[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
,
TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY AND ANTITRUST LAW IN FINANCIAL
REGULATION REFORM (PART I)
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
COMMERCIAL AND ADMINISTRATIVE LAW
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
OCTOBER 22, 2009
__________
Serial No. 111-60
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
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COMMITTEE ON THE JUDICIARY
JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California LAMAR SMITH, Texas
RICK BOUCHER, Virginia F. JAMES SENSENBRENNER, Jr.,
JERROLD NADLER, New York Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina ELTON GALLEGLY, California
ZOE LOFGREN, California BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas DANIEL E. LUNGREN, California
MAXINE WATERS, California DARRELL E. ISSA, California
WILLIAM D. DELAHUNT, Massachusetts J. RANDY FORBES, Virginia
ROBERT WEXLER, Florida STEVE KING, Iowa
STEVE COHEN, Tennessee TRENT FRANKS, Arizona
HENRY C. ``HANK'' JOHNSON, Jr., LOUIE GOHMERT, Texas
Georgia JIM JORDAN, Ohio
PEDRO PIERLUISI, Puerto Rico TED POE, Texas
MIKE QUIGLEY, Illinois JASON CHAFFETZ, Utah
JUDY CHU, California TOM ROONEY, Florida
LUIS V. GUTIERREZ, Illinois GREGG HARPER, Mississippi
TAMMY BALDWIN, Wisconsin
CHARLES A. GONZALEZ, Texas
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SANCHEZ, California
DEBBIE WASSERMAN SCHULTZ, Florida
DANIEL MAFFEI, New York
Perry Apelbaum, Majority Staff Director and Chief Counsel
Sean McLaughlin, Minority Chief of Staff and General Counsel
------
Subcommittee on Commercial and Administrative Law
STEVE COHEN, Tennessee, Chairman
WILLIAM D. DELAHUNT, Massachusetts TRENT FRANKS, Arizona
MELVIN L. WATT, North Carolina JIM JORDAN, Ohio
DANIEL MAFFEI, New York HOWARD COBLE, North Carolina
ZOE LOFGREN, California DARRELL E. ISSA, California
HENRY C. ``HANK'' JOHNSON, Jr., J. RANDY FORBES, Virginia
Georgia STEVE KING, Iowa
ROBERT C. ``BOBBY'' SCOTT, Virginia
JOHN CONYERS, Jr., Michigan
JUDY CHU, California
Michone Johnson, Chief Counsel
Daniel Flores, Minority Counsel
C O N T E N T S
----------
OCTOBER 22, 2009
Page
OPENING STATEMENTS
The Honorable Judy Chu, a Representative in Congress from the
State of California, and Member, Subcommittee on Commercial and
Administrative Law............................................. 1
The Honorable Steve Cohen, a Representative in Congress from the
State of Tennessee, and Chairman, Subcommittee on Commercial
and Administrative Law......................................... 1
The Honorable Trent Franks, a Representative in Congress from the
State of Arizona, and Ranking Member, Subcommittee on
Commercial and Administrative Law.............................. 3
The Honorable John Conyers, Jr.,, a Representative in Congress
from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and
Administrative Law............................................. 5
The Honorable Jim Jordan, a Representative in Congress from the
State of Ohio, and Member, Subcommittee on Commercial and
Administrative Law............................................. 9
The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
Congress from the State of Georgia, and Member, Subcommittee on
Commercial and Administrative Law.............................. 9
WITNESSES
Mr. Michael S. Barr, U.S. Department of Treasury
Oral Testimony................................................. 18
Prepared Statement............................................. 20
Mr. Michael Krimminger, Federal Deposit Insurance Corporation
Oral Testimony................................................. 26
Prepared Statement............................................. 28
Mr. Harvey R. Miller, Weil, Gotshal & Manges LLP
Oral Testimony................................................. 63
Prepared Statement............................................. 64
Mr. David Moss, Harvard Business School
Oral Testimony................................................. 95
Prepared Statement............................................. 98
Mr. Christopher Sagers, Cleveland-Marshall College of Law
Oral Testimony................................................. 105
Prepared Statement............................................. 107
Mr. David A. Skeel, Jr., University of Pennsylvania Law School
Oral Testimony................................................. 128
Prepared Statement............................................. 130
Mr. Robert Weissman, Public Citizen
Oral Testimony................................................. 140
Prepared Statement............................................. 142
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
Prepared Statement of the Honorable John Conyers, Jr., a
Representative in Congress from the State of Michigan,
Chairman, Committee on the Judiciary, and Member, Subcommittee
on Commercial and Administrative Law........................... 7
Prepared Statement of the Honorable Lamar Smith, a Representative
in Congress from the State of Texas, and Ranking Member,
Committee on the Judiciary..................................... 11
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson,
Jr., a Representative in Congress from the State of Georgia,
and Member, Subcommittee on Commercial and Administrative Law.. 12
Material submitted by the Honorable Steve Cohen, a Representative
in Congress from the State of Tennessee, and Chairman,
Subcommittee on Commercial and Administrative Law.............. 13
APPENDIX
Material Submitted for the Hearing Record
Material submitted by the Honorable Lamar Smith, a Representative
in Congress from the State of Texas, and Ranking Member,
Committee on the Judiciary..................................... 162
Material submitted by Michael S. Barr, U.S. Department of
Treasury....................................................... 260
Material submitted by Christopher Sagers, Cleveland-Marshall
College of Law................................................. 319
Material submitted by Harvey R. Miller, Weil, Gotshal & Manges
LLP............................................................ 329
TOO BIG TO FAIL: THE ROLE FOR BANKRUPTCY AND ANTITRUST LAW IN FINANCIAL
REGULATION REFORM (PART I)
----------
THURSDAY, OCTOBER 22, 2009
House of Representatives,
Subcommittee on Commercial
and Administrative Law,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 11:05 a.m., in
room 2141, Rayburn House Office Building, the Honorable Steve
Cohen (Chairman of the Subcommittee) presiding.
Present: Representatives Cohen, Conyers, Maffei, Johnson,
Chu, Franks, Jordan, Coble, and King.
Staff present: (Majority) Eric Tamarkin, Counsel; Adam
Russell, Professional Staff Member; and (Minority) Daniel
Flores, Counsel.
Mr. Cohen. Thank you. Thank you. This hearing of the
Committee on the Judiciary, Subcommittee on Commercial and
Administrative Law will now come to order.
Without objection, the Chair will be authorized to declare
a recess of the hearing. Before I start I would like to
recognize Ms. Chu, who is our new Member of the Subcommittee,
and we welcome her to the Committee, and we would like to
recognize you for any opening statement you would like to make
or hear the Bruin fight song.
Ms. Chu. Well, I am very pleased to join this Committee and
to have this as my first Committee hearing, so thank you very
much.
Mr. Cohen. You are welcome, and we are honored to have you.
I will recognize myself for a short statement. Today we
meet to consider the critical question of whether the
Administration has met its burden of demonstrating that the
bankruptcy code should be set aside with respect to large, non-
bank, financial institutions that are critical to the Nation's
financial system--too big to fail. In place of the regular
bankruptcy process the Administration proposes that Congress
grant enhanced resolution authority for such institutions,
similar to the authority that the FDIC currently has with
respect to banks.
This Subcommittee has not yet formed an opinion on the
merits of the Administration's resolution authority proposal.
Given, however, that this Subcommittee is charged with ensuring
the effective functioning of the Nation's bankruptcy system and
the three-part system of government that we have had for 200-
and-something years, we take a keen interest in any move to go
outside that system.
Additionally, a resolution authority proposal raises some
antitrust concerns that my distinguished colleague, Hank
Johnson, the Chairman of the Courts and Competition Policy
Subcommittee will probably address in more detail. I thank
Chairman Johnson for his willingness to allow this hearing to
take place before this Subcommittee for scheduling purposes.
Proponents of enhanced resolution authority contend that
the bankruptcy process is inadequate to handle insolvent but
systemically important financial institutions. These proponents
assert that bankruptcy law is too slow to address the imminent
collapse of a systemically significant financial institution
and that this lack of speed creates dangerous uncertainty in
financial markets. Nevertheless, this is what the Constitution
and the past statutes have dictated as the proper course.
They also contend that the mere act of a bankruptcy filing
by a large, interconnected financial institution could have a
destabilizing effect on the financial system because markets
and investors react very badly to news of such filings.
Proponents of resolution authority point to the chaotic
aftermath of Lehman Brothers' bankruptcy filing as well as the
ad hoc government financial assistance given to AIG to avert
its imminent collapse. They maintain that what transpired
served as proof that resolution authority for non-bank
financial institutions in financial trouble is needed to
provide a mechanism for the orderly restructuring, sale, or
liquidation of such entities.
In response there have been some criticisms leveled at the
proposed resolution authority. The President's critics contend
that granting resolution authority to those financial firms
deemed to be systematically significant may be interpreted as a
guarantee of a future government bailout should those firms run
into financial trouble, thereby encouraging continued
irresponsible risk-taking by such firms.
Others, including Harvey Miller, one of our distinguished
panelists, Lehman's bankruptcy council, note that some tweaks--
with some tweaks the bankruptcy code is perfectly capable of
dealing with insolvencies of systematically important, non-bank
financial institutions. Additionally, according to Mr. Miller,
the creation of a new resolution regime may, in fact, raise a
host of transparency and due process concerns, all of which
have constitutional issues involved.
A resolution mechanism independent of bankruptcy, if
carefully crafted to avoid the creation of moral hazard and
with sufficient elements of transparency and due process might
be an effective way to save the systematically important
institution, or also creating a means of orderly wind-down,
should that be necessary.
The burden remains with the proponents of the resolution
authority, however, to demonstrate to the satisfaction of
Congress and this Subcommittee, in particular, that the
bankruptcy system truly does not offer such a mechanism already
with respect to non-bank financial institutions and that any
actions of this creation would not violate constitutional
authorities that have long held this country in great esteem
and which are the basis of our oath of office.
I hope that this Subcommittee, which is charged to oversee
the Nation's bankruptcy system, can gain some useful insight
from our witnesses as it considers the merits of the resolution
authority proposal. Accordingly, I look forward to receiving
today's testimony.
I now recognize my colleague, the distinguished Ranking
Member of the Subcommittee, Mr. Franks, for his opening
remarks.
Mr. Franks. Well, thank you, Mr. Chairman. You know, Mr.
Chairman, I know in many areas of this Committee, just the
nature of the Committee means that we often have starkly
different perspectives, and I am sure that there are going to
be some of those things exhibited here today, but I want you to
know that I appreciate you for holding this unusually important
hearing.
I want to salute you for your leadership and that of the
Chairman of the full Committee, because I really sense that
there has been an effort to try to get at what is right rather
than who is right here, and I am really grateful for that. And
now I have to make a statement that seems to completely
countermand everything I just said, but it doesn't change the
sincerity of it in any----
Mr. Cohen. You don't have to do that.
Mr. Franks. Mr. Chairman, on the Judiciary Committee we, as
I said, often grapple with issues that are among the most
important in Congress, but even among those matters the issue
today is singularly important. The question is, how will
Congress respond to the near financial meltdown of 2008?
That crisis vaporized trillions of dollars in Americans'
wealth. Through our globally interconnected economy it affected
people all across the world. The wisdom of the Federal response
to date still hangs in the balance.
Second guessing over the choices the executive branch and
the Federal Reserve have made, particularly in September 2008,
will of course continue for decades. But, Mr. Chairman, we
don't really have the luxury of waiting for decades for those
details to be manifested and sifted by time. Another crisis may
come before we know it.
So we must choose. We must ask ourselves, what reforms
should Congress press to guard the Nation against future
calamity? And to help with that decision, Mr. Chairman, you
have called this hearing, and once again I commend you for
that.
Now, on what basis should we make this choice? I believe
the answer is fairly clear: Unless we understand what triggered
the crisis we cannot hope to answer it with the right reform or
solution. And if we don't answer it with the right reform we
may only launch the Nation toward the next crisis.
What, then, caused the financial crisis of 2008? And boiled
down to the simplest answer, in my sincere opinion the answer
is fairly straightforward: It was human errors of judgment in
our government when faced with the choice of whether and how to
intervene in our economy.
Beginning in the 1990's and continuing into this decade,
Washington laid the conditions for financial disaster. Through
the Community Reinvestment Act and its implementing policies
our Federal Government fueled an unsustainable housing bubble.
Responding to government rules, government pressure, and
easy Federal monetary policy, our financial system spread the
bubble's risk throughout our economy and the world. It did so
through risk-laden mortgages and secure ties to mortgage
instruments that were built from and upon them.
In 2008 and 2007 the piper, unfortunately, came to call. As
economic conditions deteriorated institutions realized that
vast majority of vast mortgage-related instruments they held
might not be worth the paper upon which they were written.
Financial institutions holding or responsible for insuring
these interests were exposed to being called to honor debts
they simply couldn't pay. In response, they hoarded their
capital. Lending began to freeze up and the financial system
began to grind to a halt.
As the crisis intensified, the government of the Treasury--
the government, the Treasury, and the fed took upon themselves
the unprecedented step of bailing out Bear Stearns. The market
took note and began to believe the government would bail out
any institution that was as large or larger.
