:
    June 7, 2012.................................................    41

                               WITNESSES
                         Thursday, June 7, 2012

Fiorillo, Vincent A., Trading/Portfolio Manager, Doubleline 
  Capital, LP, on behalf of the Association of Mortgage Investors 
  (AMI)..........................................................     8
Goodman, Laurie S., Senior Managing Director, Amherst Securities 
  Group, L.P., on behalf of the Association of Institutional 
  INVESTORS......................................................    10
Levitin, Adam J., Professor of Law, Georgetown University Law 
  Center.........................................................    12
Lubben, Stephen J., Harvey Washington Wiley Chair in Corporate 
  Governance & Business Ethics, Seton Hall University School of 
  Law............................................................    14
Olson, Hon. Theodore B., Partner, Gibson, Dunn & Crutcher LLP, on 
  behalf of the American Task Force Argentina....................    16
Skeel, David A., Jr., S. Samuel Arsht Professor of Corporate Law, 
  University of Pennsylvania Law School..........................    17

                                APPENDIX

Prepared statements:
    Fiorillo, Vincent A..........................................    42
    Goodman, Laurie S............................................    47
    Levitin, Adam J..............................................    59
    Lubben, Stephen J............................................    72
    Olson, Hon. Theodore B.......................................    79
    Skeel, David A., Jr..........................................    87

              Additional Material Submitted for the Record

Garrett, Hon. Scott:
    Written statement of the American Council of Life Insurers 
      (ACLI).....................................................    94
Peters, Hon. Gary:
    Research Memorandum of the Center for Automotive Research 
      (CAR), entitled, ``The Impact on the U.S. Economy of the 
      Successful Automaker Bankruptcies,'' dated November 17, 
      2010.......................................................    97

 
                     INVESTOR PROTECTION: THE NEED
                       TO PROTECT INVESTORS FROM
                             THE GOVERNMENT

                              ----------                              


                         Thursday, June 7, 2012

             U.S. House of Representatives,
                Subcommittee on Capital Markets and
                  Government Sponsored Enterprises,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 2:34 p.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Lucas, Neugebauer, Pearce, Posey, Hayworth, Hurt, Grimm, 
Stivers, Dold; Waters, Miller of North Carolina, Maloney, 
Donnelly, Carson, Himes, Peters, Green, and Ellison.
    Chairman Garrett. Good afternoon. This hearing of the 
Subcommittee on Capital Markets and Government Sponsored 
Enterprises is called to order. Today's hearing is entitled, 
``Investor Protection: The Need to Protect Investors from the 
Government.''
    I thank the panel for being here. We are on a little bit of 
a schedule, since we are starting 34 minutes late, so I will be 
pretty exacting with the time for each of the witnesses and 
also the members of the subcommittee. We will begin with 
opening statements, and I will yield myself about 5 minutes for 
my remarks.
    As I indicated, today we are holding a hearing to further 
examine a number of measures advocated for by the Obama 
Administration that have basically negatively impacted a wide 
variety of U.S. investors, including pension funds, 401k plans, 
university endowments, mutual funds, insurance companies, 
foundations, and municipal entities.
    Specifically, the Administration has taken a variety of 
actions where they have sided with the bigger banks, deadbeat 
foreign governments that we know of, and big labor, all at the 
expense of our own U.S. investors.
    These actions include, first, the recent National Mortgage 
Settlement Agreement. In this instance, the Administration 
worked out an agreement with the Nation's four largest 
servicers in the wake of the robo-signing controversy, where 
the banks agree to pay a significant penalty but with funds 
purportedly going to help homeowners. As part of the agreement, 
the Administration allows the banks to get credit on what they 
owe by literally taking money out of securitization trusts 
owned by private investors, including again, pension funds, 
401k plans, university endowments, and the like.
    So in this case, we actually have the Administration 
advocating policies that directly take money from the investors 
who committed absolutely no wrong whatsoever in order to pay, 
at least partially, for the problems admitted to by the banks. 
To ensure that this terrible outcome doesn't occur again, I 
offered an amendment to the Fiscal Year 2013 Department of 
Justice's appropriations bill to block the use of any funds by 
the Justice Department from entering into similar agreements or 
settlements in the future, where money is forcibly removed from 
residential mortgage-backed securitization trusts. This 
amendment passed, and it is my hope that it will remain in the 
final fiscal year funding bill.
    Next, we have the Argentina default issue. In 2001, 
Argentina was the third largest economy in South America. Now, 
it is the largest sovereign debt default in history, with 
hundreds of U.S. investors taking billions of dollars in 
losses, despite Argentina having the money to pay the bill.
    Since the 2001 announcement, U.S. and other foreign 
creditors have won more than 100 judgments against the 
Argentine government and it has continued to ignore these 
judgments, despite its promise to respect U.S. law. In 
February, the U.S. District Court for the Southern District of 
New York handed U.S. investors that they had still not settled 
a significant victory by agreeing that Argentina violated a key 
provision of the bond agreement and that it should treat 
obligation to all the bondholders, at least equally to the 
obligation of others. Argentina then appealed the decision to 
the U.S. Court of Appeals for the Second Circuit.
    This now is where the Administration could not resist 
intervening against U.S. investors. On April 4th, at its own 
discretion, without being asked by the Court, this 
Administration submitted an amicus brief weighing in on the 
side of Argentina and against U.S. investors. So I hope to 
learn more today from our panel as to why the Administration 
felt that they had to interfere, as opposed to just allowing 
the matter to go through the courts impartially.
    Finally, let us turn to the crisis-secured bondholder 
write-down. In 2009, the Administration took the unprecedented 
action of forcing secure creditors to take a backseat to 
unsecured labor unions. Regardless of how someone feels about 
the appropriateness of the Federal Government bailing out the 
big auto companies, at the very least, there would be some 
agreement that secured bondholders, who have a legal priority, 
should not have their claims superseded by those who may be 
politically connected--the unsecured labor unions.
    This breaking of private contracts and the harming of 
secured investors is really a blow then to the rule of law in 
this country and it has set a dangerous precedent, a political 
intervention on behalf of politically favored constituencies. 
Investor protection, therefore, is tantamount to ensuring 
healthy and well-functioning capital markets. The 
Administration should be working to protect the investors, not 
harm them.
    It is unfortunate that I have yet to hear a peep of concern 
after any of these actions from any of the usual groups that 
claim to cherish the role and importance of protecting 
investors, but we haven't. I guess, from their perspective, it 
is only bad when investors get harmed by the private sector and 
not by the government. I, however, fail to see the difference. 
In fact, because the government is usually perceived by many 
people to be on their side, I feel that it is even more 
incumbent upon the government to go that extra mile to ensure 
that none of the actions are negatively impacting the American 
investor.
    Also, it is important to recognize the severe negative 
effect these various actions will have on investors and these 
markets going forward. We are now introducing a new type of 
risk to the U.S. investment market decision. Usually, investors 
have to determine a narrow set of risks, such as credit and 
interest rates. Now, we are adding an additional layer--
government risk.
    Unfortunately, over the last several years during this 
Administration, we have seen a dramatic rise in crony 
capitalism, where the government picks the winners and the 
losers, based on political connections. This must end.
    With that, at this time, when our economy continues to be 
sluggish, it will be appropriate among the savings to last 
through those golden years, this Administration should be 
taking actions to protect these investors and savers, not 
taking actions to harm them and making them worse off.
    And with that, I will now yield to Mr. Peters for 2\1/2\ 
minutes.
    Mr. Peters. Thank you, Mr. Chairman. As we sit here today, 
we have had 27 straight months of private sector job growth, 
with the auto sector leading the way, adding more than 231,000 
new jobs since General Motors and Chrysler emerged from 
bankruptcy. Yet here we are 3 years later and we are debating 
the bipartisan effort undertaken by both the Bush and Obama 
Administrations to help General Motors and Chrysler 
restructure.
    Let us put aside for the moment that the auto rescue saved 
hundreds of thousands of jobs. Let us put aside that the 
bankruptcy was far more successful than anyone would have 
expected. And let us take a moment to ask what investors were 
actually harmed by the government's actions.
    Here are the facts. Chrysler's debt was trading at about 30 
cents on the dollar prior to bankruptcy, which is about what 
the creditors received. And 90 percent of Chrysler's creditors 
agreed to the bankruptcy sale. Critics of the auto rescue 
offered no facts to demonstrate that GM or Chrysler's investors 
were actually harmed. Instead, they alleged the company's 
workers received a bailout. Nothing could be further from the 
truth.
    The UAW sacrificed billions of dollars in earned benefits. 
Workers accepted a 50 percent pay cut for newly hired employees 
and thousands lost their jobs as a result of plant closures. 
Most importantly, there was no private financing available to 
fund the bankruptcies of General Motors and Chrysler. Had the 
government not intervened, they would have been liquidated and 
this would have had a devastating impact on the economy, 
causing widespread failures in the supply base and resulting in 
major losses to investors.
    The government's decision to intervene was designed to 
avoid this nightmare scenario. The money that went to the UAW 
was not taken from investors. It was money designed to ensure 
that General Motors and Chrysler had a workforce. Giving the 
investors anything beyond what they would have received or 
recovered through liquidation would have amounted to a bailout 
and it would have been a windfall for those who had purchased 
their investments for pennies on the dollar.
    So what is the real purpose of this hearing today? A cynic 
might argue that it is nothing more than a partisan attempt to 
discredit one of President Obama's greatest economic success 
stories in order to harm his chances at being reelected. I look 
forward to testimony of the witnesses today to see if there is 
any evidence presented that would lead to a less cynical 
conclusion.
    Thank you.
    Chairman Garrett. The gentleman yields back time. I don't 
believe we have any on our side right now.
    So, Mr. Donnelly for 2\1/2\ minutes.
    Mr. Donnelly. Thank you, Mr. Chairman.
    At the height of the recent economic crisis, our Nation's 
auto industry faced serious financial problems, putting the 
jobs of more than 3 million hard-working Americans in jeopardy. 
The failure of the domestic automobile industry would have had 
a devastating impact on Indiana's economy, America's economy, 
and the American workforce.
    The potential failure of Chrysler and General Motors 
threatened the jobs of nearly 150,000 Hoosiers, from 
transmission workers in Kokomo to parts suppliers and dealers 
from the Ohio River to Lake Michigan. The threat to our auto 
industry wasn't just a threat to Hoosier jobs. It was a threat 
to our way of life and would have plunged Indiana into a 
depression.
    In December 2008 and January 2009, the Bush Administration 
stood behind our automakers and their financial arms, providing 
temporary assistance and arguing that not providing any 
assistance to companies like Chrysler would make the recession 
even worse. When the new Administration took office in 2009, 
they built on that precedent to keep the industry alive, 
working to secure Chrysler's first lien creditors a greater 
return than they would have ever received under the 
liquidation, while keeping Chrysler and the thousands of 
Hoosier jobs that support it alive. Shortly after, the Chrysler 
Group began repaying those funds and reinvesting in the 
American auto industry and our Nation's communities.
    Chrysler Group has since paid back all obligated loans to 
the government. At a time when private capital is scarce, I 
strongly supported this temporary assistance, as did the 
Democratic Administration and the Republican Administration. 
Chrysler's spring 2009 sale to Fiat prevented the company from 
facing total collapse, an action which would have been 
devastating to an already fragile economy. This was not an easy 
decision, but it was a necessary one.
    I saw a clear choice: to either bet on American automobile 
workers, American industry, and American investors; or to bet 
against them. We bet on American workers and we will continue 
to do so every single time we are presented with that choice.
    Today, we know we made the right decision, which was upheld 
at every stage by our Federal courts, to stand behind American 
workers and families because Chrysler and the American 
automotive industry have bounced back from near collapse. In 
2011, the sales of Chrysler vehicles worldwide increased by 22 
percent. Chrysler Group's U.S. market share rose 10.5 percent, 
up from 9.2 percent a year prior. This was driven by a 43 
percent increase in U.S. retail sales. Most recently, Chrysler 
Group reported a 30 percent increase in sales from May of 2012 
over sales from May of last year. These are the best sales 
since 2007.
    We will continue to stand with our American automobile 
industry today, now, and long into the future. And we will also 
stand with American investors and American workers. This was an 
extraordinary success story.
    Chairman Garrett. That is fine. The gentlelady from 
California for 2\1/2\ minutes.
    Ms. Waters. Thank you, Mr. Chairman.
    I think that there are likely some areas where we will 
agree today, and I appreciate your holding this hearing. But 
before I get into the substance of my remarks, I must say that 
the title of this hearing--``The Need to Protect Investors from 
the Government''--does cause me some concern. I think that the 
overwhelming message of the financial crisis 4 years ago was 
that investors need more legal protections and more enforcement 
from our regulators, not less. That is why we devoted all of 
Title IX of the Dodd-Frank Act to investing in protection and 
the regulation of securities.
    Additionally, Mr. Chairman, I think that we agree that we 
both have concerns with the joint Federal and State settlement 
with the five largest mortgage servicers. But before we get 
into that, I think it is important not just to focus on the 
government role in negotiating the settlement, but to remember 
that investors also obviously need protection from the 
servicers that caused this problem to begin with.
    I have been following this issue for quite some time. When 
I chaired the Housing Subcommittee, I held the first hearing in 
the House on the issue of robo-signing and chain-of-title 
problems. In fact, Professor Levitin, who is here today, 
testified at that hearing almost 2 years ago.
    And while we have achieved some important victories, most 
notably, the standup of the Consumer Financial Protection 
Bureau, I am afraid that we still haven't adequately responded 
to the systemic mortgage servicing fraud that has taken place 
in recent years on the consumer side. I think the settlement 
will help too few borrowers and won't help them deeply enough.
    And on a related point, I am concerned that the OCC and the 
Federal Reserve allowed servicers to hire their own 
investigators under their consent orders. I also understand the 
concerns of investors that servicers can satisfy a portion of 
the settlement through a system that gives them credit for 
writing down loans that they service on behalf of others. While 
I am a supporter of the principal write-downs, it doesn't make 
good sense that servicers should satisfy the robo-signing and 
other claims against them through actions that don't cost them 
anything or that they should be doing away with.
    On the other two issues we will discuss today--the auto 
rescues and litigation involving Argentine sovereign debt--I 
think that the Administration generally acted in a way that was 
consistent with the law on both of these issues. In fact, the 
Administration continued policies that had been established by 
the Bush Administration.
    And specifically in the case of the auto rescue, I think 
the Administration did the best they could to save a critical 
U.S. industry in the midst of an historic financial crisis. 
Also, I should note that the structure of those rescues has 
been upheld in the courts.
    I sincerely thank you. I yield back the balance of my time.
    Chairman Garrett. And the gentlelady yields back the 
balance of her time. The gentleman from Connecticut is 
recognized for 2\1/2\ minutes.
    Mr. Himes. Thank you, Mr. Chairman. Mr. Chairman, the title 
of this hearing today caught my eye. This premise that 
investors need protection from the government is interesting 
for two reasons. One, it is a novel concept. Centuries of 
experience with bubbles and crashes have shown us the need for 
smart regulation--how important that is to well-functioning 
markets.
    But also, in my 3 years here, I have watched as the 
Republican Majority has seized each and every opportunity to 
remove and erode every protection that is there in the law for 
our investors as well as to damage the SEC and ECFTC to 
reducing their budgets. And so I ask myself, why are we here?
    We are obviously here for political reasons. If you read 
the summary of this testimony, this is all about pinning these 
couple of purportedly and allegedly dastardly acts on President 
Obama. So let us evaluate the claims on the merits. Let us ask 
two questions: who are the investors that we are talking about 
here; and how have all American investors fared during the 
Obama Administration?
    Now, who are the investors in Venezuelan sovereign bonds 
and in Chrysler's senior debt? The answer of course is 
tremendously sophisticated institutional investors in private 
funds who, in law, are deemed to not require the kind of 
oversight that retail investors have. I pulled the offering 
circular for the Venezuela offering and it yielded 11 and 12 
percent interest. Why? Of course, because these are enormously 
risky investments that should not be undertaken other than by 
sophisticated people.
    Page one of this offering circular reads, ``Argentina is a 
foreign sovereign state. Consequently, it may be difficult for 
you to obtain or realize upon judgments of courts in the United 
States against Argentina. In no way do I wish to imply that the 
investors deserved what happened to them, but they were the 
swashbucklers of the investment world who knew what they were 
getting into, which brings me to the question--and if I will 
bring the committee's attention to the graphic on the wall 
right now. How have investors in this country fared over the 
Obama Administration? Let us add up the maximum possible loss 
of three of the investors or the investor categories in the 
session today. And you get something on the outside, around 
$100 billion.
    Since March 2009, shortly after the President took office, 
the stock market alone has restored $7.2 trillion in household 
wealth to U.S. investors. The amount of money we are talking 
about today is less than 2 percent of that restoration. Now, 
because I care about logic, I am not going to offer 100 percent 
of the credit for that to the President of the United States. 
But if I can watch the Republican Majority blame gas prices 
entirely on the President, and the slow job growth numbers on 
the President, I would ask anyone in the Republican Majority if 
there is a good reason why we should not give entire credit for 
this $7.2 trillion gain on the part of 121 million American 
investors entirely to President Obama?
    I yield back the balance of my time.
    Chairman Garrett. And the gentleman yields back the balance 
of his time. I will yield myself 2 minutes just to respond to a 
couple of those points.
    First, the gentleman makes some sort of references as far 
as cuts or reductions--regulators--
    I know of no data to show of any cuts to regulators. In 
fact, the facts of the matter are, you would see year over year 
increases in the regulators' budget.
    Secondly, to the gentleman's point that these type of 
investments are risky investments, they may well be, but now, 
thanks to legislation out of past years' legislation and this 
Administration, add one other factor of risk to it. Not only 
the risk that this is a South American country that may have 
some variables down there, but now, you have the added risk of 
political cronyism, as this Administration gets involved in it.
    So an added risk--we talked about liquidity risk, credit 
market risk, and the other risks involved there, as the 
gentleman from Connecticut just cited. Now, you have the risk 
of the Federal Government--getting involved with it. That was 
not the intention of the Federal Government, being able to 
involve itself in this matter.
    Thirdly, to your chart which is now gone. How do you argue 
in a counter-factual? Your point being--creditors did a lot 
better under the situation where the Federal Government got 
involved with the auto company bailouts.
    If you want to do a true apples-to-apples comparison, as 
opposed to your chart, which I guess is an apples-to-oranges 
comparison, your chart basically says--on the one hand, this is 
where--what--when the Federal Government gets involved and 
spends taxpayers' money to pick its winners and pick its 
losers, under your scenario that the creditors did better than 
under the second scenario where no taxpayer dollars would have 
gone into a bankruptcy proceedings. That is not really a fair 
comparison.
    If you wanted to do a fair comparison, one would be putting 
taxpayer dollars into both situations--into the situation that 
occurred (a)--where the government picked winners and losers; 
or (b) into a bankruptcy scenario. Had you done that, I would 
assume that the honest creditors would have actually done 
better. They would have then known what the rule of law would 
be. And those parties who had no secured interest whatsoever in 
this matter--namely, the unions--would not be represented on 
your chart whatsoever.
    So let us be fair about it. Let us compare apples-to-
apples, as opposed to apples-to-oranges. And let us also be 
fair to the investors, and remember who the investors are. The 
investors are not some big Wall Street conglomerate or those 
sophisticated people that you are talking about, making these 
swashbuckling risky investments. The investors are the people 
down the street--the pension funds, the university funds, the 
401k plans. It is the retirees down in Florida. Those are the 
investors who have been harmed in each one of these cases, not 
by the investment per se, but by the involvement of the Federal 
Government.
    With that, I yield back the balance of my time. And I 
believe all time has expired. So with that, we now look to our 
panel. And again, we are on a hard deadline here.
    I would like to welcome the panel. Mr. Fiorillo, you will 
be first up. And for all the witnesses who are here today, we 
thank you for being a member of our panel. We thank you for 
your complete testimony, which will be made a part of the 
record. You will be recognized for 5 minutes, of course. And I 
will say this once, although I will probably say it one, two, 
three, four, five more times: make sure you push your button on 
your microphone and make sure you pull it as close as you 
possibly can so that people like me can hear you.
    Good afternoon. You are recognized for 5 minutes.

