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



 
                 THE IMPACT OF DODD-FRANK ON CUSTOMERS, 
                        CREDIT, AND JOB CREATORS 

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

                                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

                               __________

                             JULY 10, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-143

                               ----------
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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:
    July 10, 2012................................................     1
Appendix:
    July 10, 2012................................................    53

                               WITNESSES
                         Tuesday, July 10, 2012

Bentsen, Hon. Kenneth E., Jr., Executive Vice President, Public 
  Policy and Advocacy, the Securities Industry and Financial 
  Markets Association (SIFMA)....................................     8
Deas, Thomas C., Jr., Vice President and Treasurer, FMC 
  Corporation, and Chairman, the National Association of 
  Corporate Treasurers, on behalf of the U.S. Chamber of Commerce    10
Deutsch, Tom, Executive Director, the American Securitization 
  Forum (ASF)....................................................    12
Kelleher, Dennis M., President and Chief Executive Officer, 
  Better Markets, Inc............................................    14
Lemke, Thomas P., General Counsel and Executive Vice President, 
  Legg Mason & Co., LLC, on behalf of the Investment Company 
  Institute (ICI)................................................    15
Simpson, Anne, Senior Portfolio Manager, Investments, and 
  Director, Corporate Goverance, the California Public Employees' 
  Retirement System (CalPERS)....................................    17
Vanderslice, Paul, President, the Commercial Real Estate (CRE) 
  Finance Council (CREFC)........................................    20

                                APPENDIX

Prepared statements:
    Bentsen, Hon. Kenneth E. Jr..................................    54
    Deas, Thomas C., Jr..........................................    70
    Deutsch, Tom.................................................    82
    Kelleher, Dennis M...........................................   102
    Lemke, Thomas P..............................................   120
    Simpson, Anne,...............................................   151
    Vanderslice, Paul............................................   168

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    New York Times article by Azam Ahmed entitled, ``After MF 
      Global, Another Brokerage Firm Collapses With $200 Million 
      Missing,'' dated July 9, 2012..............................   184
    Reuters article by Carrick Mollenkamp entitled, ``RPT-
      INSIGHT-Fed knew of Libor issue in 2007-08, proposed 
      reforms,'' dated July 10, 2012.............................   187
Schweikert, Hon. David:
    Written statement of the Bond Dealers of America (BDA).......   189
    Written statement of the Mortgage Bankers Association (MBA)..   192


                        THE IMPACT OF DODD-FRANK
                         ON CUSTOMERS, CREDIT,
                            AND JOB CREATORS

                              ----------                              


                         Tuesday, July 10, 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 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Scott Garrett 
[chairman of the subcommittee] presiding.
    Members present: Representatives Garrett, Schweikert, 
Royce, Manzullo, Biggert, Hensarling, Neugebauer, Pearce, 
Posey, Fitzpatrick, Hayworth, Hurt, Stivers, Dold; Waters, 
Sherman, Hinojosa, Lynch, Maloney, Moore, Himes, and Green.
    Ex officio present: Representative Bachus.
    Chairman Garrett. Good morning, everyone. Today's hearing 
of the Subcommittee on Capital Markets and Government Sponsored 
Enterprises is called to order. Today's hearing is entitled, 
``The Impact of Dodd-Frank on Customers, Credit, and Job 
Creators.'' I thank the witnesses on the panel for being with 
us this morning.
    But before we get to the panel, we will begin with opening 
statements. I yield myself 3 minutes.
    It has been 2 years since the passage of the 2,300-page 
Dodd-Frank Act. And since that time, the economy is stagnant, 
the unemployment rate is above 8 percent, wages are declining, 
and credit, unless it is being supplied by the government, is 
frozen.
    I not only believe that these things are interrelated, I 
believe that the passage of Dodd-Frank is actually one of the 
main reasons that there has been such a tepid economic growth 
over the last several years.
    We have some charts that are going to be up on the screen, 
and here they come right now. If you look at these charts, you 
can see that GDP growth was at 4 percent in the three quarters 
preceding the passage of Dodd-Frank, and the quarter after the 
legislation was signed into law, GDP did what? It dropped, and 
it dropped continuously until it was almost negative. And it 
has continued to stay around 2 percent.
    If you look up at the next chart, this chart examines the 
impact on house prices. Prior to the passage of Dodd-Frank, 
house prices were basically beginning to normalize and maybe 
even rebound, as you see. But in the 2 years after Dodd-Frank, 
what happened? We have unfortunately seen home values go back 
on their downward slide once again, all due to Dodd-Frank.
    And finally, let us examine the manufacturing sector in our 
third chart. As the chart indicates, manufacturing production 
was also, just like the other two, regaining momentum in early 
2010. Then, Dodd-Frank came along. It was signed into law, and 
average production was almost cut in half.
    The reason that these impacts have been so severe is beyond 
the breadth and scope of this legislation. It literally makes 
wholesale changes in every facet of our financial markets, 
whether that is banking, mortgage lending, securities, trading, 
risk managing, or others.
    Each one of the titles of Dodd-Frank taken individually 
could have been a multi-Congress undertaking and should have 
been given much more thought than it was. Unfortunately, as you 
all know, Dodd-Frank was rushed through the process with really 
extreme partisanship. And the derivatives title and Volcker 
pieces were literally added in the dead of night, in the back 
room of the Senate Dirksen Building, as many of you recall. No 
one knew exactly how the pieces of the bill would work, or in 
this case not work together cumulatively. There was absolutely 
no consideration given to the possible combined costs that all 
these cumulative changes would have.
    Let me just give you an example in regards to the cost of 
credit. When the CFTC is finalizing its margin rules for 
interest rate swap, is it considering what new servicing 
requirements that the FTC is considering, adding to the risk 
retention requirements? In turn, when the FTC is considering 
these new servicing requirements, are they thinking about the 
CFPB, including a rebuttable presumption to the Qualified 
Mortgage (QM) definition? And likewise, when the CFPB is making 
their decisions, are they contemplating the possible impact of 
the Fed finalizing a Volcker Rule that could significantly 
curtail market making?
    All four of these actions alone will have an impact on the 
cost of credit in this country for consumers. It is important 
that we identify these costs individually and have rules that 
effectively balance the costs with the benefits provided.
    What is not being discussed or identified is what is the 
combined impact all of these rules and other rules will 
ultimately have on the cost of credit for borrowers in the 
country. When taken individually, the cost might be tolerable. 
But when taken all together, cumulatively, it will prove 
extremely onerous.
    So the purpose of today's hearing is to highlight the 
economic impact and the cost of these rules for businesses, 
consumers, and the economy, not viewed through the single 
vacuum of each regulator writing their own rule, but viewed 
through a more comprehensive and holistic manner. And I am 
afraid that the results we will find will not be pretty.
    This is one of the weakest economic recoveries that this 
country has ever experienced, especially given the depth of the 
recession. Unfortunately, Dodd-Frank and its over 400 rules are 
one of the main reasons that I am afraid it will be a lasting 
legacy of the legislation.
    And with that, I yield back, and I look to the chairman of 
the full Financial Services Committee, who is recognized for 3 
minutes.
    Welcome, Chairman Bachus.
    Chairman Bachus. Thank you, Chairman Garrett. Thank you for 
convening this hearing, which will be the first of about seven 
hearings this month on Dodd-Frank and its effect on job 
creation and the economy and our financial institutions and 
consumers.
    Dodd-Frank was enacted in response to the financial crisis 
of 2008. The law was not intended to hinder the ability of 
American businesses to utilize the capital markets or to unduly 
hamper the ability of consumers and businesses to obtain 
credit, create jobs, mitigate risk, and thrive.
    Yet 2 years after its passage, many argue that Dodd-Frank 
is having precisely these negative effects. Main Street 
businesses are now facing a constriction of both capital and 
credit. The derivative rules, the Volcker Rule, and a host of 
other Dodd-Frank rules are putting enormous pressure on 
corporate balance sheets at a time when economic conditions are 
already putting increased demands on the time and resources of 
job creators and entrepreneurs.
    This committee has tried to mitigate some of the potential 
negative impacts of Dodd-Frank by moving bipartisan legislation 
such as H.R. 2682, a bill that would ensure that regulators do 
not force derivative end-users to post margin, which would 
divert capital away from job creation.
    Unfortunately, the Senate has failed to act on this 
important bill, and some regulators continue to interpret Dodd-
Frank's Title VII as a grant of new authority to impose costly 
margin requirements on end-users.
    Similarly, an overly restrictive Volcker Rule has also had 
a negative impact on Main Street businesses by creating 
borrowing costs for consumers and companies, both large and 
small, by increasing borrowing costs.
    If businesses find it harder to borrow, it will be harder 
for them to make capital investments and create jobs. If 
consumers have less access to credit, it will be harder for 
them to care for their families. And if the value of the assets 
held by savers and investors declines, people will find it 
harder to save for a new home, for college or for retirement.
    Our witnesses today will be able to shed more light on the 
cumulative effect these rules are having on our capital 
markets, and our economy. And I thank them for being here.
    Chairman Garrett, again, thank you for holding this 
hearing. I look forward to the discussion.
    Chairman Garrett. Mr. Lynch is recognized for 3 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    First of all, I want to thank the witnesses for coming 
before this committee and helping us with our work.
    Today's hearing is somewhat benignly titled, ``The Impact 
of Dodd-Frank on Customers, Credit, and Job Creators.'' But the 
implication is that the financial reform is somehow damaging 
the financial system.
    Normally, there is a certain lag time between an attempt at 
regulation and an assessment. But in this case, we haven't even 
gotten through the existing financial crisis and we are already 
planting the seeds for the next one. That is what is happening 
here.
    My friends, and I mean ``my friends'' on the other side of 
the aisle want to do away with any reform that we put in place 
because of this colossal historical financial debacle that we 
have gone through beginning in 2008.
    It appears my colleagues on the other side of the aisle 
have come down with a case of collective and sudden amnesia, 
forgetting that our financial industry is struggling because of 
a loss of integrity, the loss of trust because of the last 
financial crisis, the one we are still struggling with, because 
of the recklessness on Wall Street, the exact behavior that 
Dodd-Frank is intended to stop.
    Whatever unintended effect Dodd-Frank may have on job 
creators, it pales in comparison to the havoc Wall Street 
wreaked on our economy during the financial crisis. Let me 
recount that according to the Treasury Department, the 
financial crisis that we are trying to deal with here cost 
Americans $19.2 trillion in household wealth--$19.2 trillion.
    Better Markets, whose representative is here today to 
testify, believes even this staggeringly high number is too low 
to accurately account for the cost of the crisis. They note 
that we lost $2.6 trillion in unrealized potential GDP growth 
since the crisis. We have 12.5 million unemployed Americans not 
contributing to the economy and not putting away savings for 
their retirement.
    Americans have lost an enormous amount of household wealth, 
including $7 trillion in home values, $11 trillion in 
investments in the stock market, and $3.4 trillion in 
retirement savings, not to mention the billions of dollars the 
government has spent to prop up the same banks that caused all 
of this damage in the first place. I want to note that I voted 
against TARP.
    These enormous losses which are the result of the crisis, 
by the kind of reckless behavior on Wall Street that the Dodd-
Frank law is intended to prevent, have had a much greater 
negative effect on customer credit and job creation than 
anything in Dodd-Frank itself. I am happy to join my colleagues 
in addressing any unintended consequences in the financial 
reform bill. It is not perfect. I understand that.
    But let us not forget what we are trying to prevent here: 
another catastrophic financial crisis that has cost the 
American people many trillions of dollars. The potential costs 
of a regulatory framework riddled with loopholes are far 
greater than those associated with a safe, stable financial 
system.
    I thank the gentleman for his courtesy, and his indulgence, 
and I yield back my time.
    Chairman Garrett. The gentleman yields back.
    The gentleman from California, Mr. Royce, for 1 minute.
    Mr. Royce. Yes, if I could point out, one can support 
financial reform without supporting Dodd-Frank. The problem we 
have with Dodd-Frank is that it did not solve too-big-to-fail; 
it compounded it. The banking sector is even more concentrated 
than it was a few years ago.
    You have a smaller and smaller number of organizations 
holding the majority of the assets in that sector. That is 
partly a result of the way this was done. It didn't consolidate 
a fragmented regulatory structure. Other than eliminating the 
OTS, we still have an alphabet soup of regulatory organizations 
overseeing markets with a large amount of overlap.
    And despite what was said at the time of its passage, it 
did not increase investment in entrepreneurship or foster 
robust growth in the economy. It did exactly the opposite.
    So today's hearing will hopefully shed some light on what 
it has done, namely increase uncertainty throughout the 
economy; increase the cost of credit for consumers and 
businesses; and most importantly, made it easier for smaller 
firms to fall prey to larger ones gobbling up their competition 
because of the lower cost of credit now for the largest firms 
due to the way in which Dodd-Frank sent that message to the 
market that they were too-big-to-fail.
    I yield back.
    Chairman Garrett. Thank you. The gentleman yields back.
    The gentlelady from New York is recognized for 3 minutes.
    Mrs. Maloney. First of all, I would like to welcome my 
former colleague and very good friend, Ken Bentsen. It is very 
good to see you and all of the panelists today. I look forward 
to hearing your remarks.
    And I would say that to even think about repealing Dodd-
Frank is the height of irresponsibility. You have to remember 
why it was implemented in the first place. We put in financial 
reform because we were on the brink of another Great 
Depression. There was a run on the banks. There was a run on 
the money markets. And it was not until this Congress came in 
with the leadership of Nancy Pelosi and others that we stop-
gapped and saved from falling off a cliff that would have been 
an even worse situation to respond to.
    Dodd-Frank brought in huge swathes of the market that were 
unregulated and regulated them. I don't think anyone in America 
wants to go back to the subprime crisis or to a time when banks 
were failing, and we had a number of banks that have failed. 
And I know in some cases, there were forced marriages or 
mergers just to save the FDIC deposit insurance of American 
working families.
    So Dodd-Frank came in and helped stabilize the markets. And 
I would say that markets run more on trust than on capital, and 
if people feel that there aren't rules of the game and 
transparency--I am not saying that we shouldn't make 
adjustments and refine it as we go forward in ways that reflect 
the challenges of the markets and the 21st Century, but I 
believe we will look back on Dodd-Frank as we did the great 
reforms after the Great Depression.
    After the Great Depression, Congress implemented Glass-
Steagall, the FDIC-insured accounts, the SEC. And it gave us 60 
years of unparalleled economic prosperity in our great country. 
I believe that many of the reforms--granted, nothing is perfect 
and that is why we are here to hear from the panelists today on 
ways they feel they might make the regulation better, but I 
don't know anyone in my district who wants to go back to a 
totally unregulated, huge swathe, no transparency, huge areas 
not even on exchanges that led to really the worst economic 
crisis in my lifetime and one I hope I never see again.
    So my time is up. I look forward to hearing the remarks of 
the panelists today.
    Chairman Garrett. The gentlelady yields back.
    Mr. Fitzpatrick is recognized for 1 minute.
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I, too, look forward to this hearing because strengthening 
our Nation's economy and getting Americans back to work remains 
our number one priority. And being able to raise capital, hedge 
risks, and obtain credit are necessary activities in order for 
businesses to grow and for businesses to create jobs and hire 
again.
    It is important for us to continue our oversight of Dodd-
Frank and to examine regulations because if businesses find it 
harder to borrow, it will be harder for them to make 
investments, to expand, and to hire workers. Moreover, if 
consumers find it difficult to access credit, or the value of 
their assets declines, it will make it harder for them to save 
and will put further strain on families trying to live within 
already strapped family budgets.
    Today's hearing will shed further light on the unintended 
consequences that Dodd-Frank is having on America's job 
creators and consumers. Next week marks the 2-year anniversary 
since this legislation imposed some 400 new rules on our 
financial system. Certainly, the financial industry deserves 
scrutiny after the meltdown of 2008. However, we must take care 
to make our capital markets not only safer, but to make them 
stronger and ensure that those far from Wall Street do not pay 
the price for those who are truly responsible for the financial 
crisis that did occur.
    So I look forward to the hearing, Mr. Chairman, and I yield 
back.
    Chairman Garrett. And the gentleman yields back.
    Mr. Hurt is recognized for 1 minute.
    Mr. Hurt. Mr. Chairman, I thank you for holding today's 
hearing on the effects of the Dodd-Frank Act on consumers, 
investors, and job creators.
    As we approach the 2-year anniversary of Dodd-Frank, 
regulators are still working through the more than 400 new 
rules and directives, with insufficient concern or 
understanding of the cumulative impact of these regulations on 
our economy. It is critical that this committee continue to 
scrutinize the effects that these regulations will have on 
consumers, small businesses, community banks, credit unions, 
and other financial institutions.
    As I travel across Virginia's 5th District, I am constantly 
reminded by my constituents that Dodd-Frank has caused negative 
effects on job creation and will lead to less access to credit 
for consumers, higher costs for capital for small businesses, 
and piles of Federal regulations to work through.
    As our Nation struggles through high unemployment and 
minimal economic growth, it is increasingly apparent that many 
of the regulations prescribed by Dodd-Frank will continue to 
act as a hindrance to our job creators and America's economic 
recovery.
    I would like to thank the distinguished guests and 
witnesses for appearing before the subcommittee today, and I 
look forward to their testimony.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman Garrett. Mr. Dold now for, I guess, the last word 
on this, 1 minute.
    Mr. Dold. Thank you. I thank the chairman, and I thank you 
for holding this hearing.
    And I want to thank our witnesses for taking the time to 
join us today.
    To promote good public policy, Congress must regularly 
review and revise existing laws and regulations. This process 
should include thorough and objective cost-benefit reviews of 
both intended and unintended consequences in light of 
historical evidence and new information.
    This is particularly true with bills like Dodd-Frank, which 
in addition to containing over 2,000 legislative pages, 
requires many thousands of additional pages of implementing 
regulations, some of which are internally inconsistent, 
ineffective, unworkable or counterproductive.
    I am encouraged by this committee's bipartisan work to 
address some of these issues. For example, with H.R. 4235, Ms. 
Moore and I are working together on a bipartisan basis to 
correct some of these problematic Dodd-Frank provisions.
    But we must continue to accelerate these bipartisan 
efforts. We must ensure that we understand the impact of the 
proposed regulations as a whole. We must ensure that the 
proposed or existing rules do not negatively affect risk 
management, market liquidity, credit costs, and credit access.
    Most importantly, we must ensure that unintended 
consequences do not ultimately limit small business expansion, 
job creation, and economic growth.
    I look forward to the testimony, and I yield back, Mr. 
Chairman.
    Chairman Garrett. The gentleman yields back.
    And seeing no other opening statements, I now turn to the 
panel, and I welcome all seven members of today's panel. I very 
much appreciate the testimony that you are about to present. 
And I know that some of you have been with us before, and 
others have not. For those who have not, and even for those who 
have been here before, just a reminder that you will be yielded 
5 minutes for your remarks, and your full written statements 
will be made a part of the record.
    And also just for your edification, in front of you of 
course is the timing light--red, yellow, and green--to give you 
an indication as to your time. When it turns red, your time is 
up, and since we do have a fairly large panel here--also just 
as a note, and I make this note not just to this panel, but to 
other panels who may come and other people who may be in the 
room, and so we are not casting dispersions on any one 
particular individual, association, or otherwise.
    But the rule of the committee is that statements should be 
presented to the committee 48 hours prior to the testimony, and 
of course we know we are coming in through a holiday weekend 
and what have you coming into this, but just in general, that 
is what the rule is, and so we would like to try to get back to 
that so members and staff of the committee will have the 
opportunity to review it in some detail.
    With that said, Mr. Bentsen, you are recognized for 5 
minutes, and once again, welcome to the committee.
    You are recognized for 5 minutes.
    Thank you.

 STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., EXECUTIVE 
  VICE PRESIDENT, PUBLIC POLICY AND ADVOCACY, THE SECURITIES 
       INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Bentsen. Chairman Garrett, Ranking Member Waters, and 
members of the subcommittee, thank you for the opportunity to 
share SIFMA's views.
    There is much in the Dodd-Frank Act that SIFMA's members 
supported, such as the establishment of a systemic risk 
regulator, the Orderly Liquidation Authority, and a uniform 
standard of care for retail brokers and advisers.
    Properly crafted, these provisions can appropriately 
increase supervision to mitigate systemic risk, improve 
coordination among regulators, eliminate too-big-to-fail, and 
improve protections in confidence for individual investors.
    However, other provisions, if not properly crafted, and not 
in coordination with foreign regulators, could have negative 
consequences to the detriment to businesses, governments, 
individuals, and institutional investors who rely on deep and 
liquid U.S. capital markets.
    We believe that Congress' goal in adopting the statutory 
Volcker Rule was to focus banking entities on providing 
liquidity to customers and to prohibit excessive risk-taking.
    The rules as proposed defines congressionally-permitted 
activities far too narrowly through an artificial distinction 
between permitted activities and prohibited proprietary trading 
based on a negative presumption using hard coded metrics on a 
transaction by transaction basis that is unworkable, and will 
cause market makers to pull back, to the detriment of U.S. 
capital markets.
    In the corporate bonds commission by SIFMA, Oliver Wyman 
found that liquidity losses could cost investors between $90 
billion and $315 billion in mark-to-market losses, corporate 
issuers between $12 billion and $43 billion a year in borrowing 
cost, and investors between $1 billion and $4 billion per year 
in transaction cost that is a level and depth of liquidity 
decreases.
    Further, Stanford University Professor Darrell Duffie noted 
in a paper commissioned by SIFMA that the direct and indirect 
effects would increase trading cost for investors, reduce the 
resiliency of markets, reduce the quality of information 
revealed through security crisis, and increase the interest 
expense in capital rates and costs for corporations, 
individuals, and others.
    Buy side market participants, commercial businesses, 
foreign regulators, and central banks have commented that the 
proposal would significantly harm financial markets, pointing 
to the negative impacts of decreased liquidity, higher cost for 
issuers, and reduced returns on investments.
    They further commented that other market participants are 
unlikely to be able to fill the critical market-making role 
played by banking entities, indeed the rule would apply to 17 
of the 21 primary dealers in the United States.
    SIFMA believes that the premium capture reserve account 
contained in the proposed risk retention rules will have 
negative consequences for the securitization markets. Both our 
buy side and sell side members believe that the requirements 
proposed will present obstacles to the structure in 
securitizations, including residential mortgage 
securitizations.
    As Moody's Analytics' special report stated, as a result of 
the way the premium capture rule is stated, the mortgage rate 
impact on borrowers would be significant on the order of an 
increase of 1 to 4 percentage points, depending on the 
parameters of the mortgages being originated, and discount 
rates applied.
    The consequences of the rule as written could significantly 
impede the return of private securitization markets and 
permanently cement the government's role in housing finance.
    We are supportive of many of the goals of Title VII 
derivatives regulation as with all regulation concerns focus on 
making sure that requirements are workable, and that the 
benefits outweigh the cost. Those costs after all are borne by 
market participants who may find it more difficult and 
expensive to hedge risk.
    We have also urged regulators to avoid unintended 
consequences and market impacts by carefully sequencing and 
phasing in implementation of rules by category, type of 
participant, asset class, and products within asset classes.
    A particular concern is coordination. Regulators have 
spoken of cooperation both at home and globally, but we see 
very little real evidence of actual coordination.
    An example of lack of coordination is the cross border 
application of Title VII rulemaking. The recently proposed 
guidance is complex, expansive in scope, and highly 
prescriptive. A particular concern is to propose substituted 
compliance, which theoretically should allow market 
participants operating in other well-regulated markets to rely 
on their home or host country regulation.
    This substituted compliance process will be very different 
than the mutual recognition model, and will require the CFTC to 
individually review and approve the rules of foreign nations.
    Further, we believe the CFTC's cross border application 
approach is flawed and that the Commission chose not to do so 
in the form of guidance as opposed to rule and apparently 
without sufficient coordination with the SEC. SIFMA supported 
the inclusion of single counterparty credit limits because our 
members had been using internal models for many years to 
measure and control such exposures. SIFMA, however, does not 
support the Federal Reserve's proposal in its current form 
because it exceeds congressional intent, and it would 
needlessly reduce liquidity in the financial system.
    The new method is a crude measure that overstates exposures 
under any reasonable calculation methodology by a significant 
multiple. The effect of the new methodology for measuring 
credit exposure will be a reduction in market liquidity that 
may have a significant effect on markets more broadly.
    In conclusion, the United States has taken a more 
comprehensive approach than any other country to address 
regulatory reform. Although some countries have taken steps to 
address components of topics covered by Dodd-Frank, no country 
has adopted restrictions comparable to the Volcker Rule or 
adopted legislation or regulators having the scope of Dodd-
Frank.
    There can be no question that the subsequent regulation has 
competitive consequences. It is essential that U.S. regulatory 
agencies, in proposing regulations, consider and analyze both 
the individual aspects and combined impact of proposed rules 
that may place U.S. financial markets at an unwarranted 
competitive disadvantage compared to those countries that have 
not implemented a comparable approach.
    Thank you.
    [The prepared statement of Mr. Bentsen can be found on page 
54 of the appendix.]
    Chairman Garrett. And I thank you, very much.
    Mr. Deas, welcome to the panel. You are recognized for 5 
minutes.

STATEMENT OF THOMAS C. DEAS, JR., VICE PRESIDENT AND TREASURER, 
  FMC CORPORATION, AND CHAIRMAN, THE NATIONAL ASSOCIATION OF 
CORPORATE TREASURERS, ON BEHALF OF THE U.S. CHAMBER OF COMMERCE

    Mr. Deas. Good morning, Chairman Garrett, Ranking Member 
Waters, and members of the subcommittee.
    I am Tom Deas, vice president and treasurer of FMC 
Corporation, and the chairman of the National Association of 
Corporate Treasurers. Thank you for the opportunity to speak 
with you this morning, also on behalf of the U.S. Chamber of 
Commerce about the effects of Dodd-Frank on customers, credit, 
and job creators.
    The drafters and implementors of the Act and other 
initiatives, such as proposed money market fund regulations, 
have focused mainly on the financial services industry. 
However, as the regulations roll out, we in Main Street 
businesses are concerned about our continued ability to protect 
day-to-day business risks with structured and cost-effective 
derivatives, to manage business cash flows with continued 
access to diversified short-term investment alternatives, and 
to raise capital to build new factories, conduct R&D, expand 
inventories, and ultimately to sustain and grow jobs.
    I would like to outline our concerns about derivatives 
regulations, the Volcker Rule, and money market fund 
regulations.
    On my company's use of derivatives, I can tell you that FMC 
Corporation is a proud American company founded almost 130 
years ago. Today, our 5,000 employees work hard to keep FMC a 
leading manufacturer and marketer of a whole range of 
agricultural, specialty, and industrial chemicals. Along with 
many other U.S. manufacturers and agricultural producers, FMC 
uses over-the-counter derivatives to hedge business risks in a 
cost-effective way.
    We use derivatives to manage the risk of foreign exchange 
rate movements, changes in interest rates, and global energy 
and commodity prices. Our banks did not require FMC to post 
cash margin to secure periodic fluctuations in the value of our 
derivatives.
    This structure gives us certainty so that we never have to 
post a fluctuating daily cash margin while the derivatives are 
outstanding. However, regulators have now proposed that we will 
have to divert cash to a margin account where it will sit 
idle--unavailable for productive uses.
    We still can't calculate exactly how much cash margin we 
would have to set aside, but FMC and other members of the 
Business Roundtable estimated that on average, a 3 percent 
initial margin would amount to $269 million per company.
    The study extrapolated the effects across the S&P 500, of 
which FMC is also a member, to predict the consequent loss of 
100,000 to 120,000 jobs. In our world of finite limits and 
financial constraints, posting a fluctuating cash margin would 
be a direct, dollar-for-dollar subtraction from funds that we 
would otherwise invest in our business.
    I want to assure you that FMC and other end-users employ 
OTC derivatives to offset risks, not create new ones.
    I thank the members for your bipartisan efforts to address 
margining and the inter-affiliate issues through legislative 
action.
    On the Volcker Rule, proposed regulations coordinated among 
five agencies have left its application confused, particularly 
as to the critical distinction between exempt market-making 
activities and prohibited proprietary trading. FMC's most 
recent bond issue in November, $300 million of 10-year notes 
was underwritten by a syndicate of our banks. As underwriters 
of our bonds, these firms take on the responsibility to hold or 
swap them if necessary to make an orderly market for our issue 
as it is launched. However, the Volcker Rule could 
significantly constrain this function through an ill-defined 
line in the regulation blurring what constitutes banned 
proprietary trading.
    We estimate the added cost of this regulatory uncertainty 
on our bond issue would have been $15 million. We are concerned 
that the ambiguity could produce an opposite result from what 
we all hope to achieve through undue burdens on the U.S. 
capital markets where investors and issuers have come together 
with an efficiency up until now unparalleled to the world and 
to the benefit of American businesses.
    Other impending financial regulations affect money market 
funds. This $2.6 trillion financial-market segment not only 
provides an alternative for investors who would otherwise be 
limited to bank deposits, but also supports Main Street 
companies' financing of working capital needs through purchases 
of our commercial paper.
    In 2010, the SEC, with our support, implemented a 
significant strengthening of liquidity requirements. However, 
another round of regulations would impose redemption 
restrictions, float the net asset value, and impose 
significantly higher capital requirements on fund sponsors. If 
the SEC formally proposes these new rules, many treasurers 
would begin immediate withdrawals from money market funds. We 
fear the cumulative effect of the proposed changes will 
eliminate this investing and financing alternative for Main 
Street companies and make us wholly dependent on banks, 
concentrating risk in a sector where over the past 40 years, 
there have been 2,800 failures costing taxpayers $188 billion.
    In summary, we are concerned about the lack of a clear end-
user margin exemption and other restrictions on derivatives 
such as the inter-affiliate issues, and the application of an 
overly complex Volcker Rule, combined with regulations that 
could severely limit our access to money market funds. These 
could burden American companies, limiting growth, harming 
international competitiveness and ultimately hampering our 
ability to sustain and grow American jobs. Thank you for the 
opportunity to testify today on these important issues.
    [The prepared statement of Mr. Deas can be found on page 70 
of the appendix.]
    Chairman Garrett. Thank you, Mr. Deas.
    Welcome, Mr. Deutsch.

  STATEMENT OF TOM DEUTSCH, EXECUTIVE DIRECTOR, THE AMERICAN 
                   SECURITIZATION FORUM (ASF)

    Mr. Deutsch. Chairman Garrett, Ranking Member Waters, and 
distinguished members of the subcommittee, my name is Tom 
Deutsch and I thank you for the opportunity to testify here 
today on behalf of the 330 member institutions of the American 
Securitization Forum. The securitization markets currently 
supply well over $1 trillion annually in Main Street credit to 
the economy each year for, among other things, consumers to buy 
houses, motorcycles, and cars, and for their own education, for 
farmers to buy tractors and other equipment, and for businesses 
to expand both their franchise as well as their physical plant.
    In effect, securitization is a delivery company that 
delivers these trillions of dollars from long-term savers such 
as mutual funds, pension funds, and insurance companies into 
direct consumer and credit loans to America. In my oral 
statement today, I would like to focus on some of the key macro 
challenges facing the private securitization markets in the 
face of the current regulatory headwinds. In my written 
statement, you can find links to the thousands of pages of 
comment letters that we alone have submitted to assist U.S. and 
international regulators.
    As an outgrowth of the financial crisis, many have focused 
on securitization as an ailing patient that needs heavy doses 
of regulatory medication to recuperate. ASF has strongly agreed 
that some treatment has been necessary to make appropriate and 
tailored reforms to the securitization market.
    First, through ASF Project RESTART, we have spent 
considerable effort ramping up transparency for investors and 
better aligning incentives between issuers and investors 
through various standardized market practices.
    Second, we have supported appropriate and tailored 
regulatory reform for risk retention, rating agency reform, 
conflicts of interest, and regulatory capital standards that 
would yield beneficial effects to the markets and the broader 
economy. But we have passed the point where heavy prescriptions 
of various regulatory medications have healing effects. 
Instead, we strongly urge policymakers to examine closely the 
aggregate and interactive effect of the myriad of treatments 
being administered, as they are becoming poisonous by being 
aggregated and injected in various doses, the interactive 
effects of which have not been thoroughly thought through. In 
effect, the poison to the market has become the dosage.
    So in my testimony, I will briefly summarize seven 
manifestations of this aggregate effect on the markets. First, 
straightforward products like auto- and equipment-backed 
securitizations whose performance was strong across-the-board 
through the financial crisis, are now facing extraordinarily 
complex challenges that were not designed or intended for those 
markets.
    Second, unintended interactions of various rules will 
continue to be discovered for years to come, which is causing 
immense cost in reworking various current structures as well as 
eliminating products all together.
    Third, market participants are not investing and building 
business platforms. Rather, they are putting their skeletal 
platforms in the deep freeze, particularly for residential 
mortgages, because of the tremendous uncertainty of the outcome 
of proposed rules that could very well make those business 
lines loss centers.
    This makes the Administration's and Congress' desire to 
bring private capital back into mortgage securitizations more 
difficult and more protracted. For the mortgage market, the 
complete absence of policy direction in Dodd-Frank for Fannie 
Mae and Freddie Mac, which currently lost the American taxpayer 
nearly $200 billion, has also kept private industry left to 
question when or if less than 95 percent of mortgages 
originated in America will actually not be guaranteed by the 
U.S. taxpayer.
    Fourth, some rules like the Premium Capture Cash Reserve 
Account or PCCRA are so lethal to the RMBS and CMBS markets, 
that those markets are predicted to become relegated to history 
books for many institutions if that rule were to be put in 
place as proposed. The potential impact of such a rule on 
borrowers would be substantial with interest rates rising up to 
1 percent to 4 percent, depending on the various structures. 
And rate locks would effectively be eliminated.
    Fifth, nonbanks and banks are being subject to further 
disparate rules causing competitive advantages and 
disadvantages to develop that will inevitably cause exiting of 
business lines based on regulation, rather than market 
efficiency.
    Sixth, although policy initiatives continue to evolve on a 
country by country basis, the global issuance and purchase of 
securitization is forced to comply with new and different 
standards in each country and each jurisdiction.
    And finally, seventh, many of the rules in Dodd-Frank, such 
as the Volcker Rule, were not intended to affect the 
securitization markets. But in fact, those rules have become 
the biggest sources of concern for key segments of the market 
such as the $300 billion asset-backed commercial paper market.
    When all of these rulemakings are finalized, they will 
inevitably result in increased costs for securitization and 
lending markets, which will be passed on to consumers and 
borrowers in the form of higher borrowing rates. Moreover, many 
of these markets may ultimately or finally disappear, leaving 
some consumers and business without access to credit at all. 
These are not outcomes that will help the U.S. economy or the 
unemployment rate decline. ASF greatly appreciates the 
opportunity to appear today, and I thank you for your time.
    [The prepared statement of Mr. Deutsch can be found on page 
82 of the appendix.]
    Chairman Garrett. Thank you.
    Mr. Kelleher, you are recognized for 5 minutes.