When Lehman Brothers hung on the brink in September of
2008, the Treasury and the fed refused to bail them out. Now
this, obviously--that expectation was dashed at that point.
When Treasury and the fed reversed course days later to bail
out American International Group, dashed expectations then
changed to widespread confusion.
Then, when the Treasury and the fed declared that the
financial system was on the verge--the edge, as it were--of the
abyss and ran to Congress with only a two-and-a-half-page
outline of a rescue plan, full-blown panic began to ensue. And
we still, of course, are trying to recover to this day.
Now, the Obama administration proposes in response to
revamp our system for resolving failing financial institutions
like Bear Stearns, Lehman, and AIG. But instead of responding
to what actually happened in 2008, the Administration rests on
the myth that Lehman's insolvency and the simple need to deal
with it in bankruptcy triggered the entire crisis, and acting
on the myth, it would take the largest non-bank financial
institutions out of the bankruptcy system, create a new
authority for Federal agencies to intervene with them, and let
those agencies--like the Treasury and the fed did in 2008--
decide who survives and who does not. To fund the endeavor it
gives the agencies a new bailout checkbook.
Now, Mr. Chairman, I really believe that this is a recipe
for supercharging the disaster. It institutionalizes
vulnerability to human error in the executive branch. It
institutionalizes the temptation for large firms to take
excessive risks, banking on government bailouts. And it
concentrates risks in those same institutions by encouraging
their consolidation and extending the competitive advantage of
a safety net smaller firms will simply not have.
Mr. Chairman, that is exactly the wrong direction in which
to lead this country. It is imperative that we on the Judiciary
Committee press for the clear alternative option: strengthening
the bankruptcy code so that fair, transparent, and impartial
courts can be relied upon without question to resolve these
firms' insolvencies.
Precisely that option is embodied in H.R. 3310, in which I
join Ranking Member Smith as a cosponsor. Now, I look forward
to discussing the bankruptcy option in depth with you today and
to working together on the right path forward for America.
And thank you, Mr. Chairman, for your indulgence.
Mr. Cohen. Thank you, Mr. Franks, and thank you for your
working with us on this. I was surprised you didn't have the
section we agreed on, that ACORN was not going to be able to
use this resolution authority at any time in the future.
Mr. Franks. I forgot that. We will get her in there.
Mr. Cohen. Right. And no abortions will be provided either.
Mr. Franks. Absolutely.
Mr. Cohen. That is right.
I now recognize the Chairman of the Committee, the
distinguished Chairman from the State of Michigan and the city
of Detroit, the Honorable John Conyers, for an opening
statement.
Mr. Conyers. Thank you, Chairman Cohen. We are privileged
to have the distinguished panelists--the witnesses that are
coming to help guide our discussion this morning. We are very
pleased to have them both here--Mr. Barr, Mr. Krimminger, and
the others that are coming afterward.
You know, Jim Jordan and I are in a very similar situation.
As representatives of Ohio and Michigan we have been
particularly hard hit by this downturn, and I want Trent Franks
to know that we are looking very carefully at H.R. 3310.
And I would like to meet with you about it as soon as my
staff has digested all of the intricacies of that measure. And
I thank you for bringing it forward.
Last fall, our Nation's economy was on the edge of a
financial meltdown. There is some that say we still are. I
mean, this is not like a piece of history that has gone by and
now everything is okay.
What caused the crisis was the mistaken belief shared by
Republican and Democratic administrations in the past that the
financial industry could be relied upon to regulate itself
without significant government oversight. We had to learn this
painfully before in 1929, which ended the Roaring '20's and
ushered into a depression that has never been comparable to
anything else our economic system has sustained.
In an oversight hearing last fall, our former colleague,
then the SEC chairman, Chris Cox, finally admitted that
voluntary regulation doesn't work. Well, that is wonderful,
Chris. We had to take a nation to the edge and we made this
profound economic discovery.
At the same hearing was the distinguished Alan Greenspan,
who made a similar confession--admission--that you can't rely
upon the industry to police itself. Well, that is wonderful. He
apologized.
Who can you really, seriously rely on to police itself,
anyway? Now, instead of demanding change from the financial
industry and insisting that it work cooperatively with the
regulators, we in the legislature did something amazing: We
turned around and gave--and this was a string of multibillion
dollar bailouts--we gave the first one at $700 billion.
Taxpayer funded, no strings attached, no requirement to
even explain what you did with the money. $700 billion. Well,
thanks, Chairman Paulson.
I voted no on it too, Trent, and it is now a part of
American history.
He summoned the leaders of the Senate and the House into
that room at night and laid down three sheets of paper and
said, in effect, the following: Sheet one, I want new Treasury
powers never before given to a treasury secretary in history--
that is me, he said. Sheet two, I want $700 billion right now.
And sheet three, if you can believe the arrogance, he said this
sheet requires that there be no review in the courts or even
the Congress over what we are doing.
Do you know, they signed that? This is what started us off.
And so the financial system, from this humble perspective,
was temporarily stabilized on the backs of the American
taxpayer. Your kids will be paying for that and they will be
saying, ``Hey Dad, why did you guys do that?''
``Well, we were at the edge. Don't you know, the whole
system was going to fall. We had to. We didn't have any
choice.''
In the meantime, we said, now, would you folks hold up on
the bonuses? They said, ``We can't. We are contractually
obligated to reward the people that have driven us to the edge
of the precipice--$1 million bonuses, at that.''
And so most of the institutions that caused the crisis--
many of them--shared in the bailout and are now working against
the proposals of consumer protection and efforts to crack down
on predatory and abusive lending practices, and also any
additional regulatory oversight, while we are at it. I mean,
let us continue business as usual.
And at the same time, the money is still drying up at the
bottom. You still can't get loans. You still can't get--the
credit is stuck. People with good credit cannot get small
business loans right this minute, after trillions of dollars
have been shoveled out.
And as the Troubled Asset Relief Program oversight panel
reported, nearly--right now--2 million homes have already been
lost to foreclosure in the United States. Five million
mortgages are either in foreclosure or default. And the panel
predicts another 10 million homes can or could be lost to
foreclosure.
In Detroit, in the County at Wayne--I had to check the
figure just now--it was 147 families every day go into
foreclosure--they are served with eviction. It said here on my
remarks 195, so I turned to Attorney Tamarkin. I said, ``195?
It is 147.'' He said, ``It has gone up.''
Every day, Monday through Friday, every week, 195 families
in my city are served with eviction or foreclosure notices
because they are behind in their mortgage payments. And so what
the Committee on Commercial Administration Law is doing here
today is raising the question of, how can we return fairness to
the economy and how can we unwind out of this insolvency that
surrounds financial institutions and how we can get the credit
flowing again in our Nation, not just my state or Jim's state,
across the country? It is not much different--it may not be as
bad as we are getting hit.
These massive financial institutions--this was caused--yes,
the government should take some of the blame, but the
government didn't plan the risky, risky, unregulated credit
transactions that they dreamed up with exotic instruments.
And here is, Trent, where the government does kick in. We
came up with a theory that you are too big to fail. Why do you
have to give these people that caused the problem taxpayer
money?
Well, Chairman, they are too big to fail. You have got to
do it.
Well, I think that theory has been reexamined much more
carefully. And then we hastily arrange a merger for Bear
Stearns, but we said, ``Oh, Lehman Brothers, let them go.'' And
then turned around and hand $180 billion cash infusion to AIG.
And since you had to be big and powerful to get on the
preferred treatment list, small banks failed at a rate not
since seen since the savings and loan crisis in the 1980's
while the 19 largest banks in the country were all deemed too
big to fail. And I want our witnesses to comment on these
theories that Chairman Cohen and Trent Franks and I have put
forward.
And what did some of the big boys do? They bought out the
healthy small banks. They had enough money, thanks to us, to go
out and buy the biggies--to go out and buy the little ones.
Well, I will put the rest of my statement into the record
and I thank the Chairman for his generously allowing me to take
this time.
[The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative
in Congress from the State of Michigan, Chairman, Committee on the
Judiciary, and Member, Subcommittee on Commercial and Administrative
Law
Last fall, our Nation's economy was on the edge of a financial
meltdown. What essentially caused this crisis was the mistaken belief
shared by past Administrations--both Republican and Democrat--that the
financial industry could be relied upon to regulate itself without
significant government oversight.
Unfortunately, the lessons our Nation had painfully learned in the
market crash of 1929, which ended the Roaring 20s and ushered in the
Great Depression, were forgotten over the intervening years.
At an oversight hearing last fall on the financial meltdown, the
then SEC Chairman finally admitted that ``voluntary regulation does not
work.''
Also testifying at that same hearing was former Federal Reserve
Chairman Alan Greenspan, who likewise admitted he made a ``mistake'' in
relying upon the industry to police itself.
But, instead of demanding change from the financial industry, and
insisting that it work cooperatively with the regulators, Congress gave
the industry a $700 billion taxpayer-funded, no-strings-attached
bailout.
And with the financial system now stabilized on the backs of the
American taxpayer, Wall Street is poised to hand out another round of
hefty bonuses.
Meanwhile, most of the institutions that caused the crisis and then
shared in the bailout are working against the Obama Administration's
consumer protection proposals to crack down on predatory and abusive
lending practices.
Many of these same institutions have been woefully slow in granting
reasonable mortgage modifications to struggling homeowners facing
foreclosure, while strenuously opposing my legislation to allow market-
based judicial modification of mortgages.
As the TARP Congressional Oversight Panel reported earlier this
month, nearly 2 million homes have already been lost to foreclosure,
and more than 5 million mortgages are either in foreclosure or default.
The Panel predicts another 10 to 12 million homes could be lost to
foreclosure.
Let me put these numbers in some perspective. In my district, about
195 homes in Wayne County, Michigan are being foreclosed or entering
into the foreclosure process each day.
With this worrisome backdrop, I am pleased that the Commercial and
Administrative Law Subcommittee is considering how we can return
fairness to the economy, and find ways to unwind insolvent financial
institutions that present a systemically significant risk to our
Nation's economy.
These massive institutions were allowed to precipitate an economic
meltdown with their risky and largely unregulated credit transactions,
then were all-too-often sheltered from the consequences of their
behavior as ``too big to fail.''
The last Administration took an ad hoc response. They financed a
hastily-arranged merger for Bear Stearns, then let Lehman Brothers
collapse into bankruptcy, then handed a $180 billion cash infusion to
mega-insurer AIG.
Since you had to be big and powerful to get on the preferred
treatment list, small banks failed at a rate not seen since the savings
and loan crisis in the 1980s, while the country's 19 largest banks were
all deemed too big to fail.
FDIC Chairman Sheila Bair recently testified that big banks were
able to use their size and reach to essentially ``blackmail'' the
government.
The ironic result is even bigger banks, in an even more
concentrated financial market.
So the Obama Administration's resolution authority proposal is a
welcome response to the ad hoc approach and the financial blackmail.
It is a welcome response to the perverse incentives for too-big-to-
fail entities to take on excessive risk, yet avoid moral hazard.
It promises to provide a practical mechanism to allow systemically
significant companies to fail, while managing the ripple effects.
We can all agree that the current ad hoc system, where the American
taxpayer is used as a backstop for too-big-to-fail corporations is not
working.
However, as we consider next steps, the first question we have to
answer is whether the Administration's resolution authority proposal is
the best approach for addressing insolvent systemically significant
nonbank financial institutions, or whether the Bankruptcy Code can be
amended to handle failures of these institutions.
The Lehman bankruptcy, the largest in U.S. history, has been cited
as the primary rationale for the need to create a new resolution
authority.
Some have argued that bankruptcy procedure is too slow in the time
of a fast-moving financial crisis. They have also argued that the
bankruptcy process is ``messy,'' and has a destabilizing effect on
markets and investor confidence.
They have supported a resolution regime largely modeled on the
FDIC's current authority to resolve failed depository banks.
Others maintain that the Lehman bankruptcy demonstrated that the
bankruptcy process has unique flexibility that makes it better equipped
to handle resolution of these companies.
With a few tweaks, they say, the bankruptcy system can handle the
resolution of nonbank systemically significant financial institutions
far better than an FDIC model.
I hope that our witnesses today will help Committee members better
understand which approach would be the more effective.
Second, if Congress decides to pursue the Treasury's resolution
authority approach, we should ensure that antitrust considerations are
given their full account, so that the problem of institutions becoming
too big to fail doesn't just get worse, with larger institution, less
competition, and higher prices to consumers.
The Administration's draft resolution authority legislation would
vest the FDIC and SEC with authority to seize and resell the assets of
certain business entities. However, the draft proposal is unclear about
the role of antitrust oversight by the Justice Department and the
Federal Trade Commission.
In an environment where a few banking giants are dominating the
market, it is important that we keep the antitrust laws at the
forefront.
Third, if Congress decides that the bankruptcy process is the
better course, then we must revisit which aspects of the Code should be
amended to provide a better framework to deal with institutions too big
to fail.
For example, we should scrutinize the use of the netting and safe
harbor provisions, which were inserted into the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 at the behest of
financial industry associations.
