[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                      EXAMINING HOW THE DODD-FRANK 
                        ACT COULD RESULT IN MORE 
                        TAXPAYER-FUNDED BAILOUTS 

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 26, 2013

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-34

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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York              MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          DAVID SCOTT, Georgia
KEVIN McCARTHY, California           AL GREEN, Texas
STEVAN PEARCE, New Mexico            EMANUEL CLEAVER, Missouri
BILL POSEY, Florida                  GWEN MOORE, Wisconsin
MICHAEL G. FITZPATRICK,              KEITH ELLISON, Minnesota
    Pennsylvania                     ED PERLMUTTER, Colorado
LYNN A. WESTMORELAND, Georgia        JAMES A. HIMES, Connecticut
BLAINE LUETKEMEYER, Missouri         GARY C. PETERS, Michigan
BILL HUIZENGA, Michigan              JOHN C. CARNEY, Jr., Delaware
SEAN P. DUFFY, Wisconsin             TERRI A. SEWELL, Alabama
ROBERT HURT, Virginia                BILL FOSTER, Illinois
MICHAEL G. GRIMM, New York           DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 26, 2013................................................     1
Appendix:
    June 26, 2013................................................    59

                               WITNESSES
                        Wednesday, June 26, 2013

Bair, Hon. Sheila C., Chair, Systemic Risk Council, and former 
  Chair, Federal Deposit Insurance Corporation (FDIC)............    14
Fisher, Richard W., President and Chief Executive Officer, 
  Federal Reserve Bank of Dallas.................................    11
Hoenig, Hon. Thomas M., Vice Chairman, Federal Deposit Insurance 
  Corporation (FDIC).............................................     9
Lacker, Jeffrey M., President, Federal Reserve Bank of Richmond..    13

                                APPENDIX

Prepared statements:
    Bair, Hon. Sheila C..........................................    60
    Fisher, Richard W............................................    72
    Hoenig, Hon. Thomas M........................................    94
    Lacker, Jeffrey M............................................   150

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    Written responses to questions submitted to Richard W. Fisher   203
    Written responses to questions submitted to Hon. Thomas M. 
      Hoenig.....................................................   207
    Written responses to questions submitted to Jeffrey M. Lacker   209


                      EXAMINING HOW THE DODD-FRANK
                        ACT COULD RESULT IN MORE
                        TAXPAYER-FUNDED BAILOUTS

                              ----------                              


                        Wednesday, June 26, 2013

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:04 a.m., in 
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling 
[chairman of the committee] presiding.
    Members present: Representatives Hensarling, Bachus, Royce, 
Capito, Garrett, McHenry, Campbell, Bachmann, Pearce, Posey, 
Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, 
Stivers, Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, 
Barr, Cotton, Rothfus; Waters, Maloney, Meeks, Capuano, 
Hinojosa, Clay, Lynch, Scott, Green, Cleaver, Moore, 
Perlmutter, Himes, Carney, Sewell, Foster, Kildee, Sinema, 
Beatty, and Heck.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time. The Chair now recognizes himself 
for 5 minutes for an opening statement.
    Not long after the financial crisis arose in 2008, we heard 
the cry, ``Occupy Wall Street.'' Most Americans have never 
wanted to occupy Wall Street; they just want to quit bailing it 
out. Today, though, there is a growing bipartisan consensus 
that the Dodd-Frank Act, regrettably, did not end the too-big-
to-fail phenomena or its consequent bailouts. Thus, we have 
much work ahead of us. I want to thank Chairman McHenry and the 
members of the Oversight and Investigations Subcommittee for 
their work so far on this subject.
    Ending taxpayer-funded bailouts is one of the reasons why 
this committee has invested so much time on sustainable housing 
reform. The GSEs, Fannie Mae and Freddie Mac, are the original 
too-big-to-fail poster children, yet were untouched and 
unreformed in Dodd-Frank. They have received the largest 
taxpayer bailout ever, nearly $200 billion, and along with the 
FHA, the government now controls more than 90 percent of our 
Nation's mortgage finance market with no end in sight.
    One of the most important steps we can take in ending too-
big-to-fail institutions is to remove the permanent taxpayer-
backed government guarantee of Fannie and Freddie. For far too 
long, Fannie and Freddie have been where Wall Street and 
foreign banks go to offload their financial risk on Main Street 
taxpayers. This must stop, and soon it will as part of our 
committee's sustainable housing legislation: sustainable for 
homeowners so they can have the opportunity to buy homes they 
can actually afford to keep; sustainable for taxpayers so they 
are never again forced to fund another Washington bailout; and 
sustainable for our Nation's economy so we avoid the boom-bust 
housing cycles that have hurt so many in the past.
    Regrettably, Dodd-Frank not only fails to end too-big-to-
fail and its attendant taxpayer bailouts; it actually codifies 
them into law. Title I, Section 113 allows the Federal 
Government to actually designate too-big-to-fail firms, also 
known as Systemically Important Financial Institutions (SIFIs). 
In turn, Title II, Section 210, notwithstanding its ex post 
funding language, clearly creates a taxpayer-funded bailout 
system that the CBO estimates will cost taxpayers over $20 
billion.
    Designating any firm as too-big-to-fail is bad policy and 
worse economics. It causes the erosion of market discipline and 
risks further bailouts paid in full by hard-working Americans. 
It also becomes a self-fulfilling prophecy, helping make firms 
bigger and riskier than they would be otherwise. Since the 
passage of Dodd-Frank, the big financial institutions have 
gotten bigger, the small financial institutions have become 
fewer, the taxpayer has become poorer, and credit allocation 
has become more political.
    Even if some conclude that certain financial firms are 
indeed too-big-to-fail, and I am not in that camp, it begs the 
question of whether Washington is even competent to manage 
their risk or whether the American people, in light of the 
recent revelations about the IRS and the DOJ, can trust 
Washington to do so.
    A review of the Federal Government's risk-management record 
does not inspire confidence. The Federal Housing 
Administration's poor risk management has left it severely 
undercapitalized. The Pension Benefit Guaranty Corp has an 
unfunded obligation of $34 billion. Even the National Flood 
Insurance Program is $24 billion underwater--yes, pun intended. 
And, of course, regulators encourage banks to load up on 
sovereign debt and agency MBS by requiring little or no capital 
to be reserved against them. Think Greek debt and Fannie and 
Freddie.
    We should recall it was the government's misguided and 
risky affordable housing mandate that principally loosened 
prudent underwriting standards in the first place. Government 
not only did not mitigate the risk; it created the risk.
    We have to keep our focus on the right questions if we are 
to achieve the right solutions. As a society, what are we 
willing to pay for stability? Are we trading long-term 
instability for moral hazard and short-term stability? Why 
should the government have to protect Wall Street firms from 
taking losses? Do we really want a Solyndra-like economy in 
which risk management is guided more by government politics 
than market economics and taxpayers are left to hold the bag? 
And perhaps more fundamentally, don't we want financial firms 
to take risk? In the not-too-distant past, one of the large 
investment banks took a risk on Apple when it was floundering. 
Now Apple is one of the most valuable companies in the world 
and its products have revolutionized our lives and our economy.
    Without financial risk, we lose out on innovation. Under 
too-big-to-fail, we also risk encouraging irresponsibility and 
moral hazard. Bailouts beget bailouts. And the most fundamental 
issue is this: If we lose our ability to fail in America, then 
one day we may just lose our ability to succeed. That is what 
this debate should really be about.
    I now recognize the ranking member for 5 minutes for an 
opening statement.
    Ms. Waters. Thank you, Mr. Chairman. I welcome today's 
hearing as an opportunity to examine Titles I and II of Dodd-
Frank and assess whether these provisions will achieve their 
intended goals of protecting taxpayers and preserving financial 
stability. I want to thank our esteemed panel of witnesses for 
joining us today, and I look forward to their insight and 
testimony on these critical issues.
    While there has been significant public debate regarding 
Wall Street reform, I have found that not enough attention has 
been paid to the actual legislative text. I believe the law may 
provide answers to many of our questions today, which is why I 
would encourage my colleagues to read the law.
    Title I of Dodd-Frank established the Financial Stability 
Oversight Council (FSOC), and the Office of Financial Research 
(OFR), to monitor systemic risk and potential threats to 
financial stability. Title I also gives Federal regulators 
enhanced prudential authorities over systemically significant 
financial institutions and requires these firms to submit 
credible resolution plans, known as living wills.
    The living wills are intended to reveal weaknesses and 
complexities, as well as provide a roadmap for how these 
institutions may be orderly liquidated. The law requires firms 
to pursue bankruptcy as a first resort. However, if bankruptcy 
compromises financial stability, the statute authorizes 
regulators to use an alternative tool for resolving 
systemically complex firms.
    Title II of Dodd-Frank created the Orderly Liquidation 
Authority (OLA). According to Section 204 of Title II, the 
purpose of the Orderly Liquidation Authority is to provide 
banking regulators with the necessary authority to liquidate 
failing financial companies which pose a significant risk to 
the financial stability of the United States in a manner that 
mitigates such risks and minimizes moral hazard.
    Moreover, Title II, Section 214, of Dodd-Frank provides 
that all financial companies placed into receivership under 
this Title shall be liquidated. No taxpayer funds shall be used 
to prevent the liquidation of any financial company. The law 
also requires that any funds expended in the liquidation of a 
financial firm must be recovered through assessments on the 
financial sector.
    Title XI, Section 1101, repeals the financing mechanisms 
the Federal Reserve used to bail out financial institutions in 
2008. The law mandates that any new Federal Reserve policies 
governing emergency lending serve the purpose of providing 
liquidity to the financial system, not one failing firm in 
particular, and that such policies must protect taxpayers from 
losses.
    Repealing Title II of the Dodd-Frank Act will make the 
financial system less stable and invite the chaos of the 2008 
crisis on our current recovery and would be a huge step in the 
wrong direction if it will not make megabanks any less large or 
any less complex. In fact, repealing Title II would take us 
back to the status quo use of the Bankruptcy Code, which would 
put taxpayers and the financial system at risk.
    My colleagues and I are going to use today's hearing as an 
opportunity to incorporate the relevant provisions of Titles I 
and II outlining regulators' new systemic risk and resolution 
authorities. Each of us will focus on a particular section of 
the law, explain what the provisions of the law authorize, and 
at times we will ask witnesses to expound on any ambiguity 
concerning how regulators may interpret their enumerated 
authorities. It is my hope that this will facilitate a rational 
discussion of important issues based on actual provisions 
within the law.
    Mr. Chairman, I yield back the balance of my time.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, the chairman of the Oversight and Investigations 
Subcommittee, for 3 minutes.
    Mr. McHenry. Thank you, Mr. Chairman. And I want to thank 
our panel for being here today.
    Two-and-a-half years ago, President Obama, when he signed 
the Dodd-Frank Act, said that this would end too-big-to-fail. 
Across the ideological spectrum we hear debate, but greater 
consensus on the side that Dodd-Frank did not end too-big-to-
fail. I appreciate the ranking member's opening statement, and 
in fact in the Oversight Subcommittee, which I chair, we have 
gone section by section in the text of Dodd-Frank and we have 
heard from a variety of witnesses over the previous few months 
that Dodd-Frank does not end too-big-to-fail, and systemically 
we went through those section by sections of Dodd-Frank. This 
is very important.
    From these hearings we identified, among other things, the 
shocking inability of the Financial Stability Oversight Council 
to perform one of its core functions: identifying new risks to 
the economy. We have learned that nearly 3 years after 
enactment of Dodd-Frank, the Federal Reserve has not considered 
nor made public how it will apply its broad new authorities to 
prevent future financial crises.
    We have heard from legal scholars and economic experts on 
Dodd-Frank's new resolution authority, the Orderly Liquidation 
Authority, and what it will mean in future bailouts as the 
bailout mechanism when the taxpayer will provide liquidity to 
these failed firms. The subcommittee learned that far from 
creating greater clarity and certainty in the marketplace, the 
Dodd-Frank law simply granted an incredible amount of power and 
discretion to Federal regulators to enshrine future taxpayer 
bailouts for specially designated large institutions. Now, that 
designation we have had a lot of discussion about, as well.
    Finally we heard testimony, shockingly, from the Justice 
Department regarding their obvious reluctance to prosecute 
large financial institutions, which may be the best evidence 
yet that this Administration doesn't even believe that the 
Dodd-Frank Act ends too-big-to-fail.
    The fact is that Dodd-Frank did not end too-big-to-fail; it 
guaranteed it. Instead of making it implicit, it now has made 
it explicit. That is a problem and we need to address it. And 
the message that it has sent to the marketplace has created a 
perverse incentive to the creditors of the largest financial 
firms. Now, this undermines the taxpayer, it undermines small 
financial institutions, and it undermines a truly competitive 
and fair marketplace. Too-big-to-fail must end, and that is 
what we must begin to discuss in this hearing.
    Thanks so much, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Mrs. Maloney, for 2 minutes.
    Mrs. Maloney. Thank you, and welcome to the panelists.
    In 2008, when a large financial institution was on the 
verge of failing, regulators had two options. They could allow 
it to fail and go into bankruptcy, as Lehman did, or they could 
bail it out, as we did with AIG. Neither was a good option.
    Dodd-Frank gave regulators a third option by creating an 
orderly liquidation process for large financial companies. This 
gives regulators the tools to successfully wind down large 
financial companies similar to the FDIC's longstanding practice 
of winding down failed commercial banks that worked so well 
during the crisis.
    Now, some of my colleagues say that we should just have 
bankruptcy, just let them fail. But we tried that. That is what 
we did with Lehman, and look at the results. We got a massive 
crisis and failure in the financial system, a massive financial 
crisis. This is not an acceptable solution.
    Economist Alan Blinder in his book says that too-big-to-
fail should be called too-big-to-fail messily, that we have to 
have a process to orderly, in an organized way, wind down large 
institutions, to put foam on the runway, and to orderly wind 
them down. It could not be clearer. In Section 214, it says 
that there is a prohibition of any taxpayer funds: ``No 
taxpayer funds shall be used to prevent the liquidation of any 
financial company under this title.'' It could not be clearer. 
It is against the law to use any taxpayer money to fund any 
bailout.
    But Dodd-Frank gave us a third option. Under Title II, 
which was largely written by Sheila Bair, and she can talk 
about it, we can now wind them down. And under Title II there 
was enhanced supervision calling for greater capital 
requirements, stress tests, living wills, and other tools to 
manage the wind-down of failed institutions.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett, for 1 minute.
    Mr. Garrett. Thank you.
    There is an old saying that you can't have your cake and 
eat it too, but, unfortunately, that is exactly what the other 
side of the aisle is trying to do. You can't, on the one hand, 
say that banks are no longer too-big-to-fail, and then, on the 
other hand, bemoan the fact that they still are whenever one of 
them has a significant trading loss.
    You can't, on the one hand, say that there is an 
appropriate resolution process that allows these banks to be 
wound down without taxpayer support, but then, on the other 
hand, tell those same banks exactly how they are to run their 
business because you are worried about their systemic risk and 
the costs to U.S. taxpayers.
    You can't, on the one hand, also say that you have 
eliminated too-big-to-fail, and then, on the other hand, 
specifically designate companies as too-big-to-fail and give 
them new access to the Fed's discount window.
    Unfortunately, Dodd-Frank continued the long-term goal of 
many to essentially turn the banks into utilities backed by the 
government that regulators can control and use to fund the 
government and allocate resources to their favorite 
constituencies.
    We must finally reform the system to restore market 
discipline to our financial system, and this means ensuring 
that we have a credible resolution process, free of picking 
winners and losers.
    Chairman Hensarling. Apparently, the gentleman is done.
    The Chair now recognizes the gentleman from New York, Mr. 
Meeks, for 2 minutes.
    Mr. Meeks. Thank you, Mr. Chairman. I appreciate that 
today's hearing has provided an opportunity to discuss the 
contours of Title II of Dodd-Frank, which deals with the 
Orderly Liquidation Authority, and I especially thank the 
ranking member for finally focusing our attention on the actual 
law itself.
    One of the objectives of the Dodd-Frank Act was to address 
our financial services' exposure to systemic risk arising from 
complex, interconnected, qualified financial contracts which 
represent a significant activity of too-big-to-fail 
institutions. These contracts include security contracts, 
commodity contracts, repurchase agreements, and derivative 
contracts.
    It is precisely the exponential growth, the financial and 
legal complexity, and the interconnectedness of these contracts 
that have magnified the severity of the 2008 financial crisis 
and nearly brought our economy to its knees. The Dodd-Frank Act 
addressed this risk by providing the FDIC the powers to 
mitigate this contagious effect. Section 210, Subsection 16 of 
the Act reads, ``The corporation as receiver for a covered 
financial company or as receiver for a subsidiary of a covered 
financial company shall have the power to enforce contracts of 
subsidiaries or affiliates of the covered financial company, 
the obligations under which are guaranteed or otherwise 
supported or linked to the covered financial company.''
    In effect, these provisions give the FDIC, acting as 
receiver for a financial company whose failure would pose a 
significant risk to the financial stability of the United 
States, the power to maintain continuity and financial 
contracts and limit the disruption and failure of 
interconnected institutions.
    As we observed during the failure of Lehman Brothers in 
2008, our ability to isolate contagion embedded in these 
contracts and counterpart financial obligations could mean the 
difference between experiencing a contained failure of a single 
financial institution versus experiencing another mammoth 
financial crisis. Unfortunately, the regulators did not have 
this tool then, but I am convinced that our economy is better 
protected from the concept of too-big-to-fail because of the 
Dodd-Frank legislation.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Minnesota, Ms. 
Bachmann, for 1 minute.
    Mrs. Bachmann. Thank you, Mr. Chairman.
    Just this month we received a progress report regarding the 
Dodd-Frank rulemaking; 279 rules had a deadline and they were 
passed, 63 percent of those deadlines were missed. 
Specifically, 64 which came from the bank regulators were 
missed, the CFTC missed 17, the SEC missed 49, and 35 deadlines 
were missed by other regulators.
    Now, interestingly, supporters of Dodd-Frank claim that 
these regulations prevent taxpayer bailouts, but these 
regulations aren't even implemented. So the point is, if the 
regulatory agencies are finding that the rulemaking is too 
onerous for they, themselves, to manage, imagine the burden of 
compliance on the financial services industry and on its 
customers.
    This is a bill that is so big it is already failing itself 
and failing the American financial services industry. That is 
why I introduced H.R. 46, which would fully repeal Dodd-Frank, 
and my hope is that we do exactly that.
    I yield back.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, for 1 minute.
    Mr. Green. Thank you, Mr. Chairman.
    I am so pleased that medicine is very unlike politics. In 
medicine, if a drug proves to be efficacious, we market it, we 
extol its virtues. In politics, if a law proves to be 
efficacious, we repeal it. One example might be what happened 
yesterday with the civil rights law.
    However, I would like to focus for just a moment on Glass-
Steagall. It served us efficaciously for decades, and was a 
great piece of law. It was repealed because it succeeded. Now, 
of course, we have the Volcker Rule, which is similar but not 
the same.
    This is what is happening to Dodd-Frank. It is going to be 
emasculated by some who would do so. At some point, if it 
succeeds, it will be said that we no longer need it. If it is 
emasculated and it fails, it will be said that it was never a 
success, and should not have been implemented in the first 
place.
    I stand with the ranking member. Only yesterday, I was here 
with Mr. Frank himself when his portrait was revealed, so it is 
ironic that we would have this hearing today.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    We now welcome our distinguished witnesses for today's 
hearing. From my left to my right, first, Thomas Hoenig 
currently serves as the Vice Chairman of the FDIC. Prior to 
joining the FDIC in 2012, Mr. Hoenig was the President of the 
Federal Reserve Bank of Kansas City, a Member of the FOMC from 
1991 to 2011, and served the Fed for almost 40 years. He earned 
his Ph.D. in economics from Iowa State University, and an 
undergraduate degree from St. Benedict's College in Kansas.
    Next, I am happy to welcome my friend and fellow ``Dallas-
ite,'' Richard Fisher, who is the President and CEO of the 
Federal Reserve Bank of Dallas. You know what, I am going to 
end this introduction halfway through because I made a mistake. 
The gentleman from Missouri needed to be recognized also to 
welcome Mr. Hoenig. My apologies to the gentleman from 
Missouri.
    Mr. Cleaver, you are recognized.
    Mr. Cleaver. This will be short, Mr. Chairman, since 
somebody has already done it. But I do want to take the 
opportunity to introduce Thomas Hoenig, who became the Chair of 
the Kansas City Fed the same year that I became Mayor of Kansas 
City. He is a man of great integrity and we respect him a great 
deal in Kansas City. He was with the Federal Reserve for 38 
years and then last year came to the FDIC Board.
    I have had the pleasure of working with him over the years. 
I even know his newspaper deliveryman who comes by his house 
every morning and places the newspaper on his front porch.
    So we welcome you, Mr. Hoenig, to the Financial Services 
Committee.
    Thank you, Mr. Chairman.
    Chairman Hensarling. Meanwhile, back to Mr. Fisher, sorry 
about that. Prior to his appointment, President Fisher worked 
in the private sector. Before that, he served as the Deputy 
U.S. Trade Representative from 1997 to 2001. He earned his MBA 
from Stanford, and his undergraduate degree in economics from 
Harvard.
    On a personal note, he just flew in from the U.K., and as 
soon as he finishes with his testimony, he is headed back to 
Lone Star soil where he will meet his brand new grandson, 
William Weir Smith IV. Congratulations.
    And now, hopefully not making the same mistake twice, the 
gentleman from Texas, Mr. Green, is allocated 30 seconds for an 
introduction.
    Mr. Green. Thank you, Mr. Chairman. It is nice to have a 
great Texan introduced twice. And I want you to know, Mr. 
Chairman, that while he is from a small town just outside of 
Houston known as Dallas, we don't hold it against him. He 
attended the Naval Academy, graduated with honors from Harvard, 
has an MBA from Stanford, and is a great and noble American.
    We welcome you to the committee.
    And, Mr. Chairman, I yield back.
    Chairman Hensarling. Be careful. I made an inquiry to the 
parliamentarian as to whether I could have your words taken 
down for besmirching Dallas, but fortunately for you, I could 
not.
    Our next witness, Jeffrey Lacker, is the President and CEO 
of the Federal Reserve Bank of Richmond, a position he assumed 
in 2004. President Lacker has held various positions within the 
bank since he joined as an economist in 1989. Before that, he 
taught economics at the Krannert School of Management at Purdue 
University. He holds a Ph.D. in economics from the University 
of Wisconsin, Madison, and a bachelor's degree from Franklin 
and Marshall College.
    Last but not least, and certainly no stranger to this 
committee, we are happy to welcome back Sheila Bair, who most 
recently served as the Chairman of the FDIC, a position that 
she was appointed to in 2006, and she held that position during 
the worst years of the financial crisis. Before that, she held 
a number of various public and private sector positions in the 
financial industry. She earned her law degree and undergraduate 
degree from the University of Kansas.
    I believe each and every one of you is a veteran of 
testifying before the committee. You will each be given 5 
minutes for an oral presentation of your written testimony. And 
without objection, each of your written statements will be made 
a part of the record. Hopefully, you are familiar with our 
lighting system. When you have finished, members of the 
committee will have an opportunity to ask you questions.
    Vice Chairman Hoenig, you are now recognized for 5 minutes.

