[Senate Hearing 110-1015] [From the U.S. Government Publishing Office] S. Hrg. 110-1015 OVERSIGHT OF THE EMERGENCY ECONOMIC STABILIZATION ACT: EXAMINING FINANCIAL INSTITUTION USE OF FUNDING UNDER THE CAPITAL PURCHASE PROGRAM ======================================================================= HEARING before the COMMITTEE ON BANKING,HOUSING,AND URBAN AFFAIRS UNITED STATES SENATE ONE HUNDRED TENTH CONGRESS SECOND SESSION ON THE FINANCIAL INSTITUTIONS USE OF FUNDING UNDER THE CAPITAL PURCHASE PROGRAM __________ THURSDAY, NOVEMBER 13, 2008 __________ Printed for the use of the Committee on Banking, Housing, and Urban Affairs Available at: http: //www.access.gpo.gov /congress /senate / senate05sh.html U.S. GOVERNMENT PRINTING OFFICE 50-417 WASHINGTON : 2010 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS CHRISTOPHER J. DODD, Connecticut, Chairman TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama JACK REED, Rhode Island ROBERT F. BENNETT, Utah CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming THOMAS R. CARPER, Delaware CHUCK HAGEL, Nebraska ROBERT MENENDEZ, New Jersey JIM BUNNING, Kentucky DANIEL K. AKAKA, Hawaii MIKE CRAPO, Idaho SHERROD BROWN, Ohio ELIZABETH DOLE, North Carolina ROBERT P. CASEY, Pennsylvania MEL MARTINEZ, Florida JON TESTER, Montana BOB CORKER, Tennessee Shawn Maher, Staff Director William D. Duhnke, Republican Staff Director and Counsel Amy S. Friend, Chief Counsel Jonathan Miller, Professional Staff Jennifer Fogel-Bublick, Counsel Dean V. Shahinian, Counsel Aaron D. Klein, Economist Lynsey Graham Rea, Counsel Julie Y. Chon, International Economic Policy Adviser David Stoopler, Professional Staff Member Laura Swanson, Professional Staff Member Jayme Roth, Professional Staff Member Deborah Katz, OCC Detailee Drew Colbert, Legislative Assistant Lisa Frumin, Legislative Assistant Mark Powden, Legislative Assistant Nathan Steinwald, Legislative Assistant Daniel Schneiderman, Legislative Assistant Gregg A. Richard, Republican Professional Staff Member Jennifer C. Gallagher, Republican Professional Staff Member Dawn Ratliff, Chief Clerk Devin Hartley, Hearing Clerk Shelvin Simmons, IT Director Jim Crowell, Editor C O N T E N T S ---------- THURSDAY, NOVEMBER 13, 2008 Page Opening statement of Chairman Dodd............................... 1 Opening statements, comments, or prepared statements of: Senator Crapo................................................ 4 Senator Johnson.............................................. 6 Senator Martinez............................................. 7 Senator Casey................................................ 8 Senator Brown................................................ 9 Senator Schumer.............................................. 10 Senator Bayh................................................. 13 WITNESSES Martin Eakes, Chief Executive Officer, Center for Responsible Lending........................................................ 14 Prepared statement........................................... 59 Barry L. Zubrow, Executive Vice President, Chief Risk Officer, JPMorgan Chase................................................. 16 Prepared statement........................................... 76 Response to written questions of: Senator Schumer.......................................... 115 Senator Casey............................................ 117 Gregory Palm, Executive Vice President and General Counsel, The Goldman Sachs Group, Inc....................................... 18 Prepared statement........................................... 80 Response to written questions of: Senator Schumer.......................................... 129 Senator Casey............................................ 129 Susan M. Wachter, Worley Professor of Financial Management, Wharton School of Business, University of Pennsylvania......... 21 Prepared statement........................................... 86 Response to written questions of: Senator Schumer.......................................... 137 Anne Finucane, Global Corporate Affairs Executive, Bank of America........................................................ 22 Prepared statement........................................... 94 Jon Campbell, Executive Vice President, Chief Executive Officer of the Minnesota Region, Wells Fargo Bank...................... 24 Prepared statement........................................... 103 Response to written questions of: Senator Schumer.......................................... 138 Senator Casey............................................ 140 Nancy M. Zirkin, Executive Vice President, Leadership Conference on Civil Rights................................................ 26 Prepared statement........................................... 108 Response to written questions of: Senator Schumer.......................................... 142 OVERSIGHT OF THE EMERGENCY ECONOMIC STABILIZATION ACT: EXAMINING FINANCIAL INSTITUTION USE OF FUNDING UNDER THE CAPITAL PURCHASE PROGRAM ---------- THURSDAY, NOVEMBER 13, 2008 U.S. Senate, Committee on Banking, Housing, and Urban Affairs, Washington, DC. The Committee met at 10:05 a.m., in room SD-538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the Committee) presiding. OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD Chairman Dodd. The Committee will come to order. Let me thank our witnesses in advance of their participation in this morning's hearing, and as is the normal practice, I will begin with a brief opening statement. I will then turn to--I believe Senator Crapo is going to be making an opening statement, and then to my colleagues who are here for any comments they may have as well on the subject matter of today's hearing, or any other matter related to the issue before us. This hearing is the third hearing we have had in as many weeks on the oversight of the economic stabilization act that was adopted in the waning days of this Congress, and we did not have a hearing during the election week, but we have had oversight hearings every other week during that period of time on a variety of subject matters. And I fully recognized at the time that because of the election cycle, not all of my colleagues could be here for those hearings, but I appreciate very much those who were able to attend and participate, as well as the witnesses who came before us. So today is our fourth hearing, and we will continue, by the way, through the month of November, into December if necessary, to follow up. Obviously, this matter requires our ongoing attention, as all in this room certainly fully understand. And so I would just advise my colleagues to fully expect a very active Committee during these weeks, as well as, obviously, beginning in January, I presume even before the Inauguration on the 20th, to have an active period of time, whether it is confirmation hearings or continued oversight of the subject matter that is, of course, our financial situation in the country. Today's hearing is entitled ``Examining the Financial Institution's Use of Funding under the Capital Purchase Program,'' and so I welcome all who are here. Today the Committee continues its oversight of the implementation of the Emergency Economic Stabilization Act of 2008, known as EESA. Three weeks ago, we heard from the administration witnesses about what steps they were taking to implement this important legislation. Today we hear from four of our largest firms that have received assistance pursuant to that law. We are also joined by three very distinguished witnesses who will share their views on the effectiveness of recent actions by lenders and regulators and on what additional steps would be appropriate in order to help stabilize and strengthen our economy. Forty-one days ago, President Bush signed into law the $700 billion EESA bill. Ten days later, on October 13th, the Secretary of the Treasury announced that nine of the largest financial institutions in our Nation, including the four who are with us today, would receive a total of $125 billion of EESA funds in the form of direct equity investments by the Treasury Department. These investments of taxpayer dollars are not the only taxpayer-backed benefits that have been made available to these and other financial institutions. On the contrary, they amount to just a fraction of the approximately $5 trillion taxpayer dollars that have been put at risk in recent weeks and months for the benefit of our Nation's financial institutions. And I want to enumerate those because it is the subject matter of the hearing today to understand what the expectation is coming back as a result of those kinds of commitments. Those $5 trillion have been committed in several forms, and let me enumerate them for you: one, the guarantee of all non- interest-bearing deposit accounts at federally insured banks and thrifts; the increase in deposit insurance for interest- bearing accounts to $250,000 per account; the guarantee of senior unsecured bank debt for a period of 3 years, which financial institutions may opt out of; the decision to place Fannie Mae and Freddie Mac, whose mortgage financing is used by virtually every home lender in the country, into conservatorship and provide them with a $200 billion Federal backstop; the guarantee of hundreds of billions of dollars in money market funds; the decision by the Treasury to reverse over two decades of tax law to allow companies, including financial institutions and banks, to write off their taxes the losses of companies that they acquire; the guarantee of major segments of the commercial paper market; and, last, the creation by the Federal Reserve of numerous facilities and special purpose vehicles for bank holding companies, primary dealers, and commercial firms so that they can find sources of reliable, affordable financing for their business activities. The Fed alone has committed $1 trillion in tax dollars so far to the recovery effort. By any measure, these actions amount to an extraordinary commitment of public resources. On some level, all of us, including members of the public, expect that this extraordinary commitment befits the extraordinary financial crisis now facing our Nation. It is an unprecedented sum for these unprecedented economic times. It is no secret that some who have received funds under EESA, including some of the institutions represented here this morning, did not ask for this funding. Nevertheless, they accepted it. Indeed, given the irrationality of the markets that seemed to target and take down one renowned firm after another, these public investments serve as a seal of approval. That explains why so many other firms are quickly lining up for their capital injections. Given that fact, it is reasonable, I think, for us to ask, now that they have the money that they have received, what are they going to do with these resources. What is their responsibility to the citizens of our country who are making enormous sacrifices to support the financial sector and the economy as a whole? The acceptance of public funding carries with it a public obligation, in my view. One cannot benefit from taxpayer support in all of its many forms and assume that one has no duty to serve that same taxpayer. The people of this great country of ours are generous and understanding, but they are entitled, in my view, to expect that those who benefit from their sacrifices will act with appropriate restraints and purpose. In my view, lenders who enjoy benefits conferred by taxpayers owe those same taxpayers consideration that includes the following: First, that they preserve homeownership. This Committee has said this over and over and over again, beginning with the very first hearing almost 2 years ago, over and over again. In fact, one of our witnesses here today was a witness 2 years ago before this Committee and predicted some 2 million foreclosures. It now seems quaint, that number. And yet at the time, it was suggested that somehow he was exaggerating and engaging in hyperbole. We now know the numbers this morning indicate how bad that situation is, and I am going to continue on this. It is still confounding to me why the Secretary of the Treasury and others refuse to understand this is the heart of the problem. And until we address this, this problem is not going to go away. So the first issue is preservation of homeownership. The foreclosure crisis is the root cause of the larger financial crisis, and the root of the foreclosure crisis, of course, was bad lending practices in which many of the well-known lending institutions engaged. Until we solve the foreclosure problem, we will not have any hope of solving the larger economic issues. Now, I appreciate the efforts that numerous lenders have started to make in this area, including some who are here today, and I appreciate that very much. But more, much more, must be done on a lender-by-lender as well as on an industry- wide basis to address the foreclosure crisis. Even lenders who have modified a relatively large number of loans are doing so in a manner whereby many of those loans default or redefault. That does not seem to be good for anyone, borrowers or lenders. Now is the time to utilize Hope for Homeowners and other initiatives designed to truly preserve homeownership and stabilize the economy. Second, lenders who receive public funds should use those funds to lend. Many are failing to do that. CEOs have been directly quoted as saying they intend to use public dollars to acquire other financial firms and widen their capital cushion. Let me say as clearly as I can this morning, hoarding capital and acquiring healthy banks are not, I repeat not, reasons why Congress authorized $700 billion in emergency funding. The core purpose of this law and the purpose of virtually every other action taken during this crisis is to get lenders back into the business of lending. Credit is the lifeblood of the economy, and it is absolutely essential to businesses and consumers. Lenders have a duty to use these funds, in my view, to make affordable loans to creditworthy borrowers on reasonable terms. If they do not, then in my view they are acting outside the clear intent of the statute and should reform their actions immediately. Third, and last, lenders who are eligible for EESA funding and for other items on the smorgasbord of Federal assistance to financial firms would do well to examine their executive compensation policies. EESA sets forth clear, if modest, I might add, restrictions on executive compensation for companies that receive financial assistance under this act. I would suggest that these restrictions serve as a beginning, not an end, to the restraint firms should show in compensating their most highly paid employees. Our Nation clearly is in a crisis. We all know this. We are at war in two distance countries. Our financial markets remain uncomfortably close to the precipice of collapse. Working Americans have been forced to cut back in their personal lives, even as they have been asked to shoulder the enormous burden of propping up the financial sector. At this time of austerity and apprehension, it would be regrettable if some carried on as if they do not owe a duty of restraint and modesty to those countless Americans whose sacrifice helps make your viability and prosperity possible of national economic peril. For those tempted to conduct business as usual with respect to their compensation policies, I would simply ask: Where would your company and your industry be today without taxpayer-backed deposit insurance, without taxpayer-backed guarantees of your bank debt, without taxpayer-backed special lending facilities at the Federal Reserve, and without all of the other special benefits that your industry is receiving courtesy of the American taxpayer? If you believe that you would be no worse off than you are today, then I invite you to return to the Treasury the billions of dollars in taxpayer investments, guarantees, and discounts that you currently receive. And I wish you well as you try to make it on your own. Until that happens, I think I speak for many Members of this Committee and the Senate in saying that we want to see more progress, and your friends in the financial sector, more progress in foreclosure mitigation and affordable lending and in curbing excessive compensation. And if that progress is not forthcoming, then we are prepared to legislate--now if possible, but next year if necessary. With that, let me turn to Senator Crapo for any opening comments he may want to make. STATEMENT OF SENATOR MIKE CRAPO Senator Crapo. Thank you very much, Mr. Chairman, and, again, I appreciate the attention you have given to the need for strong and continuous oversight by this Committee after now seeing the extreme and serious repercussions throughout every aspect of our economy as a result of the credit crisis. According to one study, for every dollar of net losses on loans and securities, there is a multiplier of 10 in the reduction of credit. If we use the most recent number of $1 trillion in writedowns and credit losses and take into consideration the fact that the banks have raised $350 billion in new capital, there would be a $650 billion net loss and, using that formula, a $6.5 trillion loss in credit available in the market. I am not sure whether these are the right numbers or whether we actually know what they are or what the deleveraging is. But it is clear that we are facing a significant credit loss, and it has the potential to become even worse. Secretary Paulson's announcement that Treasury is not planning to buy toxic assets and that there are more effective ways to use the taxpayer dollars that have been provided provides a perfect opportunity to assess the results of the rescue package and to consider other directional changes. As you know, Mr. Chairman, I was not one of those who supported the notion of purchasing these toxic assets and have been very concerned that not only was the taxpayer not adequately protected, but that Treasury's proposal to buy toxic assets created an incentive for investors to stay on the sidelines and watch what the Government would do to then step in at a later date and either buy or purchase or finance purchases from the Government at a discount. I am very interested in what ways our witnesses believe these taxpayer dollars should be used and in what direction we should go. I have always believed that the direct utilization of our resources to increase liquidity with specific actions was a more appropriate direction that we should take, and I am hopeful to hear the witnesses' advice on those matters as well. In addition, Mr. Chairman, I hope that we can get into a strong discussion about some of the broad regulatory, structural reforms that we need to consider. Again, as you know, I have strongly argued for regulatory reform of our financial institutions, and this is an opportunity now for us to evaluate just exactly what is the regulatory structure our Nation should have. This week, the head of the CFTC said that he believes the United States should scrap the current outdated regulatory framework in favor of an objectives-based regulatory system consisting of three primary authorities: a new systemic risk regulator, a new market integrity regulator, and a new investor protection regulator. The risk regulator would police the financial system for hazards that could ratchet across companies to have broad economic consequences. The market integrity regulator would oversee safety and soundness of exchanges and the key financial institutions, effectively acting as a replacement for existing bank regulators and the SEC's function of regulating brokerages. The investor protection regulator would protect investors and business conduct across all firms. This is a similar idea to the outline provided in March by Secretary Henry Paulson of the Treasury, and I for one believe we should evaluate these kinds of proposals. I hope we also evaluate the potential for a single regulator, as has been done in other parts of the world where we have seen some significant effectiveness. But whatever our new regulatory structure is, I think it is important that we move from the outdated regulatory structure that we have now into one that still protects a strong, viable market, but allows for the consumer protections and the other protections against the systemic risks that we are seeing today that the Chairman has described. And I look forward to working with you closely as we evaluate this important part of our regulatory system. Thank you, Mr. Chairman. Chairman Dodd. I thank you, Senator, very much. Let me just say to you very quickly here, it is my intent as Chairman of the Committee that we are going to examine thoroughly the whole issue of modernization of financial regulations. And these suggestions you have made this morning, among others, will certainly be a part of the Committee's deliberation. It is maybe the most important issue for us in the long term for this Committee to address and make recommendations to the full Senate. Senator Crapo. Thank you, Mr. Chairman. As we do that, we have got to be sure we get it right, and I look forward to working with you. Chairman Dodd. Senator Johnson. Congratulations, by the way. Welcome back. STATEMENT OF SENATOR TIM JOHNSON Senator Johnson. Thank you, Mr. Chairman, for holding this hearing today. Since the passage of the bailout, which I voted against, this Committee has talked with the regulators regarding the implementation of the $700 billion package. While there are clearly some concerns about implementation, it is moving forward. I think it is equally important that this Committee talk with the institutions that are receiving this money, and I thank the witnesses for being here today. I have been concerned in past weeks with reports of continued executive compensation, expensive trips, and other benefits for CEOs of some companies receiving Government help, and reports that over one-half of Capital Purchase Program funds will be used to pay investor dividends. In a business environment where accountability has clearly been lacking and contributed to our current economic situation, I want assurances from financial organizations using Treasury funds that they will not misuse the taxpayers' money and that there will be punitive actions by Members and regulators if funds are misused. I have a problem with the funds being used for executive compensation and dividends. Both of these should be rewards for a job well done, and that is currently not the case for many in this industry. The intent of the bailout was to stabilize troubled financial institutions and help those businesses and individuals on Main Street affected by the credit freeze--a freeze resulting from poor decisions in the subprime mortgage market. Those making the decisions on how to spend the $700 billion and those receiving the funds must remember this intended use. Thank you, Mr. Chairman. Chairman Dodd. Thank you very much, Senator. Senator Martinez. STATEMENT OF SENATOR MEL MARTINEZ Senator Martinez. Mr. Chairman, thank you very much for calling this timely hearing, and thank you also for your very passionate remarks, and I tend to agree with much of what you had to say. Let me begin by just saying that over the last several days I have had the opportunity to travel around the State of Florida, and the news on the ground is really not good. Talking to bankers, real estate developers, and others in the home industry, it is clear to me that until we change the dynamics of what is occurring today where foreclosures continue to pile up, where we continue to see banks--and I am talking now about local banks, I am talking about community banks, I am talking about Main Street banks that are being told by regulators that even though they have performing loans that are on their books, because they are real estate loans, perhaps they should call them in. And all of a sudden we have now builders that are in the toughest of times but able to maintain that business going and keep people on the job, being told that their lines of credit are being canceled or not extended because the banks simply are being squeezed by regulators. This is a real problem. It also relates to the problem that they are facing at the level of not also being sure what is going to occur with TARP. You know, one set of rules was first put out. They were going to try to work under that set of rules, and now changes have been made to how the Treasury is handling the whole TARP matter. I think some clear guidelines so that bankers and others in the lending business know exactly what the rules of the game are going to be are essential, and I think the sooner we do that, the better that it is going to be. Florida has the third highest foreclosure rate in the Nation, and it is clear to me that Florida's entire economy-- and I think the Nation's--is impacted by the homeownership crisis. And in my view, until we stem the tide of foreclosures, until we begin to find effective ways of--and I commend some of the banks that are here today for what they are doing. Some of them have been at some events that we have tried to sponsor to help families stay in their homes. To keep those loans as performing loans and active loans, as opposed to foreclosures, is something I think we need to work toward. Until we get to the bottom of this, until we get to the foreclosure crisis, I do not think any of these other problems are going to ameliorate. I think this crisis began with homeownership problems, and I think it is going to end when we get a handle on that side of the equation. And I believe that your comments are precisely on point. I think we need to ask that as these infusions of capital are being made to the large financial banks, that capital then move downstream and is out there to help local businesses who cannot get credit, to help borrowers who would buy a house if they could just get a loan, and maybe not with 20 percent down but with something different than that. The bottom line is that until we turn the tide of where we are today in terms of the housing crisis and the foreclosure crisis, I believe that our entire economy continues to be at risk. And I look forward to hearing the testimony from the witnesses today. I very much support the efforts by FDIC Chairman Sheila Bair to put a more aggressive approach to loan modifications. I think she is on the right track, and I believe that it is time that we get this done and we get aggressive about it. We have done a number of things, the administration has done a number of things, all well intended and, I think, designed to do some good to the problem. But they have all been timid and they have been late. I think we need to get aggressive and get ahead of the problem once and for all. You are right. We heard a couple of years ago about 2 million foreclosures, and we wish that that was the end of the story. And if we do not get ahead of this, if downward spiraling prices of homes does not get stemmed, if we don't get a floor on the housing economy, I think we are going to see this problem only continue to escalate. Thank you. Chairman Dodd. Thank you for that, and, of course, the news this morning is, I think, 9,128 foreclosures on average per day in the month of October, up 5 percent from the month of September and up 25 percent from a year ago. So the problems persist. Senator Casey. STATEMENT OF SENATOR ROBERT P. CASEY Senator Casey. Mr. Chairman, thank you very much, again, for calling this hearing and keeping a steady vigilance of this problem. I just have a very short statement. I think that the witnesses here today know as well as anyone in this room knows, anyone in the country would know, that until we get serious about the foreclosure problem, we are not going to be able to tackle this, and no financial system or no financial institution is going to be in good shape until we do that. Unfortunately, the Treasury Department does not seem to have the same urgency with regard to preventing foreclosures and helping homeowners as it had to get the legislation passed and to help financial institutions. Of course, that is my opinion, but I think there is a broad consensus that they are not moving with the same intensity that they moved to get the legislation passed, the emergency economic stabilization legislation passed in October. This foreclosure problem is an ever bleeding wound on our economy, and until we get serious about it, we are not going to rescue our financial system and, therefore, stabilize our economy more broadly. I was just looking at the numbers today from across the country, but just in terms of Pennsylvania, the State that I represent, which is not in the top ten, fortunately for us, still, in October, the fifth straight month where