These provisions created a safe harbor that put derivatives, swaps,
and securities transactions beyond the jurisdiction of the bankruptcy
court.
Giving banks and brokers a free hand to offset mutual debts against
each other through netting might sound like prudent risk management, it
has been described as ``chaotic'' in practice, as evidenced by the
Lehman case.
On the day before its Chapter 11 bankruptcy filing, Lehman utilized
the netting provisions to offset various financial contracts it had
outstanding.
Instead of resolving these financial contracts in a transparent
manner under the framework of the Bankruptcy Code, Wall Street
conducted a private trading session without any oversight. During this
session, Lehman's assets were ravaged by its creditors.
We remain at a momentous crossroads in our economic recovery--the
big banks propped up by the taxpayers are back to prosperity, but
everyone else has been left behind.
I commend the collaboration between Commercial and Administrative
Law Subcommittee Chairman Steve Cohen and Courts and Competition Policy
Subcommittee Chairman Hank Johnson in putting together an important and
thought-provoking hearing, and I look forward to the testimony.
__________
Mr. Cohen. Thank you, Mr. Chairman. Your remarks are always
welcomed.
And before I recognize my fellow Chairman, I think the
opposite end of the Big 10 axis here, Michigan, Ohio State
should be recognized for a statement. Mr. Jordan?
Mr. Jordan. I thank the Chairman.
Thank the Chairman of the full Committee for his comments
about the economic situation in the Midwest and Ohio and
Michigan, and frankly across the country.
Let me just make this point: As the Chairman was going
through the history of the TARP program, I do think it is
important to remember, as well, that, you know, we gave this
unprecedented authority to the government and the results have
not been what we expected, not been--well, I guess some of us
maybe expected, those of us who voted against it.
But think about what took place. That whole package was
sold to the United States Congress that they were going to get
this money and go in and purchase the troubled assets, free up
the dollars that need to be put to use right now in our
economy. And to date, they still haven't purchased the first
troubled or toxic asset.
In fact, I would almost argue that--and we had hearings on
this in another Committee--that when the program was sold to
the Congress of the United States you wonder if there was any
misleading going on, because 9 days after--this came out in
testimony during the Bank of America hearings--9 days after the
program passed the Treasury and the fed had already changed
directions and simply went to injecting capital into these
institutions.
And so I would be concerned about any new power we start
giving to government in light of what took place in that whole
scenario, which I think was just a wrong move and the wrong
kind of approach to a tough situation we had to deal with last
year.
And with that, Mr. Chairman, I would yield back.
Mr. Cohen. Thank you, Mr. Jordan. I appreciate your
remarks.
We have got votes but we have got time for the opening
statement from the Chairman of the Committee that has been so
kind to work with us today, Mr. Johnson, of Georgia.
Mr. Johnson. Thank you, Chairman Cohen. Thank you for
holding this important hearing. And I am glad that this
Committee is taking the opportunity to look at the role of
bankruptcy reform in financial regulatory reform.
And I think one of the things that I am most proud of as a
congressman in my sophomore term is my vote against the Wall
Street bailout, also known as the TARP program. And the reason
why I voted against it was because yes, I felt that there was
a--our economy was freefalling, but I thought that the best way
of addressing the issue was to start not on Wall Street but on
Main Street.
Main Street needed the bailout. So many people suffering
from foreclosure, suffering from medical bills that they could
not pay, so many people had already lost their jobs, and I
thought that we could put together a package that would help
those people. And then once Main Street was stabilized, then we
could address some concerns about Wall Street.
Used to be, in the old days I guess, that you preside over
a company, you make billions of dollars in profit, and if
something goes wrong your company goes into bankruptcy and your
leadership resigns or is fired, either one. But that process
was usurped by a new process in this Wall Street bailout
situation. The very people who led us to impending doom were
allowed to remain on board of their companies, continue to lead
their companies, while at the same time they were given
taxpayer money with no strings attached.
And with that money, instead of cleaning up toxic assets,
cleaning up balance sheets, and getting rid of toxic paper, as
it was called--and that would have, by the way, cleaning up
that toxic paper probably should have entailed the Main Street
stopping the foreclosures. That was what made the securities in
which they were bundled valueless.
And so it was when people figured that out that, you know,
we started to have these failures of these financial
institutions. And so we didn't handle the $700 billion sudden
request very well, in my opinion, and that is why I am proud of
not having voted in favor of that.
And I will say that as Chairman of the Subcommittee on
Courts--by the way, still find folks who made the billions of
dollars, millions of dollars individually, presiding over the
industry and its big players are the same people that are now
prospering from the $700 billion that they have been given
relatively few strings and in some cases no strings attached.
And then, instead of buying up the toxic paper and doing the--
clearing out balance sheets and that kind of thing, they used
the money to acquire smaller entities, smaller financial
entities.
So now it is like you have got three big great white sharks
swimming in a body of water that is not that great and then all
of the lesser fish, you know, they are getting ate up, or eaten
up with reckless abandon. And it doesn't look good long-term
for the great white sharks because they won't have any food to
eat if they keep going at this pace.
And what they need is to be regulated, but not by a new
entity. The bankruptcy laws, I believe, and--in other words,
you fail, you file bankruptcy, you resign, you get terminated.
Company then either comes back or it is permanently dead,
liquidated.
And as Chairman of the Subcommittee on Courts and
Competition Policy I consider the competition aspect or the
antitrust aspect to be of great national importance. In fact,
my Subcommittee held a hearing on this ``too big to fail''
issue, which we have multiplied now with the $700 billion
bailout. We had a hearing on that and in that hearing we looked
at whether antitrust laws should have prevented these ``too big
to fail'' institutions from becoming so big and whether
antitrust law was sufficient to review the competitive
implications of the ongoing consolidations of the banking
industry.
And to make a long story short, I want to--I look forward
to hearing the testimony today from those pro and con as to
this new entity that is being proposed. And I thank Chairman
for this time.
Mr. Cohen. I thank Mr. Johnson.
Before we leave--adjourn--for about 35 minutes I want to
recognize and accept the statement into the record, Mr. Lamar
Smith. That will be done without objection. We will return in
about 35 minutes, and we are in recess.
[The prepared statement of Mr. Smith follows:]
Prepared Statement of the Honorable Lamar Smith, a Representative in
Congress from the State of Texas, and Ranking Member, Committee on the
Judiciary
The 2008 financial crisis riveted the world's attention on
America's federal response to large, insolvent financial institutions.
This response lurched from Bear Stearns to Lehman Brothers to AIG as
one linchpin after another failed in our financial system.
Led by the Treasury Department and the Federal Reserve, the
reaction to the crisis was driven by fear of a systemic, financial
meltdown. Treasury's and the Fed's interventions, however, were hardly
helpful. They were ad-hoc, inconsistent and left the federal government
with unprecedented ownership of banks, insurance companies and other
major institutions.
With the benefit of hindsight, few would say that the strategy
Treasury and the Fed adopted ought to be repeated today. America needs
to put in place a better strategy to address the next crisis, if one
comes.
Before Congress acts, however, we must understand two issues
clearly--what caused the 2008 crisis and what corresponding strategies
may help prevent a future financial meltdown.
Many assume that it was the bankruptcy of Lehman Brothers that
triggered the worst of the panic. As a result, some commentators
advocate that we should not look to the Bankruptcy Code to deal with
similar institutions in the future.
As the committee with jurisdiction over the Bankruptcy Code, the
Judiciary Committee has a responsibility to dispel this myth.
Leading economists and academics have concluded that it was not
Lehman Brothers' bankruptcy that caused the panic. Instead, the actions
of government were at the root of the crisis.
An eminent Stanford University economist has pinpointed the
immediate cause of the panic. It was not Lehman's bankruptcy filing--
the market absorbed that event.
Instead, it was Treasury's and the Fed's subsequent actions that
signaled to investors that the government anticipated a market
collapse, but did not yet have an adequate plan of action.
First, Treasury and the Fed hastily announced a broad financial
rescue package without revealing the details. Then, their officials
appeared before Congress and demanded $700 billion with no more than an
initial sketch of their legislative plan.
Though Congress criticized the plan and demanded more details and
oversight protections, the Administration urged Congress to act
immediately to prevent a collapse of America's financial institutions.
In a self-fulfilling prophecy, it was only after the Treasury and
Fed spun everyone up into a panic that the market, indeed, panicked--
not after Treasury's and the Fed's earlier decision to let Lehman
Brothers go into bankruptcy.
The government's inconsistent treatment of Bear Stearns and AIG--
which it bailed out--and Lehman Brothers, which it did not--added to
the uncertainty that gripped the market, while underscoring the flawed
approach of ad hoc government intervention decided behind closed doors.
Finally, of course, other government distortions of the market,
from the Community Reinvestment Act to Fannie Mae and Freddy Mac and
on, helped produce the 2007-2008 credit crisis that set the stage for
panic.
The lesson of this history is not that America should avoid the
Bankruptcy Code as a means to resolve failed financial institutions. It
is that America should renounce government authority that lets federal
agencies and government employees determine who lives and dies in our
economy.
H.R. 3310, House Republicans' Consumer Protection and Regulatory
Enhancement Act, takes both of these lessons to heart. It brings an end
to billion dollar bailouts and establishes a new chapter of the
Bankruptcy Code to resolve failed financial institutions other than
banks.
Through its bankruptcy reforms, H.R. 3310 keeps the resolution of
these firms in the transparent, predictable and fair arena of the
bankruptcy courts.
It removes these cases from the closed-door world of government
agencies and prevents back-room political favoritism towards struggling
institutions. And it adds special provisions to better handle the
bankruptcies of financial institutions so all that is possible to avert
future crises may be done.
The Obama Administration has a different proposal, which only
threatens to hasten our next crisis. The Administration
institutionalizes billion dollar bailouts and the idea that some firms
are ``too-big-to-fail.'' Its special treatment of the biggest firms
gives them competitive advantages, consolidates excessive risk-taking
and lays the groundwork for the next meltdown.
And, once again, the Administration mistakenly gives government
agencies--and the political appointees who head these agencies--the
power to determine who survives.
Rather than abandon our bankruptcy system, Congress should
strengthen it.
__________
[Recess.]
Mr. Cohen. This is not working--there it goes. Good. Good.
We are back, and if any other Member would like to have an
opening statement entered in the record, so will be allowed and
have 5 days to enter that statement.
[The prepared statement of Mr. Johnson follows:]
Prepared Statement of the Honorable Henry C. ``Hank'' Johnson, Jr., a
Representative in Congress from the State of Georgia, and Member,
Subcommittee on Commercial and Administrative Law
Chairman Cohen, Thank you for holding this important hearing. I am
glad that CAL is taking the opportunity to look at the role of
bankruptcy reform in financial regulation reform.
As Chairman of the Subcommittee on Courts and Competition Policy, I
consider this an issue of national importance. In fact, I held a
hearing on the ``too big to fail'' issue, from a competition
perspective, in March 2009.
In that hearing, we looked at whether antitrust law should have
prevented theses ``too big to fail'' institutions from becoming so big
and whether antitrust law was sufficient to review the competitive
implications of the ongoing consolidations of the banking industry.
In fact, these proposals raise competition concerns because they
would give the FDIC and the SEC the authority to seize and resell the
assets of business entities.
Compounding the problem is that the seizures would not be subject
to any specific competitive review; in fact competition concerns are
only one of several factors.
The agencies are directed to focus on keeping the market stable
which could actually harm competition in the banking industry in the
long run.
DOJ, the experts in evaluating mergers, is only given an advisory
role and it is unclear whether DOJ will be able to challenge these
transactions after the fact.
Our economy remains unstable. Hundreds of billions of taxpayer
dollars have been spent and will be spent trying to revive our economy.
Congress must act in conjunction with the Administration to help
America recover.
But we must be cautious that we do not allow our antitrust laws to
be trampled on in our attempt to fix the economy. If we do, we may face
additional problems down the line.
I yield back the balance of my time. Thank you.
__________
Mr. Cohen. We have a letter that we have received from--to
Mr. Conyers--from Mr. Bernanke concerning this subject matter,
and he has a different approach than several of the opening
statements concerning the need for some type of resolution
authority for the financial systems, and I will enter the
letter in the record as delivered; he is unable to attend.
[The information referred to follows:]
__________
Mr. Cohen. Unlike everybody else, I think, that is here, I
voted for the TARP, but the continued egregious and--conduct of
the companies that received it in getting these bonuses so that
Mr. Johnson's fish can be served at Masa and Nobu and be
consumed through their salaries does make it difficult to
continue to support such actions. But the letter will be
admitted.
I would like to thank all the witnesses for participating
in today's hearing. Without objection, your written statements
will be placed into the record and we would ask that you limit
your oral remarks to 5 minutes.
You will note we have a lighting system that starts with a
green light. At 4 minutes it turns yellow, and then red at 5
minutes. When it gets to red you should have concluded your
remarks or be wrapping them up. After you have presented your
testimony Subcommittee Members will be permitted to ask
questions, again with the 5-minute limit imposed.