  STATEMENT OF THE HONORABLE THOMAS M. HOENIG, VICE CHAIRMAN, 
          FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)

    Mr. Hoenig. Thank you. Chairman Hensarling, Ranking Member 
Waters, and members of the committee, I appreciate the 
opportunity to testify on issues relating to improving the 
safety and soundness of our Nation's banking system.
    How policymakers and regulators choose to structure the 
financial system to allocate the use of government facilities 
and subsidy will define the long-run stability and success of 
the economy. My testimony today is based on a paper entitled, 
``Restructuring the Banking System to Improve Safety and 
Soundness,'' that I prepared with my colleague Chuck Morris in 
May of 2011. I welcome this opportunity to explain what I think 
are pro-growth and pro-competition recommendations for the 
financial system in that paper, which I have attached to my 
written statement. Although I am a Board Member of the FDIC, I 
speak only for myself at this hearing.
    Today, the largest U.S. financial holding company has 
nearly $2.5 trillion of assets using U.S. accounting, which is 
the equivalent of 16 percent of our nominal gross domestic 
product. The largest eight U.S. global systemically important 
financial institutions hold in tandem $10 trillion of assets 
under U.S. accounting, or the equivalent of two-thirds of our 
national income, and $16 trillion of assets if we were to 
include the fair value of derivatives, which then would place 
them at 100 percent of our gross domestic product.
    Whether resolved under bankruptcy or otherwise, problem 
institutions of this size relative to our national income will 
have systemic consequences. But I must add that my concern with 
the largest firms is not just their size, but their complexity. 
Over time, the government's safety net of deposit insurance, 
Federal Reserve lending, and direct investment has been 
expanded to an ever-broader array of activities outside the 
historic role of commercial banks.
    In the United States, the Gramm-Leach-Bliley Act allowed 
commercial banks to engage in a host of broker-dealer 
activities, including propriety trading derivatives and swaps 
activities, all within the Federal safety net. Because these 
kinds of activities were allowed to remain within the banking 
organization, the perception persists that despite Dodd-Frank 
the government will likely support these dominant and highly 
complex firms because of their outsized impact on the broader 
economy. This support translates into a subsidy worth billions 
of dollars, and I have provided a list, a summary of 
independent studies, documenting this subsidy.
    My proposal then is simple: To improve the chances of 
achieving long-run financial stability and make the largest 
financial firms more market-driven, we must change the 
structure and the incentives driving behavior. The safety net 
should be narrowly confined to commercial banking activities, 
as intended when it was implemented with the Federal Reserve 
Act and deposit insurance was introduced.
    Commercial banking organizations that are afforded access 
to the safety net should be limited to conducting the following 
activities: commercial banking, underwriting some securities 
and advisory service, and asset and wealth management. Also, 
for such reforms to be effective, the shadow banking system, I 
realize, must be reformed and its activities subjected to more 
market discipline.
    First, money market funds and other investments that are 
allowed to maintain a fixed net asset value of $1 should be 
required to have floating net asset values. Shadow banks' 
reliance on this source of short-term funding would be greatly 
reduced by requiring share values to float with their market 
value and be reported accurately.
    Second, we should change the bankruptcy laws to eliminate 
the automatic stay exemption for mortgage-related repurchase 
agreement collateral. This exemption resulted in a 
proliferation in the use of repo based on mortgage-related 
collateral. One of the sources of instability during the recent 
financial crisis was repo runs, particularly on repo borrowers 
using subprime mortgage-related assets as collateral.
    Reforms specified in the proposal I am describing today 
would not, and are not intended to, eliminate natural market-
driven risk in the financial system. They do address the 
misaligned incentives causing much of the extreme risk stemming 
from the safety net's coverage of nonbank activities.
    In addition, this proposal would facilitate the 
implementation of Titles I and II of the Dodd-Frank Act to 
resolve failed systemically important firms by rationalizing 
the structure of the financial system, making it more 
manageable through crisis.
    Market participants argue that this proposal would stifle 
their ability to complete globally. These largest firms 
understandably are driven by profit motives and the subsidy 
enhances their profits. I suggest that the proposal I offer 
would shrink the subsidy and enhance competition, which is what 
policymakers owe the American public. This structure will also 
provide much stronger protection from the possibility of future 
government intervention.
    I conclude my oral remarks by emphasizing again that the 
choices we make today are critical to the future success of our 
economy. Rationalizing the structure of the financial 
conglomerates, making them more market-driven, will create a 
more stable, more innovative, more competitive system that will 
serve to support the largest, most successful economy in the 
world.
    Thank you very much for this opportunity, and I look 
forward to your questions.
    [The prepared statement of Vice Chairman Hoenig can be 
found on page 94 of the appendix.]
    Chairman Hensarling. Mr. Fisher, you are now recognized for 
5 minutes.

 STATEMENT OF RICHARD W. FISHER, PRESIDENT AND CHIEF EXECUTIVE 
            OFFICER, FEDERAL RESERVE BANK OF DALLAS

    Mr. Fisher. Thank you, Chairman Hensarling, Ranking Member 
Waters, and members of the committee.
    We all share the goal of ending taxpayer bailouts of large 
financial institutions considered too-big-to-fail. However, as 
the iconic Patrick Henry, not Patrick McHenry, said in one of 
his greatest speeches, ``Different men often see the same 
subject in different lights.'' So I recognize and respect the 
difference of opinion on this critical issue of how to 
eliminate taxpayer bailout funds, including the different 
perspectives of the members of this committee, other observers, 
and the members of this panel.
    It is our view at the Dallas Fed, however, that Dodd-Frank, 
despite its very best intentions, does not do the job it set 
out to do. It does not end too-big-to-fail and it does not 
prevent more taxpayer-funded payouts.
    First, some quick facts. There are less than a dozen 
megabanks, a mere 0.2 percent of all banking organizations. The 
concentration of assets in their hands was greatly intensified 
during the 2008-2009 financial crisis when several failing 
giants were absorbed, with taxpayer support, by larger, 
presumably healthier ones.
    Today, we have about 5,500 banking organization; that is 
5,500 banks in the United States. Most of these are bank 
holding companies and they represent no threat to the survival 
of our economic system. But less than a dozen of the largest 
and most complex banks are each capable, through a series of 
missteps by their management, of seriously damaging the 
vitality and the resilience and the prosperity of the U.S. 
economy. Any of these megabanks, given their systemic footprint 
and their interconnectedness with other large financial 
institutions, could threaten to bring the economy down.
    These 0.2 percent of banks, the too-big-to-fail megabanks, 
are treated differently from the other 99.8 percent and 
differently from other businesses, and under Dodd-Frank, 
unfortunately, we believe this imbalance of treatment has been 
unwittingly perpetuated.
    I have submitted a lengthy, detailed statement as to the 
drawbacks of the Act, developed with my colleague sitting 
behind me, Harvey Rosenblum, a great economist at the Federal 
Reserve Bank of Dallas, and with our staff. Today, at Ms. 
Waters' suggestion, I am going to specifically address Title I 
and Title II, and then if I have time, I will summarize the 
Dallas Fed's proposal to remedy the pathology of too-big-to-
fail.
    With regard to Title I, based on my experience working the 
financial markets since 1975, as soon as a financial 
institution is designated systemically important, as required 
under Title I of the Dodd-Frank Act, and becomes known by the 
acronym SIFI, it is viewed by the market as being the first to 
be saved by the first responders in a financial crisis. In 
other words, the SIFIs occupy a privileged position in the 
financial system. One wag refers to the acronym SIFI as meaning 
``save if failure impending.''
    A banking customer has a disincentive to do business with 
smaller competitors because a non-SIFI does not have an implied 
government funding lifeline. Even if a SIFI ends up finding 
itself with more equity capital than a smaller competitor, the 
choice remains of where you would like to hold important 
financial relationships: with an institution with a government 
backstop; or with an institution without it? Thus, the 
advantages of size and perceived subsidies accrue to the 
behemoth banks. Dodd-Frank does not eliminate this perception, 
and, again, it wasn't intended to, but in many ways it 
perpetuates its reality.
    Some have held out hope that a key business provision of 
Title I requiring banking organizations to submit detailed 
plans or so-called living wills for their orderly resolution in 
bankruptcy, without government assistance, will provide for a 
roadmap to avoid bailouts. However, these living wills are 
likely to prove futile in helping navigate a real-time systemic 
failure, in my experience.
    Given the complexity and opacity of the too-big-to-fail 
institutions, and their ability to move assets and liabilities 
across subsidiaries and affiliates, as well as off balance 
sheet, a living will would likely be ineffective when it really 
mattered. I don't have much faith in the living will process to 
make a material difference in too-big-to-fail risks and 
behaviors. The bank would run out of liquidity, not necessarily 
capital, due to reputational risk quicker than management would 
work with regulators to execute a living will blueprint.
    With regard to Title II, Dodd-Frank describes and 
designates the Orderly Liquidation Authority as the resolution 
mechanism to handle the disposal of a giant systemically 
disruptive financial enterprise. These three letters themselves 
evoke the deceptive doublespeak of what I consider to be an 
Orwellian nightmare. The ``L,'' which stands for liquidation, 
will in practice become a simulated restructuring, as would 
occur in a Chapter 11 bankruptcy. But under the OLA of Dodd-
Frank, the U.S. Treasury will likely provide, through the FDIC, 
what is essentially debtor-in-possession financing from the 
yet-to-be-funded Orderly Liquidation Fund, the OLF, located in 
the United States Treasury, to the failed companies' 
artificially kept alive operating subsidiaries for up to 5 
years, perhaps longer.
    Under the single point of entry method, the operating 
subsidiaries remain protected as the holding company is 
restructured. So if a company does business with operating 
subsidiaries, then this company is even more confident their 
counterparty is too-big-to-fail. Some officials refer to this 
procedure as a liquidity provision rather than a bailout. 
Whatever you call it, this is taxpayer funding at below market 
rates. At the Dallas Fed, we would call this form of 
liquidation a nationalization of a financial institution.
    During the 5-year resolution period, incidentally, this 
nationalized institution does not have to pay taxes of any kind 
to any government entity, and to us this looks, sounds, and 
tastes like a taxpayer bailout just hidden behind the opaque 
and very difficult language, Mr. Chairman, of Section 210 of 
Title II.
    I will stop there, Mr. Chairman. I would say after a 
careful reading of Title II, to us, with all due respect to 
those who would argue otherwise, this is basically a ``rob 
Peter to pay Paul'' chain of events with the taxpayer paying 
the role of Peter. And we have made a proposal that would amend 
and summarize and simplify Dodd-Frank.
    I will just say one thing in conclusion. Despite its 849-
page proscription, it has thus far spawned more than 9,000 
pages of regulation that this very committee estimates will 
take 24,180,856 hours each year to comply with. Market 
discipline is still lacking for the large financial 
institution, as it was during the last financial crisis, and we 
need to improve upon Dodd-Frank.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Fisher can be found on page 
72 of the appendix.]
    Chairman Hensarling. The Chair now recognizes Mr. Lacker.

STATEMENT OF JEFFREY M. LACKER, PRESIDENT, FEDERAL RESERVE BANK 
                          OF RICHMOND

    Mr. Lacker. Thank you, Chairman Hensarling, Ranking Member 
Waters, and members of the committee. It is an honor to speak 
before the committee on the Dodd-Frank Act and the persistence 
of ``too-big-to-fail.'' At the outset, I should say that my 
comments today are my own views and do not necessarily reflect 
those of my colleagues in the Federal Reserve System.
    The problem known as too-big-to-fail consists of two 
mutually reinforcing expectations. First, some financial 
institution creditors feel protected by an implicit government 
commitment of support should the institution face financial 
distress. This belief dampens creditors' attention to risk and 
makes debt financing artificially cheap for borrowing firms, 
leading to excessive leverage and the overuse of forms of debt, 
such as short-term wholesale funding, that are most likely to 
enjoy such protection.
    Second, policymakers at times believe that the failure of a 
large financial firm with a high reliance on short-term funding 
would result in undesirable disruptions of financial markets 
and economic activity. This expectation induces policymakers to 
intervene in ways that let short-term creditors escape losses, 
thus reinforcing creditors' expectations of support and firms' 
incentives to rely on short-term funding. The result is more 
financial fragility and more rescues.
    The Orderly Liquidation Authority of Title II of the Dodd-
Frank Act gives the FDIC the ability, with the agreement of 
other financial regulators, to take a firm into receivership if 
it believes the firm's failure poses a threat to financial 
stability. Title II gives the FDIC the ability to borrow funds 
from the Treasury to make payments to creditors of the failed 
firm. This encourages short-term creditors to believe that they 
would benefit from such treatment. They would therefore 
continue to pay insufficient attention to risk and to invest in 
fragile funding relationships.
    Given widespread expectations of support for financially 
distressed institutions in orderly Title II liquidations, 
regulators will likely feel forced to provide support simply to 
avoid the turbulence of disappointing expectations. We appear 
to have replicated the two mutually reinforcing expectations 
that define too-big-to-fail.
    Expectations of creditor rescues have arisen over the last 
4 decades through the gradual accretion of precedents. Research 
at the Richmond Fed has estimated that one-third of the 
financial sector's liabilities are perceived to benefit from 
implicit protection, and that is based on actual government 
actions and actual policy statements.
    Adding implicit protection to the explicit protection of 
programs such as deposit insurance, we found that 57 percent of 
the financial sector's liabilities were expected to benefit 
from government guarantees as of the end of 2011. Reducing the 
probability that a large financial firm becomes financially 
distressed, through enhanced standards for capital and 
liquidity, for example, are useful but will never be enough. 
The path towards a stable financial system requires that the 
unassisted failure of financial firms does not put the 
financial system at risk. The resolution planning process 
prescribed by Section 165(d) of Title I of Dodd-Frank provides 
a roadmap for this journey.
    A resolution plan or living will is a description of the 
firm's strategy for rapid and orderly resolution under the U.S. 
Bankruptcy Code without government assistance in the event of 
material financial distress or failure. It spells out the 
firm's organizational structure, key management information 
systems, critical operations, and a mapping of the relationship 
between core business lines and legal entities.
    The Federal Reserve and the FDIC can jointly determine that 
a plan is not credible or would not facilitate an orderly 
resolution under the Bankruptcy Code, in which case the firm 
would be required to submit a revised plan to address 
identified deficiencies.
    In essence, regulators can order changes in the structure 
and operations of a firm to make it resolvable in bankruptcy 
without government assistance. It is important to remember that 
all features of a large financial firm that render it hard to 
contemplate putting it through unassisted bankruptcy are under 
our control now before the next crisis.
    Resolution planning will require a great deal of hard work, 
but I see no other way to ensure that policymakers have 
confidence in unassisted bankruptcy and that investors are 
convinced that unassisted bankruptcy is the norm. Resolution 
planning provides the framework for identifying the actions we 
need to take now to ensure that the next financial crisis is 
handled appropriately, in a way that is fair to taxpayers, and 
in a way that establishes the right incentives.
    Thank you.
    [The prepared statement of Mr. Lacker can be found on page 
150 of the appendix.]
    Chairman Hensarling. The Chair now recognizes Chairman Bair 
for 5 minutes.