 STATEMENT OF VINCENT A. FIORILLO, TRADING/PORTFOLIO MANAGER, 
    DOUBLELINE CAPITAL, LP, ON BEHALF OF THE ASSOCIATION OF 
                    MORTGAGE INVESTORS (AMI)

    Mr. Fiorillo. Chairman Garrett, Ranking Member Waters, and 
distinguished members of the subcommittee, thank you for the 
opportunity to testify.
    My name is Vincent Fiorillo and I am a 35-year veteran of 
the housing, finance, and mortgage securities industry. 
Currently, I serve as a portfolio manager at Doubleline Capital 
in Los Angeles. However, in my testimony, I am representing the 
Association of Mortgage Investors. The AMI represents the 
managers of mutual funds, long-term investors for State and 
local pensions, and retirement funds for a range of 
institutions, including unions, teachers, and first responders.
    In truth, many of you and your constituents are probably 
mortgage investors through your 401ks and other retirement 
savings, such as the TSP program. For decades, the system for 
private financial mortgages worked very, very well, in part 
because this system relied on the rule of law, execution of 
contracts, and the understanding that borrowers would repay 
their mortgages.
    In recent years, these concepts have been challenged by 
some government actions, including and then being introduced 
into the markets. We attribute these government policies to a 
lack of understanding of what the system requires to remain 
vibrant. For decades, fixed-income investing in mortgage 
securities was one of the safest and most secure vehicles for 
long-term retirement savings. Likewise, it brought private 
capital to the mortgage market, and it thus enabled people to 
get credit and expanded opportunities for homeownership.
    Today, the U.S. mortgage market operates at a drastically 
reduced level. And this privately financed mortgage market has 
largely ground to a halt, as a result of actions taken over the 
last 4 years. These changes now require investors to quantify 
and assess a political risk premium to the purchase of 
mortgages.
    Please let me emphasize that AMI members are fiduciaries 
for their clients, such as pensions and retirement funds. 
Mortgage investors understand that many hard-working middle-
class Americans were economically harmed by the financial 
crisis. We have thus strived to work with all parties on long-
term effective solutions to the mortgage crisis. AMI is on 
record for supporting many kinds of relief for responsible 
borrowers and providing a helping hand, including things like 
cash for keys, fees in lieu, and, when appropriate, principal 
reduction. The settlement, unfortunately, has the potential to 
be a retirement tax, a 401k tax, because it will place a 
portion of the cost of the settlement on the public who are 
victims of the alleged robo-signing and anti-consumer 
activities.
    Further, investors were not a participant in any of the 
negotiations. It is incomprehensible that the mortgage 
servicers receive credit for modifying mortgages held by third 
parties, which are often pension plans, 401ks, and endowments 
at Main Streets. This is why many of the left and the right are 
looking at this as a bank bailout. As it stands, it will damage 
the RMVS market further by adding yet another risk premium due 
to government intervention. It will further restrict the 
ability of deserving Americans to obtain credit for homes for 
generations to come.
    Please understand we are not saying no to modifications. 
Servicers have the right and obligation to make modifications 
to mortgages they service. They should do so, irrespective of 
an AG settlement. But they certainly should not be able to 
reduce the cost of their settlement by modifying mortgages they 
service but don't own.
    Our hope was that the final settlement would be designed to 
address such alleged wrongdoing while not settling with the 
money of innocent parties. The retirement security of innocent 
parties will be impacted by this settlement as it is currently 
filed. The final settlement is now the responsibility of the 
Oversight Committee for the next 3\1/2\ years.
    AMI asks for the following four changes to be made on 
behalf of all stakeholders, including retirees and the public 
at large. Number one, transparency. The net present value model 
incorporated into the settlement must consider all of the 
borrowers' debts, including mortgage debt, credit card debt, 
and student loan debt. A borrower's total debt-to-income ratio 
is a significant factor in the analysis.
    Two, monetary caps to protect public institutions. As 
intended, this settlement causes financial loss for the 
abusers--the bank servicers and their affiliates. 
Unfortunately, the settlement is expected to also draw billions 
of dollars from innocent parties including public institutions, 
unions, and individual investors, rather than to servicers. It 
places first and second lien priority in conflict with its 
original construct, thereby increasing future homeowner 
mortgage credit costs.
    Number three, public reporting. We ask that the settlement 
administrator be required to make reports public and available 
on a monthly basis, reporting progress on clearly defined 
benchmarks and detailing on both a dollar and percentage basis, 
whether the mortgages modified are owned by mortgage servicers 
or the general public.
    And fourth, investors stakeholder participation. Our 
clients and the general public are important stakeholders of 
this settlement, yet we were excluded from the negotiation. 
Investors must be included in any further negotiation with 
additional servicers in the future. The consequences and the 
mechanisms underlying this settlement greatly concern 
investors, including the establishment of a precedent that 
condones the bad deeds of others being paid by innocent 
responsible parties. And this settlement will undo contractual 
obligations that have second liens treated in a pari passu 
matter with other senior debt.
    And lastly, we wish to thank Chairman Garrett and his House 
colleagues for his recent appropriations amendment, which 
passed the full U.S. House of Representatives last month. We 
believe that the dual goals of protecting seniors and savers 
across this country and providing relief to responsible 
distressed homeowners are bipartisan and these efforts on a 
Federal level should be bipartisan as well.
    And again, we thank you for the opportunity to testify.
    [The prepared statement of Mr. Fiorillo can be found on 
page 42 of the appendix.]
    Chairman Garrett. Great. Thank you, Mr. Fiorillo.
    Ms. Goodman, welcome to the panel today. You are recognized 
for 5 minutes.

