[Senate Hearing 112-743]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 112-743


 
  THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

 EXAMINING THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO 
                                CONGRESS

                               __________

                             JULY 26, 2012

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Charles Yi, Chief Counsel

                     Laura Swanson, Policy Director

                   Glen Sears, Senior Policy Advisor

                  Brett Hewitt, Legislative Assistant

                 Andrew Olmem, Republican Chief Counsel

                Mike Piwowar, Republican Chief Economist

              Jelena McWilliams, Republican Senior Counsel

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 26, 2012

                                                                   Page

Opening statement of Chairman Johnson............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     2

                                WITNESS

Timothy F. Geithner, Secretary, Department of the Treasury.......     4
    Prepared statement...........................................    42
    Responses to written questions of:
        Chairman Johnson.........................................    46
        Senator Shelby...........................................    47
        Senator Reed.............................................    48
        Senator Corker...........................................    49
        Senator Kohl.............................................    52
        Senator Toomey...........................................    53
        Senator Kirk.............................................    55

              Additional Material Supplied for the Record

Washington Post article submitted by Senator Bennet..............    59
Financial Stability Oversight Council 2012 Annual Report.........    60

                                 (iii)


  THE FINANCIAL STABILITY OVERSIGHT COUNCIL ANNUAL REPORT TO CONGRESS

                              ----------                              


                        THURSDAY, JULY 26, 2012

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:04 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order.
    Today we welcome Treasury Secretary Geithner to deliver the 
Financial Stability Oversight Council Annual Report to 
Congress, as required by the Wall Street Reform Act.
    Having recently marked the 2-year anniversary of Wall 
Street reform, I believe we have made important progress to 
enhance our financial system's stability. Critics are quick to 
point to the unfinished rules, but the improved regulatory 
structure was not going to appear overnight. In 2 years, we 
have a mechanism in place to unwind failing nonbank financial 
firms, the regulators have proposed rules to enhance capital 
and prudential standards for our Nation's largest and most 
complex financial institutions, and we have improved consumer 
and investor protections, among other efforts.
    The Financial Stability Oversight Council is a key part of 
these efforts to enhance financial stability and eliminate 
regulatory gaps. It manages the process to designate financial 
firms as systemically important, coordinates interagency 
rulemakings, monitors developments in the financial markets, 
and provides a forum for all of the financial regulators, 
Federal and State, to identify areas that need to be addressed 
to strengthen our Nation's financial stability. I look forward 
to hearing from Secretary Geithner about the FSOC's progress.
    The FSOC has had some early challenges too. The Office of 
Financial Research, FSOC's data arm, has yet to have a 
confirmed Director, despite the President nominating a well-
qualified candidate. Without the certainty of a Director in 
place, the OFR has struggled to attract the staff it needs to 
put the systems in place to raise red flags when our Nation's 
financial institutions and economy are in trouble. I urge my 
colleagues to confirm Dick Berner in this role as quickly as 
possible.
    But the FSOC has also had many successes. The Annual Report 
we are reviewing today is solid. It provides important insight 
into the workings of the Council. It identifies many important 
issues of concern and provides recommendations for the 
regulators to address these concerns. From the Banking 
Committee's oversight perspective, this report provides a 
tangible way to measure the FSOC's progress.
    The FSOC also recently designated eight financial market 
utilities as systemically important. This is a major step 
forward and is another example of how Wall Street reform is 
helping to provide financial stability. The FSOC has finalized 
the criteria and is in the process of designating nonbank 
financial companies as systemically important, another critical 
step.
    The FSOC also has its finger on the pulse of the economy's 
most important issues. For example, as we can see from the 
public minutes and the Annual Report, the FSOC has been 
focusing on the situation in Europe, an issue that this 
Committee also has been monitoring.
    As I have previously stated, I asked Secretary Geithner to 
come prepared to speak about LIBOR. As the President of the New 
York Fed in 2008, he raised some early warning signs about the 
integrity of the LIBOR submission process and called on the 
Bank of England to specifically ``eliminate incentive to 
misreport'' LIBOR submissions by the banks. Shortly thereafter, 
the CFTC began its investigation leading to an international 
effort resulting in the recent enforcement actions by the CFTC, 
DOJ, and FSA. As additional investigations into this matter 
continue, I hope we can have a conversation today about what 
happened during the crisis and how, going forward, we can have 
more reliable benchmark rates that accurately reflect the cost 
of borrowing in both normal and crisis periods, protecting both 
borrowers and investors.
    While this Committee will continue to exercise oversight of 
regulators, we cannot lose sight of the fact that the LIBOR 
issue, at its core, is about fraud. There are some who seek to 
put the entire blame on the cops instead. But it would be a 
mistake to shift the focus away from the continued effort to 
hold the companies and individuals who committed fraud 
accountable.
    Our economy continues to face many challenges and it is 
unlikely that we will be able to stop every future crisis, but 
I do believe because of the work of the FSOC and Wall Street 
reform, we are better prepared.
    I will now turn to Senator Shelby for his opening 
statement.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    As you said, Mr. Chairman, Secretary Geithner comes before 
the Banking Committee today to report on the work of the 
Financial Stability Oversight Council. The Council, as we all 
recall, was established by Dodd-Frank and is required to report 
annually on the State of the U.S. economy, threats to financial 
stability, and the Council's activities.
    In this year's report, the Council describes a stagnating 
U.S. economy with a mere 1.9-percent growth rate in the first 
quarter and a Federal deficit exceeding 7 percent of GDP. It 
also reports that U.S. households have seen only modest income 
growth, that access to mortgage credit is constrained, and that 
investment is restrained by continued subdued confidence and 
elevated uncertainty--their words.
    As the Council reports, the unemployment rate is still 
above 8 percent while labor force participation has fallen to 
its lowest rate in 30 years. Nearly 4 years into this 
Administration, not even a Council headed by its own Treasury 
Secretary I believe can hide the President's failure to revive 
the economy and put Americans back to work.
    Also troubling is the Council's view of Dodd-Frank. Its 
report describes at length all of the new Dodd-Frank rules, but 
fails to mention their enormous cost to the economy. Nowhere 
does the report mention that these rules will require Americans 
to spend more than 24 million hours and billions of dollars 
every year to comply with them.
    If the Council wanted to understand why unemployment is 
high and mortgage lending is constrained, then examination of 
Dodd-Frank would have been a good place to start. More 
fundamentally, the Council's report overlooks the serious 
structural flaws in our regulatory system, which Dodd-Frank 
only made worse.
    For all of the President's talk about the need to reform 
Wall Street, Dodd-Frank has merely strengthened the advantage 
that large financial institutions possess in our financial 
system.
    First, Dodd-Frank Act imposes huge compliance costs on 
banks, conferring a competitive advantage on the large 
financial institutions that can more easily bear that burden. 
As a result, the banking system has and will become even more 
concentrated in the largest firms thanks to Dodd-Frank.
    Second, Dodd-Frank failed to address the preferential 
treatment that our largest banks receive from bank regulators. 
For far too long, regulators have viewed themselves as 
advocates and not supervisors of large banks. They have 
developed cozy relationships with their banks and actively 
sought bank-supported regulatory changes, such as lower capital 
requirements. Those close relationships, however caused 
regulators to ignore red flags from subprime loans to 
insufficient capital to dubious securitization practices.
    Regulators also adopted a mind-set that none of their large 
banks should ever fail on their watch. Consequentially, 
regulators have orchestrated a series of bailouts to benefit 
our largest banks, including the 1995 bailout of Mexico, the 
rescue of Long Term Capital Management, and most recently here 
TARP. Unfortunately, Dodd-Frank preserved and codified the 
preferential treatment for large financial institutions.
    Dodd-Frank solidified the close relationships between 
regulators and big banks by maintaining their preexisting 
prudential regulators. In contrast, the regulator for the 
smallest banks, the OTS, was abolished.
    It also protected the big banks from bankruptcy by creating 
a new resolution mechanism to ensure that large institutions do 
not fail. And all the while Dodd-Frank did nothing to make 
financial regulators more accountable. Instead, Dodd-Frank I 
believe made it more difficult to remove regulators who become 
captured by their banks.
    For example, the structure of the Consumer Financial 
Protection Bureau makes it effectively impossible to remove its 
Director. I have said many times through the years here that 
nothing focuses the mind like the specter of being fired. Not 
one regulator, however, was held accountable in the wake of the 
financial crisis.
    To add insult to injury, the very same regulators that 
missed the warning signs were then closely consulted on how to 
draft Dodd-Frank. In fact, staff from the very same agencies 
that failed us were detailed to Congress to help write the 
bill.
    This is the type of thing that outrages the American 
people, but it is, sadly, business as usual in Washington.
    Mr. Geithner is no stranger to bank bailouts or bank 
regulation. He has played a key role in financial regulation 
for the past 20 years. However, recent news reports about his 
handling of the alleged LIBOR manipulations suggests that he, 
too, may have tempered his response to what can be 
characterized as a significant problem within the banking 
industry.
    Accordingly, today's hearing gives Secretary Geithner 
before the Banking Committee an opportunity to explain when he 
first learned of the allegations of LIBOR manipulation and how 
he did everything he could to protect the American taxpayer 
from any potential harm.
    Mr. Geithner I believe will also have an opportunity to 
explain to this Committee and to the American people how the 
President's policies are improving the economy. It should not 
take too long.
    Thank you.
    Chairman Johnson. Thank you, Senator Shelby.
    In order to get to the questions of our witness as soon as 
possible, opening statements will be limited to the Chair and 
Ranking Member. I want to remind my colleagues that the record 
will be open for the next 7 days for opening statements and any 
other materials you would like to submit.
    Welcome back to the Committee, Mr. Secretary. You may begin 
your statement.

STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY, DEPARTMENT OF THE 
                            TREASURY