 STATEMENT OF THE HONORABLE SHEILA BAIR, CHAIR, SYSTEMIC RISK 
     COUNCIL, AND FORMER CHAIR, FEDERAL DEPOSIT INSURANCE 
                       CORPORATION (FDIC)

    Ms. Bair. Thank you, Mr. Chairman. Thank you for the 
opportunity to appear here today to discuss the Dodd-Frank Act, 
too-big-to-fail, and the resolution of Large Complex Financial 
Institutions, or LCFIs.
    No single issue is more important to the stability of our 
financial system than the regulatory regime applicable to these 
institutions. The role certain large mismanaged financial 
institutions played in the leadup to the financial crisis is 
clear, as is the need to take tough policy steps to ensure that 
taxpayers are never again forced to choose between bailing them 
out or financial collapse.
    As our economy continues to slowly recover from the 
financial crisis, we cannot forget the lessons learned, nor can 
we afford a repeat of the regulatory and market failures which 
allowed that debacle to occur.
    The Dodd-Frank Act requirements for the regulation and, if 
necessary, resolution of LCFIs are essential to address the 
problems of too-big-to-fail. I strongly disagree with the 
notion that the Orderly Liquidation Authority enshrines the 
bailout policies that prevailed in 2008 and 2009. Implicit and 
explicit too-big-to-fail policies were in effect under the 
legal structure that existed before Dodd-Frank. Dodd-Frank has 
abolished them. To be sure, more work needs to be done to 
reduce the risk of future LCFI failures and ensure that if an 
LCFI does fail, the process is smooth, well understood by the 
market, and minimizes unnecessary losses for creditors.
    However, to the extent the perception of too-big-to-fail 
remains, it is because markets continue to question whether 
regulators or Congress can and will follow through on the law's 
clear prohibition on bailouts. I believe we are on the right 
track for addressing these realities, but more can and should 
be done.
    First, regulators must ensure that LCFIs have sufficient 
long-term debt at the holding company level. The success of the 
FDIC's Orderly Liquidation Authority using the single point of 
entry strategy depends on the top-level holding company's 
ability to absorb losses and fund recapitalization of the 
surviving operating entities. Currently, we have no regulation 
that addresses this need and we must address this gap.
    To avoid gaming, the senior unsecured long-term debt must 
be issued at the top level holding company and it should also 
be based on nonrisk-weighted assets. To limit the contagion or 
domino effect of an LCFI failure, the debt should not be held 
by other LCFIs or banks, nor should other LCFIs be permitted to 
write credit protection for or have other real or synthetic 
exposure to that debt. A well-designed, long-term debt cushion 
would support the FDIC's single point of entry resolution 
strategy and help assure the markets that the LCFI is indeed 
resolvable and not too-big-to-fail.
    Second, the Financial Stability Oversight Council must 
continue to designate potentially systemic nonbank financial 
firms for heightened oversight. Title I of the Dodd-Frank Act 
requires that the FSOC designate firms for heightened 
supervision by the Federal Reserve. This enhanced supervision 
is designed to: first, improve regulation over large 
potentially systemic firms; second, provide regulators with 
important information to assess and plan for a potential 
failure; and third, reduce the likelihood that potential 
systemic risk will simply grow unnoticed outside of the 
traditional regulatory sphere.
    While some have argued that the designation might be viewed 
as a positive and fuel market perception so the company is 
somehow backstopped by the government, I do disagree. This 
designation is not a badge of honor but a scarlet letter. It 
includes no benefits from the government. It only heightens the 
firm's required capital and supervision. It does not mean the 
firm will be resolved under OLA rather than bankruptcy. In 
fact, Section 165 requirements for resolutions are aimed at 
ensuring an orderly resolution under the Bankruptcy Code, not 
ordered to liquidation. This helps explain why most LCFIs have 
pushed back so strongly to avoid this designation.
    Third, regulators should strengthen capital requirements so 
these firms have a meaningful buffer against losses. Our 
existing capital regime is incredibly complex, riddled with 
uncertainty, and results in a host of perverse incentives that 
encourage bad risk management and synthetic risk-taking at the 
expense of traditional lending. Not only would a stronger and 
simpler capital regime provide a meaningful buffer that reduces 
the likelihood of an LCFI failure, it would reduce the 
artificial funding advantages available to large firms and give 
regulators and counterparties a much better sense of a firm's 
financial health.
    While current capital regimes continue to over-rely on risk 
weighting and internal modeling, a better approach is to 
simplify our capital rules, strengthen the leverage ratio, and 
eliminate regulatory reliance on a firm's internal models.
    Fourth, regulators should improve public disclosure about 
large complex financial institutions' activities and risks so 
that investors can make better decisions about these companies 
and so that markets and policymakers can feel comfortable that 
a firm can fail in bankruptcy without destabilizing the 
financial system.
    Improved disclosure about the level of the large financial 
institutions' unencumbered assets could increase the chances 
that debtor-in-possession financing could be seamlessly 
arranged in a bankruptcy process without disrupting payments 
processing and credit floats. In addition, greater disclosure 
about a firm's corporate structure and profitability by 
business line could facilitate the market's ability to 
determine the optimal size and structure for financial 
institutions. It would also allow investors to see if firms are 
too big or too complex to manage and would provide better 
shareholder value if broken up into smaller, simpler pieces.
    So, thank you again for the opportunity to be here today. 
This remains an enormously important issue and the committee is 
right to keep a very close eye on it. Financial reform and 
system stability are not partisan issues. Both parties want to 
end too-big-to-fail, and though there may be different 
perspectives on how to achieve that goal, through open 
dialogue, discussion, and collaboration, we can achieve it. We 
must.
    Thank you very much.
    [The prepared statement of Chairman Bair can be found on 
page 60 of the appendix.]
    Chairman Hensarling. I thank each and every one of our 
witnesses. The Chair now recognizes himself for 5 minutes for 
questions.
    Mr. Fisher, I will start with you. In your statement, you 
gave a group of statistics about the financial concentration in 
our largest money center banks. I assume implicit in that 
statistical rendition was that it is not natural market forces 
at work which has led to the concentration of these assets. Is 
that correct?
    Mr. Fisher. Well, it is--
    Chairman Hensarling. Is your microphone on?
    Mr. Fisher. Pardon me, Mr. Chairman. It has been occurring 
over time, but this process accelerated during the crisis, and 
indeed we have greater concentration today. Over two-thirds of 
the banking assets are concentrated in the hands of less than a 
dozen institutions. And in my formal presentation, I provide a 
little graph which explains that.
    Chairman Hensarling. Now, is it my understanding that you 
believe the Orderly Liquidation Authority will further hasten 
that process, leading to greater concentration within the 
financial services industry?
    Mr. Fisher. It is my feeling that the Orderly Liquidation 
Authority does not end the concept of taxpayer-funded bailouts. 
Even if you go through Section 210, the wording is so opaque, 
so difficult. I will give you an example, Mr. Chairman. It 
says, ``The assets from a failed firm must be sufficient to 
repay the Orderly Liquidation Fund. However, if a shortfall 
remains--''
    How can it can be sufficient if a shortfall remains? There 
is a lot of contradictory verbiage in there. But essentially 
what happens is that you have a process that, even by the 
wording of Section 210, takes up to 5 years or more to occur, 
and if you do process that according to Section 210, what is 
interesting is that you end up, those institutions that might 
provide additional funding with assessments, that is a tax-
deferred or business expense that is written off. So one way or 
another the Treasury ends up paying for it, the people of the 
country end up paying for it, and it is not not taxpayer 
funded. But I do believe that it does not solve the issue of 
leveling the playing field for the other 5,500 banks in the 
country. I hope that answers your question.
    Chairman Hensarling. Mr. Lacker, you have questioned the 
Orderly Liquidation Authority as well, and I believe you have 
stated previously that you see it as a codification of the 
government's longstanding policy of constructive ambiguity. 
Based upon our most recent financial crisis, how constructive 
do you find constructive ambiguity and does it remain in the 
Orderly Liquidation Authority?
    Mr. Lacker. I think it is clear that in the Orderly 
Liquidation Authority and the use of the Orderly Liquidation 
Fund, the FDIC has a tremendous amount of discretion in the 
extent to which they provide creditors with returns that are 
greater than they would receive in bankruptcy. I think that 
discretion traps policymakers in a crisis. Expectations build 
up that they may use that discretion to rescue creditors and 
let them escape losses, and given that expectation, 
policymakers feel compelled to fulfill the expectation in order 
to avoid the disruption of markets pulling away from who they 
have lent to on the basis of that expected support.
    So to me it does seem as if the discretion that is inherent 
in the Orderly Liquidation Authority and that is inherent in 
the way the FDIC has laid out their strategy, sort of the lack 
of specificity we have about the extent to which short-term 
creditors could or would get more than they would get in 
bankruptcy, I think that potential for trapping policymakers 
into rescuing more often than they want is quite there.
    Chairman Hensarling. Ostensibly, Dodd-Frank constrained the 
Fed's ability to exercise its 13(3) authority. Just how much 
constraint do you actually see there? Was it effective and, if 
not, has Dodd-Frank dealt with too-big-to-fail, if it has not 
constrained 13(3)?
    Mr. Lacker. I commend the effort to rein in the 13(3) 
authority. I think it is unnecessary and its existence poses 
the same dynamic for the Fed that I described just now. It is 
not clear, I think it is an open question as to how 
constraining it is. It says it has to be a program of market-
based access, but it doesn't say that more than one firm has to 
show up to use it. And it certainly seems conceivable to me 
that a program could be designed that essentially is only 
availed of by one firm.
    Chairman Hensarling. In the time the chairman doesn't have 
remaining, I just wanted to say to Chairman Bair that having 
read your testimony, I agreed with far more of it than I 
thought I would, and I hope in other questions you will discuss 
the need for a stronger yet simpler capital regime, since I 
believe an ounce of prevention is worth a pound of cure.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. Mr. Hoenig, 
you mentioned the importance of activity limits for 
institutions that have access to the Federal safety net, and 
the first part of your proposal is to restrict bank activities 
to the core activities of making loans and taking deposits.
    As you know, Section 165 of Dodd-Frank requires 
systemically important financial institutions to submit orderly 
resolution plans to regulators showing how they would be wound 
down under the bankruptcy process. If regulators judge that a 
plan is not credible, the law says they may impose more 
stringent capital, leverage or liquidity requirements or 
restriction on growth activities or operations of the company 
until the firm submits a credible plan. The law also states 
that if the firm doesn't fix the plan within 2 years, 
regulators can order divestiture of assets and operations 
again. This process is designed to ensure any of these large 
institutions could be resolved by normal bankruptcy 
proceedings. The Fed and the FDIC have extended the deadline 
for submission of these plans to October.
    In your judgment, do the FDIC and the Fed have the 
authorities they need to limit activities if they find that the 
resolution plans wouldn't allow the banks to be wound down 
under an ordinary bankruptcy proceeding?
    Mr. Hoenig. First of all, let me answer your question by 
first answering the chairman's question, and that is I think 
that the subsidy that is within the industry has allowed firms 
to be larger than they otherwise would have been and removed 
them from the market's discipline. I think it forced broker-
dealers that were independent to come into the--
    Ms. Waters. Reclaiming my time.
    Mr. Hoenig. Yes, I will be right with you.
    Ms. Waters. Reclaiming my time.
    Chairman Hensarling. It is the gentlelady's time.
    Ms. Waters. Reclaiming my time.
    Mr. Hoenig. Now, to answer your question--
    Ms. Waters. Reclaiming my time.
    Mr. Hoenig. Okay, sorry.
    Ms. Waters. I am going to address this question to Ms. 
Sheila Bair.
    I don't know if you heard the question. I will go back over 
it again. As you know, Section 165 of Dodd-Frank requires 
systemically important financial institutions to submit orderly 
resolution plans to regulators showing how they would be wound 
down under the bankruptcy process. If regulators judge that a 
plan is not credible, the law says they may impose more 
stringent capital leverage or liquidity requirements. Going 
through that, the Fed and the FDIC have extended the deadline 
for submission of these plans to October. In your judgment, do 
the FDIC and the Fed have the authorities they need to limit 
activities if they find that the resolution plans wouldn't 
allow the banks to be wound down under an ordinary bankruptcy 
proceeding?
    Ms. Bair. Yes, I think there is very broad authority as 
part of the living will process, and I agree with Jeff Lacker 
that this is a very important--
    Chairman Hensarling. I'm sorry, Chairman Bair, can you pull 
the microphone a little closer to you there, please?
    Ms. Bair. So, yes. Section 165 gives the Fed and the FDIC a 
lot of authority as part of the living will process to require 
these banks to simplify their legal structure, to divide their 
activities, move the activities, high-risk activities outside 
of insured banks. The standard is resolvability in bankruptcy, 
and that is a very tough standard, particularly under the 
current bankruptcy rules. So I think there is tremendous 
authority there, which I hope both the Fed and the FDIC will 
aggressively use to get these banks to simplify their legal 
structures, divide them along business lines. I think Tom 
Hoenig's suggestions are great along those lines.
    Ms. Waters. Will the Fed and the FDIC take other actions if 
study of the resolution plans submitted in October shows they 
aren't credible? Back to Ms. Bair.
    Ms. Bair. I don't know. That might be better addressed 
directly to the FDIC. My personal view is that they should be 
as transparent as possible about the status and acceptability 
of these plans. And if their--I know that there is confidential 
information that they need to protect, but I would like to see 
more disclosure about what is in the living wills as well as 
the process for approving them.
    Ms. Waters. Mr. Lacker, would you like to comment? We have 
a few seconds left.
    Mr. Lacker. I agree with Sheila Bair.
    Ms. Waters. That is a very safe thing to do.
    I will yield back. Thank you.
    Chairman Hensarling. The gentlelady yields back.
    The Chair now yields 5 minutes to the gentleman from North 
Carolina, Mr. McHenry, the chairman of the Oversight and 
Investigations Subcommittee.
    Mr. McHenry. Thank you, Mr. Chairman.
    Mr. Fisher, does Dodd-Frank end too-big-to-fail?
    Mr. Fisher. No.
    Mr. McHenry. Mr. Lacker?
    Mr. Lacker. No.
    Mr. McHenry. Ms. Bair?
    Ms. Bair. It provides the tools to end too-big-to-fail.
    Mr. McHenry. Mr. Hoenig?
    Mr. Hoenig. It does provide the tools.
    Mr. McHenry. All right. So there is some disagreement here. 
Mr. Lacker, please explain the Orderly Liquidation Authority. 
You reference this in your writings, previous speeches, and 
your testimony today, but does the Orderly Liquidation 
Authority provide creditors with a different assumption about 
how they will be treated?
    Mr. Lacker. There are three ways in which the returns to a 
creditor in the Orderly Liquidation Authority resolution would 
potentially differ from the returns to, going through a 
bankruptcy, unassisted bankruptcy. One is that the FDIC has the 
authority to provide creditors with more than they would get in 
liquidation. There are some conditions on that. It has to be if 
it is deemed to be minimizing the cost to the FDIC, but I think 
a fair reading of the history is that standard still provides a 
fair amount of latitude to the FDIC.
    Mr. McHenry. And does that discretion provide greater 
certainty in the market or lead to more uncertainty?
    Mr. Lacker. It is more uncertainty. In addition to that, 
they would potentially receive their money far earlier than 
they would in a resolution under the Bankruptcy Code in which 
there can be delays for good procedural reasons in the 
resolution of claims of creditors; and then, third, the 
discretion provides greater uncertainty or latitude relative to 
the relative adherence to absolute priority rules in unassisted 
bankruptcy.
    Mr. McHenry. So, Mr. Fisher, the FDIC's authority, 
discretionary authority that Mr. Lacker speaks of within the 
Orderly Liquidation Authority, does it provide them wider 
latitude for bailouts?
    Mr. Fisher. According to the way the law is written, there 
is substantial latitude certainly in terms of time. I mentioned 
this in my spoken statement in terms of the liquidation process 
and the time that it takes. I think it is important to realize 
that is one issue. We can have--given the way it is structured 
and the way the wording is stated, this can take up to 5 years 
or longer. This promotes and sustains an unusual longevity for 
a zombie financial institution. I believe it imposes a 
competitive disadvantage on small and medium-sized 
institutions, but one aspect I don't think anybody has 
discussed in any of the hearings that I have studied before 
this committee is that if the reorganized company under the 
process cannot repay the Treasury for its debtor-in-possession 
financing, which is essentially what it is, then Title II 
suggests the repayment should be clawed back via a special 
assessment on other SIFIs, other large bank competitors.
    Mr. McHenry. So, in essence--
    Mr. Fisher. That assessment--excuse me, Mr. McHenry.
    Mr. McHenry. Go right ahead.
    Mr. Fisher. --is then written off as a tax deductible 
business expense, thereby reducing revenue to the Treasury and 
to the people of the United States. So to say that there is no 
taxpayer funding I believe does not completely state it 
correctly. It may be reduced, but it is still carried by the 
taxpayers.
    Mr. McHenry. So we are justified in saying that is, in 
fact, a bailout by the taxpayer?
    Mr. Fisher. That is one way to describe taxpayer support.
    Mr. McHenry. We are sensible people, we are Members of 
Congress, right? So, to this point, there is a lot of debate 
about this, do the large financial institutions have a funding 
advantage as a result of this?
    Mr. Fisher. I believe what Mr. Hoenig was about to say 
earlier--at least I will give you my interpretation--is they 
presently have a huge funding advantage. There are studies by 
the BIS, the Bank for International Settlements, by the IMF, 
there is even one which is highly disputed by Bloomberg that 
shows they have an $83 billion per year advantage. The Bank of 
England under Andy Haldane states a much bigger number, in the 
$300 billion for the internationally systemically important 
financial institutions. But here is what I think is the fact. 
If you take, say, the work of Simon Johnson, a noted MIT 
economist, who was the chief economist at the IMF--that may 
discredit him in the eyes of some in this room, I don't know. 
But as he points out, all you have to do is ask a market 
operator, does a large institution have a funding advantage 
over a smaller one. The answer is yes.
    Now, we at the Dallas Fed don't know what the number is, 
and I noticed under Brown-Vitter, there is an effort or under 
those two Senators to actually get the GAO to study the number, 
but I am here to tell you as a former practitioner with over 25 
years experience in the business, having been a banker, having 
run financial funds, having been an investor, that there is a 
substantial advantage to these institutions, and just the name 
``systemically important financial institution,'' that is like 
saying, I bought it at Neiman Marcus. It attracts and brands 
and provides a special dispensation. And I believe that despite 
the industry's efforts, there is a funding advantage. And I 
believe it is measurable, and if it is not measurable, 
certainly you can feel it as a financial operator, and it buys, 
again, the smaller--
    Chairman Hensarling. The time of the gentleman has expired.
    Mr. McHenry. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Texas, Mr. Green, the ranking member of the Oversight and 
Investigations Subcommittee, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman.
    Let me start by calling Lehman to our attention. As you 
know, this was the largest bankruptcy in American history, and 
its failure created a chain reaction that had a tremendous 
impact on the economic order. In 2011, the FDIC examined how 
Lehman could have been wound down under Dodd-Frank, and I 
believe the report concluded that it could have been done in 
such a way as to allow taxpayers to be off the hook and cause 