   STATEMENT OF LAURIE S. GOODMAN, SENIOR MANAGING DIRECTOR, 
AMHERST SECURITIES GROUP, L.P., ON BEHALF OF THE ASSOCIATION OF 
                    INSTITUTIONAL INVESTORS

    Ms. Goodman. Thank you very much, Chairman Garrett, and 
members of the subcommittee. I thank you for your invitation to 
testify today. My name is Laurie Goodman, and I am a senior 
managing director at Amherst Securities Group, a leading 
broker/dealer specializing in the trading of residential and 
commercial mortgage-backed securities.
    I am testifying on behalf of the Association of 
Institutional INVESTORS. Collectively, the members of this 
Association, all long-term investors, manage investments on 
behalf of more than 100 million American workers and retirees. 
Thus, the concerns I express are not just those of a group of 
institutional investors. They are also those of the 100 million 
individuals they ultimately serve.
    I will focus on the mortgage market, discussing three 
specific topics where the government has taken action contrary 
to the interests of investors with no investor input--the State 
Attorney General settlement, the treatment of second liens 
mortgage modifications, and the unwillingness of the government 
to recognize that the cost of delay in the foreclosure process 
are borne by investors, not the servicers that were 
responsible.
    To reiterate the points made by Congresswoman Waters and 
Vince Fiorillo, the $25 billion settlement between the State 
Attorneys General and the five largest servicers allowed the 
servicers to use investor funds to pay for servicer 
wrongdoings. Out of this $25 billion, at least $10 billion must 
be used for principal reductions. With servicers receiving a 
dollar of credit for each dollar of portfolio loans written 
down, 45 cents of credit for each dollar of private label 
securities is written down.
    We believe principal reduction is the most effective form 
of modification, but are concerned about the potential for 
abuse under the terms of the settlement. In particular, if the 
affected servicers are unable to economically modify a 
sufficient number of portfolio loans to meet their targets, 
they might choose to more aggressively write down principal on 
investor loans. For example, they may have to do a larger 
write-down when a smaller write-down would be sufficient.
    Speaking on behalf of the Association of Institutional 
INVESTORS, we recognize the settlement is done, but have three 
pragmatic requests. First, servicers should provide investors 
with information on modification activity performed on loans 
and private label securities under the settlement. We have 
included the information request in our written testimony. This 
should not be too much of a burden, as investors have been 
assured that most banks intend to rely exclusively on principal 
reduction on portfolio loans to meet their settlement targets.
    Second, going forward, servicers should be unable to use 
investor money to settle charges of servicer wrongdoing. We 
understand there is discussion on other mortgage settlements 
and want to ensure investors are protected. We are vocal 
supporters of the Garrett amendment to the DOJ appropriations 
bill. Thank you, Mr. Garrett.
    And third, provide transparency to investors on servicing 
fees during foreclosure delinquency, mirroring the disclosure 
to borrowers under the terms of the AG settlement. This is 
especially critical as some bank servicers own pieces of the 
foreclosure process such as forced place insurance and property 
preservation services.
    When investors purchased private label securities, they 
assumed lien priority would be respected. The second lien would 
be written off before the first lien suffered any diminution of 
cash flows. HAMP was originally designed by Treasury, aided by 
servicer input, with no input from investors. It required only 
the first lien to be modified. This reflected the fact that 
banks often own the second lien and service the investor-owned 
first lien. Modifying the first lien increase the value of the 
second lien.
    In response to investor outrage, the 2MP program was 
introduced, which requires that the modification on the first 
and second lien be done in a proportionate manner, essentially 
making the liens pari passu. This treatment shows a flagrant 
disregard for the legal concept of lien priority.
    Neither borrowers nor investors want to see foreclosure. 
However, some foreclosures are inevitable and quick resolution 
is in the interest of both parties. The government has shown no 
recognition that there is a real cost to investors of needless 
delay in the foreclosure process. In particular, investors must 
pay taxes, insurance, and maintenance on the property, or 
accept a lower sales process if not maintained.
    The timelines have extended considerably. The average loan 
is now 26 months delinquent at the time of liquidation, up from 
16 months 3 years ago. This increase was initially due to the 
banks' struggles to implement HAMP. Then, the robo-signing 
issue emerged, further extending timelines. And we fear the AG 
settlement will extend timelines still more.
    Members of the Association of Institutional INVESTORS have 
a fiduciary duty to the organizations and individuals whose 
money they manage to strive for the highest risk-adjusted 
returns. Governmental realignment of the risk will force 
institutional asset managers to either demand higher returns 
for those risks or reduce mortgage holdings, which entail 
credit risk. These governmental actions certainly make it more 
difficult to bring private capital back to the mortgage market.
    It is therefore critical that the government explicitly 
acknowledge the role of investors as a very important group of 
stakeholders in the mortgage market and ensure their interests 
are addressed.
    I appreciate the opportunity to share the Association of 
Institutional INVESTORS' views and I am happy to answer any 
questions. Thank you.
    [The prepared statement of Ms. Goodman can be found on page 
47 of the appendix.]
    Chairman Garrett. And I thank you as well.
    Mr. Levitin, welcome to the panel.

  STATEMENT OF ADAM J. LEVITIN, PROFESSOR OF LAW, GEORGETOWN 
                     UNIVERSITY LAW CENTER

    Mr. Levitin. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, good afternoon. My name is Adam 
Levitin. I am a professor of law at Georgetown University, 
where I teach courses in financial regulation and bankruptcy.
    The three episodes highlighted by this hearing are entirely 
unconnected and in no way indicate an anti-investor bias from 
the Obama Administration. Rather, two of them--the Chrysler 
bankruptcy and the filing of an amicus brief in the Argentine 
debt litigation--are consistent with reasoned, responsible 
stewardship of the State.
    The third episode--the mortgage servicing settlement--is 
problematic. But it is indicative of the Administration being 
held hostage by the too-big-to-fail banks, rather than evincing 
animus toward mortgage investors.
    Let me address each of these episodes in turn. There are 
four points to be made in regard to the Chrysler bankruptcy. 
First, the Chrysler bankruptcy was done according to law. The 
asset sale underwent significant judicial review, all the way 
to the Supreme Court, and was found to be kosher, while the 
plan of liquidation was overwhelmingly approved by Chrysler's 
creditors and by the bankruptcy court.
    Second, it is unfair to claim that the UAW received a 
greater return than Chrysler's senior lien holders. In the 
formal bankruptcy distribution itself, the lien holders 
received 29 cents on the dollar and the UAW got nothing. If we 
want to account for the UAW receiving an ownership stake in new 
Chrysler, we must broaden our view to include events outside 
the formal bankruptcy distribution. If we do so, however, there 
is no reason not to account for the fact that many Chrysler 
senior lien holders bought their claims at a discount in the 
secondary market for less than 29 cents on the dollar or for 
the UAW's pre-bankruptcy concessions.
    The UAW had previously accepted a 40 percent reduction in 
this pension retiree benefit claim, as well as made enormous 
concessions in its contract going forward, namely reducing the 
cost of all future workers by over 50 percent and eliminating 
pension and retiree health care provisions for those workers. 
Taking a larger view then, the senior bondholders came out of 
Chrysler's restructuring substantially better than the UAW.
    Third, the UAW's pension obligations were not funded by the 
senior lien holders in the bankruptcy, but by the United States 
and Canadian Governments in fiat. While one can question this 
funding decision, its only effect on investors was positive. 
Absent the funding of the UAW Viva, there would not have been a 
sale of Chrysler's good assets because there was no other bid. 
Chrysler shopped the company for a year and the bidding window 
was held open for 3 weeks in the bankruptcy court. No other 
bidder emerged. Chrysler is an example of the free market, not 
the government, at work.
    Fourth, absent the funding of the UAW Viva, Chrysler would 
have been liquidated. This would have resulted in a lower 
return for Chrysler's bondholders and the likely failure not 
only of Chrysler but of GM, Ford, and most of the U.S. auto 
industry. As it happens, Chrysler has been a success story 
post-bankruptcy. And there are hundreds of thousands of your 
constituents who owe their continued employment to the Obama 
Administration's responsible support for the auto industry.
    Moving on, the fact that the United States filed an amicus 
brief in the Argentine sovereign debt litigation is hardly 
novel or evidence of an anti-investor bias. The Bush 
Administration filed a substantially similar amicus brief in 
2004, supporting Argentina's position. Moreover, the Obama 
Administration has done more to help American investors collect 
on Argentine debt than the Bush Administration ever did. The 
Obama Administration imposed trade sanctions on Argentina for 
its failure to pay a judgment regarding its debt.
    Whatever one thinks of the substantive arguments about the 
Argentine debt litigation, it is entirely reasonable for the 
United States to have filed an amicus brief, given that the 
case has implications for the stability of global financial 
markets and for the ability for the United States to enjoy 
sovereign immunity abroad. To characterize this amicus brief as 
the coddling of a deadbeat state is risible.
    Finally, there is little to like about the mortgage 
servicing settlement. It was concluded without any real 
investigation, despite over a year-and-a-half of dithering. The 
settlement provides too little relief for too few homeowners. 
It will not clear housing markets. It will not deter future 
consumer fraud by the too-big-to-fail banks. It does not even 
force the banks to disgorge their wrongful profits. And then, 
there is the possibility that the cost of the settlement will 
be borne largely by mortgage investors.
    The Administration has boasted that $20 billion in 
homeowner relief required under the settlement will actually 
result in $32 billion of relief. This amplification is premised 
on the assumption that the banks will write down principal only 
on mortgages that they service for others and not on the 
mortgages they own themselves.
    It is hard to square this boast with the Administration's 
insistence that the settlement will not result in harm to 
mortgage investors. It is possible that the Administration's 
claims are merely spin to make the settlement look more 
meaningful. If the Administration's boasts are correct, 
however, then either the servicers will get settlement credit 
for modifying mortgages they were already obligated to modify 
or servicers will get credit for modifying mortgages that they 
are contractually prohibited from modifying. Either way, the 
settlement is a sham. Either no additional modifications are 
being required or the cost of the additional modifications is 
being shifted to investors who have not engaged in any 
wrongdoing and who are not even at the negotiating table.
    That said, framing the Obama Administration's actions as 
anti-investor misses the real problem, namely that the 
Administration is hostage to the big-to-fail banks. The 
Administration was forced to take action in the wake of the 
robo-signing scandal, but it knew it could not impose a serious 
and proper penalty on the too-big-to-fail banks. The only 
possibility was the sham settlement of one form or another.
    Too-big-to-fail tied the Administration's hands. And while 
it may be convenient in an election season to frame the issue 
otherwise, the only way investors will avoid being shafted 
again by the big banks' misbehavior is by eliminating too-big-
to-fail.
    I look forward to your questions. Thank you.
    [The prepared statement of Professor Levitin can be found 
on page 59 of the appendix.]
    Chairman Garrett. Thank you, Mr. Levitin.
    Dr. Lubben, welcome.

 STATEMENT OF STEPHEN J. LUBBEN, HARVEY WASHINGTON WILEY CHAIR 
     IN CORPORATE GOVERNANCE & BUSINESS ETHICS, SETON HALL 
                    UNIVERSITY SCHOOL OF LAW

    Mr. Lubben. Thank you, Chairman Garrett, and distinguished 
members of the subcommittee. I am the Harvey Washington Wiley 
Chair in Corporate Governance & Business Ethics at Seton Hall 
University School of Law in Newark, New Jersey. I was asked to 
address two issues: Argentina; and the automotive bankruptcy 
cases.
    First, with Argentina. At heart, Argentina's bonds, and the 
interpretation thereof, are a matter of New York State contract 
law, not really a matter of Federal law. It is pretty clear--
and I think we all have to concede--that Argentina has breached 
its obligations under those bonds.
    Nonetheless, we have this issue that when you buy sovereign 
debt, you also buy the issue of sovereign immunity. Knowing all 
this, the holdout bondholders nonetheless decided to decline 
Argentina's restructuring offer earlier on and take their 
chances with a litigation strategy. But in the process of 
implementing this strategy, they have advanced an 
interpretation of the pari passu clause in those--in that debt 
instrument that is inconsistent with the understanding of that 
clause in both corporate and sovereign context under New York 
State law.
    A pari passu clause basically reaffirms the idea that the 
unsecured debt is not subordinated. In a corporate context, 
this is obviously extremely important because, while it is a 
corporation's issue--subordinated debt.
    It is quite clear, however, in the corporate context, that 
the pari passu clause does not protect bondholders from 
preferential payment of other equally ranked creditors. The 
only protection against preferential payment of other equally 
ranked creditors comes under the Federal Bankruptcy Code. There 
is no such protection under State contract law. Obviously, 
there is no Federal bankruptcy system that is applicable in the 
sovereign debt context.
    So what we have here in this litigation strategy is an 
attempt to convert the pari passu clause from a rule of rank 
into basically a rule of equality. The problem is that is going 
to have some serious implications even outside of the sovereign 
debt context. I have concerns that it will make it very hard to 
do out-of-court workouts and out-of-court debt restructurings 
in the corporate context, because I have no idea how you can 
cabin their proffered interpretation of the pari passu clause 
to solely the sovereign debt context.
    So given that background, it seems to me entirely 
appropriate for the Obama Administration to intervene in the 
Second Circuit case and alert the Second Circuit to this state 
of affairs.
    Turning to the bankruptcy cases, the automotive cases--
these cases involved a quick sale of the debtor's assets under 
Section 363 of the Bankruptcy Code. This would have been a 
novel deal structure. When I graduated from law school--but, of 
course, e-mail was novel at that time, too--it really has 
become quite routine in most large corporate bankruptcy cases. 
Nevertheless, we still have several commentators who continue 
to argue that Chrysler, in particular, was defective because 
senior creditors received partial payment, while the unions and 
former employees received a greater payment.
    Importantly, these payments happen outside of the 
bankruptcy process. So there isn't any real connection, as 
Professor Levitin has already noted, between those payments and 
what happened in the bankruptcy process.
    It is not even clear that it was a bailout, per se, because 
it is quite common for senior creditors to pay junior creditors 
as part of a Section 363 sale to basically ensure peace 
following the sale. They buy the assets and want to make sure 
that those assets retain their value. It is not uncommon to pay 
certain trade creditors that you need. And it is also not 
uncommon to pay employees, because they also contribute a lot 
to the value of the assets.
    In the absence of any bidder interested in buying either of 
these automotive companies, the argument that any of the funds 
going to the unions amounts to a bailout really means that the 
government should have overpaid for the debtors' assets, or 
provided a bailout to the secured creditors. That is not really 
a question of bankruptcy law that results in a violation of the 
rule of law.
    I think we also need to note that 90 percent of the 
creditors in this case did approve the Chrysler sale. And at 
heart, Chapter 11 is always about a negotiated deal. And 
furthermore, that the Indiana funds in this case bought into a 
syndicated loan agreement. Every single syndicated loan 
agreement that I have ever seen has a majority rule provision. 
That is what happened in this case; 90 percent of the creditors 
agreed to go with it. They were bound by the terms of the 
instrument they invested in. And I see no reason why that 
shouldn't be so.
    The government stepped in, in these cases, to provide 
needed financing when none was available. It is sometimes 
argued that some could have been available in some hypothetical 
world. I will just, as my final point, note that General Motors 
had a DIP loan of about $30 billion. That is more than 4 times 
larger than any privately organized DIP loan ever. And that 
wasn't in the middle of a financial crisis.
    Thank you.
    [The prepared statement of Dr. Lubben can be found on page 
72 of the appendix.]
    Chairman Garrett. Thank you. Mr. Olson, I would like to 
recognize you and welcome you to the committee.