    Mr. Geithner. Thank you, Mr. Chairman. Chairman Johnson, 
Ranking Member Shelby, and Members of the Committee, thanks for 
the chance to come before you today to talk about the Council's 
annual report.
    As the Council's report outlines, we have made significant 
progress repairing and reforming our financial system since the 
crisis. We have forced banks to raise more than $400 billion in 
capital, to reduce leverage, and to fund themselves more 
conservatively.
    The size of the shadow banking system, where much of the 
risk was concentrated, has fallen by trillions of dollars. The 
Government has closed most of the emergency programs put in 
place during the crisis and recovered most of the taxpayers' 
investments made in the financial system. On current estimates, 
as you know, the TARP bank investments will generate an overall 
profit of approximately $20 billion. Credit is expanding, and 
the cost of credit has fallen significantly for businesses and 
individuals since the crisis. These improvements have made the 
financial system safer, less vulnerable to future economic and 
financial stress, more likely to help rather than hurt future 
economic growth, and better able to absorb the impact of 
potential future failures of large financial institutions.
    But, of course, we still face a number of very significant 
challenges. The ongoing European crisis presents the biggest 
risk to our economy. The growing recession in Europe is hurting 
economic growth around the world, not just in the United 
States, and the ongoing financial stress caused by the crisis 
in Europe is causing a general tightening of financial 
conditions, exacerbating the global slowdown in growth.
    In the United States, the economy is still expanding, but 
the pace of economic growth has slowed significantly during the 
past two quarters. In addition to the pressures from Europe and 
the broader global economic slowdown, U.S. growth has been hurt 
by the earlier rise in oil prices, the ongoing reduction in 
Government spending at all levels of Government, and slow rates 
of growth in household income.
    The slowdown in U.S. growth could be exacerbated by 
concerns about the approaching tax increases and spending cuts 
and by uncertainty about the shape of the reforms and, frankly, 
the political will of this town to put in place reforms to both 
tax policy and spending that are necessary to restore long-run 
fiscal sustainability. And these potential threats underscore 
the need for continued progress in repairing the remaining 
damage from the financial crisis and enacting financial reforms 
to make the system stronger for the long run.
    The regulators responsible have made important progress 
over the past 2 years designing and implementing the 
regulations necessary to implement financial reform. Roughly 90 
percent of the rules that had deadlines before July 2nd have 
been proposed or finalized, and the key elements of the law 
will largely be in place by the end of this year.
    As part of this, we have negotiated much tougher, new 
capital requirements on the banking system, including higher 
levels of capital on the largest banks. We now have the ability 
to put the largest financial institutions under enhanced 
supervision, tougher prudential standards, whether they are 
banks or nonbanks, and we have the ability to subject key 
elements of the market infrastructure to tougher and more 
carefully designed safeguards against risk.
    The SEC and the CFTC are putting in place a comprehensive 
new framework of oversight to the derivatives market, providing 
new tools for combating market abuse and bringing this market 
out of the shadows. The FDIC has designed an innovative way to 
put large financial institutions through an equivalent to 
bankruptcy while protecting the taxpayers from the risk of any 
loss and protecting the broader economy from the fallout of 
those failures. And the Consumer Financial Protection Bureau 
has worked to simplify and improve disclosure of mortgage and 
credit card loans so that consumers can make better choices 
about how to borrow responsibly.
    Now, these reforms are very complicated. It is a 
complicated process. It is challenging, in part because our 
financial system is very complex. It is challenge because we 
need to be careful to target damaging behavior without damaging 
access to capital and credit. It is complicated and challenging 
because we want the reforms to endure as the market evolves and 
innovates. And it is challenging because we need to make sure 
we are coordinating the work of multiple agencies, not just in 
this country but across the major financial centers.
    Now, beyond the reforms enacted in Dodd-Frank, the Council 
has put forward a list of additional recommendations for other 
changes to help strengthen our financial system. Further 
reforms are needed to reduce vulnerabilities in wholesale 
funding markets, including to mitigate the risk of runs on 
money market funds and to reduce intra-day credit exposure in 
what is called the tri-party repo market, which is an important 
secure funding market.
    Regulators need to establish and enforce strong protections 
for customer funds that are deposited for trading. Financial 
firms and regulators need to continue to improve risk 
management practices with stronger capital buffers, better 
stress testing disciplines, and better internal risk management 
disciplines and controls for over complex trading and hedging 
strategies.
    The Council recommends further improvements in the quality 
and availability of financial data. The Office of Financial 
Research is going to continue to lead this effort, and I 
appreciate Mr. Chairman reminding people that we hope the 
Senate will act on the nomination of Richard Berner to head 
that office.
    And, finally, the Council continues to push for progress 
toward comprehensive housing reform so we can bring private 
capital back into the housing market.
    Now, these recommendations will help build on the 
considerable progress made by the Council over the past few 
years in making the system safer and stronger, both more 
resilient and less vulnerable to crisis, with better 
protections for investors and consumers.
    We still have a lot of work ahead of us, however, and we 
need your support to make these rules strong and effective, and 
we need your support to make sure that the enforcement agencies 
have the resources they need to prevent fraud, manipulation, 
and abuse.
    I want to convey my compliments and thanks to the members 
of the Financial Stability Oversight Council and their staff, 
and I want to emphasize again that we look forward to working 
with this Committee and with the Congress as a whole to build 
on this progress and address the remaining challenges we face 
in the financial system.
    Thank you, Mr. Chairman.
    Chairman Johnson. Secretary Geithner, thank you for your 
statement.
    We will now begin asking questions of our witness. Will the 
clerk please put 5 minutes on the clock for each Member?
    With regard to the LIBOR issue, last week I asked Chairman 
Bernanke what he knew, when he knew it, and what did he do 
about it. Secretary Geithner, you stated that you were aware of 
weaknesses and vulnerabilities with LIBOR, that you made 
recommendations on this matter in 2008. Were you aware of any 
actions any members of the President's Working Group took after 
they were briefed at that time? In light of the recent 
enforcement action, is there more that should be done?
    Mr. Geithner. Mr. Chairman, in early 2008, as the financial 
crisis intensified, as concern about the strength of banks in 
Europe in particular, and as those banks found it harder to 
borrow dollars--and they needed to borrow dollars--you saw the 
LIBOR rates increase. LIBOR, as you know, is a reference to the 
London interbank offered rate, which is a rate set in London by 
the British Bankers' Association, which is an average of 
estimates of what a group of banks, predominantly foreign 
banks, might pay to borrow in 10 currencies at 15 different 
maturities.
    At that time, as the rate went up, there was a lot of 
concern in the market about the design of the rate and the 
potential that created for misreporting and the incentives 
banks faced to underreport as particularly foreign banks faced 
higher borrowing costs.
    At the New York Fed, we took a very careful look at those 
concerns in the market. Many of those concerns made it into the 
press. The Wall Street Journal and the Financial Times wrote 
about this in April of 2008. We looked at those concerns, and 
we thought they were justified. We were very concerned about 
them, and on that basis, we took the following steps:
    We briefed the President's Working Group on Financial 
Markets, which is a group composed of the Secretary of the 
Treasury, the Chairman of the Federal Reserve Board, the 
Chairman of the SEC and the CFTC, among others, and my staff 
subsequently briefed the Treasury and the CFTC and the SEC 
following that initial meeting.
    But in addition to that, because, again, this was a rate 
set in London by the British Bankers' Association, I raised 
this directly and personally with the Governor of the Bank of 
England, and I wrote a detailed memorandum to the Governor 
outlining a series of reforms to reduce the vulnerability in 
the rate. And the Bank of England was very receptive to those 
recommendations and indicated they supported them and would act 
on them.
    Now, it turns out, as the CFTC has testified, roughly at 
about the same time, the CFTC initiated a far-reaching 
confidential investigation that, as you have seen, ultimately 
resulted in the initial settlement announced earlier this 
month. And that investigation, which is still ongoing, has come 
to involve a range of other regulatory authorities.
    Now, if you think about what is ahead, I want to just take 
a minute and outline what we think is important and necessary 
going forward.
    In addition to this ongoing enforcement investigation--
which, of course, is very important to the integrity of our 
system because a simple, important, necessary test for any 
financial system is do we have the capacity to hold people 
accountable when they do these kinds of things. So the 
investigation are still very important. But in addition to 
those, I want to highlight some of the additional work ahead of 
us.
    The Council and the relevant agencies are taking a very 
careful look at the potential implications for the functioning 
of the financial system of these remaining challenges. We are 
carefully examining--this is the members of the Council--other 
survey-based measures of financial prices or interest rates to 
assets whether there is any other potential out there for the 
kind of problems we have seen in LIBOR. These entities are 
carefully examining potential reforms to LIBOR and alternatives 
to LIBOR.
    A broad global effort is underway, led by the Chairman of 
the Financial Stability Board, which is a group that includes 
all the world's major central banks and market regulators, like 
the SEC and the CFTC and their global counterparts, also 
examining reforms to the system.
    Now, in addition to these additional challenges ahead, we 
need to take a very careful look as a Council at how we deal 
with the circumstances in which a confidential investigation, 
enforcement action, reveals evidence of behavior or practices 
that could have implications for the financial system as a 
whole. This is a challenge because, as you know, we have to 
have very careful safeguards to protect the confidentiality of 
those investigations, and yet I think we have to find a way to 
make that information, if it has systemic implications, 
available to key members of the Council in this context. We are 
taking a careful look at that.
    Finally, we have to take a careful look at other parts of 
the financial system where the markets rely on private 
organizations composed of private firms like the British 
Bankers' Association that have some quasi-regulatory or self-
regulatory role. As you have seen in this case, we have got to 
be careful to make sure that the system is not relying on 
associations of private firms that leave us vulnerable to the 
kind of things we have seen.
    Of course, it is very important to the integrity of our 
system that the enforcement authorities have the resources they 
need to do their jobs. You know, if there is a small town in 
America and its population grows by 10-fold or 100-fold in a 5-
year period, you need to increase the size of the police 
department. It is absolutely important to do that.
    Now, the members of the Council I am very confident will be 
fully responsive to the oversight conducted by this Committee 
and other bodies in Congress to examine this particular set of 
challenges and how we are dealing with them going forward, and 
we will continue to keep the Committee informed as we pursue 
the things I just outlined.
    Chairman Johnson. There has been continued criticism about 
wrongdoers on Wall Street not being held accountable by 
enforcement officials. We now know that investigations have 
been ongoing on this matter since 2008, and so far there has 
been one major settlement. I want you to commit to me and the 
American people, will the Administration make sure that those 
found to have been involved in LIBOR fraud are held accountable 
and prosecuted to the full extent of the law?
    Mr. Geithner. Absolutely. It is very important we do that, 
and I am very confident that the Department of Justice and the 
relevant enforcement authorities will make sure they meet that 
objective.
    Chairman Johnson. There have been additional developments 
this week in Europe that have been troubling. Do you think 
recently announced policy changes out of the EU, like the 
creation of the Banking Union, are going far enough toward 
solving the European financial crisis? Are there additional 
steps that the U.S. should take?
    Mr. Geithner. Europe is working through--working to put in 
place a mix of very challenging reforms, reforms to make their 
economies more competitive, but also reforms that put better 
disciplines in place in how much countries can borrow, and 
better oversight of their financial systems. But those reforms 
are going to take some time, and in the interim, the European 
authorities are going to need to do more to restore confidence 
in the financial system to do more to make--to improve their 
prospects for economic growth, and they are going to need to do 
more to make sure the countries that are doing these reforms 
are able to borrow at sustainable interest rates.
    So there is absolutely more they need to do to underscore 
their commitment and their stated commitment, which is to do 
what is necessary to make sure the monetary union is going to 
work and hold together. But it is a very challenging crisis for 
them. The solutions to this have to be designed in Europe 
because they have to be willing to live within them, within the 
constraints, and make sure they work and pay the financial 
costs of this working. They are going to have to be designed in 
Europe if they are going to work. What we can do is what we are 
doing--to make sure that we are encouraging them to go as far 
as they can to protect the rest of us from a long and damaging 
European recession. And there are specific areas where we can 
help them financially in ways that are very much in our 
interest, which, for example, the Federal Reserve is doing with 
their swap lines. Again, that helps reduce the risk that 
European banks cut back on credit around the world and hurt 
prospects for growth here in the United States.
    There are a lot of challenges ahead. They are making some 
progress, but they have a lot more to do.
    Chairman Johnson. Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Mr. Secretary, you referenced LIBOR. We all have. Tell us 
why LIBOR and the setting of LIBOR rates is so important not 
only to the American people but to the world financial, and 
what it does and approximately how many billions of loans are 
involved, billions of dollars involved in that?
    Mr. Geithner. Well, as I said, LIBOR is set in 10 
currencies, not just the dollar or the pound sterling, 15 
different maturities. It has implications around the world, in 
part because there are a variety of financial contracts--
mortgages is one example in the United States--around the world 
that reference that rate. So it is important for that reason.
    But it is also important, of course, because we have seen a 
devastating loss of trust in the basic--of trust and confidence 
in the integrity of the financial system. So when you see a 
system vulnerable to banks' misreporting, that can have more 
damage to the basic confidence people have about how the system 
works than any of the direct finance implications of the rate 
itself. And that is why it is consequential.
    Senator Shelby. But historically a lot of banking has been 
based on trust, has it not, integrity? So when people realized 
that some people were perhaps manipulating the LIBOR rate or 
manipulating this and that or fraud here and there, it hurts 
the whole financial system, it hurts us all, does it not?
    Mr. Geithner. I agree with that. As I said, I agree with 
that completely.
    Senator Shelby. Mr. Secretary, going back to when you first 
learned about possible manipulation of LIBOR, was that in 2008, 
early 2008, I believe you said?
    Mr. Geithner. Yes, that is my judgment, looking back at 
that time, which, again, it was--these reports in the market 
and in the press and concerns started to come when the rates 
started to go up as the financial crisis intensified.
    Senator Shelby. Who did you notify besides Mervyn King, who 
was chairman of the Bank of England, about your concerns and 
others' concerns about the manipulation of the rate?
    Mr. Geithner. Well, as I said, I briefed what was then 
called the President's Working Group on Financial Markets, 
which means the--that body includes the Secretary of the 
Treasury, Chairman of the Fed, Chairman of the SEC, Chairman of 
the CFTC, other officials, too. And then my staff briefed the 
Treasury and the SEC and the CFTC after that. That was 
important because, although it was clear that the reforms to 
this problem were going to have to come in London, this had 
implications for us.
    Senator Shelby. Well, we had banks that fed into that rate, 
did we not?
    Mr. Geithner. Well, at that point, 16 banks were part of 
the sample. Three of those banks were American banks.
    Senator Shelby. OK. Did you follow up after notifying the 
working group you talked about, did you notify the Attorney 
General of the United States, the Justice Department?
    Mr. Geithner. The New York Fed and my colleagues, my former 
colleagues, are carefully looking through all the records of 
whom the New York Fed staff informed at that point.
    Senator Shelby. Did you, sir, as president of the bank, did 
you personally inform----
    Mr. Geithner. No, I did----
    Senator Shelby. ----or someone on your staff to let the 
Justice Department know about the implications of probably 
manipulation of the rate?
    Mr. Geithner. To the best of my knowledge, what I did was 
to inform the President's Working Group and those regulatory 
bodies, and the reason I did that is because those are the 
bodies which have a range of different authorities that relate 
to market manipulation and abuse. And so that was a very 
important and necessary thing to do.
    Senator Shelby. When you first learned of possible 
manipulation of the rate, did you think this was a big deal?
    Mr. Geithner. I absolutely----
    Senator Shelby. Or a trivial thing?
    Mr. Geithner. I absolutely thought this was a problem, 
which is why I took the initiative to do the things we did. 
Again, the problem was you had a rate in London overseen by the 
British Bankers' Association where banks were asked to provide 
an estimate of what they might pay to borrow, and then there 
was an estimate that was averaged over time. And that itself 
created this vulnerability to misreporting. So it was for that 
reason that we were concerned about the problem in this 
context, which is why we took the actions we did to brief the 
broader regulatory community here in the United States and to 
encourage the British to fix it, to reform it.
    Senator Shelby. Going back to the Justice Department, do 
you have any knowledge yourself of when the Justice Department 
got involved in this? Was it late? Was it recently? Or was it 
after the British hearings and regulators were involved, or 
what?
    Mr. Geithner. I do not--that is something you have to ask 
them in the enforcement agencies. My recollection from what 
other people have testified is that the CFTC's investigation, 
which they started at about the same time, April of 2008, 
ultimately came to include the SEC and Justice Department as 
well as a mix of regulators in London and elsewhere.
    Senator Shelby. Does the Federal Reserve Bank of New York 
have the authority to oversee misconduct by banks that would be 
under your jurisdiction?
    Mr. Geithner. The Congress has given the Federal Reserve, 
in this case the Board of Governors, a range of different 
enforcement powers. Those powers are given to the Federal 
Reserve as a whole, and the Reserve Banks, like the Federal 
Reserve Bank of New York, do play an active role in enforcement 
cases working with the Board of Governors when they implicate 
our direct authorities.
    Senator Shelby. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Reed.
    Senator Reed. Mr. Secretary, when you reported to the 
President's Working Group, including Secretary Paulson, 
Chairman Bernanke, Chairman Cox, and I think Chairman Lukken, 
did they direct you to do anything? Did they indicate that they 
would do anything? Essentially what was their reaction?
    Mr. Geithner. No, but as you know, as you now know, the 
CFTC did at roughly the same time--I think in response to the 
similar concerns we had, did begin this investigation, 
ultimately involved other parties. And, again, it took quite a 
bit of time, as these typically do. These are complicated 
things. But you had the CFTC and ultimately a variety of other 
regulatory enforcement authorities undertaking a very far-
reaching investigation that is resulting in very tough 
enforcement actions.
    Senator Reed. One of the things I think this illustrates 
again is the rather ambiguous position of the President of the 
Federal Reserve Bank of New York. This was brought to your 
attention. Did you communicate with Mervyn King on your own 
volition? Were you directed to do so?
    Mr. Geithner. No, I did that on my own.
    Senator Reed. And why would you do that if you were not 
responsible for or clearly responsible for the policy of the 
United States with respect to LIBOR or anything else? You were 
simply chosen by the banking community of New York to regulate 
that bank.
    Mr. Geithner. Well, I thought it was the responsible thing 
to do because it had broad implications not just for London but 
for the United States, and so I thought that was the 
appropriate and necessary thing.
    Senator Reed. Again, I think one of the things we tried to 
attempt in Dodd-Frank was to clarify the position of the 
President of the Federal Reserve Bank, the only person that has 
a statutory position, I believe, on the Open Market Committee, 
by making that position subject to confirmation and--
appointment by the President and confirmation. And ironically 
it was rejected--in fact, on a bipartisan basis, by all my 
colleagues who are here. So that was one of my ideas that just 
did not get any traction.
    But I think you would have been better served had you had 
much clearer authority and been on a level with the Secretary 
of the Treasury and with the Chairman of the Federal Reserve 
and had clear enforcement responsibilities. What is your view?
    Mr. Geithner. Well, I think I would say it this way: We had 
a financial system before the crisis where you had a huge 
amount of risk and activity that had important implications for 
the average American and the American economy that grew up 
outside the basic protections and safeguards and authorities we 
put in place after the Great Depression to deal with these kind 
of problems, and that was a terribly damaging problem for us. 
And neither the Federal Reserve Bank of New York nor the 
Chairman of the Federal Reserve Board or even the Chairman and 
Chairwoman of the SEC and the CFTC had authority at that stage 
to deal with that huge growth of risk and activity, and as you 
saw, a lot of manipulation and abuse and fraud came outside the 
safeguards of the traditional banking system.
    So the crisis was so severe in part because of that problem 
but, of course, also because within the banking system the 
constraints on leveraging capital were just not sufficiently 
prudent or careful or conservative.
    Senator Reed. Do you now feel, given the Dodd-Frank 
legislation, that you have a much better capacity to deal with 
issues like this?
    Mr. Geithner. I do. I think, as I said in my opening 
statement, you know, it is not just that we forced $400 billion 
more capital into the banking system and negotiated much 
tougher constraints on capital and leverage globally with much 
tougher requirements on the largest banks so that large banks 
have to hold much more capital against risk than do small 
banks. We have given the authorities the ability to make sure 
that where there is risk outside that in derivatives or in the 
financial market infrastructure or in large institutions like 
AIG that are not banks but still present risk, that we can put 
similar constraints on leverage on them, too.
    So I definitely believe that Dodd-Frank has put us in a 
much stronger position than we were before the crisis, even 
recognizing, of course, that you have to get these rules right 
and there is a lot of work to do still to address the remaining 
challenges.
    Senator Reed. Let me raise a final point in the few 
moments. Because of the ubiquity of the LIBOR, this presents 
huge potential liabilities for the banking system, back then 
and right now. On the one side, you might have a borrower that 
is benefiting from depressed rates, but then you have a bond 
holder that is not receiving what should be the rates that they 
contract for. And obviously was that--first, was that a 
consideration in your discussions with the Presidential Working 
Group that there could be huge potential liabilities for 
manipulation of this rate by particularly bond holders? And 
then moving to today, is that a potential going forward now 
where you have actively consideration of suits against multiple 
institutions by numerous bond holders?
    Mr. Geithner. Well, absolutely, that was a concern then, 
and that is a critical concern going forward. And as I said in 
my opening statement or my initial remarks to the Chairman's 
question, one of the issues that the Fed and the SEC and the 
CFTC are working on now, which the Council will review, is to 
make sure they are carefully examining not just the remaining 
implications for the integrity of the system but reforms and 
alternatives to make sure we address those remaining problems. 
That will be a critical focus of the remaining work ahead. And, 
you know, again, that basic vulnerability and reality is what 
motivated the actions I initiated in 2008.
    Senator Reed. Thank you.
    Chairman Johnson. Senator Crapo.
    Senator Crapo. Thank you, Mr. Chairman. Thank you, 
Secretary Geithner, for being here with us today.
    I want to switch to the housing issues, and in your 
testimony, you state, ``As we move forward, we must take care 
not to undermine the housing market, which is showing signs of 
recovery but is still weak in many areas.''
    I am hearing a lot of concern about how Dodd-Frank will 
reduce credit availability in the housing market through some 
of the proposed rules for a qualified mortgage that increases 
liability and a qualified residential mortgage that requires a 
20-percent downpayment. Recently, the Director of the CFPB, Mr. 
Cordray, said that if the qualified mortgage is drawn too 
narrowly, that could upset the mortgage market. That could be a 
notable example of a rule itself restricting access to credit.
    I would like your opinion on this. Do you believe that 
there needs to be a broad QM definition?
    Mr. Geithner. Well, I want to just start by saying that I 
completely agree that right now mortgage credit is tighter than 
it should be, and it is tighter than the basic requirements put 
in place by Fannie and Freddie and FHA, for example. And the 
main reason for that is because banks and servicers, given all 
the mistakes they made and the damage they made, feel much more 
vulnerable now to what people call ``put-back,'' which is these 
institutions protecting the taxpayer by putting back to those 
originators loans that did not meet those initial tests, you 
know, no-doc loans or some of the other loans they described in 
that context.
    Senator Crapo. And that is why we are working on the QM and 
the QRM.
    Mr. Geithner. Yes, but I think that concern is the biggest 
remaining cause of the fact that credit is tighter in a 
mortgage than it needs to be. And independent of that rule-
writing process ahead, I want to just make it clear that the 
FHFA--Ed DeMarco, to his credit, and the FHA are looking at 
