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



 
                     THE IMPACT OF THE VOLCKER RULE

                        ON JOB CREATORS, PART I

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                            JANUARY 15, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-59

                 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              BRAD SHERMAN, California
EDWARD R. ROYCE, California          GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma             MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia  RUBEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey            WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas              CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California            DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota          AL GREEN, Texas
KEVIN McCARTHY, California           EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin
BILL POSEY, Florida                  KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK,              ED PERLMUTTER, Colorado
    Pennsylvania                     JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia        GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri         JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan              TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin             BILL FOSTER, Illinois
ROBERT HURT, Virginia                DANIEL T. KILDEE, Michigan
MICHAEL G. GRIMM, New York           PATRICK MURPHY, Florida
STEVE STIVERS, Ohio                  JOHN K. DELANEY, Maryland
STEPHEN LEE FINCHER, Tennessee       KYRSTEN SINEMA, Arizona
MARLIN A. STUTZMAN, Indiana          JOYCE BEATTY, Ohio
MICK MULVANEY, South Carolina        DENNY HECK, Washington
RANDY HULTGREN, Illinois
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:
    January 15, 2014.............................................     1
Appendix:
    January 15, 2014.............................................    65

                               WITNESSES
                      Wednesday, January 15, 2014

Bentsen, Hon. Kenneth E., Jr., President and Chief Executive 
  Officer, the Securities Industry and Financial Markets 
  Association (SIFMA)............................................     9
Funk, Charles, President and Chief Executive Officer, MidWest One 
  Financial Group, on behalf of the American Bankers Association 
  (ABA)..........................................................    11
Ganz, Elliot, Executive Vice President and General Counsel, the 
  Loan Syndications and Trading Association (LSTA)...............    14
Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship, MIT 
  Sloan School of Management.....................................    12
Robertson, David C., Partner, Treasury Strategies, Inc., on 
  behalf of the U.S. Chamber of Commerce.........................    15

                                APPENDIX

Prepared statements:
    Bentsen, Hon. Kenneth E., Jr.................................    66
    Funk, Charles................................................    86
    Ganz, Elliot.................................................    97
    Johnson, Simon...............................................   104
    Robertson, David C...........................................   111

              Additional Material Submitted for the Record

Hensarling, Hon. Jeb:
    Written statement of the American Association of Bank 
      Directors..................................................   122
    Written statement of the Independent Community Bankers of 
      America (ICBA).............................................   126
Ellison, Hon. Keith:
    Washington Monthly article by Haley Sweetland Edwards 
      entitled, ``He Who Makes the Rules,'' dated March/April 
      2013.......................................................   127
Foster, Hon. Bill:
    Written responses to questions submitted to Hon. Kenneth E. 
      Bentsen, Jr................................................   147
Perlmutter, Hon. Ed:
    Bloomberg article by Kasia Klimasinska entitled, ``U.S. Posts 
      Record December Surplus on Fannie Mae Payments,'' dated 
      January 13, 2014...........................................   148
    Amendment to the Dodd-Frank Act offered by Representatives 
      Miller of North Carolina and Perlmutter....................   150


                     THE IMPACT OF THE VOLCKER RULE

                        ON JOB CREATORS, PART I

                              ----------                              


                      Wednesday, January 15, 2014

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:05 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, Neugebauer, McHenry, Campbell, Pearce, Posey, 
Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Fincher, 
Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, 
Cotton, Rothfus; Waters, Maloney, Velazquez, Sherman, Meeks, 
Capuano, Lynch, Scott, Green, Moore, Ellison, Perlmutter, 
Himes, Carney, Sewell, Foster, Kildee, Murphy, Delaney, 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 hearing today is entitled, ``The Impact of the Volcker 
Rule on Job Creators, Part I.'' I wish to alert all Members 
that we have already scheduled Part II of the hearing on this 
topic on February 5th. It will be with regulators who 
promulgated the rule.
    I will now recognize myself for 5 minutes to give an 
opening statement.
    As a Nation, we just marked the 50th anniversary of the War 
on Poverty, tragically a failure on more than one level. To 
win, we need more jobs, which means we need less Volcker.
    In 2 weeks, the President will deliver his sixth State of 
the Union Address. Early in his term, he received from the 
Democratic Congress every single major policy initiative he 
asked for: the stimulus; Obamacare; and the Dodd-Frank Act from 
which the Volcker Rule arises. He got it all. The results of 
this are an unprecedented spending spree and a regulatory 
tsunami, the effects of which are now apparent to all. We have 
become a part-time worker, unemployment check, food stamp, 
insolvent Nation with few opportunities and even fewer hopes 
for the truly needy amongst us.
    The President's policies have exacerbated the very income 
inequality that he now decries. Under President Obama, 6.7 
million more Americans have fallen into poverty. America is 
suffering under the highest poverty rate in a generation, 
median household income has fallen each year that he has been 
in office, and a record 47 million Americans receive food 
stamps.
    With a record like this when it comes to the War on 
Poverty, some Americans may just wonder which side the 
President is on. And if history proves a reliable guide, during 
the State of the Union Address the President will offer more of 
the same: more food stamps; more unemployment checks; and more 
minimum wages, all neatly wrapped in the politics of division, 
redistribution, and envy. That is not right, that is not fair, 
and it is not what hard-working, struggling families in the 
Fifth District of Texas are looking for.
    Joseph of Mabank, Texas, told me, ``I am a disabled veteran 
and have been without work for over a year. All I want is to 
have a good-paying job and let the rest come as it happens.''
    Claudia from Mineola, in my district, was laid off for 9 
months. She finally found a job that paid her 25 percent less 
and added 60 miles to her daily commute. She said, ``I don't 
have the American taxpayers bailing me out or lending me money 
that I can't pay back.''
    It is for Joseph and Claudia and all of the unemployed and 
underemployed Americans that we have to fight, and you cannot 
win a war on poverty as long as you are conducting a war on 
jobs.
    And that brings us to the subject of today's hearing, the 
900-plus page compound, complex, confounding, confusing, 
convoluted Volcker Rule. Like most of the other 400-plus rules 
of Dodd-Frank, the Volcker Rule is aimed at Wall Street but it 
hits Main Street, and regrettably the poor and downtrodden 
amongst us become collateral damage.
    First, Volcker is a solution in search of a problem. It is 
important to note that of the roughly 450 financial 
institutions which failed during or as a result of the crisis, 
not a single one failed because of proprietary trading. In 
fact, financial institutions which varied their revenue stream 
were better able to weather the storm, and thus keep lending, 
and thus support jobs. Instead, these bank failures have come 
largely from concentration in lending in the subprime and 
sovereign debt markets. And who steered these financial 
institutions into these markets? Sadly, but not surprisingly, 
it was Washington, and they are still at it.
    At one of our earlier hearings on the Volcker Rule, a 
Democratic witness claimed the burdens placed on our economy by 
Volcker were no big deal because ``it only applies to just a 
few banks.'' If thousands upon thousands of negative comments 
the regulators received in response to their proposal from 
community and regional banks, and businesses both big and 
small, do not lay that claim to rest, I believe today's hearing 
will.
    The statement that Volcker only applies to just a few banks 
ranks right up there with, ``If you like your health care plan, 
you can keep it.'' For if it were true that the 900-plus page 
regulation applies to just a few banks, why did the Public 
Utility Commission in my native Texas warn that my constituents 
could experience higher and more volatile electricity prices 
because of Volcker? That is higher electricity prices for the 
poor. And why will the Volcker regulation, as one study points 
out, take $800 billion out of the productive economy and 
sideline it? That is the equivalent of taking more than $6,900 
out of every American household's paycheck.
    As a Nation, we can do better. We must do better. The path 
out of poverty is not food stamps or unemployment checks, it is 
not the culture of victimization or the politics of envy, and 
it is certainly not the Volcker Rule, which will harm many of 
our capital markets, equity joint ventures (EJVs), 
collateralized debt obligations (CDOs), venture capital, and 
especially the CLO market.
    The path out of poverty is well-known. It has everything to 
do with strong, faith-based institutions; strong families; 
strong communities of support; strong schools designed for 
students, not teachers' unions; and small businesses and 
entrepreneurship with access to affordable and available 
capital so there are boundless job opportunities for all, 
especially the poor, and as chairman of this committee, this is 
what we will work toward.
    The Chair now recognizes the ranking member, Ms. Waters, 
for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. Normally, I 
would thank you for holding a hearing, but it looks as if this 
hearing that you have called is more focused on an attack on 
the President and the Administration than really dealing with 
the Volcker Rule, so I am going to try and direct my comments 
to the Volcker Rule.
    It has been more than 5 years since the beginning of the 
financial crisis which resulted in the largest destruction of 
wealth in a generation. And while many observers still disagree 
about its central cause, we know that proprietary trading 
played a significant role. Such trading has indeed produced 
tremendous profits for some of our largest financial firms, but 
it also contributed to losses during the height of the crisis. 
In fact, one academic study estimated that by mid-April of 
2008, banks had lost roughly $230 billion on certain 
proprietary holdings, which regulators and other interested 
parties had believed were simply inventories of assets held to 
facilitate client trading.
    In the wake of these devastating losses, taxpayers stepped 
in to staunch the bleeding, and Congress took action to ensure 
that such an emergency would never happen again, enacting 
comprehensive legislation to address the many causes of the 
crisis, from the bad loans at the heart of the collapse, to the 
exotic securitizations that drove the demand for predatory 
mortgages, to the opaque derivatives markets that created 
tremendous interconnectedness and risk in our financial system.
    A key part of Wall Street reform is the Volcker Rule. If 
properly implemented, the rule will provide that banks insured 
by taxpayer dollars can no longer engage in proprietary trading 
or investments in risky vehicles like hedge funds. The concept 
of the rule is simple: Loan-making, deposit-taking banks should 
not be engaged in risky speculative activity on the backs of 
the American taxpayers.
    Many observers of our financial system agree with this. 
Standard & Poor's has pointed out that, ``the implementation of 
the Volcker Rule could have favorable implications for the 
credit profiles of some of the largest U.S. banks such as 
reducing trading portfolio risk.'' John Reed, the former 
Citigroup chairman, notes that, ``A strong Volcker Rule is one 
of the most important provisions to prevent too-big-to-fail 
financial institutions, stop conflicts of interest, and support 
credit in our economy.'' And even Chairman Hensarling has 
stated to The Wall Street Journal that, ``We have to do a 
better job ring-fencing, fire-walling, whatever metaphor you 
want to use, between an inspired depository institution and a 
noninsured investment bank.''
    In the face of this statutory directive to implement 
Volcker, our regulators have undertaken their tremendous task 
of wading through 18,000 comments and have engaged with 
stakeholders during dozens upon dozens of meetings. We see the 
European Union potentially moving forward with a similar 
effort, and the United Kingdom has passed legislation 
implementing a similar measure known as the Vickers Report. All 
of these actions should be applauded.
    At the same time, I understand that regulators are working 
diligently to address some issues related to the rule that have 
come up in the last month, including the issue related to 
collateralized debt obligations backed by trust-preferred 
securities. Most of the Democratic members of this committee 
urge regulators to provide an exemption for banks that would be 
consistent with their treatment under the Wall Street Reform 
Act. I appreciate the regulators' responsiveness on this point 
and believe their recent interim rule has provided important 
relief to community banks.
    Mr. Chairman, the Volcker Rule will ensure Federal dollars 
are no longer used to protect losses from risky trading. Doing 
so will protect the U.S. economy from suffering another 
debilitating financial crisis, and will ensure taxpayers are 
never again asked to rescue failed financial firms. And now 
that we have the rule's framework in place, I look forward to 
conducting real oversight and ensuring that our regulators are 
faithfully enforcing this provision which will be central to 
the success of the Wall Street Reform Act.
    I thank you, and I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, the Chair of our Financial 
Institutions Subcommittee, Mrs. Capito, for 2 minutes.
    Mrs. Capito. Thank you. I would like to thank the chairman 
for yielding me time and for having this hearing.
    Two years ago, Mr. Garrett and I had a joint hearing 
talking about the challenges of the implementation of the 
Volcker Rule, so this is our third hearing. And just over a 
month ago, five agencies charged with writing this rule 
released their final version. Throughout the discussion, the 
focus has been to limit certain activities at large complex 
financial institutions. However, within hours of the release of 
the final rule, it was apparent that financial institutions and 
small businesses on Main Street would be significantly affected 
by the rule. The ranking member talked about this issue.
    Three weeks ago, we learned that financial institutions 
which held CDOs backed by trust-preferred securities could be 
required to take an immediate writedown on these investments in 
order to comply with accounting principles. These potential 
losses facing institutions could have been very significant, 
and especially punitive for smaller institutions. It is 
important to note when the rule was written and published in 
December, or before the final rule was published, this issue 
was not even a part of the rule to where they could have had 
any comment or any public weigh-in on this rule so we could 
have averted this.
    To me, this just shows you that the uncertainty surrounding 
the rollout of the rule is a product of placing artificial 
deadlines on the agencies for writing these rules. There 
clearly was miscommunication between the agencies, which 
brought about these unintended consequences. In fact, the 
treatment of CDOs backed by trust-preferreds was not even 
mentioned, as I said, and the end result sent hundreds of banks 
scrambling with a very tight deadline.
    Members of both the House and the Senate, on both sides of 
the aisle, have expressed concern in the last few weeks, and I 
would like to thank the agencies for releasing an interim rule 
last night that provides clarity for how financial institutions 
will treat their investments and collateralize debts backed by 
trust preferred securities (TruPS). Their interim final rule is 
similar to legislation which I authored with Chairman 
Hensarling last week.
    I look forward to hearing the comments, and I want to thank 
the witnesses for coming today. Thank you.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, the ranking member of our Capital 
Markets Subcommittee, Mrs. Maloney, for 2 minutes.
    Mrs. Maloney. This is an important hearing on the Volcker 
Rule, which is named after former Federal Reserve Chair Paul 
Volcker, a great New Yorker. Chairman Volcker initially 
proposed this ban on proprietary trading because he believes 
that banks which receive Federal deposit insurance should be 
serving their customers and not making risky bets for their own 
accounts. This was a sensible proposal because customer 
deposits would be at risk if the bets went wrong.
    The GAO report on proprietary trading calls proprietary 
trading a leading cause of the financial crisis, which, 
according to their report, took over $9 trillion of assets from 
our country and affected $12 trillion of economic growth that 
would have happened without the crisis.
    The road that this rule took from an idea in Chairman 
Volcker's head to the final rule was long and difficult. It 
involved 5 different Federal agencies plus an oversight 
council, over 18,000 comment letters, multiple hearings in 
Congress, and now a 71-page final rule with 892 pages of 
explanatory notes. And there is still a great deal of work that 
needs to be done. Bank examiners will have to work with the 
banks to develop the detailed compliance and data reporting 
programs for which the rule calls.
    So as we press ahead with the implementation phase, I would 
urge the regulators to stay committed to a data-driven 
approach. If the data shows that there are unintended 
consequences, or if liquidity is seriously impaired, then the 
regulators need to be willing to make tweaks to the rule to get 
the desired outcome. At the same time, if the data shows that 
banks are evading the Volcker Rule, then the regulators need to 
be equally willing to exercise their authority to crack down. 
The Volcker Rule is the law of the land now, so it is important 
that we get it right. Thank you.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, the Chair of our Capital Markets Subcommittee, 
Mr. Garrett, for 2 minutes.
    Mr. Garrett. Thank you, Mr. Chairman.
    Now, 3\1/2\ years after its enactment, the regulatory 
tsunami of Dodd-Frank continues unabated. We should all know by 
now that Dodd-Frank solved few, if any, of the problems that 
caused the financial crisis. For example, instead of actually 
solving too-big-to-fail, Dodd-Frank actually codified it. 
Instead of taking the time to solve the problems that caused 
the financial crisis such as the oversubsidization of the U.S. 
housing market by the Federal Government, the failed prudential 
regulation, and failed monetary policy by the Federal Reserve, 
Congress instead created a solution in search of a problem, and 
exhibit A is the Volcker Rule.
    As critics have pointed out, the Volcker Rule has the 
potential to significantly crimp the legitimate market-making 
activities to the detriment of the U.S. financial markets and 
disrupt the corporate bond markets, reduce liquidity, drive up 
borrowing costs, and harm investors.
    Unfortunately, it is difficult to know exactly how 
detrimental this rule may be, in part because it lacks clear 
rules of the road in favor of regulatory discretion, and in 
part because the regulators failed to support it with an 
adequate economic analysis. And this is to say nothing of how 
the rule will be coherently implemented and enforced by five 
separate regulators, each with different mandates and 
authorities.
    By the way, this is just one rule. We must also consider a 
number of other rules that haven't been finalized yet, for 
example, the supplemental leverage rule, the liquidity coverage 
rule, the risk-based capital rule, the counterparty credit 
limits rule, the net stable funding rule, the credit risk 
retention rule, the rules for foreign banking organizations, 
the rules on security-financing transactions, the pay ratio 
rule, the derivative cross-border rules, the SEF rule, the 
clearing rules, the position limit rules, the OTC market 
rules--I could go on, but I don't have the time.
    So what is the cumulative effect of all these rules 
together on the U.S. economy and American businesses? Mr. 
Chairman, similar to the Volcker Rule, no one really knows, 
especially the regulators, all of whom continue to thumb their 
nose at the law and continue to not perform the appropriate 
economic analysis.
    I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New York, the ranking member of our Financial Institutions 
Subcommittee, Mr. Meeks, for 1\1/2\ minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    As we sit here today to discuss an important milestone in 
our efforts to reform our banking institutions and financial 
system, the adoption of final rules to ban banking institutions 
from engaging in proprietary trading and investments in private 
equity funds and other covered funds is a central piece of our 
new financial order that we passed and enacted almost 4 years 
ago.
    Just yesterday, the Subcommittee on Financial Institutions 
held a hearing on the QM rules which became effective just last 
week, another major piece of our new financial order. I am very 
pleased to see that we have finally made progress through the 
effective implementation of these two major financial reforms, 
which both in their own way ensure that the clients', 
depositors' or mortgagors' interests are preserved and 
protected.
    The Volcker Rule will finally settle a long-known problem 
in our banking system. Clients seeking investment advice or 
assistance from their bankers will know for sure that their 
bank's own proprietary trading will no longer be able to 
conflict with their own interests. We have observed too many 
cases here and abroad where aggressive traders chasing the next 
big bonus abused this privileged relationship, passing their 
own toxic investment to other clients and benefiting from it at 
the same time. Moreover, we have seen too many big banks suffer 
volatile revenue, and even some go under because of their 
engagement in risky trading activities which can lead to 
massive losses and insolvency.
    I join with the ranking member to make sure the regulators 
help with CDOs, and I also ask the regulators to look to clear 
up some of the rules with reference to CLOs. I think those 
things would help us as we move forward, and I very much look 
forward to hearing the testimony of the witnesses.
    Chairman Hensarling. The Chair now recognizes the chairman 
emeritus of the committee, the gentleman from Alabama, Mr. 
Bachus, for 1 minute.
    Mr. Bachus. Thank you, Mr. Chairman.
    Mr. Chairman, Mrs. Maloney said that the Volcker Rule is 
the law of the land. It actually is not the law of the land. It 
takes effect on April Fool's Day. And what is the law of the 
land? We really don't know.
    We started with a 37-word short paragraph in an 846-page 
bill, Dodd-Frank, which said you can make markets, but you 
can't do proprietary trading. That sounds pretty easy, doesn't 
it? Now we have over 900 pages of trying to distinguish between 
the two. Often, they are indistinguishable. But I think Federal 
Reserve Governor Daniel Tarullo told us what it is. He said a 
specific trade may either be permissible or impermissible, 
depending on the context and the circumstances under which the 
trade was made. That sounds like what Madam Pelosi said about 
Obamacare, ``We will have to pass the bill to find out what is 
in it.'' And we see how that has worked out. The Weekly 
Standard has this train wreck on it which is Obamacare. That 
was actually in July.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Ohio for 1 
minute.
    Mrs. Beatty. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    We have certainly heard a lot about the history and 
opinionated views on that short section of Dodd-Frank, Section 
6119. So, let's fast-forward to where we are now on the rule: 
18,000 comments, a final rule, and nearly 3 years later to 
where we are today. Though the regulators wisely developed a 
lengthy timetable for implementation, we are currently on the 
verge of strengthening our banking system, and improving our 
financial markets, and are one step closer to eliminating the 
idea that there are certain institutions that are too-big-to-
fail.
    With respect to the TruPS, the CDO issue, the joint agency 
fix issued last night seems to me to strike the right balance 
between exempting only community banks versus exempting all 
banks. The regulators have done so by creatively constructing 
the exemption not on the basis of the size of the bank holding 
the TruPS, but instead on the basis of the size of the banks 
issuing the TruPS.
    Thank you, and I yield back.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Colorado, Mr. Perlmutter, for 30 seconds.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    In Dodd-Frank we tried to, by an amendment, return to the 
separation of commercial banks from investment banks and 
insurance companies. That amendment was defeated. An objection 
and prohibition against proprietary trading by banks was then 
passed by this House, was modified, and became what is now the 
Volcker Rule to try to rein in the Wild West approach that 
caused our economy to crash in 2008.
    So I take the words of Mr. Garrett and the chairman to 
heart that that is what they believe, but without something 
like the Volcker Rule and Dodd-Frank, this economy would be in 
the tank for years and years to come.
    With that, I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    Today, we welcome five witnesses. First, our former 
colleague, Ken Bentsen, Jr., is president and chief executive 
officer of the Securities Industry and Financial Markets 
Association. Mr. Bentsen served in this House as a Democratic 
Member from my native Texas from 1995 to 2003. We welcome him 
back today.
    Charles Funk is the president and chief executive officer 
of MidWest One Bank in Iowa City, Iowa. He previously served as 
president, chief investment officer, and senior vice president 
of a regional Midwestern bank. He currently serves on the 
American Bankers Association's Board of Directors.
    Professor Simon Johnson is the Ronald Kurtz Professor of 
Entrepreneurship at MIT's Sloan School of Management. He is 
also a senior fellow at the Peterson Institute for 
International Economics. Professor Johnson's opinions on a 
variety of financial subjects regularly appear in mainstream 
news and Internet publications. He earned his Ph.D. in 
economics from MIT.
    Elliot Ganz is the executive vice president and general 
counsel of the Loan Syndications and Trading Association, where 
he is responsible for managing LSTA's legal and regulatory 
affairs and its market practice and standardization 
initiatives. He holds a law degree from NYU.
    Last but not least, David Robertson is a partner and 
director of Treasury Strategies, a consulting firm that 
provides advice to corporate and other professional treasurers. 
As the leader of financial services practices, Mr. Robertson 
works with global and regional banks, payment and liquidity 
providers, and regulators.
    Each of you gentleman will be recognized for 5 minutes to 
give an oral presentation of your testimony. Hopefully, each of 
you is familiar with our lighting system of green, yellow, and 
red. And please remember to pull the microphones very, very 
close to your mouth when you speak. And without objection, each 
of your written statements will be made a part of the record.
    Mr. Bentsen, you are now recognized for 5 minutes.

 STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., PRESIDENT 
   AND CHIEF EXECUTIVE OFFICER, THE SECURITIES INDUSTRY AND 
             FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Bentsen. Thank you. Chairman Hensarling, Ranking Member 
Waters, and members of the committee, thank you for providing 
me the opportunity to testify.
    SIFMA represents a broad range of financial services firms 
active in the capital markets. Those who have grappled with the 
Volcker Rule at any level deeper than that of a media sound 
bite know that balancing the statutory mandate to both prohibit 
and permit certain activities and investments in a way that 
does not harm the capital markets and the companies, 
governments, and investors who rely on those markets is a very 
serious business and horribly complex. It is no wonder that the 
proposed rule posed over 1,300 questions and that the final 
rule runs 71 pages with nearly 900 pages of comments.
    SIFMA and our members still believe the Volcker Rule is a 
policy response in search of a problem, and we remind the 
committee that no other country has adopted a corollary to it. 
It is, however, the law of the land, and our members are 
committed to complying fully with the rule.
    As the rule comes into full force, it will affect many 
markets and products. Our preliminary assessment shows that 
beyond the impact that will result from the significant new 
compliance costs, the rule will also affect venture capital, 
equity joint ventures and acquisition vehicles, municipal 
financing via tender option bonds, asset-backed commercial 
paper, commercial loans and lending via CLOs and CDOs and other 
securitizations, and trading of foreign sovereign debts.
    I would note that the relief issued yesterday by the 
agencies is certainly welcome relief for some, but it has not 
resolved the very serious issues regarding collateralized loan 
obligations that, left unresolved, will affect the cost of 
credit to Main Street businesses which benefit from that 
market.
    Our members are also beginning to focus on their 
conformance plans and the intense compliance programs that the 
final regulation requires. But this work is not the end of the 
story. Just as the financial sector will have to develop and 
implement conformance plans, compliance programs, internal 
controls, independent testing and auditing, training and 
records and retention, so too will regulators have more work to 
do to explain what certain provisions mean and how they are 
intended to work.
    Most importantly, just as five regulators ultimately 
coordinated to write one rule, they must now coordinate and be 
consistent in their interpretation, examination, supervision, 
and enforcement. A lack of consistency will not only create 
unnecessary and costly confusion; it will undermine the rule 
itself.
    The lack of an explicit mechanism or process for ongoing 
regulatory coordination and resolution of differences has 
emerged as our member firms' greatest initial concern. Without 
it, there is a significant risk that agencies will have 
differing interpretations of similar provisions or activities 
covered by the rule, resulting in inconsistencies in their 
examination, supervision, and enforcement. This will 
undoubtedly raise additional compliance burdens that will cause 
firms to needlessly restrict activities which are otherwise 
explicitly allowed, the net effect of which being the 
restriction of capital committed to certain markets and the 
resultant reduction in liquidity.
    What happens if the SEC and its examiners takes one point 
of view for the broker-dealer while the OCC takes another point 
of view for the national bank of the same affiliated 
institution? Add the complexity of the CFTC reviewing the 
activities of the national bank for its registered swap dealer. 
What if the FDIC takes one view for nonmember banks and the 
Federal Reserve another for member banks?
    This concern is significant as we move deeper into firms 
planning for conformance, implementation, and development of 
compliance regimes. For example, a number of the largest 
institutions must begin tracking certain metrics of their 
activities by July of this year. Our members have concerns as 
to how each agency will interpret the metrics described in the 
rule, and how and to which agency they will be reporting. 
Differences in approach across agencies would make the metrics 
reporting almost impossible, especially given the fact that 
metrics reporting will have to be programmed into the computer 
systems. Inconsistency in approach could also undermine the 
transparency and comparability of the information from 
institution to institution, thus making the information far 
less valuable.
    Regrettably, the final regulations are completely silent on 
regulatory coordination. The final Volcker Rule does not 
address how interpretations in guidance will be meted out, how 
examinations will be coordinated in form and result, how the 
agencies will work together on supervision in any respect, or 
how various cross-border compliance and coordination issues 
will be addressed.
    We believe that the immediate goal should be for the 
agencies to articulate a transparent and consistent roadmap for 
coordination on both near-time interpretive guidance and the 
long-term examination and supervisory framework, including 
realistic goals on quantitative reporting which prioritize 
utility of data. Further, we believe that it is incumbent upon 
the FSOC to exercise its authority to coordinate supervisory 
activities with respect to the rule as Congress provided for. 
Additionally, we strongly believe that there is an oversight 
role for Congress to play in ensuring such coordination and the 
consistent application of the rule, beginning with this hearing 
today.
    In conclusion, I wish to stress that there remain many 
outstanding questions as to how the Volcker Rule will be 
implemented and enforced. There is a strong likelihood that 
significant issues may arise in the coming weeks and months 
that are simply not on our radar screen today. The Volcker Rule 
is that complex. Failure to adequately address these issues 
when they arise could result in more compliance burdens that 
would undermine the activities beneficial to the economy. We 
look forward to working with Congress, our regulators and other 
market participants to ensure that the implementation of the 
Volcker Rule is not disruptive to the capital markets and the 
job creators they support.
    With that, I look forward to answering your questions.
    [The prepared statement of Mr. Bentsen can be found on page 
66 of the appendix.]
    Chairman Hensarling. Mr. Funk, you are now recognized for 5 
minutes.

   STATEMENT OF CHARLES FUNK, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, MIDWEST ONE FINANCIAL GROUP, ON BEHALF OF THE AMERICAN 
                   BANKERS ASSOCIATION (ABA)

    Mr. Funk. Chairman Hensarling, Ranking Member Waters, my 
name is Charlie Funk, and I am president and CEO of MidWest One 
Bank and MidWest One Financial Group, a $1.7 billion community 
bank headquartered in Iowa City, Iowa. I appreciate the 
opportunity to be here on behalf of the ABA to discuss the 
unintended consequences of the recently finalized Volcker Rule.
    Let me begin by thanking you, Chairman Hensarling, Ranking 
Member Waters, Subcommittee Chairwoman Capito, and many other 
members of this committee for the recent engagement with the 
regulators on the unnecessary and potentially significant 
losses on collateralized debt obligations secured primarily by 
trust-preferred securities.
    I would also like to thank Chairman Hensarling and 
Chairwoman Capito for introducing H.R. 3819, which ABA strongly 
supported, to provide relief to banks like mine which would 
suffer considerable losses under the agency's rule. Your many 
voices on the issue and sense of urgency to address unintended 
negative consequences helped move the process forward to find a 
satisfactory solution. This solution will help many community 
banks like mine and, more importantly, the customers and 
communities we serve.
    ABA also applauds the regulatory agencies for moving 
quickly to find a resolution to the problem. This is a very 
good example of how the agencies should act when problems in a 
rulemaking arise. With such a complicated rulemaking as the 
implementation of the Volcker Rule, which totaled nearly 1,000 
pages, inevitably there will be problems that were not 
anticipated. If the regulators had not acted, the immediate 
cost to my bank would have been over $1 million. For the 
industry it would have been at least $600 million, with the 
impact on communities many multiples of that.
    Although this specific issue now appears to be resolved, it 
is indicative of a much broader problem. Just as the Dodd-Frank 
Act is the law of the land, so is the Volcker Rule. While we 
have concerns with the aspects of the rule, our focus now is to 
ensure that it be applied in a way consistent with its original 
intention to address the systemic risk, not impose costs on 
banks like mine unrelated to systemic issues.
    We are very concerned that the agency's rule is so broad 
that it has consequences far beyond what Congress intended and 
will hurt legitimate investments that not only are safe and 
sound choices for banks, but that support the credit 
availability and financial service needs of our customers. As a 
result of the agency's broad definition, many investments made 
by banks of all sizes in CDOs, CLOs, collateralized mortgage 
obligations, and venture capital investments will no longer be 
allowed. These pooled products are essential to ensuring credit 
reaches where it is needed most, as well as helping banks 
manage and mitigate risk by diversifying their exposure to 
borrowers. These are traditional banking assets, not the 
trading instruments that Volcker was designed to capture.
    There is a real irony in the fact that a rule designed to 
prevent banks from taking losses on short-term assets will 
instead force banks to sell long-term investments early, often 
resulting in a market loss. The loss to banks will be the gain 
of the less regulated nonbank sector which was complicit in the 
problems that led to the financial crisis as they will have an 
opportunity to buy assets with recovering values at discount 
prices.
    Finally, the rule also results in a compliance burden for 
community banks despite agency statements to the contrary. It 
is possible that community banks will need to put in place 
compliance programs to ensure they do not inadvertently violate 
the Volcker Rule. These compliance programs are costly and 
time-consuming, taking away valuable resources that could 
otherwise be used to serve local communities.
    In conclusion, the Volcker Rule should not impair 
traditional banking services that allow banks to meet the needs 
of their customers, nor impose unnecessary costs on any bank, 
particularly regional and community banks where no argument of 
systemic risk can be justified. Congress should be vigilant in 
ensuring that the rules are focused on the original intent to 
reduce systemic risk and not used to hinder the traditional 
business of banking, which is providing credit to customers.
    Thank you for allowing me to appear before you today, and I 
would be happy to answer questions during that time.
    [The prepared statement of Mr. Funk can be found on page 86 
of the appendix.]
    Chairman Hensarling. Professor Johnson, you are now 
recognized for 5 minutes.

     STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF 
        ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF MANAGEMENT

    Mr. Johnson. Thank you, Mr. Chairman.
    I completely agree with what Mr. Funk said, which is that 
the original intent of the Volcker Rule is to reduce systemic 
risk. I am sure you all remember vividly the fall of 2008 when 
very large banks and quasi-banks such as Citigroup, Morgan 
Stanley, Merrill Lynch, and others suffered very large losses 
because they made big proprietary bets. They engaged in 
excessive risk-taking. They didn't always call it proprietary 
trading, it is true. That perhaps reflected their 
misunderstanding of the risks in which they were engaged. And 
in September 2008, the Bush Administration came to Congress 
asking for a bailout, not, I think, particularly a bailout 
targeted at community banks, but a bailout targeted at some of 
the largest firms on Wall Street.
    Chairman Paul Volcker, I believe, correctly articulated 
that we should limit the amount of risk-taking that can be 
taken by what are now bank holding companies, very large bank 
holding companies. I would stress the largest six or the 
largest eight is the focus of attention here. They have FDIC 
guarantees on their deposits. They also have some degree of 
subsidy because they are perceived by many in the credit 
markets to be too-big-to-fail. They should therefore, as a 
matter of general prudence and a matter of systemic risk 
reduction, be limited in the kind of proprietary bets they can 
take, and that is exactly what the Volcker Rule was designed to 
do. It has gone through a very long, involved process with an 
enormous amount of industry input, and there is now a good 
chance that the rule as proposed and as amended, including 
yesterday, will serve that purpose.
    I think, Mr. Chairman, you are exactly right to focus on 
the job creators, on what has happened to jobs in the United 
States. I am the former chief economist of the International 
Monetary Fund, among other things. I worked on financial crises 
around the world for more than 25 years. Unfortunately, the 
experience we have had in this country over the past half 
decade is very typical of what we have seen in lots of 
different countries and situations. When the financial system 
blows up, and when the biggest parts of any financial system 
get it wrong in terms of understanding the risks, or in terms 
of managing their positions, sometimes we call that proprietary 
trading, and sometimes it has different names. It is the same 
problem almost everywhere.
    And the damage, you are absolutely right, Mr. Chairman, is 
on the companies, it is on the community banks, it is on the 
people who try to create jobs. That is why we have had this 
deep, long-lasting recession from which it is hard to recover. 
This is a typical experience of a finance-induced deep 
recession, unfortunately.
    I think when we look at the implementation of Dodd-Frank, 
we should be careful with regard to unintended consequences. I 
think the regulators came under appropriate pressure from both 
Republicans and Democrats because of the TruPS CDO issue. They 
responded in a way that I believe to be appropriate. I hope 
that you will continue to watch on these same details.
    However, I also recall that 2 years ago I appeared in a 
hearing before this committee along with a number of other 
witnesses, many of whom predicted dire consequences if the 
Volcker Rule were to come anywhere near to becoming a reality.
    Financial markets are forward-looking. As you know, we have 
the rule. Some details no doubt remain to be fully clarified. 
But we have the rule, and we have financial market reaction. 
Have we seen the drying up of sovereign bond liquidity? Have we 
seen big increases in spreads in the way that were predicted? I 
don't believe so.
    If we do see consequences, unintended consequences, of 
course they should be addressed, and I think it is admirable 
that you are holding this hearing and you are holding these 
other hearings. That is exactly what we need, to look at the 
consequences, intended and unintended.
    In that context, I hope you also think again about business 
development corporations, which reportedly are being considered 
as a vehicle through which some of our largest bank holding 
companies--at least one of them--could find their way again 
into highly speculative proprietary betting type of business. 
So that is not how they are currently used, but that is how 
they could be used. Hopefully, we will have some discussion 
also about CLOs in that context as well.
    To conclude, the Volcker Rule has a good chance of reducing 
systemic risk. It requires appropriate oversight from Congress. 
I am encouraged that you are providing that oversight. It 
requires the regulators to avoid and prevent the development of 
new loopholes.
    Thank you very much.
    [The prepared statement of Professor Johnson can be found 
on page 104 of the appendix.]
    Chairman Hensarling. Mr. Ganz, you are now recognized for 5 
minutes.

STATEMENT OF ELLIOT GANZ, EXECUTIVE VICE PRESIDENT AND GENERAL 
 COUNSEL, THE LOAN SYNDICATIONS AND TRADING ASSOCIATION (LSTA)

    Mr. Ganz. Thank you. Good morning, Chairman Hensarling, 
Ranking Member Waters, and members of the committee. My name is 
Elliot Ganz, and I am the general counsel of the The Loan 
Syndications and Trading Association, or LSTA. The LSTA is an 
association which represents the interests of the many 
participants in the $3 trillion commercial loan market. We 
thank you for the opportunity to testify at this timely 
hearing.
    My testimony will focus on how the Volcker Rule's 
definition of ownership interest could negatively impact credit 
availability for American companies by profoundly disrupting 
the market for open-market collateralized loan obligations, or 
CLOs. This disruption could lead to a significant reduction in 
the amount of credit available to some of the most dynamic job-
creating companies in America and would result in material and 
arbitrary losses to American banks which hold almost $70 
billion of safe, well-performing CLO debt securities.
    The best place to start is by describing what a CLO 
actually is. A CLO is a securitization fund managed by an 
independent SEC-registered investment adviser which issues 
securities and then uses that money to provide loan financing 
to American companies. CLOs finance approximately $300 billion 
of these loans, representing almost half of all loans made by 
nonbanks in the United States.
    These loans are made to some of the most dynamic companies 
in America, across all States and all industries, including 
broadband, satellite, cellular, health and hospitals, energy, 
airlines, automotive and retail. Who are these companies? They 
include such iconic American companies as Sears, Aramark, 
SuperValue Stores, Rite Aid, Good Year Tire, and Delta 
Airlines, who together employ hundreds of thousands of 
Americans. Hundreds of smaller companies also rely on CLO 
financing, including Regal Cinemas, Armstrong World Industries, 
ABC Supply, TempurPedic, and Quikrete . Just these five 
companies alone employ almost 50,000 people.
    Many of these smaller companies have no access to capital 
markets other than through the loan market. In all, we estimate 
that companies which access the CLO market for financing employ 
more than 5 million people.
    CLOs have performed remarkably well over the years, 
including during and after the great financial crisis. Since 
1996, cumulative realized losses to CLO debt securities has 
been less than 1 percent.
    Attracted by the safety and soundness of CLOs, their 
historical performance, and their reasonable risk-adjusted 
return, a wide range of U.S. banks currently invest almost $70 
billion in the highest-rated debt securities. While a 
significant amount of CLO debt securities are held by large 
banks, they are also held by at least 30 other banks, including 
21 with assets less than $25 billion, many of which are 
community banks.
    To be clear, banks are not buying CLO equity. These are the 
highest-rated debt securities of CLOs. They have none of the 
characteristics of equity and are simply not ownership 
interests. Yet, the Volcker Rule artificially and arbitrarily 
converts CLO debt securities into the equivalent of equity 
through an expansive definition of ownership interests, thereby 
making them prohibited to banks.
    Because the ability to restructure $70 billion of these 
securities is extremely challenging and the prospect highly 
doubtful, banks will be forced to divest, putting downward 
pressure on prices for CLO debt, thereby triggering further 
selling pressures, leading to a cascade of falling prices, 
despite the fact that these remain very high-performing, safe 
assets.
    The agencies yesterday provided limited relief to holders 
of CDOs and trusts. This was a $600 million accounting loss 
recognition problem. In contrast, if the price of CLO debt 
securities were to drop by only 10 percent, banks holding them 
would face potential capital losses of up to $7 billion, losses 
that would be attributable solely to the imposition of the 
final Volcker Rule. This furthers no regulatory objectives.
    The good news is that there is an easy regulatory fix to 
this problem. It requires no exemption or carve-out, simply 
guidance from the agencies that the term ``ownership'' as 
defined in the final rule does not cover CLO debt securities 
that contain only a contingent right to remove or replace a 
manager for cause, but contain none of the other indicia of 
ownership listed in the definition. We believe that adoption by 
the agencies of this simple proposal would allay the concerns 
of the CLO market and we urge the involved agencies to issue 
this guidance in the coming days so that CLOs can continue to 
provide financing to American companies.
    Thank you, and I look forward to your questions.
    [The prepared statement of Mr. Ganz can be found on page 97 
of the appendix.]
    Chairman Hensarling. Mr. Robertson, you are now recognized 
for 5 minutes.