STATEMENT OF THE HONORABLE THEODORE B. OLSON, PARTNER, GIBSON, 
   DUNN & CRUTCHER LLP, ON BEHALF OF THE AMERICAN TASK FORCE 
                           ARGENTINA

    Mr. Olson. Thank you, Chairman Garrett, Ranking Member 
Waters, and members of the subcommittee for having a hearing on 
an issue of great importance to American investors.
    My firm and I represent NML Capital Limited, which is one 
of many investors that has won substantial judgments from U.S. 
courts against the Republic of Argentina. NML is part of a 
family of funds that manages capital for dozens of U.S.-based 
organizations including colleges, universities, hospitals, and 
pension funds. My firm and I have also recently represented 
victims of Hamas-orchestrated and Iranian-supported terror 
against the government of Iran.
    In these representations, I have been troubled by our 
government's eagerness to side with lawless nations against the 
interests of Americans. For example, just last month our 
government filed a brief in the United States Supreme Court 
supporting the position of the government of Iran that it can 
refuse to disclose to American victims of Iranian-sponsored 
terror the location of Iranian assets needed to satisfy 
victims' judgments.
    I have been particularly troubled by positions our 
government has taken recently against investors in U.S. 
markets. For example, the government recently intervened in an 
appeal in favor of Argentina, in a case where the trial court 
had ruled that Argentina must abide by a contractual obligation 
to treat one set of bondholders no less favorably than another. 
Dr. Lubben has mentioned that that is a question of New York 
law, and the United States intervened without being asked to by 
the court to express an opinion on State law, not Federal 
Government law.
    The government intervened voluntarily without any 
invitation from the court, and the issues primarily, as I said, 
involved New York law. Not only did the government gratuitously 
intervene, but it also did so after showing no interest in this 
case for a year-and-a-half after the trial court was 
considering these important issues.
    In the appeals court, it largely repeated Argentina's 
arguments, adding only unsubstantiated and vague allegations 
and assertions about U.S. policy. The brief was signed by top 
officers of the Treasury Department, the Justice Department, 
and the State Department. Just 1 year ago, the United States 
Court of Appeals for the District of Columbia Circuit 
admonished the government that the gratuitous, last-minute 
filing of such a brief in an appellate court was patently 
unfair to the litigants and disrespectful to the district 
judge.
    The broader context of the Argentina case raises grave 
concerns and grave questions about why our government should 
repeatedly choose to side with Argentina, and this is not the 
first time. And it is not specifically limited to this 
Administration. I hasten to make that point. It has happened 
before, but in different circumstances. But it seems to be 
happening with increasing frequency. It has involved support 
for the government of Iran, support for the government of the 
Congo, support for the government of Argentina--lawless nations 
that do not abide by the rule of law.
    In this case, Argentina unquestionably has the ability to 
pay its investors. It is sitting on $47 billion in foreign 
currency reserves in a Swiss bank. Yet, it refuses to pay and 
has used every means imaginable to avoid paying its judgments 
and paying the judgments of the United States Court and has 
spirited its assets out of the United States. It has declared 
it will never pay a single penny on these debts. A Federal 
judge who heard this case said, what is going on between the 
Republic of Argentina and the Federal court system is an 
exercise of sheer willful defiance of the Republic to honor the 
obligations and judgments of a Federal court.
    Our government's decision to invest taxpayer resources in 
supporting such defiance--when the courts have not even asked 
for its views--is disappointing, to say the least. It is all 
the more disappointing in light of Argentina's recent actions. 
Nationalizing an oil company, defying international arbitral 
awards, inciting tensions with Great Britain--these actions 
have drawn the rightful condemnation of the international 
community. Yet, when the United States filed its brief in 
support of Argentina, the Argentine finance secretary 
celebrated the filing of our government's brief, declaring that 
it validated the arguments used by Argentina and the general 
strategy of the Argentine government against American 
investors.
    The time has come for our government to concern itself with 
the rights of American investors, the rule of law, thoughtfully 
drawn congressional limits on sovereign immunity, and the 
enforceability of contracts under U.S. laws voluntarily entered 
into by foreign sovereigns to induce investments by our 
citizens. These considerations should not be overridden by 
vague, inarticulate, and expedient concepts of foreign policy. 
The lawful contractual and statutory rights of our citizens 
should be paramount over the unlawful defiance of our laws by 
governments that have no respect for the rule of law or the 
laws of nations.
    [The prepared statement of Mr. Olson can be found on page 
79 of the appendix.]
    Chairman Garrett. I thank the gentleman. Mr. Skeel, welcome 
to the committee.

STATEMENT OF DAVID A. SKEEL, JR., S. SAMUEL ARSHT PROFESSOR OF 
      CORPORATE LAW, UNIVERSITY OF PENNSYLVANIA LAW SCHOOL