ways even ahead of defining those rules that they can help 
address some of those concerns, that it is residual uncertainty 
about reps and warranties and put-back risk is leaving mortgage 
credit harder to get for an average individual with a good 
credit score than should be the case.
    Now, you are right that those rules have to be designed 
very carefully, and what the Chairman of the CFPB is doing, 
what the other agencies responsible for what you call the 
qualified residential mortgage rules are doing is they are 
trying to figure out how to balance appropriately the obvious 
need for more careful, prudent underwriting standards, more 
standardization, better disclosure with the need to be careful 
not to overdo it, not to go too far.
    Senator Crapo. But wouldn't you agree that in that context 
we need to be sure that we do not define the QMs too narrowly 
so that we do not restrict access to credit more than is 
necessary?
    Mr. Geithner. Well, I would not say that. I agree with the 
objective completely. I think you want to make sure that both 
these two rules are designed together and carefully to reduce 
the risk that you restrict mortgage credit more than it would 
be prudent to do and is necessary to do.
    Senator Crapo. All right. Thank you. I want to move to 
another topic now since the time is obviously short in these 5-
minute sectors. I want to go to the end user issue.
    You may recall that ever since the Dodd-Frank conference, 
there has been a debate about whether nonfinancial end users 
were intended to be exempted from the margin requirements by 
the statute. That was clearly what the Members of Congress 
intended. In fact, Chairman Dodd and Chairman Lincoln 
acknowledged that the language was intended to exempt those 
entities that used swaps to hedge or mitigate commercial risk.
    The regulators, though, have read the statute otherwise and 
have issued regulations now that do, in fact, require margin 
from those nonfinancial end users, and they basically take the 
position that, notwithstanding their understanding of 
congressional intent, it was the exact language that they feel 
bound by. Because of that, I have introduced legislation to 
correct that and make it clear that there is an exemption for 
the end users, and when he was before the Banking Committee 
recently, I asked this question that I am going to ask you to 
Chairman Bernanke: Would it be appropriate for us to correct 
that language and provide an exemption for nonfinancial end 
users so that it is very clear that that is what congressional 
intent and what statutory language requires?
    Mr. Geithner. In my own view, I do not think you need to do 
that because I think the way the statute was designed, you gave 
flexibility and discretion to the regulators to try to achieve 
the objective you laid out. I think the concern is if you open 
this up too much, you are going to let the exception undermine 
the critical safeguards over financial institutions that the 
law was absolutely intended to cover.
    I do not think this requires a legislative fix. I think the 
law gives the regulators the discretion to get that balance 
right, but that is obviously something that we need to continue 
to look at, and I would be happy to consult with you more, to 
talk with you more closely about it to get a better feel for 
how they are defining that balance.
    Senator Crapo. So are you saying that you believe that the 
statutory language as is currently gives the regulators the 
authority to exempt nonfinancial end users?
    Mr. Geithner. I think it gives the regulators--I want to be 
careful about how I do this, how I say this. And it is not my 
authority. It is the authority of the regulatory agencies. I 
believe it gives them the ability and the discretion and the 
authority to define an exception that I think meets your 
objective.
    Senator Crapo. You are not saying that there should be no 
exception for end users. You are saying we need to get it 
right.
    Mr. Geithner. Yes, that is right. I agree. I believe the 
law as you wrote it does try to make sure you are not capturing 
people in risk you do not need to capture. But we are worried 
always that if you create exceptions and loopholes in this 
context that you will end up swallowing or undermining the 
broader safeguards that are necessary. I know that is not your 
intent, but that has to be our concern.
    Senator Crapo. But if I understand you correctly, then you 
are saying that you are worried that if Congress does this, 
they may get it wrong and be too broad in the exception?
    Mr. Geithner. I did not mean to quite imply that. I am just 
saying that I think the balance the Congress struck in the law 
I thought was right, and I think the regulators were given the 
ability to try to get that balance right.
    Senator Crapo. Then would you at least agree that if the 
law is interpreted to mean otherwise--in other words, if the 
regulators--I understand the prudential regulators to be taking 
the position that they do not have that discretion. Would you 
agree that the regulators need to have the discretion to 
address this issue and provide an appropriately formed 
exemption?
    Mr. Geithner. I think I want to talk to them a little more 
carefully about it and come back to you and follow up on it. 
But, again, I just want to say this: In general, we are trying 
to be very careful to make sure that we do not legislate--this 
is not your intention--that we do not legislate things that 
would weaken the overall protections in the bill, and we think 
the law gave the regulators the ability to strike an 
appropriate balance in this context.
    Senator Crapo. And you are not saying there should be no 
exemption, appropriately defined, for end users?
    Mr. Geithner. No. What I am saying is I think they should 
implement the law as you intended it.
    Senator Crapo. Thank you.
    Chairman Johnson. Senator Tester.
    Senator Tester. Yes, thank you, Mr. Chairman. Secretary 
Geithner, welcome.
    In the Council's report, one of the emerging threats that 
you identify in the fiscal policy outlook of the United States 
and the uncertainty posed by the impending fiscal cliff. Over 
the past year the cost of dysfunction here in Washington has 
caused volatility in the financial markets, frustration on Wall 
Street, and uncertainty in an already tenuous economic 
recovery. This week, the GAO released a report showing that the 
Treasury Department was forced to spend $1.3 billion in 
additional borrowing costs associated with the actions taken to 
avoid the default last year. That was a self-inflicted wound 
which was completely irresponsible. That was people putting 
political agendas ahead of the country, and I do not like the 
situation that we found ourselves in.
    We do need a long-term plan to get our fiscal house in 
order. There is no doubt about that. But I also do not like 
having to tell folks that because folks in Washington could not 
get it together to solve our country's problem, it cost us over 
a billion bucks. That happened because some were willing to see 
the Federal Government default on its debt. As a result our 
credit rating was downgraded by Standard & Poor's. There is a 
real cost associated with our lack of action on this important 
issue. Our debt and the costs associated with it increased by 
billions every day, and Washington does not act.
    Just this week, we had a made-in-Washington fight 
encouraged by interest groups over competing tax plans that we 
know have little chance of being signed into law. And instead 
of working to address the debt, we are no closer to resolving 
our problems. We can spend the next few weeks pointing fingers 
and blaming each other, but if we continue to play political 
games, nothing is ever going to get done. We have to get a lot 
more urgent about this issue.
    The bottom line is we do need a bipartisan, balanced 
deficit reduction plan that is broad in scope and large enough 
to address the magnitude of the problem. It is going to have to 
cut spending. It is going to have to include revenue. And I 
think we all know that there is only one bipartisan plan that 
has achieved this broad scale and scope necessary to begin to 
tackle the challenges before us. That plan was developed by the 
President's Commission on Fiscal Responsibility and Reform, a 
Commission that the Administration did not initially support. 
And when we tried to create that Commission through 
legislation, seven Senators who had previously supported that 
idea turned around and opposed it.
    Now, I do not support everything in the Commission's plan, 
but it is a real starting point. It is a real plan. The 
Commission's efforts are now in their third iteration with 
input and compromise from a number of Members from this 
Committee and renewed support by a number of CEOs. I am 
concerned that the President has given only lukewarm support to 
these efforts so far, and that came after the Gang of Six 
introduced a plan last July and it was evident that there was 
wide spread support for it.
    Given the experiences of the past few years, do you regret 
that the Administration did not engage earlier on this issue 
and get behind the framework presented by the Fiscal 
Commission?
    Mr. Geithner. Senator, I completely agree with you that 
this problem of the unsustainable long-term deficits we face is 
a very serious economic problem, and it is not something we can 
avoid and defer. And I completely agree that the solution to 
this is going to lie in the broad frame of what Bowles-Simpson 
laid out in the sense that it is going to require a substantial 
amount of carefully designed deficit reduction with a balance 
of revenues through tax reform tied to significant changes to 
help reduce the rate of growth of costs in health care and 
other parts of spending. That is where this began. That is 
where it is going to end. And even if you and others have some 
disagreements with the precise composition of that, or the 
design, we have been very, very supportive of that basic 
strategy.
    As you know, the President of the United States in April of 
2011 and September of 2011 and the budget in 2012 they released 
in February laid out a detailed set of recommendations, both on 
the tax reform side but also on the spending side, that would 
meet that basic test of restoring our deficits to a sustainable 
level. And I think it is very important to keep reminding 
people that we face these two critical challenges. One is we 
have an economy that is not growing fast enough, and we need to 
make sure that we are doing everything we can to make growth 
faster so we are healing the remaining damage caused by the 
crisis. But we also have to get Congress to come together on a 
bipartisan basis and agree on a set of reforms to start to 
restore sustainability, and you have got to do those carefully 
so they do not hurt growth. They have to be designed carefully. 
We have got to make sure they are going to make us more 
competitive over the long run, things for education, for 
infrastructure, for private investment that make sense. But 
absolutely we need to get the country to come together around a 
set of these reforms, and we have to demonstrate we can make 
some tough choices in this area.
    You expressed concern about the actions the Senate took on 
the tax side yesterday, but I just want to speak in favor of 
what happened, because what the Senate did was to extend tax 
rates for 98 percent of Americans but also demonstrate they are 
prepared to do the fiscally responsible and the fair thing by 
allowing those tax rates for the top 2 percent to expire. And I 
think that was a good example of what you can do that is good 
for the economy for certainty, but also demonstrating that this 
town can make some tough choices to start to restore 
sustainability.
    Senator Tester. My concern was more with the fact that if 
it ever comes to fruition, I am not sure it will. I just want 
to ask one more thing, and my time has run out. I think the 
country is ready for a long-term, well-thought-out plan to take 
care of our deficit and debt in the long term. I think the 
country is far ahead of Washington, DC, on that. The question 
that I have--and Congress has its own faults. I talked about it 
in my opening. The question I have is: What have you learned, 
what are you going to recommend to the President when the time 
is right to push forth a real plan to get our deficit under 
control?
    Mr. Geithner. Well, I have been a long and consistent 
supporter of action on a balanced framework of tax reforms that 
raise revenue tied to long-term reforms across Government on 
the spending side that are designed not just to protect the 
safety net but make it more sustainable over time, but also 
preserve the ability for us to invest in things that matter for 
growth. I am a longstanding supporter of that. I will continue 
to be. And that is just driven by a basic recognition that if 
we are going to do more for growth to make the economy 
stronger, we also have to deal with these long-term fiscal 
needs.
    We cannot just do the long-term fiscal stuff, though. If we 
do that alone and do not address this broad range of major 
challenges that middle-class America still faces, the erosion 
of competitiveness we face, then we will leave the country 
worse off as well. So we have to do both those two things.
    Senator Tester. OK. Well, thank you very much.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Corker.
    Senator Corker. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary, for being here.
    I want to talk to you mostly about the things FSOC has the 
ability to look at, and I know that in Title II, as we wrote 
the bill, there were lots of words like ``liquidate'' 
throughout it. And as the FDIC has come forth with their 
proposal, what really is happening--and I think you know this--
is that in these large, highly complex institutions, they found 
out that they were so intertwined that the best way to deal 
with them was to let the entity continue to operate but to take 
the stockholders out and some of the creditors at the holding 
company level, but continue to allow the institution to 
operate, which is very different than liquidation. And for 
people who are concerned about consolidation of banking, on the 
one hand that solves that problem, but it does not deal with 
really, you know, said over and over and over, we want to put 
these banks out of business. We have heard some of the leaders 
in the industry say that.
    The FDIC mechanism really does not do that. I mean, it is a 
process where they in essence operate these entities for up to 
5 years and then re-IPO them. I mean, in essence, everything 
stays the same. I know the stockholders obviously, though, are 
crushed, thankfully, and the leadership is gone, and those are 
all good things if the institution fails.
    But I am just wondering--I mean, I think I have accurately 
discussed how that is going to be, and we spent a lot of time 
with them. I am just wondering if you feel comfortable about 
that, or would we be better off, if there is systemic risk, for 
the FDIC to step in potentially during the immediate phase but 
then move it on to an orderly bankruptcy at that time, because, 
again, that is what happens in a bankruptcy, the entity 
continues to operate. But you would really move away from any 
kind of potential--I am not saying this would happen--potential 
crony capitalism where certain creditors were dealt with 
differently because they knew the right people.
    Mr. Geithner. Senator, I understand your concerns, but I do 
not share them in this case, and let me explain. I think what 
the FDIC designed is designed to do exactly what you said the 
objective should be, which is to come in, if necessary, and 
dismember the institution, put it out of its misery, sell 
whatever is remaining viable--that is viable remaining back 
into the market----
    Senator Corker. That is not what they are doing.
    Mr. Geithner. I believe that is exactly what they are 
doing. Now, you are----
    Senator Corker. No, they are just doing it at the holding 
company level.
    Mr. Geithner. No, I think that is a slight misimpression, 
but, again, I understand your concerns about this. What they 
are trying to do is to make sure they have a practical way to 
do the practical equivalent of bankruptcy for a large, complex 
financial institution. And what Congress did, which is very 
important, is to deprive them and the Fed and the other 
relevant agencies of the ability to protect them from their 
mistakes and to leave them to survive to fight another day.
    You deprived them of that ability, which you should have 
done. And I know Ranking Member Shelby's longstanding concern 
about this, and you said in your opening remarks you have the 
same basic concern. And I do not think it sounds right for 
these reasons. Again, what the bill does is force the largest, 
most complicated institutions to hold more capital against risk 
than would a normal commercial bank, a small regional bank, a 
community bank. And it means that if they end up making 
mistakes that put them in jeopardy, the Government can do 
nothing but step in and dismember them safely at no risk to the 
taxpayer.
    Now, your concern, I understand your concern, but I do not 
think it is justified by their strategy.
    Senator Corker. What I would like to do, because I do not 
want to spend the whole 5 minutes on this, but I do not think 
the word ``dismember'' is appropriate, and I would love to--we 
do not necessarily have to talk to you.
    Mr. Geithner. That is not really a technical term. I just 
meant----
    Senator Corker. Well, ``dismember'' means--and I think what 
the FDIC has found is that these organizations are so 
intertwined, they are not like stovepipes that you can just 
move off to the side.
    Mr. Geithner. That is absolutely----
    Senator Corker. That because of that they are not 
dismembering them. They are going to allow them to operate up 
to 5 years and then re-IPO them. And so that is a different 
concept. And, by the way, I see some of the benefits of not 
creating concentration, because another large institution might 
have to take those pieces. I understand the problem. But I do 
not think that is exactly what Congress intended, and I just 
think that if it is going to be laid out the way that it is, 
one of the things we might think about is a real bankruptcy 
taking place, because, in essence, the institution continues to 
operate under background.
    Let me just move on to one other point. This took longer 
than I thought. The money market funds. I think you all believe 
that they create systemic risk as they are currently set up, 
the FSOC. Is that true or false? There could be systemic risk--
--
    Mr. Geithner. Well, I believe that although they are in the 
stronger position and smaller in size because of the reforms 
that were taken by the SEC, I still think--I still believe, as 
does the SEC and the Fed, that they are still vulnerable to 
runs that could not just disadvantage the investors but could 
hurt the system as a whole.
    Senator Corker. So the SEC obviously--and, by the way, 
contrary to some of the folks on my side of the aisle, I do not 
understand why we are protecting them exactly the way that we 
are right now, and I think the SEC maybe has not come up with 
the right solution. But I am wondering if you happen to know 
what that right solution might be. It seems to me we still have 
not quite come to the right conclusion on the money markets. 
And if the SEC does not take action, I think the FSOC can. And 
I am just wondering what your thoughts might be in that regard.
    Mr. Geithner. Well, I think it is important that the SEC 
propose a range of options for how to go forward on this so 
that the market can assess those and comment on them, and the 
SEC and others can reflect on what that means for trying to get 
this balance right. I think the SEC has to go further than they 
have gone. There are a range of options people are considering, 
as you know. One option is to go to a full floating NAV. One 
option is----
    Senator Corker. And that would take a tax change to make 
that work, right, a Tax Code change.
    Mr. Geithner. That would take a range of things. One option 
is to have a mix of investment restrictions, liquidity 
requirements and capital requirements to protect against this 
risk. And another option is to have a mix of those things and 
some type of hold-back provision. And it is a very complicated 
question in that context. And my own judgment is the SEC needs 
to go further--they can go further, and we should get on with 
the business of letting them expose to the world and to the 
market a set of options that the world can comment on and help 
refine.
    Senator Corker. And I agree, it should be more market based 
than what it is, and I think a de minimis floating NAV should 
not create tax consequences, and that might be a way of solving 
it.
    If I could just ask one more question, a lot of the 
community banks are in here lobbying us about the transaction 
account guarantee. I think it expires at year end. I am 
reticent to want to continue things like that. I mean, if you 
look at a transaction accounts, there is almost--it does not 
take much activity to have a transaction account, and so if you 
have got excess reserve with money markets paying almost 
nothing and you can move into a transaction account that is 
fully guaranteed--as a matter of fact, I think there has 
already been tremendous flight into transaction accounts for 
this reason, because it is fully insured. I would just love to 
have your thoughts as we consider this at year end. I mean, 
should we continue to extend full guarantees on transaction 
accounts--full guarantees? Or should we end Government 
involvement in that way?
    Mr. Geithner. Very good question, and the relevant parts of 
the FSOC are thinking through that question now. Our judgment 
so far has been that it is not necessary to extend it. That has 
been the judgment of the relevant authorities so far. But I 
know this is an issue and a concern to many people, and we are 
going to look at those concerns carefully. I am happy to talk 
to you about it.
    Senator Corker. You are good.
    Chairman Johnson. Senator Merkley.
    Senator Merkley. Thank you, Mr. Chair, and thank you, Mr. 
Secretary.
    A section of your report addresses housing finance reforms 
as an issue to be concerned about, and you note that differing 
State standards on foreclosure practices, the lack of national 
service standards, the lack of agreed standards for mortgage 
underwriting, all of these are relevant to restoring a market 
for private capital in financing. But I wanted to focus on a 
different piece of that puzzle, and that is, we have about 4 
million families who are underwater who do not have Fannie and 
Freddie loans, and they are essentially locked into high 
interest loans with no chance of refinancing. And I consider 
this a systemic risk from my perspective because those families 
become high risk for foreclosures, foreclosures drive down the 
price of the market, and the high amount of money they are 
paying every month compared to what they would pay under a 
lower interest means that they do not have extra spending 
money, if you will, that would strengthen other parts of the 
economy.
    So all of those are interconnected, and so that is a piece 
the President identified in his State of the Union and 
certainly I have been immersed in, and I would like to ask if 
you share concern about those 4 million families with no 
refinancing options, and if we can kind of get an effort, as 
much support as you can possibly give to help us address that 
piece of the puzzle.
    Mr. Geithner. We share your view completely. As you know, 
the President has been very supportive of legislation in that 
context. Your own leadership in this stuff we fully support. We 
like the way you designed it. I think it would be--it is good 
economic policy, good for the country for that to become law 
just for the reason you said. It is not just a fairness 
question, but it would help reduce the remaining pressures that 
housing is putting on the economy as a whole. There is a very 
good economic case for doing it. You could do it in ways that 
do not leave the taxpayer exposed to any meaningful risk in 
that context. So we would be very supportive of progress in 
that area.
    Senator Merkley. Thank you. Well, and I would encourage you 
to help in any way you can with launching pilots. I realize 
there are questions that have to be resolved legally about 
whether a program is a modification of an existing program, but 
we have a number of these funds out there congressionally 
approved that are being underutilized, and if one refinancing 
program is a modification of another, it seems like launching a 
few pilots in the balance of this year would really help pave 
the path for us to build some momentum.
    Mr. Geithner. Well, I think the policy is very good. It is 
very well designed. We would like to work with you on it. And 
the question is whether we can find legal authority and 
resources to test on a pilot basis.
    Senator Merkley. Great. Thank you.
    I wanted to turn to another issue that I thought carried 
some systemic risk. There was an article in the Financial Times 
just about a week and a half ago about banks' stepping up their 
oil trade role, and what the article basically says is that 
several of the largest banks have got into close relationships 
with refineries in order to have contracts to provide the crude 
to the refinery, to buy the refined products after they are 
refined. And this is essentially because under the draft rules, 
spot commodities are exempted from proprietary trading 
restrictions, and banks are also pressing for forward commodity 
contracts to be exempted as well.
    My question is, you know, 3 years from now are we going to 
have a situation where, because one entity is both affecting 
the supply of oil and trading over the contracts related that 
are affected by the price of oil, essentially a conflict of 
interest that is going to be an Enron-style issue?
    Mr. Geithner. Good question. So I think you need to think 
about this in two different ways. First, it is very important 
that we have in place safeguards that limit the risk. Banks 
take risks in these areas that could threaten the ability of 
the firm or the markets more generally. That is about making 
sure they hold capital against the risks they hold, we limit 
the risks they hold. And provisions like the Volcker Rule are 
part of that important objective.
    But in addition to that, you need to make sure that the 
market regulators have the authority that they need to make 
sure that they can police and deter manipulation, and one of 
the things that is very important--the most important 
consequences of the fact that the SEC and the CFTC have now 
adopted the definitions they adopted earlier this month on 
swaps is that that will unlock now a range of additional 
authorities they have to police abuse and manipulation.
    Both those two things are important to address the risks 
they pointed out, and we are going to be very focused on making 
sure we are not just limiting the risk they take too much risk 
in those areas but that the market is not vulnerable to 
manipulation and abuse.
    Senator Merkley. Well, thank you very much, Mr. Secretary.
    Thank you, Mr. Chair.
    Mr. Geithner. Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary.
    I also wanted to ask some things about this very concerning 
LIBOR issue. As we sit here today, do we know whether Citibank, 
Bank of America, and JPMorgan, which participate in the LIBOR 
process like Barclays, did or did not similarly manipulate 
LIBOR?
    Mr. Geithner. We do not know that, but I think that is a 
question you need to refer to the enforcement agencies, and I 
suspect you are going to find that because this is still a 
confidential investigation, they will not be in a position to 
answer that question until the remaining investigation is 
brought to its natural conclusion. So I do not----
    Senator Vitter. So we do not know that as we sit here 
today?
    Mr. Geithner. Well, I can only tell you what I know, and I 
do not know that. I do not know what they know. And the reason 
I do not is because, as you would expect, they have very 
careful protections around their investigations to preserve 
confidentiality.
    Senator Vitter. When did you first know about this LIBOR 
issue and manipulation?
    Mr. Geithner. Well, as I said, in roughly the spring of 
2008.
    Senator Vitter. So spring of 2008.
    Mr. Geithner. Right.
    Senator Vitter. So we are now over 4 years later, and we 
have not answered that question. Doesn't that----
    Mr. Geithner. No, I do not think that is quite right in the 
sense that--you know, again, what we did at a very early stage 
in this process is bring this to the attention at the highest 
levels of the relevant agencies with authority to prevent 
manipulation and abuse and push----
    Senator Vitter. You brought it to the highest levels, but 
we have not gotten to the bottom of it 4\1/2\ years later?
    Mr. Geithner. Well, no, I do not----
    Senator Vitter. Doesn't that unequivocally suggest somebody 
dropped the ball?
    Mr. Geithner. Well, I do not think you should look at it 
this way, but the CFTC at that same time started this 
investigation, ultimately involved the SEC and the Justice 