STATEMENT OF DAVID C. ROBERTSON, PARTNER, TREASURY STRATEGIES, 
        INC., ON BEHALF OF THE U.S. CHAMBER OF COMMERCE

    Mr. Robertson. Thank you, Chairman Hensarling, Ranking 
Member Waters, and members of the committee. I am appearing on 
behalf of the U.S. Chamber of Commerce. I participated in the 
CFTC roundtable on the Volcker Rule, and my colleague, Anthony 
Carfang, has testified before both House and Senate 
subcommittees on the subject as well. I am here to represent 
the perspectives and viewpoints of corporate treasurers.
    In these forums, we have raised concerns regarding 
unintended consequences the Volcker Rule could cause. These 
include impaired market liquidity and reduced access to credit 
and capital, higher costs and less certainty for borrowers, 
potential competitive disadvantages for U.S. businesses and 
financial institutions, increased compliance costs, higher bank 
fees, a shifting of risk out of banks into other less well-
regulated sectors of economy, and capital flows into offshore 
markets. The true effects of this mammoth regulation will not 
be known until the conformance period ends; however, some 
problems which impact both businesses and individuals are 
coming into focus.
    It is important to recognize that U.S. businesses benefit 
from the most efficient capital markets in the world. Companies 
doing business in the United States operate with roughly $2 
trillion of cash reserves, and that represents only 11 percent 
of U.S. GDP. In contrast, corporate cash in the eurozone is 20 
percent of GDP, and in the U.K., the ratio is even higher at 32 
percent.
    Reduced access to capital or certainty of access will 
require companies to hold more cash on their balance sheets, 
slowing economic growth. And how will companies generate more 
cash? Through layoffs, reducing dividend payouts that retirees 
depend upon, and by forestalling capital expenditures which 
fuel growth.
    Mr. Ganz did an excellent job of noting the jeopardy that 
the Volcker Rule places around collateralized loan obligations, 
but this may be only the first wave of capital formation 
problems that could arise.
    It is also noted that harmonization of the rule is needed. 
The Volcker Rule was written by five separate agencies, each 
with different areas of responsibility and different tools, 
histories, and processes for regulation and enforcement. 
Capital investment by business requires a stable and 
predictable regulatory environment. For the Volcker Rule to 
work and support economic growth, it is critical that its 
interpretation and enforcement be harmonized amongst all of the 
regulators to provide clear rules of the road.
    The real impacts of the Volcker Rule will not be known 
until the end of the conformance period winds down; however, we 
need to be particularly vigilant to its impact because 
currently we are under a very unusual macroeconomic scenario 
characterized by quantitative easing, which has pumped excess 
liquidity into the economy. We fear that this quantitative 
easing may actually mask the effects of the Volcker Rule for a 
period of time, but the start of the wind-down of QE is under 
way, and the potential has already boosted long-term rates.
    The Volcker Rule will not be implemented in a vacuum. We 
face a time of unprecedented regulatory change. Corporate 
treasurers have to contend with looming money market 
regulations that could imperil 40 percent of the commercial 
paper market, Basel III lending requirements, Basel III 
disincentives for commercial lines of credit, and the 
implementation of derivatives regulations that could reduce the 
ability of businesses to mitigate risk and ensure affordable 
access to raw materials. All of these dynamics are converging 
in one place, on the desktop of the corporate treasurer, and 
their combined impact upon a business' ability to raise capital 
and appropriately take on and manage risk has not been fully 
vetted or thought through.
    Lastly, I would like to draw attention to some rulemaking 
process and procedural flaws that raise concerns about the 
level of rigor that was conducted in crafting the regulations. 
The process to create the regulations did not permit sufficient 
dialogue. There was a comment period, but the nature of the 
regulation was so far changed that a reproposal would have been 
well in order. It also did not entail the required cost-benefit 
analysis or an assessment by the SEC on its impact on capital 
formation.
    Accordingly, we would respectfully request that Congress 
review the procedures for rule writing, especially with joint 
agency rulemakings, to ensure fair procedures for input and 
comment and hold agencies accountable in the consideration of 
the impacts and the costs on the economy and businesses.
    I appreciate the opportunity to appear before you today on 
behalf of the U.S. Chamber of Commerce. The Chamber supports 
the passage of H.R. 3819 and respectfully requests that the 
bill be amended to include an exemption for CLOs.
    Thank you. I look forward to answering your questions.
    [The prepared statement of Mr. Robertson can be found on 
page 111 of the appendix.]
    Chairman Hensarling. The Chair now recognizes himself for 5 
minutes for questions.
    Mr. Robertson, I think I just heard you in your testimony 
say that because of an aspect of the Volcker Rule, companies 
may have to build up to $1 trillion of additional cash 
reserves. Did I understand that correctly?
    Mr. Robertson. That is correct.
    Chairman Hensarling. I have to tell you, even by 
congressional standards, that is a fairly staggering number.
    I think I also heard you say that from your experience, 
companies may have to downsize and lay off workers. You were 
here for my opening statement. I am thinking about two 
constituents I have, Claudia and Joseph, who are either 
unemployed or underemployed. So elaborate how you come to the 
conclusion that these companies may have to downsize and lay 
off workers because of the Volcker Rule.
    Mr. Robertson. Thank you.
    One of the things that is a characteristic of our financial 
market is very robust capital markets, very strong access to 
commercial credit. So as a result, companies are able to 
invest, they are able to support their working capital needs 
through just-in-time financing. This allows them to run their 
balance sheets very efficiently and direct their cash toward 
working capital and investment.
    The minute that companies begin to doubt the ability of the 
market to provide financing for them or to manage financial 
risk, they are going to need to insure themselves against that, 
and that is going to require them to hold more cash, because 
they won't know if they can get credit; and secondarily it is 
going to require them to hold more cash to hedge financial 
risks if they don't have access to derivatives and other 
hedging tools that are used for their activities. Basically, 
the comparison is between the United States with its robust 
markets, and Europe and the U.K., which have less robust 
markets.
    Chairman Hensarling. Mr. Ganz, you spent a fair amount of 
time in your testimony speaking of the CLO market. You also 
have a fairly staggering number--I notice, on page 2 of your 
testimony: ``In all we estimate that companies that access the 
CLO market for financing employ more than 5 million people.'' 
How do you derive that statistic?
    Mr. Ganz. We did a survey of all of the loans that were 
held in CLOs, and then we tracked that against--we used a 
service to track that against how many employees each of those 
companies employed.
    Chairman Hensarling. You also say in your testimony, 
``Often these growing job-creating companies have no other 
access to the capital markets other than through the loan 
market,'' specifically speaking of the CLO market. How did you 
come by that conclusion?
    Mr. Ganz. The companies that borrow through CLOs are called 
non-investment-grade companies. That means they have no 
ratings, so they can't access the investment grade markets. 
They can't access the regular bond market. Some of them can't 
even access the high yield market, particularly the smaller 
ones. So the only place they can get money is from the 
leveraged loan market. That is an institutional market largely, 
and CLOs provide 50 percent of the financing in that market. So 
it is a very big deal. And, again, I think it is very important 
to note most companies in America are noninvestment grade.
    Chairman Hensarling. Like many other Members of Congress, 
again, I have constituents who are unemployed, I have 
constituents who are underemployed, and my guess is if I did a 
survey, most have never heard of the Volcker Rule, most have 
never heard of the collateralized loan obligation market. What 
should I tell these constituents about why they should care 
about the Volcker Rule?
    Mr. Ganz. In this context, the expansion of one paragraph 
in one small section of the Volcker Rule artificially converts 
debt securities into equities and has a profound impact on the 
banks that hold these. Those banks are going to have to divest 
their securities. So besides the impact that it has on the CLO 
market itself, the banks that hold those securities are going 
to take an immediate capital hit. If they take an immediate 
capital hit, they are going to have less money to lend into 
those communities.
    Three banks filed letters to the agencies, three smaller 
banks with assets in the $20- to $35 billion range, and they 
addressed that specifically. They have somewhere between $300 
million in CLO notes up to about $1 billion, and if they have 
to take a $30 million hit or more, that is going to be less 
money available to lend into their communities.
    Chairman Hensarling. Thank you. My time has expired.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you very much.
    To Mr. Funk, and I think Mr. Johnson, and maybe others who 
recognize that both sides of the aisle cooperated and worked to 
make sure that the regulators quickly addressed the TruPS CDO 
issue, and just as we were able to do that, I think that we are 
able to work with regulators on some of the other issues that 
are being identified, such as the CLO issue. And I think that 
we should be focused more on what we can do to implement 
Volcker, because it is the law, but at the same time deal with 
any unintended consequences. And since we have already 
demonstrated that we are willing to do that, and the regulators 
are showing that they are willing to respond, let us focus on 
what we can do to make sure that we deal with some of the other 
issues with which you are concerned.
    For example, CLO. Let us take the CLO issue, Mr. Robertson. 
You have identified this as a real concern. Have you thought 
about ways in which the regulators can address these concerns, 
and are you willing to work with us to address these concerns?
    Mr. Robertson. Yes, absolutely. And I think actually Mr. 
Ganz outlined clarifying that CLOs were not meant to be 
captured under the rule that was trying to catch hedge funds. 
So clarifying that these are debt securities, not equity 
securities, they are not deemed to have an ownership interest 
in equity.
    Ms. Waters. Are you willing to work with us in the way we 
just demonstrated we can work on unintended consequences?
    Mr. Robertson. Oh, absolutely.
    Ms. Waters. Mr. Johnson, a number of comments have been 
made about compliance, and, of course, Mr. Funk, we are 
concerned about any costs that are caused by compliance, and we 
want to make sure that we do everything that we possibly can to 
assist you with compliance without costing a lot of money to 
the bank. How can we do this, Mr. Johnson? Do you have any 
thoughts on that?
    Mr. Johnson. Congresswoman, I understand that the 
regulators are addressing this. It is a live issue. I am not 
sure it is completely resolved. But incorporating a relatively 
minor compliance requirement within the existing reporting and 
supervision for community banks, I think that is--I am not 
saying it is trivial, but that is not adding a big additional 
burden. I think that makes sense.
    This rule is not targeted at the community banks. There are 
some spillovers that you are identifying in this discussion. 
But I think you can incorporate it within the existing 
supervisory framework.
    If I could just add a point on the CLOs, Mr. Ganz has a 
very straightforward proposal, which is an FAQ issued by the 
regulators; not even a new rule or clarification, just a 
frequently asked question and the answer to such a question. 
And I think he puts his finger in his written testimony, which 
I have only looked at quickly, on the key issue, which is the 
banks can make loans, that is what banks do, but they can't 
take an equity interest in certain investments to the degree 
they used to. So that is what--in his written testimony Mr. 
Ganz is differentiating that quite carefully. And I think, 
again, these are sensible ideas that you can absolutely work on 
with the regulators.
    Ms. Waters. Mr. Funk, in terms of compliance, do you 
believe that we can work with you to reduce costs to the 
community banks for compliance efforts?
    Mr. Funk. Absolutely.
    And I will say, just to give you an example with regard to 
the Volcker Rule, I represent a community bank and I didn't pay 
much attention to the Volcker Rule until about December 10th. 
It was then when I found out that we were going to have to take 
a million-dollar charge. And that is why we are so appreciative 
for both sides of the aisle taking a stand on this, because we 
had to have this resolved. We have left our books open. 
Normally, we close our books on the 3rd or 4th day of the 
month. We had to leave them open, but were finally able to 
close them today because of the announcement from the 
regulators. So, thank you so much for your help on that.
    Ms. Waters. You are so welcome.
    Mr. Bentsen, you have worked in this House, and you have 
seen efforts for cooperation from both sides of the aisle, and 
you have seen times when we have not cooperated. And so, given 
what you are looking at now, based on the work that both sides 
of the aisle did recently, don't you think that we can resolve 
some of these concerns, these unintended consequences, without 
going at destroying the Volcker Rule?
    Mr. Bentsen. Congresswoman, absolutely. I think what 
happened with the trust preferreds was very positive, but I 
think it is indicative of problems in the underlying rule 
itself. It is very complex. The CLO issue has arisen. There are 
going to be others that are coming going to come up. The 
coordination issue is huge, and Congress absolutely has a role 
to play.
    The law belongs to Congress. It is the regulator's job to 
implement it, but Congress has a role to oversee the law and 
make sure it is done appropriately.
    Chairman Hensarling. The time of the gentlelady--
    Ms. Waters. I yield back.
    Chairman Hensarling. --has expired.
    The Chair now recognizes the gentleman from New Jersey, the 
Chair of our Capital Markets Subcommittee, Mr. Garrett, for 5 
minutes.
    Mr. Garrett. And, again, I thank the chairman.
    I will start down at this end of the panel.
    Congressman Bentsen, good morning. As you may know, SEC 
Commissioner Mike Piwowar has stated that, ``rulemaking 
agencies failed both at the proposing and adopting stages to 
prepare an economic or other regulatory analysis of the Volcker 
Rule. As a result, we do not know what the rule's economic 
impact will be or whether other alternatives might have 
accomplished the goals of the rulemaking at a lower cost with 
less disruption of the capital markets.''
    So my first question is, do you agree with his statement 
that they failed to abide by the law, by the Administrative 
Procedures Act (APA), and to do a robust economic analysis and 
find out if there are other alternatives out there?
    Mr. Bentsen. Congressman, I won't opine with respect to the 
APA, but I will say that--first of all, we called for a robust 
economic analysis in our comment letter. We thought that was 
entirely appropriate. As you know--
    Mr. Garrett. You did?
    Mr. Bentsen. --the APA applies--
    Mr. Garrett. You did call for that?
    Mr. Bentsen. Yes.
    As you know, the APA applies differently to different 
agencies. And, in particular, the prudential regulators do not 
have the same burden that the independent agencies--and 
certainly they don't have the same burden that other Executive 
Branch agencies have. So, that is actually a role that Congress 
should probably take a look at going forward.
    Mr. Garrett. So, regardless of what the APA may say, it is 
your opinion, I guess is what you are saying, that an economic 
analysis, and a robust one, should have been done in this 
situation.
    Mr. Bentsen. We believe so, yes.
    Mr. Garrett. Okay. Great. Thanks.
    Running down to Professor Johnson, I was reading through 
your testimony last night and watching the Senate hearing of 
your testimony last week. In both cases, you repeatedly stated, 
as you did this morning, that the impacts of the rules are 
overstated. Specifically, you state, ``Financial markets are 
typically forward-looking--you just said that this morning--so 
the expected future effects of any such rule are likely to be 
felt in advance of full implementation, yet none of these 
negative consequences has actually transpired.'' And you just 
said that this morning.
    But if I go down to the end of the table to Mr. Robertson, 
you said in your testimony, in written testimony and what you 
said just now, ``Because of the 18-month conformance period, it 
is not possible to understand the full impact of the Volcker 
Rule, particularly on Main Street businesses, until the rule is 
completely implemented and operational at the financial 
institutions.''
    And you also said--and I thought it was an astute point--
both in your written testimony and right now, that the QE, 
quantitative easing, and the extraordinary impact that has had 
on the bond market is also significant.
    So I will bring it back to Professor Johnson. I am sure you 
are familiar, being an academic, with the portfolio balance 
channel theory--and this is something that Ben Bernanke has 
talked about in the past--which basically says, as you do QE, 
what does that do? It affects the price--it affects the price 
going up; the yields are going down. And what does that do to 
the marketplace? People have to go into the marketplace to try 
to find similarly situated risk that they could have had but 
for the fact of QE. And that essentially means that bond 
investors would have to go further out on the credit-risk curve 
to buy corporate bonds.
    That is what the effect has been in the corporate bond 
market because of QE, right? And I see Mr. Robertson nodding to 
that.
    So aren't you missing the mark when you say that we can 
look to current activity in the marketplace if we fail to 
consider what the effect is of QE today, and if we fail to 
consider the fact that tapering will occur in the future and 
the combined effect of those on the bond market?
    Mr. Johnson. No, Congressman, I don't--
    Mr. Garrett. Why not?
    Mr. Johnson. --believe I am missing the point. If you look 
at the testimony that was provided at the previous hearing 
before this committee--for example--
    Mr. Garrett. I did.
    Mr. Johnson. --I testified before the CFTC hearing, and one 
of Mr. Robertson's colleagues was there. There was plenty of 
talk about immediate consequences, for example, on sovereign 
yields in Europe and on risk spreads. And it is not clear that 
QE would affect all the risk spreads in the way that you are 
indicating.
    Now, it is true we have a particular set of monetary 
policies right now in this country. It is also true the Federal 
Reserve has exerted a lot of control over dimensions of the 
credit conditions, and they may well continue to want to do 
that going forward. I agree that those things are interacting.
    But my point is, in terms of the predicted consequences, in 
terms of the concrete, actual things that have changed, not Mr. 
Robertson's conjectures about what might change in the future, 
what have we actually seen change in a negative way? And that 
is my point, Congressman.
    Mr. Garrett. That is my point, that you are looking at what 
is happening today, but you cannot push that to the future 
because in the future we will not have the QE. The QE, under 
this theory and under--I think most people agree that it has 
had an effect on price and yield and has pushed the market out 
into this area. So you can't say that what is going to occur 
today is going to be in the future.
    My time is almost up, and, gosh, I was going to give Mr. 
Robertson the last word, but I see the chairman is quick with 
the gavel, as always.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, Ms. Velazquez, for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Mr. Robertson, you mentioned that U.S. companies will need 
to raise an additional $1 trillion to comply with the Volcker 
Rule, yet hedging for ordinary business operations is exempt. I 
just would like to know how you calculated this figure?
    Mr. Robertson. First of all, I wouldn't claim that they 
would have to raise $1 trillion. What I was trying to 
distinguish was the level of cash that U.S. businesses hold on 
their balance sheets to support the economy and contrast that 
with the U.K. and the European Union, which have less robust 
capital markets.
    What we have done is we have compared the cash holdings 
published by the Federal Reserve to GDP to those published by 
the Bank of England, and the European Central Bank, and noted 
the lower level of cash proportional to the economy that U.S. 
corporations hold.
    And so our concern is, we know from our experience in 
working with corporate treasurers that one of the reasons why 
they don't have to hold that much cash is the efficiency of the 
system, the reliability of access to capital. We are not 
stating it will be $1 trillion, but our concern is that 
anything which reduces that efficiency could force U.S. 
businesses to hold more cash.
    Ms. Velazquez. Professor Johnson, would you like to 
comment?
    Mr. Johnson. It is a fascinating calculation Mr. Robertson 
is presenting, but I don't see that it has any basis in fact 
whatsoever, in the sense of what is the impact on the 
efficiency of the financial market, of the Volcker Rule. I am 
sorry that Mr. Garrett has left the room, but this is exactly 
the point.
    If there were a disruption to the financial markets, if it 
were becoming harder to access credit, if corporate treasurers 
were fearing their access to short-term financing, those would 
be legitimate concerns, but we would see them now. The markets 
would already be disrupted.
    And that is what previous fellow witnesses have testified 
to; they said the effects are coming now, right away, 
immediately, because the financial markets are forward-looking. 
Where do we see this disruption concretely for corporate 
treasurers?
    Ms. Velazquez. Professor Johnson, is there any Volcker Rule 
comparison in Europe at this point?
    Mr. Johnson. There is plenty of discussion in Europe about 
finding ways to separate commercial banking, the utility-type 
commercial banking, from relatively risk-taking investment 
banking.
    The very latest moves--but I would caution that the 
Europeans go back and forth on this--is to move towards more of 
a Volcker-type approach, limits on proprietary trading, away 
from the so-called ring-fencing or the separation of 
activities.
    But the European policy is not completely settled. And I 
would certainly not wait for the Europeans to sort out their 
banking system, which is an enormous mess, supported by massive 
government subsidies. You really do not want to go to what the 
Europeans have.
    Ms. Velazquez. So, Professor, there is no rule in Europe at 
this point that is costing $1 trillion to Europeans?
    Mr. Johnson. There isn't a--they are not holding more cash 
because of some impact of an equivalent to the Volcker Rule, 
that is correct.
    Ms. Velazquez. Professor, Dodd-Frank provided the financial 
industry with a number of exemptions to the Volcker Rule, 
understanding that most trading was for legitimate business 
purposes such as helping small businesses hedge risk. And yet, 
some industry participants continue to argue that the Volcker 