creditors as well as investors, shareholders to share the 
burden of the cost.
    My question, Ms. Bair, to you is, could you please 
elaborate on how this could have been accomplished such that we 
would have preserved economic stability and avoided having 
taxpayers bear the burden of the cost?
    Ms. Bair. So, yes, that report concluded that under Title 
II, systemic disruptions could have been avoided, and also that 
the losses for the creditors, for the bondholders would be 
substantially less. Lehman's bondholders still haven't been 
paid yet, and the losses are going to be substantial once that 
happens, and the strategy that was articulated in that paper is 
the one the FDIC says it won't use, which is single point of 
entry, taking control of the holding company, continuing to 
fund the healthy portions of the operation to avoid systemic 
reduction, to maintain the credit flows, require derivatives 
counterparties to continue to perform on their contracts, 
whereas in bankruptcy, they have this privileged status where 
they can repudiate their contracts, grab their collateral and 
go, which creates a lot more losses for bondholders, and that 
is one of the reasons why the bondholders are going to be 
suffering such severe losses in Lehman.
    So I think it is a viable strategy. Is it perfect? No. Is 
there a lot more work to be done to make it work as well as it 
should? Yes. But I do think we would have had a much different 
result, and ironically, bankruptcy proponents, those who want 
to change bankruptcy to make it work for financial 
institutions, which I am all for, be careful with that because 
one of the things some of them want to do is provide government 
funding into a bankruptcy process. So if you don't like the 
fact that the government can provide some liquidity support in 
a Title II process, which will be repaid off the top, be 
careful because the bankruptcy folks want that same kind of 
mechanism in a bankruptcy process, and the reason they want to 
do that is because a financial institution, whether it is large 
or small, its franchise will be destroyed if it can't fund its 
assets anymore.
    It is not like a brick and mortar company. It has to have 
liquidity support to maintain the healthy parts of its 
franchise. If you are going to provide that type of mechanism, 
make sure it is under the control of the government which has a 
public interest mandate.
    So I think that does need to be an important part of the 
debate about bankruptcy versus Title II. But I do think it is a 
viable strategy, and I think it would have worked a lot better, 
served the country better and ironically Lehman creditors as 
well if it had been used in that case, but we didn't have it 
then.
    Mr. Green. Thank you.
    Now a question for everyone. I would like to ask a really 
difficult question, but you are all brilliant people, and this 
should be easy for you, given what you have accomplished in 
life and what you have studied. If you genuinely thought in 
your heart of hearts that the failure of a given entity would 
bring down the American economy as well as the world economy, 
if you genuinely thought that it would and the only way to 
prevent it would be the utilization of tax dollars to be 
repaid, you genuinely believe that we may bring down the 
American economy if you do not respond, and tax dollars to be 
repaid is the only methodology by which you can prevent this, 
would you take the measure of using the method available to 
you, Mr. Fisher? I am going to ask for a yes or no, given that 
time is of the essence.
    Mr. Fisher. My quick answer, Congressman, and again, you 
are a personal friend of mine, but my quick answer is this: It 
is better to create--
    Mr. Green. I reject your quick answer, and I ask you this.
    Mr. Fisher. It is better to create greater and noble--
    Mr. Green. Here is what I am going to ask. If you would 
not, if you would not do this, if you would not utilize the 
only method available, which is tax dollars, and the American 
economy and the world economy is about to go under, raise your 
hand, anyone.
    Let the record show that there were no hands raised, 
including my very good friend, Mr. Fisher.
    And I would also say this to you, friends, this is what 
Dodd-Frank attempts to do. It only has the ability or accords 
the ability if we are about to have a tragedy of economic 
import comparable to what happened with Lehman, and as a 
result, it would not allow us to bring down the economy.
    Thank you, Mr. Chairman.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the chairman emeritus of our 
committee, the gentleman from Alabama, Mr. Bachus, for 5 
minutes.
    Mr. Bachus. Thank you. Back in May and June of 2010, we 
were debating this very subject, how do we address the failure 
of a large financial institution? We basically had two choices, 
and one was what I call rule of law, and that is enhanced 
bankruptcy. And the other was what Chairman Bair referred to a 
minute ago as tools. But that would be tools you give to the 
government, and those are discretion. So, really, the choice is 
between rule of law and discretion, government discretion in my 
mind, and I would just ask each of you to comment on that.
    Mr. Hoenig. If I may, Congressman, number one, Title I is 
bankruptcy, and that is the preferred method. Number two, our 
odds of being able to implement Title I in bankruptcy increase 
if we take the subsidy and pull it back and if we split out 
investment banking activities from commercial banking so that 
firms can fail and not bring down the economy, as Drexel did. I 
think that is a much preferable way, and it does require the 
rule of law in your Title I.
    Mr. Bachus. And as I understand it, you want to really 
limit it to commercial banking?
    Mr. Hoenig. I want commercial banking to be the only sector 
which has this very explicit subsidy.
    Mr. Bachus. So that is one path, and I acknowledge that.
    Mr. Fisher. Congressman, I agree with Mr. Hoenig.
    Our proposal that I have outlined in my submission just 
restricts the Federal safety net, that is deposit insurance and 
access to the Federal Reserve's discount window, to where it 
was always intended to be, as Mr. Hoenig said, and that is in 
traditional commercial banking deposit and lending 
intermediation and payment systems functions. If that were the 
law, that is the law.
    And then, secondly, all other activities with other parts 
of a complex bank holding company, I don't want to get rid of 
the complex bank holding companies, you can't stuff the old 
rules back into the bottle, Glass-Steagall, but it would be 
very clear that every transaction, every counterparty, every 
customer, anybody who does business with them has a clear 
contract that says there will never, ever be a government 
bailout. That is much simpler than what is in this legislation 
here, which is so opaque and so complicated. So when you have 
discretion, you have room for powerful lobbies to influence 
decision making. When you have a strict rule of law, as long as 
it is a good rule of law--I believe it is a simple proposal we 
have made from the Dallas Fed--then you remove that possibility 
for folks to work on the regulators, massage the regulators, 
lobby the regulators and so on, and you have a greater chance 
of discipline. So this is all about the rule of law, and I 
agree with you on that front.
    Mr. Bachus. All right. Dr. Lacker?
    Mr. Lacker. I think you are right to put your finger on 
that. I think discretion is at the core of too-big-to-fail. It 
is why we got here. It began over 40 years ago with the rescue 
of a $1 billion institution in Michigan where the FDIC went 
beyond insured depositors. The precedents that kept being set 
on through Continental Illinois gave rise to the expectation 
that policymakers might use their discretion with uninsured 
claimants, but regulators tried to have it both ways. We tried 
to, with constructive ambiguity, preserve the fiction that we 
wouldn't intervene, tried to get people to behave as if we 
wouldn't intervene because that aligns incentives correctly and 
limits risk-taking, and yet we wanted to preserve the 
discretion to intervene, and markets saw through that. And as a 
result, when the time came, when push came to shove in the 
spring of 2008, markets had built up a tremendous array of 
arrangements that were predicated on our support, and we were 
boxed in. Pulling the rug out from under that would have been 
tremendously disruptive. But the problem isn't that we need to 
provide the support. The problem is to defeat that expectation 
at the core.
    Mr. Bachus. Sure. And even on Lehman, when we started 
talking about whether the government would exercise discretion 
or not, it unsettled and made the process unpredictable, and I 
would say this: Discretion is almost antithesis to 
predictability and certainty. When you have discretion, you 
take away certainty, and then it is hard to have something 
orderly.
    Mr. Hoenig. And remember, Lehman had been allowed to 
leverage up, to issue basically a deposit that had the 
impression of government backing.
    Mr. Bachus. Right.
    Mr. Hoenig. And therefore facilitated its size, its 
vulnerability and then the crisis.
    Mr. Bachus. I am going to write you all a letter about 
Governor Tarullo wanting to go beyond Basel 3 in some of his 
increased capital requirements and other things such as that, 
and I have a real concern that the rest of the world won't 
follow us in that regard, and--but I will have to write a 
letter because of the time.
    Mr. Fisher. Chairman, can I just point out as a point of 
fact that Ms. Bair was not at the FDIC when Continental 
Illinois failed.
    Mr. Lacker. Much less Bank of the Commonwealth.
    Chairman Hensarling. For the record, the Chair now 
recognizes the gentleman from Massachusetts, Mr. Capuano for 5 
minutes. Apparently, I don't.
    I recognize the gentleman from New York, Mr. Meeks, for 5 
minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    My first question goes to Chairwoman Bair. Dodd-Frank 
created OLA to apply only in the rare situation where it is 
necessary to avoid the adverse effects of liquidating a 
systemically important financial company under the Bankruptcy 
Code. Can you discuss other adverse effects that may result in 
liquidating a large and complex financial institution under 
traditional bankruptcy and how OLA helps mitigate some of these 
dangers?
    Ms. Bair. Right. So I think the two problems, the main 
problems you have in bankruptcy, which are where you have an 
advantage with the Dodd-Frank Act, the Title II approach is, 
one, regulators can do advance planning, and these institutions 
don't go down overnight, even with Lehman Brothers. This was a 
slow burn over months of time. So regulators can be inside the 
institution planning, trying to figure out how it will be 
resolved if it fails. Regulators can also provide, the FDIC can 
provide temporary funding support to keep the franchise 
operational. Take a bank, for instance. So a bank goes down. If 
there is no process to continue some liquidity support, a small 
business can't access their credit line anymore to make 
payroll, you are going to your settlement for your house, there 
is no funding for your mortgage anymore. These are financial 
assets.
    To maintain any value in the franchise, you need to 
continue funding the operations, and again that is true with 
large and small banks. The government can do that under the 
stewardship of the FDIC. I think you need a government agency 
if you are going to be temporarily putting government money 
into that. You just can't do that with bankruptcy. Again, I 
caution you that some of these bankruptcy advocates, that is 
what they want. They want the Fed to be lending into a 
bankruptcy process.
    The third thing that we can do under Dodd-Frank and we 
could always do under banks is require derivatives 
counterparties to continue to perform on their contracts, so 
they can't walk away and repudiate their obligations. That 
created tremendous disruptions for Lehman. So those are the 
things that are addressed which are advantages of Title II. I 
think there are Bankruptcy Code changes that could be made 
which would facilitate very quick debtor-in-possession 
financing to provide that liquidity that you need, stop giving 
derivatives to counterparties this privileged status. The 
planning thing is still going to be a problem, but maybe 
working with the regulators, that can work better.
    But you don't have that now, and so you need something like 
Title II, and there is serious work going on at the FDIC to 
make this a viable, operational strategy where the shareholders 
and creditors will take the losses. There is no doubt in my 
mind about that. And there are substantial limitations on the 
discretion of regulators. They can't differentiate among 
creditors except under two conditions: one, you are going to 
maximize recoveries; or two, you are going to maintain 
essential operations. You have to pay your employees. You have 
to pay your IT people, the people who are mowing your lawn, and 
that is true in bankruptcy. Those people are paid in full in 
bankruptcy. Those creditors are differentiated. So, I think 
there are a lot of constraints.
    Prior to Dodd-Frank, we didn't--Congressman, you are 
absolutely right, it was all over the place: WaMu goes into 
receivership; Lehman goes into bankruptcy; Bear Stearns gets 
bailed out. It was bad. But I think Dodd-Frank was trying to 
say, this is the process going forward, here, the government is 
going to do this, these are the limits on their discretion. I 
think there are very meaningful limits there, and I'm sorry if 
we disagree, but I think it is in the statute.
    Mr. Meeks. Thank you. Let me ask Mr. Lacker a question 
about living wills, which are important tools and should 
credibly show how a bank could be resolved under the Bankruptcy 
Code, but it is not clear to me why the effective use of living 
wills makes elimination of the FDIC's authority under Title II 
necessary or even advisable. Can you discuss your views on the 
Orderly Liquidation Authority in light of the failure of the 
Bankruptcy Code to mitigate the systemic impact, for example, 
that Lehman's bankruptcy had on the economy and the financial 
stability? And can you also discuss how taxpayers and the 
economy would be more secure if a large systemic firm was 
liquidated under bankruptcy? Moreover, where would large firms 
find adequate debtor-in-possession financing in the private 
sector?
    Mr. Lacker. Good question. I think the orderly liquidation 
process provides that discretion. I think it provides enough 
discretion that regulators are likely to feel boxed in and 
forced to use it. I think that Lehman told the world a lot of 
things, and as Sheila Bair pointed out, I think that meant 
essentially five different firms had been handled four 
different ways, and then, after AIG, it was six different firms 
five different ways. I think the tremendous turmoil in 
financial markets was due to just confusion about what the 
government's strategy was about doing that.
    Now, as for the bankruptcy of a large financial 
institution, so, we have come to become accustomed with the 
bankruptcy of a large airline, for example, and plenty of 
people are creditors of airlines, they go fly airlines that are 
bankrupt, and things, life goes on. I am not saying that we 
could ever get to the point where a large financial firm could 
fail and go into bankruptcy and it would be as far back in the 
newspaper as an airline bankruptcy, but we need to get to that 
point, and the key thing to remember is that everything that 
makes bankruptcy scary for a large financial firm is under our 
control now. They don't have to be so dependent on the--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from West Virginia, 
the Chair of the Financial Institutions Subcommittee, Mrs. 
Capito, for 5 minutes.
    Mrs. Capito. Thank you, Mr. Chairman.
    We obviously have a disagreement on the panel, and I think 
if the basic disagreement is whether too-big-to-fail exists or 
not and half the people think it exists, then, in my opinion, 
it exists because, real or imagined, it is very much a part of 
the Dodd-Frank bill and also the Orderly Liquidation Authority.
    So let's dig down with President Lacker, talking about the 
living wills and how they may be used to then tweak, as 
Chairman Bair was saying, or reshape the Bankruptcy Code to be 
able to address the issues that you all have talked about 
today. Could you please talk about how a living will could be 
beneficial in this process?
    Mr. Lacker. It is a matter of planning ahead of time so 
that you have confidence that you can take them to bankruptcy 
unassisted, and it would not be disruptive. Sheila Bair points 
out the ongoing franchise value of a company sometimes involves 
liquidity needs. Those liquidity needs are foreseeable. We can 
plan for those, we can provide for those.
    Congressman Meeks mentioned debtor-in-possession financing 
that a bankrupt firm gets in bankruptcy. That is something we 
can entirely foresee and for which we can entirely plan. We can 
estimate how much liquidity they could need at the outside, 
what is likely needed, what is the worst-case scenario, and we 
can make them organize their affairs so that they don't need 
any more liquidity than they would have on hand themselves in a 
bankruptcy. So they wouldn't need the Fed or the FDIC or the 
Orderly Liquidation Authority.
    Mrs. Capito. Let me ask a further question on this because 
one of the push-backs on an enhanced bankruptcy initially when 
we argued this was that it wasn't--the courts weren't agile 
enough or quick enough to be able to react to this. Does 
anybody have a comment on that?
    President Lacker, go ahead.
    Mr. Lacker. I will just say I am familiar with proposals 
for a new chapter in the Bankruptcy Code, Chapter 14. There are 
some, I think, meritorious features of those recommendations 
that are definitely worthy of consideration that would improve, 
that could improve on the bankruptcy process for large 
financial firms. I think dedicated judges assigned specifically 
to this class of bankruptcies could help in that regard.
    Mrs. Capito. Okay. Another thing I have been concerned 
about, as the Chair of the Financial Institutions Subcommittee, 
is the consolidation and mergers that we are seeing, not so 
much on the largest institutions, but we know they are getting 
bigger, but some of the other smaller institutions, if they 
can't meet the cost of compliance, so they are either being 
acquired or merged or whatever. I don't know if this 
liquidation or this resolution process will mean more 
concentration in the financial services industry. Has anybody 
thought of it like that because it does provide that?
    Yes, Mr. Fisher?
    Mr. Fisher. What is interesting about this conversation is 
that we are still talking about institutions that are too-big-
to-fail. These different sections are to handle these mega-
institutions that present a systemic risk. As long as they 
exist, as long as they have a comparative funding advantage, 
they place the smaller institutions at a competitive 
disadvantage, and if that is your question, what I worry about 
here is this entire conversation is based on maintaining too-
big-to-fail and on institutions that are so-called systemically 
important, and putting them through a process that, again, is 
understandable, is earnest, but develops a massive bureaucracy 
and procedure in order to deal with them should they get into 
trouble.
    Far better I think and we propose to structure the system, 
incent the system to have institutions that don't put us in 
this position in the first place. That is the basis of our 
proposal. But as it is now, we are continuing to allow them to 
concentrate, and then we have these fire drills we put up in 
case they get into trouble.
    Mrs. Capito. Right.
    Ms. Bair. Could I just add, I think--
    Mr. Hoenig. Let me just say--
    Ms. Bair. Go ahead.
    Mr. Hoenig. Let me just say I agree with what Mr. Fisher is 
saying, but I think, in bankruptcy, there are still two issues. 
One is debtor-in-possession financing and the other is cross 
border, and that is what the living wills are partially 
designed to address, and what a new Chapter 14 would address as 
well. But if you rationalize the structure of the firms--if you 
get them into manageable sizes and you scale back the subsidy--
you address the drive toward further consolidation. Although 
that is always an issue, if you take away the competitive 
advantage that these largest institutions have over regional 
and community banks, I think you have a much more rational 
system in which failure can be addressed through bankruptcy, 
and Title II becomes less significant under those 
circumstances.
    Ms. Bair. I would just like to add that Title II really 
subjects these large financial entities to the same process 
that community banks have always had, and almost all community 
banks I know support Title II of Dodd-Frank because they know 
that process. They know it is a harsh process. It is a harsher 
process than bankruptcy, frankly, because the management is 
gone; the boards are gone. They have to--they are required to 
be fired. They can continue in a bankruptcy process. So I don't 
think--there is a problem, there is absolutely a problem, 
Congresswoman, with too many of these other regulations 
applying to small banks and compliance costs, and that is going 
to speed further consolidation, but on Title II, I think, if 
anything, most community banks I know support it because it 
imposes the same discipline.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney.
    Mrs. Maloney. Thank you very much, Mr. Chairman.
    I would like to ask Sheila Bair, I am sure you remember the 
bailout of AIG in 2008, and we did this by taking an 80 percent 
stake, equity stake in the company. Essentially, the government 
or the American taxpayers became the majority owners of the 
company. We did not put it through bankruptcy, and we did not 
liquidate the firm. We kept the old firm alive with government 
money.
    Now, I would like to draw your attention to Section 206 of 
Title II, which says that the FDIC, ``shall not take an equity 
interest in or become a shareholder of any covered financial 
company or any covered subsidiary.'' I understand you wrote a 