Department in it, and it is true it took 4 years for them to 
find the evidence they disclosed in the settlement. I do not 
know that that is surprising if you look at what is typical in 
financial cases like this. Again, if you look at a cross-
history of these things, these things take a lot of time. You 
have to do them very carefully. But they were----
    Senator Vitter. Do you think it is reasons to take 4\1/2\ 
years and we do not know as we sit here today whether Citi, 
Bank of America, or JPMorgan were involved in this activity?
    Mr. Geithner. I think that you have to address that to 
them, but I think that, again, what they did--and to their 
credit, they started very early, like we did, in trying to make 
sure that they were examining carefully what there was any not 
just risk of this behavior but it was actually happening in 
that context. And they deserve enormous credit for doing that.
    Senator Vitter. As the prudential regulator through the New 
York Fed of these three institutions, did you and the New York 
Fed look into the issue directly?
    Mr. Geithner. I believe that we did the necessary and 
appropriate things, as I said, in bringing this to the 
attention not just to the Fed and the SEC and the CFTC, which 
was a very important thing to do at that early time, but also 
to the attention of the British. And, remember, these 
concerns----
    Senator Vitter. Can I just follow up on the question? You 
do not think this issue with regard to those three institutions 
potentially impacted their safety and soundness?
    Mr. Geithner. I thought this was----
    Senator Vitter. The New York Fed was the primary regulator 
of that.
    Mr. Geithner. I thought this was a very important issue not 
just for our financial system but for the global financial 
system, which is why we did what we did. And, again, I think 
that----
    Senator Vitter. Do you think it directly potentially went 
to the safety and soundness of those three institutions?
    Mr. Geithner. I do not know, but I am not sure that I 
needed to know that because I thought the concerns themselves 
were sufficiently troubling to justify a very substantial 
response.
    Senator Vitter. Given what we all now agree is very 
troubling information about LIBOR, why was it allowed to be 
essentially the repayment metric for TARP?
    Mr. Geithner. Well, what you are referring to, I believe, 
is that in a series of specific programs that the Fed and the 
Treasury undertook in the financial crisis, we, like many 
investors, used LIBOR as a reference rate. In many ways, we 
were in the position of investors around the world, which is we 
had to make use of the best available index at that time.
    Now, you are raising the concern of were we disadvantaged 
by that. We do not know whether we were or not, but we are 
looking very carefully at that question, and we will obviously 
be in a position to brief you on that once we have looked at it 
carefully enough.
    Senator Vitter. When LIBOR was used in those contracts, you 
and others had knowledge of the fundamental systemic concerns 
about its validity, right? So why was it used in those 
contracts? Surely there were some other alternatives, and 
surely the Federal Government was calling the shots about the 
repayment metric.
    Mr. Geithner. Well, no, you are right. We, the Fed and the 
Treasury, at that point needed to choose what rate to 
reference, and we made a judgment at that time what was the 
best rate at that time. And it is true that in that same broad 
timeframe, we knew this rate was vulnerable to the type of 
practice we faced. But what we do not know is whether we were 
disadvantaged by that choice.
    Again, it is not clear at this stage--although this is 
really a question you should talk to the SEC and the CFTC 
about, we do not know at this point what impact that behavior 
had the rate up or down for investors and borrowers. As one of 
your colleagues said earlier, it is possible that people who 
borrowed money were advantaged by this. It is possible people 
who borrowed money were disadvantaged. But we do not really 
know the extent that happened.
    Senator Vitter. It is certainly easy to imagine--let me put 
it this way--that mega banks that borrowed money were 
advantaged by manipulation of LIBOR that artificially pushed it 
down, correct?
    Mr. Geithner. It is possible, but, again, if----
    Senator Vitter. And if that happened, the taxpayer was 
disadvantaged.
    Mr. Geithner. But I think if you read carefully the SEC 
settlement documents, you will find that the attempted behavior 
went in both directions. So what you do not now know is what 
impact that had on the rate itself or the direction of the 
impact. But, again, that is a very important issue, and it is 
an issue which those agencies and the other agencies that are 
part of the Council are going to examine very carefully. And, 
of course, it is going to be a matter of litigation as well.
    Senator Vitter. But you knew when using LIBOR that it was 
manipulated so there was that potential, so why did we use it?
    Mr. Geithner. No, that is not quite accurate, what you 
said. What we knew is that the way the rate was designed, as I 
said--and this was fully in the public domain--that the rate 
was designed where banks, mostly foreign banks, presented 
estimates of what they might pay to borrow across these 
different currencies. And, therefore, as you might expect, any 
rate that is an average of estimates, there is some risk in 
that context. And it was just that risk that caused us to push 
for broader reforms and make sure we briefed the enforcement 
agencies. But----
    Senator Vitter. But beyond that, you knew of reports of 
manipulation.
    Mr. Geithner. No. We knew of reports of underreporting in 
that context, misreporting in that context, but, again, what we 
did, in terms of choosing a reference rate, which is we do what 
investors around the world did, which is we had to make a 
choice among alternatives, and that was the best alternative 
available at the time. And I cannot say now with confidence 
that that choice in any way disadvantaged the American 
taxpayer. I think it is quite unlikely, but we are going to 
take a careful look at that.
    Senator Vitter. Well, again, let me just wrap up because I 
am over time. It seems to me that Treasury and the Fed and the 
New York Fed knew of basic problems with LIBOR, knew of charges 
of manipulation that underreported and pushed down the rate, 
and then the Treasury adopts that very metric for TARP 
repayment.
    Now, it is very clear that that raises the huge potential 
of advantaging those mega banks and disadvantaging the 
taxpayer.
    Chairman Johnson. Senator Menendez.
    Senator Vitter. Thank you, Mr. Chair.
    Senator Menendez. Thank you, Mr. Chairman. Mr. Secretary, 
thank you for your service and your testimony.
    You know, I was reading, as someone who wrote a letter to 
you on this issue on LIBOR, that documents that were released 
by the Fed banks show that as early as August 2007 Barclays 
told Fed analysts about possible problems. And you testified 
earlier that some time in early 2008 you made not only 
recommendations to the Bank of England but you informed--and 
correct me if I am wrong--the Securities and Exchange 
Commission, the Commodity Futures Trading Commission, and the 
Fed under Federal Reserve that had the control here. Those are 
all 2008. Now, let me just see my history. In 2008, who was the 
President of the United States?
    Mr. Geithner. Well, you know the answer to that question, 
Senator. President Bush was President.
    Senator Menendez. Right. And who were the appointees in 
those respective agencies made by?
    Mr. Geithner. By the President of the United States and 
confirmed by the Senate.
    Senator Menendez. OK. So we start off with a reality that 
this was known to entities going back into the Bush 
administration, and when you became aware of it, you raised it 
to all of those appropriate entities that had the wherewithal 
to conduct investigatory abilities to pursue. Is that a fair 
statement?
    Mr. Geithner. That is absolutely a fair statement.
    Senator Menendez. All right. So with that in mind, so that 
we cast this in the appropriate context, it still is 
challenging and troubling because, obviously, the reason that 
Barclays enters into a consent agreement is they did something 
wrong. And when they did something wrong, there is a 
manipulation of some sort.
    Now, depending upon that moment that you borrowed, as has 
been said, you might have actually benefited, or you might have 
actually been caused harm. And considering how many mortgages 
and other commercial instruments are indexed to LIBOR, that is 
a real concern.
    My question is: As we move forward here, has the Treasury 
or the Fed considered issuing our own American LIBOR or using 
banks' data when calculating a number? Is that feasible? And 
how do we prevent this from happening again? Because one of my 
frustrations is that we can in the Congress pass and have the 
President sign laws that define what is acceptable and 
unacceptable practices. But we cannot seem to get the culture 
in financial institutions--many, not all, but in many financial 
institutions--to accept that.
    So, one, can we have an equivalent of an American LIBOR or 
other index that would be more transparent, less subject to any 
manipulation? And how do we get the culture here to turn 
around?
    Mr. Geithner. Let me start with the latter question. You 
need tough rules, tough safeguards, enforced by people who have 
the resources to enforce them. There is no alternative to that. 
You cannot regulate for ethics. You cannot regulate for 
culture. You have to assume these institutions are going to 
have incentives to do the wrong things sometimes, take risks 
they understand or do not understand. That is inherent in 
finance. The job of Washington and Government is to make sure 
there are tough rules in place that can be enforced, and that 
requires resources, not just authority.
    Now, we are looking very carefully at not just what reforms 
make sense to how LIBOR is determined, but what alternatives 
might be better for the system of LIBOR going forward. And we 
are going to so that very carefully and involve all the 
relevant people, and we will brief this Committee and the 
Congress as we go through that process.
    As you are pointing out, it is an interesting thing that an 
interest rate that affects the price at which Americans might 
borrow in dollars was set in London by a group of foreign 
banks, largely by a group of foreign banks who needed to be 
able to borrow dollars occasionally under a process overseen by 
the British Bankers' Association. It is a strange thing. And so 
it is right to think about what is a better alternative to that 
now, and that is one of the things we are very focused on.
    Senator Menendez. Well, I think the question is very ripe 
to think about what is an appropriate alternative here, and I 
appreciate your answer to my question of culture. But let me 
just say that if we have the rules, the regulations, the laws, 
and even if we give--which I support--the regulators the 
resources to pursue this, what we need is vigorous sanctions at 
the end of the day so that people get the message this is not 
simply the cost of doing business.
    Mr. Geithner. I agree. That is what enforcement means.
    Senator Menendez. And I have a challenge here with many of 
my colleagues who actually want to retract from those vigorous 
sanctions and the essence of the process that would bring those 
to a determination when someone should be sanctioned, because 
otherwise we are not going to change the culture, and the 
American people are ultimately going to be subject to the risk 
of those who make decisions that ultimately create collective 
risk. And that is a huge problem.
    Finally, I would like to ask you, can you tell us at a time 
that your testimony talks about the European debt crisis 
remaining a looming challenge for the United States, with the 
possibility of defaults in certain countries, what have we done 
to know the full exposure of U.S. banks and other institutions 
to the debt of European countries, and if they were to 
materialize at this point in time, what are we doing to limit 
the effects on Americans in that context?
    Mr. Geithner. A very good question. The Federal Reserve has 
throughout the past 3 years not just carefully looked at how 
best to measure the potential exposure--actual and potential 
exposure of U.S. banks and other financial institutions to 
those parts of Europe, but as I said in my opening testimony, 
we force banks to hold much, much more capital against the 
risks than they held before the crisis, $400 billion more 
capital than they held before the crisis. And banks have moved 
very aggressively to significantly reduce and limit their 
exposure to the risks you pointed out. That has happened in 
money market funds, too, by the way, which is important in this 
context.
    Now, it is important to recognize, though, that Europe is a 
very large part of the global economy, and the strongest 
economies in Europe still are very big and very consequential. 
So a prolonged serious financial crisis in Europe that goes 
well beyond a long recession would still have significant 
implications for our economy because, you know, export growth 
would be weaker, financial conditions would be tighter here, 
and that would add to the pressure we are facing on the U.S. 
economy.
    But U.S. institutions have much less exposure, they hold 
much more capital against the risk in that exposure, and that 
is a good thing for us.
    Senator Menendez. Thank you.
    Chairman Johnson. Senator Toomey.
    Senator Toomey. Thank you, Mr. Chairman. Mr. Secretary, 
thanks for being with us.
    Just briefly, I want to follow up on the discussion that we 
had in the anteroom earlier about the money market funds. I 
just want to strongly urge you to reconsider the position that 
the SEC needs to adopt a new round of regulations now, for 
several reasons.
    First, I am not aware--we certainly have not seen the 
evidence--that the new wave of regulations that was already 
imposed in 2010 is somehow inadequate, and we have seen that 
this industry is now on a stronger footing and got through some 
very difficult times last summer without a single hitch, 
suggesting, in fact, that they are in pretty good shape.
    The second point I would make is this notion that I see 
repeated often that they are somehow very susceptible to runs 
is quite ironic to me given that over the 40-year history of 
hundreds and hundreds of funds through all kinds of 
extraordinary historical moments, there have not been runs.
    So to suggest that we need this new wave of regulations, 
some of the proposals of which I am concerned would destroy the 
product--I mean, the capital requirement I do not think 
achieves its stated objective. I think it is unaffordable. 
Withholding requirements I think badly damaged the product. So 
I would like to just urge you to reconsider this. I think this 
is the wrong way to go.
    The question I would like to get to, if I could, is on 
LIBOR. First of all, there has been some suggestion that some 
of the British regulators may have known and, in fact, may have 
condoned or even encouraged some misreporting during the 
financial crisis for fear that otherwise a perception of risk 
at these banks might cause problems. So I think I know the 
answer, but just for the record, did you or any of the 
regulators that you are aware of ever actually condone or 
encourage misreporting of LIBOR?
    Mr. Geithner. Absolutely not.
    Senator Toomey. OK. That is what I thought.
    Here is what I do not understand, and that is, how you were 
aware of this in early 2008, and for the last 4 years you never 
used the bully pulpit that you had to, A, warn the American 
people--all right? So there are literally hundreds of 
municipalities across Pennsylvania that were engaging in 
interest rate swaps where they were paying a fixed rate 
typically and receiving LIBOR payments, and we know and you 
knew that those LIBOR payments may not be the correct payments, 
in fact, might very well be less than what they ought to be 
getting. These municipalities did not know that, and they 
should have.
    The second thing--and then I will let you answer. But the 
second thing is: Why did you not use the enormous influence 
that you have had, both at the Fed and at Treasury, to persuade 
the financial institutions to adopt a different mechanism that 
would not be subject to this kind of manipulation when there 
are other alternatives available?
    Mr. Geithner. On your first question, again, I did what I 
thought was the most effective way to get to the heart of this. 
In general, you are right, there are some problems that you can 
address by talking about them, but generally, I am of the view 
that it is better to act on these things, and that is what we 
tried to do.
    Now, these concerns that you refer to, as you know, were in 
the public domain at that time. The Wall Street Journal, among 
others, did a very good job of reporting these concerns. And 
the vulnerability that we were worried about was there for 
people to see.
    Now, in this period between that time, the spring of 2008, 
when we acted, and when the CFTC announced the settlement 
earlier this month, they were involved, to their credit, in a 
far-reaching, complicated, difficult investigation which 
ultimately uncovered the damage that you referred to. And, 
again, they ultimately involved the SEC and Justice in that 
context, fully appropriate I am sure in this context, and that 
process took some time.
    But in the interim, the British did do some things to try 
to reform the way the rate was structured. I do not think those 
reforms went far enough. But our system has to work this way, 
which is you have to combine reforms to the underlying problem, 
which we set in motion, with enforcement action, with 
consequences. And that is exactly what happened in this 
context.
    Senator Toomey. I am not at all suggesting that we should 
not have had enforcement.
    Mr. Geithner. Right.
    Senator Toomey. I think we should have, absolutely. My 
concern is that knowing that this rate did not have integrity, 
you nevertheless stood by while thousands of transactions were 
being executed, you know, interest rate swaps, loans, all kinds 
of agreements, and it seems to me you could have used the 
enormous persuasive power that the Secretary of the Treasury 
has to encourage and, in fact, persuade the financial 
institutions to fix this or start using an alternative 
mechanism.
    Mr. Geithner. Well, that was exactly the objective of the 
actions I took at that early stage in the process. I do think 
it is important to recognize that the market began some time 
ago because the market was broadly aware of these concerns, 
both investors, borrowers, and lenders were aware of these 
concerns, has started to evolve toward other alternatives, and 
that is happening. And that was driven by the recognition that 
their interests might be better served.
    Again, I want to just caution, though, that it is important 
to take some time to carefully examine what was the impact of 
the behavior on those rates. Again, I do not think we know with 
confidence now the direction of the impact or the magnitude of 
the impact, but that is a very important issue and critical to 
restoring trust and confidence in the system. And I think the 
relevant authorities are doing a careful job now of looking 
through that.
    Senator Toomey. And my time has expired. I will just close 
by saying I understand that we do not yet know exactly the 
direction or magnitude of the costs, but we know that this was 
a process that lacked integrity, and I would suggest that some 
of the transactions that were entered into, and subsequently 
resulted in significant losses, might never have been entered 
into in the first place had the participants understood the 
lack of integrity in this rate-setting process.
    Mr. Geithner. Well, I think that is one reason why it was 
so important that we did what we did, which is to try to set in 
motion reforms--not just reforms to the process, but make sure 
that the authorities responsible for abuse and manipulation had 
the ability to act on those concerns.
    Chairman Johnson. Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary, for your testimony.
    Just on the LIBOR point, when the Chairman of the Fed was 
here the other day, he talked about the possibility of moving 
toward a more market-based alternative to LIBOR, and you had 
mentioned to Senator Menendez maybe we should be thinking about 
that. What would those alternatives look like? And I think the 
point he was making was that rather than having a rate that is 
sort of voluntarily reported by a small set of banks, security 
might actually find yourself in a place where you could have 
rates that were stress-tested by the market so that we could 
really have confidence in what we were getting. Could you tell 
us a little more?
    Mr. Geithner. You are absolutely right, and I think one of 
the dominant questions before the Council and the people 
looking at this question is exactly what would be a better 
alternative and what transaction-based rate would better serve 
the broader interests of the market.
    There are other parts of the financial markets where they 
rely on survey-based estimates, and they do that for very 
practical reasons. And doing that does not necessarily make it 
vulnerable to the types of incentives to misreport that you saw 
in this case. But you have to design the safeguards around that 
very, very carefully so it is not vulnerable to that. But, of 
course, we will look at all those options, and we will be happy 
to brief this Committee as the thinking evolves on that.
    Senator Bennet. I think we would like to hear about that. I 
think there are probably some situations where the market is 
lagging or transactions are not actually happening, and you can 
see why in that circumstance you might not have a market rate 
that would work. But it would seem that there ought to be one 
that could replace LIBOR. That would be very interesting to me.
    Robert Samuelson had a piece in the Washington Post this 
week called ``The $12 Trillion Misunderstanding'', and in this 
piece he accounts for how we got from a projected budget 
surplus of $5.6 trillion that was made in 2001 to where we are, 
which is $6.1 trillion--an $11.7 trillion swing, he says. And 
he goes through and he says this is how we got here: The 
biggest cause of it was the recession itself, which was about 
27 percent. If you add up the recession and the tax cuts from 
the early 2000s, you are at 40 percent. If you add up the Iraq 
and Afghanistan war, you are at 10 percent. That is 50 percent 
of where we are. Increases in defense spending, 5 percent; the 
Obama stimulus, 6 percent; and so on and so forth until he gets 
to 100 percent. And his conclusion is: ``So, most theories 
(often partisan) of the $11.7 trillion shift turn out to be 
wrong, exaggerated or misleading. There were lots of causes; no 
single cause dominates.''
    And I think I would like to enter that article in the 
record, Mr. Chairman, with your permission.
    Chairman Johnson. Without objection.
    Senator Bennet. I think he very clearly lays out the 
comprehensive nature of how we created this problem and the 
reason why we are going to need, as you have testified, a 
comprehensive solution to get out of this problem.
    So as we think about coming to the end of the year here, it 
seems to me maybe there are four alternatives to what we face.
    We could go over the cliff--and when I say we are going 
over the cliff, it is not the U.S. Congress. We are driving the 
American people over the cliff if we do not do something. That 
is one option, so we could let the sequester go into effect, 
the tax cuts expire.
    We could do as we have done for a long time and continue to 
kick the can down the road and just say, well, we did not 
really mean it. When we put this tough sequester in place, we 
did not really mean it, so we are going to turn around and just 
lift it or extend the tax cuts.
    We could solve the problem in a comprehensive way during 
the lame-duck session.
    Or we could put some process in place to try to get us to a 
solution in the new year.
    I wonder if you could talk a little bit about, first of 
all, are those the only alternatives? Maybe there is something 
I have not thought about. And, second, how the financial 
markets would respond to those, or maybe what would be the most 
reassuring thing we could do for the American people at the end 
of the day not to repeat the travesty of the debt ceiling 
discussion last summer.
    Mr. Geithner. Well, I agree that if Congress were to choose 
to try to defer everything--tax cuts, tax expiry, and 
sequester--and do nothing about the long-term fiscal position 
and nothing to help growth in the short term, that would be 
very damaging to the interests of the country. And I think to 
say that as a Nation we have no capacity to come together on a 
set of reforms to address these problems and have to go, as you 
used the phrase, off the cliff seems deeply irresponsible.
    So I think the solution to this problem has to lie in--and 
there has been a lot of foundation laying by you and others and 
your colleagues in this direction over the last year in 
particular. The solution has to lie in replacing those expiring 
tax cuts for middle-class Americans and the sequester with a 
balanced mix of reforms that will raise a modest amount of 
revenue and lock in some carefully designed savings to make our 
commitments to seniors more affordable over time and still 
preserve some room to invest in things necessary for us to 
grow.
    That is the way this has to be resolved, and if were to do 
that as a country, that would be good for confidence and good 
for the economy, good for certainty, and it would demonstrate 
again what the world has always believed about this country, 
which is ultimately we come together and do the necessary 
thing. We do not wait until it is too late.
    Senator Bennet. I think--and, Mr. Chairman, I apologize, 
because I know that my light is red, but I have been here for 
the whole hearing, so I will just ask one follow-up question.
    [Laughter.]
    Senator Bennet. And I have learned so much, so it has been 
good. One follow-up question to that is--and I do not believe 
there is enough of this around this place, but at home, people 
do have a sense that we are all in this together, that we have 
to come together and fix this together. And at least in 
Colorado they really are sick of the partisanship in this place 
on this topic.
    Could you give us, in that spirit, a sense of what the 
scale we would be asking ourselves to commit to versus what 
they have to do in Europe, for example, and what we would be 
asking our generation to do to secure the future for the next 
generation, as a relative matter, and what the people in these 
other countries are going to have to face?
    Mr. Geithner. Excellent question. Let me just try and do it 
very briefly. To get our deficits down to level where the debt 
stops growing as a share of the economy, we need to do--on top 
of the trillion dollars of savings Congress enacted last, we 
have to agree on roughly $3 trillion, at least $3 trillion of 
additional savings. That seems like a lot to people, but it 
only about 2 percent of the national output income this economy 
creates. It is roughly 2 percent of GDP. And that is a very 
manageable challenge for a country like us. And if you do it 
carefully, with sensible reforms on the tax side and carefully 
designed savings on the spending side, you can do it without 
causing any damage to the growth prospects of the U.S. economy 
and to the basic confidence and security retirees have or what 
people have for health care, even the basic safety net for low-
income Americans.
    The challenges faced by every other major industrial 
economy in the world, from Japan to Europe, are vastly greater 
because their growth potential is weaker, their populations are 
much older, the size of their Governments are dramatically 
larger, the generosity of their commitments are much higher. So 
our challenges, although they feel daunting to us and cannot be 
deferred forever, are completely within our capacity to act 
again without asking Americans or the business community or the 
retirees to accept an unacceptable basic burden in that 
context. And that is why this should be within our capacity to 
solve.
    You know, we cannot control what Europe does. It has big 
effects on us, but they are not within our capacity to control. 
These things are completely within our capacity to control, and 
they are completely within the ability of this body to come 
together and agree on some sensible reforms.
    Senator Bennet. Thank you, Mr. Chairman.
    Chairman Johnson. Senator Wicker.
    Senator Wicker. Mr. Secretary, I sure appreciate Senator 
Bennet being here the whole time. I can assure you I have been 
watching on television, and I have learned a lot, too. I admire 
Senator Bennet for being here the whole time. I have got some 
prepared questions, but let me just follow up on what he says. 
Two things.
    These carefully structured savings, let us not talk about 