Rule will negatively impact access to capital for small 
businesses.
    Have you seen any report, any evidence, any statistics, any 
report to that matter?
    Mr. Johnson. No, Congresswoman, I haven't. I have not seen 
credible independent analysis to that point.
    I think it is a very important point, but remember, the 
Volcker Rule is targeted at the largest six or eight bank 
holding companies. We have big, liquid, deep markets. Mr. 
Robertson is absolutely correct on that. Those markets have not 
been disrupted by what we have seen so far. And given the 
trajectory which is implied by the latest rule clarification, 
including yesterday's, I don't think we are going to see that 
disruption.
    Ms. Velazquez. Thank you.
    Mr. Funk, there has been a lot of discussion recently about 
the treatment of TruPS CDOs under the Volcker Rule. However, 
the fact remains that these are risky assets which could 
undermine the safety and security of the small pool of banks 
that hold them.
    If not 2 years, as drafted, what is a reasonable amount of 
time to divest these assets, given the demonstrated poor 
performance of these TruPS CDOs?
    Mr. Funk. These were debt securities when we bought them, 
not equity securities. And when we bought them, they were 
investment-grade, they were not what we would consider in our 
bank to be a risky asset.
    We have written them down. We bought $9.7 million. We wrote 
them down to about $1.7 million. We, in 2008, charged off $8 
million, so our holding value is $1.7 million.
    I think the key thing, Congresswoman, is on this particular 
point, if we hold these for another 10 or 12 years, we are 
almost certain we will recover more than our book value. We 
have plenty of capital in our bank, we are able to hold them, 
but the rule as it was proposed would have required us to take 
a hit right now--
    Ms. Velazquez. So what is a reasonable time?
    Chairman Hensarling. The time--
    Ms. Velazquez. That is my question.
    Chairman Hensarling. --of the gentlelady has expired.
    The Chair now recognizes the gentlelady from West Virginia, 
the Chair of our Financial Institutions Subcommittee, Mrs. 
Capito, for 5 minutes.
    Mrs. Capito. Thank you, Mr. Chairman.
    I would like to follow up, Mr. Funk, where you left off. 
You have already written down--let's start, when you first 
purchased these securities, they were not considered risky 
investments and were really--the reason they took such a dive 
was as a part of the recession, the financial crisis. Is that 
correct?
    Mr. Funk. That is correct.
    And what I will tell you is in our bank in Iowa City, when 
we bought these in 2005 or 2006, there was a lot of discussion. 
We decided to limit it to $10 million. We wound up with $9.7 
million. As I recall, they were all rated either A or A1 by 
Moody's, and they were investment-grade. They survived bank 
examinations, and they were not considered a risky asset. But, 
like many things, they were a casualty of the recession.
    Mrs. Capito. Right. And you are still receiving revenue 
from this. This was part of the reason that you purchased 
these, correct?
    Mr. Funk. They are not--we will receive revenue. We are not 
right now. But the way the pools work is that as the banks 
continue to pay, eventually you get revenue. Our particular 
class that we hold is not getting cash right now.
    Mrs. Capito. It is not a revenue--
    Mr. Funk. But we are very confident that in the next 10, 
12, 15 years, we will recover all of our book value and then 
some, perhaps.
    Mrs. Capito. Okay.
    I would like to ask a question on two things, quickly. I 
have been working with Mr. Meeks on some legislation to say, if 
we are going to move new regulations forward, understanding 
that regulations have to move with the time and the instruments 
and what is moving on, I get that, but what are we going to do 
about the old, existing, antiquated, no-longer-useful-but-
still-must-be-complied-with regulations?
    And we are working on a scenario where we would say to the 
regulators, before you move forward with something that is 
complicated, like the Volcker Rule, you have to look at where 
the existing regulations are right now, and are they useful, 
are they compatible, or would it be better to move in the new 
while you are taking out the old?
    Does anybody have a sense that kind of exercise took place 
during the enactment of this rule?
    I will start with you, Mr. Funk, then anybody else.
    Mr. Funk. That I don't know. What I do know, and I think it 
has been said elsewhere, and is something that really concerns 
me, is that our particular bank is subject to the regulation of 
three entities: the SEC; the Federal Reserve for our holding 
company; and the FDIC for our bank. And the way the Volcker 
Rule is written, they can all enforce the Volcker Rule 
differently, and I think that creates a lot of confusion. So we 
do need more uniformity. But I certainly agree with the intent 
of your question.
    Mrs. Capito. Mr. Bentsen?
    Mr. Bentsen. Congresswoman, first of all, I think that is 
an outstanding idea, and I don't think it is limited to the 
Volcker Rule or limited to--
    Mrs. Capito. Right.
    Mr. Bentsen. --the potential regulators. I would argue you 
could add FINRA to that and what is going on with the 
consolidated audit trail and the Order Audit Trail System 
(OATS) that exists today.
    So we don't want to build redundant regulation or redundant 
systems. And we have seen--and I think this is an example in 
Volcker, dealing with the trust preferred issue, where you 
basically had legal definitions conflicting with the accounting 
rules, where apparently no one was talking to one another to 
figure out what was going on. And we are going to find more of 
that. This is too big of a rule that we won't.
    Mrs. Capito. Right.
    Mr. Bentsen. And I think we will see that in the capital 
standards, as well, where we are laying Basel III on top of 
Basel 2.5 on top of Basel II. And, again, we know that there 
will be conflicts in there.
    Mrs. Capito. Yes, Professor?
    Mr. Johnson. Congresswoman, I think you are making a very 
good point. But part of the point of the comment procedures and 
process was exactly to let the industry speak to any kind of 
issue, including problematic legacy issues.
    Now, the TruPS CDOs didn't come up, and that was 
unfortunate--
    Mrs. Capito. It wasn't in the rule.
    Mr. Johnson. No, I understand. And as I said, that was 
unfortunate, and has been addressed in, I would suggest, record 
time by the regulators, because you all agreed this was a 
problem.
    I think that the right way to do this is exactly to have a 
long period of time--we have had 3\1/2\ years of comments and 
back-and-forth with the industry. If you can find additional 
legacy, leftover problematic issues, absolutely, you should go 
after them with Mr. Meeks--
    Mrs. Capito. Right.
    Mr. Johnson. --but there has been a very detailed process 
already.
    Mrs. Capito. Thank you.
    And I guess my question concerns the next step. Does 
anybody on the panel have a sense that it actually occurred?
    Mr. Robertson?
    Mr. Robertson. I don't have a sense it occurred. I know 
there was a mandate for the regulators to coordinate. But just 
given the scope of the effort and the amount of time that took 
place, as you point out, there was no re-proposal. And I think 
there needs to be much closer working around these regulations 
with the various constituencies to surface these issues. It is 
great to address unintended consequences after the fact, but, 
at that point, there is a lot of disruption already created.
    Mrs. Capito. Right.
    The other issue--I will just make a comment, because I 
don't have time for another question, really--is what you are 
all talking about, the complexity of what we are dealing with 
here. And I think that is not just a burden in terms of trying 
to figure it out, but it has a financial burden that is 
attached to it, too, that does translate to Main Street.
    And so I say good luck to all of us for figuring out the 
complexity of this rule and seeing the ramifications as we move 
through this.
    Thank you so much.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from New York, the ranking member of our Capital 
Markets Subcommittee, Mrs. Maloney, for 5 minutes.
    Mrs. Maloney. I want to thank the chairman for recognizing 
me, and thank the ranking member, and thank all of you for your 
important testimony and for being here today.
    We all know that the problem of the crisis, the financial 
crisis, was not caused by community banks or regional banks or 
credit unions. And many of us on this panel are working very 
hard to shield them from unnecessary regulation.
    But we know from many books and from the GAO report that I 
have with me that proprietary trading was a cause, and, in 
fact, in this report they call it a leading cause, of the 
financial crisis. We know it was the CDOs; we know that it was 
certain bad lending practices. And this Volcker Rule takes care 
of this problem. So we need to put it behind us and go forward.
    Now, if there is something that needs to be adjusted, such 
as the trust-preferred CDOs--which, according to testimony, the 
rule that came out from the regulators, the adjustment, takes 
care of the challenge. Is that correct?
    Mr. Funk. As far as I know, it takes care of the vast, 
vast, vast majority of banks in America.
    Mrs. Maloney. Then, if there are unforeseen consequences, 
let's take care of them, but let's go forward. The Volcker Rule 
is here. It is going to stay. It is now part of the fabric of 
our country.
    But one area that was raised in your comment letter, Mr. 
Bentsen, you said that the proposed rule--and this may be an 
adjustment that needs to take place. Your organization raised 
serious concerns with the definition of a banking entity, which 
you argued was far too broad. Does the final rule address your 
organization's concerns on this issue?
    And if it doesn't, how would you propose fixing this 
problem? Is it possible that the final rule will sweep in 
purely nonfinancial operating companies because of this broad 
definition?
    That was in your comment letter.
    Mr. Bentsen. Sure.
    As we have been going through it, it does appear that the 
regulators did narrow the definition of ``banking entity'' and 
they narrowed the definition of ``covered funds.'' However, I 
will give you one example that is causing a great deal of 
concern.
    In ``covered funds,'' registered investment companies, what 
we would think of as mutual funds, retail mutual funds were 
explicitly exempted where they had not been in the proposed 
rule. However, they are not exempted under the definition of 
``banking entity.'' So, in effect, you already have a conflict 
now where, on the one hand, mutual funds are not treated as 
covered funds under the funds section, but they are captured by 
way of being defined as a banking entity if they are affiliated 
with a bank, which many mutual funds are.
    So, again--
    Mrs. Maloney. It just seems like it could be an issue which 
could be handled by the regulators. And if a nonfinancial 
subsidiary doesn't do any proprietary trading or investing, why 
should anyone have to worry about it?
    Mr. Bentsen. I think what it is indicative of--a couple of 
points of what it is indicative of, is the broadness and 
complexity of this rule and the fact that today it is trust 
preferreds, tomorrow it is CLOs, the next day it is 1940 Act 
registered funds, that we are going to find these things going 
through. And it is going to take a lot of work, hence the 
reason for Congress to continue to play a very active role in 
this process.
    The second point--and I want to respond to Professor 
Johnson--is that regardless of what everyone thinks the intent 
was or wasn't, this rule, by practice and by the way it is 
written, has an extremely broad impact. It doesn't just affect 
the top five largest institutions; it affects any banking 
institution that has--anybody who is affiliated with a banking 
institution. So it has a very broad impact. And the rule is 
written as such to indicate that it has that broad reach.
    Mrs. Maloney. If an affiliate isn't doing proprietary 
trading, then it wouldn't affect them.
    Mr. Bentsen. But, Congresswoman, with all due respect--
    Mrs. Maloney. I would say that this panel--certainly many 
of my colleagues and I, if there is any adjustment that needs 
to take place, we will be a strong voice in helping that 
adjustment and certainly shielding community banks and regional 
banks and credit unions that did not cause the crisis.
    I have one other question. Mr. Volcker, in his written 
statements--and I would like to put his statement in the 
record. I thought it was excellent.
    Chairman Hensarling. Without objection, it is so ordered.
    Mrs. Maloney. He said that the rule will change--and I am 
quoting from his statement--the tone at the top, because it 
requires CEOs to certify that they have adequate compliance 
procedures in place.
    And I would like to ask anyone to comment. Do you think 
that--okay, Mr. Ganz, would you comment on if you think that 
will be--and Mr. Robertson?
    Mr. Ganz and Mr. Robertson and Mr. Johnson, you all had 
your hands up.
    Chairman Hensarling. Very quickly, because the time of the 
gentlelady has expired.
    Mr. Robertson. I think that is a basic fiduciary duty of 
any bank CEO, to fully comply with all the regulations and also 
to appropriately manage risk.
    Chairman Hensarling. The time of the gentlelady has--
    Mr. Bachus. Mr. Bentsen was also trying to respond to her 
question about whether community banks will be affected.
    Chairman Hensarling. I understand that, but the time of the 
gentlelady has expired.
    And the chairman emeritus happens to be next in the queue, 
so the Chair now recognizes the gentleman from Alabama, our 
chairman emeritus, for 5 minutes.
    Mr. Bachus. I will answer like Mr. Bentsen would say. The 
community banks are affected.
    Mr. Bentsen. Congressman, I would just say, and in response 
to Congresswoman Maloney, the point is that all of these banks 
are captured, and it is not a question of whether they are 
doing something that is prohibited. It is the fact that they 
are subject to the compliance requirement on what they are 
allowed to do as Congress intended in the statute, but they 
have to go through all of these hoops of this new compliance 
regime to do what Congress said they could do under the 
statute.
    Mr. Bachus. Thank you.
    And could I get that put back on my time? That was in 
response to her question. But it needed to be said.
    Chairman Hensarling. I am afraid not.
    Mr. Bachus. Thank you.
    In Mrs. Maloney's opening statement, she again talked about 
how proprietary trading was central to the financial crisis. 
Professor Johnson, I think you sort of agreed with that. She 
quoted a GAO report that she says claims that it was central, 
but if you read it, it says it wasn't central, it says it 
wasn't a cause of the financial crisis. So, I am going to 
introduce that.
    This whole Volcker Rule is a response to the financial 
crisis, because people keep saying that it was caused by 
proprietary trading.
    Professor Johnson, you talked about mortgage-backed 
securities, and you said that was proprietary trading. But, it 
is not. The regulators encouraged the banks to hold mortgage-
backed securities long-term. That wasn't proprietary trading.
    None of the five banks--really, the banks didn't fail 
because of proprietary trading. Even Paul Volcker said--and I 
will quote him, ``Proprietary trading in commercial banks was 
not central to the crisis.'' Secretary Geithner said, ``If you 
look at the financial crisis, it did not come from proprietary 
trading activities.'' Even Raj Date of the Consumer Financial 
Protection Bureau--he was the deputy--was for Dodd-Frank. He 
said, similar to what Mr. Bentsen said, ``The Volcker Rule is a 
solution to a non-problem.''
    Professor Johnson, you are the Democratic witness. I think 
what you are responding to is too-big-to-fail. I think that is 
why you want the Volcker Rule. Am I correct?
    Mr. Johnson. Too-big-to-fail is a very important and 
persistent problem, Congressman, but irrespective of the 
approach that you prefer to tackle it, I would still recommend 
some version of the Volcker Rule.
    Mr. Bachus. Why? If a bank--if they trade and lose money, 
should the government prohibit that if there is no taxpayer 
interest?
    Mr. Johnson. If a small trading house takes speculative 
proprietary bets and loses and goes out of business, I think 
that should hopefully be of no concern to any of us. But it 
does interact with size, scale, complexity, and systemic 
consequences, some of which we can anticipate and some of which 
catch us unawares every time. So it is that systemic impact 
that creates the implicit government support, including the 
support from this and previous Congresses.
    Mr. Bachus. I think that is what you are afraid of. I think 
you are afraid that they are still too-big-to-fail, even though 
the Administration--you and I agree that Dodd-Frank didn't end 
too-big-to-fail. You can still have systemic risk.
    But I think what you really want to do, and tell me if I am 
wrong, is you want to break up these big megabanks. Am I 
correct?
    Mr. Johnson. Congressman, if you were willing to make them 
small enough and simple enough so they could all fail, and go 
through bankruptcy without causing any systemic consequences, 
then, yes, I would say, let them get on and run their 
businesses--
    Mr. Bachus. And I believe that is your motivation, is you 
want to break these banks up.
    And let me say this. I have 20 seconds. The problem I see 
with that is we are in a global economy and they are global 
megabanks, aren't they?
    Mr. Johnson. There are some highly subsidized socialized 
banks coming from other countries. That doesn't mean we should 
emulate--
    Mr. Bachus. But, they are global.
    Mr. Johnson. There are some global banks--
    Mr. Bachus. And they can move their proprietary trading 
somewhere else, and we can't prevent that.
    Mr. Johnson. If they move it outside of where it causes 
problems for our economy, perhaps we shouldn't be concerned. 
But if it is a bank like JPMorgan Chase, it is going to lose--
    Mr. Bachus. But no other country has adopted the Volcker 
Rule.
    Mr. Johnson. If they are going to lose big in London, 
Congressman, and that is going to affect the bank holding 
company in the United States, then we have to worry about--
    Chairman Hensarling. The time--
    Mr. Bachus. You are a British American. Britain has not 
passed a Volcker Rule, nor any other country, and they are not 
going to.
    Chairman Hensarling. --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 want to thank the panel for their testimony.
    I have to be honest. This stuff, for me, I kind of always 
feel like I am up to my nose in it, because it is tough stuff. 
It might be easy for all you guys; you are all a lot smarter 
than I am. I have spent most of the week trying to figure out 
how many points I can get out of Ed Perlmutter for the 
Patriots-Broncos game. That is about as complex as I can get.
    And it is kind of interesting, when I hear the complaints 
about a complex rule, it presumes that CBOs and CLOs and CDO 
TruPS and CDO squares are simple. They are some of the most 
complicated financial instruments in the history of mankind, 
and you expect simple rules to kind of keep them in check. I 
don't get it. You have a complicated, difficult, always 
advancing, always changing financial services market. You are 
going have to have complex rules to try to catch up--never get 
ahead, but just to catch up.
    And, honestly, it would help me a lot if anybody ever came 
to talk to me about a complex rule who didn't always come to me 
to complain about any rule. I would love to be here at a panel 
with people subject to regulations, who told me, ``That is a 
fair and reasonable regulation.'' I have never heard that in 
the 14 years I have been here.
    So I will, kind of, start off with difficult stuff to 
comprehend.
    Mr. Robertson, your $1 trillion number, it is a big number, 
a scary number, but I have some other numbers. GAO says that 
the financial crisis wiped out $9 trillion of assets. GAO says 
that it reduced economic output by $12 trillion. The TARP that 
we passed was just short of a trillion dollars. The Federal 
Reserve increased its balance sheet by a trillion and a half. 
All total, that is $23.2 trillion that were either lost or put 
on the line because we didn't have sufficient regulations at 
the time.
    Now, I don't know about anybody else, but my concern is 
that we have adequate regulations going forward. I totally 
agree, and I have been saying from day one, this regulation, 
all regulation--I know that the other side likes to pretend 
that we are all for overregulation. That is my platform: I am 
here to kill business because I hate jobs. That is ridiculous.
    We are looking for balanced regulation, and not for the 
normal players but to try to somehow cow the outliers. Now, 
whether this particular regulation hits the mark or not will 
tell over time, and if it doesn't, we will amend it, like it 
has already been amended even before it is implemented.
    Mr. Bentsen, you pointed out some very interesting comments 
that might be of concern to me as I check them out. And if they 
work out, if I agree with them, which I tend to on their face, 
I will try to help you address those. Those are fair points.
    But for me, it is really only about one thing. As I see it, 
the whole crisis was caused because we had the financial 
institutions, the biggest ones, taking risk that they had 
insufficient capital reserves to cover. That is the bottom 
line. I don't care that somebody is gambling their own money, 
and if they lose it--but when they do it in a way that then 
puts my mother's pension at risk, that is a problem, and we 
have to do something about it.
    So, yes, is it any surprise, is it wrong that we are asking 
some of the people who were making some of the riskiest bets to 
increase their capital reserve? Now, whether $1 trillion is the 
right number, that is a fair question.
    Mr. Robertson, do you think that we should actually ask 
anyone to have any capital reserve ever?
    Mr. Robertson. Absolutely.
    Mr. Capuano. So now the question is, how much?
    Mr. Robertson. Exactly.
    Mr. Capuano. And that is a fair question. Is $1 trillion 
too much? Maybe. What is the right number? Half a trillion? 
$700 million? I don't know. But that is what we are here for, 
to try to get it right.
    The one thing I know without question, without doubt, 
without debate is that it was insufficient in 2008. Does anyone 
disagree with that? Do you think that we had sufficient capital 
requirements in 2008? Because if you do, please raise your 
hands, because I would like to hear more.
    So we all agree that they were insufficient and we have to 
increase them. How much? Anybody here have the answer? Because 
if you do, I want to hear it. I am not sure.
    Mr. Johnson. Congressman, I think they should be increased 
by much more than currently proposed.
    Andrew Haldane of the Bank of England recently said that 
the way to think about capital on a global basis in the largest 
financial institutions is that they were--capital requirements 
on a leveraged basis were between 1 and 2 percent. So you could 
be 98 percent leveraged, 98 percent debt or more. Now, under 
this Basel III agreement as applied in the United States, we 
will get slightly over 3 percent capital requirement, so you 
can be nearly 97 percent debt.
    I don't think that is enough to withstand the kinds of 
risks that you are identifying.
    Mr. Capuano. So I should continue being nervous, which I 
guess I am.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, the 
Chair of our Housing and Insurance Subcommittee, Mr. 
Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. And I appreciate 
the panel being here.
    I think my biggest concern, whether it is the Volcker Rule 
or all of these regulations is, one, the lack of cost-benefit 
analysis that has been done. Because ultimately, who is going 
to pay for these increased costs are the people who are at the 