STATEMENT OF DENNIS M. KELLEHER, PRESIDENT AND CHIEF EXECUTIVE 
                 OFFICER, BETTER MARKETS, INC.

    Mr. Kelleher. Good morning, Chairman Garrett, Ranking 
Member Waters, and members of the subcommittee. Thank you for 
the invitation to Better Markets to testify today. I am the 
president and CEO of Better Markets, which is a nonprofit, 
nonpartisan organization that promotes the public interest in 
the domestic and global financial markets. It advocates for 
transparency, oversight, and accountability with a goal of a 
stronger, safer financial system that is less prone to crisis 
and failure, thereby eliminating or minimizing the need for 
more taxpayer funded bailouts. I have detailed my background 
and what Better Markets does in my written testimony and it is 
also available on our Web site. I won't repeat it here.
    Let me begin my summary of my testimony by stating a fact: 
Wall Street is not a job creator. Wall Street is a job killer 
of historic proportion. As we sit here today, our country and 
tens of millions of good, hardworking Americans are suffering 
through the worst economy since the Great Depression of the 
1930's. That is a direct result of the Wall Street-created 
financial collapse of 2008, which was the worst financial 
crisis since the stock market crash of 1929.
    As we sit here today, I am sorry, tonight, many of our 
neighbors will sit at their dinner table, look at their 
children, and worry about their future: 21 million Americans 
today can't find full-time work; 11 million Americans are 
paying mortgages higher than the value of their homes; 5 
million Americans have had to move out of their homes due to 
foreclosures, and millions more are packing up as we speak 
today; and the American family's net worth has plummeted almost 
40 percent in 3 years, wiping out almost 2 decades of hard work 
and prosperity. None of this happened because of the Dodd-Frank 
financial reform law passed 2 years ago. None of this happened 
because of the rules meant to implement the financial reform 
law, almost none of which have even been put in place yet. None 
of this happened because regulators who are the Wall Street 
policeman are trying to make Wall Street follow the law like 
everyone else in this country.
    That economic disaster happened as a result of Wall Street 
and the financial industry being deregulated in the 1990s and 
virtually unregulated starting in 2000. This unleashed a 
recklessness that took just 7 years to cause the biggest 
financial collapse since 1929 and almost caused a second Great 
Depression. Wall Street was able to do that because it and its 
allies changed or eliminated the laws, rules, and regulations 
put in place during the Great Depression of the 1930s, which 
protected the American people from Wall Street and the 
financial industry. After that, our country did not have a 
financial or economic crisis on that scale for more than 70 
years. And remember, even with the unprecedented degree of 
government regulation of Wall Street and the U.S. capital 
markets for 70 years, our country prospered. We built the 
largest, most broad-based middle class in the history of the 
world.
    Wall Street, our financial industry, our nonfinancial 
businesses, and our economy all thrived for 70 years. 
Deregulation of the only industry in the country that threatens 
our financial system and entire economy changed all that. 
Financial predators were let loose. Doing anything and 
everything to make as much money as fast as possible became the 
Wall Street business model. And as the JPMorgan London Whale 
bet of April and Barclay's rate rigging scandal of today shows, 
little has changed.
    That is why the Dodd-Frank financial reform law is more 
properly understood as the Wall Street re-regulation law. It is 
designed and intended to prevent Wall Street and the too-big-
to-fail banks from causing another financial collapse and 
economic crisis. Nothing in that law could ever cause the 
damage to jobs, our economy, our financial system, and our 
country that Wall Street did when it caused the financial 
collapse and worst economy since the Great Depression.
    Unfortunately, Wall Street and its allies are engaged in a 
campaign that attempts to deflect the public debate away from 
that crisis, away from Wall Street's role in that crisis, away 
from the cost of that crisis that they put on the American 
people and to the new financial reform law, to the industry's 
alleged burdens and to the rules being put in place to prevent 
another crisis.
    As detailed in my written testimony, for more than 100 
years the industry has complained nonstop about regulation. But 
history proves again and again that these complaints are 
without merit. The industry has always adapted and that 
industry and our country have prospered. In closing, the 
important anniversary isn't the 2 years since the passage of 
the financial reform law meant to protect the American people; 
it is the almost 4 years since Wall Street created the crisis 
and inflicted this economic wreckage on every corner of our 
country. How long before we stop worrying about Wall Street's 
profits and start worrying about taxpayer pockets and Main 
Street families?
    Thank you.
    [The prepared statement of Mr. Kelleher can be found on 
page 102 of the appendix.]
    Chairman Garrett. Thank you.
    Mr. Lemke, you are recognized for 5 minutes, and welcome to 
the panel.

  STATEMENT OF THOMAS P. LEMKE, GENERAL COUNSEL AND EXECUTIVE 
    VICE PRESIDENT, LEGG MASON & CO., LLC, ON BEHALF OF THE 
               INVESTMENT COMPANY INSTITUTE (ICI)

    Mr. Lemke. Good morning, Chairman Garrett, Ranking Member 
Waters, and members of the subcommittee. I am Thomas Lemke, 
general counsel of Legg Mason & Co. We are a Baltimore-based 
global asset management firm that manages more than $630 
billion in mutual funds and other assets for our clients. I 
very much appreciate the opportunity today to testify on behalf 
of the Investment Company Institute on the impact of Dodd-
Frank.
    ICI is a national association of mutual funds and other 
SEC-registered investment companies. The members of ICI help 
more than 90 million investors seeking to achieve their 
financial goals.
    It is important to note that Dodd-Frank is not directed at 
SEC-registered mutual funds. These funds were not a cause of 
the financial crisis. However, Dodd-Frank is very broad and 
very technical in its scope, and in a number of areas it raises 
important implications for mutual funds.
    Our written statement addresses these matters in detail. In 
some cases, we believe the impact of certain provisions on 
mutual funds and their investors was not intended by Congress. 
In other cases, we believe that new regulations designed to 
achieve Dodd-Frank's protections should be implemented in a 
manner that minimizes market disruptions and strikes the right 
balance between cost and benefits.
    I would briefly like to highlight four issues of particular 
concern to ICI and its members.
    First, is the Volcker Rule. Congress' clear purpose in this 
area was to limit proprietary trading by banks and to prohibit 
banks from sponsoring or investing in unregistered hedge fund 
and private equity funds. Mutual funds and other SEC-registered 
funds were not the rule's target. Under the proposed rule to 
implement Volcker, however, some SEC-registered funds could be 
treated the same as hedge funds or private equity funds, thus 
barring banks from owning or sponsoring these funds. Virtually 
all non-U.S. retail funds would get similar treatment. That is 
not what Congress intended, and we believe the proposed rule 
should be amended to explicitly exclude all these funds from 
treatment as covered funds or banking entities.
    We are also concerned that the Volcker proposal could 
sharply reduce market liquidity by preventing banks from 
exercising their historic role as market makers. For mutual 
funds and their investors, less liquidity means higher spreads, 
higher trading costs, and diminished returns.
    In comments to regulators, ICI has offered recommendations 
designed to avoid an adverse effect on market liquidity and 
address other problems with the Volcker proposal. We and many 
other commenters believe that significant changes are 
necessary. As a result, we have called upon regulators to issue 
a new proposal for public comment before adopting any final 
rule.
    Our second concern is the Financial Stability Oversight 
Council (FSOC) and its authority to designate Systemically 
Important Nonbank Financial Institutions (SIFIs). These 
provisions in Dodd-Frank did not target SEC-registered funds. 
Indeed, Dodd-Frank includes criteria and other language 
suggesting that these funds are not what Congress had in mind.
    FSOC and its Office of Financial Research are conducting an 
analysis of asset managers to see if these companies pose any 
threats to financial stability. We believe this study should be 
subject to formal public comment. ICI also believes the FSOC 
will conclude at the very least that SIFI designation would not 
be a proper tool to address any such risks.
    Third is the regulation of derivatives and asset-based 
securities. These instruments play an important role for many 
institutional investors, including registered funds.
    Funds use swaps, futures, and other derivatives to manage 
risk, improve returns, and gain liquidity. ICI has supported 
reforms that would increase transparency and reduce 
counterparty risks in these markets, though we still have a 
number of specific concerns with the regulatory proposals.
    Broadly speaking, we urge the SEC and the CFTC to work 
together, and with their global counterparts, to ensure that 
new regulations achieve the protections sought by Dodd-Frank in 
a coordinated and cost-effective manner while minimizing market 
disruptions.
    Fourth and finally, we could not discuss the impact of 
Dodd-Frank without raising what we believe is a troubling 
example of a regulator using Dodd-Frank as a pretext to expand 
its authority through unjustified regulation.
    In February, the CFTC vastly extended its reach over SEC-
registered funds, and only SEC-registered funds, by sharply 
curtailing their ability to rely on a rule that has long 
exempted otherwise regulated entities from CFTC registration. 
The CFTC claims to have acted on these amendments under the 
``more robust mandate'' it received under Dodd-Frank, but its 
actions were neither required nor even contemplated by Dodd-
Frank.
    The result of the CFTC's action is that SEC-registered 
funds will be subject to unnecessary and redundant regulation, 
the cost of which will be borne by funds and their 
shareholders.
    ICI and the U.S. Chamber of Commerce have challenged the 
CFTC's Rule 4.5 amendments in Federal court. If our case does 
not succeed, not only will SEC-registered funds and their 
shareholders suffer the consequences of this ill-advised rule, 
but the CFTC will face a host of new registrants and further 
demands on its limited resources at a time when the agency 
itself says that its workload under Dodd-Frank ``creates risks 
in its critical oversight roles.''
    We believe this prospect should be of serious concern to 
Congress.
    Mr. Chairman and members of the subcommittee, our written 
statement contains additional detail on these and other 
matters, and I will be happy to answer any questions you may 
have. Thank you.
    [The prepared statement of Mr. Lemke can be found on page 
120 of the appendix.]
    Chairman Garrett. And we thank you.
    Ms. Simpson, welcome, and you are recognized for 5 minutes.

     STATEMENT OF ANNE SIMPSON, SENIOR PORTFOLIO MANAGER, 
INVESTMENTS, AND DIRECTOR, CORPORATE GOVERANCE, THE CALIFORNIA 
         PUBLIC EMPLOYEES' RETIREMENT SYSTEM (CALPERS)

    Ms. Simpson. Thank you. Good morning, Chairman Garrett, 
Ranking Member Waters, and distinguished members of the 
subcommittee. My name is Anne Simpson. I am the senior 
portfolio manager for investments and director of corporate 
governance at CalPERS, the California Public Employees 
Retirement System.
    I would like to share our views this morning on the 
positive impact of Dodd-Frank and to address the unfinished 
business. Also, to highlight the importance of completing the 
task of ensuring what we think of as smart regulations. This is 
in order to protect investors like us, but also to protect the 
markets upon which we and also the wider public relies.
    CalPERS is the largest public pension fund in the United 
States, with more than $230 billion in global assets, and we 
are share owners in more than 9,000 companies. We pay out over 
$14 billion annually in retirement benefits to more than 1.6 
million public employees, retirees, and their families.
    This is not only an important source of daily income for 
our members; it also provides a positive economic multiplier to 
the local economy.
    CalPERS fundamentally relies upon the safety and soundness 
of the financial markets. For every dollar that we pay in 
benefits to our members, 66 cents are generated by investment 
returns. We are a long-term investor with liabilities that are 
measured in decades. We need stability in the capital markets 
and sustainable economic growth to meet those liabilities now 
and in the future.
    We fully understand the virtuous circle between savings, 
investment, financial markets, and economic growth.
    The financial crisis hit us hard: $70 billion was wiped 
from CalPERS' portfolio. We simply cannot afford another 
crisis. This is why CalPERS is concerned with ensuring that 
financial markets are regulated in a way which: is coordinated 
and complete; is fully transparent; protects investors from 
conflicts of interest; fosters responsible behavior by market 
actors; and furthermore, does not prevent investors from taking 
advantage of new opportunities and innovation.
    For us, these are the hallmarks of smart regulation. But a 
critical element is to ensure that regulation is proportionate. 
For CalPERS, we weigh the additional costs that are required 
and the balance with the protection that they provide to our 
fund.
    To those who question whether we can afford to invest in 
smart regulation, we reply, ``How can we afford not to?'' The 
impact of the financial crisis is still around us, and we 
cannot be complacent about risks ahead and before us.
    Those arguing that we cannot afford the cost of regulation 
are in danger of being penny wise and pound foolish. We see 
smart regulation as an investment in the safety and soundness 
of financial markets which generate the vast bulk of the 
returns to our fund. Smart regulation is an investment in the 
effective functioning of capital markets, which is critical not 
just to investors like CalPERS, but to the recovery of the 
wider economy.
    CalPERS believes that Dodd-Frank establishes an effective 
framework for promoting that safety and soundness of capital 
markets and providing investors the protections and the rights 
to ensure those markets function well. However, unless 
effectively implemented, the promise of Dodd-Frank will remain 
largely unfulfilled.
    Let me turn briefly to the critical elements of that 
unfinished business, which we regard as vital to delivering on 
that promise.
    Derivatives: CalPERS fully supports regulation of the 
trading of derivatives, which we use extensively in our own 
portfolio. The legislation will bring oversight and 
transparency, and a key part is ensuring that most swaps are 
exchange traded or centrally cleared.
    We are pleased the CFTC has adopted thoughtful rules to 
implement the business conduct standards, but there is more to 
be done. We will be glad to continue to engage with the 
regulators to get those rules in the right place.
    The Volcker Rule: We fully support the objectives of the 
so-called Volcker Rule and would like to incorporate by 
reference the attached comment letter previously submitted by 
CalPERS to the relevant agencies. The principle here is simple: 
to ensure that banks do not rely upon the window as a backstop 
for proprietary trading or other risky activity. We realize 
there is more work to be done to ensure clarity.
    Alignment of interest: We want to ensure alignment of 
interest between those making decisions in the financial market 
and the providers of the long-term capital that they are 
deploying. But alignment means sharing not just rewards, but 
risks, and over the long term.
    For that reason, we support the risk retention proposals 
which would require those who issue asset-backed securities to 
retain at least a 5 percent piece of the credit risk of any 
asset.
    As a purchaser of asset-backed securities, CalPERS wants to 
see that its own long-term economic interest in these 
securities is aligned with those originating the 
securitizations and underlying debt obligations.
    Credit ratings: CalPERS supports reform of the industry. 
These entities played a troubling role in the financial crisis. 
They provided many securitized products with investment grade 
ratings, even though underlying debt instruments pose serious 
risks of default.
    In response, Dodd-Frank included some important provisions 
intended to include transparency and accountability, and we 
have more detail in our written testimony. We are hopeful the 
SEC will act swiftly to issue final rules and also to withdraw 
the no-action letter that allows credit rating agencies to 
avoid liability for false ratings in securities filings.
    Shareowner rights: Effective regulation also relies upon 
market participants playing their proper role. For that reason, 
shareowner rights, both to information and the ability to 
follow through and take action, are vital. Investor protection 
starts with shareholder rights. We see it as self-help.
    A good example is the new rule known as ``say on pay.'' We 
are pleased the SEC adopted final rules on executive 
compensation last year, and we have just completed our second 
proxy season under these rules. We see a positive impact. 
Dialogue with companies has improved and many companies are 
making sensible reforms in response to shareowner concerns. 
There are some additional rules to complete the set, and we 
look forward to their promulgation by the SEC.
    Finally, regulation--
    Chairman Garrett. You are 1 minute and 40 seconds over, 
so--
    Ms. Simpson. Oh, I apologize.
    We would like to ensure that funding is secure and 
adequate. There is work to be done. We are willing to continue 
with our engagement with regulators. Difficult as the work is, 
it must be put on track.
    Thank you.
    [The prepared statement of Ms. Simpson can be found on page 
151 of the appendix.]
    Chairman Garrett. Thank you, and I appreciate that.
    And finally, Mr. Vanderslice, you are recognized for 5 
minutes.