Pennsylvania saw that more than 4,000 foreclosures filings, the largest--I should say the longest such stretch since at least 2005. So we have got much work to do on this issue, and I hope that the Treasury Department moves with much greater speed than they have demonstrated so far when it comes to preventing foreclosures. And that is why I think this hearing and so many like it are so important, Mr. Chairman. Thank you very much. Chairman Dodd. Thank you very much, Senator. Senator Brown. STATEMENT OF SENATOR SHERROD BROWN Senator Brown. Thank you, Mr. Chairman, for calling this morning's hearing and those hearings that have preceded it. Thank you for all the work you have done in the last several weeks with oversight and with what we need to do, discussing what we need to do in the future. I want to thank our witnesses. I commend the banks that have recently announced major efforts to modify loans in a broad and meaningful fashion. I appreciate the efforts of those on the panel who are advocating on behalf of our Nation's homeowners. Thank you for that. It has been a month and a half since Treasury Secretary Paulson and Federal Reserve Chairman Bernanke and their colleagues came before this Committee to ask for the authority to commit $700 billion for stabilizing our economy. Congress responded quickly to provide that authority, as we know, but as Secretary Paulson recognized in his testimony then, such an extraordinary grant of authority must be accompanied by oversight and by transparency. Mr. Chairman, you were accomplishing the former, the oversight. I am not convinced we have achieved the latter. Almost 3 weeks ago, the people of northeast Ohio learned that National City Bank, which had been in business since 1845, would be purchased by PNC. The taxpayer funds that would have been allocated to National City were instead allotted to PNC. PNC will be able to take advantage of the recent decision by the IRS to permit banks to write off the losses of banks that they acquire without limitation. I do not fault in any way PNC in this. Given the Government's decisions, its actions made sense. It gives every indication it will be a good corporate citizen, as National City has been in Cleveland. But while this was the first acquisition funded by the Emergency Economic Stabilization Act, it appears it will not be the last. Several banks have indicated they plan to use taxpayer capital for acquisitions. I have asked Treasury a number of questions regarding the planned acquisition of National City as well as the larger issue of using taxpayer funds to finance mergers and acquisitions. Several of my colleagues on this panel have done the same. I am not aware of any answers having yet been supplied. The American people are waiting for answers, too. Many of them were not thrilled with the idea of committing $700 billion in taxpayer money to some of the very companies that engineered this crisis. They know we face a credit crunch, but must reconcile that against companies that seem to be carrying on business as usual, as Senator Johnson said, with their lavish retreats and their healthy bonuses. I hope our witnesses today will provide some answers. We all understand, as Secretary Paulson discussed yesterday, the need to change tactics when one approach does not work or when, as Secretary Paulson said, circumstances change. But the purpose of the legislation we passed remains the same: to unfreeze the credit markets. If taxpayers' funds are not going to be used for lending, then we need to give serious thought to whether this effort still makes sense. The whole purpose of the economic rescue bill is to prevent a recession from becoming something worse, maybe not the Great Depression, but perhaps the Not So Great Depression. I mean no offense to our witnesses, but I did not vote to save Wall Street. I voted to save Main Street. I voted to save Main Street not just from the credit crunch that has engulfed the country for the past few months, but from the grinding pace of foreclosures that has gripped my State for several years. I do not see how any strategy to right the economy can succeed if it does not bolster banks' lending efforts and fix the damage from the evaporation of lending standards over the past several years. We have only solved half the problem if we get credit to a tool and die shop, but its employees are losing their homes. We are finding ourselves forced, in effect, to impose underwriting standards in the middle of a loan rather than at the outset. That inevitably is going to be messy. Some loans will still default. Some people just bought too much house or lost a job and simply cannot afford their mortgage or any mortgage. But we owe it to the millions of homeowners facing foreclosure to work with them. It is in the investor's interest to keep that person in the home rather than taking on the expense of foreclosure and selling it into today's market. And it is in the Government's interest to accept an imperfect approach as the better alternative to inaction. As Franklin Roosevelt said some 70 years ago, ``Better the occasional faults of a Government that lives in a spirit of charity than the consistent omissions of a Government frozen in the ice of its own indifference.'' We cannot be indifferent to the millions of Americans who face the prospect of losing their homes. We need to live in a spirit of charity while making very rational--very rational-- decisions on how to deploy the resources of the Federal Government to help both the struggling credit markets and the millions of people who depend on them. Thank you, Mr. Chairman. Chairman Dodd. Thank you very much, Senator, and before turning to Senator Schumer, you have made the point, and it deserves being remade. I read this morning about we are going to see the Treasury move now to consumer issues on credit cards and car loans, and that sounds good. But to put that ahead of homeownership to me is just, once again, denying the underlying problem that we face. Senator Schumer. STATEMENT OF SENATOR CHARLES E. SCHUMER Senator Schumer. Thank you, Mr. Chairman. I want to thank you for your diligence throughout this period of holding a whole series of hearings. It is vital that we make sure that the programs implemented by Treasury and the Federal Reserve are accomplishing the goals of restoring our financial system and our economy, and these hearings play a major role in that, so I thank you. Now, although we seem to have avoided the devastating effects of a full-fledged depression through the recent emergency interventions, particularly the Government backing interbank lending and business deposits at banks, we still face frozen credit markets for consumers and businesses as well as a recession that threatens to be too long and too painful for the entire country. I am glad that Secretary Paulson and the rest of the Treasury team have finally seen the light and decided to abandon asset purchases. It was the worst-kept secret in Washington that the asset purchases and the auctions Treasury proposed would not work and were likely to be scrapped. During the entire negotiations, from the days you and I, Mr. Chairman, and some of the others sat across the table, Treasury never figured out how to price the assets, whether by auction or by purchase. So it was just a matter of time until Secretary Paulson finally acknowledged that reality, and I am glad he did so we could move on. Now, many of my colleagues and I recognized that capital injections were clearly the correct approach from the beginning, and we gave Secretary Paulson the authority to do them without him asking for them. Now I suspect he is grateful we did, since it has become the most indispensable tool to restore confidence in our financial system, and I am glad we have moved away from auction and asset purchase and to capital injection. But the Capital Injection Program is not working either, not because there is a fundamental flaw in the concept of capital injection, but because of the way the program is structured. Because of the way it is structured, it is not meeting its goals of improving stability in the system and increasing lending the way it should. Treasury's stated purpose for the capital injections was to give banks a strong capital base so that they could increase lending into the economy for things like credit cards, auto loans, and small business loans. But in these uncertain and difficult times where nobody is sure of asset values, banks are inclined to hoard rather than deploy capital. They do not know how much lower the value of the assets they have will go, so they are hoarding the new capital in case they go lower. And in its zeal to include the largest banks and avoid any stigma in participating, Treasury failed to make the rules strict enough to overcome that inclination. And as a result, the Capital Injection Program is not producing very much new lending. Even if Treasury may not be able--now I intend to ask the witnesses here from the banks why they are not lending more with this additional capital. But even if Treasury cannot change the terms retroactively, any new capital injection must come with tougher requirements. Treasury should revise the terms for the next $125 billion, and if they come to us and ask us for the additional $350 billion, I intend to write those provisions--do my best with, I know, the support of many of my colleagues here, to put those provisions into the new terms of the law. Because consumers and businesses around the country depend on credit, if it is not available, the recession will be deeper and longer than it has to be. And yesterday Secretary Paulson said, well, let us focus on auto loans and credit card loans and small business loans. But he is ignoring the best way to get to do it, which is through the Capital Injection Program, but a Capital Injection Program with some stringency, with making sure that the institutions who take it--and I am against forcing institutions to take it; I think that was a bad idea-- but that those who take it, need it, should have to meet some requirements. It is particularly true for small businesses that need credit to expand and create jobs. I just got a call yesterday and saw up in Buffalo a company of 300 employees, been there for a long time, cannot get a loan. Good-paying jobs in Buffalo, they do not come easy, and they are ready to go under even though the firm has been in business for a long time. And I am sure that story can be repeated in every one of our States over and over and over again. Small businesses need credit to expand and create jobs. They also need it to keep their doors open to protect the jobs they have. Millions more jobs could be in jeopardy if we do not fix the lending markets, and fast. The Federal Reserve Quarterly Lending Report for the third quarter reported that 75 percent of banks have tightened credit on commercial and industrial loans to small firms during the third quarter. That was up from 65 percent in the second quarter and 50 percent in the first. So Senator Kerry and I have been working on adding some targeted small business items to the stimulus package, such as temporarily waiving all lender and borrower fees, and increasing the maximum loan amount, and I will be asking these questions in addition to encourage banks to lend to small business as larger banks. I also believe, as some have stated--I think you, Mr. Chairman, and I could not agree with you more--that tougher terms should include more stringent restrictions on executive compensation to ensure that there are not incentives for executives to take excessive risk and more help for struggling homeowners. Chairman Bair's proposal in combination with the change in bankruptcy laws--and I believe this will only work if we change the bankruptcy laws--is the clearest and cleanest solution. One more point, Mr. Chairman. It is critical that we ensure the Government's capital is not wasted in other ways. I am calling for any mergers completed with the help of TARP money first to be approved by Treasury. And this relates to my colleague from Ohio's point. While there are mergers that should take place to improve systemic stability and encourage lending, in a very weak institution a merger may be the right way to go. Giving away Government money so that it can be used to gobble up competitors in a way that will not have any impact on the overall stability of the financial sector should not be endorsed. Mr. Chairman, the Government's assistance has to include significant help from Main Street as well as Wall Street. Consumers and businesses must see improved access to credit as a result of the Government's actions, and struggling homeowners must see a renewed commitment from the Government to help them avoid foreclosure. I look forward to discussing these issues with the panel, and thank you for holding the hearing. Chairman Dodd. Thank you very much, Senator. We have been joined by Senator Bayh, and I do not want to spring it on you here just as you sit down, but would you like to make an opening comment, Senator? STATEMENT OF SENATOR EVAN BAYH Senator Bayh. No, Mr. Chairman, except to say that I share the concerns of our colleagues as I understand that they have been expressed with regard to executive compensation dividends and, most of all, getting the capital that has been provided into the marketplace to get the job done for which it was intended. So I look forward to hearing from our panelists, and thank you for this very, very timely hearing. Chairman Dodd. Thank you very much, Senator. Well, let me welcome our panelists, and I am going to introduce them briefly and then turn to them for any opening statements. Let me encourage you to try and keep your statements relatively brief, if you can, and then we take the full statements, obviously, as part of the record, and any supporting documentation or evidence that you think would be helpful for the Committee to have, we will consider it as accepted at this juncture. So I look forward to your full testimony. Let me, first of all, introduce Martin Eakes, and Martin is no stranger to this Committee. In fact, at the outset of my remarks, I pointed out that we had witnesses in February of 2007 to come and talk about the very issue which is the subject matter in part of today's hearing, and it was Martin Eakes who made the statements that caused some voices in this city and elsewhere to ridicule his predictions of 2 million foreclosures 2 years ago. So, Martin, we thank you for being with us. Martin is the CEO and founder of Self-Help, a community development lender, and CEO of the Center for Responsible Lending. He has received numerous awards, including the MacArthur Foundation Fellowship in 1996, and I want to note, as I did a minute ago, that in 2007, Martin Eakes testified before this Committee--at one of our first hearings, I might add, under my chairmanship--that there would be 2 million foreclosures, a number that was met with great skepticism by people in the industry, and others. I think everyone would agree today that we would be lucky if that were the number, as Senator Martinez pointed out, that we were actually dealing with. Next to Martin Eakes is Barry Zubrow, who is Executive Vice President and Chief Risk Officer for JPMorgan Chase, also serves as the Chairman of the New Jersey Schools Department Authority. I do not know which is the tougher of those two jobs. We thank you for being with us. Our next witness is Mr. Gregory Palm, Executive Vice President and General Counsel, The Goldman Sachs Group, and a member of its Management Committee. He joined Goldman Sachs as a partner in 1992. Previously, Mr. Palm served as law clerk to Justice Lewis Powell of the Supreme Court. We thank you, Mr. Palm, for being with us. Then we will hear from Susan Wachter, who is the Richard Worley Professor of Financial Management and a professor of real estate and finance at the Wharton School, University of Pennsylvania. She served as Assistant Secretary for Policy Development and Research at HUD from 1998 to 2001. The next witness is Anne Finucane. Anne is the Global Corporate Affairs Executive of Bank of America Corporation, also serves as the Northeast President, Executive Vice President of Corporate Communications, and a member of the CEO senior management team. She is someone I have known for a long time. Anne, thank you for being here with us today. We are then going to hear from Jon Campbell, who is the Chief Executive Officer of the Minnesota Region and Executive Vice President of Wells Fargo Bank. In his current position, he is responsible for the Wells Fargo Regional Banking Mergers and Acquisitions Program. And our final witness is Ms. Nancy Zirkin, well known to many of us here. She is Executive Vice President and Director of Public Policy for the Leadership Conference on Civil Rights. Ms. Zirkin joined the Leadership Conference in 2002, and under her leadership the organization has gone from a 10-person operation to four times as many who work on these issues, and, Nancy, we thank you for joining us this morning. With that, Martin Eakes, we welcome you to the Committee, and the floor is yours. STATEMENT OF MARTIN EAKES, CHIEF EXECUTIVE OFFICER, CENTER FOR RESPONSIBLE LENDING Mr. Eakes. Good morning, Chairman Dodd and Members of the Committee. Thank you for holding this hearing and for inviting me to testify. My organization Self-Help has made $5 billion of loans to 55,000 low-wealth families to purchase their first homes. I take it personally when people are losing those homes. I am also the CEO of the Center for Responsible Lending, a nonprofit, non-partisan research and policy organization dedicated to protecting homeownership. I have been at this work a long time, more than 10 years, trying to stop abusive loans and foreclosures. In 1998, I helped put together the coalition in North Carolina of banks, credit unions, realtors, home builders, seniors, churches, civil rights groups, housing groups, to put together an almost unanimous bill to stop abusive lending in North Carolina. I have testified at Federal Reserve and congressional hearings starting in 2000, and virtually one or two every year since. In 2007, I testified in front of this Committee saying that we had a silent storm of foreclosures that were 20 to 30 times the magnitude of Hurricane Katrina in its devastation. Unfortunately, that storm is no longer silent. So you will excuse me, I hope, for being a little bit impatient at this point. I have taken calls and sat with hundreds of parents facing foreclosure, and every single one of them are numb in their face and have tears in their eyes, and I have had to watch them lose their homes. I have sat in State legislative hearings where 90-year-old grandmothers walk to the podium with their walker, saying that they were looking in the want-ads to get a job so that they could prevent foreclosure of their home. They were not going to get a job. Let me just say flat out that voluntary efforts by lenders and servicers, while admirable, will not fix the problem of bad loans in this country and the problem of foreclosures. The voluntary efforts have been too little, too late at every single stage of the crisis. It is not that Hope Now, the voluntary association, intends to be ineffective, but there are structural barriers that make it so. Eighty percent of the foreclosures we see today are happening in private label securities. These are subprime loans and Alt-A that are in these complicated structured securitizations. Within those securitizations, the various tranches have what we call ``tranche warfare.'' When one party benefits, another one loses, and they threaten to sue the servicer if they continue modifying loans. Fifty percent of the subprime and Alt-A loans that are subject to foreclosure have piggyback second mortgages, which makes it almost impossible to structure and modify those loans, because you still have a party that is not part of the solution. Then, finally, one of the most pernicious barriers is that there is actually an incentive in the industry now to foreclose versus working out loans. Loan servicers who govern these securitizations get paid when they foreclose, but they do not get paid when they work out a loan. They just do not get paid. In the worst cases, the servicer gets paid twice when it forecloses. The world owes Bank of America, one of the best banks in America, a debt of gratitude for taking on the thankless task of cleaning up Countrywide's wasteland of unethical lending practices. But Bank of America has not had time to get rid of Countrywide's affiliates which prevent a conflict of interest in fees that are paid to its own affiliates every time there is a foreclosure. For most of Countrywide's foreclosures, they would order a credit report and an appraisal, purchased from an affiliate that they owned 100 percent every time there was a foreclosure. They would order a forced placed insurance for people who got behind on their payments, again, from a company 100 percent owned by Countrywide. And, finally, when there was a foreclosure necessary, the trustee that was hired was 100 percent owned by Countrywide. In my book, that is simply corrupt. I have been in meetings where the senior executives of the largest banks have talked about being arm-twisted into accepting the $25 billion of Government risk capital at a dividend rate of 5 percent. Taking the money was an act of patriotism, agreed to in order to protect the anonymity of those other banks, those anonymous ones that really were weak enough to actually need it. Let me just say on this panel we have four of the strongest, best managed financial institutions in the world, but not a single one of these banks would exist today if it were not for support and backing from the Federal Government. If there were not Federal deposit insurance and access to the Federal-backed liquidity windows at the Federal Reserve and Federal Home Loan Bank, not a single one of these banks would have survived from August 2007 until today. So there is a duty to fix these loans and make the steps, and there are two things we need to do right now. The first has been referenced already. Lift the ban on judicial loan modifications so that loans against a personal residence can get fixed if the lender is unwilling to do it voluntarily. Note that the recent bills that have been presented to fix this bankruptcy provision would not allow a modification of the home loan if the lender voluntarily modified it in advance. Lifting the ban on judicial modifications for residences is what solved the debt problem for farmers in the 1990s, and it will do the same thing here. No. 2, we should insist that Treasury invest up to $50 billion of the $700 billion, or 7 percent, in the plan proposed by Sheila Bair and the FDIC. It is the only plan that has been put forward thus far that will actually work to help the foreclosures on the ground. Many of you commented in your opening statements that we cannot solve this crisis until we go right to the source, which is foreclosures and the spillover effect. Every time a house gets foreclosed, it damages and destroys the neighbors all around it. The FDIC's plan is really the carrot, if bankruptcy is the stick, saying do the right thing or we will let a court do it. This is a carrot. What the plan says is let us induce loan servicers to make the loan modifications that have not been able to be done voluntarily. It would set a 31-percent housing- payment-to-income ratio as the threshold for what is an affordable modification. And in order to have the lenders reduce the interest rates on their loans to as low as 3 percent or extend the term or defer principal to get the loan to an affordable level, the Government would then take on 50 percent of the redefault losses if those loans that were modified eventually went to default. Loan servicers have told us that is their biggest concern, so it addresses the problem not only taking on 50 percent of the losses, there is still an incentive for the lenders to not throw losses at the Government because they would still have losses themselves. This program could reach 3 million households. If 2 million of them were successful and one-third redefaulted, the one- third would create $100,000 of loss per house, let's assume, times a million households, would be $100 billion of loss. The Government's 50-percent share of that would be $50 billion. It is a pretty paltry amount to invest to actually solve the problem that we have been facing. When are we going to insist that the taxpayer funds that were set up to solve this problem are actually spent on the people who are losing their homes, particularly in Florida and Arizona and Michigan, Ohio and California, places where the problem is utterly out of control? So I thank you for holding this hearing. I appreciate your work, and let me help you any way I can in putting some pressure on Treasury to do the right thing. Chairman Dodd. Thank you, Martin, very much. And I am sure we are going to--I know I am going to raise the question with the other panelists about the Sheila Bair proposal, and just get prepared as witnesses to anticipate that question that Mr. Eakes has raised and address it. Mr. Zubrow, thank you for being with us. You have to pull that microphone a little closer to you. STATEMENT OF BARRY L. ZUBROW, EXECUTIVE VICE PRESIDENT, CHIEF RISK OFFICER, JPMORGAN CHASE Mr. Zubrow. Thank you very much, Mr. Chairman. Chairman Dodd and Members of the Committee, thank you for including us in today's hearing on the Capital Purchase Program. I am pleased to represent JPMorgan Chase before this Committee. You have with you my detailed written testimony. Given the size of this panel, allow me to summarize a few key points. At JPMorgan Chase, we believe that the Government's investment in our firm comes with a responsibility to honor the goals of the Capital Purchase Program. To that end, we are using the CPP funds to expand the flow of credit into the U.S. economy and to modify the terms of hundreds of thousands of residential mortgages. At the same time, we continue to maintain prudent business practices and underwriting standards that have helped JPMorgan Chase to create and maintain a fortress balanced sheet. What does this mean in practice? Let me begin with our loan modification efforts, which we believe will help to strengthen the U.S. real estate markets and to keep people in their homes. Last week, we announced the significantly expanded loan modification program that we expect will help roughly 400,000 additional families to stay in their homes. Since early 2007, Chase has helped about 250 families avoid foreclosure, primarily by modifying their loans or their loan payments. Our new initiative is reaching out to additional customers of Chase, but also to Washington Mutual and the EMC unit of Bear Stearns, which are now part of the bank. As part of these efforts, we are opening 24 regional counseling centers to provide borrowers with face-to-face help in high delinquency areas. We are hiring over 300 new loan counselors, bringing our total to more than 2,500, so that homeowners can work with the same counselor from the start to the finish of the process. Proactively, we are reaching out to borrowers to offer pre- qualified modifications, such as interest rate reductions and principal forbearance. We seek to expand the range of financing alternatives which are available to our customers and to provide an independent review of each loan before moving it into the foreclosure process. Until all of these changes are fully implemented--we hope within the next 90 days--we have stopped any new foreclosure proceedings on our owner-occupied properties. The Capital Purchase Program's goal of providing capital to the U.S. economy is absolutely consistent with our own core business of supporting our customers through lending operations. Despite the challenges economic conditions, we continue to provide credit to our customers, whether they are consumers, small businesses, large corporations, not-for-profit organizations, or municipalities. Throughout the past year, during some of the most turbulent and difficult conditions many of us have ever witnessed, we have prided ourselves on being there for our clients, whether by making markets, committing capital to facilitate client business, investing in infrastructure and other projects, or making loans to creditworthy borrowers. In short, we have been open for business and we continue to be open for business. The CPP enhances our ability to lend to consumers and businesses large and small, and we are committed to honoring the goals of this program. The Committee has also asked us to address executive compensation practices, and I