[House Hearing, 114 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 FOURTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 22, 2016
__________
Printed for the use of the Committee on Financial Services
Serial No. 114-103
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
PATRICK T. McHENRY, North Carolina, MAXINE WATERS, California, Ranking
Vice Chairman Member
PETER T. KING, New York CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma BRAD SHERMAN, California
SCOTT GARRETT, New Jersey GREGORY W. MEEKS, New York
RANDY NEUGEBAUER, Texas MICHAEL E. CAPUANO, Massachusetts
STEVAN PEARCE, New Mexico RUBEN HINOJOSA, Texas
BILL POSEY, Florida WM. LACY CLAY, Missouri
MICHAEL G. FITZPATRICK, STEPHEN F. LYNCH, Massachusetts
Pennsylvania DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia AL GREEN, Texas
BLAINE LUETKEMEYER, Missouri EMANUEL CLEAVER, Missouri
BILL HUIZENGA, Michigan GWEN MOORE, Wisconsin
SEAN P. DUFFY, Wisconsin KEITH ELLISON, Minnesota
ROBERT HURT, Virginia ED PERLMUTTER, Colorado
STEVE STIVERS, Ohio JAMES A. HIMES, Connecticut
STEPHEN LEE FINCHER, Tennessee JOHN C. CARNEY, Jr., Delaware
MARLIN A. STUTZMAN, Indiana TERRI A. SEWELL, Alabama
MICK MULVANEY, South Carolina BILL FOSTER, Illinois
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
DENNIS A. ROSS, Florida PATRICK MURPHY, Florida
ROBERT PITTENGER, North Carolina JOHN K. DELANEY, Maryland
ANN WAGNER, Missouri KYRSTEN SINEMA, Arizona
ANDY BARR, Kentucky JOYCE BEATTY, Ohio
KEITH J. ROTHFUS, Pennsylvania DENNY HECK, Washington
LUKE MESSER, Indiana JUAN VARGAS, California
DAVID SCHWEIKERT, Arizona
FRANK GUINTA, New Hampshire
SCOTT TIPTON, Colorado
ROGER WILLIAMS, Texas
BRUCE POLIQUIN, Maine
MIA LOVE, Utah
FRENCH HILL, Arkansas
TOM EMMER, Minnesota
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
September 22, 2016........................................... 1
Appendix:
September 22, 2016........................................... 59
WITNESSES
Thursday, September 22, 2016
Lew, Hon. Jacob J., Secretary, U.S. Department of the Treasury... 5
APPENDIX
Prepared statements:
Lew, Hon. Jacob J............................................ 60
Additional Material Submitted for the Record
Hensarling, Hon. Jeb:
Letter from Treasury regarding questions for the record...... 68
Written statement of the Property Casualty Insurers
Association of America..................................... 69
Huizenga, Hon. Bill:
Letter from Representative Huizenga and Representative Moore
to Dr. Jim Yong Kim, President, World Bank Group,
expressing alarm over the World Bank's cancelled Uganda
Transport Sector Development Project, dated July 14, 2016.. 77
Response letter from Dr. Jim Yong Kim, dated August 2, 2016.. 79
Pearce, Hon. Stevan:
Article entitled, ``A Fed Insider Warns of the Risk of Low
Rates''.................................................... 81
Rothfus, Hon. Keith:
Letter to Senator Pat Toomey from Patrick Gallagher,
Chancellor of the University of Pittsburgh, dated October
30, 2015................................................... 85
Letter to Representative Mike Doyle from Rich Fitzgerald,
County Executive, Allegheny County, Pennsylvania, dated
December 1, 2015........................................... 87
Letter to Senator Pat Toomey from David J. Gray, Senior Vice
President for Finance and Business/Treasurer, The
Pennsylvania State University, dated December 14, 2015..... 89
Letter to Senator Robert P. Casey, Jr., from William Peduto,
Mayor of Pittsburgh, Pennsylvania, dated May 4, 2016....... 90
Letter to Representative Mike Doyle from John K. Weinstein,
Treasurer, Allegheny County, Pennsylvania, dated November
23, 2015................................................... 92
Waters, Hon. Maxine:
New York Times editorial entitled, ``The Fake $400 Million
Iran `Ransom' Story,'' dated August 23, 2016............... 93
THE ANNUAL REPORT OF THE FINANCIAL
STABILITY OVERSIGHT COUNCIL
----------
Thursday, September 22, 2016
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:06 a.m., in
room 2128, Rayburn House Office Building, Hon. Jeb Hensarling
[chairman of the committee] presiding.
Members present: Representatives Hensarling, Royce, Lucas,
Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Luetkemeyer,
Huizenga, Duffy, Stutzman, Hultgren, Pittenger, Wagner, Barr,
Rothfus, Messer, Schweikert, Guinta, Tipton, Williams,
Poliquin, Love, Hill, Emmer; Waters, Maloney, Velazquez,
Sherman, Meeks, Capuano, Hinojosa, Scott, Perlmutter, Carney,
Sewell, Foster, Kildee, Murphy, Delaney, Beatty, Heck, and
Vargas.
Chairman Hensarling. The Financial Services 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
testimony of the Chair of the Financial Stability Oversight
Council (FSOC). I now recognize myself for 3 minutes to give an
opening statement.
With today being the official start of fall, it is
disappointing that the Financial Stability Oversight Council
has delivered the equivalent of a summer rerun. Its 2016 annual
report is basically identical to its 2015 annual report,
breaking little new ground and adding little new value.
FSOC, charged with identifying risks to our financial
stability, continues to mention only in passing the need for
fundamental housing finance reform. It fails to adequately
analyze the substantial risk that Fannie Mae and Freddie Mac,
institutions at the epicenter of the last financial crisis,
pose for precipitating the next.
Furthermore, since the advent of the Dodd-Frank Act, we are
losing, on average, one community financial institution a day
in America, as they are crushed by a Federal regulatory burden.
The big banks have only grown bigger. Banking system
consolidation can clearly contribute to heightened financial
system risk, yet there is absolutely no mention in FSOC's
report of Federal regulatory risk brought on by Dodd-Frank, a
glaring omission.
But the most scandalous omission remains FSOC's conspiracy
of silence regarding the existential threat posed by America's
unsustainable national debt and our staggering unfunded
obligations. Since President Obama came to office, the national
debt has increased by a mind-boggling 84 percent. The
Congressional Budget Office (CBO) noted in a recent report that
the President's 2017 budget would add nearly $7.5 trillion to
our publicly held debt, equivalent to $59,609 for every
American household.
CBO recently warned that such high and rising amounts of
debt have, ``serious long-term consequences for the economy and
would constrain future budget policy.'' On this, again, FSOC
remains silent, and thus its annual report loses credibility.
Although FSOC's annual report is disappointing, this
committee's focus must remain on FSOC's frightening and likely
unconstitutional powers. FSOC's open-ended and virtually
standardless SIFI designation process clearly gives Federal
regulators broad license to concentrate immense economic power
in their own hands. The designation authority is taking our
financial system, regrettably, one step closer to a government-
controlled utility model, a model whereby Washington will
allocate credit to politically favored classes at the cost of
our freedom and our prosperity. This must change.
Finally, FSOC's highly politicized structure and penchant
for secrecy are emblematic of a shadow regulatory system that
is antithetical to American democratic principles. That is why
it is so important that last week this committee favorably
reported the Financial CHOICE Act. The Financial CHOICE Act
will help bring about economic growth for all and bailouts for
none. It will end bailouts once and for all by removing FSOC's
ability to designate privileged too-big-to-fail firms and it
replaces bailouts with bankruptcy. It would protect our
financial system with high levels of loss-absorbing private
capital and impose the strictest fines and penalties ever on
those committing financial fraud. It would hold FSOC
accountable and focus its mission solely on the vital task of
monitoring emerging threats to our financial system. It is
undoubtedly a better way forward.
I now yield 5 minutes to the ranking member for an opening
statement.
Ms. Waters. Thank you very much, Mr. Chairman.
Secretary Lew, thank you for joining us today to discuss
the Financial Stability Oversight Council's 2016 annual report.
Last week, the U.S. Census reported that median household
income increased by more than 5 percent, the largest increase
in both percentage and dollar terms since the government began
tracking this data nearly 50 years ago. The Census Bureau also
reported that the poverty rate declined by 1.3 percentage
points and that the number of people without health insurance
in the United States declined by 4 million.
All told, our progress is rather remarkable compared to
where we were 8 years ago when, during the last days of the
Bush Administration, we were shedding more than 700,000 jobs
per month and millions of people were being displaced from
their homes.
But make no mistake, we need to be doing more, especially
to address the wealth gap, and particularly for African
American and Hispanic households, whose economic security was
devastated by the financial crisis.
Unfortunately however, there is an unnerving sense of
amnesia from my colleagues on the other side of the aisle about
the dark days of the crisis. Here we are, 8 years after that
devastation and more than 6 years after Dodd-Frank became the
law of the land, considering the same harmful deregulatory
proposals that would undo the critical progress we have made.
Just think about this. Two weeks ago, one of the largest
banks in the United States, which was supposedly one of the
most well-run, was found to have opened more than 2 million
unauthorized deposit and credit accounts for unsuspecting
customers. This is a massive fraud of historic proportions that
begs the question of what further reforms may be needed. And
yet, in this committee the answer is deregulation and more
opportunities for Wall Street to write the rules of the game.
And like the Consumer Financial Protection Bureau, the FSOC is
on the front line of those attacks.
With Wall Street reform, we created the FSOC to look across
the entire financial system, identifying gaps that may exist
between regulators and action to prevent another meltdown. No
longer would we allow banks to shop around for the weakest
regulator or move money around the globe to escape regulation.
Earlier this year, we saw just how effective the FSOC can
be in preventing companies from growing too large or risky as
to threaten the economy. General Electric Capital voluntarily
agreed to shrink itself and sell off much of its consumer
financial business, returning to its roots as an industrial
company. The firm is now smaller, safer, and less likely to
cause risk to the rest of the financial system if it becomes
stressed. In turn, FSOC allowed GE Capital to shed its
systemically important designation and the higher regulatory
standards that came with it.
What this means is that Wall Street reform is working as it
should. The system is creating incentives for firms to shrink
themselves and it is ensuring that companies like GE renew
their focus on creating jobs in the real economy.
And yet, despite this progress, my colleagues on the
opposite side of the aisle are intent on dismantling the FSOC.
Nowhere has this effort been more apparent than the chairman's
Dodd-Frank repeal bill, which received bipartisan opposition in
the committee last week. This harmful legislation would strip
the FSOC of its ability to designate nonbanks for heightened
supervision, repeal all existing designations for large complex
firms like AIG, and otherwise limit its ability to operate
effectively. This bill and others would put Wall Street back in
the driver's seat and leave consumers and investors to fend for
themselves.
Rather than continuing this committee's focus on harmful
rollbacks, we should be supporting further reform and exploring
how we can do more to prevent scandals like the one at Wells
Fargo.
So I look forward to your testimony, Secretary Lew, on the
state of our financial markets and what we need to keep doing
to prevent a repeat of the 2008 financial crisis.
Thank you, Mr. Chairman, and I yield back the balance of my
time.
Chairman Hensarling. The Chair now recognizes the gentlemen
from Texas, Mr. Neugebauer, chairman of our Financial
Institutions Subcommittee, for 1 minute.
Mr. Neugebauer. Thank you, Mr. Chairman.
The Financial Stability Oversight Council's mission is to
ensure the stability of the U.S. financial system and to
identify future risks to the system. It was given authority to
designate banks and nonbanks alike for heightened regulation. I
believe, however, it also has the responsibility to ensure that
the recommendations and designations are appropriately
calibrated and provide sufficient clarity to the marketplace.
To date, FSOC has failed to live up to its duty to be a
responsible Federal agency. First, FSOC has failed to exercise
its authority under Section 115 of Dodd-Frank to ensure that
the application of heightened prudential standards is applied
fairly to the bank holding companies. In the face of analysis
from the Office of Financial Research that suggests $50 billion
banks aren't systemically important, FSOC has instead chosen
arrogance over prudent tailoring.
Second, the FSOC has failed to implement a fair,
transparent, and measured process when designating nonbanks as
systemically important. As the U.S. District Court Judge
Collyer noted, the determination process is ``fatally flawed.''
Yet, FSOC has created additional regulatory uncertainty by
appealing this legal ruling.
Third and finally, the FSOC's regulatory protectionism has
failed to identify market concerns like those seen with the
liquidity constraints in the bond markets.
I hope today we will finally get to hear substantive
answers to legitimate policy questions instead of the usual
Democratic talking points praising Dodd-Frank.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, the chairman of our Capital Markets Subcommittee, for
1 minute.
Mr. Garrett. Thank you, Mr. Chairman.
And, Mr. Secretary, it is good to see you again. I
understand that you are a tough man to nail down to get to this
hearing today, even though it is the rule of law. But I guess I
would be too if my job was to come here and try to defend FSOC.
So we are starting to get at a point of an Administration's
tenure where people inevitably turn to talking about legacy and
what you all will be leaving behind. Unfortunately, when it
comes to FSOC, the Obama Administration's legacy will be
remembered by what? Secrecy, obfuscation, and a continued
refusal by the Administration, and especially you, to answer
the most basic and simple questions to provide transparency to
either this committee, to Congress, and most importantly, the
American people.
And it is not just the legislative branch that notices
this. The recent court decision invalidating the designation of
MetLife is a reminder to all of us that we live in a system
governed by the rule of law, Mr. Secretary, and not by the rule
of bureaucrats.
So, Mr. Chairman, I hope the Treasury Secretary finally
understands this, and I look forward to some of his answers
today. With that, I yield back.
Chairman Hensarling. The time of the gentleman has expired.
Today, we welcome the testimony of the Honorable Jack Lew,
Secretary of the Treasury. Secretary Lew has previously
testified before this committee on a number of occasions, so I
believe he needs no further introduction.
Mr. Secretary, without objection, your written statement
will be made a part of the record, and you are now recognized
for 5 minutes to give an oral presentation of your testimony.
Thank you.
STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary Lew. Thank you, Chairman Hensarling, Ranking
Member Waters, and members of the committee. I appreciate the
opportunity to testify today regarding the 2016 annual report
of the Financial Stability Oversight Council.
We have just passed the eight-year anniversary of the
collapse of Lehman Brothers. Every autumn this dates provides a
grim reminder of the most severe financial crisis of our
lifetimes. But it is also an opportunity to measure the
tremendous progress we have made to build a safer and more
resilient financial system that will support long-term economic
growth.
Six years ago, we worked together to put in place the most
far-reaching, comprehensive update of the financial regulatory
system since the Great Depression. The Dodd-Frank Wall Street
Reform and Consumer Protection Act addressed serious weaknesses
that contributed to the crisis, putting in place new consumer,
investor, and taxpayer protections and effectively restoring
confidence in our Nation's financial system.
Today, the success of these reforms continues to be
reflected in a long and stable economic recovery. We have cut
the unemployment rate in half. Our economy is more than 10
percent larger than its pre-recession peak. U.S. businesses
have added a total of 15.1 million jobs since private sector
job growth turned positive in early 2010. And our financial
system is safer and more resilient, providing the critical
underpinnings for more inclusive long-term growth.
Recent Census Bureau data demonstrates that significant
strides have been made. The Nation's poverty rate is down. For
Hispanics and African Americans, it is at the lowest level in
more than a decade. Household incomes are rising, with 2015
seeing the fastest 1-year growth since the Census Bureau began
reporting on household income in 1967.
Recent enforcement actions by the OCC and the CFPB also
remind us of the ongoing need for robust protections and that
that need is very real. Without a strong consumer watchdog, the
financial system can be dangerous for consumers and businesses
alike. Indeed, one of the most important lessons of the crisis
was the need for a financial regulator dedicated to looking out
for and protecting consumers.
The last financial crisis had at its core abusive practices
that should have been prevented. As the only regulatory agency
focused solely on consumer financial protection, the CFPB is
designed to ensure that markets for consumer financial products
and services are fair, transparent, and competitive, and it has
been fulfilling this statutory mission actively and well.
The conduct that led to recent enforcement actions again
underscores the importance of finalizing strong, sensible
executive compensation rules, a central component of Wall
Street reform.
Moving forward, it is critical that we continue to build
upon the success of Wall Street reform in creating a framework
for responding to risks that arise in any part of the financial
system. Rather than regulating purely in reaction to crises,
Wall Street reform established a forward-looking approach that
is focused on regulating and identifying risks presented by
markets as a whole and by types of activities wherever they are
conducted.
The Financial Stability Oversight Council exemplifies this
approach. Previously, financial regulators too often operated
in silos, and there was no single agency or group specifically
charged with collectively monitoring and maintaining financial
stability.
For the last 6 years, FSOC has brought the entire financial
regulatory community together to be on watch for signs of
vulnerability and to respond to emerging threats to financial
stability before they turn into crises.
Today, the Council continues to benefit from the diversity
of expertise and perspectives of its members, and the Council
has been open-minded and deliberative in its approach,
regularly engaging with stakeholders, frequently updating the
public on its views and actions, and always remaining careful
to avoid a one-size-fits-all approach to addressing different
types of risks, and always asking important questions and
looking to data and analysis for answers.
Before I discuss the Council's finding in its sixth annual
report, it is worth noting the report's significance. The
Council's annual report serves as a key mechanism for public
accountability and transparency, setting a marker for action,
and outlining the Council's priorities and a roadmap for the
year ahead. It is the product of extensive collaboration and
data-driven analysis, capturing the consensus of the Council's
members on key risk areas, as well as recommendations to
mitigate those risks. Importantly, the report includes a
statement signed by each of the Council's 10 voting members
that affirms that all of the issues and recommendations in the
report should be fully addressed.
The Council's 2016 annual report focuses on 12 key areas
that have been the topic of Council discussions over the past
year. These areas include cybersecurity, risks associated with
asset management products and activities, reforms to wholesale
funding markets, and global, economic, and financial
developments. For each area the report cites progress made and,
if necessary, the need for further action on the part of
Council members and member agencies.
