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



 
                   THE ANNUAL REPORT OF THE FINANCIAL
                      STABILITY OVERSIGHT COUNCIL

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 24, 2014

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 113-86
                           
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

GARY G. MILLER, California, Vice     MAXINE WATERS, California, Ranking 
    Chairman                             Member
SPENCER BACHUS, Alabama, Chairman    CAROLYN B. MALONEY, New York
    Emeritus                         NYDIA M. VELAAZQUEZ, 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  RUBEEN 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
STEVE STIVERS, Ohio                  PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee       JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana          KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina        JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois             DENNY HECK, Washington
DENNIS A. ROSS, Florida              STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana

                     Shannon McGahn, Staff Director
                    James H. Clinger, Chief Counsel
                    
                            C O N T E N T S
                            

                              ----------                              
                                                                   Page
Hearing held on:
    June 24, 2014................................................     1
Appendix:
    June 24, 2014................................................    61

                               WITNESSES
                         Tuesday, June 24, 2014

Lew, Hon. Jacob J., Secretary, U.S. Department of the Treasury...     7

                                APPENDIX

Prepared statements:
    Lew, Hon. Jacob J............................................    62

              Additional Material Submitted for the Record

Lew, Hon. Jacob J.:
    2014 Annual Report of the Financial Stability Oversight 
      Council....................................................    81
    Written responses to questions submitted by Chairman 
      Hensarling.................................................   228
    Written responses to questions submitted by Representative 
      Huizenga...................................................   250
    Written responses to questions submitted by Representative 
      Hurt.......................................................   253
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   255
    Written responses to questions submitted by Representative 
      Stivers....................................................   256


                   THE ANNUAL REPORT OF THE FINANCIAL
                     STABILITY OVERSIGHT COUNCIL

                              ----------                              


                         Tuesday, June 24, 2014

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10 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, Bachmann, Pearce, Posey, 
Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, 
Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, 
Cotton, Rothfus, Messer; Waters, Maloney, Sherman, Capuano, 
Hinojosa, McCarthy of New York, Lynch, Scott, Green, Cleaver, 
Moore, Perlmutter, Himes, Peters, Carney, Sewell, Foster, 
Kildee, Sinema, Beatty, Heck, and Horsford.
    Chairman Hensarling. The committee will come to order. 
Without objection, the Chair is authorized to declare a recess 
of the committee at any time.
    This hearing is for the purpose of receiving the annual 
report of the Financial Stability Oversight Council (FSOC) to 
be presented by the Honorable Jacob J. Lew, Secretary of the 
Treasury and Chairman of the Financial Stability Oversight 
Council.
    I now recognize myself for 5 minutes to give an opening 
statement.
    Beginning this morning, we welcome back Secretary Lew to 
discuss FSOC, but before we do discuss FSOC, I would be remiss 
if I did not bring up the continuing scandal at the Internal 
Revenue Service, an agency that is part of Treasury. Mr. 
Secretary, 13 months ago you appeared before us and said, ``My 
highest priority is to restore confidence in the IRS.'' I think 
we know, Mr. Secretary, both of us, that has not yet occurred.
    Back then President Obama said of the IRS scandal, ``The 
misconduct is inexcusable, and Americans are right to be angry 
about it, and I am angry about it.'' He said his Administration 
would cooperate with Congress to uncover the truth. That is 
what he said, but regrettably, that is not what has happened.
    In just the last few days, we have learned the 
Administration has known since at least February that years' 
worth of IRS emails of eight IRS employees at the epicenter of 
the scandal have simply vanished. How terribly convenient for 
the Administration, but how inconvenient for the American 
people who expect equal protection under the law.
    The American people, regrettably but understandably, are 
becoming increasingly cynical and fearful of their government. 
There is a growing resentment of one set of rules for 
Washington and another set of rules for everyone else. In other 
words, no one believes that simply saying, ``Sorry, I have lost 
my emails,'' is an excuse the IRS would accept from a taxpayer 
being put through a torturous audit.
    Mr. Secretary, I trust you agree that the American people 
deserve better, and it is past time for openness and 
transparency from this Administration, which you told this 
committee 13 months ago was your highest priority. It is also 
past time for openness and transparency at FSOC, which you 
chair, Mr. Secretary. While you and other Administration 
officials habitually cite the purported dangers of financial 
stability posed by the shadow banking system, you ignore those 
presented by the shadow regulatory system of which FSOC is 
front and center.
    Indeed, with the exception of agencies dealing in 
classified information related to national security, FSOC may 
very well be the Nation's least transparent Federal entity. The 
public cannot view their proceedings because two-thirds of 
those proceedings were conducted in private executive sessions. 
And when the minutes are produced, on average they weigh in at 
a mere 5 pages long, with half of the pages devoted to 
memorializing attendees' names and resolutions considered.
    Better Markets, a public interest group that consistently 
advocates for more regulation of our financial sector, has 
stated, ``The FSOC's proceedings make the Politburo look open 
by comparison. No one in America even knows who they are. At 
the few open meetings they have, they snap their fingers, and 
it is over, and they are all scripted. They treat their 
information as it were state secrets.''
    To begin to remedy this sad situation is one of the reasons 
this committee has ordered H.R. 4387, the FSOC Transparency and 
Accountability Act, favorably reported to the House. The reason 
transparency and accountability are so important is because 
FSOC can designate practically any large financial firm in our 
Nation as a systemically important financial institution, a 
SIFI, and thus render effective control over it. Thus, it has 
the ability to render great damage to our economy and set back 
the dreams of tens of millions of our unemployed and 
underemployed Americans who are counting on their capital 
markets to work for them.
    Recently Douglas Holtz-Eakin, the former Director of the 
CBO, has estimated that designating asset managers as SIFIs 
could cost investors as much as 25 percent of their return on 
their investments over the long term, or approximately $108,000 
per investor. In other words, as it operates in the shadows, 
FSOC can take away the seed capital necessary to launch a small 
business or to send a child to college. That is both unfair and 
unwise.
    And while FSOC seems dead set on trying to find systemic 
risk where no one else seems to find it, a review of their 
latest report indicates that they are willfully blind to the 
largest sources of systemic risk, with hardly a mention of 
Fannie Mae or Freddie Mac, who were at the epicenter of the 
last financial crisis, and without the leadership of the 
Administration to end permanent taxpayer subsidies, they are 
certain to be at the center of the next financial crisis.
    There has been no mention of the Federal Government itself, 
which is $17 trillion in debt and growing, with more debt 
incurred under this Administration than in our Nation's first 
200 years. Our offices are all awash. The CBO and independent 
reports say the pace of spending is unsustainable, but rather 
than rein in government spending or prioritize interest 
payments on the debt, the Administration regrettably turns a 
blind eye and has even threatened to allow default on our 
sovereign debt.
    This committee has also passed H.R. 4881, to place a 1-year 
moratorium on further designations of nonbank SIFIs. Again, Mr. 
Secretary, I would call on FSOC to cease and desist with these 
designations so Congress can have time to conduct effective 
oversight and get answers to questions that both Republicans 
and Democrats have raised about FSOC's decision-making process.
    I now recognize the ranking member for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman.
    Today I am very pleased that you are here, Secretary Lew, 
and I welcome you back. And I assure you that we are not poised 
here today to talk about the IRS. That has been done in our 
Oversight and Investigations Subcommittee. We don't have 
documents. We don't have emails. We don't have any information 
relative to that issue. We gather here today to receive your 
annual report of the Financial Stability Oversight Council, 
FSOC, as required by the Dodd-Frank Act.
    To be honest, I am surprised to see so many of my 
colleagues on the other side of the aisle with us today given 
that the FSOC has joined the ranks of the Consumer Financial 
Protection Bureau, the Export-Import Bank, and the Terrorism 
Risk Insurance Act in becoming the latest target in a 
relentless Republican effort to tear down important engines of 
job creation, economic growth, and consumer protection.
    I didn't think my colleagues on the other side of the aisle 
would have any interest in hearing about the Council's progress 
or in your views of the financial stability of the United 
States. In fact, just last week this committee approved two 
measures that, under the guise of transparency, would 
compromise the FSOC and erode the important role it plays. 
These partisan bills were nothing more than an effort to derail 
this cornerstone of the Dodd-Frank Wall Street Reform Act.
    Mr. Chairman, the economic collapse of 2008 resulted in the 
greatest loss of wealth in a generation. Starting with the 
bankruptcy of Lehman Brothers, our economy quickly ground to a 
halt, leaving the American taxpayers to clean up the mess. All 
told, the financial crisis resulted in the destruction of more 
than $9 trillion in wealth and cost each American household 
approximately $50,000, while unemployment exploded throughout 
the country.
    One problem leading up to the crisis was that no one in the 
private sector or in government saw the big picture or had the 
responsibility to deal with emerging threats before they caused 
damage to our economy. That is why Democrats created the 
Financial Stability Oversight Council, that is FSOC, to fill 
that void and serve as an advance warning system to identify 
and address systemic risks posed by large complex companies, 
products, and activities before they threaten the economy.
    In plain English, FSOC is charged with looking at every 
aspect of our financial system for possible weaknesses and 
risk, something that did not happen in the lead-up to the 
crisis. The Council's work is critical to ensuring that our 
financial regulators are working collaboratively to identify 
and respond to emerging threats to financial stability.
    It remains a mystery to me why Republicans are spending the 
few legislative days we have left in this session pushing 
partisan legislation that would hamstring the FSOC's ability to 
protect homeowners, consumers, and the American economy. And it 
is obvious that, like with CFPB, Ex-Im, and TRIA, the 
Republicans' goal is to stop the program from its important 
work even if that means ending important protections for the 
American people in our economy.
    Secretary Lew, I look forward to your insight on areas of 
systemic risk the Council has identified, particularly related 
to mortgage servicing, alternatives to reference rates like 
LIBOR, and perceptions of ``too-big-to-fail.'' As we hear 
additional details from you about the risks identified in this 
year's report, I will be interested to hear whether Republicans 
believe FSOC should take action to mitigate those risks or turn 
a blind eye and invite another crisis.
    Finally, Mr. Chairman, I am looking forward to hearing more 
from you about how we address concerns that I and other Members 
of Congress have raised regarding the transparency of the FSOC 
designation process. I am sympathetic to these concerns and 
would like to hear what steps you have taken and your 
suggestions on how to increase transparency in a way that 
continues to carry out FSOC's mission. I look forward to the 
Secretary's testimony and his insight on all of these issues, 
as well as what the FSOC is currently doing to monitor systemic 
risk and promote financial stability.
    I yield back the balance of my time.
    Chairman Hensarling. The Chair now recognizes the 
gentlelady from West Virginia, Mrs. Capito, chairwoman of our 
Financial Institutions and Consumer Credit Subcommittee, for 1 
minute.
    Mrs. Capito. Thank you, Mr. Chairman, and thank you, 
Secretary Lew, for being with us today.
    We are going to learn more about the FSOC, which was 
created by Dodd-Frank with the mission of monitoring systemic 
risk. This designation can have a significant effect on the 
institution by requiring increased levels of regulatory 
capital. The costs associated with heightened credential 
standards are quite clear; however, the processes and 
methodologies for determining a nonbank firm's systemic risk 
are much less clear.
    In fact, in the recent designation of Prudential Insurance, 
the one member of the FSOC with significant insurance industry 
experience argued that there was little evidence to support the 
notion that a large life insurer poses a systemic risk. 
Furthermore, we know little about how an institution's 
designation will affect the end users.
    Another issue I would like to discuss with you, Mr. 
Secretary, is, are there arbitrary thresholds in Dodd-Frank 
that determine if a financial institution is systemically 
significant? There has been a lot of discussion about the 
different thresholds, and I would like to dig deeper on that 
with you. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentlelady from New York, Mrs. 
Maloney, ranking member of our Capital Markets Subcommittee, 
for 1\1/2\ minutes.
    Mrs. Maloney. Thank you, Mr. Chairman, and Ranking Member 
Waters, and welcome, Secretary Lew. I believe I speak on behalf 
of all New Yorkers when we say we are so proud of you and your 
many years of public service.
    This is an important hearing. The Financial Stability 
Oversight Council was one of the keys of the Dodd-Frank 
financial reform, and it provides a forum for all of our 
financial regulators to come together to discuss the risks that 
they each see in the markets they regulate, but from a broad 
perspective, from a systemic perspective. It also requires them 
to publish an annual report that describes in detail the 
emerging threats that they see in the financial markets, and 
this is tremendously important.
    It depends on what report you look at: the ranking member 
said $9 trillion; I have seen some reports that said that we 
suffered $16-$18 trillion in loss to our economy; Christina 
Romer testified before this Congress that the economic shocks 
we experienced in the last recession were 3 times greater than 
the Great Depression, and we managed it better.
    But also, economists have testified before this panel and 
other panels that it was the only financial crisis in our 
history that could have been prevented by better financial 
market overview and regulation. We didn't keep up with the new 
products. We didn't keep up with the new trends. So FSOC was 
created to help us prevent another serious, damaging, painful 
economic loss that we could have prevented with better 
financial management.
    I look forward to reading your report. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from New Jersey, Mr. 
Garrett, chairman of our Capital Markets Subcommittee, for 2 
minutes.
    Mr. Garrett. Thank you, Mr. Chairman.
    Today FSOC has become a sort of super-regulator whose SIFI 
designation is effectively an implicit taxpayer guarantee. Over 
time, I believe ``too-big-to-fail'' SIFIs will use their 
capital cost advantage to drive smaller competitors out of 
business. In short, FSOC now picks the winners and the losers 
in our financial markets. As FSOC aggressively asserts itself 
over more and more sectors of our economy, insurance companies 
and asset managers most recently, they owe the American people 
an explanation for what they are doing.
    Despite the recently released 147-page FSOC report, the 
vast majority of which is a rehash of basic economic 
information available on any financial Web site, FSOC's 
decision-making process remains a black box. Citizens whose 
livelihoods are directly affected by FSOC have little idea why 
FSOC makes the decisions it does.
    As a Congressman, I can be briefed on the most sensitive 
intelligence in the national security information, but I am not 
allowed to even sit quietly and listen in on an FSOC meeting. 
And companies that are designated by FSOC have only the vaguest 
notion of what aspects of their operation led FSOC to deem them 
systemically important. Without that knowledge, of course, they 
could do nothing to reduce their own systemic risk.
    And more importantly, when Republican Members have asked 
questions of you and of FSOC in the past, the answers we 
receive have always been bland and evasive talking points 
designed simply to give us the impression of responsiveness 
without actually ever answering any of our questions, Mr. 
Secretary.
    In fact, this committee asked you specifically last month 
for all the documents and all the communications between you, 
your Department, and the Financial Stability Board (FSB), and I 
have everything that you supplied us with right here in this 
box in response to your promise to supply us with all of those 
documents. We got absolutely nothing from you when you promised 
us that you would supply us with that information.
    Mr. Secretary, this stonewalling by you and this Department 
must stop. We have to get real answers from you and from 
Treasury, and I hope that today, the process begins.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Colorado, Mr. 
Perlmutter, for 1\1/2\ minutes.
    Mr. Perlmutter. Thanks, Mr. Chairman.
    And, Mr. Secretary, it is good to see you here. I want to 
thank you, and I want to thank the Administration. Since the 
President took over, since Dodd-Frank was passed, the stock 
market is up 10,000 points at about $1.3 billion per point. My 
math takes that to $13 trillion. Home prices are up, IRAs are 
up, and we put 10 million people back to work, and I just want 
to thank you for that.
    We had kind of an age-old debate a few weeks ago. Mr. 
Scalia was here saying that Dodd-Frank and FSOC had too much 
discretion. We had members of the banking community saying 
there was too little discretion and too arbitrary lines of 
demarcation within the bill.
    I have two areas I would like you to talk about today: 
first, the living will, what you are doing on the major 
institutions to find out if they fall apart, how you are going 
to take them apart; and second, I want you to talk a little bit 
about the GSEs.
    I am one of those who thinks that with proper underwriting, 
the GSEs actually work very well, and the private market will 
come and go as they think they can make money in mortgages. And 
now, there isn't a lot that has to be done with respect to the 
GSEs.
    So I would like you to talk about living wills and GSEs, 
and with that, I thank the chairman, and I yield back.
    Chairman Hensarling. The gentleman yields back the balance 
of his time.
    Today, we welcome the testimony of the Honorable Jacob J. 
Lew, Secretary of the U.S. Department of the Treasury. 
Secretary Lew has testified before our committee on a number of 
occasions, so I trust he needs no further introduction. Without 
objection, Secretary Lew's written statement will be made a 
part of the record.
    Mr. Secretary, you are now recognized for your oral 
presentation. Thank you.

   STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Secretary Lew. Thank you very much, Mr. Chairman.
    Chairman Hensarling, Ranking Member Waters, and members of 
the committee, thank you for the opportunity to testify today 
on the Financial Stability Oversight Council's 2014 annual 
report.
    Nearly 4 years ago, President Obama signed into law the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, 
creating the strongest safeguards for consumers and investors 
since the aftermath of the Great Depression. As everyone here 
recognizes, a stable, thriving financial sector is critical to 
our economic growth and prosperity, and that is why these 
historic safeguards were established.
    Today our financial system is more resilient, confidence in 
our markets is robust, and the agencies charged with protecting 
consumers and investors are in a strong position to respond to 
emerging threats that could hurt our economy, damage Main 
Street businesses, and destroy jobs.
    One of the lessons from the financial crisis was 
recognizing how important it is to detect and mitigate risks to 
financial stability. In the lead-up to the crisis, individual 
regulators focused on individual institutions, functions or 
markets. This siloed approach allowed risks to fall through the 
cracks. Congress changed that by creating the Financial 
Stability Oversight Council. Now regulators are obligated by 
statute to collectively monitor the stability of the entire 
U.S. financial system, to look over the horizon to identify 
potential risks, and to respond to threats that have been 
detected. In short, the Council's work to detect possible risk 
is not only mandated by law; it is sound economic policy.
    That is why it both defies common sense and ignores recent 
history that some have suggested curtailing the Council's 
ability to analyze information regarding particular financial 
sectors, firms or activities. The Council cannot simply cordon 
off any sector or activity that could pose a threat. That would 
be a dereliction of its responsibilities and a complete 
disregard for the very purpose of the Council.
    Some have even gone so far as to suggest that the Council 
should be prohibited from simply asking questions about certain 
activities or companies that could threaten financial 
stability. We have to be allowed to ask questions. As everyone 
here knows, during the run-up to the financial crisis, 
regulators should have asked more questions about institutions 
and activities, not fewer.
    To be clear, asking questions does not equal regulatory 
action. Sometimes questions result in a conclusion that the 
Council does not need to act; that it needs to examine the 
issue further, or that it needs to gather more information. The 
Council asks questions with an open mind and without a 
predetermined outcome. In that vein, the Council's procedures 
are transparent. It has put in place a comprehensive delivery 
of approach to its evaluation of risks, and it solicits public 
input and carefully considers all points of view.
    In fact, the Council's annual report exemplifies the 
Council's commitment to transparency and collaboration. It 
reflects a collective analysis and conclusions of Council 
members regarding the key risks to financial stability, and is 
an important example of how the Council shares information 
about its work with Congress and the public.
    Each annual report also provides a road map for the 
Council's agenda for the upcoming year, what areas it will 
focus on, what areas will likely require additional attention, 
and how the Council expects to address them.
    This year's report focuses on nine areas that warrant 
continued attention and possibly further action from its 
members. These areas include wholesale funding markets, the 
housing finance system, cybersecurity threats, risk-taking by 
large financial institutions, and potential interest rate 
volatility.
    Before closing, let me point out that since the Council's 
last annual report, we have reached a number of key milestones 
in financial reform implementation. That means that homebuyers, 
retirees, and investors have better safeguards and protections. 
To that end, the Volcker Rule has been finalized, qualified 
mortgage standards have gone into effect, tough capital 
standards are now in place, over-the-counter derivatives are 
now moving onto electronic trading platforms and into 
centralized clearing, fines have been imposed on abusive 
actions related to manipulation of LIBOR and other financial 
benchmarks, and the international community is making progress 
on increasing the stability of the global financial system.
    Mr. Chairman, I want to thank the members of the Council 
and all of the staff involved with the 2014 annual report for 
their tireless work and commitment. As the Council fulfills its 
obligations to strengthen our financial system and limit risk 
to our economy, we will continue to work with the committee and 
with Congress to make real progress for all Americans.
    Thank you, and I look forward to answering your questions.
    [The prepared statement of Secretary Lew can be found on 
page 62 of the appendix.]
    Chairman Hensarling. The Chair now recognizes himself for 5 
minutes for questions.
    Mr. Secretary, I would like to start off with a matter that 
I left off with during your last appearance, for which I did 
not receive an answer. It is not a ``gotcha'' question, and 
when I receive the answer, I will certainly be fair and give 
you a brief moment to give it some context.
    As you know, 11 months ago the G20's FSB, of which Treasury 
is a preliminary member, designated 3 U.S. insurers as global 
SIFIs. Did Treasury support these designations, yes or no?
    Secretary Lew. Mr. Chairman, as I mentioned the last time I 
testified, the FSB operates by consensus, and the U.S. 
participants in the FSB joined in the consensus at that time.
    Chairman Hensarling. Okay. So Treasury considered in the 
designation, correct?
    Secretary Lew. We joined in the consensus. There was not a 
vote, but we were part of the consensus.
    But I need to really make the point quite clearly that 
action in the FSB and action in the FSOC are very different 
matters. The FSB is not a national authority. It doesn't 
designate institutions in a way that has a legal effect. And 
the FSOC, when it makes its determination, does it on a 
parallel path. Now, it may ask and answer questions in a 
similar way, but it doesn't necessarily.
    Chairman Hensarling. Let me ask this question, Mr. 
Secretary: Can a financial institution pose, in your mind, a 
systemic risk to the global economy without representing a 
systemic risk to our domestic economy?
    Secretary Lew. Mr. Chairman, I think the question of 
designation is a moment in time and based on analysis it had at 
that time. In the case of a designation of a specific 
institution, the process at FSOC goes through a very detailed 
process.
    Chairman Hensarling. I understand there may be two 
different processes. What I am simply asking is in Treasury's 
opinion, if one is a potential systemic threat to the global 
economy, must they necessarily also present a systemic risk to 
the domestic economy?
    Secretary Lew. And the reason I am answering your question 
the way I am is that in making a determination at the FSB 
level, it is based on the information and the analysis you have 
at that point. What you go through during an FSOC determination 
process is a very detailed exchange of information ultimately 
with a company--
    Chairman Hensarling. So you are simply telling me that two 
different processes may lead to two different answers?
    Secretary Lew. It could.
    Chairman Hensarling. So Treasury, then, you are telling me, 
could support a designation of the exact same firm as 
systemically risky to the global economy but not systemically 
risky to the domestic economy?
    Secretary Lew. The action taken in the FSB does not 
designate a company in the same way that FSOC does. So the only 
national authority that can designate a company for regulation 
is FSOC.
    Chairman Hensarling. Okay. Well, Mr. Secretary, my time is 
limited. Let me move on.
    I think you know that Bloomberg--different subject--
reported that when the Chairman of the SEC told the FSOC that 
they wanted to release the Office of Financial Research Asset 
Management study, which, as you well know, has been widely 
panned, Bloomberg reported that you personally called the SEC 
Chair ``to express your displeasure.'' Is that story accurate?
    Secretary Lew. I am not going to get into the details of 
private conversations that I may have had with other members of 
the FSOC, but--
    Chairman Hensarling. Okay. Let me ask the question this 
way: Did you favor or oppose releasing the study to the public?
    Secretary Lew. My view was that the OFR study was going to 
be released to the public, and the public was going to be 
commenting on it. And the question of whether or not it would 
be released in any kind of a formal way asking for comments by 
an agency other than OFR is a different question.
    Chairman Hensarling. Should the OFR--
    Secretary Lew. There was never a question that the OFR 
study would be published.
    Chairman Hensarling. Should the OFR's work be immune from 
public comment?
    Secretary Lew. No. On the contrary, the OFR report was 
meant to be public, and it was meant to elicit a public debate, 
and that debate occurred. So I very much believe that it should 
have been public, it was public, and the only question was 
should it be formally put out by one or another agency for 
comment in a formal way?
    Chairman Hensarling. Last year you said, ``It is 
unacceptable to be in a place where `too-big-to-fail' has not 
been ended. If we get to the end of this year and we cannot 
with an honest, straight face say that we have ended `too-big-
to-fail,' we are going to have to look at other options.''
    I think you may know that a few months ago your predecessor 
Secretary Geithner was asked if ``too-big-to-fail'' still 
exists. His answer, ``Yes, of course it does.''
    Using your words, can you tell this committee today with an 
honest, straight face that we have ended ``too-big-to-fail?''
    Secretary Lew. Mr. Chairman, we have made enormous 
progress. I am not sure we will know the answer to that 
question until we have the next financial crisis. That is the 
challenge that we all have in asking have we gone far enough. 
But I will say that there is more work under way to continue to 
look at the areas where we can have more protection, things 
like supplemental--
    Chairman Hensarling. We have heard from multiple witnesses 
that the Volcker Rule will significantly reduce liquidity in 
the corporate bond market. The Financial Times has reported 
that the Federal Reserve is very concerned about the potential 
of large-scale withdrawals from investors and managers of 
corporate fund bonds. They are concerned about the illiquidity 
of the corporate bond market. So it strikes me as somewhat 
ironic that the Volcker Rule, which has been touted by you and 
others as necessary to ensure financial stability, may now be a 
part of financial instability.
    This committee has requested information from Treasury and 
FSOC regarding the status of our corporate bond markets. We 
haven't received anything as yet. So has the FSOC conducted an 
analysis of the systemic risk that can result from a lack of 
liquidity in the corporate bond market?
    Secretary Lew. Mr. Chairman, we obviously are just in the 
early months after the final publication of a Volcker Rule that 
is final. It hasn't taken effect in the marketplace yet, so it 
is premature to judge what its impact on the market is.
    I think it is actually quite an accomplishment that five 
independent regulators published an identical rule on the same 
day providing clarity in an area that badly needed clarity so 
that there would not be uncertainty in the industry. I have 
actually received quite a lot of positive comment that that was 
the result.
    Chairman Hensarling. The time of the Chair has expired.
    The Chair now recognizes the ranking member for 5 minutes.
    Ms. Waters. Thank you very much.
    Some have criticized the FSOC's designation process as 
being opaque. The GAO also made several recommendations to the 
FSOC to improve its transparency. Would you please describe how 
the FSOC has addressed these recommendations? Would you also 
describe how the FSOC changed this transparency policy last 
month? Is the FSOC appropriately balancing the need for 
transparency against the need to protect sensitive market and 
supervisory information?
    This is an issue I would like to get behind us and deal 
with it in ways that would allow FSOC to do its work. And so I 
am hoping that you have not only given considerable thought to 
this, but to help us to understand how we can better make sure 
that you can carry out your mission and not have those that you 
are regulating and giving oversight to believe that somehow you 
are trying to do all this in secret. And I don't want to spend 
all of my time on this, because I really do want to get to 
nonbank market servicing. So would you please respond to the 
first part of the question?
    Secretary Lew. Congresswoman Waters, I think that the 
values of openness and transparency are very important to all 
of us. We have constructed a process in FSOC which I believe 
respects and reflects those values, and it gives an enormous 
opportunity for companies through the designation process to 
engage with FSOC without prematurely making public things that 
would not be appropriate to be a public discussion.
    Much of the discussion in a designation process involves 
reviewing the internal information that is the kind of 
supervisory information with which regulators work. When we get 
to the final stage of the designation process, there is a back-
and-forth that is quite voluminous with the company where the 
company is sharing proprietary information, information that 
gets to the essence of their business.
    So I think what we need to balance is a process that 
requires a certain amount of confidentiality with transparency. 
We just recently made some changes, and it is a young 
organization that is continuing to evolve where we are noticing 
in advance topics to be discussed. We are putting out minutes 
of meetings, notes for meetings afterwards, and we will 
continue to try to perfect the process. But I don't think the 
answer is to say it should all be a completely open public 
discussion or the inquiry itself would be stymied.
    Ms. Waters. Mr. Secretary, I would like to ask you to make 
sure that the staff of FSOC gets what the staff of this 
committee, and I would hope that the chairman would agree, so 
that you could walk through whatever changes you have made--
    Secretary Lew. I would be happy to do that.
    Ms. Waters. --in order to have more transparency. We need 
to understand that, because as you know, with H.R. 4387, this 
bill would subject FSOC to the Sunshine Act, expand its 
membership and change voting protocols for Commission and Board 
members, and allow Members of Congress to attend and 
participate in FSOC closed-door meetings.
    Now, I think this is ridiculous, and I want to get off of 
that, and so if you will help us to understand more about what 
you have done, then hopefully we can engage with you about what 
we think about what you have done and maybe have some 
suggestions for you.
    With that, do you have a moment to talk about what you have 
done in taking a look at nonbank mortgage services?
    Secretary Lew. The question of mortgage servicers is a very 
important one. As they have moved out of banks into more 
independent businesses, the challenge is how to maintain 
consumer protections and oversight, and how to make sure that 
very important backbone to our mortgage finance system 
functions well.
    I think if you look at the actions taken by the CFPB, they 
have taken on the role of consumer protection oversight in a 
very important way, and I think that is an area we have to 
continue to look at, understand, and, if we need to take more 
action, discuss what that is.
    Obviously, the mortgage system requires that there are 
servicers who are reliable, who are there to handle the 
transactions between the borrower and the holder of the 
mortgage, and it is something that we cannot have be fragile. 
So it is something we are very much watching, and we think that 
the actions taken by the CFPB are very positive ones, and we 
will continue to review the situation.
    Ms. Waters. Mr. Secretary, let me just say, one of the 
things we discovered with the subprime meltdown was a lot of 
the problems were with the servicers: the loss of paper; the 
lack of understanding what their jobs really were; the 
inability to make determinations about whether or not people 
had sufficient income to meet a proposed modification; and on 
and on and on. So this is a serious area that--
    Secretary Lew. It is a very important area. I totally 
agree.
    Ms. Waters. Thank you. And I yield back the balance of my 
time.
    Chairman Hensarling. The Chair now recognizes the gentleman 
from New Jersey, Mr. Garrett, chairman of our Capital Markets 
Subcommittee.
    Mr. Garrett. Mr. Secretary, as you know, the chairman, some 
other members of the panel, and I have asked for specific 
documents from you, and we did so over a month ago, and you 
assured us that you would provide them. You formally responded 
only last Friday, and you did so with a nonresponse. The 
response contained none of the requested documents.
    Mr. Secretary, this committee has to subpoena those 
documents. Can you promise us here today that any emails that 
make up those documents or files that we have requested will 
not fall victim to any mysterious or unexplained hard drive 
crash? And are you doing anything now to protect those 
documents that we have requested and you promised that you 
would supply, but after a month you still have not done so?
    Secretary Lew. Congressman, as you noted, I did respond 
along with the Chairman of the SEC and the Chairman of the 
Federal Reserve Board to your inquiry. In that letter, we said 
our staff would work together to--
    Mr. Garrett. So will you protect those documents? Because 
you did not provide any of the documents that we requested.
    Secretary Lew. Yes. And as the letter indicates, our staff 
will work with your staff on--
    Mr. Garrett. Are you protecting those documents?
    Secretary Lew. We routinely protect our documents.
    Mr. Garrett. We know the routine over at the IRS. Is yours 
a better routine than they have?
    Secretary Lew. Congressman, we have--
    Mr. Garrett. Okay. That is a ``no.''
    Secretary Lew. No, Congressman, that is not a ``no.''
    Mr. Garrett. Mr. Chairman, I would suggest--
    Secretary Lew. We protect our documents.
    Mr. Garrett. I would suggest that we consider issuing 
subpoenas sooner rather than later, given how fast emails are 
disappearing within the Treasury Department.
    I have a question for you from home. This is a little bit 
off topic. But if the IRS is conducting an audit of a law-
abiding taxpayer citizen--and I have gotten this a lot over the 
last several weeks--and the IRS asks for documents, and they do 
not come, and they say that they don't have them anymore 
because their hard drive crashed, the IRS and your response to 
them would be, that is okay because that is the routine system?
    Secretary Lew. Congressman, as Commissioner Koskinen 
testified last week, if that happens to a taxpayer, the 
practice is for the IRS to work with the taxpayer based on 
documents that are available to proceed--
    Mr. Garrett. So I will take that as--and so we are going to 
be working with you, and that is why I suggested that we issue 
subpoenas now because you have not supplied the information 
that you have promised to this committee.
    Mr. Chairman, I don't have any confidence in this 
Administration to be able to conduct a fair, impartial, and 
thorough investigation into that matter, nor to supply the 
information this committee has requested repeatedly. And for 
that reason, I do believe that a special prosecutor should be 
appointed to find the truth as to what actually happened there, 
and for us to go forward as quickly as possible with regard to 
subpoenas.
    Now, to return to the matter at hand on FSOC and 
designations, the chairman asked you a very simple question 
with regard to consensus. I think most people watching 
understand what ``consensus'' means. It means that the parties 
at a table consent to something. That is the root word of 
consensus. So FSB in that process said there was a consensus on 
the matter, and his simple question was, did you consent? And 
you did not give an answer. Can you say whether, when they went 
around the table figuratively, did you consent? Did you say 
yes, no, or I really don't know what to answer?
    Secretary Lew. Congressman, I answered the question. I said 
the U.S. Government representatives joined in the consensus.
    Mr. Garrett. So you said yes?
    Secretary Lew. I answered the question.
    Mr. Garrett. No. And so when you made that determination, 
the chairman also asked the question, is it possible for a 
company to be globally designated but not to be designated 
nationally by a SIFI? And the answer to that one is also yes?
    Secretary Lew. Yes. I said that they are parallel 
processes, and the FSOC, which is the national authority, would 
make its own determination based on the process conducted at 
FSOC.
    Mr. Garrett. So a company could be globally important but 
not here in the United States? How is that possible?
    Secretary Lew. The process of the FSB designation is one 
that is not binding on national authorities. Obviously, it is 
something--
    Mr. Garrett. Binding doesn't matter . It is whether or not 
that company is actually systemically important on a global 
basis.
    Secretary Lew. That is the reason that the FSOC goes 
through a very detailed analysis. There is more information--
    Mr. Garrett. Oh. So does that mean that the FSB process is 
not a detailed analysis?
    Secretary Lew. No, I am not saying it is not a detailed 
analysis, and I am not saying that the outcome would be 
different. I am just saying that there is a parallel national 
process that takes place and--
    Mr. Garrett. In a legal matter, when a judge has made a 
decision in one case, they oftentimes have to recuse themselves 
when the same parties are involved in that or the same issues 
come up. Lawyers have to do that all the time. Will you recuse 
yourself from that deliberation process when these same 
companies come up for designation on the SIFI basis even though 
they are different processes?
    Secretary Lew. Congressman, the responsibility that all of 
us at FSOC have is to review all of the information and make a 
decision based on the information presented in the FSOC 