I am pleased to introduce our first witness, Mr. Michael
Barr. Mr. Barr was confirmed by the United States Senate on May
21 to serve as the Department of the Treasury's Assistant
Secretary for Financial Institutions. As such, he is
responsible for developing and coordinating Treasury's policies
on legislative and regulatory issues affecting financial
institutions.
Mr. Barr previously served during the Robert Rubin Treasury
period as a special assistant and a special advisor to
President Clinton, as an advisor and counselor on the staff at
the State Department as well, and as a law clerk to the
esteemed U.S. Supreme Court Justice David Souter, who I think
the world of.
Thank you, Mr. Barr. Will you proceed with your testimony?
TESTIMONY OF MICHAEL S. BARR,
U.S. DEPARTMENT OF TREASURY
Mr. Barr. Thank you, Chairman Conyers, Chairman Cohen,
Ranking Member Franks, Members of the Committee. I appreciate
the opportunity to testify today.
Just over a year ago the collapse of Washington Mutual,
Wachovia, Bear Stearns, Lehman Brothers, and the extraordinary
intervention in AIG severely tested our ability to respond to
the financial crisis. In the panic that followed, our financial
system nearly ground to a halt and the crisis revealed deep
weaknesses in our financial system.
I want to begin today by briefly outlining how President
Obama's comprehensive approach addresses the challenge of those
firms whose failure could threaten the stability of the
financial system and then focus on the Administration's
proposed resolution authority.
In recent decades we have seen the growth of--significant
growth of large, highly leveraged, substantially interconnected
firms. These firms benefitted from the perception that the
government could not afford to let them fail.
Of course, during the financial crisis the Federal
Government did stand behind many of these firms. That action
was necessary, but there is no question that unless we act
meaningful reform of our financial system the problem will have
been made worse. We must end the perception that any firm is
too big to fail.
First, the biggest, most interconnected firms must be
subject to serious accountable, comprehensive oversight and
supervision. Second, we need tougher standards. The largest,
most interconnected firms should face significantly higher
capital and liquidity requirements. Through tougher prudential
regulation we aim to give these firms a positive incentive to
shrink, to reduce their leverage, their complexity and their
interconnectedness, and we aim to ensure that they have far
greater capacity to absorb their own losses when they make
mistakes.
We need to make clear that being among the largest, most
interconnected firms does not come with any guarantee of
support in times of stress. Indeed, the presumption must be the
opposite. Shareholders and creditors should expect to bear the
cost of failure.
That presumption needs to have real weight. That means the
financial system itself must be stronger and made more able to
handle the failure of any financial firm. In this last crisis
it was not.
And as part of our proposal we have also called for firms
to prepare what have been called living wills, a credible plan
for their rapid resolution in the event of distress. This
requirement will leave us better prepared to deal with the
firm's failure and will provide another incentive for firms to
simplify their organizational structures and improve risk
management.
By building up capital and liquidity throughout the system,
by increasing transparency in key markets, our plan will make
it easier for the system to absorb the failure of any given
financial institution. In most circumstances, these precautions
will be enough. Moreover, in the event that these firms do
fail, we believe that these actions will minimize the risk that
any individual firm's failure will pose a danger to broad
financial stability, which is why bankruptcy will remain the
dominant option for handling the failure of a non-bank
financial institution, even very large ones.
The last 2 years, however, have shown that the U.S.
government simply does not have the tools to respond
effectively when failure could threaten financial stability.
That is why our plan permits the government, in very limited
circumstances, to resolve the largest and most interconnected
financial companies outside the traditional bankruptcy regime,
consistent with the approach long taken for bank failures.
This is the final step in addressing the problem of moral
hazard. To make sure we have the capacity, as we do now for
banks and thrifts, to break apart or unwind major non-bank
financial firms in an orderly fashion that limits collateral
damage to the system.
The resolution authority we have proposed allows the
government to impose losses on shareholders and creditors
without exposing the system to sudden disorderly failure that
puts everyone at risk. Our approach is modeled on the
longstanding regime for bank failure.
There are significant and tested safeguards in placed,
modeled on the bank failure law to protect creditor rights.
Creditors in the resolution process, moreover, are protected by
the same system of judicial review that has existed for the
FDIC and its predecessors for its receivership authorities for
more than 75 years.
In our view, we need to have humility about the future and
our ability to predict or prevent every systemic failure of a
major financial firm. In a severe crisis if major firms fail
and prudential measures and capital buffers prove inadequate,
special resolution should be available.
Our proposals provide a way to end the firm, to wind it
down without contributing to system-wide failure. Our proposals
represent a comprehensive, coordinated answer to the moral
hazard challenge posed by our largest, most interconnected
firms, and the plan protects taxpayers and enables shareholders
and creditors to take losses.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. Barr follows:]
Prepared Statement of Michael S. Barr
__________
Mr. Cohen. Thank you, Mr. Barr. I appreciate your staying
within your 5 minutes and pardon your microphone. We will work
on it.
Second witness is Mr. Michael Krimminger, Special Advisor
for Policy to the Chairman of the FDIC, especially involved in
issues involving regulatory restructuring and resolution
authority, mortgage market developments, banking charter and
capital, international and large bank resolution initiatives,
derivatives, and other similar financial contract developments
and assorted issues. He chairs the Basel Committee on Banking
Supervision's Cross-Border Resolutions Working Group, which
recently issued a recommendation for international
infrastructure improvements and the international working group
that developed core principles for effective deposit insurance
systems.
Mr. Krimminger, proceed please.
TESTIMONY OF MICHAEL KRIMMINGER,
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Krimminger. Chairman Cohen, Ranking Member Franks, and
Members of the Subcommittee, thank you for the opportunity to
testify on behalf of the FDIC today.
The current crisis has caused tremendous hardships for
millions of Americans and shaken confidence in our institutions
and financial system. Our system has proven resilient, but at
great cost.
To restore market discipline and prevent future bailouts,
we must adopt reforms with the goal of ending ``too big to
fail.'' These reforms must focus on strengthening market
discipline while protecting the public, and this should include
strengthened oversight and capital requirements for our largest
and most interconnected financial firms, creation of an
oversight council to identify and address emerging systemic
risk, more effective protections for consumers, and tightened
regulation of derivatives.
However, improved supervision and regulation alone cannot
prevent the next crisis. Fundamentally, we must end ``too big
to fail'' as an approach for dealing with the largest financial
firms when they are failing. We need a resolution process for
these firms that can be used in a crisis to close the firm
while a receiver maintains critical operations to prevent a
broader catastrophe for innocent businesses and consumers.
This new process would only apply after a systemic
oversight council decided that an exception to bankruptcy was
essential to prevent systemic risk to our financial system.
This is no bailout. In fact, shareholders and creditors absorb
the losses and the firm's assets are later sold to private
firms. However, the ability to preplan the resolution, transfer
key contracts to a bridge institution, and temporarily maintain
critical financial operations will prevent the market disarray
that could occur if the firm collapsed.
To underline our goal of preventing future bailouts, we
would recommend that the law ban special assistance targeted to
specific open institutions. In a free economy there are winners
and losers. When a firm cannot continue it should be closed.
However, today we have a system in which the largest
financial firms appear immune to market discipline. Bankruptcy
provides the right process for the vast majority of insolvent
companies. However, the current crisis has reminded us that
there are fundamental differences between our largest financial
firms and commercial or industrial companies. Large financial
firms fulfill critical functions in providing financing for
businesses and individuals, settling cash payment,
intermediating liquidity and access to capital markets, and
even providing the infrastructure and financing for the
government securities market.
The functioning of our markets depends on ready liquidity,
confidence among market participants, and financial assets
whose value is tied to the intermediation of market, credit,
and other risks. To end ``too big to fail,'' we must have a
resolution process that market participants know can be
implemented without causing disarray in the markets. They must
know the process will actually be used in a crisis.
What the solution should entail, first and foremost, is the
swift and orderly closing of the firm while keeping its key
functions operating. Like the bank resolution process, this
requires extensive preplanning and developed expertise in
dealing with complex financial operations.
The immediate power to take charge of the firm and pass
critical operations to a newly-created bridge financial
institution will protect the public by avoiding market
uncertainty and ensuring continuity. This will allow the
receiver to stabilize the market, retain going concern value,
and avoid dumping financial contracts in already illiquid
markets. The well-established checks and balances that protect
stakeholders in the bank receivership process should apply here
as well.
In conclusion, the proposed resolution process is not a
challenge to the important role that bankruptcy plays in the
U.S. system. It simply offers an alternative in a financial
crisis so that regulators can realistically close the largest
firms while protecting the public from a market collapse and
from future bailouts.
I would be happy to answer any questions. Thank you.
[The prepared statement of Mr. Krimminger follows:]
Prepared Statement of Michael Krimminger
__________
Mr. Cohen. Thank you, Mr. Krimminger. I appreciate your
testimony.
And I now recognize myself for 5 minutes of questioning.
First thing I want to ask, I guess, is Mr. Barr, and I am
not sure if you can answer this or not, but a lot of people
feel that Mr. Paulson chose his friends at Goldman Sachs and
other friends in the financial market to take care of and let
other friends die. The laws are supposed to be applied fairly,
and the bankruptcy code is a fair, due process, transparent
system where people--there are laws and the judges are supposed
to work in that.
How can you assure the public and those of us who voted for
the TARP, although reluctantly, that if we have such a
resolution authority formed that there will be fairness and
transparency rather than favoritism played when it is outside
of the bankruptcy system, which has fairness build into it?
Mr. Barr. Thank you very much, Mr. Chairman.
Under the regime that we have proposed--the resolution
regime we proposed--it is modeled on the long history under the
Federal Deposit Insurance Act, that if the FDIC acts as
receiver under such cases, under the Administration's proposed
approach for the largest, most interconnected firms, the same
process would be used.
So the FDIC would act as receiver, there would be judicial
review as there is today of the FDI's decision with respect to
the appointment of a receiver, there would be judicial review
with respect to the FDIC's decisions with respect to the
payment of claims, and so there are important safeguards very
much built into the basic structure of resolution in our
regime.
Mr. Cohen. Thank you.
And Mr. Krimminger, maybe you would answer this but maybe
Mr. Barr would if--it is just it is FDIC. In FDIC, when a bank
needs protection does every bank have the same--is dealt with
the same way, or is there any subjectivism on the judgment on
the part of the FDIC on which banks and how they deal with
them?
Mr. Krimminger. Well, the banks are dealt with--under the
FDIC's current law we are required to apply the least cost
test. In other words, we have to choose the resolution process
for that particular bank that is the least costly to the
deposit insurance fund. So in other words, it is determined in
some ways by the assets of the bank, but not by the character
of the bank management or any other types of influences. We
simply bid the bank out to resolution and then the winning
bidder--the highest bidder, essentially, then acquires the
bank's assets.
The proposal we are talking about here would essentially
create the same process so that you might have to temporarily,
with the largest firms, create a bridge financial institution
in order to bridge that process so that there wouldn't be an
immediate collapse, but nonetheless there would be a bidding
process that would be open and transparent so that other
financial firms could bid for the assets and operations of that
bank once it were stabilized--for that institution once it were
stabilized.
Mr. Cohen. Mr. Barr, I might have missed it, but I think
you said something about the largest financial institutions. Is
there a definition of what the largest financial institutions
would be so that they would all be within the same class and
not be determined by favoritism?
Mr. Barr. So, under our proposal, Mr. Chairman, the Federal
Government, through the agencies, the Federal Reserve, with
input from the counsel of all the regulators, would make a
determination that a firm that is large, interconnected, and
highly leveraged such that its failure would pose a threat to
financial stability could be designated for stricter, tougher,
more stringent forms of supervision with higher capital
standards, higher prudential requirements, the requirement of
the living will, the tougher set of standards I outlined very
quickly in my testimony.
That designation itself would have due process protections
in it. It would have a provision with respect to notice and an
opportunity to be heard and to rebut the designation. And that
process would be open.
Mr. Cohen. It may not be--it is not directly relevant to
this, but Mr. Barr, do you have anything to do with the
Treasury's decisions on bonuses and this outrageous system that
we have now?
Mr. Barr. I do not. That is not directly within my
responsibilities. I am certainly aware that the Treasury is
involved in such cases, but it is not core to my
responsibility.
Mr. Cohen. Okay. Mr. Miller, who is going to testify later,
has suggested Lehman's biggest problem was lack of liquidity
and a need for stay protection. Have you read Mr. Miller's
testimony, Mr. Barr?
Mr. Barr. I have, just before this hearing.
Mr. Cohen. And what do you believe about his suggestion
that the problem was its lack of liquidity and the suggestion
that the Treasury's authority be expanded in certain
circumstances and that we needed to amend the bankruptcy code
to eliminate safe harbor provisions for derivatives and other
types of transactions?
Mr. Barr. In our judgment, whatever is done with respect to
the bankruptcy code, it is absolutely essential that we have
resolution authority for the failure of the largest, most
interconnected firms that might pose a risk to the system. The
resolution authority is designed to meet different objectives
from the bankruptcy code. The bankruptcy code, as you know far
better than I, is focused on the process with respect to
creditors. The resolution regime is really designed to protect
all of us, to protect the economic system from the collapse of
a significant financial firm that blows through its capital
buffers.