Cybersecurity remains a key area of focus for the Council.
In response to increasing threats presented by cyber attacks,
the U.S. financial sector has stepped up efforts to improve
security across the system. Efforts include incident response
planning, greater information sharing and analysis, and
establishing private sector best practices for assessing risk.
The report makes several recommendations for building on
this important work. The Administration remains committed to
staying ahead of this issue, and we look forward to working
with both the Council and Congress as we continue to address
it.
The Council is focused on potential risks to financial
stability posed by asset management products and activities. As
these products and activities represent an increasingly
important part of the U.S. financial sector, the Council will
continue to evaluate their implications for financial
stability.
To that end, in April of this year we published an update
regarding the Council's review of potential risks in this area,
in particular focusing on liquidity, redemption, and leverage
risks. This update was the result of nearly 2 years of data-
driven analysis and engagement with key stakeholders and
reflects the Council's focus on asking tough questions to help
inform its views. Our work in this area is ongoing, and we plan
to provide timely public updates as our analysis continues.
Let me close by saying that in the years ahead, it is vital
that we remain vigilant to ensure that we do not return to the
pre-crisis way of doing things, looking narrowly at
jurisdictional lines dictated by the kind of charter a firm has
selected and reacting to old problems instead of identifying
and addressing the threats that lie ahead. The old approach did
not work, and regulators did not respond in time to prevent a
crisis. We cannot go back.
That means we must not only remain steadfast in opposing
efforts to roll back reform, but also that we must continue to
build on the progress that we have made. The work of the
Council has been critical to this progress, and it is important
that the Council continue to have the tools necessary to
respond to future threats as they emerge.
I want to thank the other members of the Council and all
the staff involved in the development of the 2016 annual report
for their hard work and commitment. I would encourage the
committee to work with the Council to build on the progress
that we have discussed today.
The recent news of consumer fraud by a large firm should
strengthen our collective resolve to work together to build on
Wall Street reform, rather than advancing legislation that
would return us to the days when we had broad regulatory gaps
and weak consumer protections.
Going forward, I am confident that the progress we have
made over the past 6 years will continue to promote the
strength and stability of the U.S. financial system for many
years to come.
Thank you, Mr. Chairman. I appreciate your accommodating my
schedule by adjourning at 1 p.m., and I will do my best to keep
my responses brief so we can get in as many questions as
possible.
[The prepared statement of Secretary Lew can be found on
page 60 of the appendix.]
Chairman Hensarling. The Chair now recognizes himself for 5
minutes for questions.
Mr. Secretary, one of the emerging threats listed in the
FSOC report is the possibility of a destructive cyber attack.
As I believe you recall, it wasn't 6 months ago that seven
Iranians linked to the Iranian Revolutionary Guard were
indicted for a coordinated cyber attack on major U.S. financial
institutions. Attorney General Loretta Lynch said at the time,
``These attacks were relentless, they were systematic, and they
were widespread.''
So I have a couple of questions about the recent $1.7
billion in payments the Administration recently made to Iran,
payments that we now know were made in cash, made in secret,
and $400 million of which we know coincided with the release of
American hostages.
Secretary Kerry, your fellow Cabinet member, said of
related sanctions relief under the JCPOA, ``I think that some
of it will end up in the hands of the Iranian Revolutionary
Guard Corps or other entities, some of which are labeled
terrorists.''
So isn't it true, Mr. Secretary, that since the $1.7
billion was paid in cash, we have no way of tracing the money,
and you have no way of assuring us that it will not be used for
terrorist purposes?
Secretary Lew. Well, Mr. Chairman, the payments that you
are referring to are payments related to the Hague Tribunal
settlement. President Obama--
Chairman Hensarling. I understand that, but the question
is, can you trace it, and can you guarantee us that it will not
be used for terrorism?
Secretary Lew. We have laid out the facts related to this
transfer in a letter sent to this committee. The payments
complied with U.S. sanctions--
Chairman Hensarling. I understand that, Mr. Secretary, but
it is a yes-or-no question. Can you guarantee us that it will
not be used for terrorist purposes? Because I don't believe you
can trace it.
Secretary Lew. Mr. Chairman, if you would just give me a
minute, I will answer your question, just give me a minute.
Chairman Hensarling. Well, if you would answer the
question, I would allow you to give the context.
Secretary Lew. Mr. Chairman, you in your question
characterized this incorrectly. It was not ransom. It was
settlement of a contractual dispute.
Chairman Hensarling. I didn't use the word ``ransom,'' Mr.
Secretary. I said it--
Secretary Lew. You did.
Chairman Hensarling. No, I didn't. You could read the
record. I said it coincided with the release of American
hostages.
Secretary Lew. You have asked a specific question about
where the money goes. The payment went to the Central Bank of
Iran. We do a lot of work to monitor the support that Iran
gives to terrorist organizations. We have not seen--
Chairman Hensarling. What I asked, Mr. Secretary, was,
could you trace the money? Can you trace the money?
Secretary Lew. We have not seen an increase in terrorist
funding by Iran.
Chairman Hensarling. Okay. I think we will move on, Mr.
Secretary, because I am not getting an answer. But I want to
know--and we have pursued this line of questioning before--who
authorized the cash payment? We know that cash has been called
the currency of terrorism. You have an entire office at
Treasury devoted to terrorism and financial intelligence.
According to press reports, senior officials at the Justice
Department indicated objections.
Did you object to the payment or were you the one who
authorized the cash payment?
Secretary Lew. Mr. Chairman, the President spoke clearly to
the facts of this on January 17th. We have given you the
details in a letter. This was a settlement of a contract claim
where the United States Government and the American taxpayer
was exposed to potentially $5 billion to $10 billion of
additional damages--
Chairman Hensarling. It was the settlement of a contract.
The question is, Mr. Secretary--you are avoiding the question--
who authorized the cash payment?
Secretary Lew. The method of payment is a technicality. The
agreement to settle a contract dispute was a substantive issue.
Chairman Hensarling. It is not a technicality to those who
are on the receiving end of Hezbollah missiles in Israel.
Secretary Lew. The payments were consistent with our
sanctions laws. They were consistent--
Chairman Hensarling. Did you authorize the cash payment,
yes or no?
Secretary Lew. The method of payment was worked through a
process that we outlined in a letter that we provided to this
committee.
Chairman Hensarling. Okay. Mr. Secretary, isn't it true
that under 31 U.S.C. 1304, you must personally certify payments
for the Judgment Fund? So these funds could not have been
released except on your signature?
Secretary Lew. Mr. Chairman, I am telling you the payments
were properly made. I was aware of them. I was cognizant that
it was happening. It was an appropriate settlement of a
contract dispute that saved the American taxpayer billions of
dollars.
Chairman Hensarling. If you won't tell us who authorized
the cash payment, what we do know is on multiple occasions, the
Administration said that you had no choice but to use cash,
and, in fact, your State Department spokesman on August 3rd
said, ``It couldn't be done over wire transfers.'' The
President himself on the very next day said, ``We could not
wire the money.'' Yet, a Treasury Department spokesman
acknowledged that on at least two occasions, the U.S. did make
payments via wire transfer, in July 2015 or April 2016.
So did Politico get it wrong, did your spokesperson get it
wrong, or did the President get it wrong? Why were we misled?
Secretary Lew. Mr. Chairman, the President got it right.
You weren't misled. The payments were made as described--
Chairman Hensarling. There were two wire transfers made,
one in July 2015 and one in April 2016.
Secretary Lew. Mr. Chairman, I am happy to answer your
question, but you have to stop interrupting me every time I
start.
Chairman Hensarling. Well, if we would get answers, then I
wouldn't have to interrupt.
Secretary Lew. I am happy to answer your question, but you
have to let me speak.
Chairman Hensarling. Okay. I would like to listen.
Secretary Lew. All right. We have done a very effective job
cutting Iran off from the international financial system. The
payment that was made by wire to Iran was not for a billion
dollars, and not for a million dollars. It was for $900,000. It
went to a foreign bank account that Iran had. And it was a
difficult process to get the money, as it has been difficult
for Iran to get access to its own money under the JCPOA,
because we have been so effective in isolating Iran from the
international financial system.
The method of payment--
Chairman Hensarling. The wire transfers were made.
Secretary Lew. The method of payment--
Chairman Hensarling. That is correct?
Secretary Lew. The method of payment is a technical detail.
The agreement was that this settlement would go to the Central
Bank of Iran, and it was done in a way that was consistent with
the agreement.
Chairman Hensarling. You are confirming that at least two
wire transfers went to Iran, correct?
Secretary Lew. Mr. Chairman, I am telling you that before
the transaction that we are discussing, the transfer we are
discussing, one had gone. The other was subsequent. It was for
$900,000. And it was a difficult process because, as it has
been hard under the JPOA and the JCPOA, it has taken Iran a lot
of time to get access to its own money that it is entitled to
under the agreement.
I am not saying--
Chairman Hensarling. Thank you, Mr. Secretary. I believe
that the President did get it wrong.
My time has expired.
Secretary Lew. No. You are totally incorrect. I just
disagreed with you, Mr. Chairman.
Chairman Hensarling. The Chair now recognizes the ranking
member for 5 minutes.
Ms. Waters. Mr. Chairman, I would like unanimous consent to
enter into the record from the opinion pages of The New York
Times an editorial entitled, ``The Fake $100 Million Iran
Ransom Story.''
Chairman Hensarling. Without objection, it is so ordered.
Ms. Waters. I think it is perhaps incumbent upon us to help
debunk the distortion of what took place with Iran.
Let me just say, it is not simply about the so-called
ransom story that has been made up by my colleagues. Every
attempt that my colleagues on the opposite side of the aisle
have made to discredit the Iran agreement, to try to dismantle
the Iran agreement, has been made.
Just yesterday, we were on the floor with a bill that
simply said that my Republican colleagues wanted to identify
and list, I don't know, a whole array of the leadership of Iran
and expose them for their assets, where they came from, what
they are doing with it. They have been told over and over again
that even that action did nothing but signal harassment and a
conclusion by Iran of a bad faith effort by the United States.
I don't know why they continue it. As a matter of fact, I
have said over and over again that this country needs the
support of the Congress of the United States as our President
takes the rightful leadership to act on behalf of this country
and to negotiate deals and to do the business of the
Presidency. But what we find is an undermining of this
President at every turn, and it has been absolutely shameful
what has been happening with this Iranian agreement.
And so this conversation that just took place is just one
more effort for my colleagues to send a message across the
world that our President cannot count on the Congress of the
United States, that we negotiate in bad faith, and that somehow
what is going on in the United States is bad for the rest of
our allies who have supported us.
This ties in to what the Presidential candidate Mr. Trump
is doing. He has a theme about making America great again. Some
of us think America is already great to begin with. And his
alliance with Putin, his friend that he may be doing business
deals with, all of this ties in together.
What are we doing? In the name of trying to acquire the
Presidency and align themselves with Trump, are they continuing
to try and dismantle the leadership of this country, to
undermine us, talk about how bad we are, how crippled we are,
how Mr. Trump knows better than our generals, on and on and on
again?
It needs to stop. You should not have to suffer this today.
This is a continuing of a political effort, I guess to align
with the theme of America not being so good, not so great, and
what they are doing somehow with Mr. Trump is going to make it
better. This is absolutely outrageous.
I had some other things that I wanted to talk with you
about today, but let's just put it on the line. What we have
here is the opposite side of the aisle, the Republican Party
and Mr. Trump, who are not only not supportive of the
President, they just don't think this country is much good.
They just don't think that the generals know what they are
talking about. They just think Putin is our friend. They just
think somehow this country has gone to the dogs, I suppose, and
they have to do everything that they can to prove it by proving
that somehow this Iranian deal that is going to help keep the
world safe, and certainly the Middle East safe, that somehow it
is wrong, it is no good, and it should be undermined, be damned
our allies who joined in with us in this deal to help reduce
Iran's ability to have the kind of nuclear capability that
could cause a holocaust.
And so I just want to tell you, Mr. Secretary, I am sorry
that you have to endure this. This should not be a place where
this kind of politics is placed, put before you. It is
happening. I would hope that you would refrain from even trying
to answer some of these questions that are being raised.
This is a great country. The Iranian deal was a great deal.
The President provided great leadership. We don't have to be
ashamed of it. Shame on them.
I yield back the balance of my time.
Chairman Hensarling. The Chair now recognizes the gentleman
from Texas, Mr. Neugebauer, chairman of our Financial
Institutions Subcommittee.
Mr. Neugebauer. Thank you, Mr. Chairman.
Before I get to my FSOC question, I just want one follow-up
question from Chairman Hensarling, and this is just a yes or
no. Did we record the serial numbers on the cash that was
delivered to the Iranians?
Secretary Lew. Congressman, I would have to check--
Mr. Neugebauer. Could you check on that? I think that was
the chairman's question. I just want to know if we have some
traceability there.
My question applies to your capacity as Treasury Secretary
and chairman of the FSOC. As you are probably aware, the
Federal banking agencies submitted a required report on
investment activities of banks required under Section 620 of
the Dodd-Frank Act. This month the report was delivered to
Congress and to FSOC, and the Federal Reserve Board made a
recommendation to Congress to repeal the merchant banking
authority for banks.
As you know, Gramm-Leach-Bliley gives the joint rulemaking
authority both to the Federal Reserve and to the Treasury to
issue regulations implementing merchant banking authority and
limitations. In fact, they did so in 2001.
Before the submission of the 620 report, did the Federal
Reserve consult the Treasury Department regarding its
recommendations on repealing the merchant banking provision?
Secretary Lew. Congressman, it was a report prepared by the
regulators independently. We obviously are familiar with the
issue, but we were not involved in the preparation of that
report.
Mr. Neugebauer. So I guess since Congress gave the
authority to, and the Treasury has joint rulemaking authority
with the Federal Reserve--
Secretary Lew. I believe the report was under a different
authority than the joint rulemaking. There were two different
pieces of work that were involved.
Mr. Neugebauer. It was a recommendation?
Secretary Lew. Yes.
Mr. Neugebauer. Do you agree with the recommendation?
Secretary Lew. So, look, we are looking at the report and
would be happy to work with this committee as we review it to
respond more fully. We just received the report as well.
Mr. Neugebauer. So does the Treasury believe it has the
appropriate tools to analyze the risk from merchant banking
activities?
Secretary Lew. Yes, I think we have the ability to
understand merchant banking. It is not new to us that there are
issues regarding merchant banking. You are asking about a
specific report that came about a week ago.
Mr. Neugebauer. So with the tools that you have and the
activities that you had in the past, have you found that
merchant banking is too risky, or you haven't been able to
mitigate it, or what would be your response on merchant
banking?
Secretary Lew. Look, I think that the issue regarding
merchant banking is really an issue that has arisen out of the
fact that in the original legislation, Dodd-Frank legislation,
distinctions were made between different kinds of activities so
that private equity is treated one way, merchant banking is
treated another way. And I think we are going to need to take a
look at whether there are inconsistencies there that do require
attention, and I would be happy to get back to you.
Mr. Neugebauer. So I think basically there is probably
approximately $26.7 billion in merchant banking investments
held by banks. If the vote was to eliminate merchant banking
activities, who is going to take up that slack?
Secretary Lew. Well, I think it would require legislative
action. As I understand the recommendation that the regulators
made, was they proposed legislative action to remove a
provision that exempts merchant banking from the rules. So it
would require this body to act.
Mr. Neugebauer. So that recommendation was made to FSOC,
and FSOC has not acted on that recommendation?
Secretary Lew. We just got the recommendation very
recently. We haven't had a meeting since we got the report. I
am not aware of administrative authority that exists to do
that. But I would be happy to check and get back to you.
Mr. Neugebauer. So you weren't consulted, and you have just
received the report. Is that what you are saying?
Secretary Lew. The report came to us, I forget if it was a
week or 10 days ago, and it was done by the regulators
independently.
Mr. Neugebauer. But you didn't have any prior knowledge--
Secretary Lew. No, no.
Mr. Neugebauer. --that that was going to be the
recommendation?
Secretary Lew. I don't believe so. I am happy to check.
Mr. Neugebauer. So what will be the process moving forward?
When will FSOC take up discussions on that particular
recommendation?
Secretary Lew. I will have to get back to you, Congressman.
We haven't had an FSOC meeting since that report came in, and I
am not in a position to respond until we have had a chance to
look at it and discuss it.
Mr. Neugebauer. So will FSOC report its findings to
Congress?
Secretary Lew. We are happy to work with this committee
going forward as we review it and as you review it. We got the
recommendations, as I point out, just very recently.
Mr. Neugebauer. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from New York, Ms.
Velazquez.
Ms. Velazquez. Thank you, Mr. Chairman.
Mr. Secretary, last week the majority passed legislation
that will severely hobble the CFPB by subjecting it to a
politicized Congressional appropriation process, repealing the
single director structure and putting up significant roadblocks
to its ability to create rules and enforce them. More
shockingly, it will remove the Bureau's authority to bring
enforcement cases against abusive products and services.
In light of what we know about the impact of predatory
products leading up to the financial crisis and the recent
evidence that Wells Fargo was trying to extract profit in
deceptive ways, what will these changes to the CFPB do to
Americans' economic security?
Secretary Lew. Congresswoman, I think that if you look at
the financial crisis, it is undeniable that at the heart of it
was a practice of mortgage lending that was abusive and that
when it became a part of our financial system through complex
financial instruments, ended up triggering a financial crisis.
So we know that abusive practices are not just unfair and bad
in terms of the individuals who are affected, but if left
unchecked, can become a real threat to financial stability.
I think the recent actions taken by the CFPB and the OCC
reflect the ongoing need for tough consumer protection, for
independent consumer protection, and for an agency set up in a
way that is workable, which is what we have now in the CFPB. I
think it is a good thing that there was a place for those
issues to go for them to be addressed. It was the largest fine
that the CFPB has made.