process, which is what I will do.
    Mr. Garrett. So, the answer to that is ``no.''
    Secretary Lew. I will do my job reviewing all the documents 
and all the analysis, and we will make a decision based on 
that.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Massachusetts, 
Mr. Capuano, ranking member of our Housing and Insurance 
Subcommittee.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Secretary, I am tempted to talk about the batting 
averages of the Red Sox, but I think I will wait for another 
day for that. That is my biggest concern right now, to be 
perfectly honest with you.
    I do want to talk about a couple of concerns. First of all, 
I want to thank you for the job you have done. I think you have 
done a great job. But like everything else, there are details 
that have to be worked out, and I have a lot of constituents 
who are concerned about questions that have not happened yet. I 
am very happy with what FSOC has done, but I have my concerns 
about some of the things they have not yet--the second shoe 
hasn't dropped.
    I want to talk to you for a minute about the International 
Association of Insurance Supervisors, of which you are 
participating, and I got a response from you to a letter we had 
written. I want to read a section of that and put the letter on 
record. We were talking about the capital standards that are 
being developed by the IAIS and your letter stated that, ``the 
capital standards being developed by insurance experts will not 
have any legal effect in the United States unless they are 
implemented by U.S. regulators in accordance with U.S. law,'' 
which, of course, is the answer that I wanted. I appreciate the 
answer, but I need to push it a little further.
    And I say that because I am not opposed to 
internationalization. It is going to happen. I just think that 
we shouldn't put the cart before the horse. We haven't cleaned 
up our own house fully yet. I am not ready to pass it all over 
to an international standard. I want to make sure that in the 
standards correctly, though, that by doing so--I want to make 
sure how I understand that in accordance with U.S. law, I want 
to make sure that this is not some backdoor way to allow some 
Section 4807 of some treaty with some country I have never 
heard of to overtake our capital standards and insurance, and 
say, we have a treaty that we signed 400 years ago, and we have 
to therefore give it up. That is--I presume that you are not 
looking for that back door.
    Secretary Lew. No. Congressman, I think it is worth taking 
a step back and talking about how important our involvement in 
these international bodies is. We could do an outstanding job 
in the United States putting a system in place that is safe and 
sound for all of our financial institutions, and we are still 
exposed to vulnerabilities if, around the world, the standard 
isn't raised as well. So we simultaneously participate in 
international discussions, and in a case like this, our 
insurance experts are very much a part of shaping the 
international debate.
    Mr. Capuano. As I think you should be. I think you should 
be at the table, and I do think that you should participate, 
and I do think you should have a strong voice. I just don't 
have faith at the moment. I may have it at some future time 
that the international standards are going to be any better 
than we can do for ourselves.
    Secretary Lew. And while our participation in the 
international process often leads to a result that reflects our 
judgment of what the outcome is, we retain, as do all national 
authorities, the right to make decisions.
    Mr. Capuano. Fair enough.
    Secretary Lew. In the case of insurance, it is the States 
that have a lot of the authority.
    Mr. Capuano. The other question, though, is, number one, I 
want things straightforward. I believe in FSOC, I believe in 
what you are doing, I do believe internationalization is 
coming, but I don't want to find out the day after that, that 
somehow through the back door, we gave up our entire system of 
insurance regulation without knowing about it. If we do it, I 
think we need to do it conscientiously. I don't want to find 
out that some treaty did it, and I don't want to find out that 
somehow because somebody from Lichtenstein had a better idea, 
that now they run our insurance industry. And I don't expect 
that is going to happen, but I need to put that on the record.
    Secretary Lew. That is not the way it works.
    Mr. Capuano. You also talk about transparency, that, as far 
as I am concerned--let me back up 1 second. I also want to go 
and find out that under Dodd-Frank, as I understand it, the Fed 
and others have oversight on insurance companies that are 
SIFIs, or they have savings and loans holding companies. Other 
insurance companies are not subject to Federal regulation, and 
I just want to make sure that there is not some back-door way 
to expand jurisdiction. Though I do believe that Federal 
optional charters will come someday, they are not here yet, and 
I just want to make sure we are not trying to do that in a 
back-door way.
    Secretary Lew. It is definitely not any kind of a back door 
into Federal regulation of all insurance, though there is a 
debate to be had, as you note, as to what is the right balance 
between State and Federal. But that has to be done directly, if 
it is done.
    Mr. Capuano. That is what I wanted to hear.
    I also want to talk a little bit about transparency. You 
also agree that transparency is important, and up until now 
there has been some--there has been give and take; you get 
transparent, and then you don't get transparent. And for me, 
one of the things when it comes to designating SIFIs is the 
SIFIs know what the measurements are, or the potential SIFIs 
know what the measurements are.
    My argument is, it is like a traffic cop. If a traffic cop 
is sitting on a highway, the truth is most of the time I want 
the blue lights to be flashing because I am not interested in 
catching somebody going 3 miles an hour over the speed limit, I 
am interested in keeping them at the speed limit, and the best 
way to do that is let them know that there is a cop on the 
highway.
    And the same thing here. I am not interested in catching 
someone into a SIFI if they want to avoid it and can avoid it. 
And the only way that can happen is if FSOC and others tell 
them, here are the measurements we are going to have. If you 
choose not to participate in these measurements between now and 
6 months from now, you can take action to avoid it. Why is that 
not possible?
    Chairman Hensarling. Brief answer, Mr. Secretary.
    Secretary Lew. I think that the standards that are used in 
FSOC actually are understood by the industry. We put out 
detailed rules early on in the process. When it gets to the 
point of actually engaging with a company, there is an enormous 
amount of give and take back and forth, which gives them the 
ability to make judgments as to how they want to organize their 
risk.
    Mr. Capuano. I think we have to follow up on that at a 
later time.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from West Virginia, 
Mrs. Capito, chairwoman of our Financial Institutions 
Subcommittee.
    Mrs. Capito. Thank you, Mr. Chairman.
    As I mentioned in my opening statement, I believe that the 
process for designating the financial institutions should be 
based on activities of the institution as opposed to just 
arbitrary cut-off points, for instance, the $50 billion level, 
and then we have another level, $10 billion for the consumer 
supervision.
    And what we are finding, I think, is--and this sort of 
pivots a little bit off of the previous questioner--if you have 
these arbitrary deadlines at $50 billion, you could have a 
financial institution that is maybe at $35 billion that is much 
riskier than, say, one that is at $100 billion because of their 
business platforms, their business--and the way they structured 
their business with less and fewer risks.
    So I guess what I would ask is--and Governor Tarullo talked 
about this about a month ago, mentioned--just kind of threw out 
$100 billion to raise it up, because folks who are falling in 
those thresholds are having difficulty. How do you feel about 
that, rather than have an arbitrary asset limitation, to maybe 
look at what the risk profiles and base those designations on 
that? I know that is a discussion.
    Secretary Lew. The threshold does not lead to designation 
automatically. There is only a designation if the analysis done 
suggests that there is a risk that determines that it is 
systemically significant. And I think that the number of 
designations reflects the fact that we have seen the nonbank 
utilities designated, we have seen two insurance companies 
designated. It has not been a massive process.
    Mrs. Capito. I think in the case of the banks, if they 
reach the $50 billion threshold, it is a--
    Secretary Lew. I thought you were talking about the FSOC 
designation, the thresholds.
    Mrs. Capito. I am talking about that in conjunction with, I 
guess, the other designations of significantly systemically 
important--
    Secretary Lew. Yes. As far as the banks, I think after the 
financial crisis the burden certainly was on us to take a 
closer look at systemic risk in large institutions, and as we 
go through that process, as the regulators go through their 
more detailed reviews of both the financial conditions of those 
banks and their systemic risks, I think it is a discussion that 
we can continue to have.
    But I think for the time being, we have to look back and 
forward. We weren't where we needed to be in 2005, 2006, 2007, 
and 2008. We need to make sure that we have visibility into any 
of the institutions that could create that kind of systemic 
risk. And as far as the designations at FSOC go, the same 
standard, I think, applies. We are not looking to designate for 
the sake of designating. We are only looking to identify where 
are there areas of systemic risk that if we look back at the 
next financial crisis, we would say, why didn't you catch that?
    Mrs. Capito. I think that in the case of Prudential, they 
would argue--this is a slightly different question--that if 
they were to fail, their business model would not drag down the 
entire financial system. What kind of metrics were used for 
that, and how does that--yes, what kind of metrics did you all 
use to make those determinations when the insurance expert on 
the FSOC had a deep question about that?
    Secretary Lew. There were detailed analyses done, and there 
was a hearing where Prudential came and exercised its right to 
ask for a hearing.
    And, I think that the kinds of questions that you ask when 
you are looking to make the determination like this don't have 
to do with what happens if the company fails in good times; it 
has to do with what happens if there is a financial crisis and 
the company fails? What happens if it is a situation of great 
stress in the system? And that is not necessarily what 
regulators previously did, but when we saw what happened in 
2007, 2008, at a time of great stress in the financial system, 
things do happen that don't happen at other times, and that is 
the kind of inquiry that we went through.
    Mrs. Capito. Okay. I have asked you this, I think, every 
time you have come before us. Mr. Meeks and I have a bill out 
that would modernize and streamline the financial regulatory 
framework. We are hearing consistently, particularly from our 
community banks, but also others, that the piling on of the 
regulatory burden is really becoming a chiller in terms of 
being able to move forward with business.
    And you mentioned that once every 10 years, there is an 
analysis of this. I think 10 years is too long a period, 
especially since we have gone into--a lot of these have gone 
into effect over the last 4 years. So what efforts are you 
making in that?
    Secretary Lew. I have a certain amount of background in 
this, because when I was OMB Director, I conducted a review of 
all of the Executive Branch agencies to do a lookback, and we 
asked the independent regulators to do a similar lookback. We 
didn't have the authority to direct them to do that lookback.
    I think that at the moment with the 10-year review coming 
up, the regulators have indicated it is their intention to do 
that kind of lookback. I think that is a very important thing.
    Mrs. Capito. Thank you.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Texas, Mr. 
Hinojosa, for 5 minutes.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    And thank you, Secretary Lew, for your testimony today.
    Before the financial crisis that caused the Great 
Recession, the United States had many financial regulators, yet 
none took a comprehensive look at the economy as a whole. We 
were caught off guard because no one was tasked with looking at 
the big picture. Congress created financial stability over in 
FSOC as a cornerstone of the Dodd-Frank Act. It serves a 
critical function to keep watch for emerging financial threats.
    So, Secretary Lew, prior to that passage of Dodd-Frank, 
what government agency, if any, was responsible for looking at 
the systemic risk in the U.S. financial system?
    Secretary Lew. Congressman, I think one of the things we 
learned is that there was no single agency that had 
responsibility for looking across the system and identifying 
issues of systemic risk. One of the reasons FSOC was created 
was to make sure that in the future, agencies collectively as a 
body chaired by the Treasury Secretary would be charged with 
that responsibility.
    I think it is critically important. I don't think that it 
would be responsible for us to go back to a world where you 
don't have that kind of ability to look across the different 
silos. And that is not to say that the regulators weren't 
regulating the industries for which they had responsibility. 
They weren't necessarily looking at the interconnections and 
the way that the entire systemic risk profile developed.
    That is exactly what FSOC does. It is why it was created. 
It is why we need to be able to ask questions. And it is also 
why we need to be able to ask questions when we don't know what 
the answer is. It ought not to be that we have to have near 
certainty that there is a problem in order to ask a question. 
We have to be able to turn over a lot of stones and have the 
good judgment to only designate if the analysis of the facts 
warrant it.
    Mr. Hinojosa. So last week the committee passed H.R. 4387, 
the FSOC Transparency and Accountability Act. This bill would 
subject the FSOC to the Sunshine Act, expand its membership, 
and change voting protocols for Commission and Board members, 
and it would allow Members of Congress to attend and 
participate in FSOC closed-door meetings.
    In addition, this bill, H.R. 4881, would prevent the FSOC 
from any further actions related to the designation of a 
nonbank SIFI, including even talking about the possibility of 
the designation for 1 year. By undermining FSOC, we undermine 
our ability to avoid a future crisis like we have just 
experienced.
    Mr. Secretary, how do you view the bills passed last week 
out of this committee, and what is your primary concern?
    Secretary Lew. Congressman, I think that transparency is 
important. We are trying to develop policies which make that 
very clear. I also think that there needs to be a space where 
financial regulators can have a conversation about confidential 
information that is a protected space. And the balance is an 
important one to strike.
    I think the notion of complying with as much of the 
Sunshine Act as possible is something that we have reflected. 
Much of the Sunshine Act is reflected in the FSOC procedures. 
But because of the balance, it is not 100 percent, and I think 
it is the right balance for now, and we need to continue to 
work to strive for striking the proper balance.
    Mr. Hinojosa. I am with you.
    Secretary Lew. As far as the participation of Members of 
Congress, I would just point out that Executive Branch meetings 
happen every day all day long, and it is not considered the 
norm nor appropriate for there to be congressional 
participation in Executive Branch meetings. I don't think it 
would be appropriate here either.
    Mr. Hinojosa. In looking at your annual report, the FSOC 
delineates recommendations to improve the health of our 
financial markets. Interest rates have been kept to a historic 
low in order to encourage lending and spur economic growth. To 
offset the effect of low interest rates, the banks and credit 
unions have increased risk-seeking behavior such as extending 
the duration of assets and easing lending standards.
    So let me ask you this question: How much does the risk of 
increased interest rate volatility concern you?
    Secretary Lew. I look at all of the different moving pieces 
in our financial system to keep track of them. Obviously, low 
interest rates do produce a certain tendency for there to be a 
kind of rush to yield. We have seen a narrowing of yield curves 
that suggests that. I don't think that--if you balance the kind 
of where we have come in our economic recovery and the policies 
that have led there, I think that we are at a place where this 
is a question that the Fed and others have to look at. But I am 
not going to comment on monetary policy.
    Mr. Hinojosa. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair recognizes the gentleman from Texas, Mr. 
Neugebauer, chairman of our Housing and Insurance Subcommittee.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    In his dissent, Roy Woodall, who is the FSOC's designated 
insurance expert, stated that the underlying analysis for the 
Prudential designation used scenarios which were ``atypical to 
the fundamental and seasoned understanding of the business of 
insurance, the insurance regulatory environment, and the State 
insurance company resolution and guaranteed fund systems.''
    Do you agree with Mr. Woodall's statement?
    Secretary Lew. Congressman, obviously the FSOC decision was 
one in which I participated. I thought the designation was 
appropriate, and the risk analysis warranted it.
    Mr. Neugebauer. So you disagree with his statements?
    Secretary Lew. I am just going to comment on what informed 
my judgment in terms of the decision that we made.
    Mr. Neugebauer. So just for the record, Mr. Secretary, what 
is your background as far as experience in regulating insurance 
companies?
    Secretary Lew. I don't pretend to have been an insurance 
regulator. I have worked on insurance policy as a policymaker 
from time to time. But, I think that the responsibility each of 
us has as FSOC members is to look at a very detailed analysis 
that is prepared by all of the staffs of the FSOC. It is quite 
voluminous and detailed. In the case of the Prudential 
designation, I participated in the hearing, and you make your 
judgment based on the record that is prepared.
    Mr. Neugebauer. So when you don't have a background in that 
industry yourself, I guess one of the reasons that Congress 
decided to put these insurance people on the FSOC process was 
obviously a lot of the regulators that--for example, the Fed 
and the Treasury and others don't really have much background 
or experience in regulating insurance companies, do they?
    Secretary Lew. Look, Congressman--
    Mr. Neugebauer. Do they have a background or experience in 
doing that?
    Secretary Lew. For the most part, they have backgrounds in 
the field that they are in, whether it is banking or 
securities.
    But I think that if you look back at the financial crisis 
of 2006 and 2007 and 2008, the insurance industry was very 
integrated into the financial system and was very much a part 
of the cause of a systemic collapse. So I think that the 
questions--
    Mr. Neugebauer. The insurance industry was--
    Secretary Lew. Parts of it, yes.
    Mr. Neugebauer. What part was that?
    Secretary Lew. AIG was part of it.
    Mr. Neugebauer. But that wasn't the insurance aspect of 
their business, was it?
    Secretary Lew. The inquiry about systemic risk is one where 
you look at all of the activities of a firm, and you look at 
whether or not it has transmission channels, if there is a 
problem in that into other parts of the financial system.
    And I thought, and I continue to believe, that the analysis 
done was a very high-quality one, and it warranted the 
determination. And I will just point out that there was not an 
appeal of the judgment either.
    Mr. Neugebauer. One of the reasons for designating 
Prudential as a SIFI relates to FSOC's asset liquidation 
analysis. Are you familiar--
    Secretary Lew. Yes.
    Mr. Neugebauer. --which it assumes that simultaneous runs 
against its journal, and separate accounts by millions of life 
insurance policyholders and a significant number of annuity and 
other contract holders for products with a cash surrender 
value, this assumes a scale for which there is no precedent.
    In other words, was there anything in Prudential that would 
indicate that they had ever experienced a catastrophic 
liquidation of policies or surrender of policies?
    Secretary Lew. The question is not whether something has 
happened, but whether there is a systemic risk in the future. 
And I think the scenarios that you look at tend to be scenarios 
that have not been experienced because your goal is to avoid 
having a financial crisis that you could avoid.
    Mr. Neugebauer. The only problem with that, Mr. Secretary, 
is trying to forecast cataclysmic events. Really I don't know 
that anybody has any expertise in doing that. And by trying to 
come up with these what-if--I could come up with a lot of what-
if scenarios where you wouldn't want to put your money in any 
financial institution.
    But the problem is, when you start going down this road, 
you impact the business model and the customers who rely on a 
lot of these financial products for something that you are not 
sure is going to happen in the future, that has not happened in 
the past.
    And then when you ignore the expertise of people who have 
been put on FSOC to give you some guidance in that area, I 
think that is one of the reasons that you hear so many of us 
question the mythology that is being used in this process.
    Secretary Lew. Congressman, I don't disagree that the 
scenarios that you look at are not the likely scenarios, but 
that is not our task. Our task is to look at, in a crisis 
situation, is there a risk of financial stability being 
undermined.
    And we know what the recession of 2008, 2009 looked like. 
We know what the Great Depression looked like. There are 
scenarios that we have gone through in our history. And it is 
not just pulling scenarios out of the air; the question is, in 
a time of great stress, is there risk? And if there is risk, it 
doesn't mean that you are changing the business model all that 