 STATEMENT OF PAUL VANDERSLICE, PRESIDENT, THE COMMERCIAL REAL 
                 ESTATE FINANCE COUNCIL (CREFC)

    Mr. Vanderslice. Chairman Garrett, Ranking Member Waters, 
and members of the subcommittee, my name is Paul Vanderslice. I 
am a managing director at Citigroup Global Markets where I have 
worked for the last 28 years.
    I am here today in my capacity as president of the 
Commercial Real Estate Finance Council, also known as the 
CREFC. CREFC is the collective voice of the $3.5 trillion 
commercial real estate finance industry. Its members are 
portfolio lenders such as banks and insurance, commercial 
mortgage-backed securities lenders, issuers and investors, as 
well as a variety of firms that service these lenders and 
investors.
    We appreciate the opportunity to share our views on the 
impact of the Dodd-Frank regulations on credit availability for 
commercial real estate. CREFC recognizes the importance of many 
aspects of Dodd-Frank, including risk retention, better 
disclosure, and increased transparency.
    However, we are concerned that some of the proposed 
regulations go beyond congressional intent, and when analyzed 
in the aggregate have a combined effect that hinders credit and 
outweighs the benefits intended for investors and borrowers.
    Therefore, CREFC believes it is imperative that regulators 
abide by Executive Order 13563 which requires that regulators 
take into account the overall costs of the regulations, adopt 
regulations where the benefits justify the costs, and ensure 
regulations impose the least burden on society. We appreciate 
the subcommittee taking the opportunity to exercise its 
oversight over this issue.
    The U.S. commercial real estate market is funded by $3.5 
trillion in commercial mortgages and has approximately $1.5 
trillion in equity. Approximately $2 trillion of commercial 
mortgage debt is scheduled to mature in the next 5 years, 
almost $400 billion per year.
    Traditional portfolio lenders simply lack the capacity to 
fulfill the aggregate CRE financing need. This is so even after 
you account for additional borrower equity, new valuations, and 
tighter loan-to-value ratios. Therefore, the refinancing gap 
could be in excess of $100 billion per year over the next 5 
years and likely much larger. This shortfall is between what 
portfolio lenders can provide and what is necessary to 
refinance existing debt and fund those commercial real estate 
loans necessary for economic growth.
    Over the last 2 decades, CMBS has provided this gap 
funding, much of it in non-CBD markets. Bloomfield, Michigan, 
and Paramus, New Jersey, would be examples of these non-CBD 
markets.
    That said, the CMBS industry is in the midst of a fragile 
recovery. There is only $30 billion to $35 billion of projected 
issuance this year; 2012 will only be 18 percent of the 2006 
volume of $200 billion, and 15 percent of the 2007 peak volume 
of $230 billion. We have not seen issuance this low since 1997.
    A few lenders in 2011, because of the volatility, left the 
market, shuttered their entire CMBS businesses. And they did 
not believe in the growth of the market. There are more loan 
rollovers than new CMBS issues. So the market is actually 
losing size and may begin to lose its relevance over time. This 
is partially due to the headwinds facing the United States' 
weak economic growth forecast, as well as the intensifying 
European crisis.
    However, the market also faces the pending implementation 
of the Dodd-Frank regulations and their combined effects. While 
the former cannot be controlled, the latter can be--as an 
example, the premium capture cash reserve account, also known 
as PCCRA, included in the proposed risk retention regulations, 
but not contemplated by the Dodd-Frank Act itself,
    In a survey of CMBS loan originators and issuers, 92 
percent of the respondents said that the imposition of PCCRA 
would decrease loan origination volume from current levels. 
Almost 62 percent of those respondents said that the volume 
decreases would be more than 50 percent.
    Some indicated reductions would be as much as 90 percent to 
100 percent. All respondents indicated that the cost of loans 
to borrowers would increase; 92 percent said the cost increase 
would be 50 basis points or more; 46 percent indicated the cost 
increase would be more like 100 basis points.
    As an example, on a $10 million loan request, the loan 
would work today at a 5 percent rate. If the loan were 6 
percent, the supportable debt would only be $9 million. 
Extrapolate this to the $100 billion refinancing gap that I had 
mentioned before, and that would be a $10 billion per year 
shortfall. Therefore, this rule would constrain credit minimum 
to the tune of $10 billion a year over the next 5 years.
    Furthermore, in a separate survey of the CREFC board of 
governors, 78 percent of our board and 73 percent of our 
investment-grade investors that the PCCRA is purportedly 
designed to protect believe that PCCRA implementation would 
hinder CMBS. This is just one example from the 17 regulations 
that would affect CMBS.
    We believe PCCRA: one, is outside of the congressional 
intent of risk retention; two, would limit CRE lending when it 
is needed most; and three, would materially raise the cost of 
debt, which would hurt the non-CBD markets the most, and that 
is the very market that CMBS has historically served.
    This is why we are urging Congress to ensure regulators 
follow the congressional intent and Administration policy 
through Executive Order 13563. Without a strong return of CMBS, 
local businesses will be denied access to essential liquidity.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Vanderslice can be found on 
page 168 of the appendix.]
    Chairman Garrett. I very much appreciate your testimony as 
well.
    And so, again, to the entire panel, I appreciate your 
coming here and your testimony. You all indicated that you 
welcome any questions, and so we have some. And I will 
recognize myself for 5 minutes.
    Mr. Kelleher, I listened to Ms. Simpson, who indicated that 
she saw some benefits to, and she listed them, with regard to 
current law, Dodd-Frank, but she also saw some need for changes 
or reform or what have you in certain areas, and you went 
through some of those areas.
    But in listening to your testimony, Mr. Kelleher, it seems 
as though you are presenting us with an either-or situation, or 
a false choice situation. That is to say, either we have Dodd-
Frank as it is and as it is being implemented by the 
regulators, or we have no regulation whatsoever.
    But I don't think there is anyone from either side of the 
aisle who has ever suggested that we have no regulation. I know 
it came as a surprise a week or so ago to Ranking Member Frank 
when we indicated that we on this side of the aisle actually 
put forth a proposal for regulation prior to Dodd-Frank being 
presented. So there are alternatives to it.
    Is it your position that the bill as written and as being 
implemented is without flaw, does not need change, that we 
should not be relying upon any empirical data, as Mr. 
Vanderslice and others here have indicated?
    Mr. Kelleher. Thank you for your question.
    Chairman Garrett. Sure.
    Mr. Kelleher. Nothing that comes out of a democratic 
process, I believe, is flawless. That is the nature of a 
democratic process. There are compromises that have to be made.
    The other important part of the democratic process that 
produced the Dodd-Frank law is that it was open to the public 
and it was considered for about 2 years before it was passed. 
In fairness, the industry had vast and multiple opportunities 
to participate and they have vast and multiple opportunities to 
participate in the rulemaking process.
    But instead of listening to what people say when they say 
they are for financial reform, let us look at what they do. Who 
is supporting funding for the regulators? Who is burying the 
regulators with paper? Who is saying, ``We are for financial 
reform,'' and yet criticizing it. So you are right--
    Chairman Garrett. So, reclaiming my time--
    Mr. Kelleher. --that is a theoretical possibility, but--
    Chairman Garrett. Right. Reclaiming my time, who is burying 
with paper, I guess, is one of the questions that we are asking 
here, is who is burying them with paper, in the sense that 
maybe there is just so much that we are asking the regulators 
to do that they can't find the proverbial needle in the 
haystack, and then what are the actual outcomes of that?
    Mr. Deutsch, in your testimony, you referenced a study by 
Mark Zandi. And I believe you said--correct me if I am wrong--
that in his study, the impact of all this, of the 
implementation of the regulations would raise mortgage costs 
for me and you, the average person, by between 100 and 400 
basis points, which means one to four points, basically. Right? 
Is that what the Zandi report said?
    Mr. Deutsch. The only technical clarification is that is 
just one aspect of Dodd-Frank, is the premium capture reserve 
account by itself--
    Chairman Garrett. We have asked the regulators who are 
inundated with all this: Is there anything that refutes the 
Zandi report? We haven't gotten an answer from them. Have you 
seen anything that refutes the Zandi report on this?
    Mr. Deutsch. Everything we have seen and every canvassing 
we have done with our members supports the analysis that 
mortgage rates would increase substantially anywhere from one 
to four--
    Chairman Garrett. Okay, I appreciate that. All we go by is 
what we ask the regulator--not all, but what we go by. And they 
are not giving us anything to refute that.
    Now, Mr. Vanderslice, you raised an interesting point, and 
I have heard this before as far as on the commercial sector as 
far as opposed to, I am thinking about the residential area. 
And I have heard this before is that the market has shrunk and 
that there is how many trillions of refinance rollover?
    Mr. Vanderslice. In total debt, including CMBS, about $400 
billion per year over the next 5 years.
    Chairman Garrett. And without the securitization market 
coming back in, we can't throw this all back on to the banks. 
They can't pick it up.
    Mr. Vanderslice. Just as an example, the life insurance 
industry last year put out a record number of dollars, which 
was about $45 billion. So that was a record year for them.
    Chairman Garrett. Okay.
    Mr. Vanderslice. So our point in this is that you need 
everybody. You need portfolio lenders. You need securitizers. 
But there is such a large number of rollovers coming that 
without a functioning SMBS market, the impending rollovers are 
adding up every day. The market today is relatively small.
    Chairman Garrett. So this is one where the issue of Ms. 
Simpson's comment, penny wise or pound foolish on this 
situation--we want to be penny wise, but the implication of it 
is that if we don't get it right, what you are telling us is 
that you could see a dramatic downturn in the commercial 
marketplace.
    And that would do what to the economy, what to jobs, and 
the rest?
    Mr. Vanderslice. Yes, commercial real estate is a very 
large part of the economy. Without building owners, they don't 
have the ability to attract tenants, they can't do tenant 
improvement--
    Chairman Garrett. And since my time is over, can we simply 
address this issue by making sure that the rule of Dodd-Frank 
applies to the area where it is intended to apply, and in this 
area it was not intended to apply--
    Mr. Vanderslice. That is correct. PCCRA is a late addition 
and it is the one big impediment. CREFC again, recognizes the 
important of many of the aspects of Dodd-Frank, including risk 
retention, increased disclosure, transparency--PCCRA is a 
major, major bump in the road.
    Chairman Garrett. I think I understand you on that. Great. 
Thank you, everyone.
    The gentlelady from California, Ms. Waters, is recognized 
for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. I would like 
to thank all of our presenters here today. I have listened very 
carefully to all of the testimony. And first, I want to say to 
Mr. Kelleher that I appreciate your defining what took place 
with the economic crisis that was created in this country 
basically initiated by Wall Street and all that was going on. 
And I appreciate your passion as you describe the crisis.
    As we all know, the fallout from that crisis continues. As 
I travel throughout this country, with these boarded-up 
neighborhoods, and these foreclosures, and families who have 
been literally put at great risk because of all of this, what 
you describe is absolutely true.
    And I think no one on this panel can disagree with what you 
described as the economic crisis that put this country at great 
risk. Having said that, Dodd-Frank was a tremendous effort to 
try and deal with this crisis that was created.
    And Dodd-Frank was modified, some of the ideals in Dodd-
Frank were eliminated during the conference committee. 
Everybody tried to do something about strengthening our 
regulation and oversight without destroying the markets that so 
many people are here to talk about have been negatively 
impacted.
    Having said that, in the 2 years since Dodd-Frank passed, 
we have seen the robo-signing of foreclosure documents, the 
implosion of MF Global, the losses of the London Whale, the 
bungling of the Facebook initial public offering, the LIBOR 
manipulation scandal, and we learned just yesterday about 
another case of missing customer funds at a futures brokerage. 
And this is to name just a few of the many episodes.
    So, this continues. Some of us have tried very hard to 
understand what is being said about the risk to the market that 
supposedly are created by Dodd-Frank. To that end, I, against 
my better judgment, supported the Republicans JOBS program 
where we made it easier for companies to raise capital, these 
IPOs.
    I supported crowdfunding, in an effort to support the small 
banks. And of course, I supported rolling back some of the 
protections for investors in all of this in an attempt to try 
and send a signal that we are cooperating in whatever way we 
can to do modifications and innovations because we think that 
perhaps there is some room to compromise.
    However, what we see is a continued effort to undermine 
Dodd-Frank, whether it is defunding the regulators, repealing 
the Orderly Liquidation Authority, repealing the risk 
retention, delaying derivatives regulations for 2 years, 
repealing the liability for credit rating agencies, prohibiting 
the SEC regulation of international swaps, and on and on and 
on.
    We continue to get complaints about how harmful it is going 
to be to have transparency with the derivatives and on and on 
and on. Having said that, Mr. Deas, you represent the Chamber, 
and I guess you are also vice president and treasurer of the 
FMC Corporation, et cetera. Okay, so the Chamber has a lot of 
influences and power here. What is it you want us to do? Would 
you like us to get rid of Dodd-Frank? Do you have some better 
ideas about how to protect the investors and the customers? 
What is it you want this Congress to do?
    Mr. Deas. Thank you for that question, Ranking Member 
Waters.
    As I described in my testimony, I work for a leading 
manufacturing company, a 130-year-old American company, and we, 
like you, are very concerned about the disruptions that 
occurred in the financial markets in 2008.
    However, the regulations as they are being implemented are 
affecting Main Street companies, end-users, for instance of 
derivatives like FMC, and other members of the National 
Association of Corporate Treasurers, and yet we comprise less 
than 10 percent of the over-the-counter derivatives trading 
that goes on, and we were not engaged in the systemically risky 
activities that some of those who caused this problem were.
    Main Street companies weren't writing naked credit default 
swaps. We were using derivatives to hedge future purchases of 
natural gas used in manufacturing, exposures to changes in 
interest rates, hedging foreign exchange rates on our exports, 
and other activities like that.
    What we have said is that the effect of these regulations 
is now coming to Main Street businesses and you yourself 
supported the legislation to clarify the margining exemption 
for end-user companies from having to post that margin, which 
would be a direct subtraction from funds that we could 
otherwise invest in our business.
    And I believe you, yourself, also supported the bill to 
correct the inter-affiliate issue where derivative transactions 
between companies within the same group are being regulated as 
though they are between two banks.
    So, I thank you for those efforts, and that is what we 
want, an exemption for end-user companies from the broad sweep 
of these regulations that we believe will be to the detriment 
of American business and job creation.
    Ms. Waters. Thank you very much.
    So, I suppose what you are saying to me is that you do 
recognize that there are companies that were reckless and who 
put this country at risk and we should have tougher regulations 
and Dodd-Frank does do some of that?
    Is that what you agree to?
    Mr. Schweikert [presiding]. You are way over time, so--
    Ms. Waters. Okay.
    Mr. Schweikert. I will give you time for a quick response, 
and then I need to go on to my chairman, because I don't want 
to make my chairman mad.
    Mr. Deas. I agree there were problems in 2008, but the 
concern for these problems as they affect American business and 
Market Street companies like ours is that the cure is worse 
than the problem, from our perspective.
    Mr. Schweikert. Okay, with that, thank you, Ranking Member 
Waters.
    Chairman Bachus?
    Chairman Bachus. Thank you, and you didn't make me mad. Ms. 
Waters and Mr. Kelleher have given me a headache, but other 
than that, I think I am okay.
    Mr. Kelleher, listening to your opening statement, and 
reading it last night, it kind of was deja vu, because you were 
in Senate leadership when we were considering Dodd-Frank and we 
were sort of having some of the same debates that we are having 
now. And I noticed that you, I think, continued to paint all of 
Wall Street as the cause of the greatest depression since--I 
think it was a depression, probably still is a recession--but 
Mr. Deas said that 90 percent of Dodd-Frank affects Main 
Street, the operation of every community bank and credit union 
in the country. But, let us consider--and I know this Mr. 
Garrett, we were kind of having the same thought when you said 
that the regulators were buried in paper. The three of us agree 
on that. They are struggling to write rules. It is just a 
daunting path. But I would submit to you that, that paper is a 
result of Dodd-Frank. That is why it is there.
    And I think you have to admit that even before Dodd-Frank, 
they weren't enforcing the rules that they had. Now, Ms. Waters 
has mentioned MF Global. She mentioned, I think it is PFGBest, 
which failed yesterday. She mentioned LIBOR. None of that is 
due to Dodd-Frank. That is just pure, out and out accounting 
fraud. That is segregation of customer funds.
    For 70 years, we have had rules against that. The most 
basic rule in finance is you segregate funds, you don't mix 
funds or do what PFGBest did, representing that they had $200 