I am not saying that every issue becomes an issue of
financial stability. I actually think it is important to
address things, even if it is just a question of abusing
millions of consumers. But we also know that when these kinds
of abuses occur, it can accumulate into financial stability
risk.
So for both reasons, I think it is critical that the CFPB
maintain the ability to operate, and I believe it has operated
very well. And if you go around to the industries that are
affected by the CFPB, there actually are many who say the same
thing, that they have done their job very well.
Ms. Velazquez. Thank you. And then we wonder why there is
so much anger among working people in this country. So here we
have regulations to prevent the same crisis that we saw from
happening again, and yet people continue to use deceptive ways
to get people and to exploit working families in this country.
I hope that the Department of Justice looks into this and
brings justice, not only for the families that are impacted and
the consumers that were impacted, or even for those workers
that were tricked into going into behavior that was not the
right behavior just because of the pressure coming from the top
at the bank.
Mr. Secretary, you are well aware that Puerto Rico is
currently facing a severe financial crisis. The median
household income is $18,000, just one-third of the national
average. Forty-six percent of the population lives below the
poverty line.
On top of these challenges, the island is still struggling
with the Zika virus, which has infected now 20,000 people on
the island, including 1,500 pregnant women. And just yesterday,
a massive power outage left the island without electricity.
Half a million people in the island today have no water.
I know we passed PROMESA that was signed into law in June.
It will provide for a control board and a restructuring
mechanism for the island's $70 billion debt.
My question to you is, PROMESA did not include any proposal
to reinvigorate the island's economy for the long term. The
U.S. Government has a colony in the Caribbean. It is Puerto
Rico. We have a moral responsibility.
So given the situation that I just described, what is your
view of what is needed to happen in Puerto Rico? Should we in
Congress revisit what we did and come out with--
Chairman Hensarling. The time of the gentlelady has
expired. If the Secretary could give a brief answer, please.
Secretary Lew. Thanks, Mr. Chairman.
I would just say briefly, PROMESA was extremely important.
It will provide the basis for Puerto Rico to have a fiscal plan
that leads to debt restructuring and financial stability. But
as we have always said, alone it is not enough. There needs to
be more action.
We have proposed that Puerto Rico be treated as States are
treated for the purpose of Medicaid reimbursement and for the
earned income tax credit, things that really would stimulate
the economy, and we look forward to working with this Congress
to take additional steps to make sure that there is a long-term
economic plan for Puerto Rico.
Chairman Hensarling. Again, the time of the gentlelady has
expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, chairman of our Capital Markets Subcommittee.
Mr. Garrett. Thank you, Mr. Chairman.
Mr. Secretary, I think it is fair to say that all of us in
Congress, myself included, are outraged at the activity that
occurred over at Wells Fargo, that I know you are very familiar
with, over a number of years. The entire incident now has a
number of people clamoring for regulators to be tough when they
finalize the incentive compensation rules under Section 965 of
Dodd-Frank, which I am sure you are familiar with.
The current proposal is intended to limit compensation of
financial firms and includes a provision that would require
something called clawbacks of compensation for certain high-
level executives that could go back as far as 7 years. But like
a lot of things for the other side of the aisle, it depends on
just what executives we are talking about here when this
happens.
And so let me give you one example: you, Mr. Secretary. You
joined Citigroup back in 2006, and by 2008, you became the
chief operating officer of the Citigroup Alternative
Investments unit, which at that time managed $54.3 billion.
Then the Alternative Investments group began to do what?
Hemorrhage money that year. And by the end of 2008, Citigroup
had laid off more than 50,000 employees. The stock price
dropped by 75 percent. And then, of course, they were bailed
out by who? The American taxpayers, to the tune of $45 billion.
Then, to add insult to injury, last year the SEC announced
that two Citigroup affiliates, including the one where you were
the chief operating officer, agreed to pay $180 million to do
what? To settle charges that your unit defrauded investors.
So you were the senior officer at the Citigroup unit which
lost money, that contributed to the bank's near collapse, and
which later was charged with defrauding investors. Talk about a
legacy. Was any of your compensation at Citigroup ever clawed
back? That is a yes or no.
Secretary Lew. Congressman, I am proud of my record
implementing financial reform, pushing hard for--
Mr. Garrett. So was any of--
Secretary Lew. --pushing hard for the executive comp rule.
Mr. Garrett. I am not asking that, Mr. Secretary. Let's
just get to the question. I saw how you did not answer the
chairman's question.
Simple question: Was any of your money, your seven-figure
compensation package, ever clawed back for the time that you
were the chief operating officer?
Secretary Lew. The issues regarding my compensation have
been well worked over.
Mr. Garrett. So then it is an easy answer, Mr. Secretary.
Secretary Lew. I have answered many questions. I was paid
in a way that is well-understood and disclosed. I am telling
you that my services in this role--
Mr. Garrett. Mr. Secretary, please answer the question.
Secretary Lew. --have been to make sure that we put rules
in place that work going forward.
Mr. Garrett. Mr. Secretary, simple question. You were paid.
Your unit was defrauded.
Secretary Lew. Congressman, I--
Mr. Garrett. Was any of your money ever clawed back?
Secretary Lew. I was not subject to any action of any kind
because--
Mr. Garrett. Okay.
Secretary Lew. --no one has ever asked any questions that
led to that, nor will they.
Mr. Garrett. See, Mr. Secretary, simple. The answer is no.
None of your money was--
Secretary Lew. And let's remember what my role was when I
was there.
Mr. Garrett. Yes, you were the chief operating officer
involved--
Secretary Lew. Yes, I was responsible for administrative
activities, not for designing risk products. So let's just
remember what my role was.
Mr. Garrett. Mr. Secretary, you were a senior executive.
Would the proposed incentive compensation rules capture or
impact any of your compensation if those rules were in place
back then?
Secretary Lew. I am not aware of anything that relates to
me personally, but I also am not directly involved in writing
the rules, so I can't tell you exactly where they are. I have
urged the regulators to have broad such rule.
Mr. Garrett. Should the rules be such that senior
executives--and Elizabeth Warren doesn't make differentiation
between COOs and CEOs. She says all senior executives should
have clawbacks. Is she wrong?
Secretary Lew. I think that the questions that have been
asked in designing these rules have been, how do you align
incentives for risk taking?
Mr. Garrett. That is not the question.
Secretary Lew. No, but that is what the driving issue is.
How do you make sure that there is not an incentive in the
compensation to take risk--
Mr. Garrett. Here is one--okay, let me ask you this then.
Here is an alignment.
Secretary Lew. And that is the right question. That is what
we have been pushing.
Mr. Garrett. Mr. Secretary, thanks. Here is one on the
alignment. When you left there, despite all the hemorrhaging
and the taxpayer bailout, you received something called a
bureaucratic parachute. You had a promise in your contract that
you would be paid $944,000 if you took a high-level position in
the U.S. Government. Hey, I guess you got that, didn't you?
Was that a payment contingent upon you doing and your unit
doing a good job? Was that contingent upon the fact of whether
or not there was any fraud in your unit? Or did you just get
paid regardless?
Secretary Lew. Congressman, my compensation was based on my
performance at the job. The only thing that that provision said
was I didn't lose my last year's pay.
Mr. Garrett. The performance of your job? The company lost
75 percent stock. It went down.
Secretary Lew. Congressman, you don't know what my job was.
Mr. Garrett. Well, yes, I do. It is in this disclosure as
to what you are. You were the coordinator for all the units,
oversee coordination between operations, technology, human
resources, legal, financial, regional departments. Seems like
you had your finger on every single aspect of the company. I
guess you are telling us that you are not responsible for
anything.
So, Mr. Chairman, I will end with this. I want to make it
clear for the record that so long as you are a high-ranking
Democratic official you can make allthe money that you want on
Wall Street, but if you are not one of them, then you have to
play by the rules if the company collapses.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Sherman.
Mr. Sherman. Mr. Secretary, let me spend the first couple
of minutes on stuff so noncontroversial that I don't think
anybody in the room will disagree, because you deserve at least
a couple of minutes.
Secretary Lew. I don't need any time. I am fine.
Mr. Sherman. Oh, I know. But you deserve it anyway.
First, thank you for the Treasury Department announcement
and clarification that I asked for last time you were here. So
the 8,000 people from my district who had to evacuate for
months due to the world's largest methane leak can clearly
understand that they are not going to be taxable on the money
they got to reimburse them for their expenses when they were
living outside their home.
Second, last time you were here, back in March, I brought
up the issue of a U.S.-Armenia tax treaty. I know we have told
your staff, so I am not blindsiding you here, that I would
bring this up again. And the answer I have gotten from your
staff is, hey, it would be wonderful if we did it, but it is a
matter of prioritizing our resources. So I want to review with
you why I think it is a priority.
Canada, whose Treasury Department analog has maybe a tenth
of your resources, negotiated a treaty with Armenia. Your
Department has negotiated treaties with Luxembourg and Malta
and with dozens of other countries. But what I think your staff
may be losing track of is they are looking at everything
through solely an economic lens, and they also need to look
from a geopolitical and foreign policy lens.
And I am asking your Department to just have one tax lawyer
spend a few months to do something, and I want to describe how
important it is from the standpoint of the Congress and the
standpoint of the executive branch, State Department, foreign
policy, Defense Department.
We in Congress have provided a billion dollars of aid to
Armenia over the last 25 years. The executive branch has a
policy of getting the Newly Independent States that became
independent from the Soviet Union, to wean them from Moscow.
And that is so important that not only have you done tax
treaties with Estonia, Latvia, and Lithuania, but we have put
our lives on the line. We admitted Estonia into NATO. We could
be at war with Russia. We could lose soldiers in the field.
Now, I am not asking anybody in the Treasury Department to
put their life on the line. Just asking to do something that
should be rather easy because I have persuaded--well, I have
talked with the Armenians. They will start with your model
treaty.
Given that the Congress has provided a billion for this
objective, given that our soldiers are ready to die for this
objective, can you spare a tax lawyer for a few months?
Secretary Lew. So, Congressman, I understand the strategic
significance of Armenia and appreciate the source of your
concern. We obviously look at these tax treaties through an
economic tax policy lens, and the basic question that we ask
is, can we avoid the kind of double taxation that treaties are
meant to avoid? We don't have any evidence that there is double
taxation.
Mr. Sherman. That was the answer you gave last time. It is
a chicken and egg. There is no investments because there is no
tax treaty. There is no tax treaty because there is no
investment.
I have done my best to persuade you on this, and I have
just a minute to go on to something, and that is, too big to
fail is too big to exist. You and FSOC have the right to break
them up. People on this committee could cosponsor the Sanders-
Sherman bill and break them up.
We know that they are so big, they are too-big-to-fail. We
know that if they get in trouble, they will be bailed. The
chairman says, well, don't list them, and they won't be bailed.
We were all here--many of us here in 2008. If they are about to
go under, this Congress will pass new laws to bail them out.
So we are talking about fail. We are talking about bail. We
are also talking about jail, because the Attorney General
announced that he would be reluctant to criminally indict them,
these institutions, because of the effect it would have on the
economy.
But Wells Fargo has given us two more reasons, one
Democrat, one Republican. It appears as if Wells Fargo, for
example, was too big to manage. Here you had, they hired 5,300
good people. They established a system that caused those people
to commit 2 million felonies. They didn't monitor. They didn't
notice. That is too big to manage and, and, finally, too big to
regulate, because all the regulators at Wells Fargo missed this
too.
Too big to fail. Too big to jail. Too big to regulate. Too
big to manage. Please break them up.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Missouri, Mr.
Luetkemeyer, chairman of our Housing and Insurance
Subcommittee.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Good morning, Mr. Secretary. I would like to have my
questions in the areas of SIFI designations and community
banking, so let me start out with the SIFI designation stuff.
Dodd-Frank calls for the automatic designation of any bank
with more than $50 billion in assets to be a SIFI. Mr.
Secretary, we have had Barney Frank, the author of the Dodd-
Frank bill, in this committee, sitting in that chair, who has
testified in this committee that he told us that the $50
billion threshold is arbitrary and that we should look at
alternative methods for determination. We have also heard from
other regulators, such as Chair Yellen, Governor Tarullo, also
on this issue, and they support a different approach as well.
Would you agree that size should not be the only thing to
determine what a systemically important financial institution
is?
Secretary Lew. Congressman, I think ultimately the real
issue is risk, and size is one indicia of risk.
Mr. Luetkemeyer. Do you agree then it is not just size?
Secretary Lew. I think part of the challenge is that when
people talk about what size bank is a big bank, the
conversation is often unconnected to where the banks fall in
terms of size. There aren't that many banks over 50, and when
you talk about numbers like the piece of legislation did last
year of drawing the line at 500, you are talking about only a
very few institutions. Some of the largest institutions are in
between.
Mr. Luetkemeyer. Mr. Secretary, I have just a few minutes
here please.
My piece of legislation takes away all of the size
definitions. Size is only one issue. As you can see there is on
the board here--you probably can't see it from where you are
sitting.
Secretary Lew. I can't read it from here.
Mr. Luetkemeyer. Behind you is a copy of a chart from the
Office of Financial Research Brief Series dated April 13, 2016,
and this is how globally systemic important banks are
determined. And as you can see, there are five separate things,
and those separate criteria are exactly the five criteria that
I have in my bill: size, interconnectedness, suitability,
complexity, cross-jurisdictional activity.
If those are good enough to determine a G-SII, should they
not be good enough to determine what a SIFI is here in the
United States?
Secretary Lew. I think the challenge is that the
designation process is a very cumbersome one, and if you were
to require the decisions firm by firm for every single firm, it
would require a much more massive structure than we currently
have.
Mr. Luetkemeyer. A minute ago, though, you said that
complexity is something we need to take a look at. Yet now you
are going back to size. If you do that, we are looking at an
institution that is $50 billion at the bottom end of this
versus the larger banks that are $2 trillion. That is 40 times
difference in size.
Secretary Lew. Yes, I totally agree that there is a
difference.
Mr. Luetkemeyer. How can a bank that is $50 billion--
Secretary Lew. We have tried in every way that we can to
use regulatory flexibility and keep looking for new regulatory
flexibilities and to treat firms differently based on what is
appropriate to their risk level.
Mr. Luetkemeyer. The way to treat them more equitably and
more fairly and more flexibly is to support my bill from the
standpoint that suddenly we have different criteria that you as
a regulator can use. This is something that even the Office of
Financial Research says is a way to go about it. So it is a
little frustration on my part.
Can you tell me, sir, what the cost is to designate a SIFI?
Secretary Lew. I would have to get back to you on what the
cost. It is a long process.
Mr. Luetkemeyer. Okay. What is the cost to de- designate?
And you have already got--
Secretary Lew. I am sorry. I couldn't hear you.
Mr. Luetkemeyer. What is the cost to de-designate? You have
already got all the information. Your examiners are in the
banks. They live there. You have all the information at hand.
What additional costs are there to de-designate? Or would there
be additional costs?
Secretary Lew. Which institutions are you talking about
right now, Congressman?
Mr. Luetkemeyer. The ones that are designated SIFIs.
Secretary Lew. The ones that FSOC has designated?
Mr. Luetkemeyer. Yes, the ones that are designated--
Secretary Lew. The largest firms?
Mr. Luetkemeyer. Yes, the ones that are designated by the
$50 billion threshold.
Secretary Lew. So there are two different issues. We have
designated 12 institutions that are large nonbank institutions
for insurance companies--
Mr. Luetkemeyer. Yes, but the ones that are over $50
billion, sir, also have to pay fees, have to be under the same
regime, regulatory regime, as the big guys.
Secretary Lew. That is not an FSOC determination. They are
covered under Dodd-Frank for oversight and supervision.
Mr. Luetkemeyer. Okay. Okay.
Secretary Lew. We don't make the designation.
Mr. Luetkemeyer. But my question is, you already have the
information to designate them, what additional costs are there
to de-designate? I am just asking a question about cost, not
whether you can or not. I am just asking about cost.
Secretary Lew. I think the process of determining whether
they are covered now is a fairly simple one, because it is
based on a review of information that is available on size. If
you had an individual firm-by-firm review to see whether you
meet multiple criteria, it is a very different process than the
current one. So for me to answer the question in the current
versus--
Mr. Luetkemeyer. Okay. One more quick question. One more
quick question. My time is totally expired here.
In my home State of Missouri, we have 44 banks less than
$50 billion at the end of 2015. Twenty-six of them lost money.
Those are all targets for merger. In fact, one in my district
30 miles away from me was merged on Monday morning. This is all
due to the complexity and the increased cost of compliance.
What are you going to do about that? Does concern you at all?
Secretary Lew. I agree with you that small financial
institutions, community banks, and regional banks play an
important part in our financial landscape. They meet important
needs. We are continuing to look for how we can craft
flexibilities that are appropriate so that we can make sure
that the risks are visible but not overly burdensome. And we
look forward to working together to find ways to do that.
Mr. Luetkemeyer. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks.
Instead, the Chair recognizes the gentleman from Texas, Mr.
Hinojosa.
Mr. Hinojosa. Thank you, Mr. Chairman. And thank you, my
good friend, Greg Meeks. Thank you.
Mr. Secretary, thank you for your testimony today. We
appreciate your efforts as chairman of the Financial Stability
Oversight Council to identify the risks to our financial
stability and to respond to emerging threats and
vulnerabilities in our financial system.
The chairman's Dodd-Frank repeal bill, which received
bipartisan opposition in the committee this past week, would
provide a so-called off-ramp for Dodd-Frank and Basel III's
capital and liquidity requirements and it would replace those
safeguards with an insufficient leverage ratio that fails to
contain the guardrails in other proposals. For example, while
the chairman has attempted to conflate this bill with proposals
from people like FDIC Vice Chair Thomas Hoenig, the chairman's
proposal doesn't include the same limits on derivatives
activity in order to receive regulatory relief.
So, Mr. Secretary, my question is: Can you discuss how
replacing more complex risk weights along with other Dodd-Frank
measures might make sense for community banks engaged in
traditional banking activities but is wholly insufficient when
it comes to global mega banks?