dramatically. It is a question of, is there greater oversight 
and greater scrutiny?
    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.
    Over here, Mr. Lew. Thank you, and welcome. I think you are 
doing a fantastic job.
    I want to first of all ask for a little help that you could 
give for me and my constituents in Georgia. You are familiar 
with the Hardest Hit Program?
    Secretary Lew. Yes. I am.
    Mr. Scott. And it is your program, thanks to the hard work 
of this committee. And I would deeply appreciate if you could 
assist us.
    We have an issue in which my State was about a year late in 
getting this money out to help the hardest hit. Subsequent to 
that we have unleashed or unloaded a number of veterans, who--
it happens to be one of the fastest-growing groups of the 
homeless, and that is because they are coming home, and their 
houses are being foreclosed on and mortgages.
    So within the next couple of months, in August, we are 
putting a big event together down in Atlanta. In order to get 
moving on this, your predecessor, Mr. Tim Geithner, and the 
Assistant Treasury Secretary who started this was Mr. Tim 
Massad, who did excellent work, but unfortunately both of them 
have gone.
    So what we need is just a nice call down to the Georgia 
Department of Community Affairs, first thanking them for 
moving, but reminding them that because of that 1-year delay, 
we only have 2, 3 years left. By 2017, as you know, if we don't 
get rid of that money, it is going. It would be a shame that we 
have veterans coming home, seeking employment. This is targeted 
just for them. So just a call down would be very helpful to the 
Department of Community Affairs, asking if there is any 
assistance that Treasury can give them, because if it weren't 
for Tim Geithner and Tim Massad coming down to that event to 
light a fire in Georgia, we would not be moving as we are.
    I don't want a dime of that money coming back when we have 
soldiers coming home who are living under viaducts because they 
can't get that kind of help.
    So I appreciate your doing this, and we will get the 
information to your offices of whom to call.
    Now I have another point. I want to get to the emerging 
threats to our financial stability on the international stage. 
You have just returned from an international visit and working 
on--in this issue with some of our other counterparts. Also, 
Treasury is the enforcement arm for the Iran sanctions. Six 
months is coming up. Can you give us in a nutshell where we 
stand relative to the impact of the standstill, where are we 
are on those sanctions, and what are the emerging threats 
internationally?
    Secretary Lew. Congressman, first, on the Hardest Hit Fund, 
I would welcome the information. Tim Bowler is running that 
office, and I will have him follow up as appropriate.
    Mr. Scott. Thank you. My staffer will get in touch.
    Secretary Lew. As far as the Iran sanctions go and the 
negotiations that are taking place, three points: first, the 
sanctions have been extremely effective. They have had a 
dramatic effect on Iran's economy. They have actually crushed 
Iran's economy and brought Iran to the negotiating table.
    Second, the joint plan of action was very limited relief. 
It was several billion dollars of relief, not enough to reverse 
the harm that the sanctions do to Iran's economy. And, in fact, 
the ongoing impact of the oil restrictions in the sanctions 
does more damage than the relief granted. So the impact is 
building up, not reducing.
    Third, we have made it clear that we are going to--we are 
committed to these negotiations, but not committed to a deal 
unless it is a good deal. No deal is better than a bad deal. We 
hope there is a good deal.
    We are in the final month. I think that it will be an 
important month that determines whether or not there is 
seriousness on Iran's part to set aside its nuclear weapons 
program.
    Mr. Scott. So we are at that final month, which is the apex 
of my question. Where do we go from there? Do we go back to 
square one, or will we ask for an extension?
    Secretary Lew. I am not going to prejudge what the end of 
the month is. There have been no discussions to date of an 
extension. There is also not going to be pressure to take a bad 
deal because we are hitting a deadline. I think we will have to 
see where we are at the end of the month.
    What we have said is that if the talks break down, if Iran 
is not willing to make concessions, we will look for tougher 
sanctions, and we will take no option off the table to make 
sure Iran does not get nuclear weapons.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from North Carolina, 
Mr. McHenry, chairman of our Oversight and Investigations 
Subcommittee.
    Mr. McHenry. Secretary Lew, thank you for reappearing.
    We had a hearing about the OFR asset manager report. And 
former Assistant Secretary Michael Barr testified that the OFR 
``was not something I would hang my hat on.''
    Would you hang your hat on the asset manager report?
    Secretary Lew. I don't hang my hat on reports, Congressman.
    Mr. McHenry. I guess--
    Secretary Lew. The report was one step in the process. It 
is not a decision by FSOC. It was something that FSOC asked for 
as one of the things to consider.
    We have done a lot of other work as well, an analysis 
within FSOC, and we had a public session, I believe the day 
before your hearing, where we had broad participation by the 
industry and by experts from academia, including Michael, who 
testified.
    I think that one of the important things to remember is 
FSOC has made no decision to designate asset managers. All FSOC 
has done is ask the question. I think it is really important to 
ask the question. The answer could be that there is no need to 
designate. The answer could be that there is some other course 
of action that is advised. And we will continue to pursue that.
    Mr. McHenry. And to that end, Chair White testified just a 
few weeks ago before this committee that the SEC has all the 
authority necessary; no new authority would be needed for the 
SEC to regulate the asset management industry.
    Do you concur with that assessment?
    Secretary Lew. I think it depends on what the answer is in 
terms of what is the appropriate step to take. And I am not 
going to prejudge the outcome of an inquiry that is not 
completed.
    Mr. McHenry. Okay. Let me try that again. Do you believe 
the SEC has the authority to regulate the asset management 
industry?
    Secretary Lew. I believe the SEC does have authorities to 
regulate the asset management industry. Whether it is the 
precise authority depends on what the mode of regulatory 
response, if any, would be.
    Mr. McHenry. Yes. Thank you for clarifying, and that is 
helpful and very forthcoming.
    And so, we have a number of other questions, obviously, but 
with the FSB, a number of us have questions about the process. 
And you have answered this to some degree, but we have--many of 
us have complaints about how nontransparent FSOC is, but FSB is 
even less so.
    And so when the FSB designates G-SIFIs, and all those G-
SIFIs within that category of an investment--investment 
companies are only U.S.-registered investment companies, it 
becomes problematic for us to see that--to judge whether or not 
the FSOC will take that same tack from the FSB.
    And so to that end, in order to help us better understand 
the policymaking process, would you help us with better 
disclosure of what those discussions are like and what the 
discussions are at the FSB just going forward? I think that 
would be helpful in terms of transparency and in terms of 
making sure that we are asking appropriate questions, and you 
don't have to answer the same questions over and over again.
    Secretary Lew. Our staff does try to keep congressional--
interested congressional parties informed. We will continue to 
do that.
    Mr. McHenry. Currently, I would say it is not sufficient. 
And so, we try harder to do better when it comes to 
transparency with FSB.
    Secretary Lew. I try hard to do better at everything I do 
every day.
    Mr. McHenry. That is a fantastic commitment. So, no hats 
and try harder.
    All right. To that end, let me ask you another question, if 
we can get to this. We have passed a couple of major pieces of 
legislation through this committee and off of the House Floor 
that are bipartisan in nature. Some help credit unions, and 
others help community banks, basically lightening a bit of the 
overreach that the large bipartisan vote in Congress has shown. 
One is the swaps push-out bill that passed 292-122 on the House 
Floor, and the end user margin bill, which passed 411-12. So, 
there is a way for us to pass bipartisan legislation.
    Give us your view. What is your encouragement for Congress 
to undertake bipartisan regulatory changes?
    Secretary Lew. Look, in principle, I endorse bipartisan 
legislation as a general matter. And--
    Mr. McHenry. But in a specific matter, would you help us 
with this process?
    Secretary Lew. On the question of Dodd-Frank amendments, 
frankly, there has been an issue for the last 4 years where the 
question is, do you just make technical fixes, or do you go 
back and make broader changes? That is an important question. 
We don't think there should be a broad review of Dodd-Frank.
    There is also a question as to whether or not you give 
agencies a chance to implement things before you legislate 
again, putting an overlay to top of it. But I am happy to 
continue the conversation with you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair wishes to announce to all Members that at 
approximately 11:30, the Chair intends to call a 5-minute 
recess.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Cleaver, for 5 minutes.
    Mr. Cleaver. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for being here. And we will also 
accept your thanks for sending Mel Watt from this committee to 
the Oversight Council.
    Secretary Lew. We appreciate your sharing him.
    Mr. Cleaver. Yes.
    Mr. Secretary, I have two questions. Do you believe that as 
a result of FSOC, we do have an authority that is accountable 
and responsible for monitoring the financial stability of the 
U.S. economy? Do you believe that without FSOC, the dangers 
would be increasingly more ominous?
    Secretary Lew. Look, I believe we have a much higher level 
of visibility into the financial stability risks. We have 
relationships between regulators that are stronger and deeper 
than they ever were before, and we have the capacity, if we 
need to, for people to collaborate together in a much more 
effective way.
    I think all of that leaves us much stronger than before, 
and to give that up would put us back where we were in 2007 and 
2008, when regulators worked in their silos, and it was very 
hard to break through to look at the broader financial 
stability.
    Mr. Cleaver. That is interesting, because I am wondering 
how comfortable the members of this committee should be that 
the expectations that an American financial institution is 
still ``too-big-to-fail.'' These huge interconnected bank 
holding companies or the nonbank financial giants--how 
comfortable should we feel that the ``too-big-to-fail'' has 
been either dramatically reduced or eliminated?
    Secretary Lew. Congressman, I think we have made enormous 
progress. We have much more capital in our banks. We have 
resolution authorities that are now in place and are being 
exercised so that institutions, if they hit a failure, have a 
way to unwind without necessarily causing the kind of systemic 
risks that we saw in 2007, 2008. We have living wills for the 
largest institutions that have very detailed plans of what they 
would do if they got into distress.
    And I think if you look at the question that is often asked 
about the implicit subsidy for large banks, that is a 
reflection of the market's belief that there is a willingness 
to step in, we are seeing that way lower, if not eliminated. It 
has been reduced by academics who study it. It has been reduced 
when the IMF looked at it. It has been reduced when rating 
agencies look at it.
    So I wish I could tell you with absolute certainty that 
``too-big-to-fail'' was a thing of the past. What I can say is 
we have made enormous progress. We will continue to work at the 
kinds of sensible ongoing policies that will make our system 
even stronger. And the test, unfortunately, only comes when you 
have a financial crisis, which I hope we don't experience.
    Mr. Cleaver. Yes. I was going there, that we won't know for 
sure as we didn't--I was on the committee when Secretary 
Paulson and others came in and told us essentially that if we 
didn't do something before the Asian markets opened the 
following Monday, that the world could fall into a depression.
    I am assuming you are saying we can have a degree of 
greater comfort, but that comfort should be measured, because 
we don't really know and won't know unless we hit another--
    Secretary Lew. I would add, Congressman, that many of the 
authorities that existed at the time have been changed in Dodd-
Frank, and we don't have the tools that Secretary Paulson had 
at that time.
    Mr. Cleaver. Of course, he didn't have the tools. He made 
the tools up, by his own admission.
    Secretary Lew. There were changes made in Dodd-Frank that 
limit what both the Fed and Treasury do, so we have less 
ability to step in. And it would require--Dodd-Frank, as a 
matter of law, ended ``too-big-to-fail.'' So there is an 
obstacle, and that would be a change in the law to step in to 
exercise some of those authorities.
    Mr. Cleaver. Thank you. I yield back the balance of my 
time.
    Chairman Hensarling. The gentleman yields back the balance 
of his time.
    The Chair now recognizes the gentleman from Missouri, Mr. 
Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    Secretary Lew, welcome. I have a quick question for you 
with regards to mortgage-servicing assets. FSOC seems to be 
intent on trying to implement new capital standards on these 
folks. And I guess my first question is, where is the problem? 
And what problem are we trying to solve? Where is the risk?
    Secretary Lew. Congressman, could I just ask for 
clarification as to which capital standards you are referring 
to?
    Mr. Luetkemeyer. FSOC capital rules on mortgage-servicing 
assets. And what we are seeing is that the small banks, even 
large banks, are selling all their mortgage-servicing assets to 
nonbanks as a result of the capital rules that are being 
implemented.
    Secretary Lew. We are definitely seeing that there are 
higher capital standards for banks, in general for banks. And 
to the extent that banks choose to change their business plans 
and get out of one line of business or into another, that is 
obviously something that we need to keep an eye on.
    Mr. Luetkemeyer. I guess--let me back up here. The Basel 
III rule was the one that really is impacting this. And it is--
again, it is something that is concerning me from the 
standpoint that we are allowing the foreign rules and 
regulations, which, to my knowledge, they don't have mortgage-
servicing asset activity in foreign countries. So we are the 
only one that does this sort of activity, and yet we are 
allowing the Basel III rules, which were basically foreign 
rules, to impact our way of doing business here in this 
country.
    Where is the risk? What is the problem? And why are we 
allowing the entities from other countries to regulate a 
business that is basically American in nature?
    Secretary Lew. The capital standards that our regulators 
have put into place are actually in some ways tougher than 
Basel III. So it is not that Basel III put the capital 
requirements in place; our national authorities have to put our 
capital requirements in place.
    We have driven Basel III to a higher standard, because one 
of the things we worry about is that a risk that we face is 
that other countries don't have the capital requirements that 
we have, and their banks are not going to be as sound as they 
need to be.
    Mr. Luetkemeyer. This is about mortgage-servicing assets. 
The servicer of these assets, where is the risk with the 
servicer, somebody who services loans?
    Secretary Lew. I think the question actually is a broader 
one in terms of--
    Mr. Luetkemeyer. No, it is pretty specific. Where is the 
problem that entities that service loans need to have more 
capital? Where is the connectivity to our financial system that 
causes a greater risk, but they have to have more--
    Secretary Lew. Capital requirements are on all of a bank's 
assets. So that, I think, is really the issue. But I am happy 
to follow up with you on the specific question of mortgage 
servicers.
    Mr. Luetkemeyer. It is interesting, because as we go 
through this process, I think with the previous question, one 
of the folks, I think, was talking-- maybe Mr. McHenry--we are 
talking about some of the stress tests that banks are doing, 
and the big banks' modeling is allowed to be different than it 
is from smaller banks. And yet when you--we allow them to 
design their own modeling, you come up with a completely 
different capital ratio as if you would use that same modeling 
for smaller banks.
    And so I think, again, you are using two sizes, two 
different sets of rules with regards to big guys versus little 
guys, and I have a real problem with that, and it continues to 
be rampant through all of the things that the Treasury does. 
There are two sets of rules.
    Secretary Lew. The regulators have gone to great lengths to 
try and reflect the special circumstances around small banks 
and community banks. And it is not the banks that set the 
standards for stress tests, it is the regulators who conduct 
the stress tests.
    Mr. Luetkemeyer. Yes. But Mr. Secretary, you are allowing 
the banks to also determine their own models on how they 
determine their capital, and that is not right, because you 
have to have the same set of standards for everybody. You can't 
have two sets of standards. And it goes back to--I just have a 
real problem with that particular--let me just go--I only have 
about 24 seconds left.
    I am just--your comment a while ago that insurance 
companies were a part of the cause of the collapse of 2007, 
2008, which I wrote down here, it is stunning. Absolutely 
stunning. I defy you to give me an example of one insurance 
company that is truly--the insurance part of their business, 
was a cause of the collapse. Tell me, was it insurance policy, 
insurance rate, insurance lack of claims processing? Was that a 
cause of 2008, 2007?
    Secretary Lew. I used AIG as the example and--
    Mr. Luetkemeyer. Mr. Secretary, you know as well as I do 
that AIG--the financial portion of that company wasn't the 
insurance position of that company, it was the financial 
portion of that company that was the problem, the connectivity 
of that.
    I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentlelady from Wisconsin, Ms. 
Moore, for 5 minutes.
    Ms. Moore. Thank you so much, Mr. Chairman.
    And, Mr. Secretary, it is very nice to see you. Thank you 
for coming to speak with us today.
    I was looking through your testimony, and I couldn't agree 
more that the formation of the FSOC was an important strategy 
toward having all of the senior regulators and principals look 
at the system across the spectrum to--because I was here, 
again, when Mr. Paulson came with this four-page bill, saying, 
give us $700 billion. I don't want to go through that anymore.
    But my question is what--I think a good process leads to 
good policy. So I guess I saw Mr. Roy Woodall, the FSOC 
insurance expert, dissent from the decision to designate 
Prudential, and yet they were designated as a SIFI. And then we 
saw the SEC push back against FSOC on asset managers, an aspect 
of money market mutual fund reforms, and, of course, the SEC is 
the expert on these industries.
    So I guess I would like--do you think it would be helpful 
for us to have a sense of how you see the role of the primary 
regulators in these discussions? Is there any deference to 
them? Did they just dissent from the decision so that they 
could--so that they wouldn't be on record as being against 
their industry? What are we to learn from the experts of the 
FSOC seemingly having less of a voice?
    Secretary Lew. Congresswoman, I actually think all the 
members of FSOC have a voice, they are listened to, but 
ultimately not everyone will agree on every issue.
    I think if you look at those issues separately, I have 
spoken at some length on the review of the insurance companies 
before the designations were made. I believe the record was a 
robust one, and it warranted the decision. Obviously, not every 
member of the Council agreed. But the decision stands, and the 
company has not appealed it through the courts, as it could 
have. And I actually think the process was one that reflected 
rigor and analytic quality, and I am both comfortable with it 
and concur with the judgment that was made.
    As far as the issues you raised with regard to the SEC, 
obviously FSOC spoke to the money market fund issue before I 
was Chair of FSOC. It is an issue that was, again, at the heart 
of the financial crisis in 2008, and there was, I think, an 
urgency that was felt by FSOC to underscore that more action on 
that and on other issues that relate to the area of shadow 
banking was important.
    The SEC has the direct regulatory authority. They are 
working on a rule. I am very hopeful that they will complete a 
rule this summer.
    Ms. Moore. Mr. Lew, thank you so much. I don't have much 
time, but I do think the SEC did push back on aspects of money 
market. That ``breaking the buck'' thing was resolved.
    Finally, I guess you have heard the complaint that prior to 
designation, which is a big deal if you are designated as a 
SIFI, this is not an opportunity at all for the designee to 
present their case to the full board of principals of the FSOC, 
even to directly address the final information charges that are 
being presented to justify the decision. This seems to be just 
a little bit contrary to what we know as due process. I just 
want to know what your response to that is.
    Secretary Lew. That is not correct. First, let me go back 
to the money market fund issue. I just want to remind everyone 
on this committee that there was a real problem in money market 
funds in the financial crisis, and the challenge to solve that 
crisis fell not on the SEC, but it fell to the Fed. So it was 
quite appropriate for FSOC to take a view, and, frankly, it is 
very appropriate for us to continue to take a view to make sure 
good action is taken.
    Ms. Moore. I only have a second. I do want you to answer 
that other question, Mr. Lew.
    Secretary Lew. Remind me of the second question.
    Ms. Moore. It is the people don't get a chance to present 