am pleased to do so. JPMorgan is in business for the long term, and our compensation philosophy reflects that. Simply stated, we believe that compensation should be based on the long-term performance of our firm and the individual's contribution to his or her business, and to provide important and appropriate safeguards for safe and sound behavior. We require our senior executives to retain at least 75 percent of all their equity awards that are granted to them so that their interests are aligned with the long-term interests of our shareholders. We offer no golden parachutes or special severance packages. Our top executives are subject to the exact same severance provisions as all of our employees. Even prior to the CPP, our firm had in place a bonus recoupment policy. We have obviously amended that to ensure full compliance with the terms of the CPP. We are not yet in a position to provide specific information about compensation for this year, given that the year is not complete. However, given the type of year we are experiencing and even though we have produced profitable results in each quarter to date, I have little doubt that employees and executives will make substantially less than they did last year. Let me also state very clearly that the CPP money will have no impact on the compensations that are taken for JPMorgan Chase employees or executives. The Government's investment in our firm came along with a special responsibility, as you have noted, Mr. Chairman, to America's taxpayers. We fully intend to honor that responsibility by promoting the goals of the CPP while also acting prudently and sensibly and in the interests of all of our shareholders to maintain a healthy and vibrant company. Many believe that irresponsible lending was one of the causes of the current distress in the financial markets. No one wants a repeat of those mistakes. Every day we seek to make capital available in a responsible, safe, and sustainable way to help get the economy back on track. John Pierpont Morgan once said that he wanted to do first- class business in a first-class way. That continues to be a guiding principle for us. It remains our goal and our commitment to our customers, to our shareholders, our employees, and to the taxpayers of this Nation. Thank you very much. Chairman Dodd. Thank you very much. Mr. Palm. STATEMENT OF GREGORY PALM, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, THE GOLDMAN SACHS GROUP, INC. Mr. Palm. Thank you. Chairman Dodd and Members of the Committee, on behalf of Goldman Sachs, I wish to thank you for inviting us to participate in today's hearing. Clearly, the last several months have been an extraordinary and unsettling time in financial markets and the economy generally. The actions taken by Congress, regulators, and the administration to address the market dislocation have been significant and decisive. We also recognize, however, that much remains to be done, and hard and thoughtful work will be required by all of us. We look forward to working with all concerned parties to work our way through the current crisis and to identify and address the failings that have led to this difficult situation. First, the Committee asked us to discuss our plans for the use of funds provided under the CPP. Goldman Sachs' principal businesses are investment banking, securities, and investment management. A number of our core businesses require the commitment of capital. In investment banking, offering strategic advice remains at the center of what we do. But clients frequently expect our advice to be accompanied by access to the capital necessary to make that advice actionable and practical. In short, our value to clients depends not only on the quality of our advice, but on our willingness to draw on both our expertise and balance sheet to help finance transactions or support a company's strategic direction. In addition, Goldman Sachs plays a very significant role as a market maker. As you know, market making is essential to the liquidity, efficiency, and stability of financial markets. In dislocated markets, the role we play as a market maker on behalf of our clients can be challenging, but it is even more important. Illiquid markets and the resulting lack of price discovery produce volatility. Having the ability to take the other side of a client's transaction and establish a price for an instrument contributes to the broad functioning of markets. With the $10 billion in capital received through the TARP Capital Purchase Program, Goldman Sachs has additional capacity to inject capital and liquidity, which will contribute not only to the stability of financial markets, but to their vitality and growth. In addition, we play an important role as a co-investor with our clients. Goldman Sachs has and will raise funds to inject capital across the corporate capital structure. These funds will extend needed capital to a variety of companies whose growth opportunities would otherwise be limited. For example, we recently established a $10.5 billion senior loan fund that makes loans to companies in need of capital. The fund invests both our own capital and that of our clients. This is significant because the normal market mechanisms to facilitate the extension of credit in many areas have broken down. In the next year, Goldman Sachs expects to launch additional funds and deploy capital to various parts of the market. You also have asked us to discuss the compensation in the context of executive compensation standards for financial institutions that participate in the Capital Purchase Program and how we align compensation with performance. First, perhaps an obvious point, since the year is not yet finished, no financial compensation decisions have been made at Goldman Sachs. We are only now in the process of reviewing performance and making recommendations for year-end compensation. The Compensation Committee of the Board of Directors, which is comprised solely of outside independent directors, determines the appropriate compensation for Goldman Sachs' executives. Second, we have complied and will comply with all executive compensation standards and restrictions imposed as a result of our participation in the CPP. The CPP executive compensation requirements will be a focus at our Board Compensation Committee meeting next week. I would also note that Goldman Sachs has never had special golden parachutes, employment contracts, or severance arrangements with its executive officers, and that we have always believed that the potential for increased compensation should never be an incentive for excessive risk taking. Third, and most importantly, I want to make clear that the firm's bonuses for 2008 will be paid only out of the firm's earnings for 2008, not its capital, and certainly will not increase as a result of having received TARP funds. Since we became a public company, we have had a clear and consistent compensation policy. We pay our people based on three factors: the performance of the individual, the performance of the business unit, and the performance of the firm taken as a whole. And that is a long-term perspective. Compensation for each employee is comprised of salary and bonus. Generally, the percentage of the discretionary bonus awarded in the form of equity increases significantly as an employee's total compensation increases. In fiscal year 2007, for example, the equity portion of our senior-most executives' compensation was 60 percent. All of the equity rewards are subject to future delivery and/or deferred exercise. This aligns employees with the long- term interests of our shareholders. In that vein, our CEO, CFO, COOs, and Vice Chairmen are required to retain at least 75 percent of the equity they have received as compensation since becoming a senior executive officer. Overall, we believe our compensation policy, which is consistently and rigorously applied no matter how good or bad the market environment, has produced a strong record of aligning performance with compensation. Since 2000, Goldman Sachs has exhibited a correlation between changes in net revenues and compensation of 98 percent. I will not dwell on our record over that period because I would like to make one final point. All that said, while we are on track to deliver positive results for year-end 2008 despite remarkably challenging markets and events, net revenue for the year will be lower than in recent years. As such, compensation also will be down very, very significantly this year across the firm, particularly at the senior levels. We get it. As to mortgage servicing, finally, on the subject of modifying home loans, I would emphasize that Goldman Sachs has never been a significant originator of residential mortgages. A Goldman Sachs affiliate, Litton Loan Servicing, services residential mortgage loans. We acquired Litton a little less than a year ago. As part of its business, Litton expends significant resources to identify homeowners who may be in danger of losing their homes and works with them on potential solutions, like loan modifications--whether it involves lowering the interest rate, changing the principal amount, or otherwise. These are all designed to allow the homeowners to stay in their homes. Over time Litton has been able to demonstrate to loan owners that loan modifications very often produce lower losses than foreclosures. In the last 12 months, for example, Litton has modified in excess of 41,000 mortgage loans totaling approximately $7.5 billion in principal balance. The number of employees dedicated to this effort over this period has increased 400 percent. Although modifications to existing mortgage loans are not a magic panacea that will cure all that ails the current housing market, we believe that thoughtful restructuring of existing arrangements to provide homeowners with payment relief is a positive step toward combating its decline. Mr. Chairman, we look forward to working with you and the Committee to accomplish the important tasks set out in the Emergency Economic Stabilization Act. I would be happy to answer any questions. Thank you. Chairman Dodd. Thank you, Mr. Palm, very, very much. Dr. Wachter, we thank you for being with us this morning. STATEMENT OF SUSAN M. WACHTER, WORLEY PROFESSOR OF FINANCIAL MANAGEMENT, WHARTON SCHOOL OF BUSINESS, UNIVERSITY OF PENNSYLVANIA Ms. Wachter. Thank you. Chairman Dodd and other distinguished Members of the Committee, it is my honor to be here today to provide my perspective on the ongoing mortgage crisis and how and why stabilizing the housing market is essential to stabilizing the broader U.S. economy. The ongoing crisis in our housing and financial markets derives from an expansion of credit through poorly underwritten and risky mortgage lending. Until the 1990s, such lending was insignificant. By 2006, almost half of mortgage originations took the form of risky lending. The unprecedented expansion of poorly underwritten credit induced a U.S. housing asset bubble of similarly unprecedented dimensions and a massive failure of these loans and to today's system breakdown. Today's economic downturn could become ever more severe due to the interaction of financial market stress with declines in housing prices and a worsening economy feeding back in an adverse loop. We have the potential for a true economic disaster. I do not believe we will solve our banking liquidity problems if the housing downturn continues, and the housing market decline shows no signs of abating. Moreover, despite bank recapitalization and rescue efforts, economically rational loan modifications that would help stabilize the market are not occurring. We must directly address the need for these loan modifications in order to halt the downward spiral in mortgage markets and the overall economy. It is critical to bring stability to the housing market. While today prices may not be far from fundamental levels, just as they overinflated going up, there is great danger for overcorrection on the downside. In our current situation, as prices fall, market dynamics give rise to further expectations of price decline, limiting demand, and supply actually increases due to increased foreclosures, causing prices to decline further. A deflationary environment with demand decreases due to expectations of further price decline was in part responsible for Japan's ``lost decade'' of the 1990s. We cannot rely on a price decrease floor at currently market-justified fundamental levels if we rely on market forces alone, even, it appears, if augmented by the interventions so far of the Federal Reserve and Treasury. In fact, home inventories are not declining, and up to half of the inventory of homes are being sold through foreclosures at fire-sale prices in many markets. The Case-Shiller Price Index reflects the massive deterioration of housing wealth so far. Since the peak in 2006, housing values have fallen over 20 percent. While another 5- to 10-percent fall could bring us to market-clearing levels, actual price declines may far exceed this. And as house prices decline, these declines undermine consumer confidence, decrease household wealth, and worsen the system-wide financial stress. While banks have been recapitalized through the Capital Purchase Program--and there is discussion of the use of this funding for acquisitions--as yet, there is little evidence that bank lending has expanded. In order for the overall economy to recover and for conditions not to worsen, prudent lending to creditworthy borrowers needs to occur. Without financing for everyday needs, for education, small business investment and health, American families are at risk. And today the U.S. economy and the global economy are depending on the stabilization of their financial well-being. Moreover, the plans that are already in place do not appear to be leading to the modification of loans at the scale necessary in order to assure a market turnaround at fundamental levels instead of a severe and ongoing overcorrection. Barriers to economically rational loan modifications include conflicting interests, poor incentives, and risks of litigation to modify loans, particularly to modify loans deriving from mortgage-servicing agreements. Given the freefall in housing markets and its implications for credit conditions and the overall economy, there is a need for policies to address these barriers today. It is both necessary and possible to take effective action now. While housing values may not be far from fundamental levels, as housing values continue to fall, resolving the problem will become increasingly difficult and costly. Thus, solutions that are now possible may not be available going forward. Without expeditiously and directly addressing the housing market mortgage crisis, the Nation is at risk. Thank you. Chairman Dodd. Thank you very much, Doctor. That is very worthwhile testimony. Ms. Finucane, welcome to the Committee, and I want to underscore the point that was made by Martin Eakes, the appreciation of what Bank of America did. I think it was a number like $8.4 billion or something dedicated to foreclosure mitigation. That has not gone unnoticed. We welcome you to the Committee. STATEMENT OF ANNE FINUCANE, GLOBAL CORPORATE AFFAIRS EXECUTIVE, BANK OF AMERICA Ms. Finucane. Thank you. Good morning, Chairman Dodd and Members of the Committee. At the outset, I would like to emphasize Bank of America's continued strength, stability, and commitment to serving local communities, even during these challenging times. Bank of America earned $5.8 billion in the first three quarters of this year, reinforcing our position as opposed to one of the most profitable financial services companies in the world. In recent months, Bank of America has taken three major steps that are contributing to the alleviation of the financial crisis faced by our Nation. First, at the encouragement of the Federal Government but with no Government assistance, Bank of America acquired Countrywide Financial Corporation at a time when the mortgage industry was being viewed with increasing alarm as a risk to the broader health of the national economy. Since that acquisition, Bank of America has announced providing relief for more than $100 billion in loans, enough over 3 years to keep up to 630,000 borrowers in their homes. Second, with the encouragement of the Federal Government but, again, with no Government assistance, in the midst of the impending failure of Lehman Brothers, Bank of America announced plans to acquire Merrill Lynch. Third, despite having completed our own capital-raising effort with no Government assistance, Bank of America agreed to participate in the TARP Capital Purchase Program. We agreed to participate in this program at the encouragement of the Treasury, and we do so in the belief that it is in the best interests of the national financial system. With regard to the Bank of America home loan modification program, we are intensely focused on helping borrowers stay in their homes. In the last 6 months, Bank of America has announced two major home retention programs that together will address the needs of up to 630,000 homeowners and $100 billion in current home loans. We have more than doubled the number of our home retention professionals in the last year to more than 5,600 individuals who are equipped to serve eligible borrowers with this new program, elements beginning on December 1. A foreclosure process will not be initiated nor will it be advanced for a customer likely to qualify until Bank of America has made a decision on a customer's eligibility. Modification options will include, among others, FHA refinancing under the Hope for Homeowners Program, interest rate reductions, and principal reductions. Now I would like to address more specifically our participation in the TARP program. Under the TARP program, we have received $15 billion from the Treasury in exchange for shares of preferred stock. This investment by Treasury is designed to be a profitable one for the Federal Government. With these capital levels, Bank of America is focused on serving the financial needs of our customers, so we would look at about a 9-percent Tier 1 capital ratio. So what are we doing? Well, by example, in the third quarter of this year, we have made more than $50 billion of mortgage loans and more than $6 billion of home equity loans. Further, business lending remains strong, and we have continued making loans to States and municipalities in a time of extraordinary uncertainty. While the fourth quarter results are not available until January, thus far this year our total commercial, large corporate, and Government commitments have increased by more than $33 billion, or 6 percent. The funding of new loan commitments this year has increased by 6 percent over the previous year. And, in addition, we have committed or reaffirmed nearly $23 billion of credit to State and local governments thus far in 2008. And with this enhanced capital, we are now actively engaged in the purchase of mortgage-backed securities contributing to the increased liquidity in the market, which was one of the original objectives of the TARP program. Finally, I would like to address the issue of executive compensation, which has been the subject of much discussion here today and in relation to the TARP program. Executive compensation at Bank of America will not be paid using the capital infusion received from Treasury last week. The Bank of America Board of Directors instead determines executive compensation on an annual basis based on the financial performance of our company, and as I stated previously, Bank of America has earned $5.8 billion in the first three quarters of this year. Nevertheless, as these earnings are reduced compared to previous years, this year's bonus compensation pool for senior managers at Bank of America is expected to be reduced by more than 50 percent. While final decisions on our compensation have not been completed by the board, executive compensation levels are not impacted nor will they be enhanced by last week's capital infusion from the Treasury. With that, I will conclude my testimony. Thank you, Senator Dodd, and Members of the Committee. Chairman Dodd. Thank you very much, Ms. Finucane. Mr. Campbell, thank you. Welcome to the Committee. STATEMENT OF JON CAMPBELL, EXECUTIVE VICE PRESIDENT, CHIEF EXECUTIVE OFFICER OF THE MINNESOTA REGION, WELLS FARGO BANK Mr. Campbell. Mr. Chairman and Members of the Committee, I am Jon Campbell. I am Executive Vice President of Wells Fargo's Regional Banking group. Thank you for allowing me to comment on Wells Fargo's participation in the Capital Purchase Program. Wells Fargo believes that our financial system is more important than any one individual company. We believe the Capital Purchase Program is a positive step toward stimulating the United States' economy. It is Wells Fargo's intention to use the CPP funds for additional lending and to facilitate appropriate home mortgage solutions. Wells Fargo continues to be one of the strongest and best capitalized banks in the world. The investment from the U.S. Government adds to our already strong balance sheet and will enable Wells Fargo to offer appropriately priced credit at a time when several sectors of the financial industry have shut down. Since mid-September when capital markets froze, Wells Fargo has led the industry in lending to existing and new creditworthy customers. During this time nonprofit organizations, hospitals, universities, municipalities, small businesses, farmers, and many others had nowhere to turn when their existing capital market channels vanished. We were there to provide credit so they could continue to offer the services that our communities depend upon. We are able to lend through these difficult times because of our emphasis on prudent and sound lending which includes understanding what our customers do and what their financing needs are. As demonstrated over the past several years, we are willing to give up market share if a product is not in the best interest of our customers. And simply put, those companies that didn't put the customer at the center of every decision they made are no longer here today. We intend to expand lending in all of our markets. As demand warrants, we will have more than adequate capital to lend to creditworthy customers in an appropriate manner and, as required, will pay back the CPP investment with interest. Wells Fargo remains a strong lender in areas such as small business and agriculture. By volume, we are the No. 1 commercial real estate lender in this country. In fact, we grew commercial real estate loans 37 percent year to date in 2008. And our middle market commercial loans--made to Fortune 1500- sized companies across the country--are up 24 percent from this same time last year. As far as consumer lending is concerned, we are certainly open for business. Our consumer loan outstandings have increased almost 9 percent in the third quarter of 2008 in comparison to the same quarter in the previous year. The Committee has asked whether CPP funds would be spent on executive compensation. The answer is no. Wells Fargo does not need the Government investment to pay for bonuses or compensation. Wells Fargo's policy is to reward employees through recognition and pay based on their performance in providing superior service to our customers. That policy applies to every single employee, starting with our Chairman and our CEO. For example, the disclosures in our 2008 proxy statement show that the bonuses for all Wells Fargo named executive officers were reduced based on lower 2007 performance. Mr. Chairman, since the middle of 2007 when you convened your Housing Summit, Wells Fargo has implemented the principles you laid out by working with borrowers at each step of the mortgage crisis. With the changes in our economy and the continuing declines in property values across many parts of the country, even more people do need our help. As a number of new foreclosure relief programs require capital to implement, the availability of CPP funds will make it easier to successfully reach delinquent homeowners. This capital, leveraged with the announcement this week of a streamlined large-scale loan modification process that applies to loans serviced for Fannie Mae and Freddie Mac, will enable Wells Fargo to utilize a variety of programs quickly and also institutionalize an approach that servicers can rely on going forward. The strength of our franchise, earnings, and balance sheet positions us well to continue lending across all sectors and satisfying all of our customers' financial needs, which is in the spirit of the Capital Purchase Program. Mr. Chairman and Members of the Committee, thank you, and I look forward to your questions. Chairman Dodd. Thank you very much. Last, but not least, Ms. Zirkin. We thank you very much for being before the Committee. STATEMENT OF NANCY M. ZIRKIN, EXECUTIVE VICE PRESIDENT, LEADERSHIP CONFERENCE ON CIVIL RIGHTS Ms. Zirkin. Thank you, Senator Dodd and other Members of the Committee. Again, I am Nancy Zirkin, Executive Vice President of the Leadership Conference on Civil Rights, our Nation's oldest and largest civil and human rights coalition. Let me begin by saying why the foreclosure crisis is so important to LCCR. Homeownership has always been one of the most important goals of the civil rights movement. It is the way most Americans build wealth and improve their lives, and it is essential to stable communities. For decades, LCCR has worked to break down barriers to fair housing, as well as the barriers from redlining and predatory lending, to the credit that most people need to own a house. For these reasons, we have argued for a number of years that the modern mortgage system was terribly flawed, that countless irresponsible and abusive loans were being made, often in a discriminatory way, and that without better regulations things would not end well. Now, after years of denial, I think it is quite obvious that the mortgage crisis is definitely not contained. But to date--and despite the best efforts of you, Mr. Chairman, and others--the whole collective response, based on voluntary efforts, has not done much to actually turn the tide. At the same time, there are helpful ideas out there now such as the FDIC proposal and the efforts of Bank of America and others. However, LCCR remains convinced that the best way to quickly reduce foreclosures is to let desperate homeowners modify their loans in Chapter 13. It would give borrowers leverage to actually negotiate with servicers and give them a last resort when the negotiations do not work. It does not use public funds, and more importantly, it would quickly help other homeowners and our economy by keeping the value of the surrounding homes from being eroded, stopping a vicious cycle that can only lead to more foreclosures. We recognize that the bankruptcy relief has faced intensive opposition from industry, which is ironic to us given the number of lenders that have obtained bankruptcy relief themselves. Opponents say that allowing bankruptcy would make investors hesitant, limiting ``access to credit'' for underserved populations. Well, the fact is right now, because of the years of irresponsible lending, there is no access to credit for most of the people, anyway. We are glad that since your last hearing several banks and the GSEs have planned to drastically increase their loan modification programs, following what the FDIC is doing with IndyMac. We are all for voluntary efforts. Every home that is saved is a step in the right direction. However, industry efforts have not provided enough affordable, lasting solutions for the borrowers. This obviously has a lot to do with securitization and second mortgages. Until these obstacles can be overcome, industry efforts cannot be a substitute for actually helping homeowners directly. The stakes are simply too high because the credit drought will not be mitigated until foreclosures are controlled. While LCCR is disappointed that the bankruptcy relief that was blocked earlier this year, we are encouraged by some of the recent discussions with FDIC about a new mortgage guarantee program. As we understand it, the plan would give new incentives for loan servicers to reduce payments to 30 percent debt-to-income ratio in return for Government guarantees. If the plan can be implemented quickly, and just as importantly, if it is quickly used by the servicers, we believe it will be a great improvement over existing efforts, including Hope for Homeowners Act, moratorium, or even the existing IndyMac plan. It also aims directly at the cause of the economic crisis--foreclosures. So it is a wise investment, especially with the latest controversies over how Wall Street has been