bottom of the chain here, and that is the customers of, for 
example, Mr. Funk's bank.
    Mr. Funk, how long have you been in banking?
    Mr. Funk. Excuse me?
    Mr. Neugebauer. How long have you been in banking?
    Mr. Funk. This is my 34th year.
    Mr. Neugebauer. Yes. It has changed a little bit in 34 
years, hasn't it?
    Mr. Funk. That is a fair statement.
    Mr. Neugebauer. Yes. I have been a banker, and I have been 
a borrower, and over the years, how I did financial 
transactions changed a lot.
    And one of the things that I was concerned about is that as 
your bank has grown, you have had customers grow, as well. And, 
at some point in time, those customers grow to the point where 
you are maybe not able to handle all of their financial needs.
    And so, then, if you are doing your job, and I am sure you 
are, your job is to create ways to--free up ways to continue to 
lend to them or make sure that your customers' credit needs are 
fulfilled. Is that correct?
    Mr. Funk. That is correct. And what we usually try to do in 
those instances is bring other community banks into the group 
and satisfy them, and these customers still remain our 
customers.
    Mr. Neugebauer. And, in some cases, you can free up capital 
in your bank by taking advantage of some of the products, for 
example, that Mr. Ganz has been talking about, where 
securitizing, say, auto loans or packaging some commercial 
loans, whether you are doing it by bank participation or by 
securitizing those. Is that correct?
    Mr. Funk. That is correct.
    Mr. Neugebauer. Yes. I think the question that I have is, 
based on your initial blush of looking at how all of the 
capital markets are--because the direct lending from banks to 
businesses is actually declining. So how do you see the Volcker 
Rule impacting your ability in the future to be able to be 
creative with some of your customers?
    Mr. Funk. I think that is a great question. And I think, to 
go back to the point that before December 10th I didn't pay 
much attention to the Volcker Rule because I was told it didn't 
affect community banks, we understand the Volcker Rule is the 
law. We understand that it was designed to reduce or eliminate 
proprietary trading for systemically important banks. There is 
no way you could make an argument that MidWestOne Bank in Iowa 
City is systemically important, and yet we have seen the 
effects over the last 30 days, and it wasn't been too pleasant 
for some of our people and our board as we have tried to 
grapple with the new rule.
    And, again, we thank you for all the support in getting 
that changed. It is fair to say that things usually don't get 
changed that quickly. So the fact that you were willing to 
weigh in is very good, but what happens the next time if we 
can't get a decision that quickly and we have to recognize 
those losses? So it is the unknown, Congressman.
    Mr. Neugebauer. Thank you.
    Mr. Bentsen, one of the things that allows financial 
institutions to do some of the kinds of lending that they do 
today is being able to hedge some of those risks and to balance 
the risks that they are taking as a financial institution.
    And I think you kind of alluded to the fact that this 
Volcker Rule could impact the banks' ability to really actually 
effectively manage their risk, which is kind of 
counterproductive to what, hopefully, regulation is about. 
Regulation is about stabilizing the ability of a financial 
institution to manage their risk so that they are not 
systemically risky.
    But in many cases, if we are going to limit their ability, 
won't that have an impact on them?
    Mr. Bentsen. That is a good point, Congressman. Time will 
tell. And, I think some time ago there were five or six 
regulators sitting at this table who were talking about the 
importance of hedging as a risk-mitigating regulatory tool. And 
I think the regulators certainly had that in mind when they 
were trying to write this rule.
    And to Professor Johnson's point, the proposed rule that we 
dealt with was one thing, and we had to look at that as to what 
that might be as a final rule. We now have a new rule with 900-
plus pages and then we try to interpret that.
    So time will tell as the conformance period ends, firms 
begin to implement, and they understand what the compliance 
rules are, their compliance and enforcement liability. Then I 
think we will see the impact as it relates to hedging, market-
making, and other permitted activities.
    Mr. Neugebauer. But I think we can all agree that because 
of this new rule, pricing will have to be put in place for the 
regulatory risk of whether you are in compliance are not and 
all of the steps--
    Mr. Bentsen. It won't be free, you are right.
    Mr. Neugebauer. Yes.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Lynch, for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    I want to again thank the panelists for your help with 
doing our work.
    And I do agree, the specifics of this rule are complex, but 
I think at its core is a very simple idea, that banks of any 
size should not be allowed to use taxpayer-backed support to 
make risky or reckless bets for their own profit. That is the 
basic idea underlying the Volcker Rule.
    And, to that end, the Volcker Rule prohibits banks with 
FDIC-insured deposits or access to the Fed's discount window 
from engaging in risky proprietary trading. We just believe 
that is not something that the United States Government needs 
to be subsidizing. That is the simple idea behind the Volcker 
Rule.
    Now, this should be something we can all agree on, but 
unfortunately, I think this commonsense reform has been fought 
tooth-and-nail by Wall Street banks and their allies. And I 
understand why. We all understand that proprietary trading is 
incredibly profitable for Wall Street banks. But just because 
something makes Wall Street a lot of money doesn't mean it is a 
good thing for the American people.
    And let me take a moment just to address one statement that 
has been made repeatedly, including today--I heard repeatedly 
that proprietary trading did not cause the financial crisis. 
And there are all kinds of people cited as saying that. But 
let's go back to the facts here.
    The investment bank Bear Stearns, for starters, started its 
nosedive when it was forced to bail out two of its hedge funds 
that had made highly leveraged proprietary trades in subprime 
mortgage securities. That is when Bear Stearns went in the 
toilet. Less than a year later, Bear Stearns was sold for 
pennies on the dollar to JPMorgan to avoid bankruptcy. That is 
example one.
    Citigroup was forced to bring 7 investment funds it 
sponsored with big proprietary bets in the subprime mortgage 
market onto its balance sheet, assuming $58 billion in debt. 
And less than a year later, Citi received multiple bailouts, 
including the TARP bailout from the Federal Government--which I 
voted against--without which it would not have survived.
    Finally, Lehman Brothers, remember them? They made a huge, 
risky proprietary bet in the same subprime mortgage market 
based on their analysis that the bets that they made would be 
profitable for the bank--for the bank, not for its customers, 
but for the bank. In September of 2008, when those bets went 
south and Lehman could no longer get funding for its day-to-day 
operation, it was forced to file for bankruptcy.
    These massive proprietary bets made in the subprime 
mortgage market sent shock waves through the market and drove 
our economy to the brink of collapse. Those are just the facts. 
Proprietary trading and sponsorship of exotic investment funds 
that enabled proprietary trading by banks were absolutely a 
leading cause of the financial crisis. And I applaud the 
regulators for putting a strong Volcker Rule in place to try to 
prevent this type of risk-taking going forward.
    Now, I heard from the panelists, and I can't remember who, 
I think it might have been Mr. Robertson who complained that 
there wasn't enough comment period on this rule. But just for 
the record, there were 18,000 comment letters which were 
submitted to the regulators in coming up with this rule. We had 
111 stakeholder conferences. We began the discussion of Section 
619 in July 2010. It took 3\1/2\ years to talk about it. We 
talked this thing to death.
    So, I just bristle at the idea that we did not spend enough 
time on this and that the financial industry did not have 
enough input. There was, from the outset, an effort to either 
kill it or delay it until it died a slow death.
    So, look, we know why folks want to kill the Volcker Rule, 
but, in all honesty, I think it is a good step. Can we tweak it 
a little bit, and like we did with the trust preferred 
securities (TruPS), can we make sure that the unintended 
consequences, if any, are mitigated? Sure, we can do that. But 
make no mistake: We need this.
    And if we are talking about job creation, and we are--the 
title of this hearing is about how the Volcker Rule might hurt 
job creation--let me go back over the effect on job creation of 
not having the Volcker Rule.
    Let's go back to September of 2008, when this started in 
earnest. We lost 435,000 jobs that month; the next month, 
472,000 jobs; the next month, November, 775,000 jobs were lost; 
December, 705,000 jobs were lost; the next month--there is 
nothing there that dipped below a loss of 700,000 jobs for the 
next 6 months. So that is the impact on job creation of not 
having the Volcker Rule.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
the Chair of our Oversight and Investigations Subcommittee, Mr. 
McHenry, for 5 minutes.
    Mr. McHenry. I want to thank my colleague on the other side 
of the aisle for bringing up those issues. It sounds like it is 
not really Volcker that he is talking about, because Bear and 
Lehman didn't have a single deposit; they are not depository 
institutions.
    So the concerns that he raises are genuine ones and 
concerns that we have raised in a series of hearings on too-
big-to-fail in the Oversight Subcommittee that the chairman has 
directed. And the concerns we--
    Mr. Lynch. Will the gentleman yield?
    Mr. McHenry. --raise as a question of this is the scheme 
that Dodd-Frank puts in place that does not end too-big-to-
fail.
    Mr. Johnson, would you agree with that concern we have, 
that Dodd-Frank does not end too-big-to-fail?
    Mr. Johnson. Too-big-to-fail is still with us, Congressman. 
But, unfortunately, all of what we have previously known as 
investment banks have now converted to become bank holding 
companies.
    Mr. McHenry. Exactly. And we have talked about that.
    Mr. Johnson. And that is an important part of the issue. 
That is why I agree with Mr. Lynch that these things are 
bundled together on a forward-looking basis. Whatever you think 
happened in the crisis--
    Mr. McHenry. Right.
    Mr. Johnson. --it is all bank holding companies now.
    Mr. McHenry. But Volcker actually doesn't end up protecting 
the taxpayer, which is a genuine concern I have, that 
institutions, private-sector institutions, when they fail, the 
taxpayers are on the hook for it.
    And, look, we have had good conversations about this, as 
well. But the question I have for the panel today is: Can you 
put a dollar amount on the cost, the economic consequence of 
Volcker as is now set in stone by the regulators?
    Mr. Bentsen, do you have a dollar amount?
    Mr. Bentsen. No, sir, we can't, because we are--
    Mr. McHenry. Okay.
    Mr. Funk, do you have a dollar amount?
    Mr. Funk. No, sir.
    Mr. McHenry. All right.
    Professor Johnson?
    Mr. Johnson. Yes, Congressman. I thinks it is part of what 
is being displayed on the wall here. According to the 
Congressional Budget Office, the effect of the financial crisis 
is to increase our debt over the cycle--
    Mr. McHenry. Sure.
    Mr. Johnson. --by about 50 percent--
    Mr. McHenry. No, no. I am asking--
    Mr. Johnson. --five-zero percent of GDP, half of GDP, call 
that $8 trillion, because of the financial crisis and the depth 
of the recession that created.
    Mr. McHenry. So Volcker--
    Mr. Johnson. The Volcker Rule addresses precisely the way 
in which these largest bank holding companies, as they are now, 
can take risk, can disrupt the economy. Their ability to do 
this--
    Mr. McHenry. I understand. I have limited time, and the 
chairman is using the gavel today, actually, very well. I am 
glad I got to ask a question before noon.
    But to your point, Professor Johnson, for me as a 
policymaker, I can't simply say, well, Volcker just saved us $8 
trillion.
    Mr. Ganz, do you have a dollar amount?
    Mr. Ganz. The dollar amount I have is $7 billion if the 
market moves 10 percent. It could be greater than that. But 
that is the amount that it would impact the CLO market unless 
there is some remedy very, very quickly.
    Mr. McHenry. Okay.
    Mr. Robertson?
    Mr. Robertson. There is absolutely no way to put a dollar 
figure on it.
    Mr. McHenry. Okay.
    So part of the concern is this: We have as a matter of the 
Securities and Exchange Commission written policy that they 
will have a cost-benefit analysis before they codify rules. We 
have had a lot of good ideas across the whole panel here today 
on ways to improve the Volcker Rule as it is written, if it is 
going to be there. There are some genuine concerns that we can 
mitigate the downside on this. And yet, at the same time, if we 
had an interim final rule, we could resolve these things 
without--in realtime market consequences in the way that, in 
the rush of these five regulators to get things done, they have 
done.
    And the rush was to get the rule done, codified, and 
rolling, and then try to tweak it in realtime. The TruPS issue 
is a great example of this.
    So I have an additional question. Mr. Bentsen, who is the 
primary enforcer of Volcker?
    Mr. Bentsen. There is not a primary enforcer, in our view. 
There are five enforcers, and maybe six if you add FINRA to the 
mix, which I think ultimately the SEC will look to FINRA to do.
    Mr. McHenry. Mr. Funk, as a bank, you have plenty of 
regulators, right?
    Mr. Funk. We are a publicly traded bank, so, for us, we 
have three: the SEC; the FDIC; and the Federal Reserve.
    Mr. McHenry. Okay.
    So, Professor Johnson, in this final moment I have, as we 
said, too-big-to-fail is still with us. You have been an 
advocate of simplicity--simple institutions, simple 
regulations, what is happening in Great Britain and what Andy 
Haldane has done in terms of this discussion on simplicity.
    This is a complex rule. Do you think that there is a better 
approach to this? What you said is this provides a ``good 
chance'' that it will reduce risk. You are really not willing 
to go on the line and say this absolutely will reduce risk. You 
are saying it has a good chance.
    Chairman Hensarling. Briefly.
    Mr. Johnson. I think it depends on the implementation. I 
worry a lot about this number up here. And I don't understand, 
Congressman, why you, with your justified concerns about this 
number, cannot draw the link, the very obvious link, between 
the depth of financial crisis in the future and the--
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Georgia, Mr. 
Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. I appreciate 
it.
    The one concern I have about the Volcker Rule--first of 
all, let me say the Volcker Rule is needed. We should not be 
using proprietary trading. It could form a very unstablizing 
impact.
    But there may be an unintended consequence here, and I want 
to examine that. And that is in the international arena and how 
we are placing our economic system in a weakened position if we 
do not look very carefully at the competitive situation that we 
place our banking--and not just our banking. Our banking is 
just one part of it. We have companies and businesses. Ours is 
not a one-economy-of-the-United-States economy. So it is very 
important that our banking system not be put in an 
uncompetitive edge when it comes to dealing in the world 
markets.
    Now, here is what I am talking about. I am a member of the 
NATO Parliamentary Assembly. I serve on the Economic Security 
Committee. That is an extraordinary committee. Two or three 
times a year, we meet over in Europe, and we deal with--75 
percent of the discussion is on what is happening in the United 
States. So, let me just start with that for a moment.
    Mr. Bentsen, we have a situation here where there is an 
exemption for foreign banks and their affiliates from the 
Volcker Rule as long as they are doing business outside the 
United States and are not in any way controlled by a U.S. bank. 
But that is over in Europe. Meanwhile, we have the European 
Union and we have Great Britain who are forming their own 
Volcker Rule.
    So, in the midst of this, we are placing our economic 
system and our banking system to operate in this environment. 
So my point is, is there an area here where there is any 
unforeseen danger to our impact, our position as the leader in 
the economic activity of the world? I am very concerned about 
that. And I have, sort of, a viewpoint, because I have to deal 
with these other nations.
    And not only that, the European Union is just one, and 
within that are 28, 30 other nations, all with their own. And 
on top of that, we have McDonald's, we have Google, we have 
Coca-Cola, we have Delta, we have Deere tractor, Caterpillar. 
We have huge companies that do business all around the world.
    So I think it is very important to get an answer to this 
question: One, is there something within this Volcker Rule, 
within the environment and the reaction to it that I just 
articulated about Europe and about Great Britain, is there 
something with the exemptions that we are giving them here and 
the complexity of all of that could put the United States 
economy in a more vulnerable position?
    Mr. Bentsen, will you take a crack at that first?
    Mr. Bentsen. Congressman, yes, that is a very good 
question.
    First of all, the Europeans, either through the EU with the 
Liikanen study and potential proposals coming after that, the 
Vickers report, which is now being implemented in the U.K. 
banking law, activities in Belgium, Germany, and France, are 
all very different than the Volcker Rule. None of them ban 
proprietary trading, for starters. They look a lot like the 
Gramm-Leach-Bliley construct that we have had the United 
States.
    Second of all, you make a very good point, because while 
the rules as they relate to foreign banking entities that are 
captured by Volcker in the United States--and we represent many 
of those in our membership--the rules are murky as to what they 
can do outside the United States, we believe the biggest 
concern to the United States is the impact on the depth and 
liquidity of U.S. capital markets.
    While we still are dominant in that field, we don't have 
the vast majority that we once did. And we expect to see other 
markets grow. But we know the Asians aren't going in this 
direction, because they are trying to develop capital markets 
to sustain their growing economy and move away from a pure bank 
financing operation. The Europeans are trying to look at their 
universal bank model and, again, how they get away from just a 
pure bank balance sheet, or not a pure, but a heavily bank-
balance-sheet-dependent, and have more capital markets. 
Whereas, in the United States, we run the risk of either 
pushing people out of the capital markets or reducing the depth 
and liquidity in our markets. And that really affects the 
people who use it, and those are the issuers and the investors.
    Mr. Scott. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Campbell, Chair of our Monetary Policy and Trade Subcommittee, 
for 5 minutes.
    Mr. Campbell. Thank you, Mr. Chairman.
    There has been a lot of discussion so far about what is in 
the Volcker Rule. I want to talk about something that is not in 
the Volcker Rule which seems to be inconsistent to me.
    My understanding is that, whereas the Volcker Rule 
prohibits proprietary trading in private the bonds--so for the 
private entities. It does not do so for sovereign debt and for 
public debt, sovereign debt of other countries and for public 
debt in the United States.
    Now, I am from California, and where I sit, it would seem 
to me that it would be less risky to have proprietary trading 
in AAA-rated corporate bonds than in the municipal bonds of any 
number of cities in California or of any number of sovereign 
debt from any number of countries in Europe.
    Is this an inconsistency? Do any of you see that it is okay 
to do all the trading you want in what are clearly some very 
risky U.S. Government and non-U.S. sovereign debt?
    And Mr. Robertson is, like, champing at the bit on this.
    Mr. Robertson. Yes, I do find it somewhat interesting that 
the municipal debt has been excluded. And if you think about 
it, it is really the public sector standing up and saying, we 
think if you allow technically market-making but not trading, 
that is going to reduce our access to credit.
    So it is curious to me that we have decided that 
proprietary trading has no social good or value in creating 
liquidity and creating markets, but, with their own actions, 
the municipalities have shown they don't believe that to be 
true.
    Mr. Campbell. All right. So it is a complete inconsistency, 
in your view.
    Other thoughts or comments on that?
    Professor Johnson?
    Mr. Johnson. My understanding, Congressman, is that foreign 
debt denominated in a foreign currency is not treated the same 
way as U.S. Treasury debt. The foreign governments wanted that, 
they requested it, and they said and some private-sector people 
said there will be dire consequences if they didn't get it. But 
the treatment--they did not get--Greek bonds are not being 
treated the same way as U.S. Treasuries under the Volcker Rule.
    Mr. Campbell. No, but I think through a foreign subsidiary 
they can, though.
    Mr. Bentsen. Congressman--
    Mr. Campbell. Yes?
    Mr. Bentsen. Yes, if you are a foreign bank operation in a 
home country--so a Barclays, who is a U.K. bank, can be 
proprietary trading gilts through the--
    Chairman Hensarling. Mr. Bentsen, if you could talk a 
little closer to the microphone there?
    Mr. Bentsen. Yes. Sorry.
    There is somewhat of an exemption that was expanded as it 
relates to foreign banking operations. However, importantly, a 
number of U.S.-domiciled institutions are also primary dealers 
in foreign sovereigns like gilts, like JGBs, and others, and 
they are not afforded that treatment.
    Mr. Campbell. Mr. Johnson?
    Mr. Johnson. I think you should worry, Congressman, 
precisely about where there is either a residual responsibility 
to the U.S. taxpayer, hence the debt number, or an impact on 
the U.S. economy from some sort of investment, speculative or 
otherwise, in exactly sovereign bonds, foreign sovereign bonds. 
Because those are much more risky than commonly perceived.
    So, to the extent that this exemption becomes what you 
might call a loophole which poses risk to the U.S. economy, I 
would worry about it. But we also can't take upon ourselves, 
unfortunately or fortunately, the role of regulating all of the 
world's banks.
    Mr. Campbell. Does anyone disagree with the view, on this 
panel, that regardless of where you are on the Volcker Rule, on 
the proprietary trading in general, that the treatment of 
corporate debt and of municipal or government debt, be it in 
this country or--should be aligned?
    Okay. There is no--Mr. Bentsen?
    Mr. Bentsen. Congressman, it is a very interesting 
question. It is a conundrum, no question. I believe 
policymakers, at the time that they put in the restriction on 
proprietary trading, obviously had concerns that restriction 
could have negative consequences for the U.S. Government debt 
market, for the--
    Mr. Campbell. To say somehow it will have consequences on 
municipal but it won't have consequences on corporate, that 
makes no sense. Clearly it does, and clearly it was intended 
that government is virtuous, and therefore their debt, albeit 
bad, is virtuous, and so it is okay to do proprietary trading 
there. It just seems wrong to me.
    Mr. Johnson?
    Mr. Johnson. Congressman, you are obviously right. 
Historically and forward-looking, there are risks in both 