large part of Title II. And in light of this prohibition that 
is in Section 206, do you think that Title II of Dodd-Frank 
permits more AIG-type bailouts by the FDIC? Does it permit it?
    Ms. Bair. No, just the opposite. It bans, as you say, 
capital investments. You just can't do that anymore. Title II 
is really an FDIC-controlled bankruptcy process. The claims 
priority is the same. It is more harsh, as I said, because of 
the punitive way that the boards and managers are treated. So, 
no, there could be no more AIGs, and that was a very specific 
purpose of mine in working with this committee and folks in the 
Senate in drafting Title II.
    Mrs. Maloney. Also, how would a liquidation under Title II 
be different from the AIG bailout? How would it be handled? How 
would it be different?
    Ms. Bair. So, there would be a restructuring. My guess is 
they would use a good bank-bad bank structure. The bad assets 
would be left in the receivership, the shareholders and 
creditors would take the losses, the healthy part of the 
organization would be spun out probably into--I am sure into 
smaller, more manageable pieces. It would be recapitalized by 
converting some portion of the long-term debt at the holding 
company level into equity positions. These would be by private 
stakeholders, and the equity positions and the healthy parts of 
the entity that would be spun out back into the private sector, 
and I think it would take less than 5 years, 5 years is the 
outer limit, but it is 5 years since Lehman went through 
bankruptcy, and the bondholders still haven't been paid, so, in 
the world of restructurings and traditional bankruptcy 
processes, 5 years is not a hugely long time.
    Mrs. Maloney. And can you please describe why the 
bankruptcy option and that process did not work for Lehman?
    Ms. Bair. I think, again, there was a full stop with the 
financing. The franchise lost value very quickly because there 
was no liquidity left, and I think the ability of the 
derivatives counterparties to repudiate their contracts and 
pull out their collateral also had a disruptive effect, and 
then, of course, you triggered insolvency proceedings in 
overseas operations, as Tom Hoenig has mentioned, because the 
whole thing was going into a receivership process as opposed to 
the single point of entry strategy, which is also the one that 
the bankruptcy reform advocates want to use. It is the holding 
company that goes into the receivership, but the healthy 
operating subsidiaries underneath, including those in foreign 
jurisdictions, remain open.
    Mrs. Maloney. And very importantly, why did Lehman's 
bankruptcy really spur a global economic crisis? Can you 
explain how that happened?
    Ms. Bair. I think it was a combination of things. It 
surprised the market, as we said. There were so many 
different--I think there was a bailout expectation, and when 
the market didn't get a bailout, the market doesn't like 
surprises. I think the derivatives, the full stop on the 
funding was a real problem, I think the derivatives 
counterparties pulling out and then going back to the market to 
rehedge, I think that created some significant disruptions as 
well, and then just general uncertainty. Another important 
recommendation that I make in my testimony which will help 
facilitate bankruptcy or Title II is better disclosure, what is 
inside these firms, their financial statements. The market just 
doesn't have any confidence in them. When Lehman went down--so 
who else is out there with bad assets that we don't know about 
because the financial statements aren't doing a very good job 
reflecting that.
    Mrs. Maloney. And speaking about disclosure, there has been 
some testimony about reports which have shown that the markets 
are more dark or less disclosed since Dodd-Frank, that they are 
really not going on the exchanges. So this is not--probably the 
best clearest way is an exchange where you know what is 
happening. Why is it becoming darker? Why is that trend 
happening?
    Ms. Bair. I was referencing more the financial statements 
that publicly traded companies and financial institutions in 
particular have to make publicly available. I think on market 
trading, yes, that is another problem, and that accelerates 
volatility because who is trading what and what the deficit 
market is becoming quite opaque, and the amount of money 
sloshing around out there, it is quite volatile. So I do think 
that does exacerbate the problem as well. It is more of a 
market structure issue.
    Mrs. Maloney. My time has expired.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the Chair of the Capital Markets 
Subcommittee, the gentleman from New Jersey, Mr. Garrett.
    Mr. Garrett. Thank you. And Ms. Bair, just to follow up on 
those lines, who exactly with regard to being the bailed out in 
those situations under that title--who exactly is it that is 
being bailed out? Is it the credit--I will answer the question. 
Is it creditors actually that are being bailed out or--
    Ms. Bair. Nobody is bailed out in a Title II, and nobody--
creditors are--if you say because creditors are paid something, 
that is because the remaining value of the franchise is enough 
to give them some of their money back. That is true in 
bankruptcy, that is true in the FDIC. That is not a bailout. 
That is just the way the process works.
    Mr. Garrett. But is it the creditors who are receiving the 
fruits of the payments in that situation? I don't want to get 
into the weeds with the definition of a bailout or not.
    Ms. Bair. No, I think it is more the customers of the 
institution. It is the customers of the institution who, if 
they are relying on the credit functions of the institution, 
are the ones who are receiving the benefit. The unsecured 
creditors and shareholders are held in receivership and will 
take whatever attendant offices there are. If the franchise is 
so worthless that there is very little recovery left, they 
won't get anything back.
    Mr. Garrett. Yes. So let me go into an area in which I 
thought I agreed with you. And generally, I agree with you more 
now than in your previous capacity, by the way. So you made an 
interesting point in your written statement that I don't 
believe got a lot of attention so far here, and that is with 
regard to FMUs, financial and market utilities, is that right? 
Specifically to their access to the Fed's discount window, and 
in that area, I do completely agree with that where you say 
that new GSEs--this is creating a new GSE and a potential new 
source of system instability if left in place. Now, you may 
know that last Congress, I introduced, along with Senator 
Vitter, legislation that would have eliminated Title VIII, 
among other things, and I would hope that this will be 
included, by the way, with any new package that goes forward.
    But a couple of points with you on this, right? If the 
Chairman of the CFTC continues to move forward with regulations 
that force swaps transactions which take place outside of this 
country, overseas, between non-U.S. firms, and to comply with 
the clearing requirements under Dodd-Frank, then those 
clearinghouses will have to do, what, to clear the trades and 
then also have access to our discount window, right? So isn't 
that in short what Mr. Gensler is doing is trying to, not maybe 
trying to, but actually importing potential systemic risk over 
in Europe and then looking to the taxpayer here in the United 
States to bail them out? Isn't that the actual outcome?
    Ms. Bair. Congressman, I have not looked as closely as 
perhaps I should at the CFTC's proposed regulation. Could I 
give you a written response to that? I'm sorry; I just don't 
feel like I have enough information to answer that right now.
    Mr. Garrett. But it is true regardless of where they are, 
your point is that by having access to the FMUs, to the 
discount window, you basically have a backstop for the 
taxpayers?
    Ms. Bair. You absolutely do. That is 1,000 percent. I just 
have not thought about the interrelationship between that 
designation and what the CFTC is proposing, but yes, that is a 
bailout. I don't think Title I is, but Title VIII absolutely 
is. The too-big-to-fail designation comes with liquidity 
access, no additional regulation. Yes, if you could get rid of 
that, that would be great.
    Mr. Garrett. Right, so that is all good, and I agree with 
you, great, on that. The flip side of that is you have also 
talked, however, in some of your public comments and saying 
that you have been critical of the claim that the top tier 
allows for taxpayer bailouts in this section, right? But then 
you advocated for a prefunded pot of money, bailout money I 
will call it, paid for how? By additional levies on the 
financial institutions themselves, and I would--are you with 
me?
    Ms. Bair. Yes.
    Mr. Garrett. You say, and I can pull out your statements on 
it, that this is not a tax on the consumer; this is a tax on 
the financial institutions. Is that correct, in your 
assessment?
    Ms. Bair. I don't anticipate--first of all, I think you 
need to differentiate between propping up an institution, 
leaving it open, leaving the management in place, and giving 
them liquidity support, which is what you can do with 
clearinghouses under Title VIII, and once an institution has 
been forced into receivership, the managers are gone, the 
boards are fired, the shareholders and creditors will take 
whatever losses there are. This is true in bankruptcy or Title 
II. That is the process you provide the liquidity support. So 
you get the market discipline--
    Mr. Garrett. But ultimately, indirectly, it first goes onto 
the financial institutions, and the first one, if it can bear 
it, with its equity and what have you, but if not then to the 
other financial institutions in the industry, and ultimately 
doesn't that get passed through to the consumer?
    Ms. Bair. I would be very surprised if that happens, but I 
think that is a good reason why other large financial 
institutions which work closely with the Fed and the FDIC to 
make sure both Title I and Title II work.
    Mr. Garrett. Right. But wouldn't the simple solution just 
be to--I am with you 100 percent on the first--eliminate that 
backstop? Wouldn't the simple solution be just treating both of 
them in the same way to prevent any possibility because nobody 
knew about the possibility going into 2008 that this was all 
going to be feed back on the consumer. So wouldn't that be the 
most direct way, just to eliminate them both entirely?
    Ms. Bair. I would like to get to a world where for 
operations outside of insured banks, outside of the safety net, 
I would love Tom Hoenig's activity differentiation, the rest of 
that can go into a bankruptcy process without hurting the rest 
of us. I would love to see that world.
    Mr. Garrett. Thanks.
    Ms. Bair. We are just not there yet.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano, for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman. I am still trying to 
process Ms. Bair and Mr. Garrett agreeing on something. I am 
going to have to rewind this tape at a later time and try to 
figure this out.
    Mr. Hoenig, in your testimony, your verbal testimony, you 
used the word ``perception.'' Mr. Fisher used the same word. 
Mr. Lacker, you used the words, ``implicit, artificial, the 
people believe certain things and expectations.'' I agree with 
everything that the three of you said on those issues. I may or 
may not agree on whether there is a real ability to use too-
big-to-fail anymore, but I agree that the perception is out 
there. Whether I like it or not, whether I agree with it or 
not, it is there.
    I agree with it, and by the way, Chairman Bernanke agrees 
with it as well. To quote his testimony from an earlier date in 
this committee, he said that market expectations that the 
government would bail out these firms if they failed, period, 
those expectations are incorrect. He went on to further state, 
obviously, the perception is there, but he thought the reality 
is not, and at a later time, he also stated that the tools that 
the Federal Reserve used to implement too-big-to-fail in 2008 
were no longer available to the Fed. So I guess a lot of this 
to me is a lot of wasted time. We can agree or disagree whether 
the law does it or not, but I don't think there is any 
argument, regardless of what we think the law does, that the 
perception is there, so perception in this case may well be 
reality.
    Mr. Fisher, I particularly like, and I will be filing a 
bill to implement your second proposal, the item that just sign 
something saying we are not doing it. I like that. I don't 
think you have to repeal anything to do that. I like belts and 
suspenders. I am going to be filing a bill, and I hope my 
colleagues will cosponsor it with me. I think that is a pretty 
good general proposal.
    I also particularly liked your comment earlier that it is 
the first time I think I have heard it said that a SIFI 
designation provides a competitive benefit to somebody. I 
actually believe that, but I congratulate you for saying it.
    I want to get back to the too-big-to-fail. Really, in my 
opinion, it deals with the subsidy, the alleged subsidy which I 
happen to agree is there but some people disagree that the 
bigger banks or the bigger entities get. I was very interested 
to note that in all of your testimonies, you didn't really talk 
about size too much; you talked mostly about complexity and 
concentration. Now, size obviously factors into that. You can't 
be complex if you are not big enough. But I wonder, Mr. Hoenig, 
how would you feel if you could, if I gave you a magic wand, 
would you re-implement something along the lines or something 
equivalent to Glass-Steagall if you had that power?
    Mr. Hoenig. Yes, I would.
    Mr. Capuano. Mr. Fisher?
    Mr. Hoenig. Something like it. That is what I propose 
because you want to change the perception.
    Mr. Capuano. I know that is what you proposed, that is why 
I asked you the question.
    Mr. Fisher, I don't know what you proposed. Would you 
implement, not necessarily the same law, but something 
equivalent to Glass-Steagall if you could?
    Mr. Fisher. I think what we proposed is similar. I don't 
think you can stuff Glass-Steagall back in a bottle.
    Mr. Capuano. I agree with that.
    Mr. Fisher. Thank you for offering to put a bill in. I am 
now proud to have been educated in Massachusetts. Thank you, 
Congressman.
    Mr. Capuano. Thank you. Mr. Lacker, would you again impose 
something equivalent to Glass-Steagall if you could?
    Mr. Lacker. I think the living will process will get us 
there if we need to go there. I think it will identify what 
activities we need to push out, separate from banking 
activities, if that is what is needed to make unassisted 
bankruptcy palatable.
    Mr. Capuano. Ms. Bair, would you reimpose something 
equivalent if you could?
    Ms. Bair. Yes, I agree with it, and I think the regulators 
have the tools under Title I to get there.
    Mr. Capuano. Thank you.
    Are any of you familiar with an article that was written by 
Professor Hurley and Mr. Wallison of AEI several months ago? It 
appeared in Forbes magazine. It proposed something that would 
impose a market discipline on the larger institutions to 
actually make themselves smaller. It basically would require a 
higher capital formation if these institutions were too big, 
which would put pressure on stockholders to then voluntarily 
shrink the entity. I am just wondering if any of you are 
familiar with this? If you could read--maybe I will send you a 
copy of H.R. 2266, because that is my attempt to put it into 
legislation. I like the idea of the market rather than the 
government saying, you are too big, I like the idea of the 
market doing the same thing, which is a little different than 
everything else. It kind of lets the entities themselves, 
actually the stockholders make that decision, and I am just 
wondering, are any of you familiar with the concept of the 
proposal?
    Mr. Hoenig. I am generally familiar with the concept, and 
my concern is that given that you have them internally, doing 
this against a market bench, it probably will be gamed, and it 
will be very hard to get the capital ratios that you would 
need.
    Mr. Capuano. I am convinced that anything that we ever do 
will be gamed, which is why Congress exists, to play whack-a-
mole with everybody else.
    Mr. Fisher, are you familiar with the concept?
    Chairman Hensarling. Speaking of whacked, the Chair is 
going to whack the gavel. The time of the gentleman has 
expired. The Chair now recognizes the gentleman from 
California, the Chair of our Monetary Policy and Trade 
Subcommittee, Mr. Campbell of California.
    Mr. Campbell. Thank you, Mr. Chairman.
    One thing we haven't talked about yet is capital, and the 
Brown-Vitter proposal over in the Senate is very much capital-
based. I have a proposal on this side that is entirely capital-
based. The theory from those of us who believe that SIFI 
institutions should have more capital is that it is an elegant 
solution, in that by requiring them to have more capital, it 
makes the circumstances under which OLA or whatever any sort of 
government bailout, bankruptcy, whatever, would be reduced, and 
that it simultaneously reduces those competitive advantages 
that SIFI institutions have because this capital will be 
expensive, and it will thereby reduce their returns, which 
might even encourage some of them to break themselves up, 
either by region or by business line. But we haven't really 
talked about any of that today, so I am curious from each of 
you on the capital thing, and I know you have talked about it, 
Ms. Bair, at long-term subordinated debt. Good idea, bad idea, 
should it be a part of a proposal, or not part of a proposal? 
Is it a complete solution, or not a complete solution? I am 
just interested in all of your views on that.
    Mr. Hoenig. First of all, more capital would be a real plus 
for the industry. Right now, the largest institutions actually 
have less capital than the regional and the community banks by 
a substantial margin, so the largest should increase their 
capital. Whether they should have more capital, I think if you 
could get them up to the same level as regional and community 
banks, you would have accomplished something, but I do think 
for an equal playing field, they should have the same basic 
tangible capital levels, and then we need to revise the Basel 3 
to simplify it and make it more useful as a risk measure 
against the tangible capital. I do think some of the largest 
institutions are woefully undercapitalized overall, and that 
needs to be addressed.
    Mr. Campbell. Mr. Fisher?
    Mr. Fisher. I agree with Mr. Hoenig, too-big-to-fail with 
higher capital requirements but without complementary 
structural changes, I think falls short of the necessary 
action. Again, living wills, which we talked about before, have 
higher capital requirements, are potentially helpful tools, but 
they are not sufficient to ensure the survival of the company, 
and they will not eliminate massive losses that can choke off 
liquidity and disrupt financial markets in the economy, so I 
would say they are necessary. They are important. By the way, 
the big banks are going to fight you on that big time.
    Mr. Campbell. I have experienced that.
    Mr. Fisher. You know that? Put on your body armor? But I 
would say exactly what Mr. Hoenig said, just reminding you that 
structural changes are also an important part of this aspect. 
Thank you.
    Mr. Campbell. Thank you.
    Mr. Lacker?
    Mr. Lacker. I think robust capital requirements are very 
important, very valuable. We have seen increases in capital. 
They are very substantial since the crisis, and I hope that 
process continues. I agree with President Fisher; they are 
insufficient. I think if you get to the point where you have 
run out of liquidity, where you have run through capital, the 
fact that you used to have a lot of capital is cold comfort, 
and I think that the misalignment of incentives, which is at 
the core of the too-big-to-fail problem, really has to do with 
what happens in the end game. When you get to the point where 
you have run through capital and run through liquidity, and I 
think we have to pay attention to that, too.
    Mr. Campbell. Thank you. Ms. Bair?
    Ms. Bair. You know where I am. Yes, your first strategy is 
always to try to prevent a failure or reduce the probability of 
it, and that can only be done with high quality capital. We 
also need to dramatically simplify the risk weightings. They 
are just broken, and they are providing incentives for frankly 
harmful behavior. They really need to be changed.
    Mr. Campbell. Do you have a view--Ms. Bair, let me just 
start here in the last minute here, how much capital, debtor 
equity or what are your--
    Ms. Bair. I have suggested a minimum 8 percent, as has the 
Systemic Risk Council, which I chair, an 8 percent leverage 
ratio, nonrisk-weighted assets, with a denominator that 
includes a lot of off-balance-sheet risks, so it is what is 
called the so-called Basel 3 leverage ratio, which is one of 
the good parts of Basel. Not everything in Basel was good, but 
I think that part was good. They only wanted 3 percent, I think 
it should be a minimum of 8 percent.
    Mr. Campbell. Mr. Lacker?
    Mr. Lacker. I don't have specific numbers for you. We are 
moving in the right direction, though.
    Mr. Campbell. Okay. Mr. Fisher?
    Mr. Fisher. I don't have a specific number, although I do 
note that the community bankers aren't uncomfortable with 8 
percent capital ratios, and as Mr. Hoenig said, the big ones 
are woefully undercapitalized relatively speaking although 
improving, and there should, of course, as Chairman Bair said 
earlier, I think we have to be careful that we do have a Basel 
3 outcome that doesn't penalize the smaller and regional banks.
    Mr. Campbell. Last words, Mr. Hoenig?
    Mr. Hoenig. I have suggested a leverage ratio as high as 10 
percent because before we had the safety net, that is what the 
market demanded of the industry. So we ought to at least be at 
that level, and then simplify the industry so we can in fact 
apply that systematically.
    Mr. Campbell. Thank you.
    I yield back, Mr. Chairman.