using our tax dollars. For all of these reasons, while we have a few reservations, we strongly believe that the FDIC plan is well worth a try, and it should be adopted as quickly as possible. Before I conclude, I would be remiss, especially because this is the 40th anniversary of the Fair Housing Act, if I did not note that any measure to implement the financial rescue law must be done in a way that is fully consistent with all applicable civil rights laws--something I discuss in greater detail in my written testimony. Again, Mr. Chairman, thank you for the opportunity of testifying, and I look forward to answering questions. Chairman Dodd. Thank you very, very much, Ms. Zirkin, and I appreciate your testimony and the testimony of all our witnesses. It has been very helpful this morning. I am going to have the clock on for 7 minutes, and we will try to keep to that, if we can. We have good participation here today, and I want to make sure everybody has a chance to raise some issues. Let me, if I can off the bat, focus my first question to the bank representatives here, and I include Goldman Sachs in that because I know you are in the business of becoming a bank. You are the fourth largest bank holding company, I believe, and so I am going to ask the question of you as well. Let me ask the three questions and then ask you to respond, if you can. One important tool used by the Federal Government to address the freeze in credit markets was the guarantee, as you are all aware, of senior unsecured bank debt for all maturities. This program covers all lending institutions for 30 days, after which any bank can opt out of the program. So my first question to you, I would like to ask whether any of you here at the table this morning have any plans to opt out of this program. Second, I would like to know from the panelists if their institutions have made use of any of these number of facilities that were created to help maintain liquidity, and since they were created including the commercial paper funding facility, as I have said, whether the panelists' intentions are to make use of these funds. And, third, for those of you whose institutions offer money market funds, has the Federal guarantee on those funds been helpful to keeping those funds in your institutions? Why don't we begin with you, Mr. Zubrow? Mr. Zubrow. Thank you very much, Mr. Chairman. With respect to your first question about the guarantee of senior bank debt and whether or not JPMorgan Chase is going to opt out of that program, we are still evaluating that and have not yet made a determination on that. Obviously, once we do, we are happy to come back to you and let you and your staff know how we have decided to handle that. With respect to the commercial paper funding facilities, we certainly think that those have been very helpful in the marketplace, and certainly we have been an active issuer of commercial paper, and many of our clients have been active issuers of commercial paper. And it is absolutely clear that those facilities have been very helpful in bringing back investors into that marketplace, and I think that has been a very helpful step forward. Then with respect to your third question with respect to the Federal guarantee program, you know, there again, you know, we think that that has been a helpful addition to liquidity in the marketplace, and we think that it is going to make a big difference for bringing investors back into the market. Chairman Dodd. And it has helped keep those funds in your own---- Mr. Zubrow. And it certainly helped keep funds in the money market funds. We have certainly seen a significant increase--we obviously saw a major increase in inflows into our funds, particularly our Treasury funds, with these different additional programs both for ourselves and across the industry. We have seen a shifting back into what are called the ``credit funds'' or the ``prime funds,'' which suggests, you know, greater liquidity going into the corporate sector. Chairman Dodd. So all of these issues have been very helpful to JPMorgan Chase? Mr. Zubrow. Correct. Chairman Dodd. Yes. Mr. Palm. Mr. Palm. With regard to your three questions, first, on the opt-out, we have no plan to opt out, but we are still evaluating the program. And as I understand it, certainly the final details of the program have not been announced, and comments have been provided. Second, the CP facilities and so on, again, I think those have been helpful broadly across markets and certainly for our clients. And, third, on the money market funds and so on, we believe that will ultimately be quite helpful. What we saw at our firm, which sounds similar to JPMorgan, was there was a great flow of monies out of some of our funds into other funds, i.e., the Fed-related funds, and now some of that money has flowed back. Chairman Dodd. Because of the guarantee. Mr. Palm. I think so, yes. So obviously, indirectly ultimately that will be of benefit to the credit markets and companies. Chairman Dodd. I agree with that as well, but the institution--Goldman Sachs has benefited clearly as a result of the Federal guarantee. Mr. Palm. Yes, we believe it is a benefit to the market. Chairman Dodd. Ms. Finucane. Ms. Finucane. I think we see it positively on all three fronts. Certainly the money market fund insurance has been a real positive. We have no plans to opt out. We do need some further guidance to fully understand that. And the same on the commercial paper, it is a real positive. Chairman Dodd. Well, thank you for that as well. Let me jump, if I can, I want to--I will exclude Mr. Eakes and Ms. Zirkin from the discussion--I am sorry. I apologize. Mr. Campbell from Wells Fargo. Mr. Campbell. It is OK, Mr. Chairman. I actually was not offended at all. Chairman Dodd. No, no, no. [Laughter]. Mr. Campbell. Quickly, as it relates to the senior debt guarantees, we are still in an evaluation phase, and so I am not in a position to answer that. But we would be happy to get back to you on that. As it relates to the commercial paper guarantee, it clearly made a very positive difference in the marketplace. There were numbers of companies who had depended upon that market for many years for liquidity that were frozen out. That market has---- Chairman Dodd. Including Wells Fargo? Mr. Campbell. To some extent, but actually, my answer is more from my perspective as a banker and looking at the customers we take care of. And I saw it more there. Since I am not part of our treasury group, I do not want to comment on what the effect was specifically on Wells. And as it relates to the money market fund guarantees, the only comment I would offer is that while it has been very helpful and it has clearly helped with outflows, there is a consideration we all need to be thoughtful of, and that is, what is the impact on core bank deposits where we have now created basically a similarity between the money market funds and deposits? And I just think we have to be careful and---- Chairman Dodd. That is a legitimate point. Mr. Campbell [continuing]. Consider that as we move forward. Chairman Dodd. But Wells Fargo has benefited itself from that guarantee is my point. Mr. Campbell. Yes. Chairman Dodd. Now, I will exclude Mr. Eakes and Ms. Zirkin because you have commented on the FDIC, the Sheila Bair proposal, and I appreciate your comments. I have certainly expressed myself at several hearings on that idea. But as we saw yesterday, Secretary Paulson-while it was dressed up in a way of continuing to look at it, the fact is he rejected it flat-out, in my view, and I think that is terribly regrettable, in my view, in light of the potential benefit here. But I would like to ask the other panelists to comment specifically on that proposal as to whether or not you think it has merit and whether or not your institution would be supportive of such a move. And I realize there are details to everything, so I am not expecting you to sign off on details. But the overall thrust, in light of the fact that the voluntary program, the very meeting we had here 2 years ago in this room in which I begged the institutions and they promised they would, setting up principles to do workouts, then it was the voluntary Hope for Homeowners, then it was the Hope for Homeowners Act we passed--and all of these measures, frankly, have not produced anywhere near the results we all had hoped they would. And I do not disagree, by the way, the bankruptcy provision. And if we got a chance next week, I may off that on the floor of the Senate as part of a package out here. Senator Durbin of Illinois deserves great credit for having raised this issue for a long time. I do not know how my colleagues feel about it, but we have a chance we may raise that one. But in light of that--I do not know whether that would work or not--this does not require action by the Congress to do what Sheila Bair has suggested. It takes cooperation from the Treasury to make this happen. So I would like to know from the other witnesses here how you react to that proposal. We will begin with you, Mr. Zubrow. Mr. Zubrow. Yes, Senator. JPMorgan Chase is certainly very supportive of the types of programs that Chairwoman Bair at the FDIC has proposed. We think that there is a lot of merit in some of the suggestions. As you said, there are a lot of very important details that need to be worked out, and we are certainly actively interested in engaging in discussions with her as well as with the Committee on those details. I do think that, you know, we certainly think that the efforts that we have also taken voluntarily on loan modifications are yielding results and are an important part of the effort. But certainly taking it further is very important. Chairman Dodd. One of my colleagues may raise the issue of, boy, this gets into a very--but I recall a lengthy debate we had here over the issue of contracts and trust arrangements when it comes to securitization. And this really does get esoteric, but at some point I hope we would get back to that discussion on securitization and whether or not the contracts or the trust arrangements pose the problem of new statutory authority. But I gather your answer is that basically you think the Sheila Bair idea has merit and should be pursued. Is that a fair analysis? Mr. Zubrow. That is correct, and we are certainly happy to also talk about the securitization point. Chairman Dodd. I appreciate that. Mr. Palm. Mr. Palm. As I indicated at the beginning, since we are not really a significant mortgage originator--I think our subsidiary is the 30th largest loan servicer--probably anything I have to say on this topic should be taken as from a level of being a novice at some level. But I would say two different things. One, I think I referred to our subsidiary, Litton---- Chairman Dodd. You did. Mr. Palm [continuing]. Which was a family business created back in 1988, and the current CEO who still runs it is the son of the original founder. They believe very strongly that loan modifications are a way to actually benefit the investor as well as the homeowner, because foreclosures really are not the most economically best thing to do. Having said all that, and, again, not being an expect in the program that has been announced--and as Mr. Zubrow has indicated, there are a lot of details--I think, you know, we are impressed by the fact that there is a program that looks as though it may be helpful and, indeed, be supplemental to some of the other actions and activities being taken. I cannot say that Goldman Sachs is, you know, standing here supporting it because it is just not--we are not not supporting it, either. It is just that we have looked at it. We would be happy to be involved in further commentary and happy to provide people to you since, as my colleague Mr. Litton, for example, I know is testifying tomorrow before one of the House committees, and he truly is the expert in this area. Chairman Dodd. I am sure Barney Frank will ask him the question, and you can tell him to get ready for it. Mr. Palm. Pardon me? Chairman Dodd. Tell him to get ready for Barney's question. Mr. Palm. Oh, OK. Thank you very much. Chairman Dodd. Yes, Ms. Wachter, Dr. Wachter. Ms. Wachter. Yes, obviously, I am speaking personally based on economic incentives. I do think that Sheila Bair's plan absolutely needs to be tried, and I must say I am puzzled by why it appears as though the Treasury has, in fact, rejected it. I do not quite understand. It seems to me that this will provide incentives, it will provide risk sharing, and it will at least move toward the resolution of our major problem, which is un-economic foreclosures, foreclosures that should not take place for the investor or for the borrower or for the neighborhood. That is not the entire solution, but I do think it needs to be tried. Again, the details matter and I am not completely familiar with the details. Chairman Dodd. Ms. Finucane. Ms. Finucane. Thank you, Chairman Dodd. I think we are directionally positively disposed. I would say this: that there are some of us who have gone ahead with our own programs that are very comprehensive and far reaching. So, clearly, we are on this path already. And to the degree that we can understand the details--the concept is out there, but the details are critical for us. I think we are generally positively disposed, and, clearly, the more we can do systematically to deal with this issue, the sooner, the better. Chairman Dodd. Mr. Campbell. Mr. Campbell. We would agree with the context that we need to do something more broadly than is currently being done. A lot of us have done a lot of things, but in terms of a systemic response, there is still much to do. Chairman Dodd. And this proposal? Mr. Campbell. At this point, while we have not seen all the details, clearly the things that we have worked hard on in our own programs, one of you raised in your opening comments about the issue of redefault. And so as we look at the detail, what we will clearly want to focus on are the criteria and standards being set in whatever large-scale program is set actually set up a mechanism that results in long-term sustainable homeownership as opposed to modifications that fall apart in a short period of time because all the considerations were not made at that time. Chairman Dodd. I thank you very much. Senator Crapo. Senator Crapo. Thank you very much, Mr. Chairman. I am going to direct my first question also to the bank witnesses. Secretary Paulson said that the Treasury Department is exploring the development of a potential liquidity facility--and I do not know that we know what the details are there--for highly rated, AAA, asset-backed securities. He said that he believes this effort would draw private investors back to that market and increase the availability of consumer credit. I just would like to ask those who are banking witnesses to comment on this proposal. Do you think it has merit? Mr. Zubrow? Mr. Zubrow. Thank you, Senator. I believe that the Secretary introduced those ideas in statements yesterday, and there are not a lot of details around exactly how he envisioned the program might work. So I think it is a little bit difficult to really comment on whether or not it will work until there are more details. I do think that it is important that we find mechanisms to bring investors back into the marketplace for asset-backed securities. Certainly right now, to the extent that we are continuing and do make credit card loans, other types of loans that can be securitized, those loans right now are residing on our balance sheet, and certainly for the long-term health of the financial system we need to re-attract long-term investors into structures. And certainly anything that the Treasury Secretary, either in conjunction with the Fed or others, can do to encourage investors to come back into that marketplace, it will be very helpful. Senator Crapo. Thank you. Mr. Palm. Mr. Palm. The reopening of a market for asset-backed securities of whatever type, whether you are talking about the credit cards area or whether you are talking about, you know, simply mortgages themselves, because it is quite clear that, you know, the banks at this table themselves do not have the capital for those who are in the business to extend all home loans that are actually necessary in this country; and those markets have to be open. Having said that, you know, we read yesterday that announcement, too, and we are not aware of any of the details yet or exactly how it would work. But it certainly is something that really has to be explored because the capital necessary to support the extension of credit, whether it is consumer credit, whether it is credit to businesses, whether it is credit to homeowners through mortgages, in essence, has to be supported by a much broader range of investors as opposed to just bank deposits, for example. So we have to do something to reopen those markets, which, as you know, have been almost totally shut. Senator Crapo. Yes. Thank you. Ms. Finucane. Ms. Finucane. Well, I think we are all a little bit new to this insomuch as he made these announcements yesterday. There was not a preamble to it. I think I mentioned earlier in my opening remarks that we are ourselves back into the secondary markets, purchasing mortgage-backed securities. We see the problem that he has outlined, particularly with credit cards, the securitization of credit cards and moving that debt. So the issue is clear. I think we would like to understand better specifically what he means. So I think you are hearing from all of us that conceptually it is interesting. We have no sense of what the details are. Senator Crapo. Thank you. Mr. Campbell. I would say the same. Obviously, we have not seen the details. Wells is a bit different in one way, and clearly, as it relates to the mortgage market, having a securitized market is critical because we cannot fund all of those mortgages. As it relates to credit cards and student loans, we have not securitized those assets. Those are assets that we have chosen to hold in our portfolio, and so as it relates to us specifically, it would not do much for us, at least in two categories. Clearly on the mortgage product, it is very important that those markets function effectively. Senator Crapo. Thank you. What I hear from all four of you, basically, though, is that the notion of going into some type of development of a liquidity facility for these highly rated, AAA, asset-backed securities is an important focus that we should be taking with our efforts right now. Is that correct? Did I misunderstand that from any of you? [No response.] Senator Crapo. I will take that as acknowledgment. Is there a no here? Mr. Eakes, would you like to respond to that? Mr. Eakes. I wanted to put in a word of caution. I think until we fix the problems that we have with asset-backed securities, we should be careful about trying to promote its regrowth. So the ratings agencies were a problem in rating AAA paper. We are basically talking about setting up a Government- owned structured investment vehicle, SIV, that got Citibank into trouble. We need to think about the regulatory structure. We need to make sure that the loans that are made cannot be passed into a structure without responsibility or liability passed back to the people who originated it. And, finally, I think that by putting $250 billion of equity into the banking system, normally that should leverage $10 to $12 for every dollar of equity, so we have basically enhanced the balance sheet capacity of the banks in America by $2.5 to $3 trillion that they can add. The whole credit card market, the entire credit card market in America is about $1 trillion. So we have the ability to have, as the Wells representative mentioned, the ability to hold much of these assets on bank balance sheets because of the equity we have invested. So I just think we have some significant problems in the asset-backed market as we have heard the technical discussions about how do you modify loans once they are in there, what can you do; and we have in no way fixed those problems yet. Senator Crapo. Those are good cautions. Your answer to the question raises another point, though. You indicated that the injections of liquidity should have a 10 to 12 factor of leveraging in the marketplace. And I would just like to ask any of our witnesses: Has that, in fact, occurred? Have we seen that kind of---- Mr. Eakes. It will take time, but that is the normal leverage level for banking equity. Senator Crapo. But we are not seeing it right now. Ms. Finucane. Could I just---- Senator Crapo. Yes. Ms. Finucane. I think it is still premature. We received this money a week ago. The investments were made literally a week ago. So I think it is premature to be thinking what has the effect been other than you are seeing movement, and I think that is a positive. Senator Crapo. And we are seeing the movement. Ms. Finucane. Well, we are seeing the early stages of some movement, but it is just so early, 1 week in. Senator Crapo. All right. Mr. Campbell. I think the other thing---- Mr. Eakes. The combination of equity and raising the deposit insurance means that over time there will be a growth of balance sheet capability by the banks who have received these equity injections. Senator Crapo. OK. I assume what I am hearing is that we are seeing movement and that that is positive movement. Mr. Campbell. Mr. Campbell. The only caution I think we all have to remember is that there are two sides of this equation. There is clearly the capability that our balance sheets now have, but there also needs to be economic stimulation that requires the need for borrowings as well. And so I think clearly the capacity side has been addressed. I think one of the economic issues that we as a country struggle with is how do we move from a stagnant environment to a growth environment that then can utilize the capacity that has been generated. Senator Crapo. Well, thank you. I see my time has expired. Chairman Dodd. Thank you very much, Senator. Senator Johnson. Senator Johnson. For the four representatives of financial institutions, beginning with Mr. Zubrow, does your institution intend to use capital purchase funds for investor dividends or to acquire other institutions? Mr. Zubrow. Thank you very much, Senator, for that question. Obviously, the money has gone into our capital base. We pay dividends out of our retained earnings. So far this year, JPMorgan Chase has had profitable quarters in each of our quarters, and we anticipate that will be the case for the fourth quarter. And so we would anticipate that dividends will continue to be paid out of our earning stream and not out of our capital base. Obviously, we recognize that there is a restriction in the CPP which limits our ability to increase or change our common dividend policy, and certainly we have no intentions of doing that until the funds are repaid. Senator Johnson. Do you intend to purchase other organizations? Mr. Zubrow. You know, I think that there has been a lot of debate in the press about, you know, whether or not the CPP is going to be used to somehow purchase healthy organizations. And I think that, you know, we obviously have participated in two very important acquisitions during this year, you know, very much in conjunction with Federal regulators, both the acquisition of Bear Stearns and the acquisition of Washington Mutual, both of which, you know, we would characterize as acquiring, you know, failing institutions, and through those acquisitions we really think that we helped protect the soundness of the financial system, and certainly in the case of Washington Mutual, prevented the need for any FDIC funds to go into that--you know, against the Deposit Insurance Fund. So, you know, when we think about acquisitions, right now, you know, it is very much in line with those types of situations where we think that we can be helpful to the safety and soundness of the system. Senator Johnson. There is no intention to purchase healthy institutions? Mr. Zubrow. Right now, you know, we obviously are presented with a number of different types of acquisition opportunities, and we will continue to evaluate those based on our historic criteria. But, you know, certainly right now there is not something that, you know, I would characterize as saying we are looking to purchase a healthy banking institution. Senator Johnson. Mr. Palm. Mr. Palm. First, on the dividend point, I will reiterate much of what JPMorgan has said. We pay dividends out of our retained earnings. We have had earnings in each of the first three quarters this year. We really do not pay dividends in a sense out of a certain amount of the TARP capital that has come into us at all. I would also just like to mention the fact--I think which others have alluded to, so I will, too--that in advance of the TARP money, we had obviously engaged our own private capital raise of over $10 billion literally a week before so that we have right now a very healthy and highly capitalized balance sheet, which I think, as I said earlier, all augur well for the goal of increasing liquidity and capital committed to markets and what people want to accomplish in business and otherwise. Because one thing I would say is that there is no purpose whatsoever for us to sit on money because we pay out returns to the Government in the case of the preferred that you have purchased, we pay out returns to a variety of other people, and our interest is putting money to work, not sitting on it. On the topic of acquisitions, I can say two things. One is, as you probably know based on our history, our growth has basically always been organic as opposed to, you know, major acquisitions. We have done a few from time to time, but that is just the way we have developed. The most obvious example would be our asset management business, which, over a period of 10 years, we built from $50 billion in assets to almost $1 billion in assets, and that was all done basically through organic growth. Now, we have no acquisition on the table right now, you know, involving a healthy bank that we are looking at. In the same way as other institutions here, a variety of proposals no doubt will be presented to us over time, and I think as you also know, we are sort of new to this sector to the extent that we are in the so-called classic banking sector and we are finding our way. Whether or not, for example, we provide liquidity to the market by purchasing, you know, we will call it deposits from failed institutions or otherwise, I cannot say. But in terms of the acquisition point you make, we have no current plan. Chairman Dodd. Could I just interrupt for 1 second on that point that Senator Johnson has raised? There was a statement put out by Goldman last evening, and it says--was this last evening? A few days ago, excuse me. But it goes on talking about the company, and let me just finish this statement. It is ``creating a new one, GS Bank USA, that will have more than $150 billion in assets, making it one of the ten largest banks in the United States, the firm said in a statement last night. The firm will increase its deposit base `through acquisition and organically.' '' Now, that is the statement from Goldman. I want to raise that with you. Mr. Palm. I think that the acquisition point does not mean that we are acquiring or have a current plan to acquire, you know, a particular healthy bank. As I think you are well aware, there are a variety of situations now where there are failing institutions and otherwise where their deposit base, in essence, for want of a better word, is being sold. And so we may end up acquiring deposits in that way. But it is not a plan for the use of the TARP money. Chairman Dodd. I apologize, but I just wanted to raise that. Senator Johnson. What does Bank of America have to say? Ms. Finucane. Well, obviously we got the money, and we will use the money to strengthen our capital ratios and to invest and to loan. So we have already--I think I mentioned earlier in my oral testimony that we have already gone into the secondary market, so that is some of how we would deploy the money. Certainly we would not be using it to increase our dividend. Like the others, we pay dividends on retained earnings. I think relative to healthy banks, we are in the midst of our Countrywide transition and soon hope to have acquired Merrill Lynch. So I think we are fully engaged, shall we say. I think on the longer term, I think the question is more about are there troubled assets or troubled banks to which these healthier companies can continue to make investments. I think it is--we do not know of any, and it would be inappropriate for me to comment on that. That is the job of our CEO. But there would