municipal debt and in corporate debt, and sometimes the risks 
occur in one sector and sometimes in the other sector, and 
sometimes they affect the economy.
    I would separate out U.S. Treasury debt. I would treat U.S. 
Treasury debt separately because that has different risk 
characteristics. But I think to the extent that you are 
concerned about there being risks and corporate risks in 
municipal debt, that is obviously what we have seen in the past 
and what we will see in the future.
    Mr. Campbell. Thank you all very much. I yield back the 
balance of my time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. I am wondering a bit why the Volcker Rule 
applies to debt instruments such as bonds at all. If a bank 
makes a loan to a business, that is what they are supposed to 
do. If I understand the Volcker Rule correctly, if they buy 
corporate bonds of a similar business, that is restricted. The 
disadvantage of bonds is that your profits and loss are readily 
apparent to the world every day, whereas if you make a loan to 
a business, you assume the same risks, but you can keep them 
hidden. Nobody knows what that loan is worth this day or that 
day.
    I wonder, Mr. Ganz or others, do you have a comment on 
whether the Volcker Rule should apply to debt instruments?
    Mr. Ganz. Sure. The idea behind the section that is on 
ownership interest was to take what looks like or is called a 
debt instrument, but really has indicia of ownership like an 
equity. So, it has some upside. It gets part of the profits. 
But for--
    Mr. Sherman. You are talking about convertible debt?
    Mr. Ganz. No, I am talking--it is not specific. It just, 
for example, has the right under the terms of the interest to 
receive a share of the income, gains or profits of the covered 
funds.
    Mr. Sherman. So, participating debt.
    Mr. Ganz. Right.
    Mr. Sherman. So the Volcker Rule applies only to debts that 
participate in profit, not straight debt instruments.
    Mr. Ganz. Exactly.
    Chairman Hensarling. Mr. Ganz, could you bring your 
microphone a little closer, please.
    Mr. Ganz. I'm sorry. The problem for TruPS and the problem 
for CLOs is that one of the seven indicia of ownership is 
really not an ownership indicia, it is a debt protection. And 
that is what is going--
    Mr. Sherman. What is that one out of seven?
    Mr. Ganz. It is the ability to remove or replace a manager 
for cause. So if the manager gets arrested or does something in 
violation of the indenture, that is a protective characteristic 
of a lot of debt instruments.
    Mr. Sherman. Let me move on. But that seems to be trivial, 
and I would think they can modify that.
    What about the ``Hotel California'' rule, that if you are 
covered by the Volcker Rule, and then you are no longer a 
commercial bank or own a commercial bank, you are still covered 
by it? Does anybody see a need to let people out of the hotel a 
few years rather than forever?
    Mr. Johnson. Congressman, the problem is, of course, that 
once you extend this protection of the bank holding company 
status to the investment banks, which was done in the fall of 
2008, Goldman Sachs and Morgan Stanley became bank holding 
companies, that has come historically with a lot of 
restrictions. We will see what happens going forward.
    Certainly Goldman, and I think also Morgan Stanley, said at 
some point subsequent to that, if you are going to impose the 
full restrictions of bank holding company status on us, then we 
don't want to be a bank holding company anymore, we will go 
back to being an investment bank. In other words, they want 
full access to the Fed when they need it, but not when they 
feel it--
    Mr. Sherman. There is little assurance that we would give 
it to them again. But if we apply the Volcker Rule to any 
corporation that has been ever a bank holding company, we could 
also apply it to any corporation that might in the future 
become a bank holding company. Yes, Goldman went out and 
acquired a bank and became a bank holding company. So could 
Apple Computer tomorrow.
    Mr. Johnson. Congressman, no. You should worry about--
    Mr. Sherman. So could many others.
    Let me move on to one other issue, and that is we saw with 
AIG that you can have a highly risky parent owning subsidiary 
corporations. As long as the subsidiaries are properly 
regulated, they survive fine. Do we need to apply the Volcker 
Rule to bank holding companies, or do we just need rules to 
protect the banks themselves? What risk is there to the U.S. 
taxpayer as long as the bank subsidiary is safe?
    Mr. Funk. It is my understanding, Congressman, that it does 
apply to bank holding companies because the Federal Reserve is 
one of our regulators, and they--
    Mr. Sherman. Yes, I am asking whether from a public policy 
standpoint that is necessary.
    Mr. Johnson. But, Congressman, remember, it was AIG 
Financial Products. It was a subsidiary of the holding company 
in London that had the very big losses. So this wasn't a bank 
holding company situation.
    But to take your analogy--
    Mr. Sherman. But the regulated subsidiaries did fine. The 
unregulated entities that did not face that level of U.S. 
insurance--
    Mr. Johnson. There were huge losses to the group, and it 
was an impairment to the credit of everyone in that group 
because of what had happened in this one unregulated 
subsidiary. So I think going at the bank holding company level 
makes a lot of sense.
    Mr. Sherman. Mr. Bentsen?
    Mr. Bentsen. I would just say, Congressman, regardless of 
Volcker, AIG is now captured under the systemic designation, 
and so they are regulated at the holding company level, across 
which they wouldn't have been before.
    Chairman Hensarling. The time of the gentleman has expired. 
The Chair now recognizes the gentleman from California, Mr. 
Royce, the Chair of the House Foreign Affairs Committee, for 5 
minutes.
    Mr. Royce. Thank you very much, Mr. Chairman. I was going 
to start with Mr. Bentsen with a question based on your 
testimony, your opening statement. You mentioned the need for 
the regulators, the five rule writers, along with the National 
Futures Association and FINRA to, in your words, coordinate: to 
be consistent in their interpretation, in their examination, 
supervision and enforcement of the final regulations.
    Is there enough clarity here for the industry on this 
point? Because what happens if the OCC says certain conduct is 
acceptable, and then the SEC says no? Or, let us say FINRA has 
a different viewpoint. How is that handled?
    This is one of the concerns we have always had about, when 
we did have the financial implosion, there was a lot of 
discussion about trying to set up a world-class regulator that 
could call the shots and make the decisions. You would have a 
primary regulator that could do all of this. This is a very 
different environment. Let me hear your thoughts on that.
    Mr. Bentsen. Thank you, Mr. Chairman, for that question.
    The rule in no way states how the regulators are going to 
coordinate. In fact, it acknowledges that there is not a method 
or protocol for doing that, and acknowledges that there is 
overlap in jurisdiction. So we think it is very lacking in that 
respect.
    We actually in our comment letter suggested that perhaps 
the Federal Reserve should act as the lead regulator since 
Congress gave them the ability to extend the conformance period 
since you were amending the Bank Holding Company Act. But there 
is no mechanism, no protocol, and as a result of that, our view 
is based upon the underlying statute that it really should be 
the role of the FSOC now to step in as they have under their 
mandate to act as the coordinating body to put that in place.
    Mr. Royce. Any other views by other members on the panel on 
this?
    Mr. Funk. Mr. Chairman, I would say from the ABA's point of 
view that we recognize there will be times when there are 
different sets of rules, and we would welcome some way for 
clarity to come to this process where they all apply rules the 
same way, and if that has to come from Congress, we think that 
is a good solution. But we don't think you can have five sheets 
of music, because some of our members are regulated by all 
five, and if the rules are interpreted differently, I think 
that is a real problem.
    Mr. Royce. Let me ask Professor Johnson.
    Mr. Johnson. Sir, I think, Mr. Royce, you raised a very 
good issue. The Financial Stability Oversight Council was 
created specifically to try and bring better coordination 
across these disparate agencies, and the Chair of that is the 
Secretary of the Treasury. And I think the Secretary of the 
Treasury should have a responsibility for making sure that they 
are all on the same--using the same sheet of music. That is a 
very reasonable request.
    Mr. Royce. Rather than the Fed taking the lead on it? Or 
what--
    Mr. Johnson. That is a great question you could debate for 
a long time. The Chair of the FSOC, eventually that job went to 
the Secretary of the Treasury, so that is the logical place to 
ask for better coordination on specifically this kind of issue.
    Mr. Royce. Mr. Ganz?
    Mr. Ganz. We agree. The issue that we are dealing with now 
is a perfect example. We are asking for an FAQ, something 
really, really simple. We have to go to--we apparently have to 
go to five agencies, one of which has really nothing to do with 
the product--loan product at all, the CFTC. So that is 
incredibly cumbersome, and a streamlined process would be very 
helpful.
    Mr. Royce. And lastly, Mr. Robertson, your commentary.
    Mr. Robertson. I think there is the need to better 
coordinate regulation, and we are even seeing regulation coming 
down the pike that is conflicting with other regulations. So it 
is creating a lot of complexity for all constituents in the 
financial system.
    Mr. Royce. And then I am sure this issue has been asked, 
but I saw that CalPERS out in California raised the concerns, 
the same issue really about regulation: How do you make sure it 
is consistent? But they are making the point of global 
regulation on this issue. Just a quick commentary on that.
    Mr. Bentsen. Mr. Chairman, as I stated earlier, while other 
jurisdictions in Europe are talking about changes in bank 
structure, going from looking at the universal bank model that 
you know that they have in Europe, Liikanen and Vickers are 
really more in line with what I would call the Gramm-Leach-
Bliley construct than a ban on proprietary trading, the more 
ring fencing or separate operating subsidiaries or affiliates. 
And in Asia, frankly, they are trying to develop their capital 
markets out there, and so they are not moving in this direction 
at all.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Green, for 5 minutes.
    Mr. Green. Thank you, Mr. Chairman. I thank the witnesses 
for appearing, and, if I may, I would like to single out my 
friend, the Honorable Ken Bentsen, who was a U.S. 
Representative from the State of Texas, in fact for some of the 
area that I currently represent. Thank you for appearing today. 
Also, I would like to congratulate you. I think the last time 
you were here you did not hold the title of president and CEO. 
I think you have been promoted since we last saw you. So, 
congratulations. And by the way, I am not going to say 
congratulations and then say, now let's get on with it. I do 
want to talk with Mr. Johnson for just a moment.
    Mr. Johnson, should there be some limitation imposed upon 
banks in terms of proprietary trading, in your opinion?
    Mr. Johnson. Yes.
    Mr. Green. Should they be allowed to use taxpayer dollars? 
Should there be some limitation on tax dollars that are--
consumer dollars that are in banks which are backed by the 
Federal Government? Should there be some limitation?
    Mr. Johnson. Yes, Congressman, there should be some 
limitation on the proprietary trading activities of the largest 
bank holding companies in this country.
    Mr. Green. Is it true that this is what the Volcker Rule 
seeks to do?
    Mr. Johnson. That is absolutely the intention originally of 
Chairman Volcker, and of the legislation from Congress, and 
what the regulators worked on for nearly 4 years.
    Mr. Green. Now, do this for me. We have talked a lot about 
proprietary trading, but we haven't taken just a moment to let 
the public know what proprietary trading really is. Would you 
please give us a definition of ``proprietary trading?''
    Mr. Johnson. Congressman, the term ``proprietary trading'' 
in this context means an investment made by a bank holding 
company for the purposes of betting, for the purposes of 
getting some capital appreciation. They are not buying a 
security in order to sell the security as part of market 
making--
    Mr. Green. Who is to benefit from it? Who is to benefit 
from that trade you that just called to my attention?
    Mr. Johnson. The people making the trade within the bank, 
and executives of the bank, and perhaps the shareholders of the 
bank.
    Mr. Green. Will the customer who has a deposit, will that 
person benefit from the proprietary trading, directly benefit 
from it?
    Mr. Johnson. Assuming that there is no direct positive 
impact on the customer, and, as has been flagged already in the 
hearing, there may be conflicts of interest. There are 
certainly documented cases where it has arisen that the bank 
has been trading in its own interests on a proprietary basis, 
and that has been a conflict of interest with business they are 
doing for the customer.
    Mr. Green. So what we have is this: We have a bank that 
takes some of its customers' dollars, and it uses those dollars 
to engage in this thing called proprietary trading, which is 
using the dollars to benefit shareholders in the bank, the bank 
itself perhaps, but not those customers. Is that correct?
    Mr. Johnson. That is correct. That was the structure, for 
example, of JPMorgan's so-called London Whale proprietary 
trading.
    Mr. Green. And do you think it is unreasonable to want to 
curtail the amount of dollars that are proprietary, that are 
traded in this fashion so that customers don't end up at some 
point suffering? We don't know that it will happen, but it 
could happen. Are we trying to protect the customers of the 
bank?
    Mr. Johnson. We are trying to protect the customers, but we 
are also trying to protect the taxpayer. Remember, Congressman, 
many times these bets don't work out very well. They turn out 
not to be profitable. The expectation is they will make a 
profit, but they are very risky. So sometimes they get the 
negative downside on those bets. They lose. Who is on the hook 
for the losses? If it is a big bang holding company, one of the 
largest, there is a government backstop through the Fed and 
other ways, and that is the taxpayer ultimately.
    Mr. Green. Does the Volcker Rule prevent banks from using 
other capital to engage in proprietary trading?
    Mr. Johnson. The Volcker Rule as designed restricts the 
amount of proprietary trading that banks can do, both using 
customer funds and, for example, going out and borrowing 
additional money with which to speculate.
    Mr. Green. Exactly. But are there other funds that they can 
use?
    Mr. Johnson. Again, in principle there are restrictions on 
their ability to make these speculative investments and 
therefore to fund investments with funding sources of any kind.
    Mr. Green. Is it the opinion of any one of you, dear 
friends, that the Volcker Rule should be completely eliminated? 
If so, would you kindly raise your hand? I have heard your 
testimony, but I just want to make sure I understand. Is there 
anyone who thinks it should be completely eliminated? If so, 
raise your hand.
    Let the record reflect that no one has indicated that it 
should be completely eliminated.
    Mr. Bentsen. Congressman Green--
    Mr. Green. Let me do this. I only have 12 seconds, and I 
will come back to you in about 3 seconds. But quickly now, tell 
me this: Do you think that we can tweak it, we can mend it 
rather than end it, and it can be a benefit to us? If so, would 
you kindly extend your hand? This time, I want affirmative 
action.
    All right. I see three persons. So should I conclude we 
have other persons who don't--
    Chairman Hensarling. The Chair has concluded that the time 
of the gentleman from Texas has expired.
    Mr. Green. Thank you. And, Mr. Chairman, I would now ask 
that my friend be allowed to respond.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Wisconsin, Mr. Duffy, for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman.
    I want to follow up on a question that Mr. McHenry had been 
asking, and it goes to the cost looking forward of Volcker. And 
I guess I would ask you, Mr. Johnson, looking forward, I know 
you pointed to the debt screen, but looking at its impact on 
our economy, impact on our capital markets, do you know the 
cost of that? Do you have an assessment of that cost?
    Mr. Johnson. So the cost that we see now, Congressman--and 
I am looking at the testimony that has been provided to this 
committee and from other industry experts where they predicted 
certain outcomes, and I am looking to see whether these have 
actually transpired. The cost to the economy, which is the way 
you framed it, the right way to frame it, is very, very small. 
Now, there are adjustments still to be made, and that is what 
we are talking about today. But in terms of lost economic 
output, in terms of lost debt for the capital markets, in terms 
of any of the other concrete, specific costs that have been 
floated or suggested hypothetically, I am afraid I don't see 
them. I have not seen independent analysis that really 
quantifies those.
    Mr. Duffy. And I would agree with you. I haven't seen that 
analysis either, because the writers of the rule didn't do a 
cost-benefit analysis, which is one of our concerns. Just like 
the CFTC and the SEC do, so, too, should the rule writers so we 
could actually take a look in a little more in-depth way on the 
cost of this. And I am sure those who are involved in the CLO 
market space will think the consequence of the rule is pretty 
profound.
    Does the rest of the panel think that a cost-benefit 
analysis could have helped hone the rule and left us with a 
better product? Mr. Bentsen?
    Mr. Bentsen. Absolutely.
    Mr. Duffy. Mr. Funk?
    Mr. Funk. Yes.
    Mr. Duffy. Mr. Ganz?
    Mr. Johnson. Congressman, you would also have to include 
the benefits. So it is not the cost, it is the cost and the 
benefits that you need to include, including the reduction in 
systemic risk and what that does for the economy.
    Mr. Duffy. Thank you.
    Mr. Ganz?
    Mr. Ganz. Yes, absolutely.
    Mr. Duffy. Mr. Robertson?
    Mr. Robertson. I would say yes, and I think there are two 
costs and potential benefits. But the costs are not only what 
would this do to the economic activity, but there are also 
costs that are going to increase the financial costs of running 
different entities that will be passed on to consumers and 
corporations.
    Mr. Duffy. Yes.
    Is it fair to say that the securitization markets were 
explicitly excluded from Volcker and Dodd-Frank?
    Mr. Bentsen. Congressman, no, they were not. Securitization 
in some form was excluded, but securitization is captured in 
others, as Mr. Ganz has raised and others have raised. And 
then, of course, there is a whole section of Dodd-Frank that 
deals almost explicitly with securitization, starting with QM 
to QRM to risk retention. And so--
    Mr. Duffy. But with regards to Volcker, Mr. Ganz, were you 
surprised to see CLOs included in the Volcker Rule?
    Mr. Ganz. In the original proposal we were very surprised, 
especially since there was a rule of construction that was 
meant to carve out securitizations, particularly of loans. I 
think the legislative history reflects that this was targeted 
towards private equity and hedge funds. Asset-backed securities 
are neither of those. So, yes, we were surprised to see that.
    Mr. Funk. If I could add, I saw a letter yesterday written 
by the management team of a $20 billion community bank, a large 
community bank, in the Northeast, and that $20 billion bank has 
a $360 million CLO portfolio that they will have to divest. And 
that is part of their core operating business, and that is $360 
million that someone is going to have to borrow someplace else. 
And I don't think--getting to the Volcker Rule, that bank is 
not systemically important, and the CLOs are not systemically 
risky.
    Mr. Duffy. Because CLOs didn't have--they weren't the cause 
or a big part of or a little part of the financial crisis, were 
they?
    Mr. Funk. Not with this bank, no.
    Mr. Duffy. If you will look at our global marketplace, what 
other countries have implemented a Volcker-like rule that we 
can look at and analyze its impact on its capital markets?
    Mr. Bentsen. I would say none.
    Mr. Duffy. Do you guys all agree? There is none, right? We 
are the first ones.
    Mr. Johnson. Is that a bug or a feature, Mr. Duffy? Are we 
supposed to wait for the Europeans to sort out their financial 
system, which is a complete disaster, or to follow one of these 
Asian routes with a lot of State subsidies, or to try to back 
away from the taxpayer support--
    Mr. Duffy. Maybe if we had we done a cost-benefit analysis 
and gone through the appropriate steps to look at the impact on 
our capital markets, we might feel a little more comfortable.
    Mr. Bentsen, is it going to affect America's ability to 
remain competitive, whether it is in our banking space or in 
our small business, medium business, large business space?
    Mr. Bentsen. Our biggest concern is if the regulation, the 
compliance burden of the regulation is so onerous, and we don't 
know yet as we are going through this, that it causes firms to 
pull back from commitment of capital to market-making 
activities, that will affect the debt liquidity of U.S. markets 
to the detriment of the issuers and investors who rely on it.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Minnesota, Mr. 
Ellison, for 5 minutes.
    Mr. Ellison. Thank you, Mr. Chairman, and Ranking Member 
Waters. I appreciate the time. Also, I want to thank all of the 
witnesses today for helping us to understand things.
    I might just ask generally, this may be--the Volcker Rule 
may be unique to the United States, but I would imagine there 
are a lot of other rules that other countries have that you may 
not want, and I doubt you would ask us to follow them. Like, 
for example, how many of you are in favor of financial 
transactions tax?
    Okay. So I guess being first is not always a bad thing.
    Let me ask you a few questions, Mr. Bentsen. Again, thank 
you for your work. Thank you for helping us understand the 
issues today.
    In my district, the Fifth District of Minnesota, we are 
still reeling from the financial crisis. It hit us really hard. 
We had about 35,000 foreclosures in Hennepin County between 
2007 and 2014. Home prices fell 16 percent. Our rental housing 
market is the tightest in the Nation. And I served on this 
committee when we passed the Dodd-Frank bill, and the creation 
of the CFPB, regulation of swaps market, implementation of the 
Volcker Rule are all critical reforms that we tried to put in 
place to prevent that calamity from which average Americans are 
still reeling. We still have 7 percent unemployment.
    So I have been a little bit worried about certain elements, 
not all, I don't want to paint with a broad brush, but some 
players in the financial services industry, again not all, who 
appeared to be resisting reform at every turn. In fact, there 
is an article about it that I would like to have entered into 
the record. It is a March-April 2013 Washington Monthly article 
entitled, ``He Who Makes the Rules.'' This article describes, 
again, certain players in the financial services industry and 
their litigiousness and their just straight-up resistance and 
obstinance to commonsense regulation.
    I notice that SIFMA has filed a lot of lawsuits, including 
against the CFTC, saying it lacked the authority to establish 
position limits despite Congress' clear requirement that it do 
so. SIFMA also sued Richmond, California, for thinking about 
eminent domain to address their underwater mortgage situation. 
And also since the financial crisis, I guess I am curious, how 