the revenue stuff, but the carefully structured savings, they 
have to include savings in the entitlement programs like 
Medicaid and Medicare. That is correct, right?
    [Secretary Geithner nodding head.]
    Senator Wicker. The witness is nodding his head.
    Mr. Geithner. That is correct, and the President has 
proposed hundreds of billions of dollars of savings in that 
area because, as you know, the long-term deficits are driven by 
mostly the aging of America and the rising health care costs.
    Senator Wicker. Right. And, for example, the Medicare 
program, I think we all concede--Senator Bennet has been 
outspoken on this--a program that grows at 3 times the rate of 
inflation just simply cannot be sustained, and that is Medicare 
at the present time.
    Mr. Geithner. That is right. I think that even with the 
long-term savings in the Affordable Care Act and even with what 
you might call promising slower growth in health care costs, 
long-term projections still show unsustainably rapid growth, 
again, mostly because more Americans are retiring and because 
the cost of health care is still rising.
    Senator Wicker. And I think also most of us, while 
appreciating the importance of the savings in the Budget 
Control Act, I think we agree with Secretary Panetta and other 
members of the Administration that the meat axe approach of the 
sequester by the end of this year is not helpful to the 
economy. Is that your view also?
    Mr. Geithner. Well, again, the sequester was designed by 
the Republican and Democratic leadership not because it was 
good policy. It was designed to force this body to make some 
compromises on a set of long-term reforms. That was its 
purpose.
    Senator Wicker. And yet, Mr. Secretary, now it is the law 
of the land, and we did not get the result out of the super 
committee that we wanted. And so back to my question: You agree 
that it is unsettling for the economy to be facing this meat 
axe approach, particularly in the defense and other important 
discretionary programs between now and the end of the year.
    Mr. Geithner. I would say it a little differently. I think 
what is damaging to the economy now is the combination of 
inability of Congress to find legislative majorities to do 
things that would help growth, short term and long run, as well 
as an inability to come together and agree on a balanced 
package of long-term fiscal reforms to replace the sequester. I 
think both those concerns are weighing on the economy. I do not 
think they are as big now as the direct effects of Europe or 
the fact that spending is actually falling across the 
Government. But it is a risk, and it is referred to in this 
Council report, and I think we all have a responsibility to try 
to demonstrate to the American people and the private sector 
that, again, this body is going to be able to come together and 
make some tough choices on a balanced package of reforms. And 
then what the sequester is designed to do is to force that, and 
if Congress in the face of concerns about the impact of the 
spending cuts were to simply defer them--you are not advocating 
that, but simply defer them--that would not be good for 
confidence because it would leave the world and the markets 
concerned that it is another symptom of inability of Democrats 
and Republicans to compromise on things that are in the 
interest of the country.
    Senator Wicker. My clock is ticking too fast for us to go 
on with this, but let me just say that I think the looming 
sequester is hurting economic confidence, even as we speak. It 
is going to make the economy worse between today and the end of 
the year, and I do not think I want that, I do not think you 
want that, and I do not think the President wants that.
    Let me just ask one other question. I have in my hand here 
a report from SIGTARP, Office of the Special Inspector General 
for the Troubled Asset Relief Program. It is dated yesterday, 
but it has been out for a while. Have you had a chance to look 
at it?
    Mr. Geithner. I have not read the report, but I have read a 
summary of it.
    Senator Wicker. OK. Well, in your testimony you state, 
``The TARP bank investments have already produced a profit for 
the taxpayer of over $19.5 billion and on current estimates 
will generate an overall profit''--from TARP--``of 
approximately $22 billion.''
    The SIGTARP report appears to contradict that quite 
substantially. This is a quarterly report. It states that 
taxpayers are owed $109.1 billion as of June 30, 2012, and the 
Treasury Department has written off or realized losses of $15.6 
billion that taxpayers will never get back, leaving $93.5 
billion in TARP funds outstanding.
    This seems to be a huge inconsistency, and I would like to 
ask you to explain why there is such a different take from your 
testimony and the Inspector General's report.
    Mr. Geithner. Thank you for raising that. The $20 billion 
estimate refers to the investments in banks made with the 
authority the Congress gave us at the peak of the crisis, and 
we have already realized $20 billion in returns. And if you 
look at estimates of the remaining exposure, we will earn a bit 
more for the taxpayer.
    Now, if you look at the full complement of exposure that 
the Treasury and the Fed took to AIG, again, to protect the 
economy from a failing AIG, on current estimates the taxpayer 
in that case, too, is likely to realize a modest return, 
looking at the full complement of exposure and risk the 
Government took, not just the Fed but the Treasury as a whole.
    Now, we still own some common equity in AIG which we have 
begun to sell and we expect to sell down significantly over 
time. We are moving to do that as quickly as we can. And as 
important as the results on how carefully we have managed the 
taxpayers' exposure, I think it is important to recognize that 
the Fed and the Treasury move very aggressively to note just 
replace the management and board of the institution but to 
bring down the risk and the risky parts of the entity that put 
it in jeopardy very dramatically. So alongside what the State 
insurance companies have been doing to make sure the insurance 
business of AIG is carefully supervised and monitored, we have 
been very aggressive in bringing down the risk. I will just 
give you one example.
    The notional derivative exposure of AIG which so famously 
was at the center of their vulnerability has been reduced by 
roughly 90 percent. So AIG is in a less risky position today, a 
very different firm, and most estimates look all into the 
Government's exposure--and this is a remarkable thing--are 
likely to show that the taxpayer earned a modest return. Of 
course, life is uncertain, the world is uncertain. We still 
have substantial exposure in the equity stake we placed, but 
that is a remarkable outcome foreseen by no one at the time.
    Senator Wicker. So you disagree with the conclusion of the 
Inspector General that says----
    Mr. Geithner. I do no think----
    Senator Wicker. ----we are unlikely to get some of these 
funds back ever?
    Mr. Geithner. Well, again, we cannot--all we can know is 
what our remaining exposure is and what the market value is of 
that exposure today. But what I just said is not a matter of 
dispute. It is a matter of fact.
    Now, people might take different views of what happens to 
the taxpayers' remaining exposure in the common equity of AIG 
as the world evolve going forward, and that is something we do 
not have any certainty over. And, of course, there are some 
places in the world where that may not turn out as well, but on 
current estimates, it looks pretty favorable, and most of the 
exposure has already been recovered for the Fed and the 
Treasury.
    Senator Wicker. Thank you.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman. I appreciate, 
Secretary Geithner, you being here today and your testimony.
    The FSOC recently exercised one of its key authorities when 
it designated eight firms as financial market utilities. As I 
understand it, these companies, which are often referred to as 
the plumbing of the financial system, have not challenged those 
determinations. The timing of these mid-July determinations 
made it impossible for the FSOC to include a discussion of the 
selection process in its most recent annual report. Can you 
talk about the determination process? Why were those eight 
firms selected? Will there be other firms selected for 
designation? What does that designation mean for these firms 
going forward?
    Mr. Geithner. There are two types of what is called 
``designation authority'' provided in the financial reforms 
Congress enacted. The ones you are referring to specifically 
involve key parts of the financial market infrastructure, and 
we designated eight firms. And what that means is we have the 
authority--and this is very important, it did not exist 
before--to make sure that they are run with conservative 
cushions against risk so we are protecting the system from 
systemic risk.
    We went through a very, very careful process within the 
Council to identify the criteria we should use to decide where 
we needed to extend that authority, and we went through a very 
carefully designed process to make sure we gave the firms the 
opportunity to provide better information for our judgments and 
to contest it. And as you said, they seemed broadly comfortable 
with the outcome in that context.
    We have remaining authority that we have not yet executed, 
but we will, to designate large nonbank financial 
institutions--AIG is one potential example of this, but we have 
not made that judgment yet--who, as we saw in a way could pose 
risk to the broader economy and the taxpayer. And the reason 
why that is so important, again, is that if all you do is limit 
leverage and capital for the core of the banking system--and 
there is some risk over time, as we saw over the last few 
decades--you have a huge parallel banking system emerge with a 
lot of risk in it, and so it is very important to protect the 
system to make sure you have the authority to extend those 
prudential safeguards, leverage limitations, for example, to 
firms that are in the business of things like banks do that 
might threaten the system. That is what we are examining now.
    But, again, in each of these cases, we have to move very, 
very carefully because we want to do so in a way that is fair 
and gives the firms a fair opportunity to contest those 
judgments and that we can sustain them legally.
    Senator Hagan. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Warner.
    Senator Warner. Thank you, Mr. Chairman, and thank you, 
Senator Hagan.
    Let me, first of all, start with just following up on what 
Senator Wicker said. I would concur with him that, you know, we 
want to try to avoid the sequester at all costs. My State is 
very contingent upon defense costs, but I would find it just 
stunning to me that if all we did was simply buy off $55 
billion in 1-year defense sequester costs and say that is the 
extent of our responsibility. I mean, we need a minimum of $4 
trillion, as you and everyone else from left to right have 
said. We all care about our country's security and national 
defense, but I wholeheartedly believe the former Chairman of 
the Joint Chief, Admiral Mullen, when he said the greatest 
single threat to our country is not the threat of terrorism but 
the threat of our debt and deficit. And those who say, well, 
all we have to deal with is sequester or even a subset of 
sequester, just the defense half of the house, to me--and I do 
not think Senator Wicker said this, but, I mean, there are 
others who say that should be our only top priority--is 
stunning to me and I do not think addresses the concern that we 
face. And I would hope that we could perhaps, with your 
assistance or others', size, as you mentioned, the challenge of 
$4 to $5 trillion over a 10-year frame that would both move 
revenues closer to historic numbers, bring spending down, start 
to reform our entitlement programs. The relative ask of the 
American people is so much smaller than what is being asked of 
people all across the world. Senator Bennet pointed out Europe, 
but, you know, slowing circumstances in India and China and 
elsewhere. And the more we could frame that I think would be 
helpful.
    I want to come back to LIBOR for a moment, but I listened 
with some irony, and as somebody who has kind of not fully 
followed as closely as you and others, but, you know, here was 
a circumstance that was reported in the press, in the Wall 
Street and other papers at the time. We had regulators in 
Britain. We had a host of regulators in the United States. We 
had Treasury officials in the United States. And to my 
knowledge, the only guy that actually sounded the alarm and 
said we ought to be looking at this was the then-New York Fed 
President, and yet you seem to be getting perhaps a 
disproportionate share of ``Why not more?'' when there were a 
host of other folks who would at least have equal or greater 
responsibility in acting on this matter.
    There is going to be a question here.
    You know, one of the things that I think one of my other 
colleagues pointed out--and I think we all kind of scratch our 
head. You pointed this out. We moved to the CFTC to start an 
enforcement action. I think we all kind of scratch our heads 
saying, ``Gosh, does it really take 4 years to get an 
enforcement action through?''
    One of the things that concerns me is the nature of these 
enforcement actions, because of their confidentiality, what 
would happen if an enforcement entity feels they have got to do 
this in a confidential basis, and yet the actions may end up 
posing a systemic risk, how do we get that right so that under 
the guise of confidentiality a regulator is free to at least 
reveal to the FSOC, hey, this is not only potentially criminal 
or otherwise, but the action in itself may be systemically 
risky, and we cannot wait for 3 or 4 years for the 
investigation to finish before we kind of bring it forward?
    Mr. Geithner. Well, I think it is a very good question, and 
I thank you for raising it. I think that this is a solvable 
problem, but what it requires is that the enforcement agencies 
have in place safeguards so that if they find it necessary to 
bring to the attention behavior that has systemic implications 
to other agencies, like, for example, the Fed, they are able to 
do that without jeopardizing the investigation. There is lots 
of precedent for doing this, but we do not yet have in place 
the types of MOUs and other types of agreements that would give 
them that satisfaction. And we are on that and trying to fix 
that quickly.
    Senator Warner. And, Mr. Chairman and Ranking Member, this 
would be something I think we ought to look into a bit more to 
make sure that I could just see some systemically risky action 
being caught up inside an investigation, and we sure as heck--
we created an FSOC to try to make sure we have got that broad 
overview. We ought to urge the Treasury and others to get these 
MOUs in place.
    Let me follow up with a second question. A lot of concern, 
again, raised by both sides of the aisle about the kind of 
voluntary actions of the financial institutions to contribute 
to LIBOR and then maybe the sense that some of the incentives 
may not have been right to make sure folks were coming clean. 
You know, aren't there across the whole financial system a 
whole series of other voluntary actions where financial 
institutions are asked to contribute information that could 
also be subject to manipulation, and we have whole swaths, I 
think, about--again, with the Chairman and the Ranking Member, 
as we sorted through after the financial crisis, organizations 
like FINRA and others that are more kind of self-policing; you 
know, not that we want to create massive new amounts of rules 
and regulations, but how do we make sure that if it is LIBOR 
this month that there is not one of these other voluntary 
industry-generated self-regulatory bodies? How do we put a 
warning out that, hey, guys, everybody needs to be coming 
forward with clean, nonmanipulated information?
    Mr. Geithner. A very good question, and this is something 
the Council is looking at right now. Again, there are two 
different sets of examples we have had recently that create 
this vulnerability. One is what you saw with the British 
Bankers' Association and LIBOR, and as I said earlier, we are 
looking carefully at other survey-based measures of financial 
prices that are set by industry bodies to make sure they are 
not vulnerable to this, and we will do that very carefully.
    But there is a different example we had recently in the 
failure of Peregrine, for example, which points out--and this 
is true in a variety of areas--that the market regulators rely 
on so-called self-regulatory bodies to carry some of the burden 
for examination and audit. And as you saw in that case, and as 
the report refers to in a different context, that puts us in a 
position where you might have customer funds more vulnerable to 
fraud than would otherwise be the case.
    So the Council is going to take a careful look at all those 
things, too. I do not know where that is going to take us yet, 
but we want to address both of them, not just the first 
question.
    Senator Warner. Well, Mr. Chairman, one of the things may 
be that many of these entities I think works, do self-police. 
Rather than trying to create some huge new governmental 
structure, we may want to look at how, again, we can look at 
the penalty side if there is bad behavior within these 
voluntary organizations, what we might--to make sure we do not 
have to create a whole new artifice. And I was hoping I was 
going to--you know, that maybe being the last Member I had one 
more question, but I see my colleague is coming--no, no. Hey, 
listen, I am 3 minutes over.
    Senator Schumer. I need to get settled.
    [Laughter.]
    Senator Schumer. Ask a nice long one.
    Senator Warner. Can I get one more little brief one in?
    Senator Schumer. With the Chairman's permission, of course.
    Chairman Johnson. Permission granted.
    Senator Warner. Although, you know, I am falling into the 
hypocrisy category as well. I was going to suggest maybe we 
ought to go to 4-minute rounds to make us all do 5 minutes, but 
I have just violated it as well.
    The only last quick comment I would like to have is a very 
interesting comment by one of the architects of the collapse of 
Glass-Steagall yesterday to say let us put Glass-Steagall back 
in case. You know, interesting transformation there.
    I think one of the things, you know, as we were trying to 
sort through how you kind of get the right balance, was the 
ability of these liquidation plans or funeral plans to help try 
to regulate size. You are seeing a lot of the banks trade below 
book value. Maybe the market is saying size may not be this big 
of asset in terms of how the market views it. Are you starting 
to see any of these tools change any behavior? And thank you, 
Mr. Chairman.
    Mr. Geithner. You know, Congress thought about this 
question long and hard in considering financial system, and it 
put in place, I think to its credit, a set of, again, pretty 
tough new safeguards in the system. And among those are, again, 
higher capital requirements or authority on the largest 
institutions. So it means if you are among the largest in the 
world, you have to hold more capital against the risk you take 
than is true for a typical bank. That is one.
    Two, it is not just living wills, but there is broad 
authority in the law to limit the ability of the Government in 
the future to come in and save these firms from their mistakes, 
cannot protect them from that. That is very consequential.
    There is authority in the law for regulators to break up or 
limit the size and scope of those institutions in advance of a 
crisis if they believe they pose too much risk to the system. 
And my own sense is what is happening right now is the full 
effect and impact of those reforms as they get traction are 
starting to have people reassess what is the right mix of scale 
and scope and size that is appropriate for investors in this 
kind of thing. That is what is forcing this examination.
    What we are going to do is continue to look at any idea 
that helps satisfy this basic obligation we have to create a 
system that is more stable, more resilient, and less vulnerable 
to what we saw in 2008. But we have a much tougher framework in 
place today than we had before the crisis, and we want to make 
sure that we do not see that weakened by all the pressure we 
are facing to weaken those reforms.
    Chairman Johnson. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. I appreciate your 
being here and waiting, and I appreciate the Secretary.
    First, you know, Mr. Secretary, there has been a lot of 
discussion about LIBOR in recent weeks, about who knew what and 
when and whether various regulators should have done more to 
crack down on alleged manipulation of LIBOR. Obviously this is 
a serious issue. The potential impact is vast, although it goes 
in different directions. If people wanted a low LIBOR, they 
would lower mortgage rates and lower credit card rates and 
things like that. So it is hardly as clear-cut as some are 
making it.
    But I am puzzled by repeated claims that you and other 
regulators stood by and did nothing and that somehow we are 
just learning about this 4 years later. You and the New York 
Fed were proactive, not only by raising concerns but also 
proposing structural solutions. Moreover, Barclays just reached 
a large settlement with--guess who?--the U.S. regulators--not 
the U.K. regulators or anybody else--and it was the Fed, DOJ, 
CFTC working on this investigation. And those did not just 
startup 2 weeks ago. They have been going on for a long time.
    So I think the idea that we did nothing for 4 years is 
obviously false, and I think some are taking unfair shots at 
you. Obviously you have to answer every question and every 
criticism, and overall I would say this, since I heard one or 
two comments were talked about even here today and a lot in the 
House yesterday: I think you have been just a very, very fine 
public servant. From the days when we first met when we were 
dealing with the TARP and the stimulus, both of which saved our 
country from what I think would have the Great Depression, and 
you have been smart on the merits, down the middle, you have 
stood up to the financial services industry when you thought 
they were wrong--the Volcker Rule as an example--but you also 
did not just bash them needlessly. And so I give you kudos for 
that, and I think somebody should say it, so I did.
    I have a question for you on our favorite subject where we 
disagree: some big country over there at the other side of the 
Pacific Ocean. Under Secretary Brainard recently gave a speech 
which reminds us that China's economy is now too large for it 
to pick and choose which rules it follows, which is what the 
Chinese have done constantly. President Hu, at the fourth 
meeting of the U.S.-China Strategic Economic Dialogue, made 
significant commitments to create opportunities for Americans 
to export and sell to China by increasing market access and 
leveling the playing field by eliminating several barriers to 
trade from foreign firms. These reforms, if implemented, would 
significantly bolster U.S. investment in China, but you know 
what? I do not put much credence in them because we have heard 
commitments like this over and over and over again with very 
little result.
    What progress, if any, has China made to live up to the 
commitments they made this spring to increase foreign market 
access? What concretely have they done since that speech by 
President Hu, particularly in light of the proposed acquisition 
of Nexon by the China National Offshore Oil Corporation, which 
obviously provides increased Chinese access to the U.S. market?
    Mr. Geithner. Senator, I do not actually think you and I 
disagree on this, although sometimes we disagree a little bit 
on how best to promote our interests in this context. But on 
the basic problem, I agree with you and you are right to 
continue to give it a lot of attention in this context. I would 
be happy my staff, or do it directly, lay out to you exactly 
where they are on that specific piece, which is opening up the 
broader investment opportunities to U.S. firms. But our 
interests go much broader than that. I mean, they are not just 
about making sure the exchange rate appreciates over time, that 
it is more market determined, their trade surplus comes down, 
it has dramatically. But we need to provide much stronger 
protection for intellectual property rights for U.S. 
innovators.
    There is a whole range of other disadvantages U.S. firms 
that compete in China face today that we need to address over 
time, and it is not tenable for China, which now has a world-
class manufacturing sector, to continue to sustain and maintain 
this range of protections for its own basic firms.
    Senator Schumer. OK. Well, I would like some specifics on 
anything that has happened specifically since President Hu gave 
his speech. I would say that the Chinese trade deficit has come 
down significantly, but not with the U.S. Not with the U.S. It 
has come down worldwide and with Europe a lot, but not with us, 
as I read the numbers.
    Mr. Geithner. True, but U.S. exports, just to take the 
other side of it, are growing very rapidly to China, and that 
is a very good thing, a sign of our strength and 
competitiveness, too.
    Senator Schumer. OK. One final question, if I might, Mr. 
Chairman?
    Chairman Johnson. Yes.
    Senator Schumer. This is about the fiscal cliff and the 
middle-class tax cut bill the Senate passed yesterday. As you 
noted in your opening statement, the slowdown in U.S. growth 
could be exacerbated by concerns about approaching tax 
increases and spending cuts. And yesterday the Senate took 
significant action to eliminate a major piece of that 
certainty, so let me just ask a few questions to highlight 
that.
    What percentage of the fiscal cliff does the extension of 
middle-class tax cuts take care of?
    Mr. Geithner. The extension of the rate itself avoids $100 
billion tax increase on 98 percent of Americans. So that is a 
very substantial piece of what you called the full complement 
of fiscal measures.
    Senator Schumer. The numbers I have are it takes $130 
billion out of $607 billion, or about 21 percent. That is a 
lot, right?
    Mr. Geithner. That is a lot, absolutely. And it has a big 
effect because, again, it goes to the tax rates that 98 percent 
of American pay.
    Senator Schumer. How about the 1-year AMT patch?
    Mr. Geithner. That is also about $100 billion.
    Senator Schumer. Right, so that is another--I have 92 out 
of 607, so that is 15 percent. If you add those two things up, 
36 percent, that is a lot. And all together, how much 
protection from the anticipated GDP hit would the House's 
passage of our tax bill afford the country? My numbers are 41 
percent.
    Mr. Geithner. I would say a very substantial part of it, 
but I think that 40-percent number slightly understates it, 
because what people count in the overall number to some extent 
is already expected and planned for. The thing that would be 
most damaging to confidence and economic activity would be the 
tax of middle-class Americans to go up in this context. And as 
you know, if you let them expire, it is a very substantial tax 
increase on middle-class Americans. And, remember, it is not 
just--you all recognized this in the Senate. You do not need 
just to extend the rates and AMT, but you need to make sure you 
extend the expanded tax credits that we put in place in 2009 
that go to 25 million Americans. If you do not extend those tax 
credits, then taxes go up for 25 million Americans as well. So 
you need to do that full mix of things. And if the Congress 
were to enact that, the House were to enact that, that would 
take care of the most damaging piece of the end-of-the-year 
uncertainty for----
    Senator Schumer. So, clearly, I mean, there are other 
issues here, who should pay what, what percentage the 
Government should pay in taxes. But if you are caring about 
uncertainty, which we hear from our Republican colleagues all 
the time, the number one thing they could do is pass our tax 
cut, which we all agree on. We may not agree on what to do with 
people above 250, but we all agree it should be below 250. So 
you could take a huge amount of the uncertainty off the table. 
So my view--I do not know if you agree with this. If they do 
not pass our tax cut, they should stop talking about 
uncertainty.
    Mr. Geithner. I think it is necessary to do but it needs to 
go beyond that, and there are other things you can do for the 
economy now that would make growth stronger and infrastructure, 
involving teachers or incentives to hire. And, of course, we 
all want to see Congress come together on some set of reforms 
to help reduce the long-term deficits.
    Senator Schumer. Thank you, Mr. Chairman. I appreciate your 
indulgence.
    Chairman Johnson. Thank you again, Secretary Geithner, for 
being here today. Your work and the work of the Council is 
greatly appreciated.
    Thanks again to my colleagues and our panelist for being 
here today. This hearing is adjourned.
    [Whereupon, at 12:15 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