    Mr. Skeel. Thank you. And thank you for the opportunity to 
testify before you today on investor protection. I have had the 
privilege of coming here for hearings like this one from time 
to time, and I must say it gives me goose bumps every time I 
walk into this building. It is a real thrill to be here.
    Chairman Garrett. We will adjust the temperature.
    Mr. Skeel. We'll see if that works. I suspect I won't give 
you goose bumps with what I have to say.
    The past few years have been an extraordinary time, and the 
government has taken a variety of extraordinary actions. Like 
many Americans, I believe that some of these actions have been 
essential, while others have been deeply mistaken.
    I would be happy to share my views on these issues--I am 
after all a law professor and we share our views about 
everything--and about the substance of these decisions. But 
that is not what I would like to talk about today. What I would 
like to focus on today is what I believe is a very dangerous 
pattern that has emerged during the crisis. And that is the 
undermining of basic rule of law principles in ways that have 
injected uncertainty into the markets.
    In my initial remarks, I would like to briefly discuss two 
of the most egregious examples of this: the Chrysler bailout; 
and the recent national mortgage settlement. I would also be 
happy to give other illustrations of what I see as a very 
dangerous pattern or to talk about the Argentine litigation, if 
you all are interested.
    In Chrysler, the Obama Administration commandeered the 
bankruptcy process so that it could decide which creditors got 
paid and which didn't. As you can see, I have a slight 
difference of opinion on this from Professors Lubben and 
Levitin.
    Rather than use the ordinary reorganization process, the 
Administration structured the transaction as a sale of all of 
Chrysler's assets--all its good assets--to a new company that 
looked suspiciously like the old company, except that some 
investors were invited to participate in the new Chrysler and 
others were not. Now as Professor Lubben said, sales of assets 
as an alternative to using the normal reorganization process, 
have been a problem in Chapter 11. Not everybody loves them. 
Professor Lubben himself has criticized the common use of the 
sale of assets, rather than ordinary reorganization.
    But whatever you think about sales of assets in many 
current Chapter 11 cases, the Chrysler bankruptcy was highly 
irregular and highly unusual. It was not like other cases. It 
was structured so that new Chrysler--the shell company that the 
assets were being sold to--and any potential competing bidder 
were essentially required by the terms of the transaction 
agreement and by the bidding rules in the bankruptcy case, to 
make the same deal that the government did--to protect the 
creditors that the government wanted to protect and not to 
protect other creditors.
    Defenders of the transaction have argued that if another 
bidder came along, it would not have had to do what the 
government wanted it to do, but this is not accurate. There 
were bidding rules in the case that essentially required any 
bidder to do the same things for the UAW and for Chrysler's 
trade debt that the government wanted to do.
    As far as the point that Professor Lubben made that 
payments to the UAW and to trade creditors were made outside of 
the bankruptcy process, that is not accurate either. They were 
required as conditions of the sale agreement. The sale 
agreement had these as terms of the sale.
    I have one last thing to say about Chrysler, which is that 
a number of people have made the comment that the Chrysler 
transaction was approved by every court that looked at it. That 
is not accurate either. I think this misconception has stemmed 
from op eds that Steve Ratner, the former car czar, has 
written, which have included this mistake. Actually, the 
Supreme Court threw out the appellate court decision in 
Chrysler, vacated the opinion, but decided not to go further 
because it felt that it was too late to do anything. So it is 
not true to say every court blessed this transaction.
    Very quickly on the mortgage settlement, I believe that the 
settlement is an abuse of the litigation process and a 
usurpation of the proper role of the legislature--that it is a 
legislative action masquerading as a litigation settlement. The 
basis for the mortgage litigation was robo-signing and related 
abuses. The settlement has almost nothing to do with robo-
signing. What the settlement is, is a way to try to deal with 
the mortgage crisis a little bit--a very badly structured way 
to try to deal with the mortgage crisis and a small bailout to 
the States. And that is the way the States have been treating 
it.
    I believe that these examples and other examples like them 
reflect a serious erosion of the rule of law in this country, 
and that it is a threat to our markets. It is also a threat to 
the recovery that we are all hoping to see.
    [The prepared statement of Professor Skeel can be found on 
page 87 of the appendix.]
    Chairman Garrett. Thank you.
    And with that, I thank the panel for all of their testimony 
and their comments and their opinions. We will now turn to 
questions. And I will recognize myself for an initial 5 
minutes.
    The first question will go to, I guess, Mr. Fiorello, and 
Ms. Goodman, if you want to chime in as well, or any members of 
the panel.
    Political risk with regard to the issues that we are 
talking about here--this is an additional component now of two 
investors and how will that affect the price of bonds?
    Mr. Fiorillo. I will go first, and Laurie will follow up.
    Chairman Garrett. Okay.
    Mr. Fiorillo. Basically, when we look at bonds--when we 
look at mortgage bonds--we have some assumptions we have to 
make: how many folks will default; how many folks will not 
default; how many will pay on time; and how many will be late. 
And we take all that information and we put it into a yield 
table, if you will, or calculate what the return should be.
    Now, not only do we have to do that, we have to understand 
that the Federal Government could stand up and say, I am 
disallowing something that we have been relying on several 
years--maybe 30 years or so. And they are going to change the 
rules in the middle of the game.
    Changing the rules in the middle of the game adds basis 
points to the individual borrower. And if it is a small change, 
it is 20 basis points. If it is a big change, it is 100 basis 
points. But your constituents pay more for their mortgages. And 
I think that is what you need to hear.
    Chairman Garrett. Ms. Goodman?
    Ms. Goodman. Yes, and it influences not only the mortgages 
that are outstanding, because the recovery is going to be 
lower, there is some probability of principal write-downs of 
what is necessary. But it also affects the mortgages going 
forward, because it builds in the possibility that the 
government can change the rules of the game going forward. So 
there is an extra risk premium on mortgages that haven't yet 
been made.
    Chairman Garrett. Mr. Skeel made a comment about the lack 
of the rule of law--the uncertainty of the rule of law. This is 
something I heard repeatedly during each one of these cases 
going through when I talked to stakeholders. And stakeholders 
are simply investors and investors are simply pension funds and 
charities and municipalities and the rest, from the lowest 
level to the most sophisticated level. They are all saying, ``I 
don't know what the rule is going to be anymore.'' So what you 
are saying is, ``When you don't know what the rules are of the 
road anymore, how do you drive?'' I use that analogy--you drive 
slower. Okay. And maybe you don't invest in much at said cost.
    Now, on the Argentine situation, I guess I will address 
this to Mr. Olson. I understand that Argentina's economy 
minister is coming here to D.C. next week to hold a press 
conference. And supposedly it is to help the fact about--as you 
gave in your testimony--that there is a refusal to pay U.S. 
investors.
    When I heard about that, I said that is sort of an 
undiplomatic thing to do on the first front--to come to our 
country and say, hey, we are doing something that is going to 
hurt U.S. investors and we are proud about that. But what 
doubly gets to me is that this is part and parcel because the 
Administration became involved in this suit. And you said this 
is maybe some involved in past Administrations, though, as 
well. But clearly, it is--but they have--Argentina has been 
emboldened. Is that the correct way to look at it in this 
situation?
    Mr. Olson. They say so. I would say that this official is 
coming 1 week too late, Mr. Chairman. Because if he would have 
come this week instead of next week, he could have been here 
today to answer your questions about--
    Chairman Garrett. There you go.
    Mr. Olson. --this very thing. And I would--
    Chairman Garrett. It would have been interesting.
    Mr. Olson. Maybe you can invite him to testify and answer 
these questions. If he wants to tell American investors what 
Argentina is doing to American investors, he ought to tell them 
under oath before this committee.
    The fact is that Argentina lured American investors into 
buying their bonds by waiving sovereign immunity, submitting to 
the jurisdiction of New York courts, promising to pay 
obligations on an equal basis among all of its unsubordinated 
bondholders. They have offered 27 cents on the dollar and then 
said, they passed a law saying that anybody who didn't accept 
that 27 cents on the dollar would never be paid.
    Argentina is now defying the judgments of U.S. courts. It 
has spirited money out of the United States. It has all the 
money it needs to pay the judgments of United States courts and 
it is defying the United States courts and the rule of law. 
They should answer those questions about why they are doing 
that.
    Chairman Garrett. Yes, I agree with you. I don't know 
whether they would come to the panel, but I guess we could ask 
them sometime.
    I will close with a question to Mr. Levitin. In your 
written testimony, you state that the Obama Administration is 
not anti-investor, because ``actions that are unfavorable to 
one set of investors are frequently favorable to another set. 
In at least two of the episodes involved, the Administration's 
actions were favorable to many more investors than they were 
unfavorable.''
    I think that goes to the question that we are raising 
today. And that goes to the political nature of the investment, 
if you will, by the Federal Government. That you are picking 
one set of investors to be more favorably treated than another 
set of investors. And that goes to Mr. Skeel's comment that 
coming into it as an investor, I have no idea which way the 
government is going to happen to come down on the situation; 
whereas, you would know it in a bankruptcy.
    Mr. Levitin. I think it is important to know why the 
Administration chose particular sets of investors. It is not 
because the Administration liked one group of investors or 
another. I think it would be very wrong to characterize this as 
some sort of a crony deal.
    Instead, I think that in both the Chrysler case and the 
Argentine bond litigation, you have the Administration looking 
out for a larger interest than any group of investors. In 
Chrysler, you have the Administration looking out for the 
entire country, trying to make sure that the United States did 
not lose its industrial base.
    In the Argentine situation, the Administration has an 
interest in ensuring that we can have workouts of sovereign 
debt, so that we don't have problems like what is going on in 
Greece right now.
    Chairman Garrett. Thank you. I see my time has expired. The 
gentlelady from California?
    Ms. Waters. Thank you very much, Mr. Chairman.
    I have a question for Mr. Levitin. When you testified in 
front of my Housing Subcommittee nearly 2 years ago, you were 
one of the early commentators to point out the real scale of 
the abuse that is happening in servicing and securitization. 
The major mortgage servicers at that time--at that same 
hearing--downplayed all of the allegations being made, even 
though they had initiated a voluntary foreclosure moratorium 
because of press reports about their foreclosure practices. 
Months later, of course, we finally saw a settlement emerge 
over these practices.
    First, do we know if the settlement amount of $25 billion 
is a fair penalty? As I understand it, the Consumer Financial 
Protection Bureau (CFPB) came out with an analysis before the 
settlement, saying that servicers had saved $25 billion by 
deliberately under-resourcing in their servicing. And we know 
that servicers can satisfy the settlement amount through all 
sorts of activities that might not actually cost them anything, 
including write-downs of investor-owned loans.
    Can you talk about both the $25 billion overall number and 
the credit schedule that guides how servicers can comply with 
the settlement?
    Mr. Levitin. It is, unfortunately, really impossible to 
figure out if the settlement figure is in any way fair, because 
there was no investigation done. We don't know if the 
Administration settled the case where it didn't know what it 
was settling. And that makes it very unlikely that we got to a 
reasonable settlement figure.
    What we do know is that there was a CFPB analysis that was 
leaked, there was an internal document and that it showed, 
without showing the methodology, that the CFPB was estimating 
that servicers saved somewhere in the neighborhood of $25 
billion through various corner-cutting in the foreclosure 
process. It is not clear exactly what was included there. And 
therefore, it could have actually been a much larger number, 
but the CFPB's estimate from a--and this is on PowerPoint deck 
that got--that somehow got leaked--was that there was $25 
billion in savings.
    So the best-case scenario here is that we have seen 
disgorgement of these wrongful--of these savings. I don't even 
think that is taking into account time value, which is 
considerable on $25 billion. So in the end, the banks were 
probably coming out ahead with this.
    Ms. Waters. Thank you. You described the national mortgage 
settlement as the conclusion to round one of an ongoing 
struggle for accountability and reparations for the enormous 
damage the housing bubble did to the United States.
    You note that round two is marked by the creation of the 
residential mortgage-backed securities (RMBS) working group, 
which was announced in January of 2012 during the President's 
State of the Union. How would you assess the progress of the 
RMBS working group so far? Now that we have settled the 
servicing issue, should the public be confident that they are 
going to seriously investigate the securitization aspects of 
the recent financial crisis?
    Mr. Levitin. Given what we know publicly about the workings 
of the RMBS fraud taskforce, we should not be encouraged. There 
are two things in particular that come to the Floor. First, is 
that there is no appropriation for this working group. The 
Administration has, in my understanding, proposed something in 
the range of a $55 appropriation, which strikes me as rather 
small, but that appropriation has not been made.
    Secondly, there is the matter of the staffing of this 
taskforce. And at this point, it seems that a relatively small 
number of existing Federal employees have been detailed to this 
taskforce, such that its staffing is a fraction of the 
taskforce that existed to deal with fraud in the S&L crisis.
    Ms. Waters. Finally, I have been very concerned with the 
parallel effort going on at the OCC and the Federal Reserve 
under their mortgage servicing consent order process. How would 
you assess the credibility of that process?
    Mr. Levitin. I think that process has very, very little 
credibility. The OCC never managed to actually find any 
problems with the servicing process until it was raised 
publicly. And somehow, its examiners entirely missed the 
process.
    What I know of the OCC's internal investigation is that the 
OCC avoided asking many of the most important questions about 
the process. The supposedly independent outside consultants 
that have been hired by the servicers often have pre-existing 
relationships with those servicers and the conflicts have not 
been fully disclosed. The disclosures of the contracts that the 
OCC have made have been heavily redacted. And in one case, 
actually, the OCC, after extreme pressure, finally announced 
that it was rescinding that independent consulting work for 
Allen Hill because of a conflict of interest.
    In all, I think that we are unlikely to see any meaningful 
relief for homeowners coming out of either these consent orders 
or the servicing settlement. And I think that is a real shame.
    Ms. Waters. Thank you very much. I yield back.
    Chairman Garrett. The gentlelady yields back. The gentleman 
from New York is now recognized for 5 minutes.
    Mr. Grimm. I came into the hearing very interested in this 
subject matter. But as it progresses, I have gone from 
interested to extremely concerned. If we could just take a step 
back, Mr. Levitin, you had just mentioned that it is your 
belief that the President was making a decision in two areas in 
specific that were in the best interests of the country. He 
wasn't picking because he liked one group over another, but it 
was in the interest of the country.
    Don't you think that undermines the separation of powers to 
some extent, especially when you are talking about court cases? 
Isn't that the court's decision to decide the law?
    Mr. Levitin. I think it is the court's decision to decide 
the law, but I don't think that is what the President was 
doing. I don't think he was usurping the court's powers by 
filing an amicus brief. That is something that the United 
States does all the time.
    And the concern of the United States in the Argentine debt 