million in an account, and they only had $5 million. Now how in 
the world did the CFPB miss that? How in the world did that go 
over? It is like Madoff claiming all this money was there.
    You mentioned subprime lending and securitization. In 2005, 
I proposed legislation on subprime lending, and I wrote the 
ranking member and said, ``We need to move a bill.'' And 
actually, I think he agreed to 90 percent, but then litigation 
attorneys objected to some of what we wanted to put in as far 
as a safe harbor.
    I know you were a litigation attorney. I think the Senate 
leadership said that was a nonstarter. But we did pass a 
subprime lending bill before Dodd-Frank, and I think at least 
everyone said that would stop most of that. I want to introduce 
on the LIBOR issue, Ms. Waters--this is an article in Reuters I 
think from this morning or last night. The regulators, since 
2007, knew there were problems with LIBOR. In fact, Barclay's 
came to them in 2008 and said, ``We think other institutions 
are misrepresenting their costs.''
    And it is affecting our ability to operate. The Fed 
actually suggested reforms in 2008. Secretary Geithner--he is 
now the Secretary of the Treasury, as we all know, but he was 
the head of the New York Fed at that time--actually scheduled a 
meeting in 2008 and it said the purpose was fixing LIBOR. But 
no one ever--they knew there was a problem. People came to them 
and said there was a problem. They didn't do anything about it. 
MF Global, now I don't know how in the world people can equate 
stealing $300 million worth of clients' money, customer money, 
with JPMorgan Chase, a hedging operation that lost their own 
money.
    Isn't there a difference in our right to hedge our own 
money and lose money? And investment banking is inherently 
risky. All JPMorgan did was took a risk and they lost on that 
risk. But even if you go back the last 2 years and you take all 
their hedging operations, they made $40-something billion just 
in the last 2 years. So suddenly, they lose $2 billion, and 
somebody jumps up and equates that to misconduct?
    Mr. Lynch. Will the gentleman yield?
    Chairman Bachus. I will not, but let me--surely--
    Mr. Lynch. It is not $2 billion. It is not $2 billion 
anymore.
    Chairman Bachus. Well, $7 billion. Let us say $7 billion.
    You are still 30--
    Mr. Lynch. Let us say $9 billion. We had the guy in last 
week.
    Chairman Bachus. The gentleman is not in order. This idea 
that you are going to go in and micromanage every company and 
say that every investment they make has to make money is a 
fool's errand. There are investments made every day. Loans are 
made every day that aren't going to be paid back. But surely, 
we can all agree that stealing customers' money or depositors' 
money, for example, MF Global--surely everybody on this 
committee thinks that is a worse situation than JPMorgan. And 
we have had three or four hearings on JPMorgan, and we had one 
on MF Global.
    And here you have a company that misrepresents and said 
$200 million worth of customer money was in a bank account and 
there was only $5 million. Now I submit to you that we would 
better enforce the good old accounting rules, fraud, criminal 
conduct. But they hadn't even shown that they can invest when 
someone comes to the Fed and says we have a problem, that 
people are misrepresenting things, or it it takes them 4 or 5 
years to even discover there is a problem, when they were told 
about the problem?
    People went to the SEC and complained about Madoff for 
years. And let me close by saying that you say--and this 
argument we had back, I remember the same argument when we 
passed Dodd-Frank. You all argued against a cost-benefit 
analysis. And I will give you this, you are consistent. You say 
today that imposing our burdens on cost-benefit analysis is a 
tactic without merit. So asking what the cost is as opposed to 
the benefit, you actually believe is without merit? Do you 
really believe that?
    Mr. Kelleher. As stated in my testimony, it spells out how 
cost-benefit analysis can be done right, consistent with the 
statute and how it is being used by those to defeat financial 
reform. And that is the distinction. That is a misquote of my 
testimony--
    Chairman Bachus. You just think that our motive is wrong--
    Mr. Kelleher. No, it is not that. It is how you go about it 
and what goal one is trying to accomplish. We spell that out 
quite clearly. We have also spelled it out in opposition to the 
ICI, the Chamber, and SIFMA in the litigation. But if I might 
also say--
    Chairman Bachus. Well, you all voted--
    Mr. Kelleher. I did not--
    Chairman Bachus. You all opposed cost-benefit--
    Mr. Kelleher. I did not equate MF Global with JPMorgan.
    Chairman Bachus. Okay.
    Mr. Kelleher. MF Global is not systemically significant. 
JPMorgan is backed up by the U.S. taxpayers and the Federal 
safety net. And everybody who cares about taxpayers better care 
about JPMorgan, and--
    Chairman Bachus. No client, no customer, no depositor, no 
taxpayer is threatened by JPMorgan--
    Mr. Kelleher. That is not true.
    Mr. Schweikert. Gentlemen?
    Mr. Kelleher. Can I just very quickly respond--
    Mr. Schweikert. No. No.
    Mr. Kelleher. --to a couple of points--
    Mr. Schweikert. --no--
    Mr. Kelleher. One of which is why the regulators didn't--
    Mr. Schweikert. Sir?
    Why don't the regulators enforce the rules they have?
    Mr. Kelleher. --defunded.
    Ms. Waters. Unanimous consent, please, Mr. Chairman, to 
allow the gentleman to respond?
    Mr. Schweikert. Actually, no. I am going to be the one to 
object. Because I have been trying to be very kind to both 
sides here, particularly--
    Chairman Bachus. And Ms. Waters let me say this, we could 
go on for 2 hours--
    Mr. Schweikert. No, I understand.
    Chairman Bachus. --and I don't think we are ever going to 
agree.
    Mr. Schweikert. No.
    Ms. Waters. Regular order, Mr. Chairman, regular order.
    Mr. Schweikert. Yes, Mr. Chairman, did you have a document 
you wanted to put into--
    Chairman Bachus. Yes, I want to introduce this report in 
Reuters that our regulators knew about this LIBOR--
    Ms. Waters. Regular order? Mr. Chairman, regular order?
    Mr. Schweikert. Mr. Chairman, without objection, it is so 
ordered.
    Chairman Bachus. Yes, and that MF Global--
    Ms. Waters. Regular order, Mr. Chairman? Regular order?
    Chairman Bachus. --and that the regulators were on the 
scene for 5 years and never discovered it.
    Mr. Schweikert. Thank you. It is so ordered.
    Mr. Hinojosa?
    Mr. Hinojosa. Thank you, Chairman Schweikert, and Ranking 
Member Waters. As we approach the 2-year anniversary of the 
passing of the Dodd-Frank Act, my colleagues on the other side 
of the aisle are continually holding these hearings, not on 
proposed legislation, but to attack the Act and to make a 
political point. Meanwhile, new cracks in Wall Street are 
revealing just how important it is for Congress to fund the 
regulators at appropriate levels and to encourage them to 
propose and finalize the remaining rules under the Act.
    In the last year, we have seen high-profile Wall Street 
players being convicted of insider trading. JPMorgan 
experienced an incredible loss of an amount up to $9 billion as 
a result of exotic credit default swaps. And most recently, we 
have learned of the involvement of Barclay's and other banks in 
the LIBOR rate-fixing scandal. Just last month, JPMorgan's CEO 
Mr. Dimon testified before this committee, and in a response to 
my question about a need to re-evaluate Wall Street's culture, 
he told us that there are people you can trust on Wall Street 
and not to paint every firm with the same brush.
    I wish he would have talked about the opportunities for 
culture change in an organization in response to crisis. As a 
former businessman, I can tell you that I understand that this 
is management 101. In comparison, many analysts are pointing to 
the culture at Barclay's and other global investment banks 
overall as a systemic culprit in the LIBOR fixing scandal. And 
yet, here we are discussing how Dodd-Frank is hurting our 
investment banks. If anything, the recent events on Wall Street 
and in London should encourage us to press ahead with 
finalizing the rules under the Dodd-Frank Act.
    Just like any large and important bill in our Nation's 
history, this Act too shall be fine-tuned and refined over 
time. And I have no problem with hearing about these tweaks and 
other legitimate issues. However, simply attacking Dodd-Frank 
as a whole without discussing new legislation comes across as 
overtly political and completely unproductive. That being said, 
I will ask my direct question to Ms. Simpson. Title VII of the 
Act will place reforms to bring transparency, accountability, 
and strong stability to the OTC derivatives marketplace. Do you 
agree that the changes in Title VII will bring about this 
transparency, accountability, and stability that I am talking 
about?
    Ms. Simpson. Thank you, sir. Yes, we support the regulation 
of derivatives, and I should also say that CalPERS as an 
investor, makes extensive use of these instruments. In the 
letter which is attached to our testimony, we do explain that 
the principle of regulating derivatives is extremely important. 
But we accept as a player in the market, a market actor, that 
there will be some additional costs. For us, those costs are an 
investment in safety and soundness and we think that there is 
overall going to be systemic benefit to us as an investor. So 
we applaud the intent of Title VII and we also realize that we 
must not let the perfect be the enemy of the good, and that 
wrangling over the detail and delaying implementation is simply 
not a good strategy.
    We want regulators and market participants to get around 
the table, roll up their sleeves, and make sure that these 
rules are put on the books. There are some imperfections, but 
that is in the nature of making legislation, as in the making 
of sausage, as someone once said. But we do need to get these 
rules on the books. We mustn't delay, it is far too important 
tor the beneficiaries for whom we invest. Thank you.
    Mr. Hinojosa. Mr. Kelleher, I also appreciate your passion 
in your testimony. You remind me of former Senator Kennedy.
    Tell me, what can Congress do to get all the banks, so that 
we don't have things like today's New York Times--or yesterday, 
Monday, the July 9th New York Times which says that big banks 
face the fallout from the global investigation into interest 
rate manipulation? American and British lawmakers are 
scrutinizing regulators who failed to take action that might 
have prevented years of illegal activity.
    Mr. Kelleher. Thank you for the question, and thank you for 
the compliment. I appreciate it.
    One of the most important things that can be done very 
quickly by the United States Congress is to fund the regulators 
adequately. Wall Street often--and it is too broad, it doesn't 
apply to everybody--is a high-crime area. Deregulation took all 
the cops off the beat. You added the responsibilities to the 
regulators. The regulators are the Wall Street policemen. You 
added massive responsibilities--
    Mr. Hinojosa. Time is running out on us, and I agree with 
you. Did you know that we need 1,200 people working in that 
Bureau, and we only have 800?
    Mr. Kelleher. Yes, and they have no IT. It is an unfair 
fight. And the Street is constantly overwhelming them, knowing 
that they don't have the personnel, the resources or the 
technology to compete. It is an unfair fight.
    People who say they are for financial reform are not for 
financial reform if they do not vote for big increases for 
these regulators. They are voting for Wall Street profits, not 
taxpayer pockets.
    Mr. Hinojosa. I agree with you 100 percent.
    And I yield back.
    Mr. Schweikert. Thank you.
    Mr. Neugebauer?
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. Deutsch, I have been kind of watching the 
securitization markets a little bit since the 2008 period, and 
it appears that, for example, in the automobiles and credit 
cards and some of those areas, the securitization market has in 
many cases returned to pre-2008 levels.
    The area where we are still seeing a huge amount of vacancy 
in private activity is obviously in the residential market 
area.
    Just to kind of set the framework here, is there a 
qualified automobile loan provision anywhere?
    Mr. Deutsch. In the risk retention proposals, there is a 
qualified auto loan exemption that would require at least a 20 
percent downpayment to buy a car. I am not aware of anybody who 
puts a 20 percent downpayment on a car. It is precisely the 
type of concern we have of a risk retention rule designed for 
mortgages that is being applied to autos, but in fact, it 
doesn't really apply to autos.
    Mr. Neugebauer. But basically these markets that I am 
talking about don't have all the onerous provisions that have 
been talked about for the residential market. So would you 
attribute the fact there is a lack of private activity to the 
fact that there is just a huge amount of uncertainty about 
market participants coming back into that?
    Mr. Deutsch. Yes, there are willing investors and willing 
issuers engaging in the auto market, $50 billion to $60 billion 
a year in transactions, to which Dodd-Frank rules don't 
currently apply. And I think the investors feel that they have 
appropriate protections to be able to purchase those securities 
and yield good returns.
    Mr. Neugebauer. One of the things that a lot of people 
talked about, and I think you brought up, or somebody brought 
up, is that the taxpayers have about $200 billion invested in 
Freddie and Fannie. And so the discussion has been, what do you 
replace Freddie and Fannie with? And obviously many of us think 
you replace it with private market activity.
    If there were not all of these uncertainties out there 
today, dealing with risk retention and Qualified Residential 
Mortgages and all of the things that are out there, do you 
believe that there would be more private market activity in the 
residential market area?
    Mr. Deutsch. I would say there would be an increase in 
private market activity, but without resolving Fannie and 
Freddie, sort of the big outstanding question, it is extremely 
difficult for private market participants to compete against an 
underpriced government guarantee.
    Mr. Neugebauer. It is because basically the risk premium 
that the private market wants versus these mortgages has been 
sanitized by the American taxpayers. It is hard for them to 
compete.
    If that playing field was leveled, if Freddie and Fannie, 
for example, were required to charge a higher guarantee fee, 
where then the marketplace can say, ``I think I would rather 
keep that return because I have looked at the integrity of 
those mortgages, rather than paying a 50, 70 basis point 
premium or giving up that much return.''
    Mr. Deutsch. Yes, I think there is no question that private 
market capital would return back to the mortgage sector. Rates 
would be higher, but that is I think the appropriate balance 
between risk and return in lending out money for people to take 
out mortgages.
    Mr. Neugebauer. It turns out we weren't pricing those 
mortgages at Freddie and Fannie appropriately anyway, because 
obviously the risk premium they were using turned out not to 
be--
    Mr. Deutsch. I think it is approximately $200 billion 
underpricing of the risk premium currently to the U.S. 
taxpayer.
    Mr. Neugebauer. Right.
    Mr. Bentsen, I know that your folks have looked at some of 
the securitization issues. What do you think is the bigger 
inhibitant?
    Mr. Bentsen. I agree with Mr. Deutsch in much of what he 
said. I think that for starters, the premium capture cash 
reserve is something that Congress, we believe, never intended 
in the original legislation. And as I said, both from our sell 
side and our buy side members, who don't always agree, both 
feel that this really takes the legs out from under the ability 
to really restart the securitization market, and in particular 
as it relates to the residential mortgage bond market.
    So for starters, we think that provision really ought to be 
greatly amended or taken out in order to make sure that we can 
attract private capital back into the securitization market.
    Mr. Neugebauer. Yes. I think I was a little perplexed, too, 
that we decided to use a premium from Freddie and Fannie to 
finance other activities rather than trying to use that to make 
the American taxpayers at least get some of their--
    Thank you, Mr. Chairman. I yield back.
    Mr. Schweikert. Thank you, Mr. Neugebauer.
    Mr. Lynch?
    Mr. Lynch. Thank you, Mr. Chairman. I appreciate it.
    Mr. Kelleher, you were interrupted. You had an exchange 
going with the full committee chairman. There was an analysis 
going on, a comparison going on between yourself and the full 
committee chairman about the difference between MF Global, 
which actually stole--well, took client money to fill a hole 
that it had and some losses it was generating.
    And the comparison was being made with Jamie Dimon and 
JPMorgan Chase where they simply--they were here a couple of 
weeks ago and we were asking them about their $2 billion loss, 
which was staggering at the time. And interestingly enough, my 
last question to Mr. Dimon was, there is word on the street 
that this loss could go to $5 billion.
    And the full committee chairman refused me the opportunity 
to get an answer. He said my time had expired and he excused 
Mr. Dimon from answering that question.
    And now we understand it could go as high as $9 billion. 
And you were talking about--you were trying to address the risk 
that the JPMorgan Chase instance presented, and I would like to 
give you some time to explain the danger there to the American 
taxpayer.
    Mr. Kelleher. Thank you, Congressman Lynch.
    There is no similarity between what happened at MF Global 
and JPMorgan Chase. In fact, MF Global should be the model for 
the future, which is to say, it is a company that made wild 
bets, it shouldn't have done it, it failed, it is in 
bankruptcy, it lost its money and people lost their jobs with 
no systemic risk at all.
    That will never happen if JPMorgan fails. If JPMorgan 
fails, it is going to be a systemic event that will be saved by 
the U.S. taxpayer. It has a balance sheet of $2.35 trillion. It 
has 270,000 employees across the world, thousands of legal 
entities, 550 subsidiaries, and on and on.
    And it is backed, therefore, by the U.S. taxpayer. It gets 
massive subsidies, both on the FDIC side and the Fed side. So 
the U.S. taxpayer is underpinning JPMorgan Chase and the rest 
of the too-big-to-fail banks.
    What JPMorgan Chase did in the so-called London Whale 
splash is it is reported to have bet over $100 billion in 
exotic, illiquid, complex derivatives, intending to make a lot 
of money. It didn't make a lot of money; it is losing money. 
And it is locked into those investments and can't get out.
    It is a classic example of what banks backed up by the U.S. 
taxpayer should not be doing. It is also a classic example of 
what they did before the crisis, where they lost tons and tons 
of money.
    And the chairman mentioned, by the way, why should we care? 
That operation has made $40 billion or $50 billion over time. 