Secretary Lew. Yes. Congressman, that is a very good
question. I think we should be looking for ways to simplify
reporting, where appropriate, for small banks that don't engage
in a lot of risky activities. We have to always be aware that
even small banks are in the business of making risk decisions.
That is what banks do. And we have seen in the past that in the
accumulated activity, small institutions can create a financial
risk that is significant, but it is different than the
activities of large global financial institutions. And we
should be trying to distinguish.
For the largest financial institutions, I think if you look
at what we have done in financial reform and Wall Street reform
that has made the system safer, we have gotten much more
transparency. We see what they are doing. We see what they are
holding. We understand how it is connected to the financial
system. They have capital buffers internally. So when they take
risks, we know how much of the risk that they are taking they
can absorb before they have to look outside for any kind of
help.
I think if we were to roll that back, it would be terrible.
It would be--we have done it, a lot of other major economies
have done it. If you look at how the global financial system
responds to shocks nowadays, we could just look back to the
week after the vote in the United Kingdom on Brexit. There was
a sense of confidence in financial institutions that just
wouldn't have existed without financial reform.
Mr. Hinojosa. Thank you for that clarification. So what
impact would H.R. 5983, the chairman's Dodd-Frank repeal bill,
have on financial stability and international confidence in the
U.S. banking system and capital markets if it were enacted?
Secretary Lew. Look, I believe that if we were to roll back
some of the protections in Wall Street reform that that
legislation would roll back, it would bring back concerns about
the stability of the U.S. financial system the next time there
is a bump in the road. Bumps in the road happen. They are
either geopolitical or economic. You want a financial system
that can withstand those kinds of shocks. We are in a much
stronger place now, and I think it is a mistake to go back.
And if I could just add, there is some things we still need
to do. From the back and forth a few minutes ago, you wouldn't
know it. We are pressing very hard for executive compensation
rules to be finalized by the regulatory bodies so that we can
align risk-taking incentives and compensation in a better way.
Mr. Hinojosa. I agree that we have come a long way in
recovery. So let me ask a question on the economic recovery of
our country. Much more progress needs to be made in order for
us to climb out of that hole created by the 2008 Great
Recession, which was spurred by an historic Wall Street-created
financial crisis. Tell us, to what extent would our progress
have been even more remarkable had the Republicans in Congress
not been so committed to fiscal austerity?
Secretary Lew. Congressman, I believe that the early
imposition of tight fiscal controls was actually something that
held back our recovery here in the United States. We would have
grown faster if we had put longer term deficit reduction in
place, not slammed on the brakes so quickly.
Mr. Hinojosa. Would GDP be higher today?
Secretary Lew. I believe it would. And we have seen, since
we have more sensible policies through two budget agreements
putting in place longer term savings and freeing up short-term
spending, the economy has actually done better.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Michigan, Mr.
Huizenga, chairman of our Monetary Policy and Trade
Subcommittee.
Mr. Huizenga. Thank you, Mr. Chairman. So many issues, so
little time.
I do want to say, first of all, congratulations, Mr. Lew.
Oftentimes, depending on who is sitting in there, you get a
Jekyll or Hyde performance on the other side of the aisle.
Quite honestly, I am waiting for the outrage of the other side
with vaunted claims of how the economy has benefited Hispanics
and African Americans that you just spoke about in your
testimony. A robust economy is needed for all. Unfortunately,
this Administration has not provided that. Wall Street is doing
just fine. Main Street is not. And intercity Main Street is
even doing worse. And I just--it is, I guess, going to the dogs
characterization depends on who is sitting in the seat. So they
like who is saying it, just not what is being said.
I got just teed up. Now I had a question at the end of
this, but I got teed up by my colleague from Texas about this.
You testified as well that Dodd-Frank and the Council have
``made the financial system safer.'' However, former Treasury
Secretary and Harvard president Lawrence Summers says that
``major financial institutions don't look any safer than they
were before Dodd-Frank and may even be more risky.'' He also
flagged Dodd-Frank's myriad of regulatory restrictions as a
prime suspect for this duplicity. So I am going to follow up
with that in a written question. But I am going to give you
literally 20 seconds here to address that.
Secretary Lew. I don't think that paper in any way called
for rolling back Wall Street reform.
Mr. Huizenga. But it said it didn't work.
Secretary Lew. I think what it did was it looked at one
indication, market evaluations, and used that to do some
analysis. We have seen markets get things wrong. They didn't
predict the subprime crisis because of what was going on in the
financial sector. It didn't predict the outcome of the vote in
the United Kingdom. So I would be careful to just assume that
one thing--you have to look at the whole picture.
Mr. Huizenga. While we are on the United Kingdom, obviously
we saw that European unity was something that has been called
for as Greece has been bailed out before. We have had this
personal conversation. I have contacted Treasury Department
well over a year regarding further IMF financial participation
in a Greek bailout, and I am urging you to oppose that. Even
former executive director of the fund who voted for the first
bailout has come out against a third one.
Since you last appeared before us, the IMF's evaluation
office released a scathing report on the fund's involvement in
Greece, blasting its debt sustainability analysis and
concluding, ``that the best governance was not practiced, as
the board was poorly informed and too late in several
instances, and as a result the decision-making and supervisory
roles of the executive board were undermined.''
At some point, we have to acknowledge the damage the IMF's
credibility has been immense. And you have stated that it was
important for European unity. We have seen elections, the
Brexit in England. We just--recent elections in Germany that I
am sure have many of your colleagues over there very concerned.
My next issue is the World Bank. And, Mr. Chairman, I would
like to submit for the record a couple of letters to the record
that were sent by Ms. Moore, my ranking member, and myself. We
wrote a letter to President Kim--
Chairman Hensarling. Without objection, it is so ordered.
Mr. Huizenga. --expressing our alarm over a failed
transportation project in Uganda. This project was linked to
the sexual exploitation of children, among other appalling
consequences. Moreover, the bank's new safeguards have been
criticized for ignoring human rights, even as they protect, and
this is not a joke, the rights of farm animals. Given all this,
I hope we can work together so that the ongoing IDA
negotiations result in realistic commitments as well as true
reforms at the bank.
Thank you.
And finally, just kind of rounding off, going back to the
chairman's questioning on Iran. There was a letter to Senator
Marco Rubio in June that Thomas Maloney, the senior at
Legislative Affairs, said: The Administration has not been and
is not planning to grant Iran access to the financial system.
To be clear, until Iran has addressed other concerns we have
with its behavior outside the nuclear file, the U.S. financial
system, including the branches of U.S. financial institutions
abroad, will remain off limits to Iran, and U.S. persons will
not be able to provide financial services or products to Iran
without explicit authorization.
Iran's behavior is outside of the nuclear profile.
Terrorism remains unchanged. You even said that earlier. You
said it hasn't gotten worse. That means it hasn't gotten better
either. Just yesterday, you announced the authorization of U.S.
financial institutions to finance aircraft sales. Doesn't this
contradict your written assurances to Congress?
Secretary Lew. No, Congressman. The licenses that were
issued yesterday for aircraft were something that were
negotiated in the Joint Comprehensive Plan of Action, and they
were consistent with it. It goes only to entities that do not
engage in terrorism and it cannot be used--
Mr. Huizenga. The $1.4 billion in cash was consistent with
it too, but it doesn't make it right.
Secretary Lew. The U.S. financial system remains closed,
except for very specific purposes. And this I don't believe--I
am not aware of a transaction through a U.S. financial system
that will support it. But a licensed activity is the only
exception.
Mr. Huizenga. My time has expired.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from New York, Mr.
Meeks.
Mr. Meeks. Thank you, Mr. Chairman.
And let me first welcome you, Secretary Lew. It is coming
another way, but as a member of this committee and a member of
the Foreign Affairs Committee, I think that I want to--this
piece talking about the settlement payment to Iran, as I see
what they put up on the board and I have heard the questions by
the chairman when I was listening in my office, it just seems
to me that my colleagues on the other side of the aisle are
using as fodder for a convenient political spin. They are
playing politics this election year. And the majority have
quickly turned to these talking points about the
Administration's settlement being a ransom payment. This
despite the fact that the Obama Administration had, in fact,
briefed Congress in advance, I say that again, it had been said
before, Congress was briefed in advance of the $1.7 billion
settlement of a longstanding claim with the Government of Iran.
You did brief Congress. Is that not correct?
Secretary Lew. It was fully described by the President at
the time, and we briefed Congress at the time.
Mr. Meeks. And it is not the first time, nor is it unusual
that--in fact, I think that it was a smart thing using leverage
when conducting diplomatic negotiations. That is a common and
smart strategy that is utilized not only by this Administration
but has been done by past ones also. Is that not correct?
Secretary Lew. I believe that settling something for $1.7
billion when you were exposed to $5 to $10 billion of risk is
the right outcome.
Mr. Meeks. In fact, that is right. Because isn't it true,
Mr. Secretary, that had the Administration not negotiated the
Hague settlement, we would have ended up ultimately paying much
higher for the 1979 failed arms sale?
Secretary Lew. I believe that we resolved it in a way that
saved the United States and U.S. taxpayers substantial
exposure.
Mr. Meeks. And on top of that, for the record, on top of
that, since the establishment of the U.S.-Iran Claims Tribunal,
all U.S. citizens' claims against Iran that were registered
under the Algiers Accords have also been resolved, and
Americans, as a result, by us doing that, have gotten about--
what is it? About $2.5 billion in payments?
Secretary Lew. Yes. I don't know the total, but to my
knowledge, they have all been paid.
Mr. Meeks. So let me--and the record should be clear about
that, that this was a smart deal done utilizing leverage that
you had. You have leverage, you don't give it up, you utilize
it. That was done by the Administration. And the fact of the
matter is, I would like to say that it was something that
nobody else did, it was unique, your thought, but other
Administrations have done the same thing. Democrats and
Republicans. Is that not correct?
Secretary Lew. Settling outstanding claims?
Mr. Meeks. That is right.
Secretary Lew. Yes. It is not a new phenomenon. It
obviously is a new conversation. For decades, we haven't had an
ability to have a conversation with Iran to settle this. And we
faced the possibility of an enormous judgment against the
United States.
Mr. Meeks. So let me go back to what we were talking about,
in the time that I have left, and that is dealing--which is
FSOC. Because FSOC, which was created by Dodd-Frank Act, is
something that I believe is an absolute necessity as a
framework so that we can deal with the complex multisector
interconnected financial risks in our financial markets. And I
encourage FSOC to further embrace greater transparency in its
designation process and in how designated entities would be
regulated. Because it is key, I strongly believe that we should
emphasize and focus on working with the designated firms so
that they can de-risk, if we work with them, and they no longer
become risky, it is much better to eliminate systemic risk as
opposed to supervising it. Is that not correct?
Secretary Lew. Yes. Congressman, I actually think that the
process the GE went through demonstrates that it is a two-way
street. GE, for its own business reasons, changed its focus to
go back to being an industrial as opposed to a financial firm.
It came and made the showing that it was no longer engaged in
the activities that caused it to be designated, and we quickly
responded by de-designating. And we have not--for the debate
about designation, you would think that hundreds of firms have
been designated. It is four nonbanks and eight utilities. We
are not out going aggressively to designate firms. We
identified firms with a high level of risk. And if another firm
were to appear that presented risk, we should go forward.
But we always lay out the basis for designation so that
they know what it is that is making them be designated. And it
is a business decision whether they want to be in the form they
are with some additional oversight or change their business
structure. It is not like being designated stops you from doing
your business. It just means we have more visibility so we can
see what is going on.
Mr. Meeks. Thank you. I had another question, but I think I
am out of time and I don't want to hear that gavel from the
chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Duffy, chairman of our Oversight and Investigations
Subcommittee.
Mr. Duffy. Thank you, Mr. Chairman.
And welcome, Mr. Lew. I want to go back to your Iran deal.
I think you testified that wire transfer payments were made to
Iran before the $1.7 billion cash payment and--
Secretary Lew. I testified that one $900,000--
Mr. Duffy. Went before.
Secretary Lew. Yes.
Mr. Duffy. And--
Secretary Lew. Sometime before.
Mr. Duffy. That is my recollection too. And a wire transfer
also went to Iran after the cash payment. Is that correct?
Secretary Lew. Yes.
Mr. Duffy. So the fact is, per your testimony, that wire
transfers to Iran are possible. I will take that at face value.
Secretary Lew. No. Congressman, it is very important.
Mr. Duffy. No, no, no, no.
Secretary Lew. The wire transfer--you have to understand
what a wire transfer does.
Mr. Duffy. I am--my time. Let me get to my question,
though.
Secretary Lew. What you stated was incorrect.
Mr. Duffy. I am going to repeat my question.
Secretary Lew. So I just want to make it clear what you
stated was incorrect.
Mr. Duffy. Now, you made a wire transfer before the cash
payment, you made a wire transfer after the cash payment. And
the President told the American people that we could not wire
the money. So it leads me to believe that the Administration
has not been truthful--
Secretary Lew. No, Congressman.
Mr. Duffy. --with the American people, based on your
testimony today, because wire transfers could take place.
Secretary Lew. Indulge me to answer your question. The wire
transfer goes to an account in a foreign bank. A European bank,
say. It doesn't go to the Central Bank of Iran directly. The
question is, if you have a contract settlement with a party
that you have no trust, they don't trust us, we don't trust
them, they are not asking can you get the money to an account
that they may or may not be able to get access to. It was part
of the negotiation to get the money to the Central Bank of
Iran.
Mr. Duffy. Okay. So but wire transfers can take place. And
the wire transfer before the $1.7 billion and the wire transfer
after the $1.7 billion, were those also converted to cash?
Secretary Lew. Just as a factual matter, Congressman, it
was quite--
Mr. Duffy. Yes or no.
Secretary Lew. --it was quite challenging for Iran--
Mr. Duffy. Were those converted to cash?
Secretary Lew. --to get access to that money. It was quite
challenging.
Mr. Duffy. There's a reason for that. Right? They are the
lead sponsor of terror. We have rules in place so they can't
access cash.
Secretary Lew. I enforced those rules. Yes, I understand
those rules.
Mr. Duffy. So let's talk about the rules. In the Code of
Federal Regulation, you can't load up a plane full of cash in
the U.S. and fly it to Iran lawfully. So to get around that
rule, what did you do? You wired the money to Europe and then
had it converted to cash and sent to Iran so you didn't violate
the law. So, yes, you complied with the law, but you got around
the spirit of the law. Right?
Secretary Lew. Congressman, we have successfully cut Iran
off from the U.S. financial system. When we agreed--
Mr. Duffy. I agree.
Secretary Lew. --to settle a legal claim with Iran, part of
that agreement is you make payment. The way you make payment is
you wire money to their account or you--
Mr. Duffy. Convert it to cash?
Secretary Lew. The question was, how do they get access to
the payment of the settlement? And we worked through foreign
banks, and they wanted access--
Mr. Duffy. Mr. Lew, the problem--
Secretary Lew. --which was not unreasonable, given that it
was a negotiated settlement.
Mr. Duffy. It is unreasonable because this is a bad deal.
Secretary Lew. No, Congressman.
Mr. Duffy. No, Mr. Lew. They are the lead sponsor of terror
in the world.
Secretary Lew. Let's go back to the deal.
Mr. Duffy. We have cut them--no, no. We have cut them off
from cash because cash is the currency of terror.
Secretary Lew. Yes.
Mr. Duffy. And so when you make payments, yes, you are
going to make it to a foreign bank. And they are restricted in
how they might use that money. And they want to access the cash
because the cash is untraceable and they can use it for
nefarious things that we object to. And you made the payment
anyway in cash.
Secretary Lew. Congressman, the Joint Comprehensive Plan of
Action gives Iran access to its own money in international
banks.
Mr. Duffy. I don't have much time left.
Secretary Lew. No. Let me answer your question,
Congressman.
Mr. Duffy. Hurry up.
Secretary Lew. This is a very important question. Part of
the agreement that caused Iran to dismantle its nuclear program
and increase their--make it take 12-plus months, not 3 months,
to develop a nuclear weapon--which they dismantled their
nuclear program. We had to keep our part of the deal, which was
to give them access to their own money.
Mr. Duffy. In cash, right.
Secretary Lew. They have been having a hard time. And I am
not going to apologize for saying we need to keep our deal.
They need to get access to that cash.
Mr. Duffy. I am going to reclaim my time. I heard you--
Secretary Lew. And in the case of settling a contract--
Mr. Duffy. We can have a disagreement on--this is my time,
though.
Mr. Lew, I have--
Secretary Lew. Mr. Chairman, can the Congressman get a few
more seconds so I can answer his question? We shouldn't have to
talk over each other. This is a very important matter.
Chairman Hensarling. Without objection, but the time
belongs to the gentleman from Wisconsin.
Mr. Duffy. If I could have unanimous consent for another 30
seconds?
Chairman Hensarling. Without objection, the gentleman is
accorded an extra 30 seconds.
Secretary Lew. I respect the question. And I don't want to
be talking over each other. I would like to explain it.
A deal is a deal. When you have a country dismantle its
nuclear program and you give them access to their money, that
means they are going to get money. It is going to go to the
Central Bank. We knew that. We said all along we are going to
make sure that we keep our eye on what they do in terms of
nefarious activities and use our other authorities to stop
that.
Mr. Duffy. I have given you the time, but I only have now
30 seconds. But I know, I wish I had more time. I wish I did,
but maybe we will talk over coffee one day.
Secretary Lew. But the other half of my comment actually is
very important.
Mr. Duffy. Can you guarantee--Mr. Lew, you say you cut a
good deal, you are proud of the deal. Can you guarantee the
American people that that $1.7 billion in cash will not be used
to fund terror?
Secretary Lew. Look, Congressman, I have said--
Mr. Duffy. I will take that as a no. Yes or no.
Secretary Lew. These are not yes or no questions.
Mr. Duffy. They are yes or no questions.