be no plans in that. Senator Johnson. Mr. Campbell. Mr. Campbell. Senator, Johnson, three comments. The answer as it relates to dividends is, no, we will not use the CPP funds to pay dividends. The one caution, I think, we all have to be thoughtful on is that continuing to pay dividends at appropriate levels, while we maintain appropriate capital levels, is critical to investor confidence remaining. And so I would just say that while we clearly agree with you that the use of the funds is not for dividends, to consider restricting dividends could have unintended consequences that we all should be thoughtful of. Point two as it relates to using the funds for acquisitions, just to be clear, we did acquire--we announced to acquire Wachovia. We made an announcement 10 days before the CPP was announced. And so earlier this week we completed our own capital raise to assure that we have the appropriate levels of capital to complete that transaction. So, clearly, we are not using CPP funds to complete that transaction. And, third, as it relates to our plans for further bank acquisitions, I would be right beside B of A in saying we are fully consumed. It is critical that we do a really good job of transitioning the Wachovia transaction for the good of their customers, their communities, and all of our shareholders. Senator Johnson. My time has expired. Chairman Dodd. Thank you very much, Senator. Senator Martinez. Senator Martinez. Thank you, Mr. Chairman. I want to go back to the issue of your efforts to attempt to solve families' problems and keeping people in their homes, and I specifically want to speak to both of you since you seem to be both having active programs in this regard. How are you managing or are you able to work out loans in which the paper has been securitized? Have we been able to get to the point where those--not the paper you are holding, but that which has been securitized? Are you working those out? Ms. Finucane. Yes, we are having some luck at that. About 12 percent of our mortgage portfolio we own, and the rest is-- -- Senator Martinez. Twelve percent you own, so the vast majority of it is in the other category. Ms. Finucane. We feel that we have the covenants to be able to cover about 75 percent of that in terms of in the best interest of both the investors and in the best interest of the homeowner. But we are making progress. Of course, our program does not fully engage until December 1st, but even heretofore, we have been able to work out about 200,000 homeowners to prevent foreclosure. Senator Martinez. Mr. Campbell, we welcome you to the State of Florida. What are you going to do for our homeowners that are in trouble? Mr. Campbell. Let me respond to that. First of all, our portfolio is different than many other peers' portfolios in that it is composed primarily of two categories: our own owned loans, and then a high percentage of loans that we service for Fannie and Freddie. Fortunately, we have not had the same degree of negative amortizing loans and some other problem assets. Having said that, we have always believed that, to get to your issue specifically, one of the things that had to be accomplished very quickly was to come to some agreement with the people who we service for, and in our case that means Fannie and Freddie. So this week's agreement to the streamlined program with Fannie and Freddie will clearly help us greatly in our servicing responsibility and being able to reach resolutions that are appropriate for those homeowners that we are responsible for the servicing. Just a couple statistics in our case. It is all about contact. Currently, we are reaching about nine out of every ten customers who are beyond 60 days delinquent, so we are having good connections at the beginning. And then in about seven out of ten situations, they actually do ask us to help them figure out a resolution to their situation. And then in about five out of ten, we are actually able to mitigate foreclosure and enter into some form of modification that we believe increases their long-term sustainability of that homeownership. Senator Martinez. I guess what you are saying is that you are not being hampered in your ability to do that by the issue of securitization in your situation. Mr. Campbell. It has been challenging in that we had--for all the things you have heard, we have had to be extremely careful to make sure we were complying with our agreements, which in our case are primarily Fannie and Freddie, and the fact that we now have agreement and we have institutionalized that, it is a strong improvement from where we were. Senator Martinez. Mr. Zubrow. Mr. Zubrow. I think the issue that you raise and others have raised is obviously a very important one across the securitization industry. I would note that in the House hearings yesterday the ASF organization which represents a number of the major investors and securitization pools, you know, indicated that they had a much greater willingness to work with the industry to devise a methodology to address this issue. And so we very much welcome that movement and look forward to working with them on this. It is absolutely clear that there has to be a balancing of what is the value to the holders of the paper to be able to have a loan modification and an avoidance of foreclosure. We certainly think that that is a balancing which can be done in the appropriate circumstances to the benefit of the securitization holders, and we certainly look forward to working with the different industry groups to devise a much more streamlined process to be able to get to that end. Senator Martinez. OK. Dr. Wachter, I wanted to ask you if you could tell us your view of the bankruptcy issue. I know that it is appealing to think that a judge could just modify the mortgage. However, my lawyerly sense tells me that if you have a contract and all of a sudden it is going to be dramatically modified by a judicial fiat, there may be something that investors might look askance at, and there may be a liquidity issue going forward in terms of mortgage money. Can you tell me your view of that? I am trying to stay away from those that obviously have a point of view that may be different and maybe looking to you as an impartial observer. I have no idea. I am violating my own lawyerly world, which is not to ask a question you do not know the answer to. But I have no idea where you are coming from, and I would love to know your thoughts. Ms. Wachter. I do believe that the importance of contracts that can be relied on is critical to any system that is a basic capitalist system because you have to rely on contracts in order to determine what the risk is. On the other hand, as I said in my oral comments, the Nation is at risk, and I do think we need to have loans modified that are economically rational to modify at a much faster pace than is currently occurring. I do think that the Fannie and Freddie announcement yesterday is going to be quite helpful, but it does not get to those securitized loans that Mr. Zubrow just pointed to, and he said that he was looking forward to sitting down and getting some of those issues resolved. We have been in this crisis for a year now, or more, and it is worsening. We need to have those folks at the table. We need to get those issues resolved. And I think all options have to be at that table in terms of getting people together and incentivized to discuss what will happen going forward. Senator Martinez. Do you think the IndyMac model that is being utilized by the FDIC would be one that could be---- Ms. Wachter. Absolutely. Senator Martinez. [continuing] A more helpful model than a bankruptcy model? Ms. Wachter. That absolutely appears to be consistent with current contracts so that is indeed a solution. But the problem is that even that solution does not appear to be formally being adopted. In fact, quite the contrary, it appears to be rejected. Senator Martinez. Maybe we can work on that one first. My time is up. Thank you, Mr. Chairman. Chairman Dodd. Thank you very much. Senator Casey. Senator Casey. Mr. Chairman, thank you very much. I wanted to address my first question to Mr. Eakes, Dr. Wachter, and also Nancy Zirkin, with regard to some of the discussion we just heard in this context, this very simple but important question, I think, in terms of what we are going to do prior to even the next administration. What should the Congress do this month to take action-- which I think there is consensus on, I think it is a strongly held belief that I have--that we cannot, as so many have stated today, deal with this problem adequately unless we address directly the question of foreclosures and modifications of troubled mortgages? But what should the Congress do this month to address that problem? Nancy, we will start with you. Ms. Zirkin. Yes, it is my pleasure. Thank you, Senator. I think, first of all, I am very disappointed about the Treasury's decision yesterday because for us, while we do not know everything about Sheila Bair's plan, it sounds promising, and we have to do something. It sounds promising principally because it really gives servicers incentives. It also seeks to change the terms of the mortgage, interest first and then principal if necessary. I invite you all to read a fascinating study by a professor of law at Valparaiso University--I believe it is unpublished, and I can get you a copy--Alan White. And he makes the point that unless you do these things, that is, restructure either the interest or the principal, then it is just kicking the can down the road. And for our communities they are in desperate straits. We cannot afford to have Congress wait. The Bank of America is doing a really good job, but it is not going to kick in for another month, I am hearing. And the magnitude of this problem is so huge that what I think Congress ought to do is pressure Treasury into the FDIC plan and pass bankruptcy reform, Senator. Senator Casey. OK. Thank you. Doctor. Ms. Wachter. Well, I certainly think we need faster action on the potential solutions that are at the table and perhaps more understanding why they have not been embraced. If there is a good reason, we need to hear it. We also need to bring the securitization industry to the table to directly ask them the question you have asked us: What will it take? Senator Casey. Mr. Eakes. Mr. Eakes. I know Senator Martinez does not want to hear this exactly because he had very legitimate questions about the bankruptcy provision. But if there was one thing you could do in the next month, it would be to pass that provision, and here is the reason why: It was limited in its effect to loans that are going to go into foreclosure, so it is not going to impact other loans. It is going to only impact those loans that would otherwise suffer the loss to the borrower of being out of their homes and the loss in the neighborhood of having a vacant home. It costs the taxpayer nothing, and actually the State of Florida will be the State that has the largest number of residential units that are underwater--not the real water, but underwater in that their debt will be much higher than the value of the property. With some of the payment option ARMs, you cannot solve or modify those loans without doing both. You have to lower the interest rate and you have to lower the balance, or you cannot keep the families in those homes. So I think if you had only one shot to make in the next month, that is the one with the protections that are built into that bankruptcy provision. I would also add that if--when we had the discussion about the equity investment in the banks, no bank is going to use the equity investment to pay dividends or to pay executive compensation. That is not really the right question. Normally, equity invested in a bank has a return in good years of 20 percent; in average years, 15 percent. So if you are only being charged by Treasury 5 percent and you earn an average year on equity of 15 percent, you have got a 10-percent earnings gain. So for one of the banks that received a $25 billion investment of equity, they potentially will have an earnings attribution specifically because of this program equal to $2.5 billion. That would just be sort of standard banking numbers. So the question would be: Can you use that $2.5 billion that is going to be contributed to your operations to enable you to support this bankruptcy type provision? When I have talked--and I have talked to the CEOs and senior executives of virtually all of the banks and this table, and others, their major concern was not that they would lose money on the homes that would go through the bankruptcy provision, as narrowly as it was drafted. They were worried that the other debts, like credit card debts or car loans that are in trouble, would create an ancillary loss for the bank. My belief, which I believe really strongly is that once you have gotten deposit insurance protection, once you have had all the liquidity benefits that Senator Dodd elicited, and once you have a direct taxpayer investment in the company, it should not be too much to ask for each and every one of these banks to say, ``We are going to take a little bit of loss on our credit cards in order to fix the problems that are devastating the coasts of Florida.'' We are only halfway through the problem of subprime loans alone. You know, the number of loans that have been foreclosed that were subprime is less than the number of seriously delinquent subprime loans that are still outstanding and in trouble. We are only halfway through the subprime, not to mention a third of the way or less with the Alt-A and the payment option ARM. We are nowhere near the end of this tunnel. So I would say that is the No. 1 thing to do quickly, and then I mentioned earlier the Sheila Bair/FDIC proposal is just an absolute no-brainer. There is just no reason that we should not get that done in the next week. Senator Casey. Thank you. I think what we have with the housing market and the foreclosure problem itself is an ever bleeding wound which we have not dealt with. I am out of time, but I do want--just for the record, Mr. Chairman, one of the missing pieces of information here, it seems, is a very definitive number in terms of the number of homeowners that have been helped in the last year or two, with all the efforts that are made, the voluntary efforts by Treasury and the administration, the statutory provisions that you led the charge on and our Committee worked on, as well as the recent Emergency Economic Stabilization Act. There is no--there does not seem to be a fixed number on the record of how many have been helped, and I noticed going through the--I did not have time to ask this, but with regard to the institutions represented here, you go down the list: JPMorgan Chase, Goldman, Wells Fargo, and Bank of America. References in your testimony to how many homeowners have been helped in the last 2 years, the last year, how many projections, how many people are projected to be helped, and they are all over the lot. And one thing, if Treasury is not requiring it, I think this Committee should, in terms of amplification of the record, have each of your institutions submit for the record of this hearing, for this Committee, exactly how many homeowners have been helped and the documentation of that, and then also the projection that you have of the number of homeowners you will help in the next year or 5 years--some kind of very specific report so at least this Committee--if Treasury is not requiring it, as they should, at least this Committee will have an accurate record of what your numbers are, because I see numbers all over the lot: 250,000 families helped, 41,000, all these numbers floating around, and there is no specific reporting requirement. So, Mr. Chairman, if there is a way to make that part of the record as well as to encourage Treasury to require it---- Chairman Dodd. You just did. We will make the request, and this is a formal request now. Mr. Eakes. Could I add one more point to that question? Chairman Dodd. Certainly. Mr. Eakes. On page 4 of my written testimony, we talked about--we look at the actual modifications that have been reported through Hope Now, the voluntary industry association. And one of the things I want to emphasize is that we need to have a system that gives you loan by loan, loan-level reporting of the modifications that can be studied, not identifying data, because if someone gave you a report and said here is the number of modifications I made, you have no idea whether that was meaningful or not. So the State Attorneys General have reported that of all foreclosures, 80 percent received no modification whatsoever in the past year. Of the remaining 20 percent, the vast majority of the modifications reported by good lenders--the good guys--were what are called repayment plans, which is where you add to the payment each month and actually increase the monthly payment for the borrower. Only about 290,000, over all of the lenders in the last year, were actually modifications that reduced the payment level. And so I am optimistic. I think we have tremendously capable banks who have made announcements this week that are very encouraging. But I am also a little bit factual that I have heard pledges, and the problems are just so intractable that if we wait and give it time, 18 more months, Florida is going to be a disaster. I mean, it is already hurting, but it is going to be even worse than it is now. So we just cannot rely on voluntary modifications unless you are going to get the data, you know, in a loan-by-loan fashion that says here is what the payment was before the modification, here is what the interest rate was, here is what the loan balance was, and here is what it is after the modification. Senator Casey. I am finished, but I would amend my request to include that kind of information, because I think you are right. Just an assertion of modifications can be, I guess, in the eye of the beholder and depending on what information you convey. Ms. Wachter. And if I may just for a moment, I just wanted to encourage that as well. What Mr. Eakes says is absolutely right. There are loan modifications and loan modifications, and they need to be tracked so that we know actually the loan modifications are real. Senator Casey. Yes. Thank you. Chairman Dodd. Thank you, Senator Casey. Before I turn to Senator Brown, I just want to pick up on this bankruptcy provision. I appreciate Senator Martinez's raising it. This Nouriel Roubini is a noted economist, and just to quote him, he said, ``When a firm is distressed with excessive debt, it goes into bankruptcy court and gets debt relief that allows it to resume investment, production, and growth. When a household is financially distressed, it also needs debt relief.'' The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe, and the economic recession with a sharp fall now in real consumption spending is worsening. The idea that you can go into bankruptcy court and protect your boat, if you want to, your car, and your vacation home-- you can do that. Those are all contracts, and you can protect those in a bankruptcy court. But you cannot protect your primary residence. There is something fundamentally false about that notion. Your boat, your car, and your vacation home, I can protect. But I cannot protect your primary residence and let you get back on your feet, work this thing out, and get on your feet again. So I just hope--and I do not know whether we are going to do it next week or not, but I certainly intend, along with others here, to try and raise this. And I hope in the context-- we are talking about distressed mortgages. We are not talking about doing it for a limited period of time. But we ought to be able to build a bipartisan coalition of support. That is the one single thing I know of that I think could make a difference, that we could make a difference on, aside from the efforts by the Treasury to step forward. Senator Brown. Senator Brown. Thank you, Mr. Chairman. Thank you for your passionate and very sensible words there. Mr. Eakes, I want to follow up on Senator Casey's question to you about the loan modification and the FDIC proposal. Do you believe if Treasury and FDIC and Sheila Bair and the administration can work on that under the provisions that we wrote into the bill a month or so ago, do you think that would deter banks from participating? And if it did have that effect, would it matter? Since this does not seem to trigger Treasury's concern about possible---- Mr. Eakes. What would deter them? Senator Brown. Would requiring banks to participate in the Capital Purchase Program, engaging in loan modification similar to the FDIC proposal, would that deter banks from doing it, from participate in the program, in your mind? Mr. Eakes. I do not think so. I mean, we have seen the banks at this table and others who have announced their own programs. So if I missed your question, I will try to come back. So the Treasury/Sheila Bair proposal is to help induce, so it is offering a benefit that is explicitly tied to doing loan modifications that are deeper than what is becoming the industry standard. Right now we are at a standard that says if a borrower is paying 38 percent of his or her household income for a monthly mortgage payment, that is OK. Well, when I grew up and most of us grew up making home loans, we thought 25 percent was the level that was acceptable for housing payment. So what is unique in the Sheila Bair plan is that the proposal is you would only get this guarantee or public benefit if you reduced the payment for the borrower down to 31 percent. We have got some lenders whose loans are higher than 38 percent, which is the standard that we have heard this week, as the ratio of payment to income who are making loans now at 50 percent, 45 percent. So what is going to happen? One month later the borrower is going to come in and say, ``Well, how about reducing my payment to 38 percent?''--which we have acknowledged is the affordable level. The banks--unfortunately, the $250 billion is largely already committed, and so it would have to be some sort of renegotiation or jawboning. There is not going to be new banks, I do not think, unless we expand the $250 billion to be a larger share of the $700 billion. Senator Brown. OK. Thank you. Mr. Palm. Senator Brown, could I mention---- Senator Brown. Sure. Mr. Palm. There may be an industry standard, but Litton, for example, applies 31 percent and has applied it for a long time. Mr. Eakes. That is fabulous, and that is why---- Senator Martinez. What is the name of the entity? Mr. Palm. Sorry. Our subsidiary, they use a 31-percent level, the one that has been referred to, and that is one of the reasons why they think you can actually do something positive for both the homeowner as well as the investor. Mr. Eakes. And I will bet that Larry Litton's redefault--he is a great guy--that his redefault, once you get a borrower to the 31-percent level, which is more affordable, is much lower than the modification plans that allowed a much higher portion of your monthly income to go to the debt. I bet you---- Mr. Palm. Well, it is conceivable that it would not be much lower simply on the basis that if people do not have the income to pay more than a certain percentage---- Senator Brown. OK. Let me shift. Ms. Zirkin, in your testimony you discuss the failure of voluntary efforts to provide much relief. You recommend we put in place an affirmative duty on servicers to engage in sensible loan modification. Mr. Eakes pointed out earlier the incentive for them to foreclose. Talk to me about your thoughts there, expanding on that. Ms. Zirkin. What we have seen, Senator, is that the voluntary efforts--and I am just going to say it--have not worked. Martin Eakes has just outlined research that said, as I understand it, very few, relatively speaking, were actually helped. Senator Brown. So how do we get servicers to do these loan modifications? Ms. Zirkin. I believe there are two ways. It is the bankruptcy bill, bring them to the table--voluntary has not worked--and the FDIC plan, because there are incentives, as I understand it, in this plan to bring the servicers to the table, because they have incentives, they will be able to modify loans. But it is a very complicated problem in terms of, as we all know, of the securitization problem, and unless people are forced to come to the table with all these intricate loans all intertwined, it is not going to happen. And yet every month, every week, more and more homes are foreclosed on, and I believe at this rate it is already a tsunami. But it is going to affect not just Florida, not just Nevada, not just a few States in major ways, but every single State. I hope that answers your question. Senator Brown. Do you want to say something, Ms. Finucane? Ms. Finucane. Yes, I would. I would just like to say that on behalf of the banks, or at least sort of directionally speaking, first of all, it is true that traditionally the interest rate modifications were not part of these workouts, but they are now, and they have been there the vast majority of the workouts now, one. Two, at least in our case, even though we have not launched the $8.4 billion program for what we think will be 400,000 homeowners, we already have in this year been able to prevent 200,000 people from foreclosure. So if we had a foreclosure potentially of about 300,000, 200,000 of those did not go into foreclosure, and the vast majority of those are interest rate modifications. So I just want to speak on that I think the progress being made in the last year is enormous, and I just do not want that to go unnoticed. Senator Brown. OK. Thank you. Let me finish with asking a question of the three bank witnesses, Mr. Zubrow, Mr. Campbell, and Ms. Finucane. It is a follow-up of Senator Johnson's question an hour or so ago. Since none of you, you say, the three banks here, have plans to acquire a healthy bank, would you object to a prohibition on that activity for CPP recipients? Mr. Zubrow. Mr. Zubrow. I think, Senator, one of the issues that, you know, obviously has to be considered is that any sort of prohibition is, you know, hard to figure out in its actual application as to what you would call a healthy bank versus an unhealthy bank, and whether or not the funds that were going to acquire that were coming from the CPP or from other funds, you know, that the banking organizations already have. So, you know, I think that while we have certainly made it clear that, you know, our interest is, you know, focused on the work that we have already done with the unhealthy banks, it is hard to figure out how such a prohibition would actually be applied. Senator Brown. Ms. Finucane. Ms. Finucane. Yes, I am not sure we understand exactly what the concern is insomuch as obviously that is not where we have put our attention. We are in the middle of two acquisitions we have made with companies that I think you would consider less than healthy, one. Two, prospectively, we have talked about that we will put this money to work both for our capital ratios for lending and for investment in the secondary market. So it is just very hard to anticipate what over the next 5 years might come and whether you would not actually encourage us to do that. Senator Brown. Mr. Campbell. Mr. Campbell. I would say that clearly the intent at Wells Fargo is to use that capital to continue to lend and lend more, as well as to help remedy the crisis that exists in the home mortgage business. And as a result of that, to put other provisions on us that would not allow us to pursue normal activities that we have pursued over the years, I think we would probably would not be in favor of that kind of prohibition, because just like others here, while we are currently not in a position because of decisions we made to pursue acquisitions, in 3 or 4 years we may very well be in a position where we would like to do that, and then having agreed to a provision that would not allow us to do it would certainly not be something we would like. Senator Brown. OK. Thank you. Thanks, Mr. Chairman. Chairman Dodd. Thank you very much, Senator Brown. Let me ask you, I have just been going over the numbers for our lending institutions that are here that the capital infusion allows. In the case of Wells Fargo, you will be receiving or have received $25 billion. In the case of Bank of America, it is $15 billion, but I notice that Merrill Lynch is getting $10 billion, so I presume that is $25 billion for Bank of America. Goldman Sachs gets $10 billion, and JPMorgan Chase gets $25 billion. Just out of curiosity, there are two sets of issues. Obviously, the foreclosure mitigation is a set of issues, and