litigation is that if Argentina is found not to have sovereign 
immunity in American courts, the United States might lose its 
sovereign immunity in foreign courts. So therefore, when 
someone brings a tort suit against the United States--
    Mr. Grimm. If I could just stop you there--but if the court 
decides that they did, in fact, waive their sovereign immunity, 
then that is the law. Is it not?
    Mr. Levitin. Of course.
    Mr. Grimm. Even if it is bad for the United States. And 
sometimes things are bad for us. What makes us the United 
States and makes us great and gives us an innate advantage over 
most countries in the world is that rule of law.
    I would submit to you that it absolutely undermines that, 
even if it is bad for us. And I am not saying you shouldn't 
want to protect--a parent wants to protect its child but they 
have to let them out into the world, as scared as they may be, 
or they are not doing their job as a parent.
    Mr. Levitin. But the United States does have a right to 
express its opinion on judicial appeals and that is what this 
is--that if the Second Circuit or ultimately the Supreme Court 
says that Argentina doesn't have sovereign immunity, that is 
the law. And I don't think there is any indication that the 
Administration would disagree with it. It is simply the 
Administration saying that, at this point, it thinks that the 
district court has the issue wrong.
    Mr. Grimm. Okay. I was surprised to hear that there was 
this press conference. I was very, very surprised by that. I 
agree with the chairman. I don't think that is a diplomatic 
thing to do. I think that Argentina has been emboldened by this 
amicus brief.
    I thought that it was odd that the United States would side 
with Argentina, which isn't a particularly poor country. Are 
they able to pay the investors? Do they have the means to pay 
the investors?
    Mr. Levitin. Are you asking me, sir?
    Mr. Grimm. Sure, why not?
    Mr. Levitin. I believe they do, but again, I don't think 
the issue--
    Mr. Grimm. It is a yes-or-no question. Do they have the 
means to pay the--
    Mr. Levitin. Yes. I think they have the money, but I don't 
think that is the issue in the litigation
    Mr. Grimm. Okay. I didn't ask you what the issue was. I 
asked you if they have the means, counselor. Thank you. They 
choose not to. I have a couple of minutes left.
    Let me ask--I can't see everyone's name from here--Mr. 
Olson. Do you know if the Administration considered the effect 
on the deficit of intervening in Argentina's side against U.S. 
investors, because my understanding is, if U.S. investors are 
given back the money that they are owed, they are going to pay 
more in taxes. Doing rough math, wouldn't it mean that the U.S. 
Treasury in tax revenue would receive close to a billion 
dollars if Argentina made good on the debt that it owes?
    Mr. Olson. I don't know whether the Administration took 
that into consideration or not. I think the most important 
thing is the rule of law. We have repeated judgments that 
Argentina is defying. They do have the money to pay it. They 
have $47 billion in reserve that they could use to pay these 
judgments of United States courts that have been rendered as a 
result of their submission to the United States courts as a 
part of inducing the people to invest.
    The United States Government has a right to file a brief. 
There is no question about that. Although they did that in this 
one case without any request from the court and after 2 years 
after the litigation had been going on, and they allowed the 
district court to consider all these issues, and never once 
said what their interest was and then they file this brief.
    I am bothered by the fact that the United States Government 
is filing briefs supporting the Congo--the government of the 
Congo. And in support of Iran--against terrorism victims, 
despite congressional legislation giving them the right to sue 
the government of Iran. And then, repeatedly, on the side of 
Argentina. And as I said, the Argentine government says this 
validates our strategy against United States investors.
    I kept asking, ``Why is the United States Government 
constantly taking the side of tyrants against U.S. investors?'' 
And someone said, ``Ted, you don't understand; at the State 
Department, there is no American desk.''
    Mr. Grimm. And on that, I yield back.
    Chairman Garrett. The gentleman yields back. Thank you.
    Mr. Miller, you are recognized for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman. This 
hearing is an interesting exercise. I think the Majority wants 
to ingratiate themselves to Wall Street, but Wall Street is 
actually not a monolith. There are diverse interests, and in 
fact, adverse interests. And this is an exercise in how to let 
mortgage investors say how they have been done wrong, when in 
fact their interests are very adverse to those of the biggest 
banks, by saying the hearing is about how mortgage investors 
have been done wrong by the government.
    Ms. Goodman, Mr. Fiorillo, do you agree with Mr. Levitin 
that the injustice in the mortgage servicing agreement--and I 
agree with you that there was an injustice in having investors 
pay for the sins of servicers and in having seconds treated the 
same, instead of behind firsts in line. But do you think that 
injustice was done to harm investors or was it done to 
advantage the servicers--the big banks--unjustly to your 
disadvantage? Do you really think the government wanted to hurt 
you?
    Mr. Fiorillo. It is funny. The banks have really good 
attorneys. And by the way, I would like to thank you personally 
for your support of investors through a lot of this. You have 
been very supportive. But I think it is really important to 
understand that without investors at the table, there was no 
one to raise the issue.
    Mr. Miller of North Carolina. I did.
    Mr. Fiorillo. Okay. So what I think we have to deal with 
is, yes, the banks have done it, and we need the government's 
backing to make sure that we get it right.
    Mr. Miller of North Carolina. Right. Ms. Goodman--
    Ms. Goodman. Can I just say that there was a very simple 
way to structure the settlement, that was to require the banks 
to pay for it themselves. That is, no use of private investor 
money. It is your wrongdoing. You pay for it. And for that 
part, the government is responsible.
    Mr. Miller of North Carolina. Okay. Your criticism is good 
when it is not that principal was reduced. In fact, in your 
testimony, you said that you support principal reduction.
    Ms. Goodman. I have been a huge supporter of principal 
reduction, even before it was cool to be that.
    Mr. Miller of North Carolina. And your objection is that 
the principal reduction should have come from the pockets of 
the servicers, not the investors. Is that correct?
    Ms. Goodman. Even doing principal reduction on investor 
loans is fine because there are lots of instances where that is 
the highest net present value modification alternative. What I 
object to is the banks getting credit for their own wrongdoing 
for doing it because it encourages abuse.
    Mr. Miller of North Carolina. Ms. Goodman, both you and Mr. 
Fiorillo talked about the conflict for servicers servicing 
firsts that are owned by somebody else by investors while 
holding or being an affiliate holding seconds that they do 
actually own.
    Ms. Goodman. Huge problem.
    Mr. Miller of North Carolina. I had introduced legislation, 
as has Mr. Garrett, to prohibit that conflict of interest.
    Ms. Goodman. Thank you.
    Mr. Miller of North Carolina. Do you support that 
legislation?
    Ms. Goodman. Absolutely.
    Mr. Miller of North Carolina. Okay. It seems if the 
servicer was truly acting without a conflict on behalf of the 
investors, they would have a great deal of bargaining power to 
go the holder of the second and say, ``The homeowner is a 
couple of months past due. He says he can pay a mortgage if it 
is reduced some. We can foreclose and you will lose everything. 
Or we can talk.''
    It seems like there is a lot of bargaining power there. Do 
you agree with that?
    Mr. Fiorillo. Yes. I totally agree. I am sure Laurie agrees 
as well.
    Mr. Miller of North Carolina. Mr. Levitin, I think you have 
written on this topic. What bargaining power would a servicer 
hold if they were truly acting on behalf of the firsts and had 
no conflict?
    Mr. Levitin. If a servicer is acting on behalf of the 
firsts and has no conflict, you should be seeing a lot more 
principal write-downs.
    Mr. Miller of North Carolina. On the first without--on the 
seconds without--
    Mr. Levitin. I am sorry. I may be confused by the question. 
If the servicer is acting on behalf--is servicing the first 
known as the second or does not own the second?
    Mr. Miller of North Carolina. Would they be going to the 
seconds and saying, let us reduce in pari passu, or would they 
be saying, let us talk about knocking yours down 90 percent 
before we knock mine down at all?
    Mr. Levitin. I think you would see them talking--looking to 
see reduction of the second before you would have a reduction 
of the first.
    Mr. Miller of North Carolina. Okay. Mr. Chairman, I will 
yield back.
    Chairman Garrett. The gentleman yields back. Now, the 
gentleman from Arizona is recognized for 5 minutes.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Let us see if I can sort of paint this picture from being--
I look at the world more from the finance side. And I am also 
one of those great believers that one of the reasons certain 
countries are wealthy and some are poor is one of the key 
factors is the rule of law. That we see rule of law allows 
capital to be created and flow and investment to work.
    Am I looking at maybe only the tip of the iceberg? But a 
series of things where the rule of law is being thrown aside 
for what is, at the moment, what appears to be the most 
convenient or the most politically charged, or even in some 
models, at that moment, it appears to be economically rational.
    I am going to start with Professor Skeel and sort of work 
through the panel.
    First, one of my fixations is outlier added risk premiums 
that will be added into the mortgage market. If we are ever 
able to start to rebuild a private MBS market again. We have 
already been doing a series of things that start to change pre-
payment risk and how you would build a model. A number of the 
heart programs of those things, we have to deal with the 
reality we changed how you and I would build our statistics 
there. Have we just now started to add, with something such as 
the settlement, a whole new level of legal risks that actually 
now comes from government? And is there a way to calculate that 
type of risk premium or does it even exist?
    Mr. Skeel. I definitely agree--I believe--
    Mr. Schweikert. I beg you to pull the microphone closer.
    Mr. Skeel. Sorry. People usually don't have any trouble 
hearing my voice, but I will use the microphone.
    I absolutely believe that we now have a political risk 
factor in a variety of different markets. I think it is 
difficult to measure, but it is measurable. And people are 
trying to measure it.
    For instance, there were a couple of studies after the 
Chrysler case trying to measure the effect on credit rates as a 
result of Chrysler. And what ends up happening is, it depends 
on who you are and what industry you are in.
    I think it is true that these interventions affect people 
differently, and you can't always tell who the winner and who 
the loser is going to be. But even if there is not a systematic 
distortion, there is going to be a distortion, an uncertainty 
distortion, and I think it is in principle measurable.
    Mr. Schweikert. Professor Levitin, convince me that I am 
off base that these types of interventions--and, Doctor, you 
are also welcome to comment on this, too--is that are we 
starting to create an environment where we are adding a risk 
premium to maybe all forms of credit markets. Because we are 
starting to head towards a world where--the agreement is the 
agreement up until someone wants to change their mind and has 
good friends in the government.
    Mr. Levitin. I certainly hope not. My sense is that the 
market is going to look at the events of the last few years as 
being sui generis, that they were in response to a particular 
crisis and that going forward, they are not something that we 
should expect to be repeated.
    That said, if we see a return to sort of a faux private 
mortgage securitization market, where we have an implicit 
guarantee, then we do have that risk. That is, but I think 
instead we are much more likely to see some kind of an explicit 
guarantee in the market and that will--that will take care of 
the political--
    Mr. Schweikert. And obviously, my fixation on the mortgage 
market is very, very small degrees of risk when you start to 
analyze it and you model it--can sometimes make fairly 
substantial differences in your cost. And it is not only the 
mortgage market, but I worry about sort of the stigma through 
the Bankruptcy Code to even engaging in foreign investments, 
particularly if there have been waivers of immunity. Is this a 
pattern or are we just looking at a handful of outliers?
    Mr. Levitin. In regard to the Bankruptcy Code in foreign 
immunity, I think there is a debate about how the law is 
supposed to be interpreted. And there is an easy solution to 
that. If you don't like the way that the law was interpreted, 
Congress can clarify that. Congress can clarify what--can add 
additional protections to Section 363 of the Bankruptcy Code. 
Yes.
    Mr. Schweikert. With the concerns you have heard, 
particularly of the Chrysler servicers and some of the others 
that may have been better than other investors and holders, 
would you recommend that we go back and take a look at that 
section of the bankruptcy law?
    Mr. Levitin. Yes. And similarly, the Foreign Sovereign 
Immunities Act. If the concern is that Argentina is able to 
sort of snake out of its debts--that clarify the extent of 
sovereign immunity under the FSIA.
    Mr. Schweikert. Dr. Lubben, I know we only have a couple of 
seconds, but did you also want to share on this?
    Mr. Lubben. I think on this specific issue, to answer your 
question about is this an outlier, on the specific issue of the 
auto cases, I think it is an outlier. Specifically, I think the 
syndicated loan market would have been very shocked if the 
Indiana pension funds actually had won that, because the 
standard terms of the documents are majority rule.
    Mr. Schweikert. All right. Thank you. And--
    Chairman Garrett. Yes?
    Mr. Schweikert. Mr. Chairman, thank you.
    Chairman Garrett. Thank you. The gentlelady from New York 
is now recognized.
    Mrs. Maloney. Thank you very much. I will be brief. First 
of all, I want to direct my question to the Honorable Theodore 
Olson, and to thank you for your public service. I do want to 
mention that I worked with your wife on the Oversight and 
Government Reform Committee, and I would like to offer my 
condolences. All of us in New York are working every day 
responding to that tragedy.
    I would like to address some questions on the Argentina 
debt issue. And both Treasury and State officials have 
responded in recent months saying, Argentina must honor their 
international obligations and the United States will take 
necessary steps to make sure that they do so and send a clear 
message that they should. I just want to commend that approach. 
They should honor the obligations to U.S. lenders.
    What more should we be doing to ensure that Argentina is 
responsible and is true to its debt obligations to America?
    Mr. Olson. One of the things--there can be more pressure 
put upon Argentina. Argentina has resisted every effort by the 
United States to require Argentina to submit to judgments of 
United States courts. The interpretations that the United 
States Government have given to this Foreign Sovereign 
Immunities Act--we have talked a little bit today about whether 
the Foreign Sovereign Immunities Act ought to be amended. But 
the Foreign Sovereign Immunities Act does not provide 
protection for the things that Argentina is doing.
    And I will recite from the bond agreement that the 
Argentine government offered when it enlisted American 
investors in this. It specifically agreed that it would 
irrevocably agree not to claim and has irrevocably waived such 
immunity to the fullest extent permitted by the laws of the 
State of New York.
    So what the Argentine government is doing is defying those 
judgments. It is refusing to live up to its waiver of immunity, 
its consent to jurisdiction in New York. And the United States 
Government is repeatedly filing briefs, supporting Argentina's 
effort to do that. It filed a brief supporting Argentina's 
effort in connection with its shielding of its central bank. It 
is using its central bank as an alter ego to transfer money in 
and out of the central bank to use funds from the central bank 
for its own purposes. And then when a judge found after 2 years 
of looking at it that the central bank was indeed the same 
thing as the government of Argentina. When that case goes to 
the Supreme Court, the Government of the United States takes 
the side of Argentina and says the Supreme Court shouldn't take 
the case--shouldn't even consider the case.
    The same thing happened in connection with the other issues 
that we have been talking about today. It is incomprehensible 
to me. The government of Argentina has very, very fine lawyers 
and very sophisticated legal counsel with respect to this. When 
not even asked by the United States courts for the United 
States Government to come in and offer its legal assistance, 
and say that it is necessary to allow governments to work out 
their debt problems, when it has nothing to do in fact with the 
Greek obligations or other obligations, which have been solved 
by not including the clauses that we are talking about here 