Secretary Lew. Be serious, Congressman.
Mr. Duffy. I am very serious.
Secretary Lew. All right. Then give me a chance to answer
your question.
Mr. Duffy. This is a serious issue.
This is a yes or no. I have a few more moments. So in
regard--
Secretary Lew. Congressman, if I have the time, I will
answer your question. If not, let's be serious.
Mr. Duffy. It is a yes or no. So I have one more question
for you. We have unfrozen assets. Right? Whether it is $100
billion or they had payments, that is only $40 billion. Do you
know if any of that money has also been allowed to go to Iran
in cash or gold or any other--
Secretary Lew. Congressman, people are coming up with all
kinds of--
Mr. Duffy. You are the Treasury Secretary. That is why I am
ask you.
Secretary Lew. I have seen things--
Mr. Duffy. I am asking the Treasury secretary.
Secretary Lew. We have--we gave--
Mr. Duffy. Yes or no.
Secretary Lew. Mr. Chairman, may I answer the question?
Congressman, you--
Chairman Hensarling. Please answer the question.
Secretary Lew. --have a letter that our department sent you
describing the transfer of cash. We have laid it out clearly.
We have come up and given classified briefings. We continue to.
Mr. Duffy. My question for you that you wanted to answer,
and I guess if he could answer the question. He has asked for
it, Mr. Chairman, and I ask unanimous consent to allow that.
I am now talking about the $100 million of unfrozen assets
that might only be $40 billion. Not even $100 billion. Any of
that money that you are aware of as the Treasury Secretary, not
rumors, but you as the secretary, do you know if any of that
money has been allowed to go to Iran, of those unfrozen assets,
in cash or gold or any other kind of currency payment?
Secretary Lew. Congressman, the--
Mr. Duffy. Yes or no.
Secretary Lew. Congressman, the money is Iran's money. And
when it comes to the Central Bank of Iran, one way or another,
it gets turned into cash that they can use. So you are only
talking about what mode of transfer.
Mr. Duffy. Because you--
Secretary Lew. I am not aware of cash transfers.
Mr. Duffy. You have allowed it to happen, sir.
I yield back.
Chairman Hensarling. The time of the gentleman has long
since expired.
The Chair now recognizes the gentlelady from New York, Mrs.
Maloney, ranking member of our Capital Markets Subcommittee.
Mrs. Maloney. Thank you, Mr. Chairman.
And welcome, Secretary Lew. I want to ask you about
cybersecurity. And as you know, there have been several
reported examples where hackers have successfully stolen banks'
credentials for the SWIFT system that banks use for
international payments, and then used these stolen credentials
to initiate fraudulent funds transfers. In one case, hackers
were able to steal $81 million from the Bangladesh Central
Bank's account at the New York Fed.
And I am concerned, and I want to know are you concerned,
that repeated instances of fraudulent transfers through the
SWIFT system will undermine the confidence, and I would say,
the safety and soundness of international payments, and do you
believe that this poses a systemic risk?
Secretary Lew. Congresswoman, obviously we are aware of the
reported intrusions into the SWIFT system. And I would have to
refer you to SWIFT for detailed responses on that.
We do have confidence in the integrity of the global
financial system, but we are also very much aware of the risks
that the threat of cyber attack presents to every part of our
financial system, and really every part of our electronic
lives. It is true about utilities. It is true about virtually
every system that we deal with.
That is why the Presidenthas been so clear that we need to
take the strongest action to have a coordinated approach to
both putting best practices in place, sharing information,
removing the stigma of being attacked. Because whether you are
a business, a government, or an individual, you didn't
necessarily do something wrong that you were attacked. We have
to stay a step ahead of the bad actors. That means that the
more you know about how attacks are made, the more you can
build systems to protect against them. You know that the
attackers are going to come up with something new. It is not
like they will stop where they are. We need to make sure that
systems are updated so that you have the right equipment as
well as the right software approaches.
I think this is going to be a part of our lives for some
time to come. We have to make sure it doesn't become a threat
to financial stability. I actually think the financial system
is a step ahead of most other sectors. But that gives me little
comfort, because the financial system requires electricity, it
requires all of the other things that are part of our broader
infrastructure that we all depend on. This is a serious,
serious challenge throughout our economy and the world.
Mrs. Maloney. Thank you. I would also like to ask you about
Brexit. And just 2 days after the FSOC published its annual
report, the U.K. Voted to leave the European Union. And the day
after that vote, the FSOC held an emergency meeting that was
reported to discuss the financial stability and implications of
the Brexit vote.
Now that you have had time to reflect and to study this and
to consider various scenarios for how the U.K. Will manage its
exit, do you see any real risks to the financial stability of
the United States coming from the Brexit initiative? And if the
U.K. And the EU fail to reach a deal on financial services
before the U.K. Leaves, could that pose a systemic risk to our
financial system?
Secretary Lew. Congresswoman, I think in the period right
around the vote and after, there was very good preparation by
central banks and by finance ministries to make it clear that
there were sufficient resources in place to prevent what was a
very volatile period from spilling over into a period of real
loss of confidence. I think it was actually a measure of the
success of financial reform that there was enough confidence in
financial institutions because we knew what their balance
sheets looked like, we knew what their capital was. And it gave
central banks the ability to respond as decisively as they did.
Mrs. Maloney. And lastly--my time is almost over, and I
want to talk about you de-designated GE Capital. It was the
first de-designation in the council's history. And this came
after GE Capital made significant changes to its business model
and divested nearly $300 billion of assets. Now, some critics
of the FSOC have claimed that GE Capital only escaped after
they sold off virtually all of their financial businesses, and
that therefore FSOC requires companies to gut themselves in
order to be redesignated. Is that true? Is the only way for a
company to get de-designated is to really divest? Or was GE
Capital a unique case?
Secretary Lew. Each designation is a unique case. It is
based on the facts that are presented and the analysis of the
company and the risk that it presents. In the case of GE, they
made a business decision that, from my conversations with the
company, had less to do with designation and more to do with
their strategic vision of where the company should go. It had
the effect of changing the analysis in a material way. And they
were de-designated.
Every company knows why they were designated. They all
understand what their strategic business plans are. And they
have the basis for making the decisions for themselves.
Mrs. Maloney. Thank you very much for your service.
Chairman Hensarling. The time of the gentlelady has
expired.
The Chair now recognizes the gentleman from New Mexico, Mr.
Pearce.
Mr. Pearce. How are you doing, Mr. Secretary? Nice to have
you here today.
Secretary Lew. Always a pleasure.
Mr. Pearce. I could tell.
When the FSOC was created, basically you were charged with
three statutory mandates, and the first being to identify the
risk to the financial stability of the United States. So that
is pretty well-established.
Now, in your report today, you say that for the first time
ever we can identify and respond to emerging threats to the
U.S. financial stability. And then you go on to say that the
council, the FSOC council, convenes regularly to monitor market
developments and take action when needed to protect the
American people. And then you continue on even further to say
that the FSOC is supposed to report on recommendations for
specific actions to mitigate the risks.
For over 6 years, the Fed has kept interest rates extremely
low. In fact, near the zero level. Mostly, the inflation doves
in the Fed have downplayed the effect on the market. Now, just
last week, you had the head of the Boston Fed, President
Rosengren, he has been one of the biggest doves saying that
there is no connection here. He came out and made a statement
that says that he is concerned that easy money could be letting
markets get out of hand as they were before the crisis. That
sent the markets into turmoil.
And so a market that hadn't changed barely 1 percent in the
previous month and a half suddenly was changing tremendously in
the next 3 or 4 days. So the market is indicating some concerns
that it might be true.
So I guess my question--I would like to also submit that
article for the record, Mr. Chairman.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Pearce. And then you have also Veritude saying that
they are not going to trade in the bond market because it is
just too hard to price. It is too unstable.
Now, to me, those are things that in my small town New
Mexico way seem like they could be impacts on the stability--
the financial stability of the United States. But I was kind of
surprised because I am just thumbing through, I haven't read
the whole thing, but I am looking at your report, not just what
you said here today, and I don't see much about monetary policy
affecting the markets the way that they seem to be.
So I guess my question is, when you are ever sitting around
talking to Janet Yellen, do you ever kind of look away from the
TV cameras and say: We ought to be talking about this. It has a
little effect maybe? Do you ever bring that up?
Secretary Lew. Congressman, obviously, like all of our
predecessors, the Chair of the Fed and I talk to each other,
both in meetings and out of meetings, and I would hope that
that remains true, because as the two senior economic--
Mr. Pearce. Okay. You are just now talking, sir. And with
all respect, I am not trying to interrupt if you were really
getting in saying: Yes, we have talked about it and stuff. But
you are saying you want the conversation to be friendly and
continue, and my time is escaping. And so I am not going to
bother you anymore. I am just going to continue to make the
points. Because I think that you are not looking at the
financial instability at all that is coming up.
When I am talking a look here, the Wall Street Journal of
May 20 says that it is not China, not the U.K. It is the lack
of liquidity in the markets that is going to be a big problem.
When I take a look at Bloomberg, they talk about today's
postcrisis regulations intended to make banks safer and
discourage risk taking are eroding profits and forcing dealers
to rethink their business model. These changes have created a
vacuum in the bond market making trading much riskier. And then
they go on in the same report to say that all of this matters
because the $100 trillion global bond market is an essential
part of the machinery that keeps the world economy going. And
it is not even being referred to in your report.
And finally, then where it all comes down to hit the road,
is September 21st, a $1.9 trillion shortfall in the United
States State and local pension fund is poised to grow as near a
record low bond yields and global stock market turmoil reduce
investment gains, that they are expecting 7 percent rate of
return and they are getting 1 percent. And none of this is in
your report, which leads me to think that you are not dealing
with the financial instability of the U.S. at all.
I yield back, Mr. Chairman. Thank you.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Massachusetts,
Mr. Lynch.
Mr. Lynch. Thank you, Mr. Chairman.
Welcome, Mr. Secretary. And I have to say, I think that--
well, first of all, thank you for your service to your country.
And I think my predecessor, Joe Moakley, would be very proud of
the job that you are doing.
Secretary Lew. I am proud to have been connected to him.
Mr. Lynch. Yes. Good man. We miss him.
I do want to revisit the issue raised by the gentlelady
from New York, Mrs. Maloney, around the SWIFT. That system was
compromised. She is absolutely correct. $81 million.
Apparently, a transfer from the Bangladesh Central Bank, but
the payment was authorized to the New York Fed, and then the
money ended up in the Philippines, and there we lost track of
it.
And so given the size, the volume of transactions between
central banks and commercial banks on that SWIFT network, it
does raise some concerns. And I was wondering--I did read a
story in Reuters that we are in informal discussions with the
Philippines. They would like to be part of TPP. Now, I am
against TPP, but as long as you are having these discussions,
one of the gaps in that whole theft of $81 million was that the
Philippines have created an exemption for their casinos under
the antimoney laundering protocols that we have at FATF. And I
am just wondering, in those discussions, if we could persuade,
no matter where TPP goes, if we could persuade the Philippines
to get in compliance with that antimoney laundering protocol
that we have--with a lot of the FATF countries, that might be a
good use of our time.
Secretary Lew. Congressman, I think in general, the more we
bring other countries up to high standards of being able to
stop illicit financial activity, to see money laundering, the
better able we will be to take actions, not just in response to
cybercrime, but in terms of funding of terrorism and other
things of the like. I think the challenge of making sure our
computer systems are safe is one that, as I was saying to
Congresswoman Maloney, we deal with every day. Every CEO in the
world deals with it every day. And it is going to be an ongoing
challenge.
I know SWIFT is taking very seriously the breaches that
have been reported. And it is going to require action kind of
broadly through the financial system to stay ahead of these
cyber attacks.
Mr. Lynch. All right. Chairman Hensarling has set up a
terrorist financing task force here that I share with Mr.
Fitzpatrick. And we are just very concerned. In the
Philippines, Abu Sayyaf is very active there. So God knows
where this $81 million went. But that would certainly be a
problem.
I want to revisit the SIFI designation process a little
bit. I know that the courts rejected the application of SIFI to
MetLife. And I am just curious how that has changed your
analysis. And I know you have sort of a three-stage review
there. How is that going? Do you think MetLife is a risk
because they have been declassified, I guess, de-designated?
Secretary Lew. To be clear, a lower court has ruled in
favor. We have appealed that. We believe we have the legal case
to prevail on appeal. So we don't believe that the end of the
MetLife case will be to de-designate, but that is obviously up
for the courts to decide.
I think the process we went through was a rigorous one. The
record supports the decision that we made. And I think some of
the basis for the court's decision is very flawed. I have made
that clear. That is something that our appeal makes clear.
Mr. Lynch. Yes.
Secretary Lew. I think going forward, the point I made
earlier is, I think, very important to keep in mind. We have
not designated 500 institutions.
Mr. Lynch. Well, I know that.
Secretary Lew. We have designated 12.
Mr. Lynch. You said previously there are a very, very small
number of companies and utilities.
Secretary Lew. And they are--for a reason. Because they are
so--
Mr. Lynch. But let me--I just want to--my time is running
out. So--okay. So there is this process that I hear from some
of the companies and banks that might be affected that--and it
was cited in the lower court's decision, that there is not
enough flexibility for them to adjust their structure in a
timely fashion to avoid SIFI designation. Is that something you
are working on or--is that part of your response?
Secretary Lew. I think that the process of consultation in
the designation process has been very good. It has gotten
better over time, but it has been very good all along. I
think--
Mr. Lynch. That is according to you, just so you know. Some
people don't feel that way. But I agree with you.
Secretary Lew. I think that it is not because there is a
misunderstanding. It is because of basic issues of what
businesses are doing, what they are about. And it is not that
it--we obviously think that if decisions are made to reduce
risk, that is a good thing. But if you are going to maintain a
business organization that presents a high degree of risk,
having oversight is important. It doesn't put anyone out of
business.
Mr. Lynch. Okay. Thank you for your indulgence, Mr.
Chairman. I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, chairman of the House Foreign Affairs Committee.
Mr. Royce. Thank you, Mr. Chairman.
Mr. Lew, welcome.
Secretary Lew. It's good to be with you.
Mr. Royce. We are glad you are here. I know that back in
1986, you sat next to Tip O'Neill back when he and Ronald
Reagan were working on the 1986 Tax Act. And I was wondering
what advice you might give maybe the next Administration in
terms of how the Speaker and how the President could work on
the compromises that would get us to a result, in my view, like
that one. I think you are somewhat optimistic about the
consequences of the economic growth that we saw after the 1986
act as well.
So I wanted just to speak for a second to this issue you
mentioned about this bipartisan widespread agreement that our
current business tax rate is stifling economic growth and that
it is making us uncompetitive. And there is an agreement, I
think, on the need to eliminate loopholes. And I think also
some of us who agree we should be taking tax revenue from money
parked overseas to pay for infrastructure projects here, there
is perhaps that element too that could help move this through.
There seems to be some disagreement on whether to include
small businesses that file on the individual side to include
the passthrough companies. And I have followed your thinking
through the years. I know early on, you thought it should all
be done at once, and last month, I think you mentioned it
needed to be broken up in terms of how it was handled. But I
thought I would ask you that question, and especially in terms
of how we were able to achieve that result in 1986.
Secretary Lew. Congressman, it is a great question. It is
actually something I have given a lot of thought to. I think we
have made a lot of progress in the discussions on a bipartisan
basis on business tax reform. I think in terms of how we should
close loopholes, how we should lower rates, how we should deal
with international income, have a minimum tax, I think that we
have an emerging consensus that has the ability to get
bipartisan support. I think you put your finger on something
that has been an issue. And I think it is a misunderstood
issue. And if I could take just a minute, I would like to
explain why.
You can do business tax reform on the corporate side and
provide a lot of benefit to small businesses by letting them
deduct everything that they spend on investment by giving them
simplified procedures. Real small businesses would benefit from
where the emerging consensus for business tax reform is. The
institutions that wouldn't--the businesses that wouldn't
benefit are not small businesses. They are LLCs that organized
after the last tax reforms to go from being corporations to
being passthroughs. It is interstate pipeline companies, it is
large financial firms like hedge funds.
I think that if we look at the impact on real small
businesses, we can get there. And I hope that we can, like,
break apart where the impact of individual rates really falls.
It doesn't fall on the small neighborhood business. It is
falling on these very large firms. And I think it would be a
shame if that were to be an obstacle to cleaning up a business
tax code that is profoundly broken. It is causing terrible
consequences. We see the European commission now reaching into
our tax base with state aid fines. That is a terrible thing. We
need to stop it by fixing our Tax Code.
And you put your finger on what I think brings it together
so we should be able to get bipartisan consensus, which is
using the one-time revenue that comes from having a tax apply
to overseas income, whether it comes home or not, to fund
infrastructure. That is one-time revenue. It is a perfect use
for one-time revenue.
Mr. Royce. Let me ask you another question too. And that is
on the intersection of domestic and international regulations
in the area of the Financial Stability Board. I am concerned
that U.S. regulators, at least in part, rely on FSB
determinations, yet FSB is not subject to the procedural due
process. So I think we have an interest here in starting with
FSOC rather than starting at the other end with European,
Swiss-based FSB, where we end up without notice and comment or
prohibitions on arbitrary and capricious actions, and then we
work to accommodate the Europeans rather than the other way
around.
Given the impact that designation can have on a company,
why utilize a process that lacks some basic protections here?
Why don't we reverse that process?
Secretary Lew. Congressman, we do it the way you want us to
do it. The only designations that we make, we make based on
U.S. procedures. The FSB is a policy shaping, not an action
determining body. It is not binding on nations, but it does
help bring other countries closer to meeting our standards. And
I think it is good for us to have other countries have higher
regulatory standards.
Mr. Royce. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Georgia, Mr.
Scott.
Mr. Scott. Secretary Lew, I want to go back to the Iranian
discussion for a moment, but from another perspective. We all
agree the Iranian agreement is done, it is there, and that it
is--whether you agree with it or not. But here is my concern.