then the question is, of course, getting lending, getting credit out the window. Have any of your institutions set up Committees, forming any groups at all within your institutions that are out trying to identify creditworthy customers that may be the source of some of these billions of dollars, $125 billion that is going out to nine institutions; for some of them here today I have identified the number. I would be interested in yes or no, we have or we have not. Has there been any effort at all to utilize this money, this pool of money, to go out and identify the kind of borrowers out there that would help begin to release the stagnation that is occurring in the credit markets? Mr. Campbell. Mr. Campbell. I would be happy to comment on that. Wells Fargo has demonstrated an ability to generate revenues at double-digit levels for long periods of time, and so for us, it is not a new endeavor. Our company has always been about driving our performance through prudent revenue growth, and so for us, this is just what we do for a living. We are constantly seeking to increase the levels of credit that we provide to our marketplaces, and as I said in my testimony earlier, I think we are proud of the amount of lending that we have been able to do during these very unprecedented, difficult times. Chairman Dodd. So there is no new entity that Wells Fargo is creating in light of the $25 billion. How about Bank of America? Ms. Finucane. I think it is a similar answer insomuch as we are focused on what can we do with the $25 billion--or right now it is $15 billion for us. We have obviously already gone out to the secondary markets. We see some other issues, though, Chairman Dodd, which is the interest rates need to come down for the mortgage borrower probably to make it more attractive. That has not happened yet. Second, that the American public really is not borrowing to the degree that it was before because of the credit crunch, because of concerns about unemployment. Chairman Dodd. Is this chicken-and-egg, though? You know, one of the things is they are obviously not borrowing because credit has seized up, and credit has seized up because people are not borrowing. I mean, it seems to me we are going to in a circular motion here. I am looking for some proactive kind of thing that says, you know, here is a new pool of money for us and we are going to go out there and advertise and shop and people step up to the plate here, we are ready. Ms. Finucane. Right. Well, I think that we are ready, and we are certainly there to lend to any creditworthy individual or business, but we have got to do it judiciously, as you would expect us to. Chairman Dodd. Yes. Mr. Palm, or maybe JPMorgan or whoever wants to comment on this. Mr. Palm. I will go next. We have not established a new committee. However, what I would say, as I indicated earlier, is our whole business is committing capital and using it, and we have got now additional capital, and we have to earn a return on it for all of our shareholders, including the Government. And in that connection, our whole investment banking division is, in essence, there to service corporate relationships all around America. And part of the business model is to help them achieve whatever they are trying to do, and part of that may well be that they have something they need to do which will create, you know, productivity, jobs, innovation, or however you want to describe it, which will require additional capital. If you have more capital now, we will be able to commit some of it. That is a natural activity which, you know, just is a recurring phenomenon. There is nothing new there. But we are certainly active. Chairman Dodd. Mr. Zubrow. Mr. Zubrow. We actually have set up some new committees. There are---- Chairman Dodd. I should have started with you. [Laughter.] Maybe we could have gotten a chain reaction here. Mr. Zubrow. I was pleased not to be the first speaker for a change. But, Mr. Chairman, in fact, several weeks ago our Chairman and CEO, Mr. Dimon, tasked two subcommittees of our Operating Committee, which manages all the operations of the bank, to focus on just this very question. You know, how can we much more proactively reach out not only to our existing customer base but to, you know, other parts of the economy in order to utilize this capital, as well as other capital which we have, in order to help stimulate lending activity. Chairman Dodd. OK. Well, that is good news. I appreciate, by the way, some of the steps that JPMorgan Chase has made as well. I should have made that point, as I did about Bank of America earlier. Let me ask our bankers here as well, you heard the kind of debate and discussion like we had just before you walked back in again on the bankruptcy provision, and you have heard Mr. Eakes describe it. I should have probably done that as well. This is only for distressed mortgages, for a limited amount of time. And I know historically there has been opposition for all the obvious--the cramdowns make you very uneasy, and the point that Senator Martinez raised, the discussion about contract issues and the like. Tell me how you feel now about this. Obviously, we have got a serious problem on our hands here, and we are looking for ways to move this. Is it still the position of those who are here individually--without trying to speak for the universe of bankers, Mr. Campbell, we will begin with you. Are you adamantly opposed to this idea of trying to do something for a limited amount of time under circumstances that might very well produce the very results that happened in the farm credit areas back a number of years ago? And I understand there are differences. I am not going to try and draw analogies that are perfect. But the idea here that would actually maybe promote the kind of steps that we are all trying to achieve, how do you feel about this now? Mr. Campbell. Mr. Chairman, I want to start by, again, really confirming that we understand the sensitive nature of this crisis, and it is clearly in all of our best interests to find solutions. Having said that, our view is still that while it may be an important fix right now, what does it do to the longer-term availability of credit to this market? Chairman Dodd. But assuming we are doing it for a limited amount of time now--this is not in perpetuity. We are talking about 3, 5 years, whatever the number was. Mr. Campbell. This is a very fragile market, and, frankly, one of the things that we have to consider is we have a very large inventory of foreclosed and unsold property. And so to potentially throw a curve into this segment of the market where potentially one of the outcomes, the likely outcomes to cramdowns, would be that the markets would--since there is less predictability in the market, it is likely that two things are going to happen; investors are going to require two things to happen to try and offset the uncertainties: one, downpayment sum will probably be increased, and, logically, prices would be increased to try and offset some of the uncertainties that exist by contracts being able to be just crammed down. And so while we have got this inventory and we need to find a way to stimulate the housing market, do we want to put at risk that market by taking that step? is the question I think we all have to step back and carefully and thoughtfully think through. Chairman Dodd. So the answer from Wells Fargo would be no. Mr. Campbell. No. Chairman Dodd. Ms. Finucane. Ms. Finucane. Well, I think we have similar issues insomuch as I think we have concerns with what the investor community will do if they think they have got a bankruptcy court that can do it judge by judge, district by district. And so the marketplace can have great--the long-term issues may be greater than the short-term gain, one. And it seems like it is a one- by-one--as I said, district by district, judge by judge. And we think there are some very fundamentally big, broad programs that each of the banks here have initiated as well as Chairman Bair's initiatives that she has laid out that collectively may have the greatest impact. Chairman Dodd. Again, maybe I am missing something here, and you folks work at this every day. How do I make the--when one of my constituents says to me, well, you know, the last time I looked, the credit availability for vacation homes was not bad. How do I explain to someone that you can cram down in a bankruptcy proceeding your vacation house and there seems to be credit availability? The institutions have worked that out. But I cannot do it for the primary residence. How do I explain the distinction and difference between one you can work out and the other I cannot, two homes? Ms. Finucane. Well, I think that is a good point, but that is not--I mean, the banks did not set up the bankruptcy laws. Chairman Dodd. But that does not explain the difference why--I mean, I have got a vacation house and I have got my primary residence. Now, one house I can cram down and work out a mortgage on because the bankruptcy courts would allow me to do that. But on my primary residence, I cannot. Just to pick an example out of thin air, just say I had eight homes, and so seven of them I can protect in a bankruptcy proceeding. But the poor guy with one house cannot. How do you explain that to people? What is the justification? Ms. Finucane. I think you are asking us something about bankruptcy law as opposed to what you began with, which is the issue around do we think that is a good solution to the foreclosure issue. And we can speak to the foreclosure issue, not bankruptcy law. Chairman Dodd. OK. Mr. Palm, same question. Mr. Palm. Well, I likely misunderstand your question, perhaps given where we are in the food chain, because as I said, we are not a big mortgage originator. Chairman Dodd. I know. Mr. Palm. I am assuming one of the issues that they have alluded to is simply the issue that the cost of credit to buy your single-family home is dependent on the fact that the lender thinks that, if all else fails, they at least get the property. And I think that is the theory of the lending, which is why rates are whatever they are. I think for vacation homes, my assumption would be--and you should never assume, I realize--the rates would be at a higher level simply on the basis that you would not have the same type of certainty, and we would perhaps need an economist to verify that fact. And having said that, in general, obviously, people who have multiple homes and vacation homes or whatever--and those are not the people who we are worried about here today-- they would normally also have additional other resources, and, therefore, they would probably get--you know, even though the differential in interest is still going to be higher for---- Chairman Dodd. I wish Mel Martinez were still here to talk about Florida. Mr. Palm. No, no. But I think the problem is, you know, as alluded to, there will be an uncertainty created in the market. I cannot say sitting here that you cannot do certain things in emergency situations if you really need to do them. Even if it is only a temporary period of time, the effect on the ultimate investors is something you really have to take into account in weighing the balance. Chairman Dodd. I have saved Mr. Zubrow for last because he is going to surprise us again and tell me I am absolutely right and JPMorgan Chase supports this. Mr. Zubrow. I am sorry to disappoint you, Mr. Chairman. I really do not have a lot to add to what the others have said. I would emphasize what, you know, you and others on the Committee have pointed to, which is that we are really in a very fragile market situation today. Notwithstanding all the very good efforts that the Committee and the Government have led in terms of trying to bring stability back into the markets, the marketplace is still extremely fragile. We lack investor confidence in many of the important markets that are required to really re-liquefy the home lending process. And so I think that there is, you know, grave danger to introduce a major change in the balance of outcomes that investors might be worried about through a major change in the bankruptcy provisions, and such change could really elongate the length of time that it takes to bring investors back into this marketplace. Chairman Dodd. I guess my point--and I will end, and I am going to ask other witnesses to comment briefly on this. But the only point I want to make is I just do not see any evidence yet that has been demonstrated to me that allowing a homeowner to take bankruptcy protection for a primary residence affects generally the credit availability for primary residences generally. I mean, that is the argument, and I just do not see the evidence of that yet. And that seems to be the point, that this would harm credit availability generally if you were to make this exception. So where is the evidence to support that? I do not see it. But I know Ms. Zirkin and Mr. Eakes and you, Dr. Wachter, might want to comment on this. Ms. Zirkin. I will be very brief because I am sure Mr. Eakes has something very important to say. [Laughter.] But let me say this: I was going to say, Senator, that there is no evidence, that we have heard this all the time, and I have not seen studies, I have not seen evidence. And we are at a point now, markets are fragile; the entire economy is fragile. We have markets going down every single day, 400 points, 300 points. It is very hard to find your way. And that includes giving $700 billion to the Treasury. Where I am going with this is that people might say that they know what the effect of a bankruptcy law is. I have not seen any evidence. But we are at the point now where we have to put it in, as you said, Senator, restore it to as it was in the 1970s and 1980s, basically, so that restore it for a year or 2 years, some period of time so that we can have the empirical evidence to see if it works or it does not, because people, as I said and as we all know, are out there suffering. Thank you. Chairman Dodd. Dr. Wachter. Ms. Wachter. We do need more evidence. There is small evidence, but it does not really go to your more major point, I think on your more major point, of what would it do now. We really do not know. I think there are tremendous risks on the side of doing a legislative initiative in this direction. On the other hand, as I said earlier, the Nation is at risk, and if we do not take effective action that, in fact, leads to a slowdown in foreclosures, this issue will be minor. So we have to have all options evaluated at the table. I think that if there were such an option seriously being evaluated, there might be more movement on other options, such as bringing the servicing industry to the table. Chairman Dodd. Yes. I would just point out that I mentioned at the outset of my remarks that there are over 9,000 foreclosures a day. This is Thursday. We are going to get together here next Wednesday. Between now and next Wednesday, some 50,000 homes we put at risk in the country, 50,000 families adversely affected. Mr. Eakes, any point on this you want to make? Mr. Eakes. Yes, with all due respect to my friends on the panel, it is clear to me not a single one of them have read the bill that deals with bankruptcy. Not a single one of them have studied the provisions in the way that they would have studied the TARP provisions. The bill's proposals that have been put forth limit the cramdown, the bankruptcy adjusting the debt secured level down to the market appraised value, only to loans that will be in foreclosure. Every banker here can tell you if they have got the data that less than 1 percent of the loans that are in foreclosure now are going to cure. So if you are only dealing with the loans that would go to foreclosure and you are going to lose more money and have the costs of a foreclosure in every case, the bank is going to be better off. That is one provision. The second provision that is in the bill that details matter is that every single lender/servicer has it within their control to prevent this cramdown. If you modify the loan to make it affordable so that the borrower has the ability to pay the mortgage, the provisions in these proposals would not allow a cramdown. You have it within your power as the lender, as the servicer, to prevent the bad effect. No. 3, there is evidence--between 1978 and 1993 half of the circuit courts in this country used the bankruptcy cramdown because they said this cannot mean what the words seem to say in the Bankruptcy Code; it does not make sense. And there was no difference in the rates charged to borrowers for the first-- for home loans between the two different districts between 1978 and 1993. My good friend Lou Ranieri, who claims to me that he was the person in 1978 that lobbied and helped get this provision instituted, the ban on modifications solely for personal residences in 1978, is now actively saying there is no way to solve the problem of these piggyback second mortgages unless we lift that ban. So I just crazy, really, when I hear this stuff that is going to disrupt the market. We have had proposals at various debates that said we will only limit it to existing loans, which means that it cannot have any impact on a future loan because it does not apply to them. So I just--you know, I know I am being overly passionate about this, but, you know, I have been watching the 9,000 per day, 45,000 people lose their home and go into foreclosure every week. We do not have any time to spare. And it just drives me berserk, with all due respect. Chairman Dodd. Well, I wish you would express yourself on the issue. [Laughter.] Senator Crapo. Senator Crapo. Thank you very much, Mr. Chairman. Just one last question for Mr. Eakes. You were talking about the limited terms of the legislation that has been drafted. What is the term of the--isn't there a limitation in the term of the bill? Mr. Eakes. No. 1, it limits the loans going backwards. I think it was January 1st, 2004 or 2003. So loans that were made after that date. In several of the versions, it limited it to existing loans, which means that you have an inherent sunset because those loans, as they get modified or go through payoff or refinance, there are a new loan. And then there was on top of that a sunset of--I can't remember exactly, but it was 2 or 3 years afterwards. So during the current crisis, it is as narrowly tailored as any piece of legislation could possibly be to this specific problem. Senator Crapo. All right. Thank you very much. In my questions this round, if I have time for it, I want to cover two issues: one, credit default swaps, which I think we can talk about very quickly; and then, second, as I indicated in my opening comments, regulatory reform. But particularly, again, for the banking witnesses, but for anybody who would like to, let me just say I strongly support the efforts of our financial institutions today and our regulators to strengthen the infrastructure for clearing and settling credit default swaps by creating a central clearing system. And recent events in the credit market I think have highlighted the need for greater attention to risk management practices and, in particular, counterparty risk. A number of private sector initiatives are being developed to diminish counterparty risks to credit default swaps by achieving multilateral netting of trades and by imposing more robust risk controls on market participants. I just want to ask a general question to those who are engaged and would like to respond to this as to how you feel progress is being made here, and when do you anticipate that we might have a central clearing system up and operating. Do you want to start out, Mr. Zubrow? Mr. Zubrow. Sure, Senator. Thank you. I think you have summarized very well much of the activity among the major banks participating in the credit default swap market to bring a much more robust process to it. We are an active participant in the Clearing Corporation/IntercontinentalExchange efforts to create a central counterparty, and right now the proposal is being reviewed by both the Federal Reserve Bank in New York, the SEC, the CFTC, and the New York State Department of Banking. Those different regulators have been in a meeting with the leadership of TCC/ICE, and we would expect to hear back from them sometime in the very short future, the next--you know, potentially this week or next week, you know, regarding getting the appropriate regulatory approvals to allow that organization to be up and running as a central counterparty. So, you know, we very much are in favor of having central counterparty clearing. We think that it will continue to make this marketplace a much more robust and safe marketplace. And while we cannot predict how quickly we will hear back from the regulators, assuming that they do so within a relatively short period of time, we would hope to have this activity up and running by the end of the year. Senator Crapo. Thank you. Anybody else want to elaborate there? Mr. Palm. Goldman Sachs views this as vitally important that the proposals have been put forward, moved forward. We are involved in all the same discussions regarding the same new institutions, and we think it will be a big assist to the market. Whether it gets done by year-end or not is not, you know, entirely clear, certainly. It is dependent on a lot of things getting done. But it is the thing to do. Senator Crapo. Bank of America? Ms. Finucane. Yes, we are all active participants in this, and I think we are all supportive about the procedure and the outcome. And I do not think you will have any disagreement from any of us. Mr. Campbell. I have to admit that this is beyond my capability, but we would be happy to have the people who are aware report back to your staff, if that is what you would like. Senator Crapo. All right. Thank you very much. The last issue that I want to get into, as I mentioned in my initial comments, is regulatory reform. I have for a long time, even before we got into the thick of this crisis right now, believed that we need significant regulatory reform for our financial system in the United States. And I will not go into all the details for why I believe that, but, you know, our capital markets I think have needed to be served by a much better regulatory system for some time. Just yesterday, I believe it was, Walt Lukken, the Chairman of the CFTC, made a proposal that we reform and modernize our regulatory system. His approach, which I think is very similar to the one that Secretary Paulson made last March in his framework that he put forward, suggests that we have three regulators: one on systemic risk--by the way, my understanding is that depending on what kind of business you are in in the financial world today in the United States, you could have as many as seven different regulators, and that does not count all the State regulators and States and other potential impacts. And so this proposal is that we streamline it to a system in which we have three regulators, I assume some of them with increased regulatory strength: one for systemic risk, one for market integrity, and one for investment protection. I for quite some time have been interested in the one- regulator approach that we have seen over in Britain with the FSA, and my question is really a broad, open-ended question, and it has sort of got three parts, but it is all sort of the same question, and that is--and I open this to anyone on the panel who would like to respond. First of all, do you agree that we seriously need a new, modernized regulatory structure? Or is the regulatory structure that we have today one that we can just fine-tune a little bit and keep moving with? And, No. 2, if you do believe that we need to have a significant look at regulatory reform, what do you think of these proposals, the three different regulators or the one regulator based on principles rather than what I call the ``gotcha'' approach? I think you are all understanding where I am headed with this, but what are your thoughts as to where we should head in terms of the regulatory system we should have in place for the future for the United States financial system? And you do not have to answer if you do not want to, if you are not engaged on this issue, but I will start here on the left, and we can just move down. Mr. Eakes. Mr. Eakes. I would think some steps are more urgent than others. So, for instance, the OTS, in my view, has outlived its usefulness. If you look at Washington Mutual, Countrywide, IndyMac, we had institutions that were choosing what they perceived to be the weakest regulator in terms of the lending. If you look even at AIG--so a lot of the crises we have seen have touched through the OTS, and it would not be hard to merge the banks that it supervises into the OCC and merge the holding companies that it tries to supervise but is not really large enough to do into the Federal Reserve supervision. Even with AIG, it is not really widely reported, but what really brought that company to its knees was the credit default swaps that were traded out of an office in London. That office was able to get exempted from all of the European regulators because nominally AIG's holding company was regulated by the OTS because it owned a $2 billion thrift. So owning a $2 billion thrift enabled this to be--and the OTS is in no way capable of looking at the credit default swaps that AIG had all over the world. So I feel like that is the most critical case. When the difference between thrifts and banks was established several decades ago, the thrifts were providing 80 to 90 percent of mortgage loans. Now it is exactly the reverse; 70-plus percent, 80 percent of all mortgage loans are made by banks. So the two institutions have converged, and having a choice of regulator, as Secretary Paulson and his staff have said, we should have banks succeed based on their business choices, not based on which regulator they happen to choose. Senator Crapo. Thank you. Mr. Zubrow. Mr. Zubrow. Thank you, Senator. We certainly agree that there needs to be changes in modernization to the regulatory system in the country. You have certainly highlighted and Mr. Eakes has highlighted, you know, many of the failures of the existing regulatory structure. We very much believe that having a single regulator for the financially systemic important institutions is an important part of how the system might be reformed going forward. We obviously have not had a chance to really go through Mr. Lukken's proposals from yesterday, but I think that, you know, our ongoing view as we, you know, hopefully work with you and others on regulatory reform is to really focus on making sure that there is commonality of regulation for these key systemically important financial institutions so, as the Treasury Secretary has said, we do not end up getting regulatory arbitrage across the different groups. Senator Crapo. Thank you. Mr. Palm. Mr. Palm. Happy to. I think anyone who thinks that the regulatory system in the United States and elsewhere is not in need of reform has not been around for the last 6 months. That would be my first point. We fully support a thoughtful approach to putting together a new regulatory system. Whether that is one super regulator as described, which you mentioned you might be in favor of, or, you know, a tripartite one, one of which consists of investor protection separate from I will call it the soundness of the particular financial institution, et cetera, you know, can be debated. Either system in theory can be made to work. I think the current system--and obviously we are new to being a bank. One of the things that first struck me was the fact that--actually, being a lawyer of sorts, I first got a book out which told me all the different types of organizations you were regulated by if you were in a particular business, and it was mind-numbing, including both regulatory arbitrage as well as--it is not even necessarily arbitrage. It is just people found themselves regulated by different people, having different rules, and so on, and some, from what I can tell, not regulated at all, full stop. So I think it is very important to modernize and move forward. Certainly, the FSA system in London has lots of positives to it. On the other hand, if you step back for a second, even that system obviously did not save their economy from the consequences of what is going on now. So I think you want to have functional based regulation, and as I think Mr. Zubrow alluded to, systemic institutions, i.e., institutions who have global scale, you need to really have people who look after them as an entirety and understand their overall operations. We think that is important. Senator Crapo. Thank you. Dr. Wachter. Ms. Wachter. Yes, it