their case.
    Secretary Lew. Oh, yes. That is not correct. There is 
extensive back-and-forth between a company and the FSOC during 
the stage 3 process.
    Ms. Moore. Stage 3.
    Secretary Lew. Yes, extensive. And there is no designation 
until till the end of that. At the end of the stage 3 process, 
they have a right to a hearing. And only one company has sought 
it, but we had a hearing. And then, they have judicial rights 
of appeal after that. So there is a robust due process.
    Ms. Moore. Stage 3. Okay. Thank you so much, Mr. Secretary.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The committee will now stand in recess for 5 minutes.
    [recess].
    Chairman Hensarling. The committee will come to order.
    The Chair now recognizes the gentleman from Alabama, the 
chairman emeritus of the committee, Mr. Bachus, for 5 minutes.
    Mr. Bachus. Thank you.
    Secretary Lew, this whole the-dog-ate-my-homework defense 
that the IRS and Lois Lerner is using, I don't--the American 
people are not buying it. But, more importantly, I think it 
calls into question the integrity of the process, and I think 
it is very disturbing to all of us.
    We have computer crashes in our office from time to time. I 
think every Member has had them. And you immediately call in 
the technology people, you make sure that the hard drive is 
preserved, and you don't lose emails.
    So I hope you will investigate this as Secretary of the 
agency and find out what happened.
    Secretary Lew. Congressman, I think we all know that hard 
drives do crash, and that is what happened here. In 2011, when 
the hard drive crashed, efforts were made to recover what could 
be recovered. And subsequent to that, after it became a matter 
of interest, extensive efforts were made to put back together 
what could be put back together.
    I believe that Commissioner Koskinen has testified to this. 
A report has been sent to Congress in great detail.
    Mr. Bachus. I am just saying the American people are still 
waiting on a good explanation.
    Let me ask you this: Orderly liquidation has always struck 
me as a convoluted and kind of highly subjective process that 
does little to end ``too-big-to-fail,'' and it gives an 
enormous amount of discretionary power to regulators. And FSOC 
makes resolution advice or gives recommendations to the FDIC.
    The Judiciary Committee, with the Financial Services 
Committee, is looking at possible changes, several possible 
changes, in the Bankruptcy Code. We believe that a properly 
constructed bankruptcy would be a better way to deal with the 
resolution of failing institutions. There are established 
precedents.
    Do you think that it is a worthwhile process for Congress 
to consider this approach?
    Secretary Lew. Congressman, I think that orderly 
liquidation authority actually is an effective implementation 
of the law in Dodd-Frank. Obviously it is not the same as 
bankruptcy, but it is a process that has actually become one 
that the world is now looking at to see if a single point of 
interest system--
    Mr. Bachus. You don't think the bankruptcy process--
    Secretary Lew. I would actually be interested in following 
up with you on what the changes in the Bankruptcy Code would 
be. What I was going to say is I don't think that all wisdom 
was contained in the actions taken in the wake of the crisis.
    Mr. Bachus. We would like to work as partners on this as we 
go forward because I--
    Secretary Lew. And I don't know that it is instead of the 
orderly liquidation authority. I would not take the orderly 
liquidation authority away, and I don't know what proposals 
are, but I would be happy to look at them.
    Mr. Bachus. And I am not sure we do yet.
    Six months ago, Congress was told that there would be more 
coordination and guidance on the implementation of the Volcker 
Rule. Unfortunately, I have not heard of a lot of follow-
through on this pledge.
    Would you review with us what is being done to provide 
financial services providers with guidance they need to comply 
with the many complexities of the Volcker Rule, and give us 
some assurance that implementation questions that were posed to 
the working group will be answered? I know 6 months later, only 
6 of those 80 questions have been answered.
    Secretary Lew. Congressman, I think the fact that an 
identical rule was issued on the same day by all the agencies 
actually was an important step to giving guidance. My fear was 
there would be differences that caused confusion, and I think 
it is very important there is one rule. So I actually think 
that is the foundation.
    It hasn't actually gone into effect in terms of compliance 
yet. And the regulators are working amongst themselves as they 
go into the implementation stage to stay in close contact, 
because there is obviously the risk that you end up with common 
law in each of the agencies going in different directions. That 
is not an area we have direct responsibility over at Treasury 
or at FSOC, but I think it is an important question, and it is 
one that I ask the regulators as well.
    Mr. Bachus. Right. They still need more guidance in 
complying with Volcker, and I appreciate your willingness to 
give that. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Delaware, Mr. 
Carney, for 5 minutes.
    Mr. Carney. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary, for coming in today. Thank you 
for all your good work. I have been reading through the FSOC 
annual report. There is lots of good information and data in 
there.
    One of the things that is discussed in the annual report is 
the repo market as an area of vulnerability for our financial 
system. And, in fact, in a hearing back in February before this 
committee, Governor Tarullo cited the repo market as the second 
greatest threat to the stability of our financial system after 
adequate capital requirements.
    Do you share Governor Tarullo's concern? And what steps can 
be taken to prevent adverse consequences in the repo market 
during stress markets?
    Secretary Lew. I think that the short-term funding issues 
are quite significant. That is why, whether you call them 
short-term funding or shadow banking, we are putting so much 
attention into them.
    The risk that one day you open for business, and you don't 
either have the repo or the money market funding that you 
expected, we saw in the financial crisis, can cause an 
immediate collapse, and it is a collapse with an accelerant on 
it.
    I think if you look at the amount of funding that is in the 
repo market and the money market funds, it is considerably down 
from where it was at the time--
    Mr. Carney. So, less of a risk. But what can be done to 
prevent some of the adverse effects?
    Secretary Lew. I think on both those issues, on triparty 
repo and on money market funds, it is important that the 
regulators continue to look at the issue and take action. So 
the Fed has a responsibility in the area of repo, and the SEC 
has a responsibility in the area of money market funds. I know 
that both are working on additional steps that could be taken 
to further reduce the exposure. There is an efficient market 
there until there is not.
    Mr. Carney. Right.
    Secretary Lew. And the question isn't what happens when it 
is working well; the question is what safeguards do you have 
that you won't see in a moment where it collapses. That is why 
I think the Fed is looking at what actions it can take and why 
it is so important that the SEC finalizes the money markets 
rule, because I think they are really parallel kinds of risks.
    Mr. Carney. Moving on to GSE reform, there has been some 
discussion about it. Unfortunately, my colleague, Mr. 
Perlmutter from Colorado, is not here. He and I have kind of a 
different perspective on it.
    Your report identifies it as an important issue, but it 
doesn't say too much about the negative consequences of not 
doing reform.
    I have been working with Congressman Delaney and 
Congressman Himes on a piece of legislation that would provide 
a government backstop with a more explicit guarantee. What is 
your view on the risk of not doing reform in the short term?
    Secretary Lew. Look, I believe that housing finance reform 
is really the unfinished business that didn't get addressed in 
the immediate wake of the financial crisis. And we have seen 
only recently with the estimates of the exposure that taxpayers 
ultimately have to the GSEs that, were there to be another 
crisis, we still have the same system that we had before, which 
wasn't very good--
    Mr. Carney. With greater exposure.
    Secretary Lew. Greater exposure.
    So I believe that housing finance reform is very important. 
I think there is a lot of progress that has been made in the 
Senate working towards a bipartisan approach on this. I think 
there has to be a bipartisan solution. And the key to a 
solution is making sure that there is access to finance; making 
sure that there is a clearly delineated responsibility that is 
not a government responsibility in terms of losses, 
particularly first losses; and to the extent that there is any 
remaining government backstop, that it be extraordinary 
circumstances and well-defined.
    Mr. Carney. Right.
    Secretary Lew. I think that the process in the Senate 
didn't make great progress on that. It is obviously not 
finished. And I would hope that a bill can get to conference so 
that it is an area in which we can see bipartisan legislation.
    Mr. Carney. I hope so, too.
    I don't have much time left. But there has been a lot of 
discussion, and actually a couple of pieces of legislation 
introduced here in the House about differentiating among 
financial institutions, banks, based on different criteria than 
just size. In fact, Governor Tarullo mentioned a few weeks ago 
that maybe the SIFI designation should be on firms that are 
$100 billion or greater. What are your thoughts on that?
    We have legislation here that Mr. Luetkemeyer and my 
colleague Ms. Sewell have introduced that would differentiate 
on qualitative measures. Do you have any views about--
    Secretary Lew. I think that it is hard to have a hard view 
that there is a size that makes you financially significant and 
creating the risk. The question is, does a combination of your 
size, your structure, your interconnection to the system, and 
it is something that requires our ongoing analysis.
    Mr. Carney. Thanks. Thanks very much.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Duffy.
    Mr. Duffy. Thank you, Mr. Chairman.
    Welcome, Secretary Lew. It is nice to see you back at the 
committee again.
    Just a couple of questions on emails: How does the Treasury 
back up their emails currently?
    Secretary Lew. The main Treasury, I believe, has an auto 
backup, but I would have to get back to you on the specific 
details.
    Mr. Duffy. So after all of the information about emails and 
backups and IRS and Treasury, Housing, you have no idea how 
your emails are backed up?
    Secretary Lew. I will just say that the main Treasury is 
much smaller than the IRS. It has a different volume. So it is 
a different kind of an email system.
    Mr. Duffy. How about with the White House?
    Secretary Lew. It is generally my assumption that 
everything is backed up.
    Mr. Duffy. Okay. How about the White House? How does the 
White House back up its email?
    Secretary Lew. I am not an IT professional, Congressman.
    Mr. Duffy. Neither am I, but I know as a former State 
prosecutor how the State of Wisconsin backs up our emails. I 
know how the House backs up our emails as a Congressman. You 
were the Chief of Staff, and you are the--I am not an IT expert 
either. But you can't tell me how they are backed up?
    Secretary Lew. When I was at OMB, and when I was at the 
White House, there was auto backup, but there also were 
occasionally periods where machines broke. So it--
    Mr. Duffy. And in regard to machines breaking, when you 
were the Chief of Staff at the White House, did you have a hard 
drive cash?
    Secretary Lew. My personal hard drive?
    Mr. Duffy. Yes.
    Secretary Lew. Not that I recall.
    Mr. Duffy. Okay. When you were the Chief of Staff at the 
White House, did you have meetings or a meeting with any IRS 
employees?
    Secretary Lew. I do not remember. It was quite awhile ago, 
and there has been a lot since then. I would have to go back 
and check.
    Mr. Duffy. So you haven't pondered that question with all 
these--
    Secretary Lew. I did not--I certainly--
    Mr. Duffy. If I could ask the question, then you could 
respond, please.
    Secretary Lew. No, look, I am happy to go back. There were 
meetings that involved people from different agencies. We 
talked--
    Mr. Duffy. So the answer is, yes, you did meet with IRS 
employees?
    Secretary Lew. The answer is, I don't remember, but I would 
go back and check if I could.
    Mr. Duffy. Okay. I am sure you can't recall.
    Secretary Lew. I never had a meeting on any IRS policy 
matter that I recall. The question you are asking--
    Mr. Duffy. I mean political matters.
    Secretary Lew. No, not on political matters either. I--
    Mr. Duffy. Did you have any email correspondence with 
anyone at the IRS?
    Secretary Lew. Not that I recall.
    Mr. Duffy. When did you first learn about Lois Lerner's 
emails being lost, her hard drive crashing, those emails from 
2010 and 2011 going missing? When did you learn about that 
first?
    Secretary Lew. I only learned about it at roughly the same 
time the Congress did, when it was--
    Mr. Duffy. So you learned about it in the press?
    Secretary Lew. --when there--pardon?
    Mr. Duffy. You learned about it in the press?
    Secretary Lew. No, no. I learned about it right before the 
report was made to Congress.
    Mr. Duffy. So you were just given what, a day's notice? On 
the 12th of June, you learned about it?
    Secretary Lew. I don't remember the day, but I believe--
    Mr. Duffy. A week before?
    Secretary Lew. No. I believe it was more like the day 
before.
    Mr. Duffy. Okay. So you are the Secretary of Treasury, the 
IRS is the biggest bureau in Treasury, and you only learned 
about this the day before we did.
    But isn't it true that Treasury was notified by the IRS 
that these failures existed, and they were notified in April? 
And then it was Treasury who notified the White House in April 
that the Lois Lerner emails were gone. But you only learned 
about this in mid-June.
    Secretary Lew. The timeline, as I understand it, is that 
the lawyers at IRS and Treasury discussed the matter. They were 
notified about it.
    Mr. Duffy. In April.
    Secretary Lew. In April. And--
    Mr. Duffy. And you didn't know anything about this, right?
    Secretary Lew. And the guidance that was given at that 
time, I think appropriately--
    Mr. Duffy. You didn't know anything about this. Is that 
your testimony?
    Secretary Lew. The guidance that was given, as I understand 
it--
    Mr. Duffy. So you didn't know anything about the emails, 
all the news about it. And the lawyers knew, but Mr. Lew, the 
poor Secretary of the Treasury, had no clue what was going on 
in the agency. Is that fair to say?
    Secretary Lew. Congressman, I am happy to answer your 
question if you give me a moment.
    Mr. Duffy. If you would answer the question, I would 
appreciate it.
    Secretary Lew. You ask the questions; I can answer the 
questions.
    Mr. Duffy. Well, you don't answer the question. That is the 
problem.
    Secretary Lew. The lawyers at Treasury advised the lawyers 
at IRS, I believe correctly, to make sure they--
    Mr. Duffy. And did not advise you?
    Secretary Lew. Congressman, I am happy to answer the 
question if you give me--
    Mr. Duffy. You are not answering the question.
    I just--there is a level of frustration not just in this 
committee, not just throughout Congress, but with the American 
people. The arrogance that the Administration has shown, that 
the IRS has shown, that Treasury has shown with regard to this 
investigation is unbelievable.
    And why wouldn't you be arrogant? You say, listen, we have 
the Presidency, we have the DOJ, we have the FBI. Why not be 
arrogant? We have the press. No one is going to report us for 
this. We are not going to answer your questions, we are not 
going to be forthright, we are not going to be honest, because 
who is going to come after us?
    I have to tell you, this is a sad disservice to the 
American people the way this crisis has been handled.
    I yield back.
    Chairman Hensarling. The gentleman yields back.
    The Chair now--
    Secretary Lew. I would be glad to answer the question if I 
would be given an opportunity.
    Chairman Hensarling. I suspect there will be Members on 
this side of the aisle who will be more than happy to accord 
you more time, Mr. Secretary.
    The Chair now recognizes the gentlelady from Alabama, Ms. 
Sewell, for 5 minutes.
    Ms. Sewell. Mr. Secretary, I will give you more time. You 
can use some of my time to answer his question, if you would 
like to, but I think that it is better served that we talk 
about the matter at hand, what you are here for--
    Secretary Lew. I agree.
    Ms. Sewell. --which is your annual report for FSOC.
    I would like to return back to the SIFI designation. In 
your testimony you highlight that designation is not the only 
alternative to address potential risk posed by firms and their 
activities.
    What are some of the other policy options FSOC could look 
at? And how does the FSOC weigh the pros and cons of the 
different regulatory mechanisms in your toolbox?
    Secretary Lew. Congresswoman, the initial inquiry is 
whether or not there is systemic risk, and if you don't make 
the determination of that risk being there, then one option is 
to do nothing. So there is always the option not to designate.
    The question then becomes, what is the risk? Where is the 
risk? Is the risk in a firm? Is it in a product? Is it in a 
business line? And depending on the answer to the question, it 
could lead to different actions.
    So I believe that there has been a kind of 
oversimplification of the process, which is if you ask the 
question, then the next step is designation. I actually don't 
think that is the case. I think that there will be many 
instances where the right answer is that there is not a risk, 
or the right answer is that you don't need to designate the 
firm. Regulators have sufficient authority, and there will be 
some cases where it will be a product as opposed to a firm that 
is the issue.
    So I think we need to let the process run its course, and 
that means have full analysis, full awareness of the facts, and 
not be in a place where we are afraid to ask the question 
because the answer might be designation. I think that we have a 
responsibility, if we are going to have a system that prevents 
financial crises in the future, to ask those kinds of questions 
and not prejudge the answers.
    Ms. Sewell. I also wanted to know if the FSOC in its 
examination of an industry or individual firm indicates that a 
particular activity or business practice may cause systemic 
risk, are companies given an opportunity to address those 
concerns?
    One result of additional notification throughout the 
designation process could be to encourage companies to reduce 
their own risk. And so, would the FSOC consider establishing a 
process by which a company would be given the opportunity to 
reduce its own risk profile before designation as a SIFI?
    Secretary Lew. It is not only a question of does the 
company have the ability to modify in some way its business 
structure before, but FSOC looks on an annual basis to see 
whether or not the designation's continuing is indicated and 
what the status is. So companies have the ability afterwards to 
make changes.
    As far as the involvement with the company goes, it begins 
in the middle of the process, not at the beginning of the 
process, I think for good reasons. We have a lot of information 
that is available within both the public record and that 
regulators have, and that you don't need to create a situation 
where by asking a question you trigger a public debate at the 
first instance of asking the question.
    If it is serious, there is a huge amount of back-and-forth 
between the company and the FSOC staff.
    Ms. Sewell. I would like to--my last question is really 
about cybersecurity. I sit on the House Permanent Select 
Committee on Intelligence. I think cybersecurity is one of the 
biggest threats to disruption of the financial industry, along 
with the operational risks that it poses.
    I want to know what the FSOC thinks about cybersecurity and 
what its recommendations have been to its firms.
    Secretary Lew. Cybersecurity is something that I must say 
I, as Treasury Secretary, as Chair of FSOC, think about 
constantly. It is one of the kind of new frontiers of risk 
exposure. I believe that we have in the financial services 
sector made more progress than some of the other sectors of our 
economy, but there is still a lot of work to do.
    Ms. Sewell. Would you be open to information-sharing and 
reducing the liability so that companies can share?
    Secretary Lew. I think information-sharing is very 
important. There is a big difference between what we see and 
what companies see. The information needs to flow in both 
directions.
    I also think there is a big difference between what large 
companies have the capacity to do and what smaller businesses 
have the capacity to do. And where they are working together 
either directly or through an intermediary, whether it is a 
utility or a contractor, makes a great deal of sense.
    We have sought legislation on cybersecurity. The President 
has issued an Executive Order that goes as far as he can with 
his executive authority, but legislation in this area would be 
very important. I think the industry would be very pleased to 
see more ability to collaborate.
    Ms. Sewell. Thank you, sir.
    Chairman Hensarling. The time of the gentlelady has 
expired.
    The Chair now recognizes the gentleman from Virginia, Mr. 
Hurt, for 5 minutes.
    Mr. Hurt. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here and presenting 
us the FSOC annual report.
    I do want to ask some questions about that, but I was 
curious, based on just a follow-up to Mr. Bachus' questions 
about the IRS issue, it seemed to me your response was, well, 
in 2011, there was a hard drive crash, that is life, and that 
the IRS really has done everything it can to comply with 
congressional requests.
    Do you think that it is important for Congress to get 
answers to its questions? And is it important for Congress to 
be able to see those emails, whether we recover them from IRS 
or some other agency? Do you think that is important?
    Secretary Lew. Not only do I think it is important, I think 
that is what the IRS has been trying to do. And Commissioner 