We all must agree that as a result, right now, Iran stands
flush with billions and billions and billions of dollars. And
as you alluded to, much of their own money. And I respect the
President. He has tried very hard with this deal. I respect
that deal. But here is my concern.
We have an obligation to Israel to make sure that they have
a memorandum of understanding. But here is the point,
Secretary. The President recently issued his memorandum of
understanding, and it is woefully weak. It is about the same
amount of money as we did in 2008. Because, as you know, in the
Naval Transfer Vehicle Act of 2008, we established a fact in
law that the amount of military aid we give to Israel must make
sure that Israel has the qualitative military edge. There is
absolutely no way.
But the President, in his memorandum of understanding,
giving Israel about the same amount of money that we gave 10
years ago when we had our foot on Iran's neck, the economyis
down. Now they are flush with hundreds of billions of dollars
more. So much so that they are now shipping weapons to Israel's
enemies up and down and all around the place. As you know, we
were able to successfully stop three shiploads of weapons going
to the Houthis, going to Hezbollah, going to Hamas, Syria, all
of those places.
My point is this. The President--some of us here in
Congress want to work with the President. And I want to ask you
if you could convey to him that David Scott wants to work with
him. I have served on the NATO Parliament Assembly. I was the
vice chair--the chairman of our Science and Technology
Committee. We spent 2 years working on the Iranian agreement. I
understand that. That is past. But now we got Iran, Israel's
number one enemy, flush with all this money. And we have an
obligation in the Naval Transfer Act of 2008 to make sure that
they have the qualitative military edge. And they don't have it
with the President offering--Bush offered in 2008, I think it
was about $3.3 billion a year, and the President is talking
about like $3.7 billion, when Iran is so far superior in its
money. It has already put in $19 billion for moneys in weapons
from China and Russia, and all that.
So what I wanted to ask you was that if you could convey to
the President that Congress has a step in this too. Let us work
together. That memorandum of understanding for Israel, in order
to make sure they had the qualitative military edge as by law
we are saying, should be close to $7 billion a year. It is
Congress that appropriates that money. Give us a seat at the
table. Let us work with him on it. Could you do that for me?
Secretary Lew. Congressman, I think just a couple points.
First, I met yesterday in New York at the U.N. with Israel's
finance minister who saw the MOU as being very important in
terms of guaranteeing Israel's both military and financial
security. So I don't think your view is shared necessarily by
the Government of Israel.
Secondly--
Mr. Scott. But let me tell you something, what my view is.
I helped write that law in 2008. We made sure that they got the
qualitative military edge.
Secretary Lew. Which we have continued to stand by.
Mr. Scott. And this does not--
Secretary Lew. We continue to stand by that, yes.
Mr. Scott. You don't have the qualitative military edge
giving them the same amount of money.
Secretary Lew. I will leave the discussion of the military
issues to our military experts. But this, as a financial
matter, is a very important commitment between the United
States and Israel. And I am proud that we were able to do it. I
don't think--
Mr. Scott. Congress appropriates the money. Don't you think
we have a role in that?
Secretary Lew. Congress always has the right to appropriate
the money. I won't challenge that.
If I could just say, though, I think anyone comparing
Israel's economy and Iran's economy, Iran has a broken economy.
They have gotten some relief because of taking apart their
nuclear program. But Israel has a very--
Mr. Scott. There is not a dime of that goes to the Iron
Dome or to David Sling or to combat the traffic of weapons
going to Israel.
Secretary Lew. And I totally agree with you. We should
stand with Israel to make sure--
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Florida, Mr.
Posey.
Mr. Posey. Thank you very much, Mr. Chairman.
Secretary Lew, I have an issue that ties in with the
chairman's question about the role of the Treasury in making
payments. For 6 years, 6 long tortuous years, I have been
fighting for a group of former hostages held captive by the
Revolutionary Armed Forces of Columbia, better known as FARC. I
know you are familiar with them.
You see, these men were on a U.S. Government
counternarcotics mission when they were captured by the FARC.
One American was executed and the other three were held hostage
for 5\1/2\ years. They were subject to conditions that neither
you nor I can even begin to imagine. Horrible.
After returning home, the former hostages were granted a
judgment under the Antiterrorism Act for damages against the
FARC. However, the accounts to fund this judgment have been
blocked by the Treasury Department since the Office of Foreign
Assets Control is now designating all FARC accounts as kingpin.
Congress clearly wanted terrorism victims to be compensated
when it passed the law to allow them to access the frozen
assets of terrorists. But the Office of Foreign Assets Control
has eliminated their ability to do that by designating all FARC
assets as kingpin. A small change to TRIA would fix this.
The bill that accomplishes this, H.R. 3394, the Captive
Act, passed the House unanimously. Totally bipartisan,
unanimous, in July. Now I am hearing that the Office of Foreign
Asset Control is blocking the bill in the Senate. In the
meantime, the FARC peace accord includes reparations for
Columbian victims of the FARC terrorism, and a $450 million
appropriation to implement the accord is waiting for
Congressional passage. However, here we have American victims
of terrorism who went through years of torture on behalf of the
United States Government who have still not been compensated.
My question for you is: Will you please work with me and
these former hostages who have suffered so much already at the
hands of FARC so that they don't have to suffer at the hands of
Congress and bureaucrats in the future, and let's get them
compensated?
Secretary Lew. Congressman, I share your concern for
victims of terrorism. And I understand that it is a very
complex and heavily litigated issue regarding multiple claims
to a limited pool of money. As I know you are aware, TRIA
allows a person who has a judgment to go against blocked
assets. But currently, the term ``blocked assets,'' as defined
by TRIA, gives access to funds that are frozen pursuant to two
statutes, IEEPA and the Trading With the Enemy Act. IEEPA is
the principal tool that we at Treasury use to sanction
terrorist organizations and their members as well as victims of
state sponsors of terrorism.
The Kingpin Act, as I know you know, is designed
specifically to create tools to deal with the threat that our
country faces because of the international narcotics
trafficking. And amending TRIA to have the definition of
blocked assets include property frozen under the Kingpin Act
could very much undermine our efforts on that very important
mission as well. So we would look forward to working together
to pursue how we address the concerns that we share in terms of
victims of terror having access to compensation. But our
concerns are to protect another, I think, shared goal that we
be able to take very decisive action to stop narcotics
trafficking.
Mr. Posey. I am a little bit confused how giving American
patriots the same or equal consideration of foreign people who
have been terrorized would undermine any of our security
efforts to fight terrorism or narcoterrorism.
Secretary Lew. So the Kingpin Act is designed to provide
resources that go against fighting narcotics trafficking.
Mr. Posey. I understand that. But this is taking resources
from narcoterrorists and compensating American victims. And, I
just don't think there is any excuse for any bureaucrat in this
country to hold up--to willingly, knowingly, willfully hold up
the compensation of these gentlemen when it could be remedied
so very easily.
Chairman Hensarling. The time of the gentleman--
Mr. Posey. I think there is a special place in hell for
people that would do that.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Heck. Mr. Chairman?
Chairman Hensarling. For what purpose does the gentleman
from Washington--
Mr. Heck. I thought the protocol was to alternate between
political parties. I have not yet had my opportunity.
Chairman Hensarling. I apologize to the gentleman from
Washington. The gentleman from Washington is now recognized for
5 minutes.
Mr. Heck. Thank you, sir.
Mr. Secretary, thank you for being here. I thought it might
be interesting if we return to the ostensible purpose of our
hearing today, namely the Annual Report of the Financial
Stability Oversight Council. And I want to direct your
attention to page 16 and some of the language relating to
housing reform.
Among other things, it says, ``The Council recommends that
regulators and market participants continue to take steps to
encourage private capital to play a larger role in the housing
finance system. Further, the council acknowledges that, under
existing regulatory authorities, Federal and State regulators
are approaching the limits of their ability to enact reforms
that foster a vibrant, resilient housing finance system. The
council therefore reaffirms its view that housing finance
reform legislation is needed to create a more sustainable
system.''
So I am one who believes that it is a far stretch of the
imagination to believe that conservatorship is a status which
should exist in perpetuity. That it is implicitly by definition
something that is temporary. So I would like to see us move
forward. But yet it is not altogether clear to me what is meant
and the whys behind these assertions in this report. For
example, what is inherently unstable about the status quo, as
much as I would like to see us move forward? I do not
understand why it is the council believes that what we have is
not stable as a consequence.
Secretary Lew. Congressman, we continue to have a housing
finance system where most mortgages are in one way or another
government backed, either through FHA or through the GSEs,
which are in conservatorship. We think a more stable approach
would be to have private capital taking risk, coming in, and
having a mortgage market that is not dependent on having a
backstop of government support.
Mr. Heck. Why would it be more stable? I understand why it
would be--arguably, I would understand why it would be more
vibrant and more dynamic, because if we were to increase
private sector participation, we might have more innovation.
But what is inherently unstable about how we do things now?
Secretary Lew. If ultimately the goal is to attract private
capital into the housing market, it would be a good thing if we
had avenues for private capital to have business models to get
into the housing market and bear the risks that they are taking
in a way that is not fully dependent on one or another form of
government backstop. The challenge is how to get legislation
that would permit the development of the structure that would
meet those criteria.
Mr. Heck. I agree with all that, Mr. Secretary, except I
still don't hear an answer to my question. What is unstable
about how we are doing it now?
I agree with everything you said about the importance of
moving forward with increased private capital participation,
but the report says that it would be more stable. What is
unstable about how we are doing it?
Secretary Lew. If you go back to the period before the
financial crisis, it was explicitly said that the government
didn't stand behind the GSEs. Then there was a financial crisis
and the government had to bail out the GSEs, which is why we
are in the conservatorship now.
I don't think that anyone designed a system for permanent
conservatorship or wanted a system of permanent
conservatorship, but it requires legislation to move on from
where we are. To me, as someone who cares deeply in long-term
access to housing in this country, it would be better if we
right now had a blueprint in legislation for what the mortgage
finance of the future looks like.
Mr. Heck. Do you believe that home ownership, the
percentage of the population enjoying home ownership, would
increase if we were to allow for increased private sector
capital?
Secretary Lew. I think it certainly could, yes. Obviously,
it depends how it is done, so I can't answer in an unqualified
way.
I think it is important that anyone who is creditworthy
should have access to a home mortgage. I think right now we
have a tighter credit box than is necessarily warranted, and we
have tried through clarifying some of the regulatory issues,
things like put-back risk, to ease the credit box some. But we
also saw in the lead-up to the financial crisis that it is not
a good thing for people who can't afford a mortgage to get in
over their head.
So striking that balance right and having risks borne where
the decisions to take a risk are being made would be a better
way in the future. Obviously, we are going to do everything we
can to keep the mortgage market healthy during the period of
conservatorship.
Mr. Heck. Thank you, Mr. Secretary.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from North Carolina,
Mr. Pittenger.
Mr. Pittenger. Thank you, Mr. Chairman.
Hello, Mr. Lew. It's good to see you.
Secretary Lew, did the Office of Terrorism and Financial
Intelligence, did that office raise any concerns about the
method of payment to Iran, the hundreds of millions of dollars
in cash to a State Department-designated sponsor of terrorism?
Did they raise any concerns?
Secretary Lew. Congressman, I am obviously not going to get
into any individual things in this setting.
Mr. Pittenger. They are under your purview, and I just
asked you a direct question. Did they raise any concerns?
Secretary Lew. I would say that the view within the
Treasury Department is that everything that we did was
consistent with both good policy and the law.
Mr. Pittenger. So they didn't raise any concerns?
Secretary Lew. I am really not going to comment one way or
the other on what I did or I didn't hear from intelligence
briefers.
Mr. Pittenger. This is your Office of Terrorism and
Financial Intelligence in Treasury.
Secretary Lew. We have consistently seen analysis and
shared analysis that shows--
Mr. Pittenger. Were you apprised of any concerns by that
office?
Secretary Lew. Congressman, I was not briefed internally on
reasons not to proceed with this transaction, but I am not
going to describe who told me what.
Mr. Pittenger. Did that office conduct any analysis as to
the impact of sending ultimately billions of dollars over to
Iran?
Secretary Lew. Congressman, we have done extensive analysis
on what Iran is doing outside of the JCPOA, the Joint
Comprehensive Plan of Action, and we have tried as best we can,
and we have some ability to see what is going on, to see what
the--
Mr. Pittenger. How many banks operate--Mr. Secretary,
excuse me, but we have limited time.
Secretary Lew. But I didn't answer your last question.
Mr. Pittenger. How many banks operate under the SWIFT
authority that gives them access to the international financial
system, how many banks in Iran have that capacity?
Secretary Lew. I would have to get back to you,
Congressman.
Mr. Pittenger. That would be an important thing to know.
Secretary Lew. If I can just go back, it really is
important to answer your last question. We have been looking to
see if, as we said at the time the JCPOA was agreed to, that
there would not be a substantial increase in funding, and we
are not seeing the increase in funds available to Iran going to
the purposes that we all want to stop. If we see it, we will
stop it. If we see ships going, we will try to stop them.
Mr. Pittenger. I think going through the financial system,
through the SWIFT bank authority, has enormous impact.
Mr. Secretary, Pastor Saeed Abedini, he was one of the
hostages. I went over and greeted him in Germany when he
arrived. As he was waiting in Iran to depart from the Swiss
airline, Swiss-provided aircraft, to go to Germany, he asked
one of the guards: Why the wait? Why can't we board and leave?
And Pastor Abedini testified in Congress and also in the media
that they were waiting for a plane to arrive, and once that
plane arrived, then they would be able to depart. And, of
course, we have seen pictures of planes that arrived and bags
coming off.
Did it ever really concern you that the reality of paying
for these hostages, these ransoms, was not just perception, but
in reality that is what the Iranians believed?
Secretary Lew. Congressman, I can't speak to what anyone
else believed, but I can tell you what I understood at the time
and what I know now. We had three separate negotiations, all of
which were going on because a window had been opened at the
same time. We didn't talk to Iran for decades, but with the
negotiation of the Joint Comprehensive Plan of Action, we had
the ability to negotiate for the release of Americans being
held against their will. We had the ability to settle an
outstanding legal claim. The fact that all those things came
together is because we were talking to each another.
Mr. Pittenger. When you see that the three hostages were
released--
Secretary Lew. I couldn't hear you. I am sorry.
Mr. Pittenger. In fact, it became very offensive to Pastor
Abedini. He said: What is going to happen now is we have
exacerbated the problem, and we are going to see a dollar
amount put on every hostage.
Secretary Lew. But, Congressman, there is a fundamental
difference between ransom, which is when you give your money to
another party, than having separate transactions where you give
a party its own money.
Mr. Pittenger. It all happened at the same time.
Secretary Lew. And that is all this was.
Mr. Pittenger. One last question I would like to ask you,
20 seconds. Mr. Secretary, have we ever paid cash in large sums
to any other government before?
Secretary Lew. I would have to go back and check the
history. We do a lot of business in a lot of ways. I know your
time is almost up, Congressman. I know this has been a very
difficult week in your city, and I just want to express my own
personal sympathies to the families that have been injured and
suffered a loss.
Mr. Pittenger. Thank you. We need the leadership of Martin
Luther King in my City today. Thank you.
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.
Secretary, welcome back to the committee.
If I could just follow up on the questions from my
colleague from North Carolina related to the Administration not
seeing where the money is going, and I think your testimony was
you don't see money going to terrorist elements. That kind of
begs the question, if you are transferring money to the
Government of Iran in cash, of course you are not going to see
whether or not, that is the whole point.
Secretary Lew. We actually tried to keep track of what is
going on as best we can see it in all ways.
Mr. Barr. But the question that has been asked and I am
still looking for an answer is, can you track cash payments to
Iran and whether or not that ends up in the hands of, say,
Hezbollah?
Secretary Lew. So, look, the challenge--and this is an
issue we dealt with directly when the Joint Comprehensive Plan
of Action was being debated. I cannot tell you Iran will stop
doing things we don't want them to do. We are going to do
everything we can to stop them using those authorities.
But just as we had agreed in the JCPOA that they would have
access to their money, we said we will do everything we can to
stop the flow of money. But once money goes into the Central
Bank of Iran, the mode of transfer is not the issue. We have
the same challenge, if you had given them the money through a
check, we would still have to watch where the money goes
afterwards. We are doing that. We do not see it going.
Mr. Barr. Can you tell us in Congress and the American
people today that the $1.7 million that was transferred in cash
is not funding terrorism?
Secretary Lew. Look, I understand that you are focused on
the cash, but we are looking at how much money is going to
support regional--
Mr. Barr. That is a no. I interpret what you are saying as
a no.
Secretary Lew. Congressman, don't interpret me. I will
speak for myself. I will speak for myself.
Mr. Barr. We all know you can't tell us whether or not that
money is not going to be used--
Secretary Lew. Congressman, can you show me, contrary to
our analysis, that we have seen--
Mr. Barr. The point is it was your testimony that you don't
see it going to terrorism, but that is why you don't see it
going to terrorism, because it is in cash.
Secretary Lew. No, Congressman, that is not why. That is
not why.
Mr. Barr. Let me switch to another topic. Let me switch to
another topic.
Secretary Lew. I can't in this setting describe to you
everything that we know and see, but that is not correct.
Mr. Barr. This is evidence why the Iran deal is bad for
America. It is bad for Israel. It is bad for our allies. And it
is bad in terms of preventing terrorism.
Let me switch to another topic. Let me switch to another
topic.
Secretary Lew. But, Congressman, you just got to the core--
you just got to the core issue, which we disagree on.
Mr. Barr. The time is mine, Mr. Secretary. Let me switch to
another topic.
Do small community banks and credit unions represent
competition to large institutions like Wells Fargo?
Secretary Lew. I am going to go back and answer your last
point
Mr. Barr. No, I really want to move on.
Secretary Lew. I really want to answer the last question.
Mr. Barr. You can send me a letter. We can visit
afterwards. I really do want to move on to the issue of Wells
Fargo. I would like to move on to the issue of Wells Fargo.