is critically important going forward for the long run to restructure our regulatory system, and there is regulatory arbitrage, and that needs to be part of the issue that is addressed. And I do want to here agree again with Mr. Eakes. The insufficient oversight and lack of reserving for CDS issued by AIG was a critical part of the problem that we are facing today. I want to make two other points. One point, this is a global phenomenon now. We are going to need global cooperation on regulation, and it cannot just be in one nation because, as we see, capital flows are global. Second, again, FSA was not a cure-all. The U.K. had over the same period, not as much as we, but erosion of credit standards, and FSA did not see that happening or could not stop it; and at the same time as erosion of credit standards, a housing asset boom. This U.K. crisis is similar to the Japan crisis, is similar to the Asian financial crisis. So it is not just a better environment for regulation, a better structure, but it is better regulation. Senator Crapo. Thank you. Ms. Finucane. I think I will just reiterate what I think you have heard from the other banks, which is we do believe that there needs to be greater transparency for a regulator. I am not sure that we would support one super regulator. Maybe there is too much risk in that, and there are complications. Consumer regulation versus capital markets might be too big a breadth, so I think we would consider that. The last thing I would just say is clearly from the banks, I think the bank holding company structure has been what seems to be victorious in the long run, so we would start from there as well. Senator Crapo. Thank you. Mr. Campbell. I will only add some thoughts that have not been said. First of all, we agree that there needs to be a revamping of the system. One of the things that I think we all need to be thoughtful of is what is the pace of whatever we go to, so just being thoughtful of the timing. Second, we would encourage this dialog to give us a chance to look at, in particular, the unregulated lenders that exist. I think that that has proven at this time to have been a category that did not get looked at and I think needs to be looked at. Certainly the point of around a systemic look is also high on our list of things to do. And, finally, being clear on what the role of the Fed will be in whatever this new regulatory approach might be from our perspective is a very important consideration. Senator Crapo. Thank you. Ms. Zirkin. Ms. Zirkin. I will be very brief, because we have, frankly, focused on our communities in distress. Previously, we had called for reform of the problem that has actually caused this, but I would agree with Mr. Campbell in that we must regulate unregulated lenders. Senator Crapo. Thank you very much. Mr. Chairman, thank you for letting me go over. Chairman Dodd. Not at all. Very good points, and it was very worthwhile to hear the testimony. As I said earlier, Senator Crapo has had a longstanding interest in regulatory reform. This is a major thrust of this Committee's activities in the coming Congress. We have obviously got to grapple with the ongoing situation, but I do not intend to let that overwhelm this Committee's responsibility, because underlying all of that is the issue of whether or not we are going to have a new architecture that reflects the 21st century global economy and obviously the problems we have entered into. This whole idea of regulatory competition for business I think has been dreadful and has really hurt us terribly in the country, and obviously that is a major point. I want to also make the point that I think we have been operating under a myth for too long, and I think it has hurt our country, and that is that the notion of consumer protection and economic growth are inherently contradictory. They are not at all. I think what we have learned over the last number of months is that consumer protection and economic growth go hand in hand. In fact, when you fail to do the first, you end up doing severe damage to the latter. And I think we need to get over that notion which too often has been the subject of testimony, that if you are going to protect consumers, it is going to hurt our economy. And I think we have learned, painfully, how false that statement is. So I would just add that element as we look down the road at this effort, and I thank my colleague. I just want to end on one question. It has been sort of-- and I listened to all of you when you talked about the Capital Program and to what extent various things are--whether it is bonuses or dividends or acquisitions. And let me say on my part on the issue of acquisitions, again, my general view is I think if you are talking about purchasing or acquiring a failing institution, as several of you have done, it makes all the sense in the world to me. And the question of what is a failing institution, I realize you get into a gray area, and so you want to be careful about trying to draw too bright a line in that area. But, clearly, I think most of us would agree here that is a proper utilization of these funds. Acquiring healthy institutions with these funds is one that is disturbing. But this idea that there are retained earnings and private capital coming in, and obviously capital that has come from the Federal Government, I am a little nervous about this distinction, because money is fungible here, money is money. And, obviously, if you are not paying a dividend or you are not out there paying a bonus, that is going to increase the availability of capital in your institutions. So the notion somehow that I am going to be able to separate out here the money that I am getting from retained earnings or from private investment as opposed to capital coming from the Federal taxpayer worries me a bit here, that in a sense this notion, as I tried to make at the outset in my remarks, it is not just $290 billion. It is over $5 trillion. I asked you the question earlier about these various new instruments and protections and guarantees and so forth. To make my point, the taxpayer is really behind your institutions. I do not know if I would go so far as Martin Eakes to suggest that some of you might not be here today at this table were it not for the fact the American taxpayers contributed significantly to your well-being. And the point here is--and, again, I respect the notion that a dividend is important for investors. But also, we are at such a critical moment that we need capital to go out, and the idea that at this particular moment your investors would be so adverse to the notion that that happen that they would be unwilling to accept the fact that there may be a period of time when a dividend does not go out. I just want to get over this notion somehow that we can draw these bright lines between private capital, retained earnings, and public monies as we talk about building up our capital requirements here to be able to then engage in the kind of lending practices that all of us need to see if we are going to see the capital and credit markets become unseized and unclogged, as they presently are. I just do not think--it flies in the face of reality that you can somehow draw these bright lines between public monies and private monies and retained earnings when it comes to some of these issues. I know you are hearing this from others, so I am not saying something you have not heard before, but this notion of responsibility as well--at this critical moment, none of us in this room have ever lived through anything like we are going through, and we bear the collective responsibility of getting it right, not just for us but for that generation coming along. This country deserves far better than it is getting in this deal, and we need to make it work right, and everybody has got to pitch in, including the investor. Including the investor. And I suspect they understand that better than maybe they are given credit for. So I just urge you today and I thank you immensely for spending a lot of time, going on 3\1/2\, almost 4 hours here today, but this is extremely important, as I know you appreciate. And we do not have a lot of time to get this right. The real market, the real economy is suffering. I had dinner last evening with a very significant retailer in this country, and what is happening to retail sales, when you get 8 and 9 and 10 and 11 percent reduction in retail sales, that is phenomenal in this country. And so it is reaching right down into people out there who depend upon that salary coming in every week to sustain not only their mortgages but their families. And so we have really got to pull together on this now. I hope you will go back to your respective institutions and share the thoughts we have expressed here today. And I think it has been interesting that you have heard it across these party lines. It is not just Democrats versus Republicans. You are hearing it from Mike Crapo. You are hearing it from Mel Martinez, as well as Sherrod Brown and Bob Casey. Chuck Schumer, by the way, has some additional questions he wanted to raise, as my colleagues may have as well, and we will submit those to you. Chairman Dodd. I thank you for being here today, and we are going to continue calling upon you and asking you for your advice and counsel as to how we proceed. But I thank you. The Committee will stand adjourned. [Whereupon, at 1:16 p.m., the hearing was adjourned.] [Prepared statements and responses to written questions supplied for the record follow:] [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM BARRY L. ZUBROW Q.1. ``As you can see, many members of this panel are concerned that in spite of fresh government capital, banks are pulling back and reducing lending at a time when the country is already facing a potentially deep and long recession. How do your loan volumes for this year compare to the past few years?'' A.1. As you are aware, economic conditions in the US and globally have continued to deteriorate since the passage of the Emergency Economic Stabilization Act (EESA): the US lost more jobs in 2008 than in any year since 1945, home values are down 13% in the last year alone, and the stock market is down 21%. Despite these challenging economic conditions, JPMC continues to provide significant levels of credit, and we at JPMC have dedicated ourselves to being there for our clients-- whether by making markets and committing capital to facilitate client business, investing in infrastructure and other projects, or making loans to creditworthy borrowers. At the same time, lending decisions must be consistent with prudent business practices and underwriting standards, appropriately mindful of market and credit risks. Lending activity of all types must be conducted according to prudential risk management standards, and the challenging economic conditions only elevate the importance of operating in a safe and sound manner. We are currently gathering data and hope to present information on lending activities to the Committee in short order. Q.2. ``Are you pulling back active lines of credit from businesses and consumers? If so, why?'' A.2. In the normal course of business, lenders continually evaluate not only whether to make new credit available, but also whether to re-examine existing facilities for both businesses and consumers. This is particularly true during the type of economic circumstance in which we now find ourselves. We take seriously our fiduciary responsibility to the funds we have received from the taxpayers, as well as all shareholders, and we take seriously our obligation to protect these funds from losses, which may require that in certain cases we reduce lines or exit market segments. Most of small business lines were underwritten based on the borrower's stated income. We have reached out to borrowers and asked them to supply us with updated financials that support their income and their ability to manage their existing lines. If borrowers do not provide us with their updated financials, or their financial situation has deteriorated significantly, lines may be reduced. Q.3. ``There is a lot of concern on this panel that the banks are planning on hoarding rather than deploying this capital. What are your forward plans for the use of the TARP funds?'' A.3. TARP funding has helped to bolster JPMC's Tier 1 capital ratio, which was already well above regulatory minimum capital levels, but has risen following the government's October 28, 2008 purchase of JPMC preferred shares. This capital position has allowed us, notwithstanding deteriorating economic conditions and shifting demand patterns, to serve our customers through a very broad range of financial activity. Our capital position has also allowed us to intensify our efforts to modify the terms of residential mortgages to strengthen the US housing market by keeping hundreds of thousands of families in their homes. We believe strongly that American taxpayers deserve to know how banks that accepted TARP funding through CPP have been operating since October 24, 2008, and for as long as the government holds its preferred stock shares. We are currently developing metrics to demonstrate JPMC's lending and market activity. We are committed to transparency and accountability, and look forward to providing Congress, regulators and the American people with regular updates about what JPMC is doing to merit the trust that has been placed in us through the Capital Purchase Program. Q.4. ``We have been hearing from SBA that the number of banks participating in the 7(a) and 504 loan programs has been dropping significantly, partly because of a lack of liquidity and partly because the fees and cost of funds SBA lenders can't break even. What do you see as the main reasons for the decline in the number of participating lenders?'' A.4. A lender's ability to originate SBA loans at break even or better has been adversely impacted by the SBA's increased fees such as Lender Oversight Fees and Yearly Fees (basis point remittance). In addition, due to the combination of increased funding costs as a result of the disruption in the capital markets and the SBA's cap above the base interest rate, the lender's interest margin over its cost of funds is shrinking. Q.5. ``If all of the SBA lender and borrower fees for both the 7(a) and 504 loan programs were completely eliminated for a period of time--not reduced, but completely eliminated--do you believe that this would help spur additional lending activity in the small business'' marketplace? A.5. Yes, because borrowers would find SBA loans more affordable. In addition, lenders would have an increased chance of breaking even on the loan due to no Lender Oversight Fees or Yearly Fees. In addition, there are other actions that we believe could stimulate SBA lending such as:Increase the SBA 7(a) loan limit from $2,000,000 to $3,000,000 and the maximum guarantee from $1,500,000 to $2,250,000. Increase the SBA Express loan limit from $350,000 to $1,000,000 and the maximum guarantee to $500,000. Increase the SBA 7(a) guarantee percentage from 75% to 90% and the SBA Express guarantee percentage from 50% to 75%. Create separate mutually exclusive 7(a) and 504 program limitations. Change the SBA 7(a) size standards to mirror the current 504 size standards. Q.6. ``Loan modifications continue to be one of the most difficult aspects of this crisis. I's like to ask the entire panel, what are the most significant obstacles standing in the way of broader loan modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them?'' A.6. Until recently, the largest single impediment was the inability to provide principal forbearance in GSE loans. Another impediment is the requirement by some investors that only delinquent loans can be considered rather than loans where default is reasonably foreseeable. For portfolio loans owned by Chase, rather than serviced for others, we enjoy more flexibility because, as the ultimate investor, we can readily consider more options and make judgments for ourselves unimpeded by contractual servicing obligations. While we have the ability today to modify and do modify investor owned loans, we need to be mindful of our contractual obligations. Chase currently is rolling out a consistent loan modification toolset across the Chase, EMC and WaMu servicing platforms. When the rollout is complete, we will have the ability to assess the affordability and NPV of affordable modification options versus foreclosures in an automated fashion. We will strive to make modifications on those loans that we believe are affordable and sustainable to the borrower and represent the best NPV alternative to Chase. The GSEs have provided a tool for their recently announced Streamlined Modification Program (``GSE SMP'') that we are in the process of implementing for their loans. Programs that promote the use of a standard set of assumptions, affordability parameters and NPV analysis will be very valuable in accelerating loan modifications. ------ RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM BARRY L. ZUBROW Q.1. Which homeowners are eligible for the institution's loan modification program? A.1. Chase currently modifies loans of borrowers who are owner occupants; however, there are different facets to the program that require different qualifications. For example, Chase currently modifies owned subprime hybrid adjustable rate mortgages (``ARMs'') to the initial interest rate, but the borrower must have a history of on-time payments to verify that it is the rate shock that may cause delinquency and the current payment is in fact affordable. Chase is also modifying loans serviced by others and is committed to expanding its Foreclosure Prevention program to include loans for individual investors or pooled for trusts placed in securitization, to the extent allowed by applicable servicing agreements. We are pleased to say Chase will be actively participating in the new ``Streamlined Modification Program'' and ``Early Workout'' programs recently announced by the Government Sponsored Enterprises (``GSE'') Fannie Mae and Freddie Mac. We are also developing a more efficient process that should further accelerate the pace at which we can modify loans. Q.2. How is success through the program defined? What does it mean that a certain number of homeowners have been ``helped'' through a loan modification program? A.2. Chase believes in tracking success of our loan modification programs by focusing on foreclosures prevented, not just modifications made. (This could include a ``non retention'' cure such as short sale, which is sometimes the best option if a borrower has no income or sufficient income to afford a reasonable modification.) Chase also tracks efforts to reach borrowers as well as actual foreclosure prevention actions taken. This is an important metric because one of the most difficult problems we have in helping borrowers is actually communicating with them. Accordingly, Chase tracks outreach efforts--including borrowers dialed, and mail sent, and will begin tracking inbound visits to each of our 24 Chase Homeownership Centers set to open in early 2009. Most of the activity Chase will track is likely to arise from loan modification activities. We will track loan modifications by type of borrower (current or delinquent borrower) and type of modification. Chase is placing a strong emphasis on making only loan modifications that result in a new payment level that is affordable to each borrower. Chase will be tracking the re-default rate, the rate at which borrowers that have been modified default on the loan modification that was granted, to ensure that our programs permanently help borrowers rather than postpone inevitable outcomes. Loan modifications are not the only strategy that Chase will be pursuing. Chase believes that for a number of distressed homeowners, a refinance into a fully-amortizing FHA- or GSE-insured loan with lower payments may be a better alternative. So we will track refinances for borrowers we believe are at risk of default or are already delinquent, as well as the economic incentives (such as principal forgiveness, principal forbearance or rate subsidization) required to refinance these borrowers. In addition, Chase will track other foreclosure prevention tactics, such as payment plans (where a borrower agrees to pay back arrearages over time), deferments (where a borrower agrees to make late payments in the future), borrower stipulations (where a borrower agrees to make a set of payments, often as a prelude to a modification), and short-sales/settlements (a form of principal forgiveness where Chase agrees to accept less than the amount of the mortgage in exchange for the underlying property or the proceeds of the sale of the underlying property). Although short sales and settlements do not result in borrowers keeping their home, this may be an appropriate solution when the borrower has no interest in remaining in the home or where the borrower has had a financial hardship permanently impairing the borrower's ability to make any payments, even those reduced by a modification. Lastly, Chase will track borrowers who become seriously delinquent or enter foreclosure but improve their situation by curing their delinquency or paying off the loan in full through working with our Homeowners Assistance Department. Q.3. If your program has already been implemented, how have you calculated the number of homeowners assisted through the programs? A.3. For our existing programs, the number is calculated based on the actual number of homeowners that are assisted through loss mitigation efforts which include both home retention efforts as well as other foreclosure prevention techniques that can assist consumers exit a difficult financial situation without impairing future credit. These are further described in the response immediately above. Although we have been actively performing many of the foreclosure prevention tactics discussed above, Chase is currently rolling out the program to each servicing platform (Chase, Washington Mutual, and EMC Mortgage, formerly of Bear Stearns) and extending outreach efforts to borrowers who are not yet delinquent but may become so in the future. By the time the program is fully established, Chase will provide reporting on the number of homeowners helped. Q.4. If your have more than one loan modification program for distressed borrowers, please provide details on each. A.4. We expect to broaden the loan modification alternatives that Chase already offers as part of our Foreclosure Prevention program. The enhanced loan modifications tool set will allow for more flexibility based on the borrower's current loan type and the borrower's specific financial situation. Chase is working to finalize the offers and outreach strategy for both delinquent and current borrowers, but the offers are likely to include those described further below. Chase will identify owner-occupant borrowers we believe can benefit from a refinance into an FHA or GSE insured loan. These borrowers may qualify for principal forbearance, principal forgiveness, or below-market rates as part of their refinance. Eligible borrowers must be current and have reasonably good payment histories, except that delinquent borrowers will be screened to see if they qualify for the Hope for Homeowners product. For owned subprime hybrid Adjustable Rate Mortgages (ARMs) scheduled to reset for the first time, those loans will remain at the initial rate for life of the loan. To qualify for this program, borrowers must have a 2 or 3 year hybrid ARM and have a clean payment history. Borrowers do not need to contact Chase to benefit from this program--the rate lock will happen automatically. For subprime hybrid ARMs serviced but not owned by Chase scheduled to reset for the first time, we will also use the ASF Fast Track program to reduce payment shock. Qualifying borrowers will have their initial ARM rate frozen for five years. For borrowers whose loans are either owned by the GSEs or in their securities and that meet the GSE's Streamlined Modification Program, Chase will offer a pre-approved modification. Similar to the Chase program, term extensions, rate reductions and principal forbearance will be used to achieve an affordable monthly payment. Borrowers must be 90- days or more delinquent, in an owner-occupied single family home, and have a current loan amount of more than 90% of the current value of the home. Borrowers not eligible for any of the systematic modification programs described above are reviewed on case by case basis to determine the suitability of a modification or other foreclosure prevention tactic. For example, borrowers not eligible for SMP because they are only in early stage delinquency, may qualify for the Early Workout Program offered by Fannie Mae. Loan modifications under the Chase programs are evaluated by developing an estimated target affordable payment of 31-40% of the borrower's gross income. The percentage depends on the borrower's income level--higher income borrowers are allowed to have higher percentages. This target payment amount is subject to a minimum disposable income requirement. Once the target payment is calculated, the borrower is run through a payment ``waterfall'' where each modification option is tested to see if it can meet the affordable payment requirement. Concurrently, each modification option is subject to a Net Present Value analysis to confirm that the value of the modification exceeds the value of pursuing a foreclosure. The modification option at which an affordable payment is first reached, if yielding a positive Net Present Value to the loan, will result in a recommended borrower modification. Chase's modification product hierarchy is currently being implemented for delinquent borrowers. Chase will be proactively reaching out to those borrowers in the coming months with an appropriate offer. The components of the modification hierarchy may include: Elimination of negative amortization for pay option ARMs. In addition to the above, reducing the interest rate to achieve a sustainable payment. In addition to all of the above, establishing payments based on a new loan term as long as 40 years. In addition to all the above, reducing rate to as low as 3%. This rate is frozen for three years and then increases a maximum of 1% per year until it reaches the prevailing market rate at the time of the modification. In addition to all of the above, principal forbearance to as low as 90%-95%. This forbearance does not accrue interest but is due upon maturity or prepayment of the loan. In addition to all of the above, introduction of a 10-year interest only period on the loan. Other rate reductions and principal forbearance as necessary to meet affordability standards as long as it is NPV positive. In the near future, Chase expects to issue a similar hierarchy for borrowers who are current on their payments but are facing imminent financial distress. The modification hierarchies will be the basis for a loan-by-loan review of our portfolio to develop an offer that can be proactively presented to the borrower. Q.5. How many homeowners do you project will be assisted through your institution's loan modification programs, and what information do you use to arrive at that calculation.? A.5. We anticipate our program will prevent 400,000 foreclosures in the next two years. We base this estimate on our historical volume of helping approximately 250,000 homeowners over the past two years as well as additional volume expected as a result of our Foreclosure Prevention program. These projections were developed by looking at populations we expect will qualify for the programs, estimating how many of those we will be able to contact, and of those borrowers that we are able to contact, how many will be able to take advantage of the program. Q.6. Please also provide samples of the records and documentation you maintain regarding loans that are modified through your institution's loan modification programs, with appropriate redactions to protect confidential information. A.6. Please see attached a sample of our reporting format for data we provide to the OCC (Attachment 1), a sample modification agreement through which we document our agreement with the borrower (Attachment 2) and a sample blanket modification letter (Attachment 3). Offer letters for the expanded program are not yet finalized. Q.7. Please describe in detail the outreach efforts you have made to distressed homeowners to inform them of their new options for loan modification under the programs you administer. Specifically, what additional measures have you taken since the implementation of the program? A.7. As noted above, we are working to implement enhancements to our overall Foreclosure Prevention Program. Since the initial announcement, we conducted a national print and radio advertising campaign and established a website featuring a toll-free number for borrowers seeking information and assistance. We have identified the locations of our regional homeownership centers and are in the process of hiring staff to roll out the openings over the next quarter. We began to contact customers eligible for the SMP recently announced by the GSEs. There are still instances when borrowers contact us and expect to learn of an appropriate solution but one is not currently available. In these instances, we are recording the borrowers' information and will reach out to them when an appropriate solution is available. During the implementation period of the new initiatives, we have not made any new referrals to foreclosure. New program outreach efforts for delinquent borrowers will begin in January 2009 and for current but at-risk borrowers in February 2009. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM GREGORY PALM Q.1. Loan modifications continue to be one of the most difficult aspects of this crisis. I'd like to ask the entire panel, what are the most significant obstacles standing in the way of broader loan modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? A.1. In Litton's experience, the most significant obstacle to its loan modification efforts has been lack of customer response. Litton expends significant time and resources in attempting to communicate with homeowners. Litton reaches out to homeowners through numerous telephone calls and letters, as well as by often dispatching a representative to the customer's home--all in an attempt to engage the homeowner in ways to try to save the home. Despite these efforts, over the past 12 months at least 25% of the loans Litton services that go into foreclosure are vacant, which is a 100% increase from 12 months ago. Many times these homeowners did not respond to loan modification offers and have simply walked away from their homes. In order to reduce these numbers, Congress and the Administration should encourage struggling homeowners to contact their servicer to attempt to work out a solution. Additionally, Litton has found that local community groups and other housing-focused organizations are often able to help homeowners reach a solution with their servicers and Congress and the Administration should support this type of local advocacy. ------ RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM GREGORY PALM Q.1. All four of your testimonies mentioned the efforts your financial institutions are making to systematically modify mortgage loans to prevent foreclosures and keep homeowners in their homes. Several of the witnesses, with the exception of Mr. Campbell, supplied estimates of how many mortgage owners have been helped or are projected to be helped through these loan modification programs. I ask that each of the witnesses provide more details on these calculations, specifically: Which homeowners are eligible for the institution's loan modification program? How is success through the program defined? What does it mean that a certain number of homeowners have been ``helped'' through a loan modification program? If your program has already been implemented, how have you calculated the number of homeowners assisted through the programs? If you have more than one loan modification program for distressed borrowers, please provide details on each. How many homeowners do you project will be assisted through your institution's loan modification programs, and what information do you use to arrive at that calculation? A.1. Litton Loan Servicing LP (Litton), a Goldman Sachs affiliate, services approximately 440,000 residential mortgage loans. Over the past 12 months, Litton has modified more than 40,500 loans, representing approximately 11.3% of Litton's average portfolio and 35.5% of its average loan population that were 60 days or more past due. Litton services these loans but it does not own the loans. The responses to your specific questions below reflect Litton's experiences as a residential mortgage loan servicers. Q.2. Which homeowners are eligible for the institution's loan modification program? A.2. Litton offers loan modifications and loss mitigation opportunities to homeowners throughout the delinquency period. Litton does not, however, require a homeowner to be delinquent to discuss loss mitigation options. In order to identify issues as early as possible and to examine potential workout solutions, Litton encourages homeowners to discuss changes in their status or circumstances, including loss of income or other hardship that may affect their ability to make payments. Additionally, Litton does not preclude homeowners whose mortgages have been previously modified from requesting additional modifications. Q.3. How is success through the program defined? What does it mean that a certain number of homeowners have been ``helped'' through a loan modification program? A.3. A successful loan modification program reduces monthly mortgage payments to a sustainable level that allows homeowners to remain in their homes whenever possible. When Litton modifies loans, it considers writing down principal, waiving all or part of arrearage, decreasing the interest rate and extending the loan term, among other efforts designed to create a sustainable workout solution for the homeowner. Historically, Litton's average modification involved a payment reduction of approximately $200 per month, which resulted in an average housing debt-to-income (DTI) ratio of 39%. However, in response to deteriorating macroeconomic conditions and a weakened housing market, Litton has implemented a new DTI standard of 31%, which is consistent with FHA guidelines for new loans. Litton expects that after a period of making payments on the loan modification many of its customers will be able to refinance into a fixed-rate FHA loan. Using this standard will allow Litton to do more loan modifications with greater payment relief to the homeowner, thus providing a more sustainable solution. Furthermore, investors will still benefit from modifications which yield a better outcome than foreclosures. Q.4. If your program has already been implemented, how have you calculated the number of homeowners assisted through the programs? If you have more than one loan modification program for distressed borrowers, please provide details on each. A.4. Litton has implemented multiple loan modification programs that seek to help at-risk homeowners stay in their homes. In order to pursue any of the loan modification programs described below, Litton, as servicer for loan investors, must demonstrate that the modification results in a greater net present value to investors than a foreclosure. For ARM loans in which the homeowners is current but Litton believes is at risk of imminent default, Litton begins a streamlined modification offer campaign six months prior to a scheduled interest rate reset. These modifications extend the original terms of ARMs up to 60 months at the introductory rate. Customers with ARM loans that become 60 days delinquent as a result of an interest rate reset will receive a modification that locks in the introductory rate of the ARM for the remaining term of the loan. This type of streamlined modification is offered both to customers with whom Litton has active communication as well as those who have proved difficult to contact. If after receiving either of these types of modifications a homeowner experiences hardship in paying the monthly mortgage payment at the introductory rate, Litton will evaluate the homeowner's specific situation to attempt to create a customized modification for that homeowner using the 31% DTI standard discussed above. For fixed-rate delinquent loans where Litton has active communication with the homeowner, Litton comprehensively evaluates the homeowner's specific financial situation including income and DTI ratio to develop a tailored modification plan for the homeowner that attempts to solve for affordability. The custom modification will include one or more of: waiver of all or part of arrearages, principal reductions, decreases in interest rates and term extensions, among other efforts designed to modify the loan to achieve a 31% DTI. Litton also offers a streamlined loan modification program for fixed-rate delinquent loans for homeowners that have not responded to its loss mitigation offers. After 60 days of delinquency, these homeowners are sent a modification offer that is subject to three conditions: (1) sign and return the modification offer, (2) promptly provide Litton with proof of current income (such as a pay stub), and (3) make one payment at the new, lower, modified payment. If a customer meets these conditions, that customer has achieved a loan modification. If a homeowner responds to the offer but needs further payment relief, Litton will evaluate the homeowner's specific financial situation and attempt to create a customized loan modification as described in the paragraph above. Q.5. How many homeowners do you project will be assisted through your institution's loan modification programs, and what information do you use to arrive at that calculation? A.5. Next year, Litton anticipates to continue, if not increase, the number of modifications, but given the extraordinary market conditions surrounding the housing market and the unprecedented pressures on Litton's customers, it is difficult to project the number of loans that Litton will modify in the coming months and years. Litton has proven and remains committed to constantly examining and re-examining its modification programs to best address both the needs of the individual homeowner and investors. Additionally, it will continue to seek partnerships with strategic community organizations, including housing counseling and foreclosure prevention programs, to increase its outreach to homeowners. Q.6. Please also provide samples of the records and documentation you maintain regarding loans that are modified through your institution's loan modification programs, with appropriate redactions to protect confidential information. A.6. Please see the attached sample modification letter. Q.7. In over a decade of serving in state and federal government, I have learned that even the best consumer programs are useless if those they target for assistance do not know they exist. Please describe in detail the outreach efforts you have made to distressed homeowners to inform them of their new options for loan modification under the programs you administer. Specifically, what additional measures have you taken since the implementation of the program? A.7. Litton expends significant time and resources to communicate with homeowners. Litton contacts homeowners whose mortgage payments are past due, whose loans are scheduled for a rate reset, as well as those who are not in default but Litton believes are at risk for imminent default. Some of Litton's strategies include early and active contact with the homeowner through telephone calls, letter campaigns, home visits, participation in foreclosure avoidance fairs and collaborations with nonprofit housing counseling organizations. [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM SUSAN M. WACHTER Q.1. Professor, in your testimony you mention bank mergers as a less than ideal use of the TARP funds. What do you think of giving Treasury the authority to approve mergers in order to ensure that TARP is only subsidizing mergers that improve systemic stability and/or increase lending to consumers and businesses? A.1. Lending is necessary. However, what is necessary to assure lending will be long run profitability and financial stability. Getting from where we are now to financial stability is critical and the role of directive lending, while seemingly helpful, could be counterproductive. Q.2. Professor, you also discuss the need for banks to continue lending to creditworthy borrowers. Do you think the Administration has done enough to encourage banks to do this lending in a difficult environment? A.2. No, I do not think the administration has done enough to encourage banks to lend in this difficult environment. The administration has not taken the necessary steps to avoid severe housing price overcorrection which will interact with the recession in an adverse feedback loop for both. Q.3. What additional steps do you think the Administration could take? A.3. Similar to the plan Paulson has discussed in the Wall Street Journal on Dec. 3rd, it is necessary to lower mortgage rates and increase lending through Fannie Mae and Freddie Mac. However, I believe it will be beneficial to extend these lower rates to refinancing for existing loans, as well as mortgages for new home purchases. By reducing mortgage rates, the government will provide an opportunity for many to buy into the housing market and to purchase a home at low mortgage rates and an incentive to pay existing, refinanced mortgages even if the home is underwater as opposed to letting the home go to foreclosure. This shift would break the cycle of unsold inventory and decreasing demand causing house prices to fall. Q.4. Loan modifications continue to be one of the most difficult aspects of this crisis. I'd like to ask the entire panel, what are the most significant obstacles standing in the way of broader loan modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? A.4. There are legal and incentive barriers to optimal loan modifications inherent in contractual private label servicing agreements. These barriers, both legal and incentive based, need to be addressed. Useful steps would be to adopt a plan similar to that proposed by the FDIC for IndyMac (along the lines suggested by Sheila Bair) and also to implement REMIC legislation that has been discussed. Solutions that provide incentives and raise the cost to servicers of not optimally modified loans through penalties are both needed to stem the adverse loop that leads to further foreclosures and a worsening housing market outlook. ------ RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM JON CAMPBELL Q.1. As you can see, many members of this panel are concerned that in spite of fresh government capital, banks are pulling back and reducing lending at a time when the country is already facing a potentially deep and long recession. How do your loan volumes for this year compare to the past few years? A.1. Wells Fargo has been one of the few banks to continue lending through the credit crisis. At the end of the third quarter 2008, average loans were up 15% from the previous year and 13% (annualized) from the previous quarter. We were able to generate such strong growth because of our prudent credit discipline and by thoroughly understanding our customers' financial needs. After our release of fourth quarter 2008 earnings on January 28, 2009, we will be able to provide more updated information. Q.2. Are you pulling back active lines of credit from businesses and consumers? If so, why? A.2. Through our ongoing customer management programs, and our adherence to prudent lending principles, we modify lines of credit on a case-by-case basis and only make reductions when we feel it is warranted. Q.3. There is a lot of concern on this panel that the banks are planning on hoarding rather than deploying this capital. What are your forward plans for the use of the TARP funds? A.3. We are scheduled to release our fourth quarter earnings on January 28, 2009 but before that time we cannot provide any forward looking guidance on our lending for the fourth quarter or beyond. We can tell you that we intend to use the Capital Purchase Program funds to make more loans to credit-worthy customers and to find solutions for our mortgage customers late on their payments or facing foreclosures so they can stay in their homes. As indicated previously, through the third quarter of 2008, Wells Fargo had increased loans by 15% from the previous year, strong evidence of our commitment to continue lending through this challenging cycle. Q.4. As you all know, small businesses are the lifeblood of our nation's economy. I have been hearing from a number of companies in my state that the credit crisis is really hurting them not only because they can't get new loans, but also because their lines of credit are drying up and they are finding it difficult to make payroll. The SBA made a couple of important technical changes suggested by Senator Kerry and me in a letter last week, but we need to do a lot more to spur lending in this sector, or millions more jobs could be in jeopardy. A.4. We believe the point of the statement is what needs to be done to get SBA loans moving again and below are three areas that if the changes were implemented could result in an increase in loan activity: 7a loans Raise the threshold to $3 million--the borrowing needs of small business have gone beyond the old limit of $2 million. Raise guaranty to 85% for 7a loans no matter the size of the loan as added incentive for lenders. Adjust the 7a size standards to match 504 program standards--this would make more small businesses eligible for SBA loans. Raise spread over index (Libor or Prime) to match SBA Express limits from 2.25/2.75% to match limits set for SBAExpress loan program. The current SBAExpress limits are 4.5/ 6.5%. SBAExpress Raise guaranty from the current 50% to 75% for all lines and loans. This would encourage banks to make more use of the line of credit feature of this product. This is especially critical now since many small businesses suffer from a lack of working capital. Raise the current threshold from $350,000 to $1 million. Other SBA current program for micro-loan funding is inadequate for the borrowers under $35,000. This has been a long-time source for the funding of very small businesses using non-traditional community based lenders as the distribution network. The funding organizations provide needed technical assistance coupled with the loans. Q.5. We have been hearing from SBA that the number of banks participating in the 7(a) and 504 loan programs has been dropping significantly, partly because of a lack of liquidity and partly because the fees and cost of funds SBA lenders can't break even. What do you see as the main reasons for the decline in the number of participating lenders? A.5. The issue of cost of funds is significant. We and other lenders are seeing loan spreads (profit) decline since the cost of money has been high/volatile and the interest rates we are able to charge on SBA loans are too low. --The lack of liquidity in the market is a major problem. The secondary market for SBA loans has not been a reliable option for most of 2008. Wells Fargo does not sell SBA loans, however many lenders rely solely on the secondary market to generate the liquidity necessary for making more loans. These lenders are now caretaking portfolios and are out of loan origination. --Fees do continue to be a problem. In particular, the ongoing portfolio servicing fee which is currently set at .55 bps is a big expense for all lenders. Layering on top of this are large annual lender oversight fees, for example Wells Fargo paid $123,000 in 2008. The combination of these fees does give all lenders pause, but it truly pushes many mid-size and small lenders out of the SBA program. --More and more lenders are getting frustrated with the difficulties of collecting on loan guaranties from the SBA. The Herndon Center is unpredictable when considering lender liquidation requests. Lenders are being second-guessed and minor issues are often being used as the basis for refusing payment of a loan guaranty. Lenders are questioning the value of the guaranty. Many do not want to go through the hassle of offering SBA loans because they feel that future collection on an SBA loan guaranty is too unreliable. Q.6. If all of the SBA lender and borrower fees for both the 7(a) and 504 loan programs were completely eliminated for a period of time--not reduced, but completely eliminated--do you believe that this would help spur additional lending activity in the small business marketplace? A.6. Yes, anything that can be done to reduce the cost of capital via the elimination of fees would provide a significant psychological boost for SBA Lending. Right now both borrowers and lenders need incentives to once again get money flowing. This would be especially helpful for businesses in need of working capital, those purchasing existing businesses and for commercial real estate transactions. But the elimination of fees is only one piece of the puzzle--we need a holistic approach that can really give the industry a true shot in the arm. Q.7. Loan modifications continue to be one of the most difficult aspects of this crisis. I'd like to ask the entire panel, what are the most significant obstacles standing in the way of broader loan modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? A.7. Yes, it would be very helpful for Congress to provide clear authority to HUD to allow the agency to implement the Section 601 Accelerated Claim Disposition Program. This program is under review at HUD and would enable servicers to take a troubled loan out of a Ginnie Mae pool, apply a loan modification to keep the borrower in their homes and replace the newly modified loan back into the securitized pool. This procedure would be on par with what is permissible for conventional loans and would be a very useful companion to the Hope for Homeowners program. ------ RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM JON CAMPBELL All four of your testimonies mentioned the efforts your financial institutions are making to systematically modify mortgage loans to prevent foreclosures and keep homeowners in their homes. Several of the witnesses, with the exception of Mr. Campbell, supplied estimates of how many mortgage owners have been helped or are projected to be helped through these loan modification programs. I ask that each of the witnesses provide more details on these calculations, specifically: Q.1. Which homeowners are eligible for the institution's loan modification program? A.1. We have a wide array of various loan modification programs. Each has varying eligibility requirements. There are very few loans that we service that once the loan is in default is not eligible for some form of loan modification. Many ``eligibility'' requirements relate to specific ``automatic'' or ``streamlined'' loan modification programs. Again, the eligibility requirements can vary based on investor or specifics of the program. With respect to loans owned by Wells Fargo Home Mortgage, we recently announced a streamlined loan modification program. To be eligible for this program a borrower must be 90 days or more past due, the borrower must own and occupy the home, the property must be a single family residence, and the borrower can not be in bankruptcy. Q.2. How is success through the program defined? What does it mean that a certain number of homeowners have been ``helped'' through a loan modification program? A.2. Wells Fargo Home Mortgage considers a customer ``helped'' through a loan modification program if a loan is brought out of default status while finding an affordable payment that the borrower is able to support on a long-term basis. Success is helping eligible borrowers achieve this, reducing the number of loans that proceed to foreclosure sale while minimizing losses. Q.3. If your program has already been implemented, how have you calculated the number of homeowners assisted through the programs? A.3. The streamlined program applicable to loans owned by Wells Fargo Home Mortgage was implemented on December 15, 2008. That is, we put certain foreclosure sales on hold and commenced efforts to contact and notify eligible borrowers. It is too early to calculate the number of successful loan modifications. Q.4. If you have more than one loan modification program for distressed borrowers, please provide details on each. A.4. As indicated previously, we have and will continue utilizing our case-by-case loan modification program. In addition to the streamlined loan modification program for loans owned by Wells Fargo Home Mortgage, we have implemented a number of programs for loans we service for others. That would include the ASF Streamlined loan modification guidance, Fannie Mae and Freddie Mac's Streamlined Modification Program. The criteria for these programs is similar to what was implemented for the Wells Fargo Home Mortgage owned loan program. Q.5. How many homeowners do you project will be assisted through your institution's loan modification programs, and what information do you use to arrive at that calculation? A.5. We estimate that approximately 7 of every 10 borrowers are eligible for a Wells Fargo Home Mortgage owned loan modification--and that would include the streamlined loan modification process. We base this on an analysis of loan level data, and an estimation of the number of borrowers who will respond to the program. Q.6. Please also provide samples of the records and documentation you maintain regarding loans that are modified through your institution's loan modification programs, with appropriate redactions to protect confidential information. A.6. Yes, we are mailing you a packet regarding loan modifications and will provide that to you directly. In over a decade of serving in state and federal government, I have learned that even the best consumer programs are useless if those they target for assistance do not know they exist. Please describe in detail the outreach efforts you have made to distressed homeowners to inform them of their new options for loan modification under the programs you administer. Q.7. Specifically, what additional measures have you taken since the implementation of the program? A.7. We send out multiple letters of notification providing the borrower with information about the program and urging them to contact us. We send tens of thousands of letters each month urging borrowers to contact us. Additionally, we attend borrower outreach events sponsored by non-profit and other agencies. We make over 2 million outbound telephone calls each month in an attempt to reach borrowers. For customers who do not respond to the letters, we follow up with multiple telephone calls at various times of the day again advising the customers of the program and determining their level of interest in the program. ------ RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM NANCY M. ZIRKIN Q.1. Nancy and Martin, you both spent a considerable portion of your time on the bankruptcy issue, so I don't want to make you repeat yourselves, but I just want to emphasize one point. Isn't it true that despite some improvements, and major new programs announced by several lenders at the witness table today, that investors and 2nd mortgage holders continue to present major obstacles to loan modifications? A.1. That is correct. For example, many loans are broken apart and spread across various tranches of complicated investment securities, which means that a wide number of people have often-conflicting interests in a loan when a borrower cannot afford the payments. The only way to modify such loans, without court intervention, would be to put the entire loan back in the control of one person who can make the necessary decisions-- which, in the case of securitized loans, has often been compared to trying to unscramble an egg. Q.2. And isn't it also true that the only way to overcome those obstacles in a broad-based fashion is through bankruptcy? That the bankruptcy courts are the only entity with the power to overrule the objections of either group? A.2. That is also correct. While I'd certainly be interested in any alternatives that industry opponents of the bankruptcy bill might have for overcoming those obstacles, those opponents still haven't proposed any. Q.3. Loan modifications continue to be one of the most difficult aspects of this crisis. I'd like to ask the entire panel, what are the most significant obstacles standing in the way of broader loan modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? A.3. The key obstacles are--as you noted--the modern securitization process, and the complications in many cases brought on by the use of piggyback loans. Not all loan modification efforts face these obstacles, which is why efforts like Hope Now, Hope For Homeowners, and--even better--FDIC Chairperson Sheila Bair's loan guarantee idea are all very important. But in most case, voluntary modifications just don't work, because it takes permission from too many people--making the bankruptcy route, which doesn't rely on permission, an absolutely essential part of the response.