many lawsuits have you guys filed since the financial crisis?
    Mr. Bentsen. First of all, SIFMA did not sue in the case of 
Richmond, California.
    Second of all, in the case involving position limits--
    Mr. Ellison. I don't want to go through the cases. I just 
want to know how many lawsuits you filed.
    Mr. Bentsen. I just want to say that actually--
    Mr. Ellison. Excuse me, Mr. Bentsen. I certainly want to 
hear what you have to say, sir, but as you know, time is very 
limited. You and I could have a more extensive conversation 
offline, but right here, right now, I need you to answer my 
question. How many lawsuits have you guys filed on financial 
regulation?
    Mr. Bentsen. SIFMA has been a party to two lawsuits related 
to financial regulation.
    Mr. Ellison. I appreciate that.
    Do you guys plan to sue over the Volcker Rule?
    Mr. Bentsen. We have no plans to sue over the Volcker Rule.
    Mr. Ellison. Okay. Let me ask you this. I read your 
testimony, and I thought it was very interesting. And I guess 
the basic tenor of your message is that the Volcker Rule is 
just too complicated to implement. Now, I want to ask you, is 
this a matter about how complex and complicated it is, or do 
you disagree with the Volcker Rule in principle?
    Mr. Bentsen. We disagree with the Volcker Rule in 
principle. We state that up front. But we did not say--and if 
you interpreted that, then we didn't write it correctly. We did 
not say that it is too complicated to implement. We said it is 
extremely complicated, and how it is implemented is very 
important.
    Mr. Ellison. So when Mr. Green asked everyone to raise 
their hand, notwithstanding your suggestions about what we may 
or may not do to make it better, who would repeal it, who would 
not repeal it, you kind of lifted your hand up. Everybody else 
said that they would be willing to try to work with it in some 
form or fashion. But you really are just against it, and I 
appreciate your candor.
    Mr. Bentsen. Congressman, if I may, the point I was going 
to make to my dear colleague and friend from Houston, my fellow 
Houstonian had raised is that we were very clear from the very 
beginning that we did not believe that the Volcker Rule was 
part and parcel to the financial crisis. We have a 
disagreement. We agree with Secretary Geithner's comments and 
Mr. Volcker's comments with respect to that, and we made that 
clear. But it is the law of the land, and our members are 
moving forward to comply with it.
    Mr. Ellison. Let me ask you this: Do you think that it is 
good practice for a financial institution to use taxpayer-
subsidized money to engage in proprietary trading? I am sure 
you have a bunch of--you don't think we should have a rule, but 
do you think it is good practice or not?
    He should be able to answer, Mr. Chairman.
    Mr. Mulvaney [presiding]. I am going to cut him off there. 
The gentleman's time has expired. The gentleman's item will be 
accepted into the record. Without objection, it is so ordered.
    If the gentleman from Virginia would like to allow the 
gentleman to answer, that is fine.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Hurt, for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    I want to thank you all for appearing before us today on 
this very important issue.
    My congressional district is in rural Virginia. I represent 
everything from North Carolina all the way up to Fauquier 
County. We have 22 counties and cities. We have many, many Main 
Streets all across Virginia's Fifth District, so we don't 
represent big Wall Street firms. My district is, like I said, 
rural. We have a great interest in consumer protection.
    And I know that in the aftermath of the economic crisis, 
there was a lot of concern about consumer protection, what do 
we do to protect the consumer, but when I look at some of the 
unintended consequences of Dodd-Frank, some unintended, some 
intended, although I would admit certainly all with best 
intentions, good intentions, I think that what we have seen is 
that consumers aren't protected, but in many instances 
consumers are ultimately harmed because of the weight of many 
of these regulations that result in reduced choices and 
increased costs.
    I think that you can see that when you look in the broad 
picture, the accumulation of these regulations as it relates to 
community banks, for instance. If you look, I think in the last 
30 years, we have reduced the number of community banks that we 
have in this country by half. We have gone from 16,000 to 
7,000. And I think that is a reflection--you can't blame that 
all, obviously, on Dodd-Frank, but I do think it is a 
reflection of, again, the accumulation of the regulatory 
structure.
    I guess my question is--and I would love to have Professor 
Johnson and then Mr. Bentsen and Mr. Funk answer this question 
in that order--is there a concern and are you aware of any 
analysis that has been performed on the potential impact on 
access to capital for nonfinancial small and midsized 
businesses with the confluence of the Volcker Rule, the 
implementation of the Basel III standards, new derivative 
regulations, and the SEC's impending money market regulations? 
Are we concerned about the aggregate, and do we know, do we 
have any idea what the effect of those would be?
    And I wonder also this: Isn't it incumbent upon the 
individual agency that promulgates these rules to be concerned 
about where their rules fit in the panoply of rules that are 
obviously increasing the weight for these businesses?
    Mr. Johnson?
    Mr. Johnson. The agencies certainly should be concerned, 
Congressman, with all of those issues, and the questions you 
raised are very good questions. What is the impact of this big 
change in the way we oversee the financial system, both 
nationally and internationally.
    Mr. Hurt. Do you think the agencies should conduct a cost-
benefit analysis on each rule?
    Mr. Johnson. Congressman, there are very specific legal 
requirements for agencies. I am not an expert on those. Let me 
speak from the economic point of view.
    The reason we have this long and large comment period was 
precisely so that many different stakeholders, both from within 
the industry and from elsewhere, could articulate precisely 
what you are concerned about and tell the agencies what the 
costs will be, some of which they may be able to imagine, and 
some of which they haven't fully anticipated. That is a very 
good process we have in this country. Many other countries, 
most other countries do not have such a public comment process.
    I don't promise you that we get to one definitive number. 
It is a very complex world in which we live. But, yes, we have 
narrowed down the possibilities, and we have converged on a set 
of rules that are unlikely to have--
    Mr. Hurt. Thank you. Let me get to Mr. Bentsen, just so he 
will have time to answer.
    Mr. Bentsen. Congressman, first of all, let us say from the 
capital standards, we agree that capital standards needed to go 
up, and they have gone up about 400 or 500 percent since the 
crisis, but it is also a fact that capital is not free, and it 
has--and the price of capital has an impact on the price of 
credit and capital to the end user. So, there is no question 
about that.
    Second of all, enhanced compliance burden will also have an 
effect on price, and it could have an effect on liquidity and 
availability.
    So these will have an effect. We don't know yet, but they 
will have an effect.
    Mr. Hurt. Thank you.
    Mr. Funk?
    Mr. Funk. I think your question was about the cumulative 
effect of regulation, and in the time I have, I would like to 
tell you, the footprint of our bank would fit well in your 
district. We are in North English, Iowa, the only banking 
office in town. We are in Melbourne, Iowa, the only banking 
office in town. We are in Sigourney, Iowa. There are only two 
banks in Sigourney, Iowa.
    Our company's employment 2 years ago--3 years ago was about 
380 people. It is still about 380 people, but we have added 
between 6 and 8 positions just to deal with compliance, which 
means that is 6 to 8 fewer people out in the community serving 
our customers. And I think that is the answer I have on 
compliance.
    Mr. Hurt. Thank you, Mr. Funk.
    I think my time has expired. Thank you, Mr. Chairman.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from Colorado, Mr. Perlmutter, for 5 minutes.
    Mr. Perlmutter. Good afternoon, gentleman. Thank you for 
your testimony. And thanks for staying here so long.
    I do want to ask unanimous consent that the Bloomberg 
Report of January 13, 2014, be introduced into the record.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Perlmutter. This is what it says, the beginning 
sentence: ``The U.S. posted a record December budget surplus as 
higher payroll taxes, payments from Fannie Mae and Freddie Mac, 
and a declining unemployment rate helped improve the 
government's finances. Revenue exceeded spending by $53.2 
billion last month compared with a $1.19 billion deficit in 
December 2012.''
    So now, I kind of want to do a little history lesson, 
because as I see you, Mr. Bentsen, and you, Mr. Funk, sitting 
next to each other, there is the old saying that politics makes 
for strange bedfellows, but so does finance.
    So in 1929, we had a crash. In 1933, the first act of the 
Roosevelt Administration was Glass-Steagall, separating 
commercial banks from investment banks and insurance companies, 
and also creating the FDIC and establishing unitary banking.
    Fast-forward to 1999. We have Gramm-Leach-Bliley, which Mr. 
Bentsen referred to, which more or less eliminated the 
separation between insurance companies, investment banking 
institutions, and commercial banks.
    Go forward to the summer of 2008. The stock market is at 
13,000, okay? Then we have tremendous tumult in every market, 
both the commercial banking, the investment banking, pretty 
much everything, so that by March 9, 2009, that stock market 
had dropped from 13,000 to about 6,500. And it is $1.3 billion 
per point, so $7-point-something trillion in 6 months lost just 
in the stock market. Forget about jobs, forget about housing.
    So in the course of putting TARP together, the Recovery 
Act, the Dodd-Frank bill, and in the last 5 years, we have seen 
ourselves gain 8 million jobs, the stock market today just hit 
16,501. It has gained 10,000 points since that low mark 5 years 
ago. So that is $13 trillion. So we put in $700 billion to save 
the system through TARP. That has been paid back with interest, 
a substantial amount. That is where we are today.
    I offered--and Mr. Bentsen, you may remember this--two 
amendments when we went through Dodd-Frank. One was to, in 
effect, repeal Gramm-Leach-Bliley and reinstitute the 
separation of investment bankers from commercial bankers like 
Mr. Funk. That didn't pass. I did an amendment, too, that was--
and I would offer it into the record, too, the amendment that 
did pass, which was two pages long.
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Perlmutter. This amendment said, no proprietary 
trading. Banks, commercial banks, couldn't trade for their own 
account, which, Mr. Funk, my guess is your bank doesn't trade 
stocks or commodities for its own account.
    Mr. Funk. We do not.
    Mr. Perlmutter. Okay. So but that then was amended in the 
Senate to become what is the precursor and now the Volcker 
Rule.
    So, gentlemen, and I will start with you two, in trying as 
Congress dealing with the reality of the financial markets 
where we have major institutions that do investment banking, 
that do commercial banking--and it isn't just Goldman Sachs and 
it isn't just Morgan Stanley, but it is others. Would you have 
us go back to separating completely commercial banking from 
investment banking and insurance?
    Mr. Funk, I will start with you.
    Mr. Funk. I would not, but I think you have to have 
restrictions in place. I am here speaking on behalf of our 
industry, and I think you have to have sensible regulation that 
monitors and that regulates.
    I would also say that when you talk about regulation--I 
speak for the industry, and most of the bankers I know are not 
opposed to regulation. But it is the regulation that doesn't 
seem to make sense and that hurts consumers--not doesn't help 
consumers, but hurts consumers--is what we really have a 
problem with.
    Mr. Perlmutter. And I would respond to you, when we have 
points of contention like the trust indenture, you have to come 
to us so we can correct those things. And I would offer up my 
services to help you or Mr. Bentsen or anybody else at the 
table. But we can't have the same kinds of losses that we 
suffered in 2008. At least not in my lifetime, I don't want to 
see them again.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Ohio, Mr. 
Stivers, for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman. I appreciate you 
calling this hearing.
    I want to follow up on some questions and points that Mr. 
Duffy, the gentleman from Wisconsin, made earlier. All of you 
agreed that the rule would have benefited from a cost-benefit 
analysis. Can you raise your hand if you agree with that?
    So I thought you all agreed. Did you not agree, sir?
    Mr. Johnson. I think--
    Mr. Stivers. I said a cost-benefit analysis.
    Mr. Johnson. I think they did an analysis of the costs and 
the benefits. Perhaps you have a specific other legal standard 
in mind. But they looked to the cost in the analysis. That is 
cost-benefit analysis.
    Mr. Stivers. They did not do a cost-benefit analysis as 
required.
    Do all of you agree that the rule would be clearer if there 
was better regulatory coordination, or, again, does the 
gentleman in the middle disagree? Do most of you agree? Raise 
your hand if you agree.
    Okay. We have one dissenter again.
    On competitiveness, I have a question for Mr. Bentsen and 
Mr. Robertson. The Financial Times said that the Dodd-Frank 
rules, especially the Volcker Rule, could ultimately hamper the 
way that the corporate bond market now works. Do you believe 
the Volcker Rule will dry up liquidity in the corporate bond 
market? Be as brief as possible.
    Mr. Bentsen. Look, it could. As we see how these rules are 
put into practice and how the compliance regime works, it could 
cause firms to have to pull back from market-making activity 
that they do in the corporate bond market and other markets, 
and that would pull liquidity and could affect U.S. markets.
    Mr. Stivers. Mr. Robertson, do you agree with that?
    Mr. Robertson. I would agree as well. We have significant 
concerns that, depending on how it is implemented, it could 
reduce liquidity for underwriting and also for even warehousing 
debt.
    Mr. Stivers. So if there is less liquidity in the corporate 
bond market, will that change investors' willingness to buy 
corporate debt, Mr. Robertson?
    Mr. Robertson. Absolutely. And I think there is an issue 
even of just getting the inventory to market in a timely 
manner. And moreover, if there is not adequate access to 
hedges, that is also going to limit financial transactions and 
activity.
    Mr. Stivers. Tell me what that means to jobs in this 
country.
    Mr. Robertson. For example, at the CFTC hearing we had a 
CFO of an energy company which is heavily reliant on 
derivatives to undertake massive capital expenditures, hundreds 
of millions of dollars, to go out and explore for oil because 
they need to have that future price locked in. That is just 
thousands, tens of thousands, hundreds of thousands of jobs 
across the economy that are reliant upon risk-mitigation tools.
    So depending on how this is deployed, if it has any impact 
on restricting access to derivatives that are used for 
legitimate hedging, that could have a very massive impact on 
the economy and jobs.
    Mr. Stivers. Thank you.
    And there was previous testimony, I don't have time to get 
into it, that also talked about the competitiveness of America 
versus Europe and Asia with regard to America being the only 
country thus far that has banned proprietary trading, and that 
also would affect jobs.
    My next question is for Mr. Funk. Earlier in your 
testimony, you said your bank is about $1 billion?
    Mr. Funk. $1.7 billion.
    Mr. Stivers. Okay, I am sorry to short you there; $1.7 
billion. But your bank relies on trust-preferred securities, I 
assume, as part of your operations?
    Mr. Funk. They were bought in 2005-2006--
    Mr. Stivers. But they are on your books?
    Mr. Funk. Yes, $9.7 million when we bought them, a very 
minor part of our investment portfolio.
    Mr. Stivers. Sure. But let us say there is a bank, so in 
yesterday's interim final rule authorizing it, it allows banks 
under $15 billion to keep them.
    I want to echo some remarks of Democratic Senator Sherrod 
Brown yesterday. Can you tell me, you are a banker, your bank 
has about $2 billion in assets. Does that differ from a bank 
that, say, has $50 billion or $60 billion in assets? Like in my 
community Huntington Bank is $52 billion, but they use trust-
preferred securities, they are in the same exact business you 
are in. If those investments are not risky for you, why should 
they be considered risky under this requirement for somebody 
over $50 billion?
    Mr. Funk. I think, Congressman, the ruling yesterday 
applied to everyone. So I think that most banks in America are 
going to be very happy with what was issued yesterday. It was 
without regard to size.
    Mr. Stivers. So they did lift the $15 billion yesterday. 
Okay.
    Mr. Bentsen. I think the size issue is related to the 
issuer of the trust-preferred, not to the buyer of the trust-
preferred.
    Mr. Stivers. Not to the buyer of the trust-preferred. So 
that does help. But the point is it doesn't matter your size as 
the buyer; it doesn't change of the risk of the investment, the 
size of the buyer, does it?
    Mr. Funk. I agree 100 percent with that statement.
    Mr. Ganz. Congressman, that would be extremely important in 
the CLO context. A resolution that would cut it off based on 
the size of the bank holding would not work, not for the larger 
banks and not for the smaller banks.
    Mr. Stivers. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from South Carolina, 
Mr. Mulvaney, for 5 minutes.
    Mr. Mulvaney. Thank you, Mr. Chairman.
    Despite my reputation, I would like to focus for a few 
minutes on some things that we might be able to agree on. I 
recognize, in fact, my colleague Mr. Green asked if anybody 
wanted to completely get rid of the bill, and I think we would 
be kidding ourselves if we think that everybody agrees that 
things are perfect and we shouldn't change anything. It may be 
that some want to change it dramatically, and some want to 
change it only slightly. But let us see if we can at least 
figure out that some of the concerns raised here today are 
things that everybody can agree on might need some work in the 
future.
    So, Professor Johnson, I am going to spend some time with 
you because you are the Democratic witness, and I am going to 
read off some of the things that Mr. Bentsen spoke about in his 
opening statement and just see if we can't get some agreement 
on what the regulators should do going forward.
    You said in order to lessen the potential negative market 
impacts, regulators should consider as issues arise giving 
particular markets or products additional time to comply. Is 
that a fair consideration?
    Mr. Johnson. I'm sorry, Congressman, you are speaking a 
little fast. Additional time to comply?
    Mr. Mulvaney. I am a Southerner. Usually, I get accused of 
speaking slowly. Yes.
    It says that as new information becomes available, 
regulators should consider as issues arise giving particular 
markets or products additional time to comply.
    Mr. Johnson. I think given what we know now, there is 
sufficient time to comply. There is a long phase-in of this. If 
additional issues come up, like the TruPS preferred, of course 
they have to be dealt with. That is sensible.
    Mr. Mulvaney. And it says--and, again, I don't expect noes 
to a lot of these. I am not trying to bait you or trick you, I 
am just trying to establish that there might be some things 
going forward, and I believe you yourself at the beginning of 
the testimony said that as we deal with unintended 
consequences, they should deserve our attention.
    He also said that just as the five regulators ultimately 
coordinated to write one rule, they must now coordinate and be 
consistent in the interpretation, examination, supervision, and 
enforcement. That makes sense, doesn't it?
    Mr. Johnson. I already said, Congressman, I think it is a 
very good idea, and I think that you should look to the FSOC 
and the Secretary of the Treasury to ensure that coordination 
takes place. That is their job under the legislation.
    Mr. Mulvaney. He went on to say that it was true that we 
did not task any one agency or the agencies collectively with 
interpretation and examination. That is something we need to be 
focused on moving forward, correct?
    Mr. Johnson. Absolutely. Personally, Congressman, I would 
prefer having a single banking regulator in the United States. 
Mr. Funk already has to deal with two banking regulators and 
the SEC. It is very--three banking regulators, my apologies, 
and the SEC. That is way too complicated already, but that is a 
century-old problem in the United States.
    Mr. Mulvaney. And that goes on to another point he raises, 
which is what happens if the SEC gives one rule and the OCC 
gives another, or the FDIC gives one rule, or the Federal 
Reserve gives another. That is something that needs to be 
fixed, or at least needs to be watched as we go forward.
    Mr. Johnson. Absolutely. That is the responsibility of the 
FSOC and the Secretary of the Treasury.
    Mr. Mulvaney. I understand. He says it is completely 
unclear how the agencies plan to coordinate their efforts and 
avoid duplicative actions and undue costs and burdens on 
virtually every banking organization in the country. Another 
legitimate concern, correct?
    Mr. Johnson. They certainly haven't told me how they plan 
to deal with it, but I would turn to the FSOC. That is their 
job, and I am sure they will come and testify before you at 
every opportunity.
    Mr. Mulvaney. And finally, without beating a dead horse too 
much, he said that the top near-term goal should be for the 
agencies to articulate a transparent and consistent roadmap for 
coordination on both near-term interpretive guidance and long-
term examination and supervisory framework. A valid concern, 
correct?
    Mr. Johnson. It is a concern not just for the Volcker Rule: 
all of regulation and supervision should be subject to the same 
high standard. And I think the FDIC sets world-class standards 
for many or most of its activities in this regard.
    Mr. Mulvaney. And very briefly, before I move on to Mr. 
Funk, I want to ask you one question about your testimony where 
you spoke to--for the line, you said over the last 20 years and 
since the onset of the financial crisis, the financial system 
has become dramatically--excuse me, ``dramatically'' is not in 
there--has become more concentrated.
    I take it from the tenor and how it appears in your text 
that you consider that to be a bad thing or a potentially bad 
thing; is that correct, Professor Johnson?
    Mr. Johnson. I'm sorry. Say the question again?
    Mr. Mulvaney. This is your testimony. Over the past 20 
years and since the onset of the financial crisis in 2007, the 
financial system has become more concentrated. I take it you 
perceive that as being a potential negative impact?
    Mr. Johnson. Unfortunately, the increasing concentration 
has come with some very big negative consequences, including 
the one currently spread on the board.
    Mr. Mulvaney. Is it fair to say then that if we see as an 
unintended consequence of the Volcker Rule even more 
consolidation, or, more broadly, if Dodd-Frank drives more 
consolidation, that is something that is potentially dangerous 
to the market, and we should look at that from a regulatory 
standpoint?
    Mr. Johnson. I would be concerned about increased 
consolidation and concentration irrespective of the cause, 
including from any kind of legislation. Yes, Congressman.
    Mr. Mulvaney. Thank you, Professor Johnson.