So we think whatever the Committee decides to do with
respect to bankruptcy, it is absolutely essential that we have
resolution authority.
Mr. Cohen. Thank you, Mr. Barr.
And before I recognize Mr. Franks, the problem we have
got--and I concur with much of what you have said and what Mr.
Bernanke says and Mr. Geithner--but when you said that the
resolution authority is to protect all of us, with that as a
belief, you know, I tepidly push the green button. But it is so
difficult to do that when you see what the people on Wall
Street are doing with the money, and how well they live, and
how arrogant they are, and it is hard to think it is really us.
It is about them; it is their crowd, it is not our crowd.
Mr. Barr. If I would, Mr. Chairman, I think that people are
rightly outraged at that kind of behavior. I know I certainly
am as well. I think, though, that it is incumbent on us to
design a system in the future that protects us from excessively
risky behavior, that requires firms to pay their own way, and
by that I mean having big capital cushions so they take their
own losses, and I also mean if there is any financial trouble
in the future that the largest firms are the ones that pay for
it, not us.
Mr. Cohen. And do you think there should be something in
your legislation--in the legislation so we don't have to come
back later and fight another special interest group when we
have it as an individual bill to have some control over
executive compensation maybe in the bill, when somebody comes
into your authority that it has already drafted as part of that
law that there is no allowance of these particular types----
Mr. Barr. We have made legislative suggestions with respect
to executive compensation. Those have passed in the House with
respect to stay on pay and the independence of compensation
committees, and we have been strongly in favor of regulators
taking into account compensation in the firm not just for the
highest paid executives but throughout the firm in judging the
firm's risk management practices. So I do think those are
important principles.
Mr. Cohen. They are important principles, and I think there
ought to be something specifically in your legislation if you
hope to pass it that makes the public realize it is not going
to be another fight.
Mr. Barr. I would agree, Mr. Chairman, and there are these
two provisions that would be essential to the reform package we
have put forward in a legislative manner.
Mr. Cohen. Thank you, Mr. Barr.
I now recognize the Ranking Member for 5 minutes, Mr.
Franks.
Mr. Franks. Well, thank you, Mr. Chairman. Mr. Chairman,
the Chairman of the full Committee asked, I think, a very
pressing question related to how organizations police
themselves. And I think he is right; I think it is very
difficult for any group to police themselves even though I
think they have a responsibility to do so. But ultimately it is
wise to have a third disinterested party as referee.
And I am concerned that what I am hearing here would put an
awful lot of power into the executive branch or into your
bureaucratic branch of government to the extent that it would
be difficult for them to police themselves any better than
anyone else. I mean, in this week's news the White House pay
czar is slashing corporate pay by 90 percent. The TARP
inspector general says we won't get our TARP funds back.
Unemployment is up in 49 of 50 states, and kind of the surreal
events in our economy, the list sort of goes on.
And now what I hear--an all due respect, because I know you
guys are here to advocate a position and there is no personal
disrespect intended--but what I hear is that you are asking us
now to give the government new power to seize Citigroup and the
Bank of America and the rest of the largest financial
institutions we have. And I just think on the basis of both the
Bush and the Obama administrations in the last year I don't
know how we can possibly trust government--the bureaucratic
aspect of government--to use that authority without blowing it
up again in everyone's faces.
And I guess I am convinced that unless we get back to some
basics and make sure that these financial institutions have
basic requirements to where they are the ones that are at risk
when they make these decisions there will never be enough
policemen to take care of it. The way to get organizations to
police themselves, as Chairman Conyers said, I think is to
create a tremendous incentive on their part--selfishly on their
part--to do so.
Now, in 2008 two of the ostensibly foremost financial
authorities in the world--Ben Bernanke and Hank Paulson--I
think they made a critical mistake when they were inconsistent
in responding to Bear Stearns and Lehman Brothers. Later I
think they made another mistake when they came to Congress and
declared that the financial system would collapse if they were
not granted this rescue authority. But they failed to present a
full, thought-out rescue plan, in my judgment; two-and-a-half
pages is what they brought us.
Now, John Taylor, of Stanford, and other eminent economists
say that those two mistakes played a major role in triggering
the all-out financial panic after September 19. So if we
couldn't trust these two experts to make two decisions in the
course of a month to avoid a systemic panic, how do we entrust
the entire future to the same experts again working with lesser
experts in the FDIC and the SEC? I know that is kind of a
convoluted question, but I am just suggesting--what I hear Mr.
Krimminger saying, you know, about the process of how you would
administer the end-of-life decisions of a major company, as it
were, they sound an awful lot like the bankruptcy process.
And I am just wondering, how does the executive branch feel
like that without any practice in regard all of a sudden that
they are going to be able to handle it better than the
bankruptcy process?
So I guess I will start with you, Mr. Krimminger. Take a
shot at it.
Mr. Krimminger. Well, I appreciate the chance to respond. I
mean, I think the--what we have developed over the last 75
years is a fairly stabilized process, or a very stabilized
process for dealing with failed banks. What we are suggesting
with the resolution authority is that when an institution is at
the point of death, where it is in default on its obligations,
or would be subject to a Chapter 11 proceeding, that the
council or that the, you know, key authorities would have the
ability to take that institution and put it into a resolution
process that is very much like the bankruptcy process.
The difference is that we would have this process designed
to make sure that you could have the continuity that is
available at times during a Chapter 11 reorganization but have
the access to the liquidity resources that would allow that
continuity through a bridge financial institution and would
allow it to continue while you are in the process of selling
off the assets----
Mr. Franks. I don't want to interrupt you, Mr. Krimminger,
but why can't that process--what you are talking about sounds
good, but why can't that occur under bankruptcy?
Mr. Krimminger. Well, right now one of the difficulties
with the largest financial institutions is that you need to
have preplanning, build up a level of expertise in dealing with
the types of financial contracts we are talking about, that you
need to be able to have the ability to continue those without
having to rely upon debtor in possession financing, which at
times, as in the crisis last fall, can be difficult to acquire.
So this would allow for some backup liquidity financing.
But let me emphasize one point that I think is very
important--it is very important to us. We would not be
allowing, under what we would propose, would not be allowing
open bank assistance or assistance for specific open
institutions. This would be a situation where you would close
the institution, put it into a receivership or a resolution,
but make sure that the public interest was protected by
continuing those key financial operations.
Mr. Franks. Mr. Chairman, I guess I would just--my time is
up but I would just like to suggest that if I am a financial
source to one of these companies and they are going into this
process I would be much more likely to give money or to
encourage the process to continue under a bankruptcy setting
than I would on sort of an uncharted, untested bureaucratic
takeover of the process.
It simply doesn't make a lot of sense to me because I think
that the whole process becomes politicized and those critical
resources that are necessary to even animate a process like
this become completely uncertain about doing anything, and I
think they take a hands-off approach. That is just my opinion,
and I yield back.
Mr. Cohen. Thank you, sir.
I now recognize the gentleman from Wayne County, Michigan,
Wayne State University, dean of the Judiciary Committee, Mr.
Conyers.
Mr. Conyers. Thank you, Mr. Chairman.
I appreciated the line of questions that you engaged our
distinguished witnesses in, and for Trent Franks I want to say
that I appreciated his line of questioning especially. We are
making momentous decisions about how we get out of the problem
that we are in. And so it is very critical to minimize finger-
pointing because that always deteriorates down to
personalities.
But there are a lot of apologetic bureaucrats, economists,
government officials that are lining up here, Trent. Chris Cox
was very sorry about how he misapprehended the problem in his
executive branch position. Alan Greenspan, the guru of American
economic policy for decades, apologized about how he
misunderstood it. Hank Paulson has made some remarkable about-
faces about things that he has done.
But wait. There is Ben Bernanke, who now--you know, these
guys just didn't drop out of the sky. They have been in this
business for a long time. Do you know what Tim Geithner was
doing before he came to Washington? He was in New York. What
was he doing there? Heading up the Federal Reserve.
And what about Larry Summers? You think he has been the
head of Harvard? Is that all you think he has done? No.
You know, there have been--it would be very interesting for
us to track all the about-faces that have been made in their
careers, and it is not to say that if you find out that you are
wrong and you admit you are wrong--I think it is the thing to
do. I have had to do it. But I didn't affect the American
economic system when I made a mistake.
Who among us hasn't cast a vote that, on reflection, you
might have not voted that way at all? So, you know, this
father-knows-best attitude, this know-it-all approach--and I
want to say here and now that the resolution authority risks
creating a new generation of companies that are too big to
fail. Now you can't find anybody in Washington that doesn't
realize that this ``too big to fail'' crap was just that.
Oh, we all know that now. We didn't know it until just very
recently, though. And so for one, I haven't heard anybody yet
suggest that the Department of Justice controlling antitrust
questions, bankruptcy questions, should be given at least equal
authority to block any asset sale that would harm competition.
Look, you don't have to agree with me, but not to discuss
it--it is one thing if we have a discussion and we don't reach
agreement. It is another thing that it is not even on the table
for discussion. None of you have indicated--of our
distinguished witnesses--have indicated anything like the
direction that the Chairman, the Ranking Member, myself are
moving in, and I would like you to explain this difference of
economic analysis that we are in.
Mr. Barr. Mr. Chairman, if I could just try. I think first
I would agree with both Chairman Conyers and Ranking Member
Franks that the absolutely essential first step, important
step, is that firms pay their own way. We need to have firms
taking risks, having big capital buffers so in the event that
they fail their owners suffer. We need to make sure that we
have a system of tough prudential supervision of the largest
firms with respect to their capital positions, their liquidity
positions, their activities, engagement with merger and
acquisition activity, management interlocks, the full range of
tools available to address the problem of too big to fail.
We do need to end the perception of too big to fail. It is
an absolutely critical element. I think we are in agreement on
that. I think we need to have tougher standards to do that.
The question is, what do you do in the event of extremists
in a crisis? And I think our judgment is, consistent with
Ranking Member Franks' earlier statement, we need to be humble
about the ability of regulators; we need to be humble about the
ability of managers of large firms. People are going to make
big mistakes and you need to have big buffers in the system
when they do so that taxpayers aren't on the hook.
So in our resolution regime, this is a regime to end big
firms if they have made big mistakes, but to do it in a way
that doesn't bring down the system. And if any financing is
needed to do that, the industry--the large firms in our
industry, in the financial industry have to be on the hook for
it. They have got to be--in the legislation there has got to be
an assessment on them so that in the event any financing is
required or any working capital is required, that the largest
firms are required to pay, not the taxpayer. That is an
essential part of our reform.
That also means those other big firms are going to have a
big incentive not to have any firm go into resolution, because
they are going to pay. So you get the system right, the
incentives are right, you have people watching each other.
I would agree with both Chairman Conyers and Ranking Member
Franks that we don't want to have a system where we just trust
the regulators or trust the banks. You know, I think Ronald
Reagan famously quoted the old Russian proverb, ``We need to
trust, but we have got to verify, too.'' And that is why we
have to have a system of rules, we have to have transparency,
we need judicial review of the like that has existed for the
FDIC for the last 75 years.
Mr. Krimminger. If I could just note in kind of
continuation of that point, that at least looking at it from
the perspective of the FDIC, in our current resolution
authority there is a process, of course, where Department of
Justice review of the antitrust implications of mergers and
acquisitions as a result of a resolution. That is something
that we have applied for many, many years.
There certainly are checks and balances that are put into
place to make sure that shareholders have the opportunity to
object to the appointment of a receiver. It is not purely an
administrative process.
There are checks and balances in place so that if someone
disagrees with our decision on their claim they have the right
to go for a de novo review before Federal district court so
that we are not in any way making the decision about claims
willy-nilly but are subject to oversight as well as, of course,
the totally appropriate oversight from the Congress and from
our inspector general and others. But there is judicial
oversight of the decisions on claims and the decision to
appoint the receiver.
Mr. Cohen. Thank you, Mr. Chairman. I appreciate your
questions.
And I now recognize Mr. Coble, the distinguished gentleman
from the Tar Heel state. He will not take his 5 minutes because
he never does. Thank the gentleman.
Mr. Coble. I thank the gentleman from the Volunteer State.
Thank you, Mr. Chairman.
It is good to have you on with us today, Mr. Barr. When can
we expect the TARP to wind down and our reimbursements to TARP
being used to pay down the national debt?
Mr. Barr. I am sorry, sir. I couldn't hear the end of your
question.
Mr. Coble. And our reimbursements to TARP being used to pay
down the national debt?
Mr. Barr. Let me just say, Mr. Coble, that the TARP program
is not directly within my responsibilities. The department has
begun to wind down many of the major programs in the TARP with
the recognition that we are beginning to see some signs of
financial stability.
I think there are important--it is important to maintain
the flexibility to act in the future. I do believe that--I do
believe that we will be able to protect taxpayers in that
process and help over the long haul in deficit reduction, but
we need to make sure that we have the flexibility while the
financial system is still recovering and don't want to take any
precipitous action in that area.