               PREPARED STATEMENT OF TIMOTHY F. GEITHNER
                 Secretary, Department of the Treasury
                             July 26, 2012

    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to testify today regarding the 
Financial Stability Oversight Council's (the ``Council'') annual 
report.
    Each year, the Council is required to prepare a public report 
reviewing financial market and regulatory developments, potential 
threats to financial stability, and recommendations to strengthen the 
financial system. My testimony today reviews the conclusions and 
recommendations made by the Council in its second annual report, which 
is being submitted in full alongside this testimony.

Measures of Strength in the Financial System
    The strategy adopted by the United States to repair and reform the 
financial system after the crisis has helped produce a stronger and 
more resilient system.

    We have forced banks to substantially increase the amount 
        of capital they hold, so that they are able to provide credit 
        to the economy and absorb losses in the future. Tier 1 common 
        capital levels at our country's banks are up by $420 billion, 
        or 70 percent, from 3 years ago. The ratio of tier 1 common 
        equity to risk-weighted assets at these institutions increased 
        from 6 percent to over 11 percent during this period.

    We have forced a significant reduction in overall leverage 
        in the financial system. Financial sector debt has dropped by 
        more than $3 trillion since the crisis, and household debt is 
        down $900 billion.

    Banks are funding themselves more conservatively, relying 
        less on riskier short-term funding.

    The size of the ``shadow banking system''--which had been a 
        key source of financial stress during the crisis--has fallen 
        substantially, by several trillion dollars.

    The Government has closed most of the emergency programs 
        put in place during the crisis and recovered most of the 
        investments made into the financial system, which were 
        originally expected to result in a loss to taxpayers of several 
        hundred billion dollars. The TARP bank investments have already 
        produced a profit for the taxpayer of over $19.5 billion, and 
        on current estimates will generate an overall profit of 
        approximately $22 billion.

    Credit is expanding, and the cost of credit has fallen 
        significantly from the peaks of the crisis. Commercial and 
        industrial lending at commercial banks increased 10 percent in 
        2011 and increased at an annual rate of 11 percent in the first 
        5 months of 2012.

    The overall impact of these changes is very important. They have 
made the financial system safer, less vulnerable to future economic and 
financial stress, more likely to help rather than hurt future economic 
growth, and better able to absorb the impact of failures of individual 
financial institutions.

Threats to Financial Stability
    The Council's report identifies a number of potential threats to 
the stability of the financial system. Among the most important of 
these is the fact that the financial system still confronts a 
challenging and uncertain overall economic environment.
    The ongoing European crisis presents the biggest risk to our 
economy. The economic recession in Europe is hurting economic growth 
around the world, and the ongoing financial stress is causing a general 
tightening of financial conditions, exacerbating the global slowdown.
    Over the past 2 years, U.S. financial institutions have 
significantly reduced their exposure to the most vulnerable economies 
of Europe, and they hold substantial levels of capital against the 
remaining exposures. The combined economies of the euro area constitute 
the second largest economy in the world and are home to many of the 
world's largest and most interconnected financial institutions. As a 
result, a severe crisis in Europe would necessarily have very 
substantial, adverse effects on the United States.
    Europe's leaders are putting in place a package of long-term 
reforms--economic reforms to restore competitiveness, improve fiscal 
sustainability, and restructure their financial systems, and governance 
changes to transfer more responsibility to European institutions for 
oversight of national financial systems and how much Nations can 
borrow. For these reforms to work, they need to be complemented by 
actions in the near term to restore financial stability and support 
economic growth, including strengthening the stability of the banking 
systems and bringing sovereign borrowing rates down in the countries 
implementing reforms.
    Global economic growth has slowed and forecasts for future economic 
growth have been reduced. Europe is responsible for much of this, but 
not all of it. Growth in China, India, Brazil, and other large emerging 
economies has slowed for a variety of reasons unique to those 
countries.
    In the United States, the economy is still expanding, but the pace 
of economic growth has slowed during the last two quarters. In addition 
to pressures from Europe and the global economic slowdown, U.S. growth 
has been hurt by the rise in oil prices earlier this year, the ongoing 
reduction in spending at all levels of Government, and slow rates of 
growth in income.
    The slowdown in U.S. growth could be exacerbated by concerns about 
approaching tax increases and spending cuts, and by uncertainty about 
the shape of the reforms to tax policy and spending that are necessary 
to restore fiscal responsibility. As the Council's report discusses, 
the United States faces fiscal deficits that are unsustainable over the 
long run. The failure of policy makers to enact reforms in a timely and 
credible manner will be damaging to future economic growth.
    These potential threats underscore the need for continued progress 
in repairing the remaining damage from the financial crisis and 
enacting reforms to make the system stronger for the long run.

Progress Implementing Financial Reform
    Regulators have made important progress over the past 2 years 
designing and implementing the regulations necessary to implement 
financial reform. Nine out of 10 rules with deadlines before July 2, 
2012, have been proposed or finalized. The key elements of the law will 
largely be in place by the end of the year. The financial system is 
already in the process of adapting to these reforms.

    We have taken important steps to limit risk-taking at the 
        largest financial institutions. The Federal Reserve and other 
        supervisors have negotiated new, stronger global capital and 
        liquidity requirements. As part of this effort, Federal banking 
        regulators will impose even higher requirements on the largest 
        banks.

    We now have the ability to put the largest financial 
        companies under enhanced supervision and prudential standards, 
        whether they are banks or nonbanks, and the ability to subject 
        key market infrastructure firms to heightened risk-management 
        standards.

    We are implementing the provisions of the law designed to 
        protect taxpayers and the financial system from the failure of 
        a large financial firm. Regulators, led by the FDIC, have 
        established the new ``orderly liquidation authority,'' a 
        mechanism to unwind responsibly large, complex financial 
        companies. This authority will help make sure that culpable 
        management is fired and that investors pay for the failure of a 
        firm, not taxpayers. Nine of the largest banks have now 
        submitted ``living wills,'' providing contingency plans for an 
        orderly bankruptcy.

    The SEC and CFTC are putting in place a new framework for 
        derivatives oversight, providing new tools for combatting 
        market abuse and bringing the derivatives markets out of the 
        shadows. Their recent joint adoption of a swaps definition will 
        trigger the effectiveness of more than 20 key rulemakings and 
        marks a major milestone in the implementation of derivatives 
        reforms.

    Regulators are working to strengthen protections for 
        investors and consumers. The CFPB has worked to simplify and 
        improve disclosure of mortgage and credit card loans to help 
        consumers make more informed financial decisions. The CFPB has 
        also launched its supervisory program for very large depository 
        institutions (in coordination with prudential regulators) and 
        for certain nonbanks.

    As we put in place these reforms in the United States, we 
        are working with supervisors and regulators in Europe, Japan, 
        and around the world to provide a more level playing field. In 
        addition to the new global standards for capital and liquidity 
        requirements, we are negotiating global margin requirements for 
        derivatives. On these and a range of other issues, we are 
        trying to improve the prospect of tougher and broadly 
        equivalent global standards and requirements, so that financial 
        risk cannot simply move to where it cannot be seen or 
        effectively constrained.

    These are complicated reforms. This process is challenging because 
our financial system is complex, because we want to target damaging 
behavior without damaging access to capital and credit, because we want 
the reforms to endure as the market evolves, and because we need to 
coordinate the work of multiple agencies in the United States and many 
others around the world.

Recommendations To Improve Financial Stability
    In addition to these important reforms, the Council has put forward 
recommendations in a variety of other areas to help strengthen our 
financial system.

Risks in Wholesale Short-Term Funding Markets
    The Council recommends a set of reforms to address structural 
vulnerabilities, particularly in wholesale short-term funding markets 
such as money market funds (MMFs) and the tri-party repo market. As we 
saw during the crisis, these sources of funding were particularly 
vulnerable to disruption that can quickly spread through the markets.
    The SEC adopted a number of reforms to money market funds in 2010, 
but they remain vulnerable to runs. The Council supports SEC Chairman 
Schapiro's efforts to address certain weaknesses, including (1) the 
lack of a mechanism to absorb a sudden loss in value of a portfolio 
security and (2) the incentive for investors to redeem at the first 
indication of any perceived threat to the value or liquidity of the 
MMF. The Council recommends that the SEC publish structural reform 
options for public comment and ultimately adopt reforms that address 
money market funds' susceptibility to runs. The Council further 
recommends that, where applicable, its members align regulation of cash 
management vehicles similar to MMFs within their regulatory 
jurisdiction to limit the susceptibility of these vehicles to run risk.
    In tri-party repo markets, the Council supports additional steps 
toward reducing intraday credit exposure within the next 6 to 12 
months. In addition, the Council recommends that regulators and 
industry participants work together to define standards for collateral 
management in the tri-party repo market, particularly for lenders (such 
as MMFs) that have certain restrictions on the instruments that they 
can hold.

Customer Fund Protection
    The Council highlights the importance of establishing and enforcing 
strong standards for protecting customer funds deposited for trading. 
For example, the Council recommends that regulators consider 
strengthening regulations governing the holding and protection of 
customer funds deposited for trading on foreign futures markets. The 
Council also recommends that regulators seek ways to strengthen risk-
management standards for clearinghouses and to develop and monitor best 
practices across their respective jurisdictions.

Risk Management and Supervisory Attention
    The Council recommends continued work to improve risk-management 
practices, highlighting a number of specific challenges facing firms 
and their supervisors. The Council supports continued attention to 
strengthening capital buffers and stress testing. Firms also need to 
continue to guard against potential disruptions in wholesale short-term 
funding markets and bolster their resilience to interest rate shifts.
    Firms need to continue to strengthen internal disciplines and 
safeguards in underwriting standards, the development of new financial 
products, and complex trading strategies. The report also notes that 
high-speed trading is an area where increased speed and automation of 
trade execution may require a parallel increase in trading risk 
management and controls.