Secretary Lew. I think the world is safer with nuclear
weapons not being 3 months away from development in Iran. That
is a fundamental disagreement.
Mr. Barr. Mr. Secretary, can I ask you another question?
Chairman Hensarling. The time belongs to the gentleman from
Kentucky
Mr. Barr. Mr. Secretary, do small community banks and
credit unions represent competition to large institutions such
as Wells Fargo?
Secretary Lew. I think that there should be competition at
all levels of the banking structure.
Mr. Barr. Do they represent competition to large
institutions like Wells Fargo?
Secretary Lew. In some of their business they do.
Mr. Barr. According to the FDIC, at year end 2010, the year
that the Dodd-Frank Act became law, there were 7,657 banks. By
the end of 2015, the number had declined to 6,182. The number
of community banks had declined by 14 percent, double the rate
of that in the period leading up to Dodd-Frank. Credit unions,
we have lost 1,500 credit unions in this country since Dodd-
Frank.
So since the enactment of Dodd-Frank, the number of new
bank charters can be counted on the fingers of one hand. You
have few new charters, you have much fewer banks, and you have
1,500 fewer credit unions. You have less competition. Not a
very good record for enhancing financial stability. And, I
would add, eliminating the competition to large banks like
Wells Fargo.
If I was a defrauded customer of Wells Fargo, I would be
angry at the institution, no doubt about it. But I also would
be angry that the promises from the politicians that Dodd-Frank
was going to protect me are hollow promises and that maybe why
that is the case is that large banks like Wells Fargo have less
competition today.
Secretary Lew. Congressman, I think if I was injured by a
financial institution, I would be glad that there is a CFPB out
there to protect me
Mr. Barr. Let's talk about that, because the CFPB was
around in 2011 when these alleged activities began, and it
wasn't, in the timeline that I have seen, it wasn't until 2015
that the OCC got the CFPB involved. It looks to me like a case
of regulatory incompetence.
Secretary Lew. I think if you look at how the facts
unrolled here, the action that was taken this week reflected
the OCC and the CFPB taking action, and there would have been
no CFPB if it weren't for Dodd-Frank.
Mr. Barr. You know what? Far from an argument for enhancing
the power of the CFPB, I think what the Wells Fargo scandal
says is that we need to reform the CFPB so it actually focuses
on its mission of protecting consumers instead of taking away
choices from consumers.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Rothfus.
Mr. Rothfus. Thank you, Mr. Chairman.
Secretary Lew, over the last 7 years the spirit of
Washington has been to never let a crisis go to waste, and the
result of that attitude has been the crafting of rules that
systematically take a wrecking ball to one industry after
another.
Cambria-Rower Business College in Johnstown, Pennsylvania,
for example, closed its doors this summer, after serving its
community for over 100 years, because of the Department of
Education's crackdown on higher education providers, thousands
of coal miners have been laid off in my district and across the
country as their employers have been bankrupted by Washington
regulations, and millions have had their health insurance
wrecked. As I have noted many times in this room, community
banks are closing or consolidating in a desperate effort to
stay viable in the face of a swarm of new rules and
regulations.
And now, unfortunately, the Federal Government's wrecking
ball has another target: money market funds. As you know, the
July 2014 amendments to Rule 2(a)7, which go into effect next
month, on October 14, require stable value institutional,
prime, and tax-exempt money market funds to be offered only
with a floating net asset value, or NAV. The FSOC annual report
touches on money market funds, and I want to add some context
here.
Many institutions face legal constraints or have policies
that prohibit them from investing in cash pools that fluctuate
in value. In fact, for them the stable NAV is an intrinsically
valuable feature of money market funds.
In anticipation of this rule, we have seen nearly $1
trillion rush out of prime and tax-exempt funds. Prime funds, a
key source of funding for corporations and banks, have dropped
by 48 percent. Tax-exempt funds, which buy approximately 70
percent of the short-term debt issued by municipalities,
universities, and hospitals, have dropped 42 percent.
And on that, Mr. Chairman, I would like to offer into the
record letters to Senator Pat Toomey from the officers at Penn
State and the University of Pittsburgh expressing concern about
what is happening in this industry and support for Senator
Toomey's legislation to address this.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Rothfus. And also letters from the Allegheny County
executive, the Allegheny County treasurer, and the mayor of
Pittsburgh to my colleague, Congressman Doyle, expressing
similar concerns.
Chairman Hensarling. Without objection, it is so ordered.
Mr. Rothfus. This has caused borrowing costs for firms,
municipalities, hospitals, and schools to spike at a time when
they need access to affordable capital, and much of the money
that has moved out of prime and tax-exempt funds has gone into
Treasury and government funds. In other words, the effect of
the rule has been to stifle investor demand for commercial
paper and debt issued by municipalities and important
institutions in our communities and to stimulate demand for
debt issued by the Federal Government and the GSEs.
This rule effectively subsidizes Fannie, Freddie, and the
Federal Government at the expense of the private market and
borrowers. This thwarts investor preference by forcing
investors into government funds to get the stable NAV.
With all of this distortion and disruption and the tilting
of the playing field, I don't think we can say that this rule
is necessary or helpful. Money market funds have a long history
of stability and security through the financial crisis, and I
worry that this wrecking ball will take out an important and
necessary part of our financial system.
Are you aware of the exodus of funds from prime and tax-
free money market funds and the subsequent flow into government
funds?
Secretary Lew. Congressman, we have been monitoring flow of
funds. I don't think that the impact that we have seen is as
dramatic as what you are describing, and I think--
Mr. Rothfus. I would encourage you to listen to the
municipalities and the universities that are out there and to
gauge what they are seeing.
Secretary Lew. So, Congressman, I think we have to--I am
sorry?
Mr. Rothfus. Go ahead. You were going to say?
Secretary Lew. No, we have to remember that during the
financial crisis there was a real concern about the stability
of money market funds. There was a very careful, measured
action taken by the SEC to try and put in place rules that
would govern, which I think are going to enhance financial
stability. We are not seeing dislocations in the marketplace on
a broad basis--
Mr. Rothfus. You haven't seen a trillion dollars move out
of these funds?
Secretary Lew. I am not saying money hasn't--
Mr. Rothfus. Isn't that a significant dislocation?
Secretary Lew. I think that we are not seeing problems
arising in the market where funding needs can't be met. And
that is the metric that we look at. Is there liquidity in the
market? Are markets working? And markets are working.
Mr. Rothfus. Would you agree that this has tilted the
playing field? If you need a stable NAV and your only option is
to go to a fund that has Fannie paper or Freddie paper or
Treasuries, that that is going to have a preference over
municipals and AAA corporate bonds?
Secretary Lew. I think you have to look at the whole
picture, Congressman. We had a situation during the financial
crisis where the risk that money market funds were going to
break the buck? Almost took what was the worst recession since
the Great Depression and throw a switch to make it a depression
itself.
There was a serious issue here. I don't think the action
taken has caused disruptions that to date have raised serious
concerns. But we will look at it. Obviously, we will continue
to look at it.
Mr. Rothfus. Again, I think you want to talk to the
universities, talk to the municipalities, because this is a big
issue for them.
I yield back.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Arizona, Mr.
Schweikert
Mr. Schweikert. Thank you, Mr. Chairman.
It's always an interesting time when you get to come hang
out with us, right?
Secretary Lew. It is never boring.
Mr. Schweikert. Can I do just an idiosyncrasy, but I am
interested in this. And I ran over here, so I didn't have
enough time, so I am doing part of this from memory. In, I
think, April there is something, I think it is referred to as
the 387 rule. It is how taxes or how you value if you have
taken a stock interest in a loan.
Secretary Lew. 385
Mr. Schweikert. 385, that is it. Sorry. Thank you for
correcting me.
If I remember just the preamble on the rule proposal was
what, 75 pages? So the preamble trying to describe the proposed
rule was actually longer than the rule itself.
Where do you see that? I know a number of organizations, a
number of folks from Arizona, where we are a State that is very
entrepreneurial and trying to desperately bring in capital and
are worried about sort of the tax treatments underlying. And I
know I am getting a little technical. But, first, where do you
see those rule mechanics?
Secretary Lew. So, Congressman, we issued the 385 rule as
part of our effort to make it harder for U.S. companies to
invert, to take U.S. companies and change the address and avoid
U.S. tax liability.
The reason the preamble was a bit lengthy is we raised a
number of questions that we wanted to get comments on. So we
weren't surprised that issues were raised. We raised the issues
ourselves in the preamble.
While we got hundreds of comments, it all comes down to six
issues, which we have been working hard at addressing, and I am
pretty comfortable that we are going to be able to have a final
rule that resolves many of the concerns that have been raised
but that won't damage the principal purpose of the rule, which
was to stop inversions and to stop earning stripping and taking
unfair advantage of the tax system.
Mr. Schweikert. Those are two very different things,
though. On one side, I will use--I despise the term earning
stripping, I mean, between merged organizations or affiliated
organizations and the recognition of do you consider this a
stock holding or is it really a debt pledged with stock or
convertible to preferred. That is different than the inversion
debate.
So you could see from my view of the world as sort of
someone that sees the world as an accountant, are we sort of
conflating some of the different issues.
Look, it is a hard read. I accept that.
Secretary Lew. We have said all along that the best way to
deal with inversions is through tax reform and legislation. We
have limited administrative tools, and we use Section 385,
which in its simplest way has broader impact than you need. We
are working to address the consequences that are not central.
Mr. Schweikert. But do you think as you are sort of
addressing towards the final rule, there is that--I am
reaching--279, it is the tax treatment, where you can't
recognize the interest costs between the organizations? I think
that was also within the rule set.
Secretary Lew. Are you talking about the financial
transactions between foreign subsidiaries of a U.S. firm?
Mr. Schweikert. Actually I think it is within an
acquisition and the costs in between.
Secretary Lew. I am going to have to follow up and get the
specific question.
What I can tell you about the way we have handled this
rulemaking is we have done it by the book, by the
Administrative Procedures Act. We have gotten comments. We have
taken meetings, hundreds of conversations. We have talked to
committees of Congress of jurisdiction. And I think we are
going to be able to put final rules out that address many of
the concerns that have been raised.
Mr. Schweikert. I had one other question I have always
wanted to ask you. If we would do tax reform, particularly if
we would clean up our territorial tax system, solution?
Secretary Lew. I think what we have proposed and what I
think there is bipartisan support for is something that is a
bit of a hybrid system. We think that there should be a minimum
tax on U.S. income overseas.
Mr. Schweikert. No, no, no, I remember that, but truly if
we developed a true--
Secretary Lew. I think the hybrid approach is better
myself.
Mr. Schweikert. Okay, be preferred. But I am a territorial
tax system person, but it would solve--
Secretary Lew. But that is why I think there is a--in
answer to Chairman Royce's question--I think there is the basis
for a bipartisan compromise here. We have worked very hard to
build that.
Mr. Schweikert. Okay, because you saw Chairman Brady a
couple of months ago did sort of put out an outline, and within
that was some territorial tax--
Secretary Lew. And Chairman Camp before him put out
proposals that overlapped considerably with the proposals that
we have put forward. I think that this is something tax writers
should be able to work through early next year.
Mr. Schweikert. Okay. Just wonderful.
Can I steal 15 seconds?
Chairman Hensarling. Fifteen seconds.
Mr. Schweikert. We have our demographic crisis. You in a
previous life did some great writings in talking about what is
about to happen debt-wise. Can I beg of your organization to at
least do a solicitation of the appetite for long-term U.S.
sovereign debt to see if we could maybe do some of our
financing over the demographic bubble?
Secretary Lew. Congressman, we remain open-minded to new
approaches, but we have done a lot to lengthen the weighted
average of maturities.
Mr. Schweikert. Outside the current WAM, I am talking 45,
65, 100s.
Secretary Lew. I am happy to have a longer conversation. I
can't with the gavel going.
Mr. Schweikert. Thank you, Mr. Chairman, for your
tolerance.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Maine, Mr.
Poliquin.
Mr. Poliquin. Thank you, Mr. Chairman, very much.
Mr. Lew, thank you very much for being here. I noted that
when you walked in you indicated very clearly to me that you
had not taken your Maine summer vacation. I want to let you
know that Maine is a wonderful place to have a fall vacation,
and I am sure your wife would greatly appreciate it, and we
would appreciate it.
Secretary Lew. If only I got a fall vacation.
Mr. Poliquin. Yes, really.
Sir, Americans are very alarmed and very frightened about
an increasing number of terrorist attacks here at home and
abroad. Do you agree with the State Department's assessment
that the country of Iran is a primary state sponsor of
terrorism, yes or no?
Secretary Lew. We have implemented all of the rules on
terrorism.
Mr. Poliquin. Do you agree that Iran is a state sponsor of
terrorism, yes or no?
Secretary Lew. I have--
Mr. Poliquin. Mr. Lew, you are really good about not
answering questions.
Secretary Lew. We have made that designation.
Mr. Poliquin. Do you agree that Iran is a state sponsor of
terrorism, yes or not? Do you agree with the State Department?
Secretary Lew. I obviously agree that they are a state
sponsor of terrorism.
Mr. Poliquin. Okay. You agree. I got it. Do you also agree
that untraceable cash is the currency of terrorism?
Secretary Lew. I do believe that cash in the private
economy is a big problem because you can't track it.
Mr. Poliquin. Great. Okay. So now let's go beyond. Okay, we
agree on those two things. Thank you very much.
Secretary Lew. Congressman, just to be clear--
Mr. Poliquin. It is my time, not yours, my time, not yours,
sir.
Now, you authorized the cash being flown into Iran. Now for
whatever reason you authorized it, that is fine. That is your
decision. I think it was a mistake, but you did it.
Now, my question is the following. I know that the United
States Government owed Iran this money. How about if we had
instead put pressure on them to abandon their support of
terrorism and disavowed their goal in their public statements
about destroying Israel? What if we just had not transferred,
you had not authorized the transfer of cash to Iran until they
gave up their goal of destroying Israel and stopped sponsoring
terrorism? Wouldn't that have been a good idea?
Secretary Lew. As a simple matter, Congressman, we wouldn't
have been able to resolve the dispute that left America at risk
of having a $10 billion settlement.
Mr. Poliquin. That is not the point, sir. That is not my
point.
Secretary Lew. That is precisely the point.
Mr. Poliquin. Why in the world wouldn't you just--
Secretary Lew. We have done--
Mr. Poliquin. I am asking the question, sir. Why wouldn't
you continue to withhold those payments until they stopped
sponsoring terrorism? Why wouldn't you do that?
Secretary Lew. Congressman, I think you are mixing a bunch
of things up. We are taking action. We have taken dozens of
actions to designate entities that support terrorism. We are
continuing to take our sanctions responsibilities very
seriously to stop Iranian activity supporting terrorism.
Mr. Poliquin. Let's move on. Let's move on. You are not
going to answer the question, Mr. Lew.
Mr. Lew. I am answering the question.
Mr. Poliquin. You are really good about not answering the
question.
Secretary Lew. If you would give me the time, I am happy
to.
Mr. Poliquin. Last year your Administration, or the
Administration of which you are a part, floated a horrible
idea, which was to tax college savings plans. Do you agree that
was a very bad idea?
Secretary Lew. Congressman, that was withdrawn before it
was even dry ink.
Mr. Poliquin. I know it was. And the reason it was
withdrawn, Mr. Lew, is because there were so many of us that
made such a stink that it is a bad idea to tax college savings
plans to make it more difficult for kids in Maine.
Secretary Lew. We have done an awful lot to expand
opportunity for college education in this country.
Mr. Poliquin. Okay, let's move on. So you walked it back,
your Administration walked it back.
Secretary Lew. And I am very proud of our record, and I
would love to talk about it.
Mr. Poliquin. And I thank you very much, Mr. Lew, for
agreeing with everybody that was a horrible idea.
Now, here is my next question to you.
Secretary Lew. I hope you will agree that expanding Pell
grants and student loans has been a good thing.
Mr. Poliquin. Here is my next question to you. Here is my
next question, Mr. Lew.
There is about--I may not have this number exactly right--
there is roughly 24 trillion of private pension savings out
there, retirement savings, folks that are trying to build up
nest eggs to augment their Social Security payments when they
retire.
Do you think it is a good idea to tax retirement savings,
like your Administration thought it was a good idea to tax
college savings plans? Do you think it is a good idea to tax--
Secretary Lew. I am not sure I understand your question.
Mr. Poliquin. Do you think it is a good idea to tax
retirement savings?
Secretary Lew. We have promoted retirement savings
through--
Mr. Poliquin. Do you think it is a good idea--
Secretary Lew. What proposal are you asking me to comment
on?
Mr. Poliquin. Because your Administration thought it was a
great idea to tax college savings plans until you folks walked
it back. Do you think it is a good idea--
Secretary Lew. If it is your proposal, I am happy to look
at it. We haven't made that proposal.
Mr. Poliquin. It is not a proposal. I do not advocate for
that. So you don't either.
Secretary Lew. I thought you were proposing it.
Mr. Poliquin. No, of course I am not. You know better than
that, Mr. Lew.
Secretary Lew. I would tell you I don't think it is a good
idea.
Mr. Poliquin. Great. Then we agree on something. You think
it is a bad idea--you think it is a bad idea to tax retirement
savings.
Secretary Lew. We have IRAs. We have 401(k)'s. We have all
kinds of tax-protected savings for retirement.
Mr. Poliquin. Then do I get your commitment and will you
speak to the American people right now that if the
Administration sends out a proposal to tax retirement plans,
you will stand up against it, sir?
Secretary Lew. I think I can safely say that in the next 4
months we are not going to be sending a new proposal.
Mr. Poliquin. Will you stand up against it if that idea is
floated?
Secretary Lew. Congressman, we are in the last 4 months of
this Administration, so I think--if this was 2 years ago, it
would be one thing.