    Chairman Hensarling. Before proceeding to the next Member, 
Chairman Bair, I was just informed that you are requesting to 
be excused at noon. Is that correct?
    Ms. Bair. Yes.
    Chairman Hensarling. We won't keep you here against your 
will. It was simply the first I had heard of it.
    Ms. Bair. Oh, I'm sorry.
    Chairman Hensarling. So, again, for Members, they should 
take note that Chairman Bair has to leave soon.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Clay, for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman.
    I want to thank the panel of witnesses for their 
participation today.
    This is a panel-wide question, and it goes back to 2008 and 
prior to that. What was your position regarding the state of 
the U.S. economy? Did anyone on the panel see a potential 
collapse of our economy, and if so, did you warn anyone or say 
anything about it? I will start with Mr. Hoenig, and we will 
just go down the line.
    Mr. Hoenig, did you see trouble coming?
    Mr. Hoenig. I did speak about issues in terms of the 
imbalances that were developing in the economy in 2003 and 
2004. I did not identify exactly where this would all play out, 
but I certainly had my concerns given the interest rates that 
were in place.
    Chairman Hensarling. Mr. Hoenig, could you pull the 
microphone a little closer, please?
    Mr. Hoenig. I'm sorry. The answer is yes, I did speak about 
the imbalances that were caused by some of the interest rate 
policies that were in place at that time.
    Mr. Clay. Thank you. Mr. Fisher, did you see any trouble 
coming?
    Mr. Fisher. Yes, sir. In fact, I listened to Mr. Hoenig at 
the table and Mr. Lacker, all three of us did speak of this, 
and particularly was concerned about the housing market, what 
was happening in the housing market, the excesses in mortgage-
backed securities, and without getting technical here, watching 
the credit default swap spreads that were occurring 
particularly among certain firms, Merrill and others, Bear 
Stearns, one could see a storm coming.
    As to how pervasive and how dangerous it would be, one 
could not foresee that, but one knew that there was a big storm 
on the horizon, and we spoke about it a great deal at the 
Federal Reserve.
    Mr. Clay. Go ahead, sir?
    Mr. Lacker. In June of 2008, I gave a speech warning that 
the actions we had taken with Bear Stearns would set precedents 
that would alter incentives going forward and had the potential 
to contribute to financial instability.
    In all fairness, I was looking forward to the next business 
cycle, not the one we were in then. I had no idea that it would 
come so soon and so swiftly and with such ferocity.
    Mr. Clay. Thank you.
    And Ms. Bair?
    Ms. Bair. Yes, when I was at Treasury in 2001 and 2002, I 
spoke about and tried to do something about deteriorating 
mortgage lending standards. I went into academia. I came back 
to the FDIC in 2006. The FDIC staff were already on top of 
this. We started speaking very early about deterioration in 
lending standards, the underpricing of risks, the need for 
banks to have more capital, not less, so I think we do have a 
good track record on that.
    Mr. Clay. When you were at Treasury, did you bring it to 
the attention of then-Treasury Secretary O'Neill?
    Ms. Bair. We did. We initiated something, Ned Gramlich, the 
late Ned Gramlich worked with me. We tried to get--the Hill was 
not going to have mortgage lending standards. I think there 
were some on this committee who were trying to do it on a 
bipartisan basis. The Fed had decided they didn't want to write 
lending standards. They had the legal authority. So we put 
together a group of industry and consumer groups to develop 
best practices to try to put some curbs on this, but it was 
voluntary so it helped little on the margin, but yes, that was 
all very public.
    Mr. Clay. Thank you for that response.
    One more panel-wide question: Do you think that U.S. 
taxpayers are better off today with the Dodd-Frank law, or are 
they not better off today in fear of another bailout of large 
banks by taxpayers?
    I will start with Mr. Hoenig.
    Mr. Hoenig. Today, we have institutions that are every bit 
as vulnerable as we had before, and that is a concern. 
Hopefully, we have the tools in bankruptcy to make sure that we 
don't repeat the mistakes of the past. But I do worry that if 
they do get into trouble, we still have a very vulnerable 
financial system.
    Mr. Fisher. I would agree with Mr. Hoenig, Congressman, I 
don't think we have prevented taxpayer bailouts by Dodd-Frank, 
and I think the taxpayer is still susceptible, and I would like 
to have, again, restructuring occur so that this would not be 
the case.
    Mr. Clay. You don't think Dodd-Frank and certain sections 
provide enough protection to taxpayers?
    Mr. Fisher. No, sir, because I think it still perpetuates 
too-big-to-fail.
    Mr. Clay. Okay. All right.
    Mr. Lacker. I agree that the Dodd-Frank Act did some good 
things, and also did some things that I don't think are the 
best approach to these issues. Back in the 1930s, there were 
several pieces of substantial banking legislation. It wouldn't 
be uncalled for, for Congress to revisit this issue again.
    Mr. Clay. Thank you.
    And Ms. Bair?
    Ms. Bair. I do think Dodd-Frank provides very strong 
protections against taxpayer bailouts. The shareholders and 
creditors will be taking the losses. If there should be any 
shortfalls, there is going to be an industry assessment, the 
taxpayers aren't going to pay for it, and I am happy to support 
an amendment to the Tax Code to eliminate the deductibility of 
those payments if an assessment ever occurs.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Westmoreland.
    Mr. Westmoreland. Thank you, Mr. Chairman. And I want to 
thank the witnesses for being here today.
    This question is for President Fisher and President Lacker. 
Can Dodd-Frank's Orderly Liquidation Authority provide the 
opportunity for more AIG-like bailouts where a hard-working, 
taxpaying factory worker in my district would end up bailing 
out the creditors of European banks 100 cents on the dollar?
    Mr. Fisher. Mr. Lacker, would you like to go first?
    Mr. Lacker. Sure. It has been commented before that there 
were certain features of the way we structured the intervention 
into AIG that wouldn't be legal now, purchasing equity, for 
example. But having said that, the way that the Orderly 
Liquidation Authority is envisioned to work, with a single 
point of entry, a parent company, it envisions providing funds 
from the FDIC that would let creditors of operating 
subsidiaries escape losses. So I would have to say that your 
characterization is accurate, that it could happen again.
    Mr. Fisher. With regard to your hard-working factory, 
Congressman--
    Mr. Westmoreland. Taxpaying. Hard-working, taxpaying.
    Mr. Fisher. Hard-working, factory-working taxpayer, I don't 
believe that it provides adequate protection for that type of 
individual. I think it, again, enmeshes us in hyperbureaucracy, 
and it certainly doesn't do anything for, and in fact doesn't 
improve the situation, the comparative advantage too-big-to-
fail institutions have over whom that individual is likely to 
go to, to secure a loan or finance their car or do the kind of 
things that they like to do and they need to do at their level, 
the small community and regional banks.
    And as long as that advantage is maintained or, as the 
gentleman pointed out earlier, perceived to have been 
maintained, then they are at a funding disadvantage to the 
operation of these large systemically important financial 
institutions.
    So from the standpoint of that particular constituent it 
may mitigate the risk for these gigantic institutions, but it 
doesn't prevent these gigantic institutions in the first place 
nor the advantage they have in operating compared to the bank 
with which that institution is likely to work.
    Mr. Westmoreland. Thank you.
    Let me ask, I know that there has been some agreement 
between most of you on the panel. I know one area that you do 
agree on, I think all of you support the Brown-Vitter bill that 
is in the Senate, that we have heard a lot about over here. Do 
you think that when we are looking at too-big-to-fail, we need 
to look at some of these things that are in Brown-Vitter? And 
the thing that I would like for you to comment on is the 15 
percent capital requirement for the 8 largest banks. I got in 
here a little late and heard Mr. Campbell asking some questions 
about the cash requirements. Do you feel that the 15 percent 
for these larger banks is an unrealistic number or do you think 
that is the right number?
    Mr. Hoenig. I think that the Brown-Vitter approach does 
bring the discussion forward in the right way. Whether 15 
percent is the right number, I think that may be high given the 
history in terms of capital. My number is 10 percent with a 
real leverage number. But that would do much to improve these 
institutions which are right now sorely undercapitalized.
    And to again make the point, this would be even more 
effective if we had the system rationalized where we were 
looking at commercial banks as commercial banks and broker-
dealers as broker-dealers and where the capital requirements 
are different for each. They are different types of animals, 
they have different risk profiles, and the markets should in 
fact demand the capital that it needs, and it is going to do 
that if we scale back the subsidy that is right now distorting 
what the right capital ratio should be.
    Mr. Fisher. I would agree with that, Congressman. And I 
would also add that one of the benefits of Brown-Vitter--and I 
am not willing to endorse the bill entirely; there are some 
aspects in terms of the Federal Reserve that are undefined in 
it--is it does show that there can be a bipartisan approach to 
dealing with what is a problem and it encourages me enormously.
    As to the capital ratios themselves, again, if you were to 
follow our plan at the Dallas Fed where we would only provide 
the Federal guarantees to the commercial banking operation of a 
complex bank holding company, I am not sure we have to be as 
high as 15 percent, and I am more in the range of Mr. Hoenig. 
And I think that will be a negotiated rate, again depending on 
how big the lobbies are and how powerful they are at 
influencing the Senators who have to vote on that bill.
    Mr. Westmoreland. One quick comment to that, and then I 
know my time is up. But there were different levels: the 15; 
the 10; and the 5. Do you think all those levels need to be 
adjusted from your standpoint or just the top level?
    Mr. Hoenig. I think we need to have an across-the-board 
number that is applicable to all so that you have a level 
playing field, but I think that is dependent upon correctly 
separating out the broker-dealer activities which would then 
define their own capital needs.
    Chairman Hensarling. The time of the gentleman has expired. 
And again, for Members, although I just recently learned about 
this, we will excuse our witness, Chairman Bair, at this time.
    I assume, Madam Chair, that if Members have further 
questions, you would be happy to answer them in writing.
    At this time, the Chair will recognize the gentleman from 
Texas, Mr. Hinojosa, for 5 minutes.
    Mr. Hinojosa. Thank you, Mr. Chairman. I had a question for 
the Honorable Sheila Bair, but I think I will pass that 
question on.
    Chairman Hensarling. The gentleman is officially out of 
luck.
    Mr. Hinojosa. Yes, I am out of luck. I apologize that I had 
to run to speak to a very large group of students on the 
Education Committee and I was one of their speakers. So I ran 
down there and spoke and ran back to take this opportunity to 
ask a couple of questions.
    So I will start with the first one for President Richard 
Fisher. I want you all to know that he is my fellow Texan, 
someone that I know very well, and I would like to ask him a 
question or two, because I read an article in Bloomberg, and I 
quote, ``Fed's Fisher urges bank breakup amid too-big-to-fail 
injustice.'' And one sentence that I will read, it says, 
``Fisher reiterated his view that the government should break 
up the biggest institutions to safeguard the financial system. 
He is one of the central bank's most vocal critics of the too-
big-to-fail advantage he says large firms have over smaller 
rivals.''
    So my question then, President Fisher, is you have made 
those statements, and I have to say that I respectfully 
disagree with you about the tools within Dodd-Frank to end too-
big-to-fail, but I am interested to hear your thoughts about 
the danger of ever-growing megabanks. What danger do they pose 
and how would you go about splitting them up?
    Mr. Fisher. Thank you, Congressman Hinojosa, and I have 
explained that in my more fulsome statement that I submitted. 
First, I want to make it clear that I would prefer to have a 
market-driven solution here, and our first aspect of our 
proposal, which we have discussed while you were in and out of 
the room, is that the government guarantees that its deposit 
insurance access to the Federal Reserve discount window would 
be applied only to the commercial banking operation of a 
complex bank holding company. They would be allowed to continue 
to have those other aspects, but everybody who is a 
counterparty with those other parts of that big bank holding 
company, or little bank holding company, whatever it may be, 
would simply sign an agreement saying that the government will 
never, ever come to their rescue should that transaction go 
sour.
    I think if you did that, then market forces would begin to 
focus on who is strong in these areas and who is not and you 
would have a better rational allocation if it was understood 
that the entire bank holding company wasn't protected as too-
big-to-fail. So I want to make sure that you understand that I 
prefer a market-driven solution rather than a government-
imposed solution, although there may have to be a bridge in a 
period where the government might, by making clear how we would 
approach this ultimately, implementing the plan that we have 
suggested, rather than the hypercomplexity that is embedded in 
the 9,000 pages of rules that have come out of Dodd-Frank. I 
don't mean that disrespectfully. I am just stating an 
observation here that simplicity sometimes trumps complexity.
    Mr. Hinojosa. I am glad you gave us the count, because it 
is a huge piece of legislation. I want to say to our witnesses 
that I agree that it is important for us in Congress, both 
Republicans and Democrats, to read the law and examine the 
relevant provisions within the Dodd-Frank Act. And I want to 
ask a question on a portion of the Dodd-Frank Act, specifically 
Title XI, Section 1101(A)(B)(i), which reads, ``As soon as 
practicable after the date of enactment of this subparagraph 
the Board shall establish by regulation, in consultation with 
the Secretary of the Treasury, the policies and procedures 
governing emergency lending under this paragraph.''
    So my question I guess will go to our first panelist, the 
Honorable Thomas Hoenig, if you would like to answer this 
question. Can you discuss the emergency lending authorities 
that were used in 2008, as well as how they were used, and 
whether that type of lending is possible under Title XI of the 
Dodd-Frank Act?
    Mr. Hoenig. In 2008, the primary section that was used was 
what is called Section 13(3), which allowed for lending under 
exigent circumstances to institutions, including nonbank 
institutions. So that would allow for the lending to the money 
markets and so forth. That provision was used extensively in 
that crisis.
    The law that you are citing is designed to limit the 
lending ability, as it has to be systemic, it has to be 
industry-wide, not given on a case-by-case basis to individual 
institutions. We don't know until you actually have a crisis 
whether we will be able to implement that authority or whether 
the Federal Reserve will be able to implement that 
successfully.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, for 5 minutes.
    Mr. Royce. Yes. I think as we go to the written testimony 
of Mr. Fisher, President Fisher and President Lacker, we have 
this concept of what we do when we place a name, SIFI, on these 
institutions. What are the unforeseen consequences of doing 
that? Are we sending the message to say that they occupy a 
privileged space in the financial system? What does that mean 
in terms of their cost of borrowing compared to the costs faced 
by their smaller competitors? As Mr. Fisher pointed out, it is 
like saying you bought it at Neiman Marcus when you have this 
stamp.
    And my question is, did the Dodd-Frank legislation further 
expand, compound the conundrum here by using an arbitrary, or 
as the General Counsel of the Fed calls it, a somewhat 
arbitrary threshold number of $50 billion in assets to 
determine SIFIs, and do we really make the system safer by 
putting everyone in the pool together in this way, or is there 
a better way to do this? And if there is a better way to do it, 
what is that better way? That is my question to the panel.
    Mr. Lacker. If I could, Congressman Royce, when I think of 
the provision of the Dodd-Frank Act about designating SIFIs, it 
is a natural outgrowth of one of the animating philosophies of 
Dodd-Frank, which is that rescues are inevitable and we need to 
do what we can to stiffen and strengthen the constraints on 
risk taking at these institutions. I think strengthening 
constraints on risk taking is a valuable thing, but the other 
animating philosophy which at times competes in Dodd-Frank is 
that we want to strengthen market incentives and the discipline 
that a competitive marketplace imposes on institutions and the 
power of that discipline to limit risk taking. And from that 
point of view the designation of SIFI cuts in the other 
direction because of the implication coming out of the first 
philosophy, the implication that it is there because they are 
viewed as likely to be rescued.
    So there are cross-purposes there in that designation. How 
we grow out of that, how we transition away from that, I am not 
sure I have a solution for you, but it is a dilemma in the end.
    Mr. Royce. Thank you, Mr. Lacker.
    Any other observations on that?
    Mr. Fisher. Again, I think by designating an institution as 
systemically important, you give it a special moniker. And by 
having a procedure which is under the FSOC to deal with these 
institutions that are considered systemically important or that 
might present risk by being systemically important, you give a 
special imprimatur. I just think that places the community and 
the regional banks at a disadvantage.
    And again, Congressman, I would respectfully ask you to 
take the time to read the proposal that we have made in the 
Dallas Fed. Under our plan, supervisory agencies would oversee 
several thousand community banks, as they do now--
    Mr. Royce. I understand.
    Mr. Fisher. --a few hundred moderate size banks, and no 
megabanks.
    Mr. Royce. But remember that part of my question was the 
$50 billion threshold.
    Let me ask Mr. Hoenig.
    Mr. Hoenig. Let me just say, first of all, that being a 
SIFI has advantages and disadvantages. The disadvantage from 
their perspective is they have to do these living wills. I 
found in the last crisis that no one wanted to be a holding 
company until they wanted to be a holding company, that is, 
only when it is to their advantage. So I think there are 
institutions that will affect the economy which do not want to 
be designated SIFIs, because of this work, until they need to 
be, and I think that is a risk.
    On the $50 billion, it is not indexed, and there are a lot 
of institutions that would be pulled into that. If that is the 
issue, raise the limit, because I don't want it to be 
discretionary any more than absolutely necessary because then 
you get different outcomes depending on what the political pull 
and so forth is of the individual institutions.
    Mr. Fisher. And I would agree with that, Congressman Royce.
    Mr. Royce. And the last question I would ask you is just 
the factors that should be taken into account if we are going 
to set a regulatory standard in terms of moving over from the 
risk-based approach towards an equity capital standard or 
equity leverage ratios. If we move in that direction, what then 
are the factors that should be taken into account in setting a 
regulatory standard?
    Mr. Hoenig?
    Mr. Hoenig. I think, first of all, we need to make sure the 
leverage ratio does include off-balance-sheet items, either 
using international accounting standards or a--
    Mr. Royce. That is the major issue to you?
    Mr. Hoenig. A major issue. Because you have value, you have 
$1.5 trillion on the largest company off balance sheet in 
derivatives. That is just the derivatives. That is not the 
lines of credit. So that needs to be brought into the equation.
    And then we should ask, what should be the right number? 
And I think the Basel discussion should be about what the right 
number should be based on research that is out there, and what 
the timeframe should be to get to that number. Then, you have a 
systematic approach for leverage. Then, simplify the risk base 
to make sure that they don't get out of bounds just using a 
pure leverage ratio.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch.
    Mr. Lynch. Thank you, Mr. Chairman. I also want to thank 
the witnesses for coming before this committee and helping us 
with our work.
    Let's pick up right on that point of derivatives. Each of 
you has expressed concerns about inappropriate use of the 
government's safety net. Section 716 of Dodd-Frank, commonly 
referred to as the swaps push-out provision, would force banks 
to move at least the riskiest swaps out of the insured 
depository institution.
    Do you believe the pricing of swaps in depository 
institutions receive a benefit from access to the Federal 
safety net and do you support our efforts in Dodd-Frank to move 
them out of the depository institution?
    Mr. Hoenig. Yes and yes. I do think that they should be 
outside, and I think being inside does give them a subsidy and 
does facilitate their ability to use those instruments beyond 
what they would be able to do without a subsidy.