Mr. Coble. Thank you, Mr. Barr. Now, Mr. Barr, when you say
wind-down, is that synonymous with reimbursement?
Mr. Barr. Again, I don't want to spend too much of your
time on this because it is not directly within my area of
responsibility, but we are seeing repayments coming into the
Treasury Department.
Mr. Coble. Okay. Thank you, sir.
Mr. Krimminger, what is the current fiscal health of FDIC
and is its solvency expected to increase or decrease in the
coming years?
Mr. Krimminger. The FDIC deposit insurance fund--I am
sorry, did I interrupt you, Congressman?
Mr. Coble. No.
Mr. Krimminger. Okay. The FDIC's insurance fund today, as
of the end of the second quarter, and those are the most recent
numbers we have, including the DIF balance, deposit insurance
fund balance, as well as our loss reserves has about $42.4
billion in it. We are taking steps, of course, to replenish the
fund and have put out for public comment a plan to have the
fund replenished by having institutions pay in advance some of
their deposit insurance assessments to provide additional
liquidity to the fund.
We do expect that the fund will continue to have the
liquidity to meet all of its obligations, but very important to
note is that we have the ability to immediately draw on $100
billion line of credit from the Treasury as well as additional
authority that was granted by Congress to pull down a total of
$500 billion with the consent of the secretary of the Treasury.
Mr. Coble. I thank you, and I will put this question to
either or both: What is the rationale, if you know, for
proposing a permanent TARP-like program and why has the
Administration selected the FDIC to oversee the program in lieu
of the Treasury, if you know the answer to that?
Mr. Barr. Maybe I might just say a word and then Mr.
Krimminger could, of course, join. We in no way have made that
kind of proposal. The proposal that we have is a proposal
designed to make firms pay their own way, to internalize the
cost they pose on the system, to make sure that taxpayers are
protected, to cause assessments to be paid by the largest firms
in the event that financing is needed.
And we have a system of checks and balances in our proposal
among the FDIC, the Federal Reserve, and the Treasury designed
to ensure that resolution is only used in rare circumstances.
And when it does, the FDIC has a 75-year history with
resolution and we thought it was appropriate to ask them to
take on the responsibility of resolving these firms.
Mr. Coble [continuing]. Mr. Krimminger?
Mr. Krimminger. Yes. Congressman, we would in no way
support a proposal that would provide for open bank assistance,
we call it, or assistance for open institutions, and I think
that was kind of one of the key elements of the TARP program.
What we have proposed, or what we have supported--and
Chairman Bair has stated this in testimony--is a resolution
process that literally does close down the institution and
terminates its existence going forward so that--but one that
allows for the continuation of critical financial services
during a bridge financial institution.
So as I said, we have made very clear in our testimony
before other Committees that we would not support open bank
assistance or that type of support but would support a closing
process that, as Assistant Secretary Barr mentioned, was
designed to make the firms pay their own way and that they
would pay any sums that were necessary.
Mr. Coble. Thank you, gentlemen.
And I see my red light has appeared, and I will yield back.
Mr. Cohen. Thank you, sir. Let me follow up and use
Chairman's prerogative.
Mr. Barr, I think what Mr. Coble asked about is the TARP
money being used to pay down the debt--I think he was--I know
it is not your area, but I think the answer is, ``No, it is
not. It is going back into the TARP.'' Would that not be
correct and you all are continuing to use the money that is
being repaid for other TARP-type ventures?
Mr. Barr. The funds that come back into the TARP program,
to the extent that they are not used for financial assistance,
are held at the Treasury Department and the response I gave to
Mr. Coble was to say those funds, to the extent that they are
not needed in the event of financial crisis, would help reduce
the debt. But in our judgment it is important to retain some
flexibility while the system is still recovering.
So I do think that--I do think that there will, in the long
term, be advantages for debt reduction from the program, but in
the short term we are quite focused on making sure that there
is an ability to act, if necessary.
Mr. Cohen. Right. And about the whole program, is that just
because of the whole approach that this is going to make the
economy better and save us from disaster or is it because you
think there will actually be some dollars reserved--returned to
the Treasury to be used for debt reduction?
Mr. Barr. There will be, unless we see a significant
further crisis point in the coming year, which is possible but
certainly doesn't seem likely right now, but if there is such a
downturn then you would want to have flexibility available. If
we don't see that additional crisis then there would be
remaining funds, both through repayment as well as unexpended
amounts, that would be available to help reduce the debt over
time.
Mr. Cohen. Do you have any idea how much is unexpended?
Mr. Barr. I am sure that the department would be happy to
respond to the Committee with that. I don't have that figure in
my head.
Mr. Cohen. Okay. And you don't have an idea about how much
has been repaid either, do you, and how much interest has been
accrued?
Mr. Barr. I would have to have the department respond to
you, Mr. Chairman. It is just not within my area of
responsibility. I have rough senses of sizes, but not enough to
really be able to answer for you in a thoughtful way and I
would prefer the department respond.
Mr. Cohen [continuing]. Mr. Barr, thank you.
Mr. Johnson, you are recognized.
Mr. Johnson. Thank you, Mr. Chairman.
Federal Reserve Chair Ben Bernanke earlier this month noted
that the bankruptcy code does not sufficiently protect the
public's strong interest in ensuring the orderly resolution of
a non-bank financial firm. Do either one of you know exactly
what problems that Mr. Bernanke sees in the bankruptcy process
insofar as these large non-bank financial firms are concerned?
And also, does the United States government have power to force
a--such an institution into an involuntary bankruptcy?
Mr. Krimminger. Let me address, if I may, Congressman,
address the first question first. One of the issues that exists
under the current bankruptcy code is something that has been
highlighted by other witnesses before this Committee and I
think is highlighted by the second panel, is that under the
current bankruptcy law there is a provision that provides for
the immediate termination and netting of derivatives contracts
or other types of financial contracts upon the filing of the
bankruptcy petition.
There is also the need to have access to immediate
liquidity funding for continued operations, so in the past in
the bankruptcy that could be obtained through debtor and
possession financing. Of course, last year after the Lehman
Brothers insolvency debtor in possession financing became very
difficult or very costly if you could obtain it at all.
So the primary reason that we have supported suggestions
for a resolution authority or resolution process for the very
largest systemically significant financial firms is simply to
make sure that you could impose a process that would have the
credibility to be imposed while making sure that the
shareholders and creditors absorb the losses from that
insolvency, just as they should in bankruptcy, as well as
making sure that you maintain continuity in some of those
critical functions. For example, many----
Mr. Johnson. Okay. Well, now before you go off there I am
trying to stick within my 5 minutes. Any ability of the
government to force an involuntary bankruptcy?
Mr. Krimminger. Under current law I do not believe so. The
proposal that Treasury has provided would provide for the
authority of the secretary of the Treasury, with the
concurrence of two-thirds majority of the board of the FDIC and
the Federal Reserve to create or to decide that an institution
should be placed into this kind of special systemic authority,
and it would be triggered by, effectively, the same
circumstances that will lead to a filing of bankruptcy.
Mr. Johnson. All right. There is no reason why that could
not be done to the bankruptcy process to enable it to be of
service in these kinds of situations. Yes or no?
Mr. Krimminger. I would respectfully indicate that I think
the difficulty with the bankruptcy process would be two-fold.
Number one, we believe we need a process that focuses on the
public interest of maintaining these systemic functions while
also making sure that the losses would be imposed and making
sure that you have the ability to create bridge financial
institutions so that there could be the continuity to avoid a
liquidation of assets.
Mr. Johnson. Well, that can be done within the context of a
regulatory entity and let bankruptcy do its thing, in my
opinion. I haven't heard why that would not be a viable
alternative to setting up a new public agency, another layer of
government.
How do you respond to critics who would suggest that with a
resolution authority acting in a sudden emergency situation
would be able to provide for the transparency and things like
notice to creditors, an opportunity to be heard--not
necessarily by creditors, but--who are interested parties? How
would that be worked out?
And last, but not least, I am concerned about the
competition concerns of your proposal that would give the FDIC
and the SEC the authority to seize and resell the assets of
business entities. And with the fact that we have only a few--
we have only a few great white sharks in the pool, wouldn't
that process cause them to get bigger because they would be the
entities that would be eligible and able, financially, to take
over one of these competitors?
Mr. Krimminger. If I could just respond to--I will start
with the first part of your question first. I think that the--
we need to make one thing very clear: We, the FDIC, are not
supporting nor do I think Treasury is recommending the creation
of a new agency or a new authority. The proposal would be that
it would be an obligation that the FDIC could take on for most
entities, similar to its resolution authority.
As far as transparency, similar, again, to the bank
resolution process. There is full transparency with regard to
that process. The benefit of the bank resolution process
compared to the bankruptcy process for banks in part is the
ability for the receiver to act quickly, to be able to sell
assets and be able to continue the business operations so that
communities are not deprived of credit, are not deprived of
deposits, et cetera.
The transparency is provided because there is a full
right--there is a full claims process that is provided so
people can file claims with the receiver, and if the claim is
determined against their interest or they don't like the
decision they have the full right to go to Federal court to
litigate that claim with a complete new look at that case
without any deference at all to the FDIC's receiver's decision.
So there is tremendous transparency there, plus we, of course,
provide reports to Congress on what we are doing with
receiverships; we, of course, provide reports to our inspector
general's office as well----
Mr. Johnson. What would be the difference in a sudden
emergency?
Mr. Krimminger. In a--I am sorry----
Mr. Johnson. A sudden emergency. What would be the----
Mr. Krimminger. There would be no difference. The key thing
is to be able to move quickly to make sure there is not a
collapse of the markets that might be caused by the lack of
liquidity or the lack of completing certain transactions.
But you would still have the ability, as a creditor, to
challenge the claim decision by the FDIC in court. You would
still have clear checks and balances so even the shareholders
could challenge the appointment of a receiver in court. That is
the way it is today under existing law. So all those
protections and checks and balances on what we do would still
be in place.
Mr. Johnson. And the last question?
Mr. Krimminger. I think your last question was relating to
the competition----
Mr. Johnson. Yes.
Mr. Krimminger [continuing]. Issues. We do have, under
banking law today, the obligation when we are doing a bank
resolution to consult with the Department of Justice for an
antitrust review, or a competition review, of the merger and
acquisition transaction.
I think one of the key things that we believe is crucial
and one of the reasons for proposing a new resolution regime is
to make sure that market discipline is actually brought to bear
on the largest great white sharks out in the financial sector
so that, indeed, they will have to bear the same risk as the
smaller fish they are swimming with.
I think that is going to have a much greater impact because
they are now--the pricing of their debt, the pricing of their
equity, the pricing of their liquidity and credit is going to
be subject to market impacts in a way that they, in many cases,
are immune today because they are not expected to be closed.
Mr. Johnson. All right. Thank you.
Mr. Krimminger. Thank you.
Mr. Cohen. Thank you, Mr. Johnson.
I now recognize our rookie Member for her initial
questioning, a historic moment, Ms. Chu.
Ms. Chu. Well, I certainly would agree that after the
Lehman and AIG experiences there is little doubt that we need a
third option that--between the choices of bankruptcy and
bailout for non-bank financial firms and that we have to end
the expectation that certain financial institutions are too big
to fail. But my question is, what would be the threshold for
intervention by the resolution authority? I am assuming that
you are not suggesting that there be intervention for every
non-bank financial firm that fails, and who would determine
that threshold?
Mr. Barr. That is a terrific point, and I think that it is
absolutely critical, as you said, that the resolution authority
that we are proposing is not supposed to be used, won't be
used, can't be used broadly in the economy for non-bank
financial firms. It is a narrow authority. It is only to be
used for the largest, most interconnected, highly leveraged
firms. It is only to be used in the event that no other option
is going to be able to work for the financial system to
preserve financial stability for the system.
It is designed to be, again, a proposal that in the main,
the largest firms will have their own capital buffers, pay
their own way, and go into receivership in the bankruptcy
system. The resolution authority is really just for the cases
where the criticality to the system of what is going on, the
fact that the capital buffers and prudential requirements have
not been sufficient--in that rare circumstance you would be
able to place that firm into special resolution to prevent
widespread harm to the American economy.
The decision would be made with checks and balances between
the Federal Reserve, the Treasury, and the FDIC, as receiver,
in order to make sure that it is only used in the rarest of
circumstances.
Ms. Chu. I heard Mr. Krimminger say that the FDIC should be
this authority, but Mr. Barr, I didn't hear what your opinion
was on that.
Mr. Barr. We think the FDIC is the natural place to play
the receivership function. They have had 75 years experience
acting as receiver of the largest firms. There may be
circumstances when it is absolutely critical for the SEC also
to be involved with respect to a broker dealer, but the
expertise with respect to receivership really does lie with the
FDIC.
There would be no need to create a new entity or a new
bureaucracy or a new group of individuals involved; the FDIC is
there, it is in place, it is a well respected, well trusted
institution and I think Americans have come to see the
important role that the FDIC has been playing for three-
quarters of a century. So I think that is how we would proceed.
Ms. Chu. How would the Administration's resolution proposal
guarantee that stakeholders would be no worse off by
regulators' use of this authority than would be in the case of
a liquidation?