We should care because they are claiming falsely that it is 
hedging. Hedging doesn't make money. Hedging should have 
offsetting gains and losses. That is not what they are doing. 
They are doing proprietary trading under the guise of hedging, 
which is what everybody here was worried about when the Volcker 
Rule was put into place to stop proprietary trading, which 
contributed significantly to the crisis and the need for 
taxpayer bailouts in 2008.
    Mr. Lynch. Very good.
    I do see the comparison here. I remember I was on this 
committee back in 2007-2008 when this whole crisis evolved, and 
I remember one of the first events that we had, we had the 
failure of the Bear Stearns funds, but I remember distinctly 
the impact on Merrill Lynch. And at the time the CEO, whose 
name was Stanley O'Neal, and he came out and he did a press 
conference and he was reporting $2 billion in losses, $2.3 
billion, something like that, $2.3 billion in losses of Merrill 
Lynch.
    But he reassured people that this was well under control. 
But then 6 days later, he had to come out again, and he said, 
``Actually, our losses are $7.3 billion.'' And, embarrassingly, 
he again said, ``We have things under control.'' And then, 
about 2 weeks after that, he had to come back and say, ``We 
actually lost $11 billion.'' At that point, he was fired.
    Now, the problem there is because these structured products 
are so complex he didn't know what they lost. These folks who 
were supposed to be the smartest, it was so opaque, and so 
complex that they didn't know what they lost.
    And that is what Dodd-Frank is trying to get at with our 
transparency requirements, with the reporting requirements, to 
allow folks like Ms. Simpson over at CalPERS to know what those 
pension funds are investing in, to know what the counterparty 
exposure is, to have some transparency, to make sure that 
people have skin in the game and that there is retained capital 
there to address some losses if they do occur.
    And so it doesn't have to be this way, where you folks 
defend the banks and anything they want to do, and then folks 
try to shackle, I guess, legitimate business practice. I think 
there is an opportunity here to actually protect the taxpayer.
    Ms. Simpson, could you just use the last 45 seconds here to 
talk about the special danger to, I think, vulnerable parties, 
especially vulnerable parties like pension funds, if we were to 
go back to the way things were before Dodd-Frank?
    Mr. Schweikert. Ms. Simpson, I will ask you to go quickly, 
and pull the microphone close.
    Ms. Simpson. Yes, thank you.
    Mr. Lynch. Thank you, Mr. Chairman.
    Ms. Simpson. We simply cannot afford another crisis. In the 
worst dark days of the most recent crisis, CalPERS was $70 
billion down. Now, we have grown our way back to close to where 
we were, but it is simply not achievable to earn rates of 
return that would plug that gap. So these reforms for us are 
absolutely system critical to long-term sustainability.
    Mr. Lynch. Thank you very much. I yield back.
    And I thank the gentleman for his indulgence.
    Mr. Schweikert. Thank you, Mr. Lynch.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    I know that the study by Mark Zandi of Moody Analytics has 
already been brought up and discussed, but I would like to dig 
a little deeper into this matter. I, myself, have not seen the 
study. I do know Mr. Zandi is a frequently cited economist, 
particularly by my colleagues on the other side of the aisle.
    Mr. Bentsen and Mr. Deutsch, I think you both alluded to 
this study, so I assume perhaps you have looked into it more 
deeply. But as I understand it, and I guess, Mr. Deutsch, I am 
reading from your testimony, that the premium capture cash 
reserve account that the rules promulgated under Dodd-Frank, 
that according to Mark Zandi, this could increase mortgage 
interest rates 1 to 4 percentage points; 100 to 400 basis 
points.
    The last time I looked, I believe 30-year fixed-rate 
mortgages are going for roughly 3.75 percent. So is it a fair 
assessment to say that Dodd-Frank has the potential to double 
mortgage interest rates by the premium capture cash reserve 
account alone?
    Mr. Deutsch?
    Mr. Deutsch. I guess my response is that just one provision 
of Dodd-Frank could double the interest rate. If you add all 
the provisions relative to Dodd-Frank, it would be well more 
than that.
    Mr. Hensarling. Staggering. Have you seen any other 
studies? And so, again, this is just one provision of Dodd-
Frank, cumulative impact.
    I believe also you mentioned in your testimony about the 
Qualified Mortgage; that due to a subjective standard that will 
be promulgated by the CBPB, which frankly puts the capital 
``S'' in subjectivity, as we all know. But you cite, I believe, 
another study that says that the lawsuits arising from that 
could cost anywhere from $70,000 to $100,000.
    Have you calculated what that provision alone could do to 
interest rates? Do you know the answer to that?
    Mr. Deutsch. I think a lot of our members have tried to 
calculate just how much the costs would be. And they have all 
come to the conclusion that it just will be too prohibitively 
high to be able to engage in any mortgage lending even close to 
the line of what a nonqualified mortgage is. So they simply 
will not be able to originate mortgages even close to that line 
of what a Qualified Mortgage would be.
    Mr. Hensarling. Mr. Bentsen, again, you cited the Zandi 
study as well. Could you elaborate on its findings for your 
organization?
    Mr. Bentsen. I agree with Mr. Deutsch that just the premium 
recapture provision alone changes the economics so 
significantly that it could have an impact like Zandi and his 
colleague found in the Moody's study. And so to his point, that 
is just one provision.
    And I think it comes down the points that I made earlier, 
it is important how these rules are written and how they are 
implemented. It is important to consider the costs associated 
with how the rules are proposed. It may seem like mountains of 
paper, but that is known as the Administrative Procedures Act, 
and that is the whole process which Congress established long 
ago to comment as rules are written.
    That is why, like the Zandi study; like the Oliver Wyman 
study as it relates to corporate bond issuance and the impact 
that the Volcker Rule as proposed could have; like the Federal 
Reserve's proposal for single counterparty credit limits and 
the impact that could have--we have to look at then in the 
totality and what the costs will be to the cost of capital and 
the cost of credit. And beyond any reasonable doubt, that will 
have an impact on economic activity.
    Mr. Hensarling. Mr. Deutsch, on page six of your testimony, 
you state that the ABS market briefly ground to a halt in 
December of 2010 because of investor concerns over the Orderly 
Liquidation Authority, and only resumed due to a near-term 
patch in the form of an FDIC General Counsel's letter. These 
types of risk will be priced into the asset-backed security 
market, resulting in higher costs for consumers and businesses.
    Could you elaborate, please?
    Mr. Deutsch. Yes, the Orderly Liquidation Authority created 
a provision that allows the FDIC effectively to step in for 
nonbank financial companies. When asset-backed securities are 
issued, the auto companies create and hold title effectively to 
the car loan and they will sell off the asset-backed 
securities.
    Investors began to realize, and it took them 6 months to 
actually figure out the complex weave of the Dodd-Frank 
regulation, that in fact under the Orderly Liquidation 
Authority, the FDIC may be able to come in and take the 
underlying notes to the auto securitization, in effect, 
eliminating the securitization part of the securitization, 
which would leave an investor unprotected.
    Ultimately, the FDIC had to step in and patch that, to say, 
``No, no, we won't take that in.'' But Dodd-Frank, on its very 
face, did allow that, and ultimately the ABS markets, much like 
under the 436(g) scenario in July of 2010, had to shut down for 
a brief period of time until the FDIC resolved that.
    Mr. Hensarling. I see my time has expired.
    Mr. Chairman, 2,000 pages and so little time. Thank you.
    Mr. Schweikert. Thank you.
    Mr. Sherman?
    Mr. Sherman. Thank you.
    I don't know who to address this question to, but perhaps 
the worst day in Congress I have had, and for many others, is 
when the big banks came to us and said, ``If you don't bail us 
out, we are going to take the whole economy down with us.''
    One argument there is, is maybe no one bank should be big 
enough to take the whole economy down. Another argument is 
maybe we should have higher capital requirements. The third 
approach is maybe we should just ignore the problem until it 
comes up again.
    Assuming we want to create a circumstance where, at least 
as long as I serve in Congress, which some would argue will 
only be a few months, but others might think longer, that we 
are not going to have a situation where a bank is able to call 
the Treasury and claim they are going to take the whole economy 
down with them, unless we bail them out.
    Mr. Bentsen, you have handled tougher questions before in 
our time together. I don't know if you have a comment or 
whether anybody else does.
    Mr. Bentsen. Mr. Sherman, I guess I would make a couple of 
comments. Dodd-Frank did establish in Title I and Title II 
provisions that really address the first two points that you 
make, and in terms of establishing a systemic risk regulator 
statutorily over large and even not-so-large bank holding 
companies, and then establishing the authority to impose bank-
like prudential standards on designated nonbank entities.
    In addition--
    Mr. Sherman. So if those powers are actually used, you 
think that insulates us?
    Mr. Bentsen. They are used by law for bank holding 
companies with more than $50 billion in assets. But if I may, 
Mr. Sherman, it is a very important point. The law also 
established the Orderly Liquidation Authority to wind down 
failing systemic entities. We supported that. We think that is 
a good thing to mitigate systemic risk.
    And importantly, the Act precludes--it repealed a provision 
under the Federal Reserve Act that precludes the Federal 
Reserve, the government, from stepping in to bail out any 
failing institution.
    And the last thing I would make very clear is that we can't 
ignore Basel 2.5 and Basel III, the international capital 
accords of which the United States is a party to and which 
firms both in the United States and non-U.S. firms operating in 
the United States have raised tremendous amounts of capital, 
high-quality capital, far greater than where they were before 
in meeting the Basel III requirements which haven't even taken 
effect yet.
    Mr. Sherman. I am sure the shareholders of JPMorgan are 
happy that the institution was well-capitalized, and I thank 
you for that answer. Dodd-Frank has certainly done a lot to 
insulate us, but the amount of that insulation will depend in 
large part on how assertive the regulators are in using the 
enormous power that we have given them.
    Mr. Vanderslice, I have heard from banks in my district 
that the regulators get anxious about local and regional bank 
exposure to any kind of commercial property. Do you have a 
perspective on this?
    Mr. Vanderslice. I do. And again, I am here speaking on 
behalf of CREFC, not my employer. But as far as the bank 
exposure to commercial real estate, I think Basel III, which is 
another topic that has not been brought up, basically now 
applies to the smaller community banks as well. So the 
increased capital, considerations that those banks will have to 
have in place again kind of constrains the amount of money that 
would at least go into commercial real estate.
    You really have two issues. You have a legacy issue on the 
balance sheets of a lot of banks and regional banks, small 
lenders. And also, you have the wave of maturities coming up. 
So you take those two things into account.
    And, we think any type of regulation should be supportive 
of, kind of see that picture of loans coming due, as well as 
increased capital considerations, and kind of take the whole 
picture into account.
    Mr. Sherman. Do you find that banks are under pressure not 
to simply renew loans--you know these are mostly 5-year loans 
when they come due when of course foreclosing on the property 
exposes the bank to perhaps even more risk?
    Mr. Vanderslice. Most of what I am involved in is CMBS, 
which is effectively where the loans are sold into a trust, 
there is a third party servicer that is brought in. So those 
servicers, when a loan reaches its maturity, they go through a 
series of scenarios whether it is in the best interest of the 
trust that they service to extend or to foreclose or a lot of 
times, it is a middle ground where there is a partial 
discounted pay off as it is called, and then a restructured 
loan.
    So there are a variety of different exits, as it is called. 
So there is no one solution that fits all.
    Mr. Sherman. Thank you.
    Mr. Schweikert. Thank you.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    I have a question for Mr. Lemke regarding money market 
funds, and of course, any member of the panel is welcome to 
respond, as well.
    It has been widely reported that the SEC is contemplating 
new regulations for money market funds, and there are several 
members who have expressed concerns about new regulations when 
only recently new reforms were implemented.
    So I was wondering if you could comment on those reforms, 
and specifically how you think reforms are working out?
    Mr. Lemke. Absolutely, and the industry agrees very much 
that these reforms that were adopted in 2010 need to be given 
an opportunity to work.
    During last year when we had difficulties in Europe, the 
reforms actually worked very well. We had no major issues with 
money market funds, and we believe those reforms were more than 
adequate to deal with the issues that came up with money market 
funds during the crisis.
    In particular, the proposals that the SEC is reportedly 
talking about while we always support solid regulation in our 
industry, these regulation can't destroy the fundamental 
structure of a money market fund. And what we have been hearing 
from our clients, both in the institutional world and in the 
retail world, is they are not in favor of floating NAV funds, 
which is one of the options that is being proposed.
    And the second option being talked about is redemption fees 
and capital hold backs, both of which will be unwieldy and make 
the product unworkable. So we are hoping the SEC comes out with 
proposals that maintain the integrity of the product that is so 
popular with many investors and also is a great source of 
funding for so many sources within the country.
    Mr. Kelleher. If I may add, we should remember though that 
during the fall of 2008, one of the biggest outlays of the U.S. 
taxpayers and the government to stop the financial crisis from 
actually leading to a collapse of the financial system and a 
second great depression, was the guarantee that the U.S. 
Government did to put the full faith and credit of the U.S. 
Government behind the $3.8 trillion money market fund at the 
time.
    It was, I believe, the single largest U.S. Government 
guarantee of a private activity in the history of the country. 
So I am not disagreeing with Mr. Lemke; I am just saying that 
it is overwhelmingly important that we get the rules right. 
Because contagion and the domino effect run right through the 
money market funds.
    It is fast money, and it moves fast. If we don't build the 
protections around that right, the U.S. taxpayer is going to be 
on the hook again.
    Mr. Lemke. But it is also important, Dennis, to note that 
there were no claims made under that protection, and in fact 
the government made $1.2 million of premiums from the industry.
    Mr. Kelleher. The government actually did not make $1.2 
million on a risk-adjusted basis.
    Mr. Lemke. --the question for--
    Mr. Kelleher. There were no claims because the guarantee 
wasn't there.
    Mr. Fitzpatrick. Reclaimining my time, Ms. Simpson, do you 
think that banks will impose Volcker Rule compliance costs? 
Will that ultimately be borne by customers? Who is going to 
bear the brunt and the cost of compliance of the Volcker Rule?
    Ms. Simpson. Thank you.
    The cost will ultimately be borne by shareholders. The 
important calculation here is about risk adjusted returns. And 
I think that the industry is going to be restructured by these 
rules, but it is going to be restructured for the safety and 
soundness of the market, which is why we support this.
    It is no good to any of this if we can run up high returns, 
running very high risks. So it is quite true and we have set 
this out in our accompanying letter on the Volcker Rule, that 
we anticipate that there will be an impact on liquidity, there 
will be an impact on profitability, but actually these are 
false returns if they are not underpinned by proper risk 
management and Volcker is actually going to help with that.
    There is no return without risk, but we need to have risks 
properly managed.
    Mr. Fitzpatrick. Ms. Simpson, are you familiar with Senator 
Franken's credit rating agency reform proposal, in the Senate?
    Ms. Simpson. Is this regarding the issue of pays model 
being rethought?
    Mr. Fitzpatrick. It is the Rolodex--the next credit rating 
agency that comes up would be assigned to do credit reviews of 
structured products.
    Ms. Simpson. Yes.
    Mr. Fitzpatrick. Does CalPERS support the Franken 
Amendment?
    Ms. Simpson. No, we do think the issue of pays model needs 
to be revisited because there is an inherent conflict of 
interest there, but we do think to have the Rolodex model isn't 
actually going to solve the problem.
    We want the reforms that have been promised to be put on 
the books. We think that is going to be very helpful, but there 
is something more flawed in the business model that needs to be 
addressed. So we would like an opportunity to get around the 
table with the industry and the regulators and try to solve 
that problem.
    Mr. Fitzpatrick. Okay. I yield back, Mr. Chairman, thank 
you.
    Mr. Schweikert. Thank you, Mr. Fitzpatrick.
    Ms. Moore?
    Ms. Moore. Thank you so much, Mr. Chairman.
    I would like to start out with Mr. Lemke and sort of follow 
up on what Representative Fitzpatrick was discussing to say I 
am very concerned about the floating NAV and so I want to start 
out by asking you sir, if the SEC and the FDIC and the Fed were 
concerned--if they were to promulgate rules that included the 
floating net asset values, and of course I think that would 
mean this money would flow out of those particular investments.
    Where do you think those funds would go? Do you think that 
they would go into less regulated or overseas instruments or 
vehicles?
    And if the industry is so opposed to the floating NAV, how 
do we address the concerns of the SEC and the Fed--I believe 
that Mr. Kelleher mentioned that we had full backing of the 
FDIC, and that is what stabilized the market at that time.
    So, how do we address the concerns of the SEC and the Fed?