    Mr. Fisher. Yes and yes squared.
    Mr. Lacker. Derivatives provide the opportunity to do good 
things and to take excessive risks, and I am not sure the law 
as crafted doesn't go too far and limit the ability of banks to 
use derivatives in legitimate ways.
    Mr. Lynch. One of the problems that remains here is by 
allowing internal models of these banks to really calculate 
their risk is in many cases I think discounting the risk that 
really does lie within these megabanks' derivative exposure, 
and also the accounting rules here in the United States, I 
think, allow some of that discounting to occur.
    Mr. Hoenig and Mr. Fisher, I believe from your earlier 
testimony, would you agree that just going to just a capital 
standard such as in the Brown-Vitter rule, just a 15 percent, 
instead of getting into whether or not the activity being 
undertaken is creating the risk, just putting a flat 15 
percent--I know 15 percent doesn't have to be the number, but 
certainly using a total asset-based standard versus an activity 
standard, is that more appropriate?
    Mr. Hoenig. I think you need both. I think you need to have 
them pushed out to where they are away from the safety net, 
where they are constantly encouraging increased leverage. But 
for those institutions you need a strong capital standard in 
terms of the unexpected. Capital is for good management who 
make mistakes. It doesn't save everyone from foolish mistakes, 
but it does help moderate the extremes. But you also have to 
change the incentive. If the incentive is to lever up because 
you have a subsidy, you are going to do it. Eventually you are 
going to push hard, as we have seen over the last 10 to 15 
years.
    Mr. Fisher. I don't disagree, Congressman. I would like to 
make a side comment, if I may. The transition in banking that 
has occurred has been from going from a balance sheet mentality 
to an income statement mentality. That is, the old banking 
system used to be where you focus on just preserving the 
institution, protecting your depositors, and doing what bankers 
do, intermediating between short-term deposit and long-term 
risk in terms of commercial loans, et cetera.
    The transition that took place post-Travelers and 
Citigroup, which was quite brilliant, is the transition of 
mentality to an income statement, how much can we make every 
single year. And I think what we really need to guard against 
in the end is the utilization of these derivative transactions 
to continue to maintain the income statement mentality that 
seems to be pervasive in these large industrial concentrations, 
the big megabanks.
    So my belief on capital, for what it is worth, and I stress 
for what it is worth, I believe we should have equity capital 
as the primary Tier 1 protective capital of the institution, 
again, especially securing the commercial banking operations of 
the institution, which is where we provide the government 
guarantees that we provide or propose be restricted, that they 
be applied.
    Mr. Lynch. Thank you.
    Mr. Lacker?
    Mr. Lacker. I think capital quality is very important. I 
also think we should be humble about the ability of any one 
group of regulators or supervisors to settle on the single 
optimal formula for capital. So I think the robust approach 
would be to use multiple measures.
    Mr. Lynch. I thank the gentlemen.
    My time has expired. I yield back.
    Chairman Hensarling. The Chair recognizes the gentleman 
from Missouri, Mr. Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    And thank you, gentlemen, for being here today.
    I was wanting to talk to Ms. Bair with regards to an 
article that she wrote April 1, 2013, appeared in the Wall 
Street Journal, with regards to allowing the banks to basically 
develop their own internal models with regards to risk basing 
or to risk weight their capital. And she starts out with the 
headline of the article, ``Regulators Let Big Banks Look Safer 
Than They Are,'' with the subtitle, ``Capital ratio rules are 
upside down. Fully collateralized loans are considered riskier 
than derivative provisions.''
    As you go through the article, she talks about the 
difficulties in actually comparing the big banks with the 
little banks because of the way they model their capital asset 
ratio and the riskiness of the assets that they are looking at. 
And she made the comment here that, ``And now the London whale 
episode has shown how capital regulations can create incentives 
for even legitimate models to be manipulated.'' And then talks 
about the latest Fed stress test on Morgan Stanley reported 
that the risk-based capital ratio was nearly 14 percent. Taking 
the risk weighting out drops the ratio down to 7. U.S. Bancorp 
has a risk-based ratio of 9 and virtually the same ratio on a 
nonrisk-weighted basis.
    So we are playing games with the ratios. And I think we 
have mentioned it a few times and I would just like to get down 
to the nitty-gritty here, because each one of you have alluded 
to these same things a couple of times here, in the last two or 
three folks who have asked questions with regards to how you 
can play around with the ratios and get right down to the exact 
real Tier 1 capital.
    Can you give me some hard and fast information or an 
opinion on that, Mr. Hoenig, because you are the one who said a 
minute ago that we need to simplify the capital--
    Mr. Hoenig. Right. I am familiar with her article. I happen 
to agree with it completely. I think their reporting of 14 
percent risk weighted is counting only 50 percent of their 
total assets as risk. And then when you take out the good will, 
the intangibles, and you go to equity tangible capital, and you 
bring on the off balance sheet items, the derivatives and so 
forth, the risk part is about 3.5 percent to 4 percent. So you 
have really given the wrong impression, I think, to the market 
and to the public.
    And so what I have suggested is that you have a leverage 
ratio that is equity capital with the good will and the 
intangibles out and that you bring onto the balance sheet those 
off-balance-sheet items that have risk. There are ways to do 
that systematically, and then report that.
    The advanced approach where they are doing internal models 
is an opportunity to game the system by underreporting risk 
assets based on advantages that the regulators give by the risk 
weights themselves. That leads to bad outcomes.
    Mr. Luetkemeyer. Okay. Now you, as a regulator, all three 
of you gentlemen as regulators, how are you going to get 
through this little manipulation game that is being done here? 
Whenever you look at these banks, are you going to say, hey, 
wait, wait, this is not where you need to be. We are going to 
take a look at this a little bit differently and force them to 
raise capital or do something different with their risky assets 
here?
    Mr. Hoenig. Hopefully, through the process of the 
regulators coming together, we will turn to a leverage ratio 
that is meaningful. And that is still in process as we look at 
this Basel agreement. We need to have a full capital program 
that includes proper risk, simplified where people can at least 
operate it or understand it from the outside, with a leverage 
ratio that gives us a standard across all institutions, 
nationally and internationally, so that you can compare apples 
to apples and then you can judge risk based upon a useful risk-
weighted system. We should do that as one proposal.
    Mr. Luetkemeyer. The reason I bring the question up, and I 
appreciate your comments, is because a lot of Members and a lot 
of the public believe that Dodd-Frank solved all these 
problems. There are still inherent problems with the way they 
are regulated, with the way some of this information is 
interpreted. And while Dodd-Frank may have an ability to wind 
down a particular institution, if you have a meltdown like we 
had in 2008, it is, ``Katy, bar the door.'' We will throw out 
the rules and regulations and we will do, as Paul Volcker said, 
``whatever it takes to get this situation solved.''
    And with that, Mr. Lacker, I have just 37 seconds left, you 
mentioned a while ago that you have some 1930s laws and 
regulations we may need to go back and look at. Would you like 
to elaborate just a little bit?
    Mr. Lacker. I was just pointing out that in the 1930s, 
there was the Banking Act of 1933. It was a response to just 
the tremendous turmoil of the banks, the waves of bank failures 
in 1931, 1932, and 1933. And then Congress revisited banking 
legislation 2 years later in 1935. They didn't feel as though 
the Banking Act of 1933 was sufficient. I was just pointing out 
you might want to take a second bite of the apple.
    Mr. Luetkemeyer. We can use all the good advice that we can 
get. Thank you very much, and I appreciate all three gentleman 
being here today.
    Mr. Chairman, I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Colorado, Mr. Perlmutter, for 5 minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    Gentleman, I appreciate your testimony today. I have a 
couple of questions, and I will start with you, Mr. Hoenig. We 
talked a little bit about Glass-Steagall, and you and I have 
had conversations about Glass-Steagall. And really, as I 
remember it, there were three parts to Glass-Steagall: the 
creation of your organization, the FDIC; the separation of 
investment banks and commercial banking and insurance companies 
and that kind of stuff; and the creation of unitary banking. So 
each bank, big or small, stood on its own capital.
    I have had the opportunity as a State senator to vote 
against branch banking. I lost, because I believed in unitary 
banking. I had the opportunity here when we were going through 
Dodd-Frank to, with Mr. Kanjorski, offer an amendment that 
separated investment banking from commercial banking, and I 
lost. So I appreciate the things that you are saying, but we 
are in a political world in this place and you have to have 
more votes. So we came up with a third approach, Mr. Hoenig, 
and let's go through it.
    So as I understand this, first we try to deal with things 
in advance. Is that right? The living will--
    Mr. Hoenig. Right.
    Mr. Perlmutter. I know a couple of the very big 
institutions have 2,000 or 3,000 subsidiaries. Is that right?
    Mr. Hoenig. Yes.
    Mr. Perlmutter. And as regulators, we have put a lot of 
pressure and a lot of responsibility on your shoulders to look 
at those living wills, to say, hey, this gives us a good 
roadmap as to what to do if everything falls apart. Correct?
    Mr. Hoenig. Yes.
    Mr. Perlmutter. So I am going to lead you a little bit 
here. That is kind of what I do. Then if you see some things 
that are potentially a problem, you can demand more capital as 
a regulator. Isn't that right?
    Mr. Hoenig. Yes.
    Mr. Perlmutter. And if that is not sufficient, you can ask 
for divestiture?
    Mr. Hoenig. Yes.
    Mr. Perlmutter. This is all in advance of getting into 
bankruptcy, because, Mr. Fisher, Mr. Lacker, I will get to you, 
too, in a second. You can order a divestiture of some part of 
the organization, it could be the investment banking, it could 
be the insurance, it could be the making of engines. We have a 
big SIFI potentially that is in the manufacturing business. 
Correct?
    Mr. Hoenig. Correct.
    Mr. Perlmutter. None of that works. Then, I start into the 
statute. Section 202 allows the Secretary of the Treasury to go 
to the United States District Court and petition the court to 
place the whole kit and caboodle into receivership. Isn't that 
right?
    Mr. Hoenig. Yes.
    Mr. Perlmutter. And this can be done over a weekend in a 
confidential setting with that United States District Judge.
    Mr. Hoenig. Yes.
    Mr. Perlmutter. And it is very similar to what occurs 
today, is it not, when the FDIC--they don't go to a judge, but 
they can place somebody into a liquidation over the course of a 
weekend.
    Mr. Hoenig. That is correct.
    Mr. Perlmutter. And SIPC does that, but they do go to a 
judge to place a broker-dealer into liquidation. They do have 
to get an order of the court.
    Mr. Hoenig. Right.
    Mr. Perlmutter. So now we are in the courtroom, we are in a 
bankruptcy setting, but it is with the United States District 
Court, not bankruptcy court, right?
    Mr. Hoenig. That is correct.
    Mr. Perlmutter. All right. So now, we are in court. What is 
it that you think now allows for the Secretary and the FDIC as 
its agent, the receiver, to allow too-big-to-fail to continue? 
We are now in the court. You have the bank potentially being 
liquidated by the FDIC and you have the rest of the company in 
court in a bankruptcy. And ``bankruptcy'' has been used very 
loosely. There are two kinds of bankruptcy: liquidating; and 
reorganizing.
    So what is it that really bothers you about now we are in 
court, you have the bank in liquidation and the FDIC in charge, 
and now you have the rest of the company going under the 
authority of the United States District Judge and the receiver. 
And I am already out of time by my leading questions.
    Mr. Hoenig. It assumes all your leading questions are 
correct assumptions.
    Mr. Perlmutter. That is why I said, do you agree.
    Mr. Hoenig. Well, no, I said you can do it. Whether you 
will do is the question that is unanswered.
    Mr. Perlmutter. All right. Now, that is really the 
question. Do the regulators have the guts to do what we have 
asked of you? That is the real question.
    Mr. Hoenig. But, Congressman, the Bank Holding Company Act 
has had a provision for the last 30 years that if a nonbank 
affiliate jeopardizes the bank you can force divestiture, and I 
don't think it has ever been used.
    Chairman Hensarling. The time--
    Mr. Perlmutter. I am giving you the tools. You have to use 
them.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. Pittenger, for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Mr. Fisher, I will direct this to you first, but I welcome 
comments from any of you. Why is more complex regulation, 
particularly complex capital regulation, an ineffective way of 
reining in market expectation of government bailouts?
    Mr. Fisher. I'm sorry, Congressman, I didn't hear your 
question. Excuse me.
    Mr. Pittenger. Why is more complex regulation, particularly 
more complex capital regulation, an ineffective way of reining 
in market expectation of government bailouts?
    Mr. Fisher. Again, I think if you are simple and 
straightforward, it is a better solution than complexity. One 
of the disadvantages of complexity is it places the smaller and 
regional institutions at a disadvantage. If you talk to 
community bankers now, they will tell you what they are hiring 
are lawyers and consultants rather than people who can make 
loans and affect the business and do the business that they are 
paid to do.
    So it gives an advantage again to those that are big and 
rich. And the more complex it is, the more you are just giving 
a comparative advantage to those that have the means to deal 
with these complexities. And that means the very large 
institutions. That is the simplest way I can possibly explain 
it.
    Mr. Pittenger. It makes sense.
    Would you all like to respond?
    Mr. Hoenig?
    Mr. Hoenig. I am not sure that I understood your question 
completely, but I think the fact is that more capital is 
helpful. But if you have a subsidy that is driving you towards 
leveraging and it gives you a cost of capital advantage, as Mr. 
Fisher is saying, over regional and community banks, it leads 
to, I think, unintended bad outcomes where you then further 
consolidate the industry and give the largest firms a 
competitive advantage that they don't otherwise deserve or 
would earn in the market.
    I hope I understood your question and answered it.
    Mr. Lacker. So banking is a complex activity these days, 
and I think you need to grapple with that complexity. It 
doesn't mean you fine tune the complexity of your supervisory 
approach or regulations to it, but you have to be robust 
against the ways in which firms and markets can adapt to what 
regime you put in place. So that robustness is what you have to 
look for, and that is why I think on the capital front, there 
is a logic to risk-weighted assets, but there is also a sense 
in which humility ought to lead you to not place all your eggs 
in the basket of one capital regime. And the value of 
simplicity, I think, comes forward then.
    Mr. Pittenger. Let me ask you, Mr. Fisher or Mr. Lacker, 
how can we level the playing field between the smaller and the 
regional financial institutions compared to too-big-to-fail?
    Mr. Lacker. I think leveling the playing field is going to 
require eliminating the expectation of support for the 
creditors, the wholesale funding lenders from which they 
benefit. That wholesale funding source is what I see as the 
most consequential aspect of the advantage too-big-to-fail 
gives to larger institutions.
    Sure, being too-big-to-fail comes with an outsized burden 
of compliance, but compliance has hit a lot of small and 
regional institutions as well. A lot of the compliance burden 
is a reaction to the risks that have been taken and the 
riskiness that we see in the banking industry and the exposure 
of U.S. taxpayers and the government to these institutions, 
large and small. If we were able to rely more on market 
incentives, on market discipline, there would be less of a need 
to continually grow the compliance burden on these institutions 
and that would help level the playing field as well.
    Mr. Fisher. My definition of leveling the playing field, 
Congressman, is if you are a small or regional bank, or if you 
are in the 99.8 percent of the 5,500 bank holding companies we 
have, the FDIC has a saying: ``In by Friday, out by Monday.'' 
If you screw up, your management is removed, and new ownership 
is put in place. The playing field will be level when that 
applies to all financial institutions, including large ones.
    Mr. Hoenig. If I can add, number one, you do need to get 
the capital ratios to be more equal. Right now, the largest 
institutions have a capital advantage.
    Number two, you do need to rationalize and separate out so 
that commercial banks are commercial banks and the subsidy is 
confined to that. Then, whether you are a community bank or 
regional bank or large bank, you are playing on a much more 
level playing field and I think competition will be well-
served.
    Mr. Fisher. And leveling the playing field is the purpose 
of the Dallas Fed's proposal, Congressman.
    Mr. Pittenger. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair recognizes the gentleman from Delaware, Mr. 
Carney, for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman, and thank you to the 
panelists. This has been a very interesting and fascinating 
discussion today. I don't know that we have shed any light on 
answering the question of whether too-big-to-fail exists or 
not, but we have had some really great discussion, I think, 
about that.
    I would like to say with respect to SIFIs being a 
privileged designation, it is funny, I have not had anybody 
come to me requesting to be put in the category of being a 
SIFI. In fact, just the opposite. People have come to us 
saying, we shouldn't be included in this designation, just as 
an observation.
    But I would like to pick up where Mr. Perlmutter left off 
in the District Court, and I guess start with you, Mr. Fisher, 
and ask the question I think he was about to ask, which is what 
problem do you have with the legislation as it relates to the 
firm that is brought into the District Court by the U.S. 
Treasury because it is in big trouble?
    Mr. Fisher. I am going to ask Mr. Hoenig to address this 
question, if I may.
    Can you do that, Tom?
    Mr. Hoenig. Yes, first of all, if you have these largest 
institutions in the country at risk of failure, you have to go 
to the Federal Reserve and the FDIC and get the two-thirds vote 
to put them in the Orderly Liquidation Process.
    Mr. Carney. With the potential, as Mr. Fisher said in his 
testimony, of these eight institutions to take down the rest of 
the financial system.
    Mr. Hoenig. Right. So you are up against this major 
consequence to the economy. Then, you go to the Secretary of 
the Treasury, who has a choice: Do I put it in receivership and 
put that chaos in play or do I do something else? There are 
options perhaps I can find that would not force it into 
bankruptcy such as going to the District Court, or going to the 
President.
    So that is a very, very difficult process, which it should 
be. But I think when you then have the economy going down, you 
tend to want to step in and intervene in a way that doesn't 
cause failure.
    Mr. Carney. Rightly, yes?
    Mr. Hoenig. Yes. You are going to be very slow to act.
    Mr. Carney. So then the District Court Judge determines 
whether to require orderly liquidation under the Act, correct?
    Mr. Hoenig. If the Treasury Secretary does bring it to him, 
yes.
    Mr. Carney. If the Treasury Secretary brings it.
    Are you familiar with the enhanced bankruptcy proposals 
that the people out at Stanford have developed?
    Mr. Hoenig. Yes.
    Mr. Carney. What if the District Judge had the option of 
triggering either the Orderly Liquidation Authority or some 
sort of structured bankruptcy? The difference, I think, being--
I am no expert, as Mr. Perlmutter is, in bankruptcy--that there 
is no access to the wholesale funding source.
    Mr. Lacker. If I could comment on that, it is worth 
pointing out that in the scenario Congressman Perlmutter laid 
out, actually they don't spend much time in court. And the 
sense in which that is true is that there are only limited 
aspects of the Secretary of the Treasury's decision that are 
subject to review by the court, and it is just these two fact-
finding things out of five determinations that the Secretary 
makes.
    Mr. Carney. Okay, don't get too far down in the weeds, we 
don't have much time. I am interested in whether you think it 
would be a better process if the judge had that discretion and 
why?
    Mr. Lacker. I think it would be useful if the regulators 
themselves could initiate bankruptcy. As things stand now, they 
don't have the option to do anything but orderly liquidation by 
themselves. They can ask the firm to put itself in Chapter 11, 