Mr. Barr. We would put a floor on recovery at liquidation
value, so it would just, by operation of law, require that
system.
Ms. Chu. Okay. Thank you.
Mr. Cohen. Thank you, Ms. Chu.
Let me ask a question of Mr. Krimminger--a couple. I was
the initial person to suggest we should raise our FDIC rates
here in Congress. We did it. Would you concur that it was a
good idea and that it should be continued on to give
investors--depositors assurances that their money is safe?
Mr. Krimminger. You are referring to the guarantee of the--
--
Mr. Cohen. Two-fifty.
Mr. Krimminger [continuing]. Level? We think that certainly
that has been extended now through 2013. We would want to look
at that point as to whether that is appropriate to continue. We
have not made any recommendation on that thus far.
Mr. Cohen. Can I ask you why it would possibly not be
important to continue when it was set at $100,000 in 1981 and
then if you take the--you know, figure it out pro rata, it
should be at least $250,000 now. Why would it not be
appropriate to keep it at the same level as it was in 1981?
Mr. Krimminger. Chairman, I wouldn't want to really express
an opinion on that, but certainly we have looked--we have done
some analysis and looked and yes, there has been, obviously,
quite a bit of inflation since 1980 when it was raised to
$100,000 initially. We initially felt that it was appropriate
to put it up to $250,000 during the crisis, and we just simply
want to work with Congress and do some analysis to support
whether $250,000 is the appropriate level or some different
level.
We have certainly talked about it in the past, even
before--long before the crisis--about having it be $100,000
level adjusted based upon inflation changes in order to make
sure that it provided appropriate protection.
Mr. Cohen. And let me ask you another question: Major
financial institutions move ungodly amounts of money--trillions
of dollars--across global economies and affect--in many
countries. Considering the amount of money that these major
financial institutions move and across so many countries, does
the FDIC have the capacity to resolve all these big
institutions if they get into a crisis situation?
Mr. Krimminger. Well, we certainly would believe that we
have. This is something that we have been doing for a long
time, is resolving banks. Banks are involved in many of these
complex financial transactions. We were very heavily involved
in helping to resolve several very large banks last year.
I will fully agree with you that the types of institutions
we are talking about are much more complex and much larger in
size. But the type of expertise related to the derivatives
products, which we have dealt with quite a bit in bank
failures, and other types of financial contracts, we believe
put us in a good position to help deal with the resolution of
the largest banks and bank holding companies.
That is the area that we think is most crucial that we
would be involved in, and we think that we do have the
expertise to move forward----
Mr. Cohen. And adequate personnel as well?
Mr. Krimminger. We have a long history, Congressman, of
increasing size if necessary. We would increase size somewhat
with this authority. We are now about 6,300 employees; we have
increased the size of our staff by a little over 1,500
employees in the last year. And I think we have the ability to
call on the expertise of many others outside of the FDIC
through contracts in order to provide special expertise for
particular institutions, which we have used quite a bit with
some of the bank failures we have already had.
Mr. Cohen. Thank you, Mr. Krimminger.
Does the Chairman have additional questions?
I recognize Mr. Conyers.
Mr. Conyers. Thank you. Thank you, Chairman Cohen.
Am I correct to assume that you two gentlemen, from your
respective authorities, have created this new resolution
authority idea?
Mr. Barr. Mr. Conyers, Mr. Chairman, the Treasury
Department submitted a proposal to the Congress with respect to
resolution authority that is under--will be under consideration
by the Congress. The FDIC is an independent agency and reaches
its own judgments with respect to any legislation it might
support or would not support. And certainly I was quite
involved in that process, but it is ultimately a departmental
decision.
Mr. Conyers. Your modesty is appropriate, but this is
largely your idea.
Mr. Barr. Mr. Chairman, I can say not only with humility
but with honesty that there are a lot of people who worked on
this proposal, and it is really a departmental judgment about
the appropriate path forward with respect to resolution.
Mr. Krimminger. If I might just simply--I could even claim
more modesty, because it was primarily something developed
through the Treasury Department. Certainly we have had a lot of
contact with Treasury and other regulators----
Mr. Conyers. I will get to your modesty in just a minute.
Let us go into the secretary's modesty.
You are the secretary for financial institutions for the
Department of the Treasury.
Mr. Barr. Yes, sir.
Mr. Conyers. Right. Well, who would be putting this kind of
thing together--somebody over you did this and gave it to you?
Mr. Barr. I am sorry, Mr. Chairman. I don't mean to be
absenting myself from the decision-making processes. I just
wanted to make clear that it is a departmental judgment. I
share that judgment. I certainly was quite involved in that
judgment, and it is my responsibility to work to get that
judgment enacted. And you can hold me accountable if you
don't----
Mr. Conyers. All right. Let us look at it like this:
Treasurer Geithner wrote this up and gave it to you and you and
maybe one other person, and we have got it now. It is okay to
admit it here.
Mr. Cohen. You have a right to a lawyer. You have the right
to remain----
Mr. Barr. I don't especially need one. I am happy to have
you hold me accountable for anything I say up here about the
resolution authority. It certainly, in my judgment, it is the
right course of action. And please, any questions you may have
about it, I am happy to answer.
Mr. Conyers. Well, I am glad that you are happy to answer
them. I am happy to give them to you.
Now that we are all happy, let us--somebody wrote this.
This didn't drop out of the air, or somebody walking, a window
rolled down in a limo and a sheaf of papers were handed to you.
Mr. Barr. Mr. Chairman----
Mr. Conyers. Somebody wrote it, and you are the one that
wrote it.
Mr. Barr. I am not trying to avoid responsibility, Mr.
Chairman. You can hold me accountable for it. It is the
department's position. I worked on it with our general
counsel's office. We have a terrific team of people there, and
I am happy to have you hold me accountable for any of the words
in it.
Mr. Conyers. Well, look, I will hold your secretary
accountable then, or the guy in the office next door to you.
Mr. Barr. No. Please hold me accountable, sir.
Mr. Conyers. Well, that is what I was trying to do. So why
are you trying to----
Mr. Barr. I apologize, sir. I am not----
Mr. Conyers [continuing]. What is with the modesty? I hold
you accountable and you accept accountability.
Mr. Barr. Yes, sir.
Mr. Conyers. All right, now that that is straight. Now we
are getting somewhere.
Now, over in the Federal Deposit Insurance Corporation,
where modesty is the mode, Mr. Krimminger, and you have already
asserted your modest role in this, where does the relationship
between FDIC and Treasury come in here? In other words, they
wrote it and you are here supporting it, right, this new
resolution authority?
Mr. Krimminger. It was Treasury's bill. We are here because
we support the concept of having a new resolution authority. We
do not support every provision of the bill and we have had
discussions about some areas that we do have concerns about. So
I think that is the completely honest and completely fair way
of expressing our view.
Mr. Conyers. Well, that is all we are trying to do is
identify the--look, we are all in the same government working
on behalf of the same citizens, and--but you are here to
support the Treasury's position, and there are some
reservations that you have. Okay. Now that we have got that, we
are through with this and the modesties and the assuming
responsibility parts have all been handled.
Now, in this new proposal of resolution authority there
comes with it a dismantling of some of the protections that
have already existed. Is that not correct?
Mr. Barr. Mr. Chairman, in our judgment the bill preserves
important protections--key protections--for firms, for
shareholders in the firm and for creditors in the firm, while
providing the government with the appropriate tools to engage
in resolution authority subject to judicial review of their
actions with respect to the appointment of a receiver or the
adjustment of claims, as Mr. Krimminger has previously
outlined.
Mr. Conyers. I see. That is not so good.
Mr. Krimminger, let me try the same question on you:
Doesn't this proposal anticipate and include certain
dismantling of some protections that already exist?
Mr. Krimminger. Chairman, I do not believe it does because
it simply--the only change that it really creates is that the
initiation of an insolvency proceeding that would be initiated
through an administrative process rather than through a court-
filed insolvency process through the bankruptcy code. The types
of protections that would be available to creditors and
shareholders to challenge that process and challenging the
decisions through a court action would all remain in place.
Mr. Conyers. Are you a lawyer?
Mr. Krimminger. Yes, sir.
Mr. Conyers. And Mr. Barr, are you an attorney?
Mr. Barr. Yes, sir.
Mr. Conyers. Oh, okay. What about the dismantling of--you
both not agreed with my assertion. What about bankruptcy code
protections currently in existence?
Mr. Barr. So again, Mr. Chairman, with respect to----
Mr. Conyers. No dismantling?
Mr. Barr. With respect to firms that are subject to the
special resolution regime, those firms would be subject to the
resolution process that the FDIC uses for bank failures. Those
bank failure protections provide important protections for
creditors and shareholders with the appropriate opportunity for
judicial review, and those same sets of procedures would be
used with respect to these firms. So in our judgment it doesn't
dismantle protections; it provides protections that are
available under the bank failure regime and provides those
protections in the context of firms that are subject to the
special resolution regime.
Mr. Conyers. Okay. Attorney Barr, that is very good.
Now, let me try Attorney Krimminger. Same question.
Mr. Krimminger. I think, Chairman, we--in the FDIC's
resolution process we provide the same types of protections for
creditors. For example, there is protection under the
bankruptcy code for secured creditors; there is protection
under the FDI Act for secured creditors. In fact, in some ways
there is even more protection under the FDI Act for secured
creditors because secured creditors are not subject to cram
down, as there can be some circumstances under the bankruptcy
code.
Another example is that for existing contracts of the
failed bank or the failed institution, there is protection for
those existing contracts. There is a bankruptcy trustee who has
the power to reject or affirm certain contracts under the
bankruptcy code. So does the FDIC as receiver has the power to
reject or, as it was referred to in our statue, repudiate those
types of contracts.
But damages recoveries are available to those whose
contracts are rejected. If they disagree with the decision on
the repudiation or disagree with the amount of damages that the
receiver determines to be due to them they can file for a de
novo review, or actually a de novo case, in the Federal
district court of the jurisdiction of the bank or in the
District of Columbia.
Mr. Conyers. Well, let us take antitrust safeguards.
Attorney Barr, antitrust safeguards--are they compromised,
diminished, or dismantled, from your perspective, under this
new extended resolution authority idea?
Mr. Barr. In our judgment the proposal mirrors the
procedures that are used with respect to bank failure laws. So
in the event of the need for merger and acquisition, there is a
process for appropriate Department of Justice review. As under
existing bank failure law there are emergency exceptions to
that; those would apply also in this case.
Mr. Conyers. So the answer is no?
Mr. Barr. In our judgment they are, again, Mr. Chairman,
the same as currently provided under bank failure law. We are
extending the exact type of regime that exists today with
respect to antitrust review to this narrow context. In our
judgment that is appropriate.
Mr. Conyers. Let me try a new tactic with Mr. Krimminger.
Yes or no?
Mr. Krimminger. With regard to the antitrust protections?
Mr. Conyers. That is right.
Mr. Krimminger. With regard to the antitrust protections,
Assistant Secretary Barr stated it accurately. There
typically--yes, there is a requirement to go through Department
of Justice review on bank failures, but there can be
exceptions.
Mr. Conyers. But there is no dismantling or diminution of
antitrust safeguards? Your answer is, like Attorney Barr's, no?
Mr. Krimminger. In a systemic context there can be cases in
which there is an override of the anticompetitive consequences,
yes.
Mr. Conyers. Wait a minute.
Well, let us talk about union contracts. Are they protected
under the bankruptcy code?
Mr. Krimminger. My understanding, and I would consult with
counsel on this because I have never been involved in a
bankruptcy proceeding involving union contracts----
Mr. Conyers. Well, they are all in back of you. Just take a
moment. We are in no hurry----
Mr. Krimminger. But nonetheless, in a Chapter--I think a
Chapter 11 proceeding is somewhat distinct from a Chapter 7
liquidation proceeding. A bank receivership, where they--I can
just give you the experience that I have with bank
receiverships. In a bank receivership the claims under the
union contract would be due to be paid in accordance with the
priority system for the bank receivership, because once the
bank is closed the charter is pulled--charter is terminated.
There is no longer a right, of course, to the employment
because we are in a liquidation mode in a bank receivership.
But any claims that are due from the bank to the union or to
the union employees would be paid in the priority system, in
that liquidation priority system.
Mr. Conyers. So you can break the contract?
Mr. Krimminger. The institution in that case, Chairman, is
no longer in existence. I have no employer to provide. And I
understand from counsel that there are similar protections and
similar rights to reject certain union contracts under Chapter
11 provisions of Title 11, of course with certain protections
in place. Chapter 11 proceedings, of course, are reorganization
proceedings, whereas Chapter 7 is a liquidation and the
resolution of a bank is the closing of the bank so that there
is no longer a reorganization of that specific bank but the
sale of its assets over to other private entities.
Mr. Conyers. Lawyers, are retiree benefits and pensions
protected as they are--would they be protected under the
resolution authority concept that you bring to us as they are
under the bankruptcy code?
Mr. Krimminger. I believe they would be protected,
Chairman, in the same way that they would be protected in a
Chapter 7 liquidation proceeding. You are entitled----
Mr. Conyers. Wait a minute. Could we start off with a yes
or no and then the explanation?