    Finally, Mr. Funk, you said something today that I just 
want to clarify, because I live in a district similar to Mr. 
Hurt where community banks make up a large portion of our 
financial markets. And what you told me was, yes, you are 
technically not covered by this, but you really are, because in 
2 years from now, you are going to have to prove that what you 
are doing doesn't fall under the Volcker Rule, is that correct? 
So in essence you are required to meet some of the same 
compliance regulations, even though Dodd-Frank specifically 
says Volcker is not supposed to apply to you?
    Mr. Funk. I think there are a lot of questions in our 
investment portfolio that we don't have answers for right now, 
and I am speaking for all banks right now. And the answer is, 
we don't know.
    Mr. Mulvaney. And even going forward, though, if you are 
going to make a trade or investment, you are going to have to 
establish for somebody that it doesn't fall under Volcker.
    Mr. Funk. It depends if it is considered proprietary 
trading or not, and we don't engage in proprietary trading, nor 
do most banks.
    Mr. Mulvaney. Thank you, sir.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Illinois, Mr. 
Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you, Mr. Chairman. Thank you so much 
for holding this hearing and the second one to follow up. And 
thank you all for being here.
    This is obviously a very important topic, one that I have 
heard so much about in the last few weeks, especially from my 
community banks back in my district. There is a great amount of 
fear, a great amount of concern, and a lot of uncertainty. It 
is very complex. So I have to apologize even with my questions 
that they are very diverse, because this rule is very diverse 
and very complex.
    Mr. Bentsen, I wanted to address this first to you. 
Regarding the tender option bond market, the regulators clearly 
share the concern and stated in the preamble that disruption of 
the tender option bonds market could increase financing costs 
to municipalities. Does it seem possible that TOB's market may 
continue functioning fluidly with some adjustments to comply 
with the Volcker Rule? I wonder if you can talk about this 
process and how SIFMA and industry are thinking through this 
challenge.
    Mr. Bentsen. Congressman, thank you for that question. We 
are quite concerned with the rules--final rules treatment for 
tender option bonds or the lack of an exclusion for tender 
option bonds. They are an important tool for the municipal 
financing market, and we think, absent some solution, it will 
have a negative impact on municipal issuers ultimately.
    The industry is looking at the rule and seeing if there is 
a way to work through it that would meet regulators' concerns. 
We don't have an answer yet, but it is something that is a top 
priority for us.
    Mr. Hultgren. Quickly, I wonder, how would you compare--Mr. 
Bentsen as well--these tender option bonds to municipal 
securities and trades involving repurchase agreements?
    Mr. Bentsen. We view them as, frankly, similar to a 
repurchase agreement. They are like a securities financing 
transaction. They provide liquidity to the muni bond market. 
They provide inventory financing. That passes through to the 
pricing of the muni bond market to the benefit of the muni 
issuer.
    Mr. Hultgren. Mr. Funk, I want to address this to you, if I 
may. First, one of my great frustrations--I talk about it often 
in this committee--is that under the guise of consumer 
protection, many new rules have come out which actually end up 
costing consumers. I wonder briefly, you have mentioned how 
people have been shifted around. Your head count has stayed the 
same, but you are doing probably less outreach and customer 
service, and more compliance.
    I wonder what you think maybe the biggest impact would be 
for your customers from the Volcker Rule or from some of these 
other rules that have significant costs more than benefit.
    Mr. Funk. Just with the Volcker Rule, that is hard to say, 
because there is so much we don't know. I was prepared, had the 
TruPS issue not been answered, to talk about that. But beyond 
that, the effect on community banks, I think we just are 
waiting to find out. And there are many things that we don't 
know yet that probably in the next 30 to 60 days we will find 
out.
    Mr. Hultgren. Mr. Funk, I want to follow up on that. Many 
banks are not waiting until July 2015 to divest themselves of 
Volcker-prohibited securities. For example, BankUnited in 
Florida, prompted by the rule, has already sold off their CLO 
and re-REMIC portfolios. But in the case of re-REMICs, the 
status of these securities under the rules seem unclear, as 
many other areas are unclear as well. Am I correct in saying 
that there is some confusion in the marketplace regarding re-
REMICS as well as some of these other areas?
    Mr. Funk. I am not an expert on re-Remics. We can certainly 
get back for the record, but I am not an expert on re-Remics.
    Mr. Hultgren. Anybody else have a comment quickly? Mr. 
Bentsen?
    Mr. Bentsen. We would be happy to get back to you for the 
record.
    Mr. Hultgren. Okay. Thanks. We will follow up with you.
    The last question, and I would open this up, Mr. Funk, Mr. 
Bentsen, Mr. Robertson, and if any of you have any thoughts, on 
a broader note, when banks are forced to sell certain 
investments like TruPS, CDOs, re-REMIC securities, won't this 
create a buyer's market? These institutions forced to comply 
with the Volcker Rule will have to sell prohibited investments 
and potentially take a significant loss. This will be 
exaggerated in less liquid markets where we may see greater 
volatility. Isn't that true?
    And I wonder, since the regulators did not perform any 
significant economic analysis on the final rule, are there any 
estimates from the bank supervisors as to what the impact of 
conformance may be on our community banks financially, their 
bottom lines, and how this will affect the market for 
individual securities deemed covered funds?
    So in the last minute or so, I would love to hear if any of 
you have any thoughts on that. My thought is, if big banks, if 
the larger institutions are impacted, the whole market will 
feel the ripple effects from it. So, Mr. Bentsen, Mr. Funk, Mr. 
Robertson, I wonder if you have any thoughts on that?
    Mr. Bentsen. Congressman, I would just say that any time 
you create a fire sale situation, having to dump assets onto 
the market and depress the price, that is going to ripple 
through the whole system.
    Mr. Funk. And I think we had established it was a net of 
$600 million on the TruPS issue, but fortunately we have taken 
care of that. We haven't resolved the CLO issue or any of the 
other issues that we don't think are systemically risky 
investments that banks may be forced to mark to market and 
ultimately sell.
    Mr. Hultgren. The last 10 seconds, any way--again, we care 
about you, we want you to do well, but we really want your 
customers to do well. So the more you can tell us of real 
impact on your customers in the next weeks and months, the 
better.
    With that, I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now recognizes the gentlelady from Missouri, Mrs. 
Wagner.
    Mrs. Wagner. Thank you, Mr. Chairman, for this hearing.
    Mr. Funk, as the Congresswoman from St. Louis, Missouri, I 
must tell you I have a great love of Midwestern banking 
institutions.
    So I was looking at your testimony and was quite interested 
here, especially the section that talked about--and Mr. 
Hultgren spoke of it, too, a little bit--a trade-off between 
resources devoted to compliance management and customer 
engagement; of course, the reduction of resources for that kind 
of fine engagement, given the fact that you are spending so 
much money on compliance issues, and the impact that this has 
on growing your business, and obviously costs and access for 
your customers and clients.
    So I have a couple of very elementary and quick questions 
here. Can you have a prosperous community without prosperous 
financial institutions?
    Mr. Funk. When I was the chairman of the Iowa Bankers 
Association in 2010 and 2011, and I would go around our State 
and I would give various talks, there was always one statement 
in every talk I made, and that was that we have a great State, 
but in every what you would call strong community, there is at 
least one, if not two or three, strong community banks. So I 
think it is almost impossible to have a strong community 
without strong community banks.
    Mrs. Wagner. Absolutely. And who helps create more jobs, 
profitable banks or unprofitable banks?
    Mr. Funk. Is that a question?
    Mrs. Wagner. Yes, sir.
    Mr. Funk. If the unprofitable banks still have capital, and 
they are still in operation, then they still help create jobs.
    Mrs. Wagner. Thank you for your input and answers.
    Mr. Bentsen, I am sure that you are aware, sir, that SEC 
Commissioner Dan Gallagher is very critical of the entire 
process that went forward here, particularly with regard to the 
SEC taking what he called a back seat, frankly, to the banking 
regulators, who do not have expertise in securities trading. In 
his dissenting statement, Commissioner Gallagher at the time 
noted that, ``this kind of interference is the product of an 
idealistic and ideological book club mindset unburdened by the 
knowledge of how complicated it is to establish and oversee 
regulatory programs.''
    Mr. Bentsen, in your opinion, was it a good idea for the 
banking regulators to take the lead role in drafting the 
Volcker Rule?
    Mr. Bentsen. That is a good question and a difficult 
question. I think Commissioner Gallagher is absolutely correct 
as it relates to the SEC's role as the market regulator. It 
underscores the problem really in the legislative text itself 
of what Volcker was trying to accomplish, and that is why in my 
statement I said, basically on its face it looks relatively 
simple, but in practice it is exceedingly complex. And that is 
proven out in the final rule itself. It cuts across so many 
different markets.
    Our concern has always been that you can't have five or six 
or seven, if you add the National Futures Association, as 
Chairman Royce did. You have to have somebody in charge.
    Mrs. Wagner. Further to that, though, because I am 
concerned about the banking regulators taking the lead here, 
and one area where I think the SEC could have provided 
expertise is on articulating the differences between market-
making and proprietary trading. Do you believe the banking 
regulators have, in fact, a deep understanding of the 
differences between these two activities?
    Mr. Bentsen. I think we hope through this process that the 
regulators went through to get to the final rule that the SEC's 
experience in market regulation came through. But I think it is 
going to be and should be an iterative process as we go through 
the implementation that we see how it is really going to work 
out, how the metrics are going to work, how the metrics are 
going to be used, how each agency is going to look at them. 
Hopefully, there is a uniform application of them. That is 
going to be important, and the SEC is going to have to play a 
major role.
    Mrs. Wagner. I have limited time, but I will say this: The 
major role of the SEC is important. And let me just ask you 
this: Should the SEC have, in fact, been more involved in the 
drafting of Volcker, do you believe?
    Mr. Bentsen. Congresswoman, I, frankly, don't know what 
went on behind the scenes among the regulators. We weren't 
invited to those meetings. But we certainly engaged with the 
SEC, as we did with all the regulators, as is our right and 
responsibility.
    Mrs. Wagner. And you talked about it a little bit, the five 
different mandates, five different regulators, Mr. Bentsen. In 
your opinion, is there any way for the regulators to apply one 
consistent method of enforcing Volcker when they each have a 
different mandate and a different approach to regulating?
    Mr. Bentsen. Oh, I certainly think that they could. I 
certainly think that they could get together and figure out how 
to come up with a uniform examination process, a uniform use of 
metrics, compliance and enforcement regime.
    Mrs. Wagner. I believe my time has run out, Mr. Chairman.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    Speaking of time, there appear to be two more Members to 
ask questions. I thank the panel again in advance for their 
patience and endurance.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross.
    Mr. Ross. Thank you, Mr. Chairman.
    And I will probably be pretty brief, but it is interesting, 
as we sit here and talk about the Volcker Rule, and I think 
history will reflect that probably the most significant part of 
the Volcker Rule in terms of its import on the markets has been 
the anticipation of its implementation.
    Because leading up to the rule actually being released and 
now as we debate its implementation, we have seen, as some of 
my colleagues have pointed out, the divestiture of Volcker-like 
trading, proprietary trading. But now we are on the cusp of 
seeing what happens from a theoretical perspective of trying to 
eliminate proprietary trading to the practical application of 
the rule.
    And, Mr. Bentsen, you have explained some of this in your 
opening statement and you have raised this and some of my 
colleagues have talked about it, in terms of when you have 
conflicts between any one of the regulators.
    And my question, first question to Mr. Bentsen is, have the 
regulators given you any clarity as to how they are going to 
resolve conflicts and opinions as to the application of the 
Volcker Rule?
    Mr. Bentsen. No.
    Mr. Ross. None whatsoever.
    Mr. Bentsen. Not yet, no.
    Mr. Ross. Would that not be somewhat significant at this 
juncture as someone in your position as to what to anticipate?
    Mr. Bentsen. I think that really should be their next step. 
I think they need to--and I think trust preferreds is a good 
example. I think Mr. Ganz raised it about having to go see five 
regulators.
    Mr. Ross. And, Mr. Ganz, I appreciate your background in 
this, and I wonder if you could speak to the difficulty of 
complexities of the legal complications of having the conflicts 
in rulings between regulators and whether there is any recourse 
or due process for those who are affected by it.
    Mr. Ganz. It has been very difficult to deal with the 
interagency issue. We have been focusing mostly on the Volcker 
Rule and on risk retention. And, in each case, it is either 
five or six agencies, and there is no real roadmap.
    Mr. Ross. And there is no due process. If a trader needs to 
appeal a ruling that is adverse to their position, but yet 
another regulator has sided with them, you are damned if you do 
and you are damned if you don't. Quite frankly, that is a very 
unusual situation to be in.
    Mr. Ganz. It is not easy.
    Mr. Ross. Okay. I appreciate that.
    Back to market-making, I think there is an ambiguous area 
where I think we are going to have probably more hard times 
trying to wrestle with as time goes on. Because I think you 
have to look at trend analysis, but it gives such a great deal 
of discretion to the regulators to determine whether there has 
been an investment based on market-making or, rather, just for 
self-serving proprietary trading.
    In fact, Jones Day in their initial reaction to the rule 
stated that, ``troublesome questions include the effects and 
consequences of a change, sudden or otherwise, in these 
reasonably expected near-term demands or in market cycles in 
times when market-making can be suspended.''
    Back to you, Mr. Bentsen. Have the regulators given any 
guidance as to what will constitute market-making?
    Mr. Bentsen. Congressman, in the final rule itself, they 
certainly lay out the compliance framework and systems that 
they expect the firms to use, including the metrics, and what 
they will rely upon.
    What is not clear is whether they will rely upon them 
uniformly or across five different jurisdictions. And it is not 
clear how these will work. Obviously, we will have to go 
through that process.
    Mr. Ross. And as a litigator, I can only say that this is a 
wonderful thing for my profession, because it will be a relief 
act for those out there trying to help interpret what the 
application will be among several agencies.
    Finally, I want to talk briefly about the investment in 
sovereign debt. I think when these regulations are being 
decided upon, there must be a consensus that there is infinite 
capital out there. And I think we can all agree that there is a 
finite amount of capital and that capital will seek the path of 
least resistance and the highest rate of return.
    And now that we have allowed for the investment in 
sovereign debt, what I foresee--and, Professor Johnson, I want 
to get your opinion on this--is that capital will leave the 
domestic market and go to foreign investments, because there is 
no need to prove that you are innocent before guilty by way of 
the Volcker Rule, and instead you can invest in sovereign debt 
and not have to worry about investing in domestic trades.
    What is your opinion about that?
    Mr. Johnson. No, I don't think that is correct, 
Congressman. Obviously, investors are looking at risk, they are 
looking at returns, they are looking at a strong, rebounding 
U.S. corporate sector. There are a lot of concerns, legitimate 
concerns, about sovereign debt around the world. And those are 
the primary drivers of market attention to trends.
    Mr. Ross. I agree with you, market trends can be analyzed 
over time, and they can be forecast based on that. But the one 
element that I think happens to be hardest to manage is the 
impact of regulatory involvement. And I think that is what we 
are going to see with the Volcker Rule when I, as a banker, now 
have to prove that I am innocent until proven guilty. And 
instead of going through that compliance, instead of going 
through that regulatory morass of having to prove my innocence, 
I would rather invest my assets on behalf of those whom I have 
a fiduciary duty to into foreign debt. And I think that is what 
we are going to see happen.
    And I realize my time is up, and I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus.
    Mr. Rothfus. Thank you, Mr. Chairman.
    And I thank the panel for your patience in putting up with 
us today. I think I am the last one.
    During this hearing, someone referred to a GAO study on 
proprietary trading. On page 22, the GAO stated that, ``staff 
at the financial regulators and the financial institutions we 
interviewed also noted that losses associated with lending and 
other risky activities during the recent financial crisis were 
greater than losses associated with standalone proprietary 
trading. For example, one of the firms reported increasing the 
reserves it maintains to cover loan losses by more than $14 
billion in 2008, and another of the firms increased its loan 
loss reserves by almost $22 billion in 2009. Further, FDIC 
staff, whose organization oversees bank failures, said they 
were not aware of any bank failures that had resulted from 
standalone proprietary trading.''
    Mr. Funk, do you agree with the GAO that proprietary 
trading was not the cause of the financial crisis?
    Mr. Funk. I would say proprietary trading might be a small 
part of the financial crisis, but I would agree, I think it is 
not the sole cause by any stretch of the imagination.
    Mr. Rothfus. And the GAO states that other activities like 
mortgage lending were associated with greater losses to the 
banks. Wasn't the financial crisis really brought on by 
government-mandated policies that paved the way for the 
loosening of lending standards?
    Mr. Funk. That might be a part of it, but I think it is a 
long list that caused our financial crisis.
    Mr. Rothfus. Mr. Robertson, as we become better educated 
about the Volcker Rule and the American people become better 
educated about the Volcker Rule, did the Volcker Rule leave in 
place the ability for banks to hold for their account any 
securities?
    Mr. Robertson. They can certainly hold securities as 
investments for sale--or, excuse me, to hold as investments. It 
does not allow them to have a trading portfolio in instruments.
    Mr. Rothfus. So, educate me on a proprietary trade. Can 
they buy a Treasury?
    Mr. Robertson. They can hold a Treasury.
    Mr. Rothfus. Could they buy a paper issued by Fannie Mae or 
Freddie Mac?
    Mr. Robertson. They could buy paper from Fannie Mae and 
Freddie Mac.
    Mr. Rothfus. The same Fannie and Freddie Mac that had 
hundreds of billions of dollars of taxpayer--that we bailed 
out.
    Mr. Robertson. Exactly. And, to your earlier point, if you 
look at the anatomy of the financial crisis, it was a mortgage-
driven crisis.
    Mr. Rothfus. So we have banks that are able to hold 
Treasuries. Now, we have gone through this quantitative easing 
for a considerable amount of time. Has that suppressed interest 
rates, the quantitative easing?
    Mr. Robertson. Oh, absolutely.
    Mr. Rothfus. And what happens when we unwind the 
quantitative easing? Would you expect to see interest rates go 
up?
    Mr. Robertson. Absolutely, and hopefully alongside 
continued economic recovery.
    Mr. Rothfus. And when the interest rates go up, all these 
banks are holding the Treasuries, what happens to the principal 
value of Treasuries?
    Mr. Robertson. Obviously, if they are in extended maturity, 
they will decline.
    Mr. Rothfus. Okay.
    So we have established that banks are able to hold some 
securities--Treasuries, Fannie and Freddie paper, securities 
like that. Are we concentrating the types of securities, then, 
that banks can hold?
    Mr. Robertson. We are definitely putting restrictions 
around how they can manage those portfolios. So if we have a 
bank making a loan to a private middle-market company, that is 
a financial instrument on its balance sheet with risks. And 
banks take on all kinds of risk on behalf of corporate clients. 
To the extent that they manage those prudently, they make 
money, and the system is fine. To the extent that we impose 
constraints that are not constructive on how they manage those 
financial risks, we actually impair the ability for risk to be 
managed.
    Mr. Rothfus. This is for Mr. Bentsen and Mr. Robertson. The 
regulators have backtracked on the TruPS issue with what we saw 
just yesterday. Does this support the conclusion that the 
regulators erred in not promulgating a second proposed rule or 
an interim final rule?
    Mr. Bentsen. We believe that they should have done a 
reproposal, because the initial proposal was very much like a 
concept release. It had 1,300 questions in it. Clearly, the 
regulators were struggling to figure out how to write a very 
complex rule off of the legislative text, and a reproposal 
would have been beneficial to the process. They chose not to do 
that, they chose not to do an interim. So we are left with the 
final, so we have to work with that.
    Mr. Funk. Could I add to that?
    Mr. Rothfus. Yes.
    Mr. Funk. If I could add to that, there has been a lot of 
discussion today about, you had 18,000 comments, you had 3 
years to make comments. We always make comments on issues we 
know about, and the TruPS issue was something that was 
completely unforeseen.
    And the regulatory agencies, in our opinion, need to signal 
what they are going to regulate a little bit more, because this 
whole thing with the TruPS never would have happened had it 
been part of the comment period. I am confident it would have 
been worked out.
    Mr. Rothfus. I thank the chairman. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    Again, I wish to thank our witnesses for their testimony, 
their patience, and their endurance.
    Without objection, I would like to enter into the record 
letters from the Independent Community Bankers of America, and 
the American Association of Bank Directors. Without objection, 
it is so ordered.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 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 1:15 p.m., the hearing was adjourned.]


                            A P P E N D I X



                            January 15, 2014

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