but they can't force that. The Hoover Group proposal would give 
regulators the ability to do that, and I think that would be 
valuable, and I think that would be a better way to get to the 
right outcome.
    Mr. Hoenig. May I add that if the Stanford Group is 
successful with regard to the Chapter 14, which they are 
working on now--to address the issues of debtor-in-possession 
financing to provide liquidity and cross-border issues--then 
bankruptcy will be a natural first choice in every instance.
    And those are the two things that the Orderly Liquidation 
Authority addresses. That is why it is there. So, you have to 
get a solution to debtor-in-possession and cross-border issues 
to make sure we can put the largest firms into bankruptcy. That 
is what Stanford is working on.
    Mr. Carney. Thank you very much. My time has expired.
    Mr. McHenry [presiding]. We will now recognize Mr. Hurt of 
Virginia for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    And I want to thank each of you for your testimony here 
today, and I'm sorry that Ms. Bair is gone because I thought 
her testimony was very interesting as well.
    It occurred to me as I listened to the testimony of each of 
you that there really can be or should be some opportunity here 
to amend the Dodd-Frank law in a way that really can get us 
where I think that we all want to be, and that is something 
which has eluded us over the 2 years that I have been in this 
Congress. And so this gives me some hope that maybe there is 
some possibility that we can do these important, important, 
important things that we must take the opportunity to do while 
we can, as Mr. Lacker said, all the things that we can do to 
keep this from happening again. We control those levers, if we 
will. And so, I am just very interested in your testimony, and 
I thank you for it.
    I guess my first question--which would have been to Ms. 
Bair had she been here, she makes it pretty clear; she uses the 
word ``abolish.'' She says that bailouts are abolished under 
Dodd-Frank. But I hear something different from this side of 
the table, that it is really not that clear. And when you look 
at the numbers--and I was particularly interested in the 
numbers from the Richmond Fed--that financial sector 
liabilities today, 27 percent of the financial sector's 
liabilities today enjoy an implicit government guarantee.
    That being the case, and I know that you can't speak for 
Ms. Bair, but can you help those of us up here who are 
listening to very intelligent people, can you help us figure 
out where is the difference between what Ms. Bair is saying and 
what I think the facts are, and that is, there are tremendous 
implicit guarantees and there is risk associated with that.
    Mr. Lacker?
    Mr. Lacker. Sure. In Ms. Bair's defense, the legal 
authority under which we provided assistance to the merger of 
Bear Stearns and JPMorgan Chase and assisted AIG was Section 
13(3), and the ability to craft a firm-specific 13(3) program 
has been eliminated. We can craft a program, but it has to be 
of wide market availability. So in that sort of narrow sense, 
that is true.
    But too-big-to-fail has been around since--it started in 
the early 1970s, as I said. That was carried out via the FDIC's 
authority. They had the ability to add extra money and pay off 
uninsured creditors, uninsured depositors in bank failures. And 
the Federal Reserve has a role, too, because when we lend to a 
failing bank before it is closed we can let uninsured creditors 
get their money out before the closure takes place and the 
remaining uninsured creditors are forced to take losses.
    So, we still have those modalities. We still have those 
capabilities of keeping short-term creditors--letting them 
escape without bearing losses. That is why she says, yes, that 
authority we used, the way we chose to do it has been 
abolished, but we were doing it other ways before that.
    Mr. Hurt. Got it.
    Anything you want to add to any of that?
    Mr. Fisher. I think President Lacker has given a good 
explanation of what we think she meant by that.
    Mr. Hurt. One of the things that has been touched on by 
both sides of the aisle is this idea that the subsidy, the 
government subsidy that is real, that gives competitive 
disadvantage to the largest banks, and I think that you see 
that trend seems to me to be continuing, that trend in favor of 
those banks, despite the fact that we are told that the 
bailouts have been abolished, we continue to see that. And so 
it concerns me from an issue of competitiveness domestically.
    But are there other concerns that any of you have as it 
relates to global competitiveness? Obviously, it goes to the 
heart of what individual customers and banks, the 
competitiveness that exists in this country. But does any of 
this rise to the level of concern as it relates to global 
competitiveness?
    Mr. Hoenig. Congressman, I have been asked that question a 
lot, and I am convinced that a banking system that competes 
from a position of strength will be the system that wins. What 
we have now is a structure that is not a free market structure. 
It is heavily subsidized. Because of that, we have capital 
levels that are lower than they otherwise would be.
    We are asking, if you will, directly or indirectly, for 
either other members of the banking industry or the public to 
underwrite our ability to supposedly compete with the rest of 
the world. When we rationalized this structure before, when we 
had broker-dealers separate from commercial banks, we were the 
most competitive capital market in the world.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    And I thank each one of you for being here today.
    So we started this discussion today on whether or not Dodd-
Frank ended too-big-to-fail, and there are a lot of different 
opinions. I think the first thing that I was curious about, 
now, under Title II you have the insurance, and are too-big-to-
fail firms predominantly banking firms or are those just 
different financial firms? Because where I am going is, under 
Title II they are now covered by deposit insurance, which gives 
them access to funds from firms too small to succeed. And so I 
wonder what kind of advantage that we are giving too-big-to-
fail firms?
    So forget whether or not Dodd-Frank did anything. We have 
different opinions. But what about, Mr. Fisher, do you have an 
opinion about that ability for too-big-to-fail firms to get 
into the deposit insurance funds now?
    Mr. Fisher. Yes, sir, and I believe I addressed that very 
specifically in my written submission. But just to summarize, 
again, the purpose of deposit insurance was the old-fashioned 
purpose of assisting commercial bankers to take in deposits, 
assure their depositors, and then intermediate to make the kind 
of loans on which your constituents depend. I believe that 
should be the sole purpose of that deposit insurance. In other 
words, I don't believe that a complex bank holding company 
should be able to exploit that for other services they may 
provide.
    By the way, I don't want to take away their capacity to 
provide those other services, but it should be restricted to 
the original purpose for which it was intended.
    Mr. Pearce. Forget the discussion of whether Dodd-Frank 
technically ended it. We have given them a conduit to funds 
that they did not have access to before, which seems to hint 
that maybe it doesn't have as much effect at killing too-big-
to-fail. That is what some of our friends on the other side of 
the aisle say.
    Mr. Hoenig, now, first of all, regulators have discretion, 
is that correct? I heard that comment.
    Mr. Hoenig. Discretion for?
    Mr. Pearce. For making decisions on what to do under 
circumstances of too-big-to-fail during bankruptcy. You have 
discretion, is that correct?
    Mr. Hoenig. Under bankruptcy, they would go to a bankruptcy 
court and it would be handled there.
    Mr. Pearce. But as it approaches that, the regulator has 
the ability to maneuver certain tools, I think is what Ms. Bair 
said.
    Mr. Hoenig. Of course. The regulators will examine the 
institution or deal with the institution, insist on more 
capital to keep it from failing, and so forth.
    Mr. Pearce. Does Dodd-Frank have any consequences for 
regulators if they choose incorrectly or purposely make a 
mistake?
    Mr. Hoenig. Purposely make a mistake?
    Mr. Pearce. Just if they make a mistake. We will just leave 
it at that.
    Mr. Hoenig. Well, look, if it is a mistake, it is a mistake 
like any other. That is what you have capital for, mistakes by 
management or otherwise.
    Mr. Pearce. I find the whole discussion that we are having 
today, we are going to create a regulatory agency that comes in 
and looks and determines if firms are solvent, if they are 
qualified, but we are going to turn that over to regulators. 
Now, keep in mind the regulators had been hearing for 10 years 
on Bernie Madoff that he was doing stuff, but they turned a 
blind eye, and the courts found that the regulators could not 
be held accountable for that. They were shielded by the 
discretionary function exception. And the court did express 
regrettable disdain for the actions, but nothing happened.
    So we are trying to decide on fairly small nuances here, 
but there is no nuance in taking segregated customer accounts, 
and yet Jon Corzine still hasn't had anything done to him. He 
took $1.5 billion. The regulators were sitting in the room 
watching him, multiple regulators, and not one thing going.
    We are having this protracted discussion here today on 
should the regulations be tweaked here or tweaked there. If we 
can't hold the regulators accountable, I will guarantee you it 
does not matter if too-big-to-fail is in place or it is not in 
place, because the regulators will have in their discretion, in 
your terms, their discretion to determine whether or not things 
should be done, whether or not they should get bailed out, and 
there is nothing that we as the American people, the taxpayer, 
can do.
    These are the things that are making people furious out 
there in the streets. They get stuck for people who have wrung 
every single bit of profit they can out on risky adventures, 
and then the taxpayer gets stung with it. And I will guarantee 
you this whole system has many, many problems ahead of us if we 
don't get this right, if we continue to create a system of too-
big-to-fail through law.
    Chairman Hensarling. The time of the gentleman has expired.
    The gentleman from Kentucky, Mr. Barr, is recognized for 5 
minutes.
    Mr. Barr. Thank you, Mr. Chairman.
    I think of all of the data available to Members of Congress 
and observers of this interesting question about too-big-to-
fail, there is one piece of data that is most telling about 
whether or not Dodd-Frank has solved the too-big-to-fail 
question. It is the statistic that Mr. Fisher points to, that 
0.2 percent of institutions control nearly 70 percent of all 
industry assets. So for those folks out there who say that 
Dodd-Frank has solved too-big-to-fail, I think that is a 
statistic that we ought to always keep in mind.
    To that point, have we seen a greater concentration of 
industry assets in these megabanks in the 3 years since Dodd-
Frank has been the law of the land?
    Mr. Fisher. Congressman, we have seen a greater 
concentration as we go through time. And certainly from before 
the financial crisis to now, yes, because of the acquisitions 
that were made, we have seen a concentration in fewer hands.
    Mr. Barr. You have kind of two parts to this. You have the 
implicit government taxpayer subsidy, the $83 billion subsidy, 
the cost of funding advantage for the SIFIs, but you also have 
the regulatory pressures placed on the 99.8 percent, the other 
banks, the regional banks, the community banks, the 
consolidation that we have seen in the smaller banks.
    I would like for the panelists to comment on not only the 
taxpayers' subsidy and the funding advantage of the SIFIs, but 
also the effect of Dodd-Frank and the CFPB and the regulatory 
pressures and the consolidation and the lack of new charters in 
the smaller banking sector and whether or not that has 
exacerbated the problem of too-big-to-fail.
    Mr. Fisher. I am going to just quickly comment because my 
other colleagues will no doubt want to comment in the 2\1/2\ 
minutes left. I travel throughout my district, which is a large 
district, the Federal Reserve District of Dallas, the 11th 
District. I meet constantly with bankers. To a person--these 
are community bankers, these are regional bankers--they are 
deeply concerned that they are being overwhelmed by regulation 
and they are having to spend their moneys, as I said earlier, 
hiring people, lawyers, et cetera, with all due respect to 
lawyers, to help them comprehend and deal with this, rather 
than being able to afford, with their limited budgets and with 
their interest margins being so tight, hiring bankers to make 
loans to go out and do what bankers are paid to do.
    So we are being constantly criticized and concerns are 
being raised that they are way swamped in terms of all the 
different things that you mentioned. And it is not just Dodd-
Frank, you mentioned other authorities that have been granted 
under different legislation that was enacted, and they just 
feel deluged. And that puts them at a disadvantage, because if 
you are not able to spend your time worrying about how to make 
a loan, someone else is going to make it for you.
    Mr. Barr. And I think it is a good point. I think it just 
goes to show that we ought not just look at Title II and OLA 
and the implicit taxpayer subsidy here, but also the 
consolidation that is happening and the lack of sufficient 
competition to the SIFIs because of the consolidation--
    Mr. Fisher. These are unintended consequences, Congressman, 
of this process.
    Mr. Barr. Right. One final question as my time is expiring, 
and the question is to all of you. It relates to the regulatory 
discretion that is conferred under OLA and whether or not we 
are moving away from a bankruptcy rule of law-based system to a 
system in which there is excessive discretion and we are moving 
away from the rule of law.
    Many people believe that General Motors, the automobile 
bailout of recent years was highly politicized, because the 
Federal Government conditioned its bailout on GM giving 
preferred treatment to the union claims. President Fisher and 
President Lacker, under Dodd-Frank's OLA, could the FDIC use 
its discretion to pick winners and losers, much like we saw in 
the auto bailout, and picking winners and losers among 
creditors of a failed firm in a politicized manner, much like 
we saw in the auto bailout?
    Mr. Hoenig. Let me say first that, just to clarify, in 
terms of the discretion under Title II to the FDIC, it is 
limited. And besides that, the FDIC's own rule requires that 
you treat, in terms of order of preference, in the same manner 
as bankruptcy. And I would point out that even in bankruptcy, a 
bankruptcy judge can make exceptions in terms of assuring that 
payments are made and that essential operations continue.
    So it is not a broad-based discretion that they can pick 
whomever they want. It is very clearly identified in terms of 
the order of preferences that they have to stick with, and the 
exceptions have to be explained as carefully as in a 
bankruptcy.
    Chairman Hensarling. Really quick answers from the other 
gentlemen.
    Mr. Lacker. He is right, discretion is constrained at the 
FDIC. But broadly speaking they have, as I read the statute, 
more discretion, more authority, more leeway than a judge does 
in bankruptcy to violate absolute priority.
    Chairman Hensarling. Mr. Fisher nodded in consent. The time 
of the gentleman has definitely expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    And thank you, gentlemen, for making yourselves available 
and for sticking around.
    I want to go all the way back to one of the opening 
statements. It was made by Mrs. Maloney and it caught my 
attention; it is the actual language of Section 214. And she 
read it accurately, the second sentence says that no taxpayer 
funds shall be used to prevent the liquidation of any financial 
company under this title. And I think for some people, both in 
this room and outside of this room, that sort of ends the 
discussion. But I think it is clear that it doesn't end the 
discussion. In fact, you heard Mr. Green give a certain set of 
circumstances under which he would certainly support additional 
taxpayer funds being spent. So I think it is very much an open 
question as to whether or not taxpayer funds can still be used.
    Walk me through the process under which that might possibly 
happen. I turn to Section 214(b), and it says that, ``all funds 
expended in a liquidation of a financial company under this 
title shall be recovered from the disposition of assets of such 
financial company,'' but then it obviously immediately 
contemplates that might not be enough to pay because the next 
half of the sentence says, ``or shall be the responsibility of 
the financial sector through assessments.''
    Now, let's skip for a second the impossibility of defining 
perhaps what the financial sector is, but that is the word that 
is used. These assessments, number one, how easy would it be to 
do that, Mr. Lacker? If we are talking about a situation, the 
economic situation where a major bank is failing, how easy is 
it going to be to assess the other banks in the financial 
sector?
    Mr. Lacker. It is going to be really hard to do it in a 
timely way. And my sense is that what is envisioned, both in 
the FDIC's plans for implementing the Act and the Act itself, 
is that is recovered after the fact. After assets are sold off 
in an orderly way over the course of several years, then you do 
the calculation that says, oh, we have to go back, we have a 
hole we have to fill, we go back.
    The point I would make about the taxpayer part is the key 
thing about too-big-to-fail is the incentives, short-circuiting 
the incentives of creditors, and from that point of view it 
doesn't matter where you get the money, whether you get it from 
taxpayers, which is viewed by I think many as terribly unfair, 
or you get it from the man in the moon. Ultimately, you are 
short-circuiting incentives, and that is what gives rise to 
excessive risk-taking, and excessive short-term wholesale 
funding.
    Mr. Mulvaney. I recognize that.
    Mr. Fisher, yes, go ahead.
    Mr. Fisher. I was just looking, sir, at the remarks made by 
Martin Gruenberg when he was Acting Chairman of the FDIC at a 
Federal Reserve Bank of Chicago conference. Just to make your 
point here, he talks about the Orderly Liquidation Fund located 
in the Treasury Department. Those are taxpayer moneys. The 
Orderly Liquidation Fund must either be repaid from recoveries 
of the assets of the failed firm or from assessments against 
the larger, more complex financial companies. Taxpayers, as you 
said, cannot bear any loss from the resolution of a financial 
company under the Dodd-Frank Act.
    As I pointed out in my spoken comments, first of all, these 
are taxpayer moneys, there is an opportunity cost of setting 
them aside. I know we don't often talk about that, but that is 
something to consider.
    Secondly, let's say that it is insufficient in liquidation 
and you need to go back to the industry, as you mentioned, and 
you assess them. They are given a tax deduction as a business 
expense for the expenditure of those funds. That is taking 
money from the taxpayer, as far as I am concerned.
    Mr. Mulvaney. And, by the way, if we do get the assessments 
set up, who ultimately pays for those?
    Mr. Lacker. The customer is going to pay for it.
    Mr. Hoenig. The customer.
    Mr. Lacker. And I would venture to say many of them are 
going to--
    Mr. Hoenig. Let me add one thing, though. Title I, and I 
think Title II, are designed for an idiosyncratic event, a 
large institution that gets into trouble. If you have a 
systemic meltdown as we had last time, I feel pretty confident 
that the Congress will be asked for another TARP. The market 
perceives if you have a systemic meltdown, that may be the 
case. So, you have many issues.
    Mr. Mulvaney. I think that is an excellent point. This 
might work if you have an aberration, if you have one large 
financial institution going out, but it raises very serious 
issues about what is going to happen if you end up in a similar 
situation to where we were in 2008 and 2009.
    Mr. Fisher, you wanted to say something?
    Mr. Fisher. I completely agree with that, because remember 
how interconnected all these firms are. I doubt you would just 
have one alone.
    Mr. Hoenig. Bankruptcy will be--
    Mr. Fisher. And then you go back to Mr. Fisher's--
    Mr. Mulvaney. That goes to Mr. Lacker's point that if you 
have perverted the market and you have given this sense of 
safety where there is none, you are going to encourage 
creditors to lend to these facilities when they shouldn't be 
doing so.
    Mr. Hoenig. Which is why we should, if you will, 
rationalize or simplify the system so that we don't end up in 
the same position we did in 2008. We need to pull back the 
safety net to commercial banking so that we can--
    Mr. Mulvaney. I hate to cut you gentlemen off, but I have 
20 seconds left. The last section says, ``Taxpayers shall bear 
no losses from the exercise of any authority under this 
title.'' I would suggest to you and to the chairman that is 
simply unenforceable. That is language that made people feel 
good about voting for the bill, but I think you have already 
seen, and Mr. Hoenig you just mentioned it, that there are 
folks in here today who, under the right set of circumstances, 
would use taxpayer money again, even with Dodd-Frank in place, 
and I think that tells us a lot about where we are.
    Thank you, gentlemen.
    Chairman Hensarling. The time of the gentleman has expired. 
No other Members are in the queue.
    I wish to thank all of our witnesses for their testimony 
today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    This hearing stands adjourned.
    [Whereupon, at 1:04 p.m., the hearing was adjourned.]



                            A P P E N D I X



                             June 26, 2013

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