Koskinen has been working to assemble the emails to provide 
them for review, the Lerner emails.
    Mr. Hurt. But in your role as Secretary of the Treasury, 
and ultimately the authority over the IRS, do you believe you 
have the authority to independently look at what the IRS is 
doing to make sure that this gets done? What have you done, and 
what are you going to do to make sure that we pull out all the 
stops to get these emails?
    Secretary Lew. I believe that they are working quite hard. 
The number of hours and man-years, person-years that have been 
put into this, the amount of money that has been spent is 
astronomical. They have made an enormous effort. Commissioner 
Koskinen has testified at length on it. Obviously, it is not a 
situation that anyone chose to have. There was a machine 
failure in 2011. But they have worked as hard as they could to 
reconstruct, and 70,000 emails, I believe, were turned over for 
review.
    Mr. Hurt. I understand. But obviously it is a very critical 
time period, and I guess what I would love to hear, as a Member 
of Congress who has constituents who are very worked up about 
this, is I would love to know that the Secretary of the 
Treasury is exercising everything within his power to make sure 
that the IRS is doing that. It does not sound like you have 
taken any direct role whatsoever, and that concerns me.
    Secretary Lew. No. When I became aware of this, what I was 
told was that the message had been sent from Treasury, I 
believe appropriately, find out everything you can, find 
whatever you can, and give a complete report when you have 
that.
    That report was completed, I concur with the advice that 
was given, and if there is any more that can be done, it should 
be done.
    Mr. Hurt. But you are the doer. It seems to me that is a 
passive--
    Secretary Lew. What I can't do is make a hard drive that 
broke not be broken.
    Mr. Hurt. I understand that--
    Secretary Lew. What they have gone and done is they have 
looked at all the recipients of emails to pull them out from 
the recipients' email records. They are doing everything they 
can, and an enormous amount of information has been provided.
    Mr. Hurt. All right. Thank you.
    Let me just ask my--I only have 2 minutes left, but let me 
just ask you this question. I represent Virginia's Fifth 
District, a rural district, with a lot of Main Street small 
businesses, family farms, and working Virginia families. Access 
to capital is very important, and community banks and credit 
unions play a huge role in reaching the people whom I 
represent.
    In the last 30 years, I am sure you know these figures, we 
have gone from seeing 18,000 community banks that held 40 
percent of bank assets, 18,000 to now, today, fewer than 7,000 
community banks, 18,000 to 7,000, and assets amounting to 40 
percent to now down to 15 percent.
    And I guess my question is, as a part of the mission of the 
Financial Stability Oversight Council, in your role as Chair, 
does that trend concern you, the idea that we are reducing the 
number of community banks and the assets that are held there? 
And does that in and of itself present its own systemic risk 
when you have the consolidation of these assets in banks the 
way we have seen it the last 30 years? Does that concern you, 
and if it does, what do we do about it? What can you do about 
it? What is the FSOC doing about it?
    Secretary Lew. Congressman, as the different agencies with 
the responsibility for implementing Dodd-Frank have taken 
action, each and every one has made efforts to try and treat 
community banks in a way that reflects the importance that they 
play in our economy and the fact that they are different from 
large institutions. There is a lot of discussion about it, 
there is a lot of attention to it, and I believe the rules 
reflect that.
    We have a dynamic changing landscape in the financial 
services world. We have to keep an eye on what those changes 
are. I think the community banks play an important part in it, 
and we, as we have acted, have tried to reflect that.
    Mr. Hurt. But does that trend concern you? Where do we--I 
yield back my time.
    Mr. Hultgren [presiding]. The gentleman's time has expired.
    Mr. Hurt. Thank you.
    Mr. Hultgren. The gentleman from Illinois, Mr. Foster, is 
recognized for 5 minutes.
    Mr. Foster. Thank you.
    I would like, if we could, to turn our attention first to 
the upcoming July 20th deadline for the talks with Iran, which, 
obviously, these can succeed, fail, or come to some 
intermediate result. What sort of contingency plans are you 
looking at for the financial part of the sanctions, which may 
have to be strengthened or weakened or held in place?
    And, second, what is the role you envision for Congress in 
the overseeing and concurring on any changes to the financial 
sanctions that may result as a result of these negotiations?
    Secretary Lew. Congressman, we have kept in place the 
architecture of our Iran sanctions even during the period of 
negotiations. The Joint Plan of Action had very narrowly 
defined, denominated, one-time relief, and the rest of the 
sanctions stay in effect. Since we began the negotiations under 
the Joint Plan of Action, we have taken over 60 enforcement 
actions on the underlying sanctions. So we don't have to do 
anything to put it into place; it remains in place.
    The question really is, what happens if the talks fail? Do 
we then go for tougher sanctions? We have made it clear that if 
the talks fail, there would be, I believe, the need to take 
tougher action on sanctions.
    Mr. Foster. But my question is, do you have contingency 
planning for the possibility of tougher sanctions, the 
possibility of effectively monitoring relaxed sanctions if 
there is a--
    Secretary Lew. In a world where there is an agreement, that 
is obviously a very different situation. And I am not going to 
prejudge what the sanction regime would be after that. We have 
multiple sanction regimes with Iran, and I can tell you that we 
will be vigilant about implementing all sanctions that remain 
in effect after an agreement.
    If there is an agreement, obviously there will be some 
change, but we are not announcing in advance what that is. 
Frankly, we are not at the point yet where we are ready to say 
that we have seen a basis for making the decision to do that. 
We are going to have to see Iran making the kinds of 
concessions that it has to make, which means not having nuclear 
weapons.
    Mr. Foster. Okay.
    In your report, the section on data gaps and data quality, 
which were some of your systemic concerns, you mention that 
they are still unable to effectively monitor securities lending 
transactions and reinvestment of the cash collateral.
    So what is the nature of that situation? What action is 
needed? How worried should we be about that?
    Secretary Lew. Look, I think that there is both an 
increasing concentration of activity in certain places because 
we now, for example, in commodities have a registration, so it 
is transparent, what is happening. That puts more transactions 
in one place.
    We also have the challenge of communicating amongst systems 
which are different systems.
    The reason it was highlighted as a risk there is we do have 
more work to do on that. It is both a technical challenge, but 
it is also a question, ultimately, of the stability of the 
system. So I think that the observations in the report reflect 
the fact that we are going to keep working on it.
    Mr. Foster. Do you feel like you have all the legislative 
authority you need in that specific area, or is this something 
where Congress might have--it is my recollection that, during 
the crisis, something like 40 percent of AIG's losses were from 
their securities lending business.
    Secretary Lew. Right.
    Mr. Foster. So this is not a trivial thing, despite what 
was said earlier in this hearing. And so--
    Secretary Lew. We obviously have a lot more tools now. We 
have a whole set of rules, particularly in the derivatives 
area, that weren't there before. So we have made a lot of 
progress.
    I actually don't know the answer to the question of whether 
we have all the authority we need, and I would like to follow 
up as we learn more.
    Mr. Foster. Okay.
    I will do everyone a favor and yield back early.
    Secretary Lew. I'm sorry?
    Mr. Foster. I yield back.
    Mr. Hultgren. The gentleman from Illinois yields back the 
balance of his time.
    The gentleman from North Carolina, Mr. Pittenger, is 
recognized for 5 minutes.
    Mr. Pittenger. Thank you, Mr. Chairman.
    Secretary Lew, thank you so much for being here today. I am 
always impressed by your presentations. You are a very eloquent 
man, even when we don't hear what we would like to hear.
    You have an amazing pedigree: Harvard undergrad; Georgetown 
University; you worked for Speaker of the House Tip O'Neill; 
for Bill Clinton, been in the White House. You are one of the 
most powerful people in the world today.
    My background is a little bit different. I grew up in 
central Texas. I went to the University of Texas, a fine 
university. I can't tell you I was one of the better students; 
I was not. My daddy told me, he said, ``Son, if you want to be 
smart, you need to hang around a lot of smart people.''
    I built a real estate investment company, and one thing I 
did was hire a lot of smart people. We have half a dozen 
attorney groups who work with us around the country. I am no 
longer part of this company. We hired securities attorneys, we 
hired real estate attorneys. We hired market analysis people. I 
hired an economist that we kept for 25 years.
    Their good work and counsel kept us out of a lot of 
trouble. I can say that after 25 years and a couple thousand 
investors and maybe 60 or 70 partnerships, we never had a 
failed one. That is by the grace of God, but really a lot of 
good, smart people telling this little boy from central Texas 
what he ought to be doing.
    Today, we are looking at the operations of FSOC and what it 
is doing and its designations, and that is important to a lot 
of people. It is going to affect a lot of companies in the 
impact of this country. A lot of families will be affected.
    Yet, when I read some of the input from some of the 
individuals who would be associated with FSOC and aware of it, 
I find that they take a different position than the position 
that you have.
    I look at Doug Elliott with the Brookings Institution, 
which you have been a part of yourself, who says that 
heightened prudential standards would cause broad economic harm 
because the insurers of one of the largest providers of long-
term investment funds, and limiting the ability of insurers to 
make long-term investments would be unfortunate, since many 
commenters have pointed out that they need to increase the 
supply of such funds, especially with regard to massive 
investments in U.S. infrastructure that are needed in the years 
ahead.
    We look at Roy Woodall, an FSOC member, appointed by the 
President. His comment was that he felt that the FSOC's 
analysis relied on scenarios antithetical to a fundamental and 
seasoned understanding of the business of insurance and the 
insurance regulatory environment.
    Barney Frank, a former chairman of this committee, stated 
that it was not his intent that asset managers be designated 
for heightened prudential standards or supervision by the 
Federal Reserve Board because they do not pose a systemic risk.
    Mr. Lew, my point is that many of us believe that these 
designations undermine the market discipline, they allow some 
companies to be favored, to believe that they are protected 
from further losses. Some of us see that there are structural 
flaws at FSOC that allow this to continue.
    I think the thing that is troubling to me is that you are a 
bright guy, you are nobody's fool, you didn't get to where you 
are by just slothing through, but you have some capable people 
who understand the business, like the folks who understand my 
business, that you don't appear to be listening to. And I would 
hate to think that, years ahead, you will look back and say, 
maybe I should have listened to those people a bit more.
    And the concern that I have and frankly, a lot of my 
constituents have, is that the folks in Washington think they 
have superior knowledge, they are smarter than everybody else, 
they have it all figured out. And I would just commend to you 
that there is safety in good counsel, wise people who 
understand the business, like Mr. Woodall. He understands this 
business.
    So that is really my comment, and we have 30 seconds left, 
and you are welcome to say whatever you like.
    Secretary Lew. Congressman, first, I appreciate the kind 
personal remarks.
    The process we go through in FSOC is, one, is a level of 
great detail and great rigor. And all the members of the 
Council have views that are worthy of being heard and 
considered. There isn't always a unanimous view. I believe the 
record that was built justified the action taken in the cases 
where designations were made, but I don't believe it always 
will.
    And I just would point out that, particularly in the asset 
management area, no decision to designate has been made yet, so 
it is premature to know the outcome there.
    Mr. Hultgren. The gentleman's time has expired.
    Mr. Pittenger. Thank you.
    Mr. Hultgren. The gentleman from Michigan, Mr. Kildee, is 
recognized for 5 minutes.
    Mr. Kildee. Thank you.
    And welcome, Mr. Secretary. It is always good to have you 
here.
    Secretary Lew. It is always a pleasure to be here.
    Mr. Kildee. I just want to say how much I appreciate your 
participation, your candor, but also your demeanor in this 
hearing. And I concur with Mr. Pittenger's commentary--while I 
might not agree with his conclusions, I concur with his 
commentary and applaud his demeanor, as well. I wish that were 
more the norm. But your patience and politeness is noted, at 
least by some of us here.
    I do agree that you don't necessarily get smarter when you 
come to Washington. I also have concluded that there is a 
certain amount of evidence that the trend is in the other 
direction. But I will say to you, I appreciate--and I am not 
speaking of you; I am talking about some of us on the other 
side of the dais--I appreciate your politeness.
    I want to talk to you quickly about two things. One has to 
do with the Department of Treasury's TARP program. As you are 
aware, TARP includes a program called the Hardest Hit Fund. Mr. 
Scott mentioned it. It is intended to assist those communities 
and homeowners in communities that have been most negatively 
affected by the financial crisis.
    Some communities have had a much more difficult time coming 
out of that crisis, largely because many of the communities 
that were hit by the crisis had already been hit by a long-term 
crisis in housing--depressed values, abandonment, et cetera.
    So last fall, myself and my staff worked with your team at 
Treasury; it was specifically Former Assistant Secretary Tim 
Massad. And we were able to secure $100 million to be 
reallocated from the particular uses that Hardest Hit allowed 
to demolition.
    What I would like you to consider, and you will be getting 
a letter from me later this week on this, is whether there has 
been any consideration or discussion within Treasury to extend 
the use, the available uses, eligible uses, of Hardest Hit that 
could be used for demolition beyond just residential properties 
but to look at specific commercial properties and residential 
communities that have negative externalities and are depressing 
the value of property.
    I say that because before I came to Congress, I was 
involved in doing a lot of work and research and activity in 
this area, and we were able to conduct a number of studies that 
measured the impact of demolition on surrounding property 
values.
    In Flint, Michigan, my hometown, for example, we took a few 
million dollars, and were able to demolish several hundred 
homes, and saw surrounding property values have a positive 
impact. In fact, just several million dollars unlocked the 
value of local properties to the tune of about $112 million. 
Changing that value equation obviously is one of the factors 
that mitigates future abandonment resulting in foreclosure.
    Is that something that you might consider at Treasury?
    Secretary Lew. Congressman, the decision on using the 
Hardest Hit Fund for housing demolition was one of the first 
issues that I made a decision on when I became Secretary. And 
I--
    Mr. Kildee. You made a good decision. I appreciate that.
    Secretary Lew. --believe the analysis was very solid, that 
if your goal is to keep houses from going underwater or get 
them from being underwater to being above water, having 
abandoned properties on the block was something that had a 
material impact. And since the purpose of those funds is to 
help homeowners get out from underwater, the relationship was 
quite direct.
    I haven't looked at the question of commercial property. I 
would be happy to look at it. But it would have to meet a test 
that is permissible under the TARP program.
    And I will just add, I had the pleasure of being in 
Michigan the day that the demolition began--
    Mr. Kildee. Right.
    Secretary Lew. --in the Marygrove neighborhood in Detroit.
    Mr. Kildee. Right.
    Secretary Lew. And you go block to block in that 
neighborhood, and you see where abandoned houses have been 
allowed to sit for a year and where they have been demolished. 
It has everything to do with the stopping the decline and 
helping the rebirth of a neighborhood. I think we made the 
right decision, and I was very pleased to be able to join the 
mayor there.
    Mr. Kildee. I very much appreciate it. It is definitely a 
direction that makes sense. The application of the funds to 
commercial properties within neighborhoods, I think, will have 
as dramatic, if not a more dramatic effect. So I will be 
communicating with you on that in the coming weeks.
    And rather than ask a question, I just want to reiterate, 
on a completely different subject, my support for the work that 
Treasury continues to do in implementing sanctions regarding 
Iran. As you may be aware, I have a constituent who continues 
to be held in an Iranian prison; his name is Amir Hekmati. And 
it has certainly made a difference. The sanctions are what have 
brought the Iranian Government to the negotiating table. I 
can't prejudge what will happen in the P5+1 or with July 20th 
soon approaching, but we know we wouldn't be in a position to 
even have the possibility of an agreement without those 
sanctions. I appreciate your work on that.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Pennsylvania, 
Mr. Rothfus, for 5 minutes.
    Mr. Rothfus. Thank you, Mr. Chairman.
    Thank you, Mr. Secretary. Good afternoon, now that we have 
passed the noon hour.
    Just a few days after you testified before this committee 
in May, Douglas Holtz-Eakin, the former Director of the 
Congressional Budget Office, released a study in which he 
estimated that if the FSOC designates asset managers as SIFIs, 
investors could see their returns reduced by as much as 25 
percent over the long term. As he puts it, designating asset 
managers could cost each investor more than $100,000.
    And while the OFR's asset management study considers 
farfetched in the remote hypothetical situations, it never 
considers the costs that will be imposed on investors and on 
the economy if the FSOC designates asset managers, nor does it 
consider whether the benefits of designation outweigh those 
costs.
    Shouldn't the FSOC's SIFI designation process consider the 
costs of designation as well as its benefits?
    Secretary Lew. Congressman, I just want to underscore that 
no decision has been made on whether to designate the asset 
managers or not. So the OFR study was one piece of analysis as 
part of a process.
    Mr. Rothfus. And should they consider costs of designation?
    Secretary Lew. The designation process is one that is aimed 
at determining whether or not there is systemic risk. It is not 
a--
    Mr. Rothfus. So there is no consideration for the costs 
that will be imposed?
    Secretary Lew. The statute creates a standard that we use, 
which is whether or not there is that level of risk that 
warrants a decision.
    Obviously, as regulators, if they take responsibility for 
an area, they then weigh different approaches in terms of how 
to regulate, and then it is a different issue. But the statute 
does not actually create a cost-benefit standard.
    I can't speak to the analysis that you are describing. 
Obviously, I am aware of it, I have seen it. But it makes 
assumptions about actions that have not been taken yet, so I 
think it is premature for anyone to draw a conclusion--
    Mr. Rothfus. If you could take a look at the OFR's, the 
Office of Financial Research's September 2013 report, OFR 
argues that mutual funds with a floating net asset value are 
risky because they could create a run on redemptions during a 
time of stress. Then, when I look back to FSOC's attempts to 
subvert the SEC's jurisdiction over money market funds in 2012, 
FSOC proposed a floating NAV for money market funds.
    These two examples seem to be contradictory. Doesn't this 
just reinforce the reason why regulating this industry should 
be left to the SEC, who has the needed familiarity and 
expertise?
    Secretary Lew. The SEC, as I mentioned earlier, is in the 
process of considering a rulemaking with regard to money market 
funds, and I certainly hope that they reach a conclusion that 
provides the kind of oversight of the--
    Mr. Rothfus. Should that be within the discretion of the 
SEC and not the FSOC?
    Secretary Lew. The FSOC reached a conclusion, with the SEC 
being very much a part of the process, that this was an 
important area to address. The FSOC made recommendations; now 
the SEC has a rulemaking.
    And I will also add that, in the process of going through 
the asset manager review, the SEC is fully a part of that 
process. They review drafts of the OFR study. They are part of 
the decision that FSOC will make, because the Chair is a voting 
member of FSOC and the staff work on all the preparation to it. 
So--
    Mr. Rothfus. I would like to ask a question getting back to 
``too-big-to-fail'' and whether it has been ended.
    The President and this Administration have a sad history of 
overselling its policy objectives and initiatives. They 
oversold an $800 billion stimulus saying that it wouldn't 
cause--or, if you passed it, unemployment wouldn't go above 8 
percent. They oversold the Affordable Care Act with the famous, 
``If you like your healthcare plan, you can keep it.'' They 
shockingly oversold, I would say misled, about the impact of a 
video in Benghazi. They oversold the ability to reset relations 