today, and including collective action clauses in the 
indebtedness that those governments issue. It has nothing to do 
with the issue that the United States is raising.
    So it seems to me that at a minimum, the United States 
ought to stay neutral. But if it is going to intervene in legal 
proceedings on behalf of tyrants who are not obeying the rule 
of law, or American investors who are depending upon the rule 
of law, the answer is that it should be supporting United 
States investors, not the government of Argentina.
    Mrs. Maloney. I couldn't agree more. And I believe Judge 
Griesa, the judge overseeing the court cases with Argentina and 
the U.S. creditors in New York has said, ``What is going on 
between the Republic of Argentina and the Federal court system 
is an exercise of sheer willful defiance of the obligations of 
the Republic to honor the judgments of a Federal court.''
    Do you believe that that is a fair assessment?
    Mr. Olson. That is a fair assessment. Judge Griesa has 
handled scores of these cases against the government of 
Argentina. I have been in the court where the judge has looked 
at all of the evidence. He expressed his exasperation over and 
over again. He says, you do have the money. They have never 
denied that they have the money to pay these debts. These are 
judgments of the United States courts.
    He has been extremely patient. He has been extremely 
careful. And he has said over and over again that Argentina has 
the money to pay this debt. It is willfully defying the orders 
of the court. It is doing everything possible to spit in the 
face of United States law and United States courts. He has been 
very patient, but he has made these conclusions after an 
abundance of evidence has been presented to him.
    Mrs. Maloney. So what do we do about it?
    Mr. Olson. I think that the expression here today of this 
committee or this subcommittee and our United States Government 
that it will not tolerate rules of law frustrating the laws of 
the United States, which include the Foreign Sovereign 
Immunities Act.
    The other example I mentioned earlier in my testimony had 
to do with the government of Iran. Congress specifically 
authorized the victims of terrorism to sue state sponsors of 
terrorism and to get judgments against them.
    The people that we represent are victims of terrorism. 
There is no doubt that Iran sponsors that terrorism. They are 
trying to find assets of Iran in the United States and the 
United States Government has taken the position that they can't 
have discovery to find out what those assets are in the United 
States. It has already been decided that Iran is not immune. It 
is subject to the jurisdiction of the courts with respect to 
these victims of terrorism.
    And the history that you and Congress put in the bill that 
says that this law has nothing to do with discovery. The United 
States is taking the position that it indeed gives them 
immunity from discovery. I don't find that comprehensible.
    Thank you.
    Mrs. Maloney. My time is up. Thank you.
    Chairman Garrett. The gentlelady's time has expired. The 
gentleman from Texas is recognized.
    Mr. Neugebauer. Thank you, Mr. Chairman. And by the way, 
thank you for having this hearing. I think this is an extremely 
important hearing.
    When I think about the credit markets right now and 
globally, if there is ever a market that needs more certainty, 
it is the credit markets and certainly less uncertainty. I want 
to go back to some of the earlier comments. I think a number of 
us have been working to try to figure out how we get the 
private mortgage-backed securities market back operating again.
    Right now, Freddie Mac, Fannie Mae, and FHA have over 90 
percent of the market. And as I have sat down with a number of 
market participants and they are saying--what does it take to 
get people back into the mortgage-backed business. One of the 
things they keep telling me is that all of the uncertainty that 
surrounds mortgage origination now, whether it is servicing 
with the regulatory risk of CFPB and all of these new rules 
coming out.
    And then, of course, obviously, one of the things that was 
brought up was the legislative risk. And now, I think there are 
these two new risk premiums that are creeping into the market. 
It is the legislative risk, but it is also the regulatory risk 
of all of these new regulations and whether these new products 
or are the existing products in compliance.
    So I think the question I would have, Mr. Fiorillo, for 
you, is what does it take for us to--what kinds of things do we 
need to send from a signal standpoint to the marketplace to get 
the private market back operating again, because we can never 
get the--wing the marketplace from Freddie and Fannie as long 
as there is no private participation?
    Mr. Fiorillo. Congressman, one of the things that frightens 
me after doing this for 35 years is that the head of a very 
large insurance company recently said she would never buy 
another non-agency mortgage-backed security ever again. Okay, 
that is a pool of a couple of hundred billion dollars in 
dollars that could go into this market.
    You know the ``KISS'' symbol, the ``Keep It Simple 
Stupid.'' We have to keep it simple. We can't have 400-page 
prospectuses. We have to have an investor who can trust the 
servicer to do what is necessary for the benefit of the 
security holder. We need a borrower who is going to put some 
equity into the game. That doesn't necessarily exclude those 
folks who need extra help. We have FHA. We can use that vehicle 
to get there and to do that.
    But for the basic $600,000 to $800,000 mortgage, that 
shouldn't be a government product. The U.S. taxpayer shouldn't 
be financing millionaire holders. Okay? We can do that. 
Investors know how to price risk. So if you allow us to tell 
you we need a minimum downpayment. We need to know the 
foreclosures are done properly. We need to know that the titles 
have transferred properly and there are ways to do that. And 
finally, we need to know that when someone says, I make ``X'' 
amount of dollars, I can trust that servicer and that 
originator actually checked that out. And more importantly, 
when that loan is made, that first lender should have something 
to say about someone adding a second lien. If you do all of 
those things--it is not hard--we can get back, I think.
    Mr. Neugebauer. Ms. Goodman.
    Ms. Goodman. Yes, I think the first thing you need is 
regulatory certainty in terms of what the origination landscape 
looks like; that is, QM, QRM, HOEPA, disparate impact. You have 
a bunch of different sets of rules that have interactions that 
haven't been fully appreciated. They have to be made 
consistent. You need simple, clear rules.
    Second, you have to address the second lien issue, as 
Vincent mentioned, which means you have to change that clause 
in Garn-St. Germain, which does not--which essentially 
prohibits a first from allowing the placing of a second.
    And third, investors have to be assured that the conflicts 
of interest that are inherent in the securitization process. To 
the extent the rules are spelled out now, they are not going to 
be changed later.
    Mr. Neugebauer. So if I can clear up those and assure the 
investor that somebody can't come in there and just arbitrarily 
give them a 5, 10, 16 percent haircut because somebody didn't 
like the way the policy was implemented, or that is another 
part of that.
    I think the important thing here--this is the last point I 
want to make, and I think one of you on the panel made this 
point--ultimately, who pays for these additional risks and 
uncertainty? Who is penalized for that?
    Mr. Fiorillo. The borrower--the new borrower coming into 
the marketplace.
    Ms. Goodman. Yes.
    Mr. Fiorillo. The more constituents. So they are paying 
more for the consumer. They are getting more government, but 
they are getting higher interest rates.
    Ms. Goodman. Absolutely.
    Mr. Fiorillo. No doubt about it.
    Chairman Garrett. The gentleman's time has expired. Now, it 
is the gentleman from Connecticut.
    Mr. Himes. Thank you, Mr. Chairman.
    Mr. Olson, thank you for appearing before us today. And 
though I don't always agree with the causes on which you 
advocate, I have a lot of respect for the way in which you do 
it. An exception to that is your work in California, which I 
thought was superb and courageous on your part.
    I am not a lawyer, so I just want to clarify a few things 
here in your testimony. We heard you talk quite a bit about the 
Congo, about Iran, and about terrorism. I wonder with sovereign 
states, many of which you listed, is it your contention that 
just because a sovereign state may be a bad actor that they are 
not entitled to due process within a court of law?
    Mr. Olson. They are entitled to the protection of the 
Foreign Sovereign Immunities Act, which was enacted by 
Congress. With respect to terrorist states--
    Mr. Himes. Let us not address terrorist states. Sovereign 
states, regardless of how we feel about their activities or 
motivations, are entitled to protection under sovereign 
immunity and to due process.
    Mr. Olson. They are entitled to those things in different 
ways.
    Mr. Himes. So it would be--and just, again, principles of 
law. I might--we would all agree that, for example, a lawyer 
for one of those States wouldn't be held accountable or 
wouldn't somehow be regarded as bad for advocating on behalf of 
that State.
    The question I am trying to get at is you don't want this 
committee to take away the impression that because the 
President and his Administration have filed amicus briefs on 
behalf of Argentina or anyone else that they somehow are fellow 
travelers with the Congo, or that they somehow validate or 
endorse the positions of those governments. That is not your 
intention. Am I correct in that?
    Mr. Olson. That is correct. And I might say this: I 
specifically said in my testimony that it is not specifically 
focused on this Administration. It has happened in other 
Administrations.
    What I am concerned about is that the governmental entities 
are looking at this from the perspective or through the lens of 
the foreign sovereign, as opposed to seeing the perspective of 
the American investor trying to seek vindication of his or her 
rights in American courts. Those foreign sovereigns are getting 
due process in the rule of law and they are represented by very 
sophisticated, very successful lawyers.
    Mr. Himes. I understand. I just wanted to really clarify 
that you don't want this committee, out of your testimony, to 
draw the conclusion that somehow this Administration is--we 
heard the term ``crony capitalism.'' You are not trying to 
leave the impression that somehow this Administration is 
cronies with Argentina, the Congo, or--
    Mr. Olson. No, I did not mean that at all.
    Mr. Himes. Okay. Thank you. Is the filing of an amicus 
brief, unrequested by a court, which you have highlighted a 
couple of times here today, very unusual? Do people file amicus 
briefs when they are not requested to do so by courts?
    Mr. Olson. Circumstances vary. And the United States 
Government from time to time does that without being invited to 
by the court. But I quoted, particularly, the United States 
Court of Appeals for the District of Columbia, which last year 
chastised the government for waiting until the appellate level, 
then coming in gratuitously and what the Judge--Judge 
Silberman--said for the court, in that case, was that this was 
unfair to the litigant, to come in at this late date and 
disrespectful of the district court.
    Mr. Himes. No, I understand and appreciate that. And 
frankly, I am sort of willing to stipulate that it was unfair 
and disrespectful, but I guess my final question is, would you 
contend that the Administration has, in any way, usurped or 
acted extra-legally in any of its actions with respect to these 
States?
    Mr. Olson. I am not saying they are violating the law. No.
    Mr. Himes. Okay. Thanks. So, sharp-elbowed, disrespectful, 
but there is no usurpation of the rule of law here by--
    Mr. Olson. Utilizing the power of the United States 
Government to come in on the side consistently of foreign 
tyrants, as opposed to United States citizens--I am 
disappointed that is happening. I think it is the wrong 
approach. I don't say it violates the law.
    Mr. Himes. You are much more familiar with this case than I 
am. Do you think that it is likely that the Administration has 
taken the position that it has because it is somehow a--and 
again, the Majority's word--``crony'' of these countries? Or is 
it possible that the Administration has taken the position and 
filed the briefs that it has because it has competing interests 
of international diplomacy or strategy that might, in fact, be 
driving the Administration's position here?
    Mr. Olson. I am not saying--I didn't say and I didn't 
intend to imply, and at no point did I say that it was 
cronyism.
    Mr. Himes. I am just asking whether it is possible.
    Mr. Olson. What I said is they are looking at this from the 
perspective of the foreign government, as opposed to from the 
perspective of the citizens who need their help as much as the 
foreign governments do.
    Mr. Himes. Thank you.
    Professor Skeel, a quick question for you. You raised the 
specter of a risk premium, if I may use my words, associated 
with the aggressive activities of the Obama Administration in 
these three cases. Mr. Olson said that this is not a purely 
Obama thing. And in fact, we have seen this over a substantial 
time.
    So my question for you is, is there any academic proof of 
any kind that suggests that the kind of risks that might be--
and by the way, I haven't opined on the merits of any of these 
cases. They are actually quite interesting and complicated. My 
question for you--is there any proof at all, any analytically 
supportable proof that in fact in the market today, investors 
are demanding a risk premium associated clearly with this 
activity, rather than the destruction of our financial markets 
or the housing markets, the economy? Is there any evidence out 
there that that may in fact be true?
    Mr. Skeel. We do have some early studies of the Chrysler 
case, in particular. And they can be interpreted in different 
ways. One of the studies finds that the cost of credit for 
heavily unionized industries went up significantly as a result 
of Chrysler. Another study finds that bond prices went up, bond 
costs went down, as a result of Chrysler in unionized 
industries, presumably because of the expectation of a bailout 
in those kinds of industries.
    So what I would say is we are still at the early stages. It 
does look like there is an effect as a result of these cases, 
particularly in industries that look like them.
    Mr. Himes. Thank you, Mr. Chairman. Thank you.
    Chairman Garrett. The gentleman yields back. Mr. Stivers is 
recognized.
    Mr. Stivers. Thank you, Mr. Chairman.
    My first question is for Mr. Olson. I want to kind of 
follow up on something the gentleman asked you a minute ago. It 
is my understanding that you testified that U.S. investors have 
won over 100 judgments against the government of Argentina, yet 
the government of Argentina is still not making any effort to 
satisfy those judgments. Can you help me understand, while it 
is not illegal, why the Administration would choose to 
interfere and file an amicus brief on behalf of the government 
of Argentina? And clearly, they have the right to file an 
amicus brief on anything they want, but what would be a 
motivation for that? And maybe you can't get into motivation, 
but I am just curious.
    Mr. Olson. I don't know the motivation, and I certainly do 
not want to suggest any improper or illegal motivations by the 
lawyers in our government. I think they are all honorable 
people. I am disappointed. And I think the American citizens 
would be disappointed that when there are these close 
interpretations, and we are talking about provisions of 
contracts that are very clear. The provision that we are 
talking about in the one case in the Second Circuit says that 
the payment obligations under these bonds shall be treated at 
least equally with other payment obligations. And what 
Argentina has done is refuse to do that.
    The judge, after listening to all this, finds that it is 
clearly violating those provisions, and now the United States 
Government is coming in with an interpretation that is not 
consistent with any court decisions and not consistent with 
what the scholars have said. And it is unaccountable to me. I 
would think that as an American citizen, if I was a pension 
fund and so forth, I would ask, why isn't our government coming 
in on our side of the interpretation of that, rather than the 
foreign government, which is defying the rule of law?
    Mr. Stivers. Sure. And one follow up to that. Earlier this 
year, the U.S. Trade Representative announced that the decision 
to suspend the general system of preferences eligibility for 
Argentina because of their unwillingness to try to meet the 
court's decisions to repay the awards that were found by U.S. 
courts for these U.S. investors. Yet, then the Administration 
files this amicus brief that supports Argentina. Does that send 
mixed signals to the government of Argentina?
    Mr. Olson. It sends a signal to the--here is how the 
government of Argentina saw it. And I quoted this in my earlier 
statement--the government of Argentina, as soon as that brief 
was filed, says that vindicates our position. It vindicates our 
strategy against the American investors. Their strategy is 
defiance and they even passed a law prohibiting their payment 
of this indebtedness or responding to this judgment. That is 
their strategy. So they took the filing of that brief as 
support for their strategy against American investors.
    Mr. Stivers. And it is my understanding that Argentina has 
$45 billion in reserves. So it is not like they can't pay these 
judgments.