    Mr. Lemke. We continue to believe that the 2010 amendments 
that the SEC put in place have already addressed the concerns 
with money market funds. Again, we had a highly extraordinary 
market crisis, a temporary fix was put in place--and we should 
point out that money market funds were one of the first 
financial institutions that suffered during the crisis because 
they invest in such short-term paper.
    They are much like a canary in a coal mine, the signal to 
the general market that problems were coming. We think that 
those issues have been addressed and--bring back the other 
issue with the SEC is that perhaps they are talking to 
different people, but what we are hearing from retail and 
institutional investors is they do not favor a floating NAV.
    It is highly complicated, it is going to make their lives 
far more difficult, and as we already know, money will leave 
money market funds and that is going to reduce opportunities 
for investors to get returns, but it is also going to reduce 
the market for corporations and State and local governments 
that need funding on a short-term basis to be able to operate 
their activities.
    Ms. Moore. So, what is your suggestion?
    Mr. Lemke. For?
    Ms. Moore. You believe it has already been done?
    Mr. Lemke. Yes, we do.
    Ms. Moore. And we just need more time to demonstrate that?
    Mr. Lemke. Yes, and the experience so far has been very 
positive that these reforms have worked.
    Ms. Moore. Mr. Kelleher, I see you are dying to respond to 
this question as well.
    Mr. Kelleher. One can't fairly say that the reforms since 
2010 have worked. We haven't had a crisis. We haven't had a 
run. And frankly, even today, what used to be the implicit 
guarantee behind the too-big-to-fail banks is now explicit.
    The U.S. Government is not going to allow a too-big-to-fail 
bank to fail today. It is why they get a funding advantage, a 
credit rating boost, and why they can compete unfairly against 
all the other banks and all the other institutions in the 
country.
    So, saying that the rules have worked well is to say 
nothing. The only time that we will know if the rules work is 
if we have another crisis, and believe me, we don't want one.
    But we need rules that work in a crisis when there is a 
real run. Mr. Lemke is exactly right, and spells out the 
problem well. Let me quote him, ``investing the money market 
funds in short-term paper, it is like the canary in the coal 
mine.'' He is right. It is the first money to run. And that is 
why we have to get that right, because that is almost like the 
light on the fuse, the end of which is the explosion and the 
collapse of the financial system.
    Ms. Moore. Thank you, Mr. Kelleher. I reclaim my time.
    You mentioned earlier in your testimony that you didn't 
think that Dodd-Frank was perfect, although we definitely need 
some kind of re-regulation.
    What unintended consequences if any do you see in Dodd-
Frank that we need to address? What areas of our work do we 
need to revisit?
    Mr. Kelleher. I think the regulators would disagree with 
you that Better Markets thinks Dodd-Frank was perfect, because 
we filed 100 comment letters and had dozens of meetings about 
how to change Dodd-Frank and implement the rules in a way that 
is faithful to the law.
    It is not perfect. It is not the law I would have written. 
So we haven't taken that position and no one would take that 
position. It is a product of democracy and it has pluses and 
minuses, but overall, it can work if people of good faith 
implement it.
    The Volcker Rule needs to be changed in some way so that it 
is clear and more faithful to the statute. The statute got it 
right, better in some ways than the Rule, but the Volcker Rule 
has to focus on compensation and focus on making sure the 
permitted activities of market making and hedging actually do 
those activities and don't become a vehicle for disguised prop-
trading. There are a whole variety of things in the derivatives 
area and in the too-big-to-fail area including putting in place 
the prudential standards under Section 165 at the Fed, 
including the Orderly Liquidation Authority and living wills.
    All of which we have recommended changes that be made in 
the rulemaking process. Because while there has been discussion 
earlier about the Orderly Liquidation Authority of the FDIC, 
that is at the end. It is as important to get the front-end 
regulation from the Fed and the Treasury to make sure that the 
living wills are in place and that these too-big-to-fail 
institutions can be taken down in an orderly fashion, which 
they cannot be today because we don't even have international 
agreements yet.
    So if you look at Lehman, Lehman would happen today just 
like it did in 2008. And if the government doesn't step in, 
then JPMorgan Chase, Goldman Sachs, Morgan Stanley and all the 
other too-big-to-fail banks would be bankrupt, as they would 
have been in 2008 but for the trillions of dollars the U.S. 
Government and U.S. taxpayers put behind them.
    So I think there are a lot of things that can be improved, 
and we have been arguing to improve them.
    Ms. Moore. Thank you. I yield back, Mr. Chairman.
    Mr. Schweikert. Thank you, Ms. Moore.
    Mr. Royce?
    Mr. Royce. Thank you.
    Mr. Kelleher, just going through some of the observations 
you made earlier about the side effects of Dodd-Frank in terms 
of the impact it does have on the larger institutions crowding 
out their smaller competitors, I think that this is one of the 
reasons why some of us have a problem with a strategy that 
ended with now several years after the crisis we now have 5 of 
the largest banks holding 52 percent of all U.S. banking 
industry assets, right?
    That is up sizably over the last couple of years, and that 
means exactly what you implied there, that the FDIC is right 
when they say that there is this huge basis point advantage, 
lower cost of lending, that goes to these large institutions. 
Why? Because, you are right, it is explicit now.
    And there are those economists who said all along that the 
problem in the system was that we were not requiring enough 
capital, and when we hit a storm or when the Fed got the 
interest rates wrong and created a bubble because we ran 
negative real interest rates for 4 years running, or all of the 
other errors that were made, arguably, in this whole scheme, 
that we would hit the skids and if these institutions weren't 
well-capitalized enough they wouldn't survive.
    The GSEs--and I know we have talked about this--were 
leveraged 100-1. The investment banks were allowed to leverage 
30-1. It should have been 10-1.
    So the question I really have for you is, to think that 
those regulators who so blatantly failed the last time around 
are going to be so prescient that they are going to be able to 
see this thing coming, that is not the way things work in 
financial calamity. That is why we require adequate capital, or 
should have. That is why, going forward, we should be requiring 
adequate capital.
    Because you presume that you can do something that I am not 
sure human beings can really do. Right?
    Mr. Kelleher. No.
    Mr. Royce. And I just throw that question out for you.
    Mr. Kelleher. Thank you. There is much that we agree on, 
but the one thing that is very important is that we learned, 
history teaches us after the Great Depression that there is no 
silver bullet for policing the financial industry. What you 
have to have is layers of protection.
    And history also teaches us that while capital is a 
convenient mechanism, it almost always fails, because it is 
risk-adjusted capital, it is easy to be gamed based on the 
assets and things, but it is a key, key--
    Mr. Royce. No, no, no, but if you do the leverage ratio, 
and if regulators can do one thing--and let us hope we can do 
that--manage to keep abreast of where that ratio is. That is 
where we were so far off the mark, right, 100-1 at the GSEs, 
30-1 for the investment banks, and that is with knowledge, that 
is with the regulators knowing that was the situation.
    If we are going to assume that you have special powers--
    Mr. Kelleher. No--
    Mr. Royce. --shouldn't we at least assume that you would be 
able to get to the bottom of a leverage ratio and enforce it? 
How do we do that? Because my concern is that all the other 
folderol that we have enacted has allowed the larger 
institutions now going forward because of that lower cost of 
borrowing to gobble up their smaller competitors and thereby to 
overleverage again.
    In other words, I am not sure we are out of the thicket. 
And I think to get back to the solution at hand, I would like 
to have you sort of just revisit this. I remember I was 
involved in the markup and I remember your engagement, too, on 
the Senate side. I just think we should rethink some of these 
premises. Do you know what I mean?
    Mr. Kelleher. Look, everything can be rethought and looked 
at again to make sure it works by people in good faith who 
believe fundamentally in financial reform, but I would say that 
there are too-big-to-fail banks which compete unfairly because 
of public subsidies and support that preexisted Dodd-Frank. And 
Dodd-Frank didn't create it and Dodd-Frank didn't even make it 
worse. The financial crisis did.
    But what is most important--
    Mr. Royce. No, but making it explicit did. I think you 
would concur--
    Mr. Kelleher. The U.S. Government did that, not Dodd-Frank.
    But more importantly, the point is, you are right. I don't 
presume anybody is prescient or fully capable. We need layers 
of protection--capital is one part of it, but multiple other 
layers are absolutely essential to protect the American 
taxpayer, our financial system and our economy from this ever 
happening to them again.
    Mr. Royce. Right. But remember one other thing: The largest 
institutions are now best positioned to absorb those regulatory 
costs, which--and my worry is with their competition, right? I 
am worried about the other financial institutions, the banks, 
the community banks.
    Mr. Kelleher. We want fair competition, too.
    Mr. Royce. See? And so, we have now layered on all of those 
costs that have so disadvantaged the competition, thus in some 
ways compounding the problem. That is why I would like to get 
us to see this from a different paradigm.
    Mr. Kelleher. 90 percent of Dodd-Frank is focused on 
systemically significant institutions, maybe even more--
    Mr. Royce. But not in terms of regulatory cost.
    Mr. Kelleher. Ultimately, it is really focused on 
systemically significant firms. So I think nobody has a bigger 
interest in reining in Wall Street than the other 99 percent of 
the banks. There are 7,500 banks in the United States. Only 20 
have assets more than $20 billion--$50 billion. Those 7,500 
banks have a huge interest in reining in Wall Street to 
eliminate that unfair competition and subsidy. I agree with 
that.
    Mr. Royce. Thank you, Mr. Chairman.
    Chairman Garrett. Thank you, Mr. Royce.
    Mr. Green?
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing. And if I may, Mr. Chairman, we have a witness 
who is from Houston who represented us in Congress, and I want 
to thank him for being here and thank you for the rich history 
that your family has in making Texas a better State and the 
country a better place. That, of course, is Mr. Bentsen.
    And I also thank you for your balanced approach. You have 
indicated that there are some things in Dodd-Frank that you 
have supported, but you do have some concerns with the Volcker 
Rule, and I share some of your concerns and look forward to 
working with you to see if we can come to some bipartisan 
solutions.
    Mr. Deutsch, how are you today?
    Mr. Deutsch. Doing great. Thank you, sir.
    Mr. Green. How many times have you appeared before the 
committee? This is just a matter of curiosity.
    Mr. Deutsch. I think we are in the range of 12 or 13 times.
    Mr. Green. You and I know each other fairly well. Welcome 
back.
    Mr. Deutsch. It is always great to answer questions from 
you.
    Mr. Green. Thank you very much.
    Mr. Deas, I think that you have, with your candor--and I 
appreciate candor--brought us to what I see as a crucial 
question. You have indicated that the cure is worse than the 
problem that we had. That was your comments as it relates to 
Dodd-Frank. I will give you a chance to amend. Do you agree 
with that statement, that the cure is worse than the problem?
    Mr. Deas. No, sir, I said that--what I meant to say--
    Mr. Green. All right.
    Mr. Deas. --what I believe I said was that the cure as it 
was applied to end-users and Main Street companies is worse 
than the disease.
    Mr. Green. So is it fair to say--thank you for the 
clarification--that you do not support the repeal of Dodd-
Frank?
    Mr. Deas. We have been working within the--
    Mr. Green. I am going to have to do something now. I hate 
to do this to you, but let me just ask you this, and I will 
extend this to everyone on the panel. Because I think that 
there is some confusion as to where people stand on this 
question of Dodd-Frank, and let us just go on the record, and 
let us understand that we have made prior statements and this 
is a time to be consistent with our prior statements.
    So if you are of the opinion that we should repeal Dodd-
Frank, kindly extend a hand into the air. If you are of the 
opinion we should repeal it. All right, I take it from the 
absence of hands, and I would like the record to reflect, that 
there is no one on the panel who desires to repeal Dodd-Frank.
    And that is a good thing, because, quite candidly, I think 
that it can be amended, it can be tweaked.
    Is there anyone who believes that any legislation of this 
magnitude has ever been developed that didn't have to be 
amended? If so, raise your hand. So we are in agreement, Dodd-
Frank is very much like any major legislation, you have it and 
then you have to work with it to tweak it and make it better.
    But I do want to go to Mr. Kelleher, and I hope I 
pronounced it correctly. If I did not, you will have the 
opportunity to correct me. But you were talking about what I am 
going to call the baby in the bathwater test. There are people 
who will say that there is a baby in the bathwater, but then 
they throw out everything, the baby and the bathwater.
    Recognizing that there is a baby in the bathwater, and then 
throwing out the baby, I am not sure that your actions are 
comporting with what you say. And this is what you brought up, 
sir.
    So I would like for you to continue your comments about 
people saying one thing and doing another as it relates to 
Dodd-Frank.
    Mr. Kelleher. I think the most important marker of whether 
or not people who claim they are for financial reform, people 
who claim that they want to protect the American taxpayer, the 
economy and the financial system, the marker is, are they 
voting for funding for the regulators or not?
    The regulators are so grossly underfunded, they don't have 
the manpower, personnel or IT capability, just technology, to 
keep up with the industry.
    So if people believe in financial reform, we need to put 
the cops back on the Wall Street beat, we need to make it a 
fair fight so that they have the ability to pass intelligent, 
robust, capable, proper rules that implement financial reform 
and regulate Wall Street in a smart way.
    That is what has to be done. Right now, they are just being 
pummeled. They are being criticized. They are being abused 
nonstop.
    And so anybody who says they are for financial reform but 
does not loudly, publicly, and often demand increased funding 
for the regulators, the CFTC and the SEC, then don't believe 
them when they say they are for financial reform. You cannot be 
for financial reform and not be for funding the regulators and 
putting the cops back on the beat. That is all there is to it. 
It is an either-or. Either you are going to protect Wall 
Street's profits or you are going to protect taxpayer pockets. 
That is the choice.
    Mr. Green. Thank you.
    And, Mr. Chairman, I yield back.
    Mr. Schweikert. Thank you, Mr. Green. Mr. Stivers?
    Mr. Stivers. Thank you, Mr. Chairman. Welcome to the 
committee everybody. And I am going to focus on probably the 
Volcker Rule. Maybe a little bit about money markets. A couple 
of my colleagues have talked about that. And then if I have 
time, I will ask some questions about risk retention. But I 
would like to start with the Volcker Rule and I would like to 
start with Mr. Bentsen. Can you tell me, you talked about the 
Wyman Study earlier and how it will affect capital markets. Can 
you talk about how the Volcker Rule might impact U.S. jobs and 
job creation?
    Mr. Bentsen. The Wyman Study found that in the case of 
corporate bond issuance--as I mentioned, the cost associated 
with that would have a net negative effect on corporate 
earnings. And so one could extrapolate from that obviously if 
you have a net negative effect on corporate earnings, that is 
going to impact capital investment or investment in plant and 
equipment and ultimately jobs by corporations. I think that the 
bigger question, or the bigger issue with Volcker is that it 
doesn't have to be that way. Now very clearly SIFMA was not 
supportive of Volcker when it was being considered. We were 
very upfront about that.
    It is the law of the land. But we believe the regulators 
have misinterpreted what Congress wrote in the statute and have 
actually come up with a proposed rule that is contrary to the 
statute, will impede traditional market-making activity and 
raise the cost of capital for--as virtually every commentator 
or certainly 90 percent of the commentators from buy side to 
sell side, to issuers, to foreign central banks, will raise the 
cost of capital which will have a negative economic impact.
    Mr. Stivers. And obviously, there will be some cost 
associated with that which could affect American jobs. Do you 
think anything in the Volcker Rule could encourage American 
companies to relocate jobs overseas? Or incentivize investors 
or firms to move operations to foreign jurisdictions?
    Mr. Bentsen. I think the best way I could answer that, 
Congressman, would be that if it has, as we believe--if the 
Rule proceeded as proposed, we believe it would have a very 
negative impact on U.S. financial markets. U.S. financial 
markets have been losing share of business in equities and the 
corporate bond market over time. Some of that is just a natural 
progression as other markets grow and develop. But I don't 
think we want to hasten that decline that would have an impact 
on U.S. corporations, small businesses and the like to access 
our capital markets.
    Mr. Stivers. Thanks. And other than this transaction-based 
approach, you actually suggested in your testimony that there 
is a better approach as opposed to looking at every individual 
transaction, maybe looking at the entire picture of what a firm 
is going as opposed to getting them concerned about every 
transaction. Do you want to talk any more about that?
    Mr. Bentsen. Absolutely. We think that there are a number 
of things that the regulators--and we suggested a number of 
things that the regulators could do and again we are not alone 
in this. The buy side has weighed in on this in addition to the 
sell side. We think first of all you need to reverse the 