with Russia. They oversold the record-retrieval capacity of the 
IRS with the email scandal. They oversold their ability to 
manage the VA. They oversold the demise of Al Qaeda.
    Now, as recently as July 2013, you stated, as a matter of 
law, that Dodd-Frank ended the notion that any firm is ``too-
big-to-fail.'' And you also said, if a financial firm fails, 
the taxpayer will not bear the cost of that failure.
    Now, Secretary Geithner--or, today, you seemed to backtrack 
on that. When the chairman asked you if ``too-big-to-fail'' has 
been ended, you testified, ``We won't know until the next 
crisis.'' But that is not how Dodd-Frank was sold to the 
American people.
    Secretary Geithner now says that, of course, the ``too-big-
to-fail'' still exists.
    Would you agree that the Administration oversold the 
promises of Dodd-Frank?
    Secretary Lew. Mr. Chairman, can I have a few seconds to 
answer?
    Chairman Hensarling. A brief answer, Mr. Secretary.
    Secretary Lew. Congressman, I had tried to address that 
issue at some length earlier, but I believe we have taken 
enormous steps to make our financial system more safe and more 
sound and to make it so that, if a bank fails, a financial 
institution fails, they will bear that risk themselves. That is 
what the capital is going to help do; that is what the 
resolution rules will help do.
    What I said in the response to the earlier question is a 
matter of fact. The true proof comes at the time of the next 
financial crisis. I believe we have taken very dramatic steps 
and made very dramatic progress.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Washington, Mr. 
Heck.
    Mr. Heck. Thank you, Mr. Chairman.
    Mr. Secretary, thank you so much for your presence here 
today.
    As you know, in 2012, when the Congress reauthorized the 
extension of the Export-Import Bank, the Secretary of Treasury 
in your department was directed to enter and pursue 
negotiations with other major exporting companies, with an 
objective of substantially reducing and then--and with the goal 
of eliminating the role of export credit authority subsidies of 
goods sold.
    I am curious as to whether or not, as a result of that 
process or any of your other conversations with finance leaders 
from other countries, has there ever been an indication to you 
of a willingness on the part of those other countries to 
``substantially reduce'' their export credit authority.
    Secretary Lew. Congressman, there actually is a working 
group on export credit subsidies that met at Treasury 2 weeks 
ago, and there were 15 countries represented at that.
    The issue has come up in my conversations from time to time 
with other finance ministers, and I have made the same point to 
them that we have made in public, which is that there has to be 
a level playing field. It cannot be a question of the United 
States unilaterally withdrawing from these kinds of programs 
while other countries stay in, because that would put our firms 
at a disadvantage.
    So I think the working group is a good thing, and a level 
playing field is the goal.
    Mr. Heck. Have any of those countries indicated a 
willingness to do away with their export credit authorities?
    Secretary Lew. I am not sure they have gone that far yet, 
but that is obviously one endpoint that would leave a very 
level playing field. But it can't be that the United States 
steps back while everybody else is subsidizing their exports.
    Mr. Heck. As you are aware, China is, as we sit and speak, 
developing a commercial aircraft for sale, the C919. It is my 
impression that it is being substantially subsidized by China 
in its development. Would that be your impression, as well?
    Secretary Lew. I do understand that there is a Chinese 
aircraft industry, and I don't know the exact structure of it, 
but they do have many state-sponsored enterprises.
    Mr. Heck. And they also have a state-sponsored enterprise 
to develop small aircraft, which are being sold with the 
assistance of China's export credit authority already.
    What would your opinion, then, Mr. Secretary, be as to 
whether or not China, in absolute dollars and as a percentage 
of GDP, about the largest export credit authority on the face 
of the planet, what is your opinion about whether or not the 
Chinese export credit authority would engage in financing of 
the sale of their C919s once they are developed?
    I realize that no memo has been issued by them, but you are 
a worldly guy with a strong, firm grasp of how the economy 
works. Would you fully expect China to provide export credit 
authority for the sale of their commercial aircraft?
    Secretary Lew. I think we have seen in the commercial 
aircraft industry worldwide that there is a willingness of 
governments to provide export support. I have no reason to 
believe that China would choose not to do that. I don't know of 
the specific intention.
    I do think that it is a case where we either all have to 
agree to not do it or the United States has to maintain the 
Export-Import Bank kinds of support so that our industries can 
compete on a fair basis with other manufacturers who have 
access to export support programs. There is not a place for the 
middle ground where we withdraw and others don't.
    Mr. Heck. I don't want to put words in your mouth, to be 
sure, so let me do a little reflective listening. Here is what 
I think I heard you say: If our future is that Airbus is 
provided export credit authority for purchases of financing 
sales and the Chinese-made, at some point in the future, C919 
aircraft is provided with Chinese export credit authority 
financing assistance and airplanes made in the United States of 
America are not provided with export credit authority 
financing, that would put us at a material disadvantage to 
compete in the global market.
    Secretary Lew. Yes, I think that is correct.
    And I also think that our Administration's support of the 
Export-Import Bank has been clear. We think it is an important 
aspect of how not just our aircraft industry but many large and 
small U.S. firms can play on a level playing field in a world 
where other exporters have access to credits. We can discuss a 
world where there were no such credits, but in a world where 
others engage in that, we can't unilaterally disarm.
    Mr. Heck. Thank you. Fair enough.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from New Mexico, Mr. 
Pearce, for 5 minutes.
    Mr. Pearce. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for being here today.
    Mr. Secretary, you had written in your comments on page 2 
that we learned from the 2008 financial crisis that regulators 
should have asked more, not fewer, questions about the 
institutions and the activities they oversaw.
    So why do you think that we weren't asking enough questions 
going into this 2008 time period?
    Secretary Lew. I can't go back and tell you exactly why 
different institutions and individuals behaved the way they 
did, but I think we saw the results, that there was a financial 
crisis--
    Mr. Pearce. No, I am--
    Secretary Lew. --that took everyone by surprise.
    Mr. Pearce. I think it wasn't the institutions themselves. 
It is that regulators should have asked more. Why were the 
regulators not asking more questions?
    Secretary Lew. There was no regulator that had broad 
responsibility for looking across the financial horizon and 
asking about financial stability. Regulators each had their 
siloed areas of regulatory authority. And in their areas, they 
asked questions the way they had in the past.
    Mr. Pearce. There hadn't been anything in the past that had 
caused people to say, hey, we need to start asking more 
questions, we ought to work back and forth across these silos? 
Nothing had come up about that?
    Secretary Lew. In retrospect, there were people saying that 
there were questions about that which needed to be asked, but 
the system didn't respond. And--
    Mr. Pearce. When you say the system didn't respond, what 
does that mean?
    Secretary Lew. I think that in the 1990s, there was the 
debate about derivatives, and in the early 2000s, there was a 
run-up in the housing market and development of highly 
leveraged--
    Mr. Pearce. What system was not responding?
    Secretary Lew. Depending on the issue, it was different 
regulators. You had relatively lax regulation in some of the 
banking regulators. You had--
    Mr. Pearce. Was anyone calling attention to that?
    Secretary Lew. Was anyone calling attention to it?
    Mr. Pearce. Yes, sure. Anyone in your field of interest, 
your sphere of interest.
    Secretary Lew. I was not in Washington at the time, so I 
don't want to pretend to have been participating. But the 
build-up in mortgage credit on riskier and riskier terms was 
viewed as a narrow housing issue, not a systemic issue.
    Mr. Pearce. But nothing in your experience gave you cause 
where you would elevate the concerns?
    Secretary Lew. It was not my set of responsibilities at the 
time, but--
    Mr. Pearce. If I would take a look back at 1994 to 1997, 
you were Deputy Director of OMB, and in 1998, you were made the 
Director. And when I take a look at the Web page for OMB, it 
says that it is oversight of agency performance, oversight of 
all agency performance, measures quality of agency programs, 
policies, and procedures.
    Now, it was exactly during that period that long-term 
capital did almost exactly the same thing. They almost 
collapsed the world economy, according to the leading articles 
of the day. And, under your watch, you had the ability to see 
that this extremely dangerous thing was occurring in the 
markets.
    And what they were doing was ramping up their asset--or 
they were taking their asset value down as low as 3 percent. 
That is exactly what Bear Stearns did 10 years later, down to 3 
percent. And it was one of the original partners at Long-Term 
Capital who was the head of Bear Stearns.
    So, we had 10 years to assess. And the system knew exactly 
what was going on. You were the one in charge of the OMB; you 
were the one in charge at the White House. And yet, you make 
the statement here that regulators should have asked more, not 
fewer, questions. You were the one who should have been saying 
to the regulators, ``Your system is not working.'' This is a 
very dangerous thing that went on.
    And, yet, now and today, we are sitting here, and on page 3 
you say, ``As the distance in time since the financial crisis 
grows, we must not forget the financial and emotional pain 
endured by millions of American families who lost their homes 
or retirement savings or jobs.''
    It would be nice if that same perspective had been kicked 
out after the Long-Term Capital failure, saying, let's not let 
this happen again, but instead, 10 years later, the same thing 
happens again. And I find your statements to be surprising.
    I yield back, Mr. Chairman.
    Secretary Lew. Congressman, if I could just respond 
briefly.
    Mr. Pearce. If I have time, sure.
    Secretary Lew. First of all, when I was at OMB, the Office 
of Budget and Management has relatively limited insight into 
independent regulatory agencies, their rules, and the actions 
they make. They are independent regulators.
    One of the reasons FSOC was created was to have a place 
where there was an ability to look across all of the 
independent regulators and work together. I think FSOC actually 
is an important solution to that problem.
    Mr. Pearce. Again, the warning sign was there. We almost 
collapsed the world economy. You were the guy in charge of 
checking the economy.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes.
    Mr. Sherman. Thank you.
    Mr. Secretary, the last 2 or 3 times you have come here, I 
have focused your attention on the worldwide unitary system of 
taxation. Last time you were here, you said that your Assistant 
Secretary for Tax Policy had reviewed that and was anxious to 
talk to me about it. He hasn't reviewed it.
    I would hope that you would commit now that your Department 
would devote some serious high-level time to reviewing what 
would be a system that would increase our tax revenues by over 
$1 trillion over 10 years and is the system that has been used 
by the 50 States to deal with multi-jurisdictional income taxes 
long before globalization occurred and multi-jurisdictional 
income tax meant international rather than multi-State.
    Can I get a commitment that you and your Department are 
going to look at the--
    Secretary Lew. Congressman, he has reviewed it. If he 
hasn't been in touch with you, I will make sure he gets in--
    Mr. Sherman. Oh, no, he was in touch. He basically--we 
talked for a few minutes, but he had not looked at the issue.
    Secretary Lew. My understanding is that there are people in 
his office who have looked at it. I will make sure they contact 
you.
    Mr. Sherman. They are streamed on other things.
    I have read Ayn Rand. Ex-Im Bank is not mentioned in any of 
her books. I dream of a world in which all competition is fair 
and as uninfluenced by government as possible.
    Do you think you could be successful in getting Germany and 
France and Japan to eliminate their analogs to the Ex-Im Bank 
if we would just eliminate ours first?
    Secretary Lew. I don't know the answer to that question. 
Obviously, the engagement that is under way is aimed at trying 
to answer that question.
    What I do believe is that it would be wrong for us to 
unilaterally withdraw from the Export-Import Bank while other 
countries are providing export subsidies, putting our 
manufacturers and exporters at a disadvantage. There needs to 
be a level playing field.
    Mr. Sherman. It is strange, because I am on the Foreign 
Affairs Committee, where sometimes Members of our party are 
accused of being in favor of unilateral disarmament, and then I 
come here and it is folks on the other side in favor of--or at 
least some, in favor of unilateral disarmament.
    Secretary Lew. And I don't disagree with the notion that it 
would be a good thing if there were no export subsidies. The 
two positions are not inconsistent.
    Mr. Sherman. Right. But if we eliminated the Ex-Im Bank, 
wouldn't our foreign trading partners have absolutely no 
incentive to eliminate theirs?
    Secretary Lew. I think if we did it on a unilateral basis, 
yes. If it was part of a negotiation, that would obviously be 
very different.
    Mr. Sherman. Right. That would be like doing missile 
control with the Soviet Union by eliminating all our missiles 
and then going to the missile control--
    Secretary Lew. I am not sure I would want to compare the 
stakes, but I understand the analogy.
    Mr. Sherman. Okay.
    You have to define SIFIs. The tendency is to define SIFIs 
based on the size of their assets. I want to urge you instead 
to look at the size of their liabilities.
    What causes a SIFI to bring down the entire economy is that 
people were expecting that they would meet their obligations 
and they are unable to do so. For example, if you had a company 
with a great name but modest assets that went out and incurred 
a trillion dollars of contingent liabilities by writing a bunch 
of credit default swaps, that entity would be a SIFI, assuming 
defaulting on a trillion dollars of credit default swaps would 
bring down the economy--maybe the number would be bigger--
regardless of the size of its assets. As a matter of fact, the 
smaller its assets, the worse situation we are in, if they are 
engaging in more than a trillion dollars of credit default 
swaps.
    With that in mind, as to mutual funds, they don't have 
liabilities, except if they are leveraged, except for one 
thing, and that is they have the contingent liability that if 
the custodian function is not handled correctly and you open 
the safe and there is nothing there, then they have a 
liability.
    So I would hope that when you are dealing with an 
unleveraged mutual fund with extremely strong custodian 
functions that you would not be designating that as a SIFI.
    I don't know if you have a comment?
    Secretary Lew. As I have said a number of times this 
morning and afternoon, we have not made a decision yet, but we 
definitely understand that there are different kinds of assets 
in asset management funds, custodial funds. I understand the 
important difference between leveraged and unleveraged funds.
    We will complete this process and reach a determination as 
to whether or not there is a basis for designation. But asking 
the question does not mean we decided to designate.
    Mr. Sherman. Okay.
    And, likewise, insurance companies seem to be well-
regulated. It is when you let the unregulated portion of AIG 
write credit default swaps that you have a SIFI problem.
    I yield back.
    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.
    And thank you, Secretary Lew, for being here.
    I want to follow up on how we can work together in a 
bipartisan and constructive manner, as Subcommittee Chairman 
McHenry had questioned a few minutes ago.
    As he noted, we have passed a couple dozen bills by super-
majorities out of this committee, including many by voice vote, 
and many of those have passed the House, as well, that made 
sensible reforms to Dodd-Frank.
    Notably, even former Fed Chairman Ben Bernanke, in his last 
appearance here, when asked where Congress should focus and 
where the Fed would be interested in engaging, he stressed a 
couple of different things: first, he stressed swaps push-out, 
which creates more systemic risk and impacts end-users' ability 
to hedge; second, he mentioned end-user margin, which Congress 
never intended and where regulators need clarity; and third, he 
said regulatory relief for banks, especially smaller financial 
institutions.
    I wonder, does the Administration intend to support any of 
these sensible reforms? And does Treasury have a list of 
bipartisan reforms that we can work on?
    Secretary Lew. Congressman, as we have indicated, we think 
that many of these issues are premature, that regulators are 
dealing with these issues and that the need for legislation is 
not yet clear.
    And as I mentioned in my response to an earlier question, 
the idea of going in and amending Dodd-Frank, if it is a 
question of truly technical fixes that don't open other issues, 
obviously is different than if it is part of an effort to take 
a broader look at Dodd-Frank.
    We have not thought that the legislation was appropriate up 
until now. That continues to be our view. But we look forward 
to working with you going forward.
    Mr. Hultgren. I would say, please hurry. People are 
suffering under these things. Again, as Chairman Bernanke 
recognized, these do have an impact. And further delay is 
absolutely impacting the economy and many of these institutions 
that are just trying to get answers and trying to figure out 
how to work.
    And, again, when these are done in a super-majority way, to 
me, it would seem like it would draw light to the 
Administration and to the Treasury that this is important, that 
this isn't just something that we are tinkering with or pushing 
on, but instead this is what we are hearing from people who are 
trying to respond in a very difficult climate already. And I 
would say delay and confusion is making it worse.
    Let me move over a little bit to oversight function of 
FSOC. I believe oversight is extremely important, that this 
committee has to be engaged in this because of the design of 
FSOC, which really makes it much more opaque and unaccountable 
than other regulatory agencies.
    Certainly, this includes broad statutory discretion that 
the FSOC has to designate certain companies as SIFIs. We have 
talked about that a lot today. That is why I am a cosponsor of 
Chairman Garrett's bill, the FSOC Transparency and 
Accountability Act, which would implement commonsense reform 
measures to the FSOC that would improve the SIFI designation 
process.
    One example of FSOC's inadequate structure is how it 
constitutes who a voting member is. I wanted to ask you some 
questions on this. The FSOC is dominated by the heads of bank 
regulatory agencies: the Chairman of the Federal Reserve; the 
Comptroller of the Currency; the Chairman of the National 
Credit Union Administration; and the Chairman of the Federal 
Deposit Insurance Corporation. Not surprisingly, these 
regulators have a bankcentric view of the world.
    Secretary Lew, I wondered, can you explain to the committee 
why it is that the expertise and judgment of bank and credit 
union regulators should be substituted for that of the SEC in 
the case of asset managers, or State insurance regulators in 
the case of insurance companies, when determining how these 
firms should be regulated? Are these persons really qualified 
to vote on whether to designate nonbank financial institutions 
as SIFIs?
    Secretary Lew. I think the statute was set up quite 
correctly to require all of the members of FSOC to look across 
our financial system and look at risks that cut across the 
responsibilities of different regulators and that might not be 
visible if you looked at it just in one channel.
    The view of each member of FSOC is important. And I think 
that the nature of the debates, the discussions within FSOC are 
very collegial and very respectful. And if you look before FSOC 
existed, there were barely relationships between many of the 
regulators. So, we have come a long way in terms of closing a 
gap that was part of what contributed to the financial crisis.
    Mr. Hultgren. I think the problem is so much of it is 
bankcentric-focused and not seeing that there are very 
different risks out there, depending on the group that we are 
talking to.
    And let me, in the last few seconds that I have, shift over 
to ask about the possibility that certain mutual funds could be 
designated as SIFIs.
    Mutual funds use little or no leverage. In fact, the 14 
largest U.S. funds had an average leverage ratio of 1.04 to 1, 
compared to U.S. commercial banks, which had an average ratio 
of 9 to 1.
    Does the fact that mutual funds are not leveraged make it 
impossible for them to fail in the same way that banks do?
    Secretary Lew. Look, we are in the process now of looking 
at the asset management industry and the products of the 
industry, and the answer to your question will come at the end 
of our inquiry, not now.
    Mr. Hultgren. My time has expired, and I yield back. But I 
do want to say, this has an impact on industry, and the sooner, 
the better. This is taking a long time.
    Thank you. I yield back.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Nevada, Mr. 
Horsford, for 5 minutes.
    Mr. Horsford. Thank you, Mr. Chairman, and Ranking Member 
Waters.
    Mr. Secretary, thank you for being here today.
    I want to ask a question about the effect of the housing 
crisis on the majority of U.S. homeowners who are still 
struggling to recover.
    I am from Nevada. Unfortunately, our State is still the 