Housing Finance Reform
    The Council continues to support progress toward comprehensive 
housing finance reform. The U.S. housing finance system has required 
extraordinary Government support since the financial crisis, and the 
market continues to lack sufficient private capital. As recognized in 
the framework for housing finance reform developed by certain member 
agencies of the Council, the return of private capital is crucial to 
reestablishing confidence in the integrity of the market and better 
aligning incentives.
    However, in order for private capital to come back into the market, 
there needs to be greater clarity from regulators and Congress on new 
rules for all participants in the market. Challenges include the lack 
of broadly agreed upon standards for mortgage underwriting (which are 
necessary to support the valuation and liquidity of mortgage-backed 
instruments), nonuniform foreclosure practices across different States, 
and uncertainty surrounding the potential liability of mortgage loan 
securitizers.
    In addition, reform should address servicer compensation models and 
the need for national mortgage servicing standards, and it should 
strengthen protections for borrowers. Members of the Council are 
addressing many of these challenges through existing authority and the 
implementation of Wall Street Reform, yet comprehensive reform will 
require significant legislation, and the leadership of this Committee 
will be central to the effort. As we move forward, we must take care 
not to undermine the housing market, which is showing signs of recovery 
but is still weak in many areas.

Improving Transparency and Financial Data
    One of the weaknesses in our old system of regulation was a lack of 
information--information that could be used to help identify threats 
and more effectively understand the financial system. Gaps in data and 
analysis remain a threat to financial stability, and an important part 
of reform efforts will continue to be the improvement and availability 
of financial data and information.
    This project is being spearheaded by the Office of Financial 
Research (OFR), which was established by Wall Street Reform. The OFR's 
work is crucial to improving transparency, our understanding of how the 
financial system supports the economy, and our capacity to identify 
threats to financial stability. The OFR has done tremendous work over 
the past year, undertaking a number of initiatives, including steps to 
create a ``legal entity identifier'' for financial contracts, which 
will help us understand exposures in the market. Last week, the OFR 
released its first annual report, which analyzes threats to financial 
stability along with ways to address data gaps and promote data 
standards.

Conclusion
    The member agencies of the Council have made considerable progress 
over the past few years in making our financial system safer and 
stronger--more resilient and less vulnerable to crisis, with better 
protections for investors and consumers.
    We still have a lot of work ahead of us, however. We need your 
support to make these rules strong and effective. And we need your 
support to make sure the enforcement agencies have the resources they 
need to prevent fraud, manipulation, and abuse.
    I want to thank the other members of the Financial Stability 
Oversight Council, as well as the staff of the members and their 
agencies, for the work they have done over the past year and their 
efforts to produce this annual report.
    We look forward to working with this Committee, and with Congress 
as a whole, to build on the substantial progress we have made to create 
a stronger financial system.

               RESPONSES TO WRITTEN QUESTIONS OF
           CHAIRMAN JOHNSON FROM TIMOTHY F. GEITHNER

Q.1. One of the purposes of FSOC was to increase coordination 
among the agencies to better spot risks to the financial 
system. Can you offer specific examples of how FSOC 
coordination has benefited the financial system? If Congress 
were to repeal or undermine Wall Street Reform, as some have 
suggested, what would be the impact on financial stability?

A.1. The FSOC has benefited the financial system through 
increased, ongoing information-sharing among its members and 
their staffs, and through new joint accountability for the 
monitoring and identification of threats to financial stability 
pursuant to the Dodd-Frank Act.
    While statutorily required to meet quarterly, the FSOC has 
met over 25 times since its formation. For example, the FSOC's 
principals have come together to share information on a range 
of important financial developments, such as the situation in 
Europe, housing markets, the interaction of the economy and 
energy markets, the tri-party repo market, and lessons to be 
drawn from recent errors in risk management at several major 
financial institutions, including the failure of MF Global and 
trading losses at JPMorgan Chase. More recently, the FSOC met 
to discuss the impact of Hurricane Sandy on the functioning of 
our markets and has proposed for public comment recommendations 
to the SEC regarding reforms of money market funds. Staffs of 
FSOC members and member agencies continue to work on these 
issues.
    Under the Dodd-Frank Act, the FSOC is required to report on 
its view of potential emerging threats to financial stability 
and significant financial market and regulatory developments. 
This requirement informs the FSOC's work throughout the year, 
and allows the public to be informed of the FSOC's views on 
important matters regarding financial stability and the 
financial services marketplace.

Q.2. As Wall Street Reform and Basel III rulemakings on SIFIs 
progress, what steps did FSOC take to analyze the differences 
between banks and nonbank SIFIs and to incorporate those 
findings into the rulemakings? Do you think that the actions 
and rulemakings to date recognize the differences between banks 
and nonbank SIFIs? How do you plan to synchronize designation 
of nonbank SIFIs with regulations that would govern the 
different types of nonbank SIFIs? What role did FIO and the 
Independent Insurance member of FSOC play in the rulemakings?

A.2. The Dodd-Frank Act and subsequent work of the Financial 
Stability Oversight Council recognize the various distinctions 
between bank holding companies and nonbank financial companies 
as well as between different types of nonbank financial 
companies. Unlike bank holding companies, for which the statute 
provides a specific threshold for the application of enhanced 
prudential standards, nonbank financial companies must be 
considered by the Council based on specific statutory criteria 
and the Council's determination that a particular firm could 
pose a threat to U.S. financial stability. The designation of 
nonbank financial companies also differs from that of 
systemically important financial market utilities, which are 
considered under another designation process set forth in Title 
VIII of the Dodd-Frank Act.
    In general, before being designated by the Council, a 
nonbank financial company will be evaluated in a three-stage 
process which goes well beyond the consideration of a firm's 
size (as measured through total consolidated assets) that 
occurs under the Dodd-Frank Act for a bank holding company. The 
Council's six-category framework for evaluating nonbank 
financial companies focuses on a firm's size, 
interconnectedness, substitutability, leverage, liquidity risk 
and maturity mismatch, and existing regulatory scrutiny. 
Furthermore, the Council has consulted with the Federal Reserve 
Board on the potential differences between the supervision of 
and enhanced prudential standards for nonbank financial 
companies and for bank holding companies.
    The Federal Insurance Office and the Council's independent 
member with insurance expertise were instrumental in developing 
the rulemaking and processes for designating nonbank financial 
companies which allow for more effective and fully informed 
evaluations of insurers for potential designation.
    Regarding Basel III rules, Treasury is not a rule writer. 
Nevertheless, the banking agencies have consulted with the 
Federal Insurance Office as they consider public comments 
received on their proposed capital rules and work toward final 
rules to implement Basel III.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SHELBY
                    FROM TIMOTHY F. GEITHNER

Q.1. While you were President of the Federal Reserve Bank of 
New York (the ``New York Fed''), did you:

  A.   Take any action to further investigate allegations of 
        LIBOR manipulations before or after the President's 
        Working Group on Financial Markets met in May of 2008?

  B.   Instruct your staff to request information about 
        allegations of LIBOR manipulation from any LIBOR-
        reporting bank supervised or regulated by the New York 
        Fed?

  C.   Instruct your staff to send inspectors or examiners to 
        LIBOR-reporting banks supervised or regulated by the 
        New York Fed to investigate allegations of LIBOR 
        manipulation?

  D.   Recommend to the Board of Governors of the Federal 
        Reserve System to exercise its statutory authority and 
        commence formal enforcement action (including imposing 
        fines or penalties) against LIBOR-reporting banks 
        supervised or regulated by the New York Fed for 
        manipulations of LIBOR?

    If you answer ``yes'' to any of the above questions, 
provide a full explanation, including the dates of any actions 
taken.

A.1. During the financial crisis, market participants began to 
raise concerns about the reliability of the LIBOR and the 
possibility that banks were not reporting their actual cost of 
borrowing. Some of these concerns were reported in articles in 
the the Wall Street Journal and the Financial Times in 2008.
    The New York Fed took a number of actions in response to 
these concerns. The New York Fed informed U.S. regulators and 
other Government officials, including the key agencies with 
responsibility and authority for market manipulation and abuse. 
As you noted, I raised the issue personally with the 
President's Working Group on Financial Markets in May of 2008. 
This meeting included the leaders of the CFTC, SEC, OCC, FDIC, 
the Federal Reserve Board of Governors, and Treasury.
    The New York Fed also raised concerns with the Bank of 
England and pushed for reforms to the LIBOR process that would 
make the rate less vulnerable to misreporting. I raised 
concerns in person with Bank of England Governor Mervyn King in 
May of 2008. Shortly thereafter, I sent Governor King a 
memorandum with six specific recommendations for ways to 
address this problem. The Bank of England responded favorably 
to our recommendations and indicated that they would act on 
them. New York Fed staff continued to communicate with British 
authorities in follow-up.
    At roughly the same time, the CFTC began a 4-year long, 
far-reaching, confidential investigation, which ultimately 
involved the SEC, the DOJ, and a number of foreign regulators. 
The CFTC's investigation resulted in the very substantial fines 
and other measures related to Barclays and other firms.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                    FROM TIMOTHY F. GEITHNER

Q.1. It is my understanding that despite serious questions 
about LIBOR's accuracy and relevance raised throughout the 
spring and summer of 2008, the Federal Reserve and the Treasury 
Department continued to use LIBOR as a benchmark in connection 
with the emergency liquidity and credit facilities created 
during the financial crisis. For example, this measure was used 
to set the interest rate for the Term Asset-Backed Securities 
Loan Facility (TALF), which was established by the Federal 
Reserve Bank of New York and the Treasury Department in March 
2009. Why did the Federal Reserve use this measure to set the 
loan rates in the TALF? Did the Federal Reserve use this 
measure to set the rates used in the other credit and liquidity 
programs established during the financial crisis? If so, which 
programs? Did the Federal Reserve consider using other rates? 
Why or why not?

A.1. As you noted, Treasury worked with the Federal Reserve to 
establish the Term Asset-Backed Securities Loan Facility (TALF) 
to increase the availability of credit for U.S. households and 
small businesses. Because of Treasury's involvement in the 
program, we are happy to address your question as it relates to 
the TALF.
    Under the TALF, the Federal Reserve Bank of New York 
extended loans to finance purchases of certain highly rated 
asset-backed securities that were in turn backed by loans to 
businesses and households. TALF loans with both fixed and 
floating interest rates were extended, and the floating-rate 
loans were based on several base rates, including LIBOR, prime, 
and the FOMC's target Federal funds rate. Each TALF borrower 
was required to choose a TALF loan rate that corresponds to the 
interest payments on the securities financed by and 
collateralizing the TALF loan. If the interest rate on the 
securities is based on LIBOR, the TALF loan rate is also based 
on LIBOR.
    The TALF is now being wound down. Whereas approximately $70 
billion in loans were extended, there were approximately $850 
million in loans outstanding as of December 2012. We do not 
expect to have any losses from the program.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER
                    FROM TIMOTHY F. GEITHNER

Q.1. Yesterday you said at the House hearing that regulation is 
not meant to protect institutions from their own mistakes but 
to prevent the system from the consequences of these mistakes. 
I wholeheartedly agree and, in fact, I think we have taken too 
much of a focus on protection institutions as a regulatory 
paradigm. Would you elaborate on what you meant by this, and 
tell us if you think regulators or policy makers are too 
focused on protecting institutions, not protecting the system?

A.1. Previously, I testified that the Dodd-Frank Act prohibits 
regulators from bailing out financial firms from their own 
mistakes. Further, the Dodd-Frank Act is designed to make sure 
that when financial firms do make mistakes, the broader economy 
and the U.S. financial system are not imperiled.
    Reforms include provisions designed to make sure that firms 
are able to absorb the costs of their own mistakes. Higher 
capital requirements, better quality capital, and mandatory 
stress testing are important parts of these reforms along with 
enhanced prudential standards for nonbank financial companies 
that are designated as systemically significant. Mandatory 
clearing reduces the interconnection risks that can come with 
complex derivatives contracts by creating a central 
counterparty. Additionally single counterparty exposure 
ceilings further constrain the size of risks that individual 
firms can assume to each other.
    In addition, the Dodd-Frank Act creates an orderly 
liquidation authority so that when a complex financial company 
does fail, it can be wound down in a way that mitigates 
potential adverse effects on the U.S. financial system and the 
economy at large.

Q.2. Some people have talked about various ``silver bullet'' 
fixes to systemic risk. A few ideas include making banks 
smaller or separating types of activities that one firm can 
engage in. As the Chairman of the FSOC, have you given thought 
to these approaches? Why hasn't the FSOC advocated for a more 
aggressive approach to dealing with risk?

A.2. The ideas that you mention have been the subject of 
discussions of the Council and within its member agencies. 
While different policies have the potential to reduce risk in 
different ways, I do not agree that there is a single ``silver 
bullet'' fix.
    With regard to making big banks smaller, the Dodd-Frank Act 
reduced the probability of failure of large institutions and 
helped ensure that the rest of the financial system can absorb 
or contain losses. Reforms included new liquidity requirements 
for large financial institutions, limits on leverage, 
concentration limits on relative size of financial 
institutions, activity restrictions, margin rules for 
derivatives, and stronger financial cushions for central 
counterparties. The FSOC has also been active, pursuing reforms 
with its members on money market funds and the tri-party repo 
market.
    It is important to remember that the U.S. banking system is 
less concentrated than that of any other major developed 
economy. The three largest U.S. banks account for 32 percent of 
total banking assets in the United States, compared to 46 
percent for the three largest in Japan, 58 percent in Canada, 
63 percent in the U.K., 65 percent in France, 70 percent in 
Germany, 71 percent in Italy, and 76 percent in Switzerland.
    With regard to separating types of activities that one firm 
can engage in, this is being addressed most importantly by the 
Volcker Rule. In Treasury's role as a coordinator of the 
rulemaking, we are working with the Council's relevant member 
agencies to implement the Volcker Rule in a manner that will 
prohibit banking entities from engaging in proprietary trading 
and restrict their ability to invest in or sponsor hedge or 
private equity funds, while protecting statutorily permitted 
activities. This is, however, a complex process that involves 
coordination of rulemakings by five different agencies that 
have received thousands of comment letters from the public.

Q.3. Has BASEL effectively killed LIBOR because the capital 
requirements of BASEL make interbank lending prohibitively 
expensive? This is what some banks are telling us. Do you agree 
with this assessment?

A.3. The Basel Committee on Banking Supervision's Basel II 
agreements introduced harmonized global liquidity standards for 
banks known as the Liquidity Coverage Ratio (LCR). An important 
provision to promote financial stability, the LCR would reduce 
a bank's liquidity risk by requiring that a bank have 
sufficient resources to survive an acute short-term stress 
scenario: banks would be required to have a sufficient amount 
of unencumbered, high quality and liquid assets to offset net 
cash flows the bank could experience under an acute short-term 
stress scenario over a 30-day horizon. Unsecured lending from 
financial institutions is assumed to completely run-off under 
the proposed LCR stress scenario suggesting that a bank's 
funding through the interbank market is not a stable source of 
financing. While the U.S. banking regulators have yet to 
propose a rule to implement the LCR and it is anticipated that 
there could be an impact on interbank funding rates, the 
markets do not show evidence of a correlation between the 
advent of such rules and cost of interbank lending at this 
time.

Q.4. We now have an unlimited guarantee on ``transaction 
account.'' This guarantee provides insurance to accounts 
greater than $250,000. Since this guarantee was put into place, 
$1.3 trillion have come into TAG accounts. Many of these have 
of course come from money market funds. Is this a systemic risk 
in your view?

A.4. The Non-interest Bearing Transaction Account program 
extended in 2010 by the Dodd-Frank Act expired on December 31, 
2012. It is estimated that at the time of expiration, $1.4 
trillion was deposited in such accounts at small and large 
banks. The expiry may cause some larger depositors to withdraw 
their deposits from the banking system because these deposits 
are no longer insured, while other depositors may elect to keep 
their deposits in uninsured accounts. Those depositors that 
leave the banking system may invest previously deposited funds 
into cash-like vehicles such as money market mutual funds, 
short-term securities, or off-shore investment vehicles, or 
short-term securities. To date, we have seen no evidence of 
disorderly flows of funds and will continue to monitor these 
flows over the coming weeks and months.

Q.5. The Treasury Department is responsible for managing the 
term structure of U.S. debt issuance. According to the Office 
of Debt Management the weighted average maturity of outstanding 
U.S. debt has increased from about 73 months to roughly 77 
months. Could we be lengthening it more as a way to lock in 
today's low long-term rates?

A.5. In 2008, the weighted average maturity of the Treasury's 
portfolio was approximately 48 months. Since that time, through 
prudent debt management, we have increased the portfolio's 
weighted average maturity to approximately 64 months, which is 
above both precrisis levels and the long-term average of 58 
months.
    On numerous occasions, I have stated our intention to 
continue the extension of the average maturity of our debt 
outstanding. However, while we remain steadfast in this goal, 
Treasury must also adhere to the same principles that have made 
the Treasury market the deepest and most liquid in the world. 
One of these principles is that we do not act opportunistically 
and try to ``time'' our issuance with the overall level of 
interest rates. Another is that we strive for our auctions to 
be regular and predictable. While these principles may limit 
how quickly we can extend the weighted average maturity of the 
debt, they also help Treasury to attain the lowest cost of 
funding over time.

Q.6. Looking at various possible structures on MBS, if we had 
had just a 7 percent first loss tranche in front of the 
taxpayer on GSE MBS, the taxpayer would have been insulated 
from loss during this latest crisis. In fact Fannie and 
Freddie's multifamily models show that this can be done. Should 
the private sector be in a first loss position in mortgage-
backed securities?

A.6. The Treasury's white paper on housing finance reform 
released in February 2011 (Reforming America's Housing Finance 
Market) presents three options for long-term, structural 
change--all three of which are conditioned upon placing private 
investors and lenders in a first-loss position on mortgage-
backed securities. Treasury staff continues to explore these 
options by engaging with stakeholders on alternatives that 
would best facilitate a more robust return of private capital 
to mortgage lending.

Q.7. If you have had a chance to review the proposals from the 
FDIC on Title 2, do you still agree that liquidation is the way 
the FDIC is viewing their authority? Is a better way to do this 
to make Title 2 more of a temporary ``holding bin'' where we 
would take a firm ``off the grid'' during a time of financial 
stress then put that firm into bankruptcy once the systemic 
risk has passed?

A.7. Title II is meant to take the place of bankruptcy under 
limited circumstances; specifically, where the resolution of 
the failed financial company under the Bankruptcy Code would 
have serious adverse effects on U.S. financial stability. The 
purpose of Title II is to provide the FDIC with the necessary 
authority to resolve failing financial companies that pose a 
significant risk to U.S. financial stability. As receiver under 
Title II, the FDIC is prohibited from using taxpayer funds to 
prevent the liquidation of the failed financial company. Equity 
holders in the failed financial company are expected to be 
wiped out.
    The notion of placing a large financial company into a 
temporary ``holding bin'' and taking it ``off the grid'' 
assumes that it could be accomplished in a seamless manner. 
However, a firm that is placed into a Title II receivership is 
expected to be highly interconnected. In addition, placing a 
large, interconnected financial firm into a ``holding bin'' is 
analogous to conservatorship, which Congress rejected.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KOHL
                    FROM TIMOTHY F. GEITHNER

Q.1. On the second anniversary of the signing of the Dodd-Frank 
legislation the SEC was scheduled to provide a report on the 
current credit rating agency industry.
    What actions have you and Financial Stability Oversight 
Council taken to insure that rating agencies will not repeat 
the same error of over rating issues? Has the FSOC and the SEC 
evaluated what types of reforms to the current structure would 
mitigate conflict of interest and avoid inaccuracies in the 
future?