    Mr. Olson. The judge asked them--District Judge Griesa 
asked them over and over again, are you taking the position 
that you can't pay? Is there any evidence that you cannot pay 
these judgments? Argentina never once took the position that it 
couldn't pay them. They have $45, $46, $47 billion in reserves 
in Switzerland. They can pay this indebtedness and, in fact, it 
will help them ultimately because they might restore some 
credibility in the financial markets. But they will not pay.
    Mr. Stivers. One last question for Mr. Olson, and then I 
want to get to Professor Skeel.
    What impact will this have on investors' willingness to 
look at sovereign bonds if they think that an American 
Administration is going to back the foreign country over the 
American investor?
    Mr. Olson. It is very devastating for foreign governments 
who wish to issue bonds to U.S. investors. U.S. investors and 
any investor needs to know that it will be backed by the rule 
of law. That is why when Argentina issued these bonds, they 
said they would submit to the jurisdiction of New York courts 
under New York law. Because they knew that if they did that, 
investors would be secure in New York law and in American law. 
Now, when they don't pay any attention to it, that sends a 
signal to investors--stay away from this kind of indebtedness, 
which costs those foreign governments a lot of money.
    Mr. Stivers. Thank you. And to Professor Skeel, a similar 
question. What kind of impact do you think that the actions of 
the mortgage servicer settlement will have on investors' 
appetite for future private label mortgage-backed securities?
    Mr. Skeel. I think it is going to interfere with them 
detrimentally. I think you can't do something like this and 
pass on a cost without it having an effect on the market.
    Mr. Stivers. Thank you. My time has expired.
    Chairman Garrett. Thank you. The gentleman yields back.
    Mr. Peters is recognized for 5 minutes.
    Mr. Peters. Thank you, Mr. Chairman. I want to move back to 
the auto side of the discussion here.
    I think it is easy to pass judgment now that we are here in 
2012 and make up some stories about hypothetical investors who 
were somehow harmed by the government's intervention in the 
auto industry, but I think the facts are fairly clear. The 
rescue of GM and Chrysler has been a huge success for 
investors. It has been a success for workers, as well as 
taxpayers.
    The Center for Automotive Research has done extensive 
research on this topic. And in 2010, they issued a research 
paper entitled, ``The Impact on the U.S Economy of the 
Successful Automotive Bankruptcies.'' And in this memorandum, 
they discuss how the orderly bankruptcy saved 1.14 million jobs 
and that this has had a substantial benefit on government 
receipts. Rescuing the auto industry avoided a much deeper and 
longer recession and saved the government tens of billions of 
dollars in lost revenue and increased unemployment payments.
    Mr. Chairman, I would like to ask for unanimous consent 
that this report be made a part of the record.
    Chairman Garrett. Without objection, it is so ordered.
    Mr. Peters. Thank you, Mr. Chairman.
    Professor Skeel, I listened to you with intent to your 
testimony in talking about other parties bidding in this 
process. Can you identify, for the committee here, any other 
party that wanted to bid on the assets of General Motors or 
Chrysler?
    Mr. Skeel. In the actual transaction, as you know, the 
ultimate recipient of Chrysler was Fiat. I think if we had had 
an ordinary bankruptcy process where there was actual non-
governmental money exchanging hands, I think it is quite likely 
that Fiat would have made a bid for at least some, maybe most, 
of Chrysler's assets. There may have been other bidders as 
well.
    Mr. Peters. But you don't know of any other bidders that 
had any interest in this at the time? At the time when we were 
in a financial crisis, these companies were in desperate shape. 
You have no other people who are out there. This is just 
hypothetical that there were people out there?
    Mr. Skeel. Chrysler certainly had been talking to Fiat for 
a good period of time.
    Mr. Peters. Other than Fiat.
    Mr. Skeel. Other than Fiat, there were rumors in the market 
of people who might be--
    Mr. Peters. But nothing substantial?
    Mr. Skeel. But I do not have a specific bidder that I am 
confident would have been.
    Mr. Peters. Right. Thank you.
    Mr. Levitin, do you agree with Professor Skeel that there 
may have been other private interests out there interested in 
purchasing these companies that were somehow crowded out 
because the government was involved?
    Mr. Levitin. We don't know of any.
    Mr. Peters. Right. So if there is no private financing 
available for bankruptcy, what is the alternative with 
restructuring? Is that liquidation?
    Mr. Levitin. Liquidation was really Chrysler's only 
alternative to the sale. And that would have cost not just jobs 
at Chrysler, but it would have cost jobs at GM. It would have 
cost jobs at Nissan. It would have cost jobs at Ford. It would 
have cost jobs at all of their suppliers.
    Mr. Peters. But catastrophic, do you have any sense of what 
the cost--or I should say, what the value of those companies 
would have been in early 2009, during the height of this 
crisis?
    Mr. Levitin. In liquidation?
    Mr. Peters. Yes.
    Mr. Levitin. I have no sense, but I think it would be very 
low. I think the Chrysler secured lien holders would have been 
lucky if they had received anywhere close to 29 cents on the 
dollar.
    Mr. Peters. Anywhere close to 29 cents. That would have 
been a generous amount of money in liquidation.
    Mr. Levitin. Yes.
    Mr. Peters. Mr. Lubben, investors were in fact buying and 
selling debt right up to the point of bankruptcy, weren't they?
    Mr. Lubben. Yes, they were.
    Mr. Peters. And is it true that at the time that is where 
Chrysler was selling--was around 30 cents on the dollar?
    Mr. Lubben. Around 30 cents and the pension funds had 
bought in a few months before, at a little higher than that.
    Mr. Peters. And that is basically what the investors 
ultimately received?
    Mr. Lubben. That is what they ultimately received. They 
received 29 cents on the dollar.
    Mr. Peters. So they received what the value would have 
been. In fact, Mr. Levitin's testimony is that, likely, it was 
even lower when you are trying to sell off abandoned auto 
plants, there wasn't a real high value in the marketplace at 
that time. Nor were there many willing buyers to go in to do 
that.
    Mr. Lubben. Yes, if the company had been liquidated, was no 
longer a going concern, the recovery would have been a lot 
less. And as it turned out, the recovery was very close to what 
the market estimated it would be.
    Mr. Peters. So Mr. Lubben, based on the value of those 
assets at the time, would you say that investors got a fair 
deal?
    Mr. Lubben. I think they got a fair deal. I think they got 
exactly what the market expected they would get.
    Mr. Peters. Now, could you also talk a little bit about 
what the courts who have reviewed this matter--there has been--
Mr. Skeel mentioned that there is some contention as to what 
the courts have said. I think that is different than your 
testimony. How have the courts viewed this bankruptcy? Was this 
an aberration or consistent with bankruptcy law?
    Mr. Lubben. No, I just--I quote in my written testimony, 
Judge Gonzalez in the Chrysler opinion, who said that this case 
is just like any other 360 sale, except for the identity of the 
Debtor-in-Possession (DIP) lender, namely it is the U.S. 
Treasury, as opposed to Chase or Bank of America.
    So two bankruptcy courts, two different bankruptcy judges 
approved those two cases. And so far, all the cases have been--
when the courts have gotten to the merits, all the cases have 
been affirmed on appeal. Now, Professor Skeel did note that the 
Supreme Court vacated the Second Circuit's decision, but they 
vacated as moot, which basically means the case is over at that 
point. There wasn't any actual decision on the merits.
    Mr. Peters. Thank you. I believe my time is up. I yield 
back
    Chairman Garrett. The gentleman yields back. The gentleman 
from California has joined us. That is great. Mr. Ellison.
    Mr. Ellison. I yield 1 minute to Brad Miller.
    Mr. Miller of North Carolina. Thank you, Mr. Ellison. My 
question is one in which Mr. Ellison has the same interest.
    Ms. Goodman, you said in your testimony that principal 
modification was good for the investor and that the interest--
the principal reduction was good for the investor and that 
homeowners and investors' interests were aligned on that point.
    There has been a great deal of debate about whether the 
Federal Housing Finance Agency (FHFA) should allow principal 
reductions by Fannie and Freddie. FHFA says they are different. 
Their mortgages are better and they are worried that if they 
allow modifications, people who can pay will stop paying.
    Have you done any analysis of whether principal 
modification makes sense for Fannie and Freddie's loans as 
well?
    Ms. Goodman. There are clearly cases in which it does. The 
FHFA has done a couple of pieces of analysis where they have 
shown that it hasn't. But in fact, what they haven't allowed 
for is using principal forgiveness on some loans and principal 
forbearance on others. And had they done the analysis properly, 
they would have found that principal reduction, under some 
circumstances, makes a lot of sense.
    And as to their moral hazard criticism, it is important to 
realize that you can put gating around the situation to 
eliminate the moral hazard. You have to be delinquent before a 
certain date or you can't get the reduction.
    Mr. Miller of North Carolina. Right. Mr. Ellison?
    Mr. Ellison. Thank you. I just want to make a quick comment 
before I ask a question. I know we are running low on time. I 
think the framing of this hearing is really unfortunate. And 
the reason why is because if we were to take any one of these 
three issues that have been set forth today, I think we would 
be perfectly legitimate to question the settlement. Is that 
right or is it not right? Does it make sense--should it not 
make sense? This Argentine bond issue--clearly, I think it is 
fair to raise questions here. Different people can disagree.
    But to frame the whole hearing as harm the government is 
doing to the people or to the investors--I guess, let me get 
the exact title of this hearing--``The Need to Protect 
Investors from the Government''--is just like flagrant 
political ideology and I just think it is a misuse of the 
gavel. And I am very disappointed.
    I hope that when we get together back, we don't engage in 
this kind of just base ideological fighting. Because I think it 
just lowers the whole Congress when we do it that way. And 
again, this is without any disrespect to any of the testimony 
we have heard today. I thank the witnesses for coming in. I 
think it is important that we have this kind of testimony. I 
think it is unfortunate that the three issues are grouped this 
way, as just as sort of general framing of the government or 
the Obama Administration, quite specifically, as being out to 
hurt investors or Americans, generally. It is just not true and 
it is an abuse of this process.
    Anyway, Professor Levitin, I just want to ask you a 
question. In your testimony, you said that investors are not 
likely to be harmed by this AG settlement if servicers are 
complying with the pulling servicer agreement. And you state 
that investors will only be harmed if modifications are being 
done that are not permitted to be performed by the contract. 
Can you expand on that?
    Mr. Levitin. Some pulling and servicing agreements prohibit 
modifications of various sorts or place restrictions on loan 
modifications, including principal write-downs. There is 
variation among pulling and servicing agreements on what 
servicers may or may not do. In some cases, those servicers are 
actually instructed to take steps to manage the loans as if for 
their own account. And if a servicer were doing that, it would 
be trying to maximize the value of the loan. In some cases, 
that would mean doing a principal write-down, rather than 
having a foreclosure.
    So following the pulling and servicing agreements in some 
cases would mean doing principal write-downs, and in other 
cases would mean not doing them. And it is not clear what is 
going to happen in terms of the settlement. Generally, if 
servicers are going to be complying with the pulling and 
servicing agreements, and therefore, simply and not doing 
modifications on them, or if they are going to violate them and 
do modifications when they aren't supposed to be doing them. Or 
if they are going to do modifications they are already 
obligated to do.
    So basically, there are two possibilities: either servicers 
are going to be doing things they are already obligated to do, 
in which case, they shouldn't be getting any credit for it 
under the settlement--that is just a sham; or they are going to 
modify loans they shouldn't be modifying. And it is going to be 
done at the expense of investors. That is wrong, too. Either 
way, it doesn't come out well.
    Chairman Garrett. The gentleman yields back. And at this 
point, we look for the final word on the matter. The gentleman 
from California, and congratulations, also, on your recent win 
the other night as well. The gentleman is recognized for 5 
minutes.
    Mr. Sherman. Only in California does your congratulations 
on win need to be followed by a ``good luck, we hope you defeat 
the same candidate in the second''--
    Chairman Garrett. It is temporary. Yes, I understand.
    Mr. Sherman. We have a unique system in California. We are 
the only State with an exhibition season as part of our--
    Chairman Garrett. We will restart your clock at 5 minutes.
    Mr. Sherman. That is okay. I won't be long. As to the GM 
settlement, it is pretty apparent that the Federal Government 
provided a subsidy for--or an investment for the auto companies 
as part of the overall deal. If the Federal Government had just 
stayed out, the companies would have gone bankrupt.
    Ms. Goodman, is there any reason to think that if the 
Federal Government had done absolutely nothing, and the bond 
holders were picking through the carcasses of these two former 
auto companies, that the bond holders would be any better off?
    Ms. Goodman. I am going to actually defer to someone else 
who has more expertise in that matter.
    Mr. Lubben. I can give it a shot. So the question, as I 
understand it, was if the government--
    Mr. Sherman. If they had gone into a freefall bankruptcy at 
the worst possible time for our economy, at least in my 
lifetime, with no Federal involvement whatsoever, why would the 
bond holders have been better off than they are today?
    Mr. Lubben. They would have been, I think, far worse off. 
Because given that there was no liquidity, no financing 
available at that point in time, and financing--debtor in 
position financing is vital to continue operating during 
Chapter 11, because your creditors--your trade creditors, who 
previously would have extended you trade credit are not going 
to do that after you file Chapter 11. So it is vital to have 
that financing. No financing was available at the time. You 
file bankruptcy with no financing. You pretty much have to 
liquidate.
    Mr. Sherman. But the bond holders would be the proud owners 
of vacant auto plants.
    Mr. Lubben. Non-operating auto plants.
    Mr. Sherman. Non-operating auto plants in the Midwest in 
the height of a financial crisis.
    Mr. Lubben. Right.
    Mr. Sherman. I am glad the Federal Government did protect 
the bond holders from that eventuality. But obviously what the 
Federal Government did was not focused on trying to help the 
bond holders, and if the subsidy had been equally proportioned 
among all the stakeholders, then the bond holders would have 
been better off.
    Now, as to Argentine bonds, Mr. Olson, I have had an 
interest in these China bonds. I don't know if you have focused 
on that at all. Britain was able to force Beijing to provide 
some settlement to those who held the bonds and who are British 
Nationals. Has the U.S. Government helped or hurt Americans' 
efforts to collect on those bonds?
    Mr. Olson. I think--I am not aware of anything that the 
Federal Government has done to help.
    Mr. Sherman. In contrast to how the British government 
helped its--
    Mr. Olson. I can't speak to that. I am not sufficiently 
versed in that, but what I have said is that the consistent 
taking of legal positions supporting the Argentine government 
has hurt. So when the United States says it is important to our 
foreign policy interests or that sort of thing, that a contract 
be interpreted in a certain way, that is inconsistent with the 
rule of law and not very helpful.
    Mr. Sherman. I forget which British prime minister said 
this but he said, ``The home interests have the home office and 
the foreign interests have the foreign office.'' Whether the 
State Department represents us to the world or represents the 
interests of the world or foreign governments here in the 
United States is perhaps a subject for another hearing. I yield 
back.
    Chairman Garrett. The gentleman yields back. And that bell 
means that votes are upon us at this time. Without objection, 
we will enter into the record a letter from the American 
Council of Life Insurers (ACLI).
    Without objection, it is so ordered.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 30 days for Members to submit written questions to these 
witnesses and to place their responses in the record.
    And with that, this hearing is adjourned.
    [Whereupon, at 4:36 p.m., the hearing was adjourned.]




                            A P P E N D I X


                              June 7, 2012







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