third highest in the country for foreclosures, with 1 in 717 
housing units currently in or pending foreclosure filing, and 
some 34 percent of Nevada homes are still seriously underwater, 
the highest in the Nation.
    As part of the Administration's response to the housing 
crisis, the Treasury, under TARP, established two central 
programs, the Making Home Affordable and the Hardest Hit Fund. 
And I noticed your media advisory yesterday about an 
announcement that you will be making this Thursday at the 
Making Home Affordable Anniversary Summit on new housing 
initiatives. It is my understanding that you plan to announce 
additional policies to assist struggling homeowners, provide 
more affordable housing options for renters, as well as expand 
access to credit for borrowers.
    Can you provide any further details about these initiatives 
or the announcements that you plan to make on Thursday?
    Secretary Lew. Congressman, we have been looking hard at 
all aspects of the authorities we have and that regulatory 
agencies have that affect access to credit and relief that 
might be available to homeowners.
    I would refer back to the announcements made by the FHA and 
the FHFA to deal with this issue of put-back risk that is 
closing down the credit box so that people who are fully 
creditworthy are not getting access to mortgages. I think that 
is going to make a big difference.
    We need to finalize the risk retention rules so we 
eliminate any remaining uncertainty as to what the final rules 
are.
    And we are constantly looking, in the Making Home 
Affordable program, at what can we do with authorities we have 
to, based on the current situation in the market, provide 
appropriate relief to homeowners. And I hope to be able to make 
some more comments about that on Thursday.
    Mr. Horsford. Wonderful. I am eager to hear about the 
Treasury's efforts in this regard, particularly for struggling 
homeowners, as you said, like those in my home State of Nevada.
    And I would like to ask if I can meet with you and members 
of your staff following your announcement on Thursday so that I 
can make sure that these initiatives are helping the people who 
need the relief the most at this time.
    Secretary Lew. I am happy to have our staff follow up with 
yours.
    Mr. Horsford. Thank you very much.
    Mr. Secretary, as well, are there any other areas that you 
see, particularly around the housing area, where this committee 
should be working with you and other leaders to help provide 
the relief that homeowners are seeking?
    Secretary Lew. Congressman, that is obviously a very 
important question. If we look at the recovery to date, we are 
doing pretty well in most areas, most sectors of the economy. 
The place that has not been recovering where it should is 
construction and housing.
    Some of that is a question of market conditions. We had a 
financial crisis with a huge overhang of inventory and credit-
stressed institutions and investors and borrowers. I think, as 
we now get to the point of a more healthy economy, we have to 
make sure that creditworthy people have access to credit and 
that we don't have the pendulum go to the point where it is 
blocking out of the market people who are not a risk.
    It is certainly not that we need to return to the days of 
before the crisis when we had low-doc, no-doc loans, people who 
got into mortgages they couldn't afford. But if you have 
somebody with a FICO score of 740 who can't get a mortgage, 
then the system has overcorrected. And the put-back decisions, 
the announcements on put-back risk, should have an effect on 
that. I have talked to CEOs of banks who think it will have a 
material effect.
    As we go through the process of seeing what the effect of 
what we have done administratively is, I would look forward to 
continuing the conversation as to whether there are other 
actions, other tools that we don't have the authority to do on 
our own.
    Mr. Horsford. One other area, in my concluding time, that I 
would like to have a conversation about is the review of the 
criteria that credit reporting agencies use in which to measure 
consumers. That is an area that I think needs review. This 
committee has not had a hearing on that in well over a year. 
And we are in a different landscape and setting today than we 
were pre-2008.
    Secretary Lew. I think that is correct. And I think it is 
also the case that there are many people for whom the credit 
rating agencies miss the test of their true creditworthiness 
because they are paying their utility bills and other things on 
a regular basis.
    Mr. Horsford. Thank you.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Florida, Mr. 
Ross, for 5 minutes.
    Mr. Ross. Thank you, Mr. Chairman.
    Mr. Secretary, let me ask you quickly, if I can, because I 
know your time is coming to a close here, companies are 
notified under Stage 3 of the SIFI designations that they have 
been designated as a SIFI, correct?
    Secretary Lew. That is correct.
    Mr. Ross. And there is really no other opportunity to be 
notified, though, other than Stage 3?
    Secretary Lew. We all know notification is Stage 3, and 
there is plenty of time in Stage 3--
    Mr. Ross. The SIFI designation states, ``In general, this 
analysis, Stage 2, will be based on a broad range of 
quantitative and qualitative information available to the 
Council through existing public and regulatory sources, 
including industry- and company-specific metrics beyond those 
analyzed in Stage 1 and any information voluntarily submitted 
by the company.''
    It just seems kind of odd that if they are not aware until 
Stage 3, how would they know to volunteer any information at 
the Stage 2 level?
    Secretary Lew. The--
    Mr. Ross. I guess what I am getting at is it is almost like 
a ``gotcha'' situation. Because they don't want to be a SIFI if 
they don't have to be, and so they would like to work with 
you--
    Secretary Lew. Companies know if they meet the Stage 1 
standard, because the Stage 1 standard is a publicly 
available--
    Mr. Ross. But they are not notified that they are being 
reviewed.
    Secretary Lew. No, but the companies know that if they are 
in the group of companies that meet the threshold, that they 
can voluntarily provide information.
    Mr. Ross. Yes, but they don't know if they are in Stage 2. 
Don't you think it would be better and more transparent if 
there was an opportunity for notification in the Stage 2 level 
of a company that is under review for SIFI purposes?
    Secretary Lew. The process was actually set up in a very 
careful way to try to get information that was available to use 
to make preliminary determinations before engaging a company in 
a process where--
    Mr. Ross. And it should be a cooperative process, I agree.
    Secretary Lew. But if a company is notified, that creates 
all kinds of other issues, which--
    Mr. Ross. But it could cause self-correctness.
    Secretary Lew. It could what?
    Mr. Ross. It could cause self-correctness. In other words, 
they could--look, they would want to cooperate, I would think. 
And not only would they want to cooperate, but I think other 
companies in the same industry may also want to have the 
opportunity to prevent them from being under that review.
    Wouldn't that be a more transparent, a more cooperative 
process?
    Secretary Lew. I think the tension--the transparency of the 
process is very high, because Stage 3 is where the detailed 
back-and-forth with the company and FSOC goes on.
    Mr. Ross. I do agree. All I am saying is, if they can have 
some opportunity to avoid Stage 3, wouldn't that be better and 
enure to the benefit not only of the company but also--
    Secretary Lew. I am not sure it would benefit the company. 
I think that, for many companies, if there was a kind of 
preliminary designation they were notified of, that would 
create a sense that they were about to be going through Stage 
3. They may have to disclose it; it could have an effect on 
their business.
    Mr. Ross. But most companies don't know really that they 
are even going to be Stage 3.
    Secretary Lew. I think the financial firms that are at the 
Stage 1 threshold level do understand that they are there.
    Mr. Ross. Let me change topics here. Just recently, the 
International Association of Insurance Supervisors came out 
with their plan to implement capital standards for insurance 
companies, hopefully on a global basis. Unfortunately, they 
seem to be rushing things. And I think that the NAIC's head, 
former Senator Ben Nelson, has expressed his dismay and concern 
that they are going at breakneck speed.
    My question to you is, if the United States doesn't 
participate in these global standards for capitalization for 
insurance companies, really they don't become global. And, in 
fact, there may be other countries that may follow our lead.
    Can you give us some assurances from the Treasury and the 
FIO that everything is being done to make sure that the 
interests of domestic insurance carriers are being advocated 
and protected as we go through this process of assessing--
    Secretary Lew. Congressman, there is robust participation 
by insurance commissioners and others who are expert in the 
U.S. insurance industry in that process. And I can tell you 
that it is with a great deal of input from the United States 
that the discussion goes forward.
    Mr. Ross. And with regard to statutory accounting 
procedures and generally accepted accounting procedures, those 
two being at odds, too, most insurance companies now having to 
potentially have to keep two sets of accounting principles, 
which would be very duplicative, very costly.
    Can we get some assurances from Treasury that we will focus 
on not a duplication but rather a continued streamline process 
for accounting principles such as the SAP, or statutory 
accounting principles?
    Secretary Lew. I will have to get back to you on the 
specific issue regarding the insurance accounting principles.
    I can tell you, as a broad matter, my view has been, if we 
can in international conversations eliminate some of the noise 
between different systems--
    Mr. Ross. And duplication.
    Secretary Lew. --it would be a good thing. The problem is 
that it is not always as easy to accomplish as you would like.
    Mr. Ross. I agree, which is why we would like your advocacy 
in that regard.
    Secretary Lew. Yes.
    Mr. Ross. With that, Mr. Chairman, I will yield back.
    Chairman Hensarling. The Chair intends to recognize the 
gentleman from California, followed by the gentleman from 
Kentucky, and then we will excuse the Secretary.
    The Chair now recognizes the gentleman from California, Mr. 
Royce, chairman of the House Foreign Affairs Committee.
    Mr. Royce. Thank you, Mr. Chairman.
    At the outset, I would just like to set the record straight 
on an issue that I think was raised twice today, and that is 
the story of AIG.
    If I could submit for the record, Mr. Chairman, the story 
that ran in last week's American Banker?
    Chairman Hensarling. Without objection, it is so ordered.
    Mr. Royce. Thank you.
    It is by Hester Pierce. It is entitled, ``AIG's Collapse: 
The Part Nobody Likes to Talk About.'' And that part, of 
course, is the securities lending portfolio run for the benefit 
of the State-regulated life insurance subsidiaries of AIG.
    And if I could briefly quote from the article: ``Government 
rescue money was critical to the recapitalization effort of 
AIG. Taxpayer funds were also critical in meeting securities 
borrowers' demands for cash. Securities lending counterparties 
received $43.8 billion in the last quarter of 2008, comparable 
to $49.6 billion in collateral postings and payments to AIG's 
derivatives counterparties.''
    The record is pretty clear here. The taxpayer bailout 
associated with AIG, which I opposed, by the way, applies both 
to its Financial Products unit in London and to its State-
regulated insurance arm right here in the United States.
    But on to my question here for the Secretary.
    Secretary Lew, as you know, the U.S. and the EU are 
currently engaged in trade talks as part of the TTIP 
negotiations. And with regard to banking and securities 
regulation, the EU has put forth a limited but reasonable 
proposal to strengthen U.S.-EU regulatory cooperation and to 
create a more results-driven dialogue that avoids market 
disruption and regulatory fragmentation. It is focused on 
consistency of regulation, limiting extraterritorial impact, 
and laying the foundation for recognition where appropriate.
    So the EU has made this a top priority. Do you not believe 
that enhancing this dialogue is an important objective and 
could lead to a high-standard comprehensive regulatory regime?
    Secretary Lew. Congressman, I believe that both TTIP and 
TPP are very important trade negotiations. And I have spent a 
great deal of time working with my counterparts on the aspects 
of those trade negotiations that fall in my area.
    I do think there are challenges in TTIP, particularly with 
regard to financial services, that we have not yet reached an 
agreement on.
    Mr. Royce. Right, right, but this would be a way to get 
there. If you feel that financial services regulatory issues 
being part of TTIP discussions would be important, this would 
be a way to bridge that.
    Secretary Lew. Our view--my view is that, to the extent 
that the question is should financial regulatory standards, 
prudential standards, be subject to a trade negotiation, the 
answer there, I believe, has to be ``no.'' We can't be in a 
place where we are subjecting our financial regulatory 
standards to trade remedies.
    We have to regulate to make sure we have a sound financial 
system and drive through the G-20 and other bodies to have the 
international standards reflect our high standards.
    I think competition in the marketplace for financial 
service companies ought to be part of a discussion, and we 
ought to have open access subject to our national authorities.
    Mr. Royce. Here is a point. The Wall Street Journal article 
recently, in which Acting CFTC Chair Mark Wetjen takes issue 
with the process and policies with the CFTC cross-border 
guidance, here is his quote: ``I don't think that was the right 
decision. If you have equally comparable comprehensive 
regulations in Europe, as an example, then what's the reason 
why we wouldn't allow for substituted compliance in that 
situation?''
    There's the question, and if you can have that dialogue in 
order to substantiate that.
    And the second would be an article I am going to quote 
here, ``Transatlantic Swap Liquidity Split Persists,'' which 
highlights two polls that show concrete evidence that 
``regulators have failed in their attempts to tackle a 
liquidity split by two swap market reforms in Europe and the 
United States.''
    Now, the Administration has pointed to the current 
regulatory dialogue, the financial management regulatory 
dialogue, as an appropriate forum. But what success has that 
produced? It hasn't, in terms of regulatory cooperation and 
consistency.
    So I think you have an opportunity here. Many of the 
challenges we have seen today--uncertainty, market disruptions, 
which we talked about--could be avoided if we go down the road 
of this dialogue.
    Secretary Lew. Mr. Chairman, if I may just very briefly 
respond?
    I think that in the area of substitute and compliance we 
have made a good deal of progress, but the challenge is what is 
true comparability. And that is something that I believe is 
being worked through in the derivatives area with the CFTC and 
their counterparts both in Europe and in Asia.
    And if it is true substitute and compliance on a basis of 
comparable standards, that is one thing. I just don't believe 
that a trade context is the appropriate place to resolve those 
matters.
    Chairman Hensarling. The time of the gentleman has expired.
    The Chair now recognizes the gentleman from Kentucky, Mr. 
Barr.
    Mr. Barr. Thank you, Mr. Chairman.
    And thank you, Mr. Secretary, for your patience. It looks 
like I may be the very last questioner, so I appreciate your 
patience.
    Mr. Secretary, you have repeatedly said that an institution 
can appeal its SIFI designation if it disagrees with the FSOC 
determination that it poses systemic risk.
    But the first appeal is to FSOC itself, an appeal that 
seems useless, given that the institution is not appealing to 
an independent arbiter but instead to the same agency that is 
making the original designation.
    And then the second appeal would be to the courts, but that 
appeal would also seem fairly useless, given the fact that FSOC 
has not promulgated some objective standards to guide its 
terminations, and the court couldn't effectively review those 
designations and would have to defer to FSOC's original 
judgment.
    And, secondly, the institution wouldn't challenge the 
regulators' judgment anyway, for fear of retaliation in the 
supervisory process. Just last month, Former Assistant Treasury 
Secretary Michael Barr pointed out that institutions may refuse 
to appeal these designations precisely because they fear 
regulatory retaliation.
    So my question is this: Given the substantial flaws in the 
appeals process, both the original, initial administrative 
appeal and then the judicial appeal, does the designation 
process really give institutions a meaningful opportunity to 
challenge their designations?
    And, given these flaws, would you support an alternative 
process which would create an independent ombudsman or arbiter 
as an alternative to review the initial designation?
    Secretary Lew. Congressman, I actually don't agree with 
that assessment of the current process. I think that the 
engagement at the Stage 3 level is robust and it does affect 
the thinking at the staff level and the principal level. I 
think that when we had the one face-to face hearing, it was 
actually a very substantial exchange of questions that were 
responded to.
    And I think that as far as recourse to judicial resolution, 
it has not been the case that financial institutions or others 
are afraid to challenge judgments that they don't agree with 
when the regulators make them.
    Mr. Barr. So you would not reform the current statutory 
process?
    Secretary Lew. I think the current process is actually 
working pretty well.
    Mr. Barr. Okay.
    In regard to Ex-Im reauthorization, you have said that 
every other developed country has an export credit agency, and 
we shouldn't go it alone, we shouldn't unilaterally disarm, 
regarding export support.
    But, given the fact that we have unilaterally burdened 
financial institutions with the Volcker Rule while the rest of 
the world does not have a similar regulatory regime, since we 
have unilaterally burdened our manufacturers with greenhouse 
gas standards not imposed by other countries, since we have 
unilaterally subjected our financial institutions with higher 
capital standards than the rest of the world, since we have 
unilaterally subjected the United States business community to 
the highest corporate tax rate in the world, what is the 
difference?
    Secretary Lew. Congressman, I would actually counter on two 
of those issues and on the third agree with you.
    I think, when it comes to Volcker, you have processes going 
on through other international processes, Liikanen and Vickers, 
where they are looking to put in similar kinds of systems.
    I think if you look at climate rules, the agreements made 
in Copenhagen were very important. We are complying, meeting 
our standards; other countries are doing the same.
    On the tax rate, I agree with you; we need to do business 
tax reform. We should not have a statutory business tax rate as 
high as we do, and I would look forward to a bipartisan effort 
to do that.
    Mr. Barr. I am glad you at least agree on that point. And I 
take it you take my point on the others, particularly with 
respect to the greenhouse gas rules, which other countries, 
developed countries, China, India, certainly are not adopting.
    Really quickly, final minute, I do want to ask you about 
the lost IRS emails. We knew that targeting of conservative 
groups by the IRS began in February-March 2010. Despite 
repeated inquiries from Congress in 2011, the IRS responses did 
not mention knowledge of the targeting.
    In fact, in February of 2012, Commissioner Shulman was 
aware of the inappropriate targeting, but in March of 2012, the 
Commissioner said, ``I can give you assurances''--this is to 
the Ways and Means Committee--that there was absolutely no 
targeting.''
    There was further stonewalling. The Administration said 
this was a rogue office in Cincinnati. As it turns out, we know 
that was not the case. There was also the story that this was 
targeting of both progressive and conservative groups. TIGTA 
George confirmed that the progressive groups were not targeted.
    And then we find out about these lost emails, and there was 
stonewalling, when Commissioner Koskinen knew about the hard-
drive program in February and when Treasury knew about the 
hard-drive program in April of early year. We didn't find out 
until 11 days ago that there were these lost emails.
    So when the President says there was not a smidgeon of 
corruption and when we find out that the hard drive crashed 10 
days after Chairman Camp first sent a letter inquiring into 
this matter back in 2011, do you agree with this assessment 
that there is, maybe not corruption--I am sure you don't agree 
with that--but that the stonewalling is inappropriate?
    Chairman Hensarling. The time of the gentleman has expired. 
If the Secretary wishes to give a brief answer.
    Secretary Lew. If I can just responsd briefly.
    Congressman, I don't believe there is any evidence of any 
political interference to date. And I don't think any of the 
issues that have come up undermine that view.
    I think if you look at the reaction that we had when the 
TIGTA report came in, the first step we took was to replace the 
top leadership. Danny Werfel came in. All the leadership 
between him and the program was changed at a Senior Executive 
Service level. Procedures were put in place so that it was a 
very different process going forward.
    I think the fact that a hard drive broke is only evidence 
that a hard drive broke.
    Chairman Hensarling. The time of the gentleman, again, has 
expired.
    I would like to thank the Secretary for his testimony 
today.
    The Chair notes that some Members may have additional 
questions for this witness, 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 this witness and to place his 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 1:10 p.m., the hearing was adjourned.]
                            A P P E N D I X



                             June 24, 2014
                             
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