Mr. Poliquin. Okay. I am assuming, since you think it is a
bad idea--I am assuming, since you think it is a bad idea--we
are on the same page, thank you, Mr. Lew--you will stand up
against any attempt to tax retirement savings. That is what I
heard? Thank you.
Secretary Lew. Congressman, don't put words in my mouth. I
am happy to answer a detailed question.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Pennsylvania,
Mr. Fitzpatrick, the chairman of our Terrorism Financing Task
Force
Mr. Fitzpatrick. Thank you, Mr. Chairman.
Mr. Secretary, proposed staff reallocations at the
Treasury's Office of Terrorism and Financial Intelligence, TFI,
have raised some concerns about how they might affect the
execution of TFI's various missions, but also raise questions
about compliance with appropriations language, civil service
rules, and constraints on the gathering and use of financial
intelligence data.
Further, the amount of information on the proposed moves
supplied to Congress has been minimal, and it appears that TFI
is proceeding with them at full speed, that despite bipartisan
staff admonitions to slow the process down until there is
Congressional buy-in, for fear of creating disruption in this
critical part of our country's effort to stop the financing of
terrorism and other financial crimes.
The fact that the plans are intended to be complete before
a new President, a new secretary or deputy secretary takes
office, raises the possibility that they may not agree with the
realignment, creating more disruption as further moves or
reversal might have to occur.
So with that in mind, Mr. Secretary, I have a couple of
questions. First is what is the purpose and what are the
specifics of the proposal, if you can share them with us,
please?
Secretary Lew. Congressman, TFI is an extraordinary
organization. I couldn't be more proud of the work that they do
and the effectiveness they have. It is a new organization. It
was pulled together, cobbled together from a number of
different subagencies after 9/11.
Mr. Fitzpatrick. Can you tell us about the proposal
specifically?
Secretary Lew. And one of the things that good management
requires is that you, particularly with a new organization, try
and make sure that you get it right.
I think the current acting under secretary, Adam Szubin,
who grew up as a career official in TFI--
Mr. Fitzpatrick. What is the proposal, Mr. Secretary?
Secretary Lew. I am happy to get back to you on the details
of the proposal. Frankly, I have deferred considerable latitude
to the acting under secretary because he is truly expert in all
of the detailed work that they do.
Mr. Fitzpatrick. You may not have the answer to the
question, but if you are agreeing to please get back to us.
Secretary Lew. No, but what I can answer--
Mr. Fitzpatrick. Staff has repeatedly asked for the
information and it has not received any information about it.
Secretary Lew. We have scheduled a briefing on the Senate
side. We are happy to schedule a similar conversation on the
House side.
The challenge here is to ask, how do you take an
organization that used to be separate organizations and make
sure that it is as healthy as possible to do the very important
work it does? And that is what the acting under secretary has
been looking at. No final decisions have been made. It is still
a work in progress.
Mr. Fitzpatrick. On the work in progress, knowing where it
is going, because my concern is--and you just in response to
Mr. Poliquin's question said, sir, this is the end of the
Administration, don't get us on record. If you are moving
forward--
Secretary Lew. He was asking me about a new tax proposal.
Mr. Fitzpatrick. If you are moving forward with the
proposal to change the alignment, you need to come to us with
some specifics. So I would ask, with the specifics that you do
know, what impact would it have on the Treasury's ability to,
say, enforce the Bank Secrecy Act?
Secretary Lew. We obviously take all of the
responsibilities, including the Bank Secrecy Act, at the
highest level of seriousness. There is no aspect of TFI's work
that isn't important. And this is about--
Mr. Fitzpatrick. Do you have any idea the impact of these
proposed moves on the Bank Secrecy Act and the enforcement by
Treasury?
Secretary Lew. The objective is to make sure that TFI as an
institution operates more effectively and more efficiently, not
diminishing any of the activities.
Mr. Fitzpatrick. You are speaking to all these questions at
the 30,000-foot level. You don't have any specifics?
Secretary Lew. I didn't come here today with the plan in
front of me. We will follow up at the staff level.
Mr. Fitzpatrick. Okay. I appreciate that.
Mr. Secretary, are there any declared whistleblowers at the
agency?
Secretary Lew. Not that I am aware of. I am looking back to
see. Yes, my staff is not aware.
Mr. Fitzpatrick. Not that you are aware of.
Have any staff at TFI been ordered not to talk to Congress
about this proposal that I spoke about in my first question?
Secretary Lew. I know that there are some things that are
in the clearance process, and we have to go through the
clearance process internally within the Administration. But it
is only a normal process, it is not anything specific about
this.
Mr. Fitzpatrick. Why can't TFI redirect a portion of its
anticipated 17 percent growth in FTE in the President's fiscal
year 2017 budget or what ends up appropriated in a continuing
resolution?
Secretary Lew. If I could ask, if you could submit a
question, I am happy to take it. That is at a level of detail
that I would have to look at the question in more detail.
Mr. Fitzpatrick. Mr. Secretary, I appreciate your
willingness to try to answer the questions. You are not able to
answer any of the questions here today. I would just--
Secretary Lew. Congressman, I pay attention to a lot of
details, but these are pretty small details, and I don't
understand the question.
Mr. Fitzpatrick. Sure. But any major realignment, first of
all, needs to be included so that we understand in the
appropriations process what our respective--
Secretary Lew. No, I agree.
Mr. Fitzpatrick. We will get you the question.
Secretary Lew. Yes, I am happy to answer the question.
Mr. Fitzpatrick. How long will it take you to answer these
types of questions?
Secretary Lew. If you give me the question today, we will
get back as soon as we can. I would like to understand the
question and be able to give you a complete answer.
Mr. Fitzpatrick. Thank you, Mr. Secretary.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Colorado, Mr.
Perlmutter.
Mr. Perlmutter. Mr. Secretary, good to see you. Thank you
for your service. Thanks for coming in and answering these
questions even when my friends are kind of pounding away. I
appreciate the way you handle it, the seriousness of this, but
also your willingness to have a little bit of give and take
with my friends.
So I am going to just talk about a couple of things, first
to thank you, thank the President. When President Obama took
office, my district was at about 10 percent unemployment. We
are on average about 3 percent today, and that is even--so the
suburbs of Denver--and that is even with oil and gas not doing
very well in my State, which would put us at about 2 percent
unemployment.
But strong economy. Foreclosures, which had been off the
charts at the beginning of the Obama Administration, now very
strong housing market, almost too strong. Hopefully supply
starts catching up with demand. And lots of jobs. Strong
economy.
I just want to thank you for your part in doing that,
because it is been a long, long road. So thanks to you. Thanks
to this Administration.
The other thing I want to talk about and say thanks, but we
certainly aren't there, and since the chairman is here, he
knows this subject, it is marijuana and banking. And he knows
it because I always bring it up, because we have to confront
this and deal with it at some point. At least 25 States have
some level of marijuana legalization, some kind of a regulatory
structure in place, either for medical marijuana or
recreational marijuana. If you add the States that have
cannabis oil to deal with seizures, that is probably another
eight States, and there are several that have it on their
ballots this year.
And the Federal law, particularly in the banking sector,
and the State laws, kind of run smack dab into each other. And
I appreciate the assistance that the Administration and
Treasury have provided to give banks some potential path to
allow legitimate businesses to be able to have banking
services. So thank you for that.
Now, my question is on this proposed 385 rule on debt
equity kinds of transactions between subsidiaries or the parent
and a subsidiary and money going offshore. I know that you all
are trying to deal with inversions, and I appreciate that. But
I guess I want to talk to you about it. I want you to tell me
what you think the 385 is intended to do.
And I would just ask you all to be looking at those
transactions that sort of have been in the hopper, and then
this new rule comes down and it changes the economics of the
deal in a tremendous way. And I would ask you to consider
either grandfathering in those deals that are in--haven't yet
closed or may be closing, and the effects on those particular
deals.
So I turn it over to you, sir.
Secretary Lew. Congressman, the principal objective of the
rule is to try to shut down inversions and to shut down the use
of kind of blatant tax-avoidance devices.
There were a number of issues raised in the preamble to the
regulation, the draft regulation, saying we know that we took a
kind of simple approach, that is going to raise concerns, we
would like to get comment on each of the issues that might not
be central to the core purpose.
Not surprisingly, we got a lot of comments. The comments
kind of circle around a half a dozen issues. We have been
working on each of those issues to try to come up with policy
solutions that address what might be peripheral or unintended
impacts, protecting the core objective of the rule.
We are making very good progress. I think that the business
community feels that we have listened to the concerns raised.
That is certainly what I am hearing. We have listened to the
members of the tax-writing committees of Congress and many
other Members of Congress, and we are working to try and
finalize the rule.
Critics of the rule quickly asked us to add enough time to
the comment period so that it would be impossible to do a final
rule. And we did not want to do that. We want to do a good
rule. We will only do a good rule. So if we don't finish with a
good rule, we won't do it. But I think we have time to do a
good rule.
Mr. Perlmutter. And I think you do too, and I appreciate
the fact that you have been taking comments from folks. I guess
I want you to hear again particularly those instances where
there is this lookback of 3 years or 36 months, there is the
potential for a deal that was--and these are big and
complicated deals--that you take into consideration the fact
that they were underway as this regulation came into play. So
please look towards some grandfathering on this.
Secretary Lew. And thanks for your comments at the
beginning of your remarks.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentleman from Indiana, Mr.
Stutzman.
Mr. Stutzman. Thank you, Mr. Chairman.
And thank you, Mr. Lew. It is good to see you again, and I
appreciate your time here.
I would like to talk about the situation at Wells Fargo
Bank. I was looking at an article that you have a couple of
quotes, and I would like to read them. It says that after the
Senate hearing the other day, that Senator Robert Menendez of
New Jersey had said they will hold a hearing on the bank's
aggressive sales tactics next week.
``The magnitude of this situation warrants thorough and
comprehensive review,'' the committee members said in a letter
on Monday. And now, Treasury Secretary Jack Lew is adding his
voice to the chorus of criticism.
``The pattern of behavior that we have seen here is
something that needs to stop. It is not acceptable to do things
that are designed to increase either an individual or firm's
bottom line by deceiving customers or passing on charges that
are either invisible or they don't know about.
``This is a wake-up call,'' he continued. ``It should
remind all of us, and firms, that culture and competition make
a difference. How you reward people, how you motivate people,
what values you hold people to matter.''
You said that, correct?
Secretary Lew. I think a couple words were misquoted there,
but yes.
Mr. Stutzman. Well, looking at the timeline--and I will
talk about the CFPB. I don't think the CFPB is serving the
American people. This is case number one, proof number one. You
look at the timeline, that we know that wrongful termination
lawsuits were filed against Wells Fargo by former employees
alleging fraudulent accounts back in 2009. Wells Fargo started
seeing a CFPB presence in the Wells Fargo offices in 2011,
early 2012. Is that correct?
Secretary Lew. Congressman, I can't comment on a specific
regulatory matter. I don't have visibility into all of the
details, into any of the internal details of regulatory
actions.
Mr. Stutzman. Okay. Then, in mid-2013, CFPB apparently
first hears of the problems at Wells Fargo through
whistleblower tips.
The point that I am trying to make to you is CFPB is not
doing its job.
Secretary Lew. I don't agree with that, Congressman.
Mr. Stutzman. When did you know about the situation at
Wells Fargo?
Secretary Lew. Congressman, I was not aware of the
situation in the depth, the scope of it, until the final
action. Obviously, there had been some news coverage, but the
full magnitude of it was a matter that regulators were looking
at. I think but for the CFPB, the penalties would not have been
in place.
Mr. Stutzman. That is true, but the greater penalty to
Wells Fargo is going to come from their customers. I am a Wells
Fargo customer, and I am mad. I am upset about it. And I am mad
at them, but I am also mad at the CFPB, I am mad at the
government, because 5,300 people were fired. This is not just a
small scam.
Secretary Lew. Congressman, if you are proposing increasing
CFPB resources so they can have more people watching, I would
be happy to work with you.
Mr. Stutzman. I knew you would say that, because that is
always the answer from a failed agency, is give us more
funding, give us more so we can go in and find this.
They were in Wells Fargo as early as 2011, 2012, and
approximately 939 employees were fired for improper sales
practices in 2011. Another 1,000 in 2012. Another 1,250 in
2013. And then CFPB, who has been there for almost 2 years,
first hears about it through whistleblower tips. What were they
doing?
Secretary Lew. Congressman, I really can't comment on what
the regulatory actions--I just don't--they properly doing that
independently.
What I can tell you is for a brand new organization, the
CFPB has done an enormous amount of good work to make sure that
the American consumer, when they get a mortgage, can understand
what they are getting, to make sure that banks cannot put in
place the kinds of provisions that led to the subprime crisis
in 2008. And they have a cop on the beat roll as well, and I
think it is a good thing they were there to levy a penalty
against this behavior.
Mr. Stutzman. I don't see how it could take this long--
5,300 people were talking somewhere. Somebody had to know
something. And I don't know how you didn't know about it. When
did you first hear about it?
Secretary Lew. Congressman, I don't recall when I first
heard about it, but I just told you the scope of it was
obviously quite dramatic in the final regulatory action.
Mr. Stutzman. Well, I tell you, the American people don't
trust Washington, and now this has happened. This was supposed
to prevent big situations like this happening.
Secretary Lew. Let's agree on what we can agree on. We
should have tough regulators who are watching to see that
things that hurt consumers get stopped and don't happen.
Mr. Stutzman. Then we should fire--
Secretary Lew. Let's work together on that.
Mr. Stutzman. Let's fire a bunch of CFPB regulators--
Secretary Lew. I think you are going in a place that I
wouldn't go. That is not fair.
Mr. Stutzman. We are firing them at Wells Fargo.
Secretary Lew. We can continue this conversation.
Mr. Stutzman. Thank you, Mr. Chairman.
Chairman Hensarling. The time of the gentleman has expired.
The Chair now recognizes the gentlelady from Utah, Mrs.
Love.
Mrs. Love. Thank you.
Secretary Lew, thank you for being here. We are getting
close to the final moments and you get to head out.
But I ran across an analysis that was done by the
Corporation for Enterprise Development and the Institute for
Policy Studies, and the analysis stated that it would take 228
years for Black families to amass wealth of White families in
the United States. Is that something that the Administration is
concerned about?
Secretary Lew. Congresswoman, I am not familiar with that
analysis, but we are very, very concerned about the differences
in asset accumulation and income-earning capability.
Mrs. Love. It was really interesting because in your
opening statement it almost sounded like you thought that we
were doing okay and that everything was--
Secretary Lew. We are doing a lot better, but we have
consistently said that the benefits of growth are not being
experienced as broadly as they should be and the difference in
terms of the impact of the housing crisis on the only asset
that a lot of African American families had, their home, was
disproportionate. So there is still a lot of work to do.
Mrs. Love. It also states that it is going in a different
direction. When we look at all of the industries, we just
talked about the CFPB, we talked about some of these other
agencies, that has made it a lot more difficult for Black
families to get ahead.
What we are concerned about, and what I see often, is that
most--a lot of the time--the majority of the time, these are
agencies that actually hurt the people that they vowed to
protect. And I was wondering if you were looking into some of
these policies and if you could see the same things that aren't
just my opinions, but opinions of people on both sides.
Secretary Lew. We have done quite a number of things to
look at financial inclusion, access to the financial system,
access to credit, to actively promote more inclusive practices,
both in the private sector and in terms of things that we can
do.
I will give you an example. When we have summer jobs, we
are promoting that summer job programs are linked to opening a
bank account.
Mrs. Love. Are you actually looking at the current policies
that actually are hurting American families, especially the
poorest among us, and seeing if there is any way that we can
correct some of those policies? That is what I am asking. I am
not asking you to do more. I am actually asking if you are
seeing any areas where we can undo some of the damage that has
been done.
Secretary Lew. I don't agree necessarily with what the
source of the damage is, but I am certainly agreeing with you
that the result is unacceptable.
Mrs. Love. I know I have very little time. I just wanted to
get your opinion on that.
Secretary Lew. It is an interesting subject I would love to
spend more time on. It is one of the central topics we have to
make progress on as a country.
Mrs. Love. In the next few days my colleagues and I on the
Subcommittee for Monetary Policy and Trade are scheduled to
have a hearing to examine the implications of the Financial
Stability Board for U.S. growth and competitiveness. Since you
are here today, I wanted to take an opportunity to ask you just
a few questions about the FSB.
As you are aware, many of us remain concerned about the
extent to which U.S. regulators defer to international bodies
like the FSB when it comes to promulgation of regulations that
impact the United States institutions and the United States
economy.
So another international organization similar to the FSB is
the Basel Committee on Bank Supervision. The group is currently
considering changes to the regulatory framework known as Basel
III. So, as reported last month, European members of the Basel
Committee are apparently pushing back against the proposed
changes to how Basel III framework assesses credit,
operational, market risks, with some European members
reportedly threatening to reject the proposal.
It seems that the European regulators are willing to defend
their rules, their institutions, in such organizations. Why are
the United States regulators by contrast so willing to defer to
the agenda of the FSB?
Secretary Lew. I don't think that is an accurate
description of how U.S. regulators participate. We have used
our involvement in the FSB, in the Basel Committee, and all of
the international bodies to drive an agenda of increasing the
quality of regulation and making it closer to the United
States.
Mrs. Love. Okay. So can you give me a single example in
which you or your Treasury colleagues have objected or resisted
an FSB initiative?
Secretary Lew. The FSB only makes decisions by consensus,
so it doesn't get to a decision if it is not a consensus. We
drive that process with our views.
Mrs. Love. So you have never objected to any--
Secretary Lew. No, no, I didn't say--
Mrs. Love. Can you give me some sort of example?
Secretary Lew. I have 10 seconds left. We are happy to get
back to you in writing.
Mrs. Love. Okay. I yield back.
Chairman Hensarling. The gentlelady yields back.
There are no other Members in the queue, so 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.
We would ask, Mr. Secretary, that you respond as promptly
as you are able.
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 12:54 p.m., the hearing was adjourned.]
A P P E N D I X
September 22, 2016
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