negative presumption. Second of all, you need to move away from 
hard coated metrics and instead have supervisors work with the 
firms that they examine and allowing those firms to develop 
their own set of metrics and come up with their own compliance 
programs, similar to what is done in the anti money laundering 
program.
    And most of all, that the Rule recognized what Congress 
recognized in saying that customer focused business fits within 
the market making exemption and allows that to move forward. 
And so we think that nothing we have proposed takes away the 
authority of the examiner or the regulators to step in and tell 
a firm, we don't like what you are doing. But it does it in a 
way that we think doesn't impede the ability of firms to meet 
their market making commitment, provide liquidity to the 
markets as Congress explicitly provided for in the statute.
    Mr. Stivers. Thank you. And Mr. Deas, can you talk about 
the impact of the Volcker Rule on Main Street? Your testimony 
talked about what it would do and what it would cost companies 
on Main Street in additional cost of credit. But what does that 
mean to jobs? And what does that mean to American 
competitiveness?
    Mr. Deas. The example I used, that on our most recent bond 
issue of $300 million, we estimate the cost over the life of 
the issue would be an additional $15 million of financing 
costs. And that is $15 million that my company wouldn't have to 
invest in expanding plant and ultimately growing jobs. That 
effect would be replicated across the entire productive 
economy.
    Mr. Stivers. And to Mr. Green's point, do you think that 
the--to Mr. Bentsen's point, do you believe the Volcker Rule 
could be fixed as well?
    Mr. Deas. I believe that inherently the Volcker Rule 
requires intent be proven or disproved. And in other words, 
from the eyes of one regulator, and there are five regulators 
who are charged with implementing this, a transaction may be 
proprietary trading, whereas from the financial market 
participant it might be market making, which they thought was 
exempt. And if that cannot be cleared up, then they will stay 
away from it at a higher cost to American business.
    Chairman Garrett. Thank you, Mr. Stivers.
    Mr. Stivers. I yield back the balance of my nonexistent 
time.
    [laughter].
    Mr. Schweikert. Mr. Manzullo?
    Mr. Manzullo. Thank you. The problem I still have with 
Dodd-Frank is at the time of the collapse, there were Federal 
regulations and laws in effect that if had been properly 
implemented, could have avoided the entire crash. Let me just 
give you an example. The Fed has had the authority since 1994 
to govern bank holding companies, documentation and 
underwriting standards for mortgages that they issue. If the 
Fed had been properly doing its job, it would not have allowed 
the 1As and the subprimes and the so-called cheater loans to 
take place.
    It wasn't until October 1, 2009, that the Fed required 
written proof of a mortgage applicant's earnings. Come on. That 
was so basic. And Ken, you were here in 2000 when we had the 
first GSE reform bill. It didn't go anywhere. In 2005, we had 
the second one, along with the Royce Amendment which would have 
really tightened up the underwriting standards. Of course 
everybody was fighting. Oh you can't stop the building boom, et 
cetera, et cetera. But we can talk all we want about the 
Volcker Rule, about this and about that and we need to get back 
to, at least in my opinion the reason for the collapse of the 
economy was in the residential home market.
    But no one seems to talk about the fact that we are looking 
at new rules and new regulations and yet there were laws in 
effect at the time that could have stopped this. Now granted, 
75 percent of the mortgages were private label. In fact during 
the height of all of this, 25 percent were GSEs. Does anybody 
agree with me on this statement? Want to comment on it? Which I 
find interesting. Because people very seldom want to talk about 
what really caused the economic collapse. And I have gone 
through the testimony here.
    Unfortunately, I didn't have the opportunity to sit in on 
all the testimony going on. But maybe it is because I have been 
on this committee since 1994, that I have had the opportunity 
to sort of take a historical view as what could have happened. 
It was hell around here. When people like myself and Ed Royce 
were taking a look at something come down in the future, we 
couldn't put our finger on it, but we could smell that 
something was going wrong and something dramatically would 
happen when people who could not even make the first monthly 
payment on their homes were allowed to purchase homes.
    The Federal Government had the authority to intervene and 
stop that practice. Why didn't the Federal Government intervene 
at that time? Anybody who is in favor of Dodd-Frank and more 
legislation should be able to answer that question. Or at least 
comment on it. Do I have no takers on it?
    Mr. Kelleher. It depends on what you are saying. I think it 
is certainly the case, sir that there were plenty of rules on 
the books that were not enforced, or were poorly enforced. But 
I think you will agree, because you were here, that in 1999 
Gramm-Leach-Bliley took many laws off the books. In 2000, the 
Commodity Futures Modernization Act prohibited regulation of 
the derivatives markets. In 2001, there was a famous picture 
that reflected the attitude at the time where the two top 
banking regulators and the two top banking lobbyists had a 
chainsaw cutting through regulations saying they weren't going 
to be enforced.
    And in 2004, I think it was the OCC that sued to stop 
States from enforcing predatory lending, the point that you 
just made. So one of the problem is--and I may be wrong, it may 
not have been the OCC, maybe one of the other Federal 
regulators, I don't remember. But there were States like North 
Carolina and others who saw what was happening on the street 
level as you often do when you go home to your districts. You 
are actually close to the street and you know what is 
happening, particularly in the neighborhoods, residential 
markets. And what they saw was unleashed predatory behavior in 
the mortgage markets. Exactly what you just said.
    No money down, and get 110 percent of your loan. So the 
State attorneys general started to enforce their predatory 
lending laws. A Federal regulator went to court to preempt them 
from doing that saying that it was Federal power and then they 
didn't do it. So you are absolutely right that there were some 
laws in place that could have stopped this, including, 
importantly, State laws that the Fed stopped from being 
enforced. But it is also the case that many laws were repealed, 
overtaken, and changed both statutorily from here--
    Mr. Manzullo. I understand, but the reason I brought that 
up--I am not being critical of anybody here on the panel 
because everybody has made some really good statements--is the 
fact that maybe I am wrong and maybe I look at it through a 
different lens, but there had to be a trigger cause.
    There had to be a trigger. And to me, it was the 
residential market. And even with the repeal, in Gramm-Leach-
Bliley, of different regulations, et cetera, there never was a 
repeal of the authority that the Fed had all along in order to 
regulate the documents and the underwriting standards.
    And I make that statement based upon the fact that you 
could have the best drafted bill in the world that Congressman 
Bentsen would agree that doesn't--the Volcker Rule, for 
example, doesn't go transaction by transaction, but it is just 
a broad generic view. And still, if the people in charge of the 
agencies are not with it and are not monitoring Wall Street, it 
still won't do any good.
    Mr. Schweikert. Mr. Manzullo, I can't imagine you ever 
being wrong.
    [laughter].
    And now to one of those moments that I am going to yield 
myself 5 minutes here. And almost every potential question has, 
sort of, been randomly thrown out, but there is something that 
I have, sort of, a fixation on that I would love to solicit the 
panel. I am going to start with you, Mr. Deutsch.
    Presently, if you look at our mortgage markets, our 
residential mortgage markets, it is a government market now. I 
see numbers 97, 96, 98 percent of all home loans now are 
Fannie, Freddie, Ginnie, FHA. And we have worked very hard both 
in my office and on this committee in the discussions on the 
mechanics, what do we have to do to start to rebuild a private-
label market again, something that will be stable, good 
visibility--the appropriate visibility so we never have the 
problems in the future?
    And we meet with different players up and down the food 
chain, from the folks in the TBA side all the way down to the 
securitization, to the servicing. And we get this pushback 
constantly, saying, ``Well, there is this one piece of Dodd-
Frank we are worried about.'' And often that worry is it is a 
rule that hasn't actually been promulgated yet, but we are 
worried about it.
    Mr. Deutsch, you and I have had this conversation at least 
a couple dozen times as we have been, sort of, systematically 
trying to figure out how you rebuild a private securitization 
market.
    What do you see in Dodd-Frank right now that are the 
biggest barriers to move from functionally a socialized 
mortgage market we have today to something that would have some 
competition in it?
    Mr. Deutsch. First, I would start with what is not in Dodd-
Frank, which is there is no reform of Fannie and Freddie. That 
is a big outstanding question, and if you are a market 
participant, you want to know what that is. And right now, they 
are issuing $1.2 trillion of mortgage-backed securities a year. 
That is a huge part of the market that you just don't know 
where it is going to go; how is that reform going to fall?
    Second, the Premium Capture Cash Reserve Account. I think 
if we could beat that horse any harder, we would. 
Unfortunately, we can't beat it any harder. It is a regulatory 
abomination, in terms of being able to create CMBS and RMBS in 
the future.
    Third, the Qualified Mortgage definition: If it comes out 
that is very vague, as to what is or is not a Qualified 
Mortgage, any originator and then ultimately any investor who 
would buy into a mortgage-backed security is going to say, if 
there is anything even close, I don't want that loan, which 
means credit is going to get cut off more and more to the 
borrowers who most need it.
    So those are a couple of the quick areas. I think within 
Dodd-Frank there are substantial questions outstanding for the 
RMBS market. And until many of those are answered, if you are 
running a business, if you are running a firm, why would you 
want to put money to create a platform when, a year from now or 
2 years from now or 3 years from now, the regulators may say, 
sorry, that is not going to be a platform that can work?
    Mr. Schweikert. Mr. Vanderslice, almost the same question, 
maybe more on the CMBS: What is out there in Dodd-Frank that is 
scaring the expansion, the growth and the reforms within the 
private-label markets?
    Mr. Vanderslice. I think it was said best before; I think 
the term was ``regulatory abomination,'' with respect to PCCRA. 
There are plenty of things in Dodd-Frank that work for the 
commercial real estate market. I think we have been very clear 
about that at CREFC--risk retention, better disclosure, 
increased transparency.
    And, there are a lot of things that are very positive. 
PCCRA is the stumbling block that we are wrestling with right 
now.
    Mr. Schweikert. Okay. And, sort of, the open-ended side of 
the question is if you are like I am where you believe, whether 
it be perception or rules that are to come that we are creating 
more and more of a concentration of trillion-plus dollars a 
year of a government-insured mortgage market, in many ways we 
are creating massive risk at that level.
    Congressman, from what you pick up out there, what would 
you be doing right now to start reviving the private-label 
market? And what Dodd-Frank obstacles do I have within that?
    Mr. Bentsen. I think Mr. Deutsch hit a lot of the important 
points. I think there is a lot of uncertainty because we don't 
know what the final rules are going to be with respect to QM 
and QRM, what the final risk retention will look like, whether 
or not there will be a premium recapture.
    So in order to make an investment and--on a business model, 
you don't know what the rules of the road are going to be.
    And then on top of that, we have now Basel 2.5 and Basel 
III coming in, so if you are subject to those rules, then, in 
addition, you are going to have to--you are still trying to 
figure out what your capital requirements are going to be, in 
addition to risk retention.
    So I think all of that uncertainty, not to mention, as 
well, as Mr. Deutsch mentioned, what exactly is going to happen 
with respect to the GSEs going forward, is that has to be 
resolved.
    Mr. Schweikert. And we have had the conversation with 
probably half of this panel that also fear that running 
parallel what happens to the GSEs, what is within Dodd-Frank 
that is an impairment in creating a private-label market.
    And I am already over my time. I recognize my friend from 
New Mexico, Mr. Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    Since I was feeling the, as you are talking through your 
statement and as I am reading it, the desire for 
predictability, and I understand that the points have been 
well-made, though, that I am not sure that the path forward is 
to more regulations. MF Global had the CFTC and the SEC both 
sitting in the room there, right at the time they are making 
the decision to use the customer's segregate funds in an 
illegal way and nobody said a word, and now they can't find, 
whatever, or they couldn't find the money for a couple of 
months afterwards.
    JPMorgan had 57 regulators sitting in the rooms with them 
as they were going through their--and so with I understand the 
desire for predictability, but as you talked about the 
sustainable economic growth, I don't know any country or any 
company even in the world that has that. Those sustainable 
economic growth models of the really regulated utilities of the 
past led to markets that--well, you see what happened in the 
telecommunications market when it deregulated.
    I grew up with the old black phone, it was just one, and 
then you didn't even have an extension cord. And that product 
market just exploded once the regulations were pulled away, and 
that is what regulations do--they give certainty, but they also 
take away the innovations and the future. And so, I don't know.
    What actuarial assumptions does your plan have to keep it, 
sort of, in balance?
    Ms. Simpson. Thank you. It is a very good point about 
regulation. This is not a question of quantity; it is about 
quality. In our remarks, we really put an emphasis that 
regulation is one piece and it must be smart regulation. It 
must ensure that the market players play their role. And among 
the market players are of course share-earners like CalPERS. We 
want the information and we also want the rights so that we can 
act as responsible earners.
    Mr. Pearce. Sure, I understand that.
    Ms. Simpson. That is important. The--
    Mr. Pearce. What actuarial assumptions--
    Ms. Simpson. The actuarial assumption that we have the 
discount rate is 7.5 percent.
    Mr. Pearce. 7.5 percent.
    Ms. Simpson. That is--
    Mr. Pearce. What if you fall 0.25 percent short? How much 
does that affect your payout?
    Let us say you get 7.5 percent. Do you have that figure?
    Ms. Simpson. I am sorry, I don't, and we would be glad to 
come back to you, but the impact--
    Mr. Pearce. I am guessing that it is going to penalize your 
funds something in the neighborhood of $15 billion per 0.25 
percent. And that is what we are all facing is that we are in a 
highly competitive world.
    What kind of a payout do your beneficiaries receive?
    In other words, they get blank percent of their active-duty 
pay? What--
    Ms. Simpson. That is correct. The average pension paid to 
our members is $2,000 a month.
    Mr. Pearce. No, what percent?
    Ms. Simpson. It is 0.5 percent per year, per year of 
service. But the formula varies among the 1,000 employers that 
we invest for. CalPERS is a complex structure, but we would be 
glad to come back to you with the details.
    I worked in the investment office, not the actuarial or the 
benefits office, so I apologize.
    Mr. Pearce. Going back to your testimony, on page five, you 
really, kind of, log in on the CDS things, and you talk about 
the collateralized debt obligations and those market failures. 
And you, sort of, lead to the concept that more regualtions 
would be better.
    And I would tell you that there are a couple of guys 
sitting in a garage apartment in Berkeley, written up in the 
big short here. They had $110,000 and they figured out that 
these things can't be real, and they bet against it, and with 
$110,000, they made $80 million because they were betting 
against the CDOs and CDSs and whatever.
    Your retirement fund had $232 billion. This is what your 
risk managers are supposed to do. And for you to come to us and 
you want us to give more regulations, then I am thinking about 
the 57 regulators sitting in there watching while JPMorgan does 
what they do, and now they are saying, well, if we just had 
more, it would be okay.
    And I am sorry. I just don't think that predictability is 
going to be out there.
    Do your beneficiaries vote on the pay levels of high 
executives?
    Ms. Simpson. At CalPERS?
    Mr. Pearce. Yes.
    Ms. Simpson. Our staff? No, the--
    Mr. Pearce. See, you are asking on page 10 for you to be 
able to vote on corporate compensation, but you don't offer it 
inside. That is very problematic. If it weren't such a big 
problem, you would be doing it yourself anyway, but there is 
just--I understand, I really--we all wish there was more 
predictability and more certainty, but life is going to be very 
uncertain, you can see the worldwide chaos that is developing 
in the financial markets. Thank you Mr. Chairman, I appreciate 
your indulgence.
    Mr. Schweikert. Thank you, Mr. Pearce, and we only have 
about 3 minutes.
    Ms. Simpson. Our request is the transparency for 
information that enables us to price risk. Risk is where return 
has been in the balance in a proper way. Our salaries are 
extremely modest. They are set by State government and they are 
all on our Web site. So I do invite you to--
    Mr. Schweikert. All right. Thank you, Ms. Simpson, but we 
only have about 3 minutes left on the Floor vote so let me, 
without objection, ask for unanimous consent to put 2 items 
into the record: a statement from the Mortgage Bankers 
Association; and a statement from the Bond Dealers of America
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the record will remain open for 30 
days for Members to submit written questions to these witnesses 
and to place their responses in the record.
    Thank you for your participation today. This hearing is 
adjourned.
    [Whereupon, at 12:50 p.m., the hearing was adjourned.]



                            A P P E N D I X



                             July 10, 2012

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