A.1. The FSOC has highlighted the role that credit rating 
agencies played in the lead-up to the financial crisis, and 
continues to consider the role of credit ratings in specific 
markets and more generally.
    In its 2011 annual report, the FSOC noted the role that 
credit rating agencies played in the structuring and sale of 
residential mortgage backed securities and collateralized debt 
obligations. Moreover, the annual report stated that credit 
rating agencies did not understand well the complex ways that 
these products allocated credit risk, and that these products 
contributed to the buildup of the housing boom, the severity of 
the subsequent bust, and the broadening of the financial crisis 
beyond its origins in the subprime mortgage market.
    Further, in its 2012 annual report, the FSOC noted that 
credit ratings are critical for institutions that rely on 
short-term funding, and that the continued reliance on short-
term funding for illiquid assets can be a source of instability 
for the financial system. The FSOC recommended reforms to 
mitigate the risk of instability in these short-term wholesale 
funding markets in its 2011 and 2012 annual reports.
    Additionally, the SEC has proposed rules designed to 
improve the integrity of credit ratings and increase 
transparency in the ratings process. These proposed rules would 
require Nationally Recognized Statistical Rating Organizations 
to disclose information on internal controls, the methodology 
used to determine ratings, and the performance of past ratings. 
The proposed rules would also establish strengthened 
protections against conflicts of interest.
    The FSOC will continue to monitor the role of credit 
ratings in the wholesale short-term funding markets and in the 
financial services marketplace more generally. The FSOC will 
also discuss the SEC's work to reform the oversight of credit 
rating agencies, as appropriate and consistent with the FSOC's 
duties.
                                ------                                


        RESPONSES TO WRITTEN QUESTIONS OF SENATOR TOOMEY
                    FROM TIMOTHY F. GEITHNER

Q.1. Are you or do you plan to consult with State insurance 
regulators in the evaluation of any insurance companies for 
possible designation as systemically important financial 
institutions? If so, when and with whom? If not, why?

A.1. As required by the Dodd-Frank Act and as set out in the 
Council's rule and interpretive guidance on nonbank financial 
company designations, the Council will consult with the primary 
financial regulatory agency, if any, for each nonbank financial 
company or subsidiary of a nonbank financial company that is 
being considered for designation before the Council makes a 
final designation of such nonbank financial company. We have 
been actively consulting with appropriate State insurance 
regulators and will continue to benefit from their expertise 
and perspective throughout the Council's analysis of any 
insurance company being considered for designation.

Q.2. Please explain how SIFI determination criteria for 
nonbanks such as interconnectedness and substitutability will 
be measured as part of the evaluation process. For example, how 
will FSOC determine how much interconnectedness is enough to 
lead to a firm being designated as a SIFI? Do all the factors 
weigh equally or are particular factors more (or less) 
important? When does the combination of factors lead to SIFI 
designation? Please share any metrics that will be used in this 
regard.

A.2. The Council generally uses a broad range of company-
specific and industry-specific quantitative and qualitative 
information to evaluate nonbank financial companies. The 
Council's rule and interpretive guidance on the designation of 
nonbank financial companies extensively describes the Council's 
analytic framework and the types of analysis that the Council 
intends to carry out.
    During Stage 1 of the analysis, the interpretive guidance 
sets forth specific quantitative thresholds that the Council 
use to identify nonbank financial companies for further 
evaluation. With regard to interconnectedness, the thresholds 
of $30 billion in outstanding credit-default swaps for which 
the company is the reference entity, $3.5 billion of derivative 
liabilities, and $20 billion in total debt outstanding are all 
relevant. In addition to these Stage 1 thresholds, the 
interpretive guidance provides numerous examples of 
quantitative metrics that the Council can use in its Stage 2 
and Stage 3 analyses.
    Substitutability, however, is not as easily measured 
quantitatively and is one reason that the Council does not 
believe that a determination decision can be reduced to a 
formula. Because each company considered for designation may 
present unique risks to financial stability, the Council must 
approach each decision based on the particular facts relevant 
to that company, which will include a mix of quantitative and 
qualitative factors not weighted according to a formula but 
evaluated in a manner that holistically considers whether the 
company could pose a threat to U.S. financial stability.
    Additionally, the Council will provide any nonbank 
financial company subject to a proposed designation with a 
written explanation of the basis for the Council's proposed 
designation. This explanation provides companies with clarity 
with respect to the Council's reasoning in arriving at proposed 
designations.

Q.3. What is the current timing for designations? Roughly how 
many designations do you anticipate in first round? Roughly how 
many designations do you anticipate overall?

A.3. In accordance with the Council's interpretive guidance on 
nonbank financial company designations, the Council has been 
applying the Stage 1 thresholds to nonbank financial companies 
on a quarterly basis, and those companies that exceed the Stage 
1 thresholds are reviewed in Stage 2.
    Each analysis is company-specific, and the timing of 
designations depends on the amount of existing public and 
regulatory information as well as the amount of information 
sought from the companies directly. The Council continues to 
work expeditiously on this front. At the Council's September 28 
and October 18, 2012, meetings the Council voted to advance an 
initial set of companies to Stage 3 of its designations 
process, which is the final stage before a proposed 
designation.
    The Council's rulemaking notes that, based on data 
currently available to the Council through existing public and 
regulatory sources, the Council has estimated that fewer than 
50 nonbank financial companies meet the Stage 1 thresholds. It 
is not possible to predict the number of companies likely to be 
designated, due to the company-specific analysis that is 
required for each designation.

Q.4. Given that the Treasury is a member of the Financial 
Stability Board (FSB), which will make G-SIFI determinations, 
can you clarify how a company that is designated a G-SIFI but 
not designated a SIFI in the U.S. will be regulated?
    For instance, how would an insurance company that is 
currently regulated at the State level be regulated as a G-
SIFI?

A.4. Council members are working closely with their 
international counterparts on a number of initiatives, 
including the process for identifying globally systemically 
important financial institutions (G-SIFIs). This international 
coordination is being undertaken with the goal of creating 
international standards that are as consistent as possible with 
domestic standards to create a level playing field and minimize 
the risk of regulatory arbitrage. In particular, FIO is a 
member of the International Association of Insurance 
Supervisors (IAIS) and serves on its Financial Stability 
Committee and Executive Committee. In this role, FIO has worked 
to align the IAIS methodology, criteria, and timing with the 
Council's designation process in order to minimize the 
possibility that a U.S. insurance firm could be recommended by 
the IAIS for designation but not designated by the Council 
under section 113 of the Dodd-Frank Act.
    The aforementioned efforts should minimize the likelihood 
that a company would be designated as a G-SIFI without being 
designated by the Council. However, if such a situation arose, 
the Council would make a determination as to the appropriate 
course of action at that time. In relation to an insurer, until 
the IAIS finalizes prescribed policy measures to be applied to 
a G-SIFI, it would be inappropriate to speculate about the 
enforcement mechanism.
                                ------                                


         RESPONSES TO WRITTEN QUESTIONS OF SENATOR KIRK
                    FROM TIMOTHY F. GEITHNER

Q.1. As implied in Secretary Geithner's testimony and 
reinforced by recent Ford Motor 2012 earnings projection, the 
eurozone recession will impact U.S. firms (http://
www.chicagotribune.com/classified/automotive/sns-rt-us-ford-
resultsbre86o0ky-20120725,0,6348895.story).

    How will FSOC monitor and measure the systemic risk 
        of a eurozone recession on the U.S. economy?

    Is there a possibility that FSOC would recommend 
        delay of regulatory rules that are shown to carry high 
        costs until the eurozone crisis subsides, if such delay 
        might minimize the risk of U.S. recession?

A.1. The prospect of a eurozone recession or credit market 
disruption is a principal risk to the stability of U.S. 
financial markets today. As such, the FSOC and its members will 
continue to monitor exposures of U.S. financial institutions to 
euro-area risks. It will also continue to monitor potential 
asset price declines that could arise from euro-area shocks, 
which could in turn translate into stresses on balance sheets 
within the U.S. financial system. Decreased market confidence 
resulting from euro-area struggles could lead to greater risk 
aversion in U.S. financial markets. The FSOC will remain alert 
to indications of such behavior and any potential consequences 
that it may have on the stability of the financial system.
    The FSOC's member agencies are implementing regulations in 
a thoughtful manner that is effective and supports the 
financial system's ability to grow, innovate, and better serve 
our economy. Delays in rulemaking could increase uncertainty, 
since clear rules are most necessary when markets are under 
stress. The United States has taken a leading role in an 
extensive international effort to improve financial regulation 
around the globe. The FSOC's member agencies are playing an 
important part in coordinating this effort globally to enhance 
the safety and soundness of the financial system and to close 
gaps in financial regulation.

Q.2. Weaker eurozone countries are struggling to issue the debt 
that they need to fund current deficits. Spain currently pays 
an interest rate over 7 percent for debt with a 2-year 
maturity.

    Do all sovereign borrowers need to learn that 
        credit may not be available to them in public markets?

    If so, what are credible funding alternatives?

A.2. The eurozone is undergoing a difficult, but necessary 
adjustment of the large economic imbalances that developed in 
the decade before the global economic crisis. Countries that 
are reforming deserve strong support from their European 
partners. European fiscal and monetary authorities have 
committed to stabilize markets with a credible firewall to 
limit market contagion and reinforce access to market financing 
at sustainable rates for countries undertaking difficult long-
term reforms to stabilize public finances, restore 
competiveness, and repair banking systems.
    While much work remains to be done, progress toward putting 
in place Europe's permanent crisis response facility, the 
European Stability Mechanism, and the introduction of the ECB's 
new instrument aimed at restoring order and ``remov[ing] tail 
risks for the euro area,'' are welcome.

Q.3. This year's FSOC annual report notes a shift toward 
deleveraging across the U.S. economy.

    Is this shift a factor in the slower-than-expected 
        economic growth seen in the past year?

    What is its long-term impact on the financial 
        sector?

A.3. The shift toward deleveraging by both households and firms 
has been a contributing factor to the pace of economic activity 
over the past year. Increased uncertainty stemming from 
domestic economic growth and eurozone concerns has led to 
greater risk reduction by consumers and institutions. Debts are 
being paid down and credit flows remain substantially below the 
levels observed prior to the recent financial crisis. These 
trends have led to higher savings rates and stronger balance 
sheets, but have also acted to reduce overall consumption in 
the economy.
    The longer-term effects of deleveraging will depend on the 
extent to which this trend continues or is reversed. The FSOC 
will continue to closely monitor the use of leverage in the 
financial sector to identify and respond to possible risks to 
financial stability.

Q.4. A recent study published by the Federal Reserve Bank of 
New York finds that more than 80 percent of equity premiums 
earned since 1994 occurred in the 24 hours preceding an 
announcement by the Federal Open Market Committee (http://
libertystreeteconomics.newyorkfed.org/2012/07/the-puzzling-pre-
fomc-announcement-drift.html). Does this concentration of 
return present a systemic threat?

A.4. I appreciate you bringing this report to my attention. The 
FSOC has established an ongoing interagency process, in 
collaboration with the OFR, to analyze trends in financial 
markets and to identify and monitor threats to the financial 
system. The FSOC makes an annual report to Congress on 
identified emerging threats and recommendations to promote 
financial stability.

Q.5. In January 2009, U.S. banks started closing Government-
guaranteed SBA loans using a new LIBOR-based index set by the 
Small Business Administration, shifting from Prime Rate-based 
loans to LIBOR.

    Considering the concerns that the Federal Reserve 
        Bank of New York had expressed about the efficacy of 
        LIBOR in 2008, why did the Treasury Department not 
        recommend that SBA programs return to a Prime Rate base 
        before expanding SBA lending as part of the stimulus 
        plan?

    Is there are possibility that the SBA's LIBOR index 
        set artificially low rates that may have discouraged 
        banks from participating in the SBA programs while the 
        economy was still in recession?

A.5. As you know, there is a broad, global effort currently 
underway to analyze and seek reform to LIBOR and explore 
alternatives. Your specific question refers to a decision 
announced by the Small Business Administration in 2008 pursuant 
to its authority under Section 7(a) of the Small Business Act. 
The Treasury Department does not have authority over the 7(a) 
program.
    In an SBA Procedural Notice, dated November 14, 2008, which 
can be found on the SBA's Web site, the SBA observed that 
``[d]ue to the globalization of the financial markets, many SBA 
lenders' source and cost of funds (and/or internal yield model) 
is partially or completely based on the London Interbank 
Offered Rate (LIBOR) rather than the Prime Rate, which 
traditionally has been SBA's base interest rate for 
establishing the maximum interest rate lenders can charge for 
SBA-guaranteed loans.'' \1\ According to the SBA, due to market 
turmoil, spreads between the Prime Rate and LIBOR narrowed such 
that lenders were unable to profitably make SBA loans based on 
the Prime Rate. As a result, lenders ``substantially reduced or 
eliminated their SBA lending.'' Following discussions with 
lenders, the SBA ``concluded that allowing lenders to use an 
adjusted thirty day (one month) LIBOR rate as a base rate for 
pricing SBA loans [would] ameliorate several of the factors 
impeding small businesses' access to capital through SBA's 
guaranteed loan programs.'' Allowing an adjustment of three 
percentage points to the thirty day (one month) LIBOR rate 
``reflect[s] the historical 3 percentage point spread between 
the LIBOR and the Prime Rate and [helps] reduce the uncertainty 
and the financial risk to lenders and to secondary market 
participants.''
---------------------------------------------------------------------------
     \1\ Procedural Notice 5000-1081, http://www.sba.gov/sites/default/
files/bank_5000-1081.pdf. See also, 73 Fed. Reg. 67101 (2008).

Q.6. Currently, various financial regulators, including the 
Treasury, are finalizing rules for Qualified Residential 
Mortgages (QRMs), intended to assure a liquid secondary market 
for mortgage securities. Should a final rule include criteria 
for the borrowing index used to set secondary market securities 
---------------------------------------------------------------------------
and/or the underlying mortgages in a QRM?

A.6. While the Secretary of the Treasury, as Chairperson of the 
FSOC, is a coordinator of the credit risk retention rule for 
asset-backed securities, Treasury is not a rule writer. The 
Dodd-Frank Act directs the Board of Governors of the Federal 
Reserve, the Office of the Comptroller of the Currency, the 
Federal Deposit Insurance Corporation, the Securities and 
Exchange Commission, the Federal Housing Finance Agency, and 
the Department of Housing and Urban Development to define QRM 
based on characteristics that indicate a ``lower risk of 
default.'' In adopting the final QRM definition, the Dodd-Frank 
Act provision directs agencies to consider, among other 
standards, underwriting and product features that historical 
data indicate reduce the risk of default, such as documentation 
and verification of the financial resources relied upon for 
qualification, residual income and debt-to-income standards, 
mitigation of the potential for payment shock on adjustable 
rate mortgages, mortgage guarantee insurance or other credit 
insurance, and restriction the use of balloon payments, 
negative amortization, prepayment penalties, interest only 
payments, and other features where data show a higher risk of 
default.

              Additional Material Supplied for the Record
        ``WASHINGTON POST'' ARTICLE SUBMITTED BY SENATOR BENNET
        THE $12 TRILLION MISUNDERSTANDING: WHOSE BUDGET BLUNDER?
                   The Washington Post, July 24, 2012
           By Robert J. Samuelson, Washington Post Columnist

    Call it the $12 trillion misunderstanding.
    It ranks among the biggest forecasting errors ever. Back in 2001, 
the Congressional Budget Office projected Federal budget surpluses of 
$5.6 trillion for 2002-2011. Instead we got $6.1 trillion of deficits--
a swing of $11.7 trillion. Naturally, political recriminations 
followed. Who or what caused the change? President Bush's tax cuts for 
``the rich''? The Iraq and Afghanistan wars? The Medicare drug benefit? 
The financial crisis? President Obama's ``stimulus''?
    Doubtlessly, the question will emerge as a campaign issue. But any 
intellectually honest answer--perhaps futile in today's politically 
charged climate--will admit that no single cause explains the change. 
We now have evaluations from the CBO and two nonpartisan groups: the 
Committee for a Responsible Federal Budget (CRFB) and the Pew Fiscal 
Analysis Initiative. They all point in the same direction.
    For starters, a weak economy was the largest cause. The CBO 
attributes $3.2 trillion of the $11.7 trillion shift (about 27 percent) 
to ``economic and technical changes.'' ``We overestimated how good the 
economy would be, even before the Great Recession,'' says Marc Goldwein 
of the CRFB.
    Consider. In 2001, the CBO projected that the economy would grow 
about 3 percent a year over the 2002-2011 period. Actual growth from 
2002 to 2007 averaged only 2.6 percent. From 2008 through 2011--the 
Great Recession started in late 2007--growth averaged only about 0.2 
percent annually. Slow economic growth reduces tax revenues and 
increases spending for jobless benefits and other assistance.
    After the CBO issued its report, Sen. Rob Portman (R-Ohio), a 
former director of the Office of Management and Budget who is often 
mentioned as a vice presidential possibility, put out a press release 
claiming that Bush tax cuts for wealthier Americans (generally $250,000 
or more for couples and $200,000 for singles) explained only 4 percent 
of the debt shift. The CRFB checked his math and concluded he was 
right. But all of Bush's 2001 and 2003 tax cuts--which, except for 
benefits for the rich, are now supported by Obama--had a bigger effect, 
accounting for about 13 percent of the debt swing.
    Together, the weaker economy and 2001-2003 tax cuts explain 40 
percent of the debt shift. Here's how Pew allocates the rest. Its 
estimates parallel the CBO's and the CRFB's, which either cover 
slightly different time periods or use slightly different budget 
categories.
    Iraq and Afghanistan wars: 10 percent
    Increases in discretionary domestic spending: 10 percent
    Other increases in defense spending: 5 percent
    Obama stimulus: 6 percent
    2010 tax cuts: 3 percent
    Medicare drug benefit: 2 percent
    Other tax cuts and means of financing: 12 percent
    Higher interest costs on larger Federal debt: 11 percent
    So, most theories (often partisan) of the $11.7 trillion shift turn 
out to be wrong, exaggerated or misleading. There were lots of causes; 
no single cause dominates.
    One other thing: Even projecting surpluses from 2002 to 2011, the 
CBO cautioned then that large deficits would ultimately return.
    ``Over the longer term,'' then-deputy CBO director Barry Anderson 
testified before the Senate Budget Committee in January 2001, 
``budgetary pressures linked to the aging and retirement of the baby 
boom generation threaten to produce record deficits and unsustainable 
levels of Federal debt.''
    Unfortunately, that hasn't changed.

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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