Mr. Krimminger. Yes, they would be protected in the same
way as under a Chapter 7 liquidation proceeding. As in a
liquidation proceeding, there is a winding up of the affairs of
the entity and its assets are then sold to others in order to
recover money to pay off the creditors. That is the same
situation in a bank failure.
Mr. Conyers. Now, Attorney Barr, what is your response to
that same question?
Mr. Barr. I am afraid, Mr. Chairman, I would have to defer
to Mr. Krimminger's expertise on that.
Mr. Conyers. Sure.
I am sorry, Mr. Chairman, but this is some of the most
fantastic questioning and responses that I have received in a
long time here in the Committee. I apologize for taking so much
time.
Now, in bankruptcy the non-bank would be in a Chapter 11
and not break the contract without negotiations and approval.
That is not true under the FDIC. Is that a true statement?
Mr. Krimminger. I would defer, Chairman, to your counsel
with regard to what the bankruptcy provides. But what the FDI
Act provisions provide is that, just as in a Chapter 7
liquidation, we have a insolvent closed entity that no longer
continues in operation.
Our goal with the resolution authority that we would
support is to end the ``too big to fail'' so that the entity is
propped up in some fashion, either temporarily or permanently,
from government or taxpayer dollars. So we would be closing the
entity, just as in a bank receivership, and it would be then--
its assets would then be recycled, if you will, into the
financial system.
Mr. Conyers. Is that a long way of saying yes?
Mr. Krimminger. I say I would defer to counsel--your
counsel----
Mr. Conyers. My counsel says yes.
Mr. Krimminger. I do not know the bankruptcy provision on
that specific provision, but we are not talking a Chapter 11
proceeding. We are talking about the closure of the
institution, the pulling of its charter, and then the
maintenance of the functions that are systemic, not the actual
firm in a Chapter 11 reorganization. So it is a different
situation.
Mr. Cohen. Mr. Chairman, if I could do something out of the
ordinary, I would like to ask Mr. Miller to come up to the
panel--not be recognized, because I think everybody has
recognized him in the past; he is kind of our Black's Law
Dictionary on bankruptcy sometimes--and ask him without
introduction if he can give us his basis of his knowledge on
bankruptcy to respond to some of the questions the Chairman has
asked and the witnesses have demurred on.
Mr. Miller, please?
The question is an assortment of questions that the
Chairman asked. He may want to ask you directly about
bankruptcy law and how it might be distinguished from
resolution, and as far as union protection, as far as Justice
Department and antitrust, as far as pensions, et cetera, et
cetera. Are there more opportunities to the bankruptcy court to
protect rights of individuals that might be under this new
legislation?
You need to hit your mike.
TESTIMONY OF HARVEY R. MILLER,
WEIL, GOTSHAL & MANGES LLP
Mr. Miller. As I understand the testimony, the concept of
the FDIC is that because the charter of the bank is terminated
there is no longer an employer and therefore there is no longer
a union contract, and all of these other contracts have
effectively been terminated. Under the bankruptcy code, if it
is a Chapter 11 bankruptcy, there are protections for pensions,
there are protections for labor contracts, and very specific
procedures that have to be followed.
And a Chapter 11 does not have to be a reorganization. Many
Chapter 11s today are liquidations with those protections under
1114 and 1113 in place. So there are extra protections under
the bankruptcy code.
Under Chapter 7, which is a liquidation, those provisions
do not apply. But if a Chapter 7 trustee wanted to sell the
assets to another company or a purchaser who wanted to run that
business, there is still the possibility for a trustee to
assume the union contract and transfer it to the purchaser. So
I would submit there are greater protections which are being
proposed in the resolution regime.
[The prepared statement of Mr. Miller follows:]
Prepared Statement of Harvey R. Miller
__________
Mr. Krimminger. May I respond briefly?
Mr. Cohen. Yes, sir.
Mr. Krimminger. Just to be clear about this, if you have a
Chapter--if you have a bank resolution and you create a bridge
bank, yes, the existing contracts can be terminated by the fact
that there is no further employer, but you can also transfer a
contract. That is one of the powers of the receiver when one of
us talk about continuity. The receiver would have the authority
to transfer those contracts over to the bridge bank intact so
that, just like a Chapter 11, there are to be similar types of
protections for union, pension, or other contracts if that were
viewed as being important to maintain the going concern value
of the entity in a bridge bank structure or a bridge financial
institution structure under the proposal, or the operations and
prevent a systemic risk that was the concern that led to the
use of this extraordinary power in the first place.
So you can transfer contracts. That is why I am saying it
is very similar, in many ways, to bankruptcy law. You can
transfer contracts by the receiver over to the bridge bank. You
can also terminate, reject, or repudiate, depending upon your
preference for terms, those contracts as well so that they
don't flow over to the bridge banks.
Mr. Conyers. It doesn't seem like you concur completely
with Mr. Miller.
Mr. Krimminger. No, I don't, because there is also the
power to continue those contracts into the bridge bank, and I
would just simply humbly suggest that perhaps that is something
that hasn't been considered.
Mr. Miller. If I may, Mr. Chairman, that assumes that the
FDIC will find a buyer. What we are talking about here are
first-tier financial holding companies of a huge size. I would
look to the Indymac situation, where the FDIC was unable to
find another bank to transfer those accounts to. And in the
context of the testimony, that would mean those union
contracts, those pension plans are terminated.
Mr. Krimminger. Well, look, if I may respond as well--may
I?
Since the reference was made to the Indymac situation, the
Indymac situation did involve, effectively, a bridge bank
structure created. The contracts and primary--all of the
operations of Indymac were transferred to that bridge bank
structure and then that entity was sold virtually intact from
the bridge bank. Of course you leave some claims that are of no
value down in the receivership, but that institution was sold
virtually intact and is now operating as One West Bank in
California by a new set of investors.
Mr. Miller. Yes, sir, which can also be done in bankruptcy
if you are going to have a bridge bank that is being financed
by a Federal agency. You can also do it in Chapter 11 without
any Federal assistance.
Mr. Krimminger. And may I respond as well?
The Indymac receivership and bridge bank, since we are
referring to that one, had no special assistance other than a
protection of the depositors, which is, of course, the charge
of the FDIC. There was not other Federal assistance provided at
all.
Mr. Conyers. Well, there seems to be a problem in the minds
of some of the Members of this Committee about whether these
guarantees are diminished or improved through this resolution
authority idea. I am a little bit concerned, and this is why we
are having this discussion, of course, isn't it?
I mean, after all, this is a draft that is not in final
form, is it, Mr. Barr?
Mr. Barr. That would be up, of course, to the Congress to
determine.
Mr. Conyers. Well, sure, and we wouldn't do anything
without consulting with you and Mr. Krimminger. And so we are
concerned about whether or not we would be dismantling many of
the bankruptcy code protections that apply to non-bank
financial institutions and the antitrust safeguards that apply
to them.
That is a valid concern, and that is a big concern, Mr.
Miller.
Mr. Barr. Again, Mr. Chairman, in our judgment it made
sense to use the system that is in place for bank failures,
which has a long history and established protections in it and
to decide in particular circumstances that are rare that should
be extended to a further category of institutions that would
have then a regime that has the same protections that have been
used in bank failure law for many, many years.
Mr. Miller. Thank you, sir.
I suggest that we should not forget that what is the
fourth-largest non-bank financial holding company is currently
in bankruptcy and is being administered in bankruptcy very
efficiently and without a single dollar of Federal assistance,
in a proceeding in which, as the prior panelists have said, was
able to sell assets within a period of 5 days, did not need
debtor and possession financing, has been running this estate--
this huge, complex estate--for well over a year, and if it had
the protection of the automatic stay in connection with the
derivative contracts, would be a much more valuable estate
today.
I would submit to the Committee that this whole problem of
derivatives is so complex that three-quarters of the people on
Wall Street still do not understand what a derivative is. And
where you have almost a million counterparties in these
derivative transactions, many of whom took full control because
of the way the statute is written.
I don't believe the FDIC has ever had any experience with
derivatives and how you unpeel them and how you unwind them.
And there are billions and billions of dollars involved in that
process.
Mr. Conyers. We can't disagree with that, can we, Mr. Barr?
Mr. Barr. If I could, Mr. Chairman----
Mr. Cohen. Well, Mr. Krimminger, that is the reason I asked
you the question about, is the FDIC equipped to take on these
global economic situations with these multi-country--I mean,
you all do like the bank of, you know, Tucum Karey--you are
talking about doing the bank of the Semi-world.
Mr. Krimminger. Like WaMu and some other substantial
institutions. Yes, I think it would be a challenge but I think
the----
Mr. Conyers. You have never done it before.
Mr. Krimminger. Well, I don't know--our point is that there
is value to preplanning and value to planning these types of
insolvencies in advance. There were some consequences from the
Lehman failure that were created by the drying up of liquidity.
I am not going to say that was all caused by the Lehman
failure, but certainly there were consequences to that failure
that created substantial problems in the financial system.
Our judgment, which we would agree with Treasury on this,
is that it is important to have an alternative system where you
have the most--the largest financial firms involved in a
potential collapse. We have had experience working with
derivatives. We have dealt with a lot of major counterparties
around the world.
My work, as illustrated by the Chairman's introduction, as
a co-chair of the international working group looking at these
issues, we have been working with international colleagues for
months and years to try to deal--to try to find better ways of
dealing with these issues.
One of the recommendations in our working group report,
which was published on the Bank for International Settlements
Web site on September 17, was the need to have an insolvency
system that could be consistent across both banks and the very
largest non-bank financial firms in order to allow for greater
coordination to prevent there from being cross-border
consequences that can cause significant problems.
And it is certainly not a secret that there certainly have
been substantial cross-border disagreements with regard to
everything from information sharing, with regard to the
treatment of certain creditors and certain claims, and with the
preferential treatment alleged by some of certain creditors and
claims in the Lehman Brothers bankruptcy.
So I wouldn't want to sit here and say that it is an easy
problem to solve, but I don't think we can sit here and say
that the bankruptcy resolution is an easy problem to solve for
these very largest institutions either.
Mr. Conyers. Well, we beg to apologize for undervaluing the
extensive global experience that the FDIC has accumulated over
the years. I wasn't fully appreciative of that fact.
Mr. Barr. If I could, Mr. Chairman, I think that the
bankruptcy proceeding that Mr.--is referring to is successful
only in the narrowest sense. So we have a responsibility, I
think all of us, not just to have a system that works with
respect to the process of bankruptcy and the creditors in that
bankruptcy, but really with respect to the stability of the
financial system as a whole and the protection of taxpayers.
And the decisions that were made last year and the results
of which, since the tools were so limited available to the
Federal Government, the Lehman bankruptcy was maybe okay for
the narrow proceeding that it is engaged in, but was absolutely
horrible for the financial system, and American taxpayers,
consumers, and businesses are paying for it every day. And I
don't think we want to set up a system in the future that is
narrowly procedurally successful and brings down our financial
system.
Mr. Conyers. But aren't we creating a super--a powerful
super-regulator with so-called resolution authority that we
have never created before?
Mr. Barr. Not in my judgment, Mr. Chairman. We have a
longstanding system of resolution for bank failure, we have
particular----
Mr. Conyers. Am I right? Are we creating a--or maybe I am
wrong. When have we ever created any kind of authority with the
power that is being contemplated now that the Treasury--that
Mr. Barr, particularly--has handed us to consider? Is this
routine?
Mr. Miller. Absolutely not, sir. Absolutely not. I don't
believe we have ever done that before.
Mr. Conyers. I don't know about it.
Mr. Barr. Mr. Chairman, we have a longstanding history, we
have a bank failure regime that has been in place for three-
quarters of a century. It is a special resolution regime for
financial firms. We are talking about applying that in rare
circumstances to an additional group of companies whose failure
could really bring down the system. And so in our judgment
really we have a long history of established practice and we
are applying it in this context.
Mr. Conyers. Well, all I have to do is take my medicine and
get more rest and I will learn that this is what we do
regularly for almost a century. This has been going on all the
time, Chairman Conyers, you just didn't know about it. It
slipped my attention completely. A super-regulator authority
with this authority to get rid of many of the safeguards of due
process for unions, pensions, for secured and unsecured
creditors that are all covered in the bankruptcy code now.
Attorney Harvey Miller?
Mr. Miller. Yes, sir.
Mr. Conyers. It is all there.
Mr. Miller. It is all there. I think Mr. Barr, sir, is
referring to two different things: one, what caused the
failure, which is an entirely different subject. There are many
factors that precipitated Lehman's collapse which were--
included excessive risk-taking, which should have been subject
to some regulation, poor regulation, and a general economy
which was suffering from the takeover of Fannie Mae and Freddie
Mac, and as well as the growing enormity of the subprime
crisis. And you can trace back the subprime crisis, many of the
problems.
What I was addressing myself to was, when failure occurs,
how do you deal with that failure? And the bankruptcy code and
the bankruptcy courts allow you to deal with that failure with
all of the protections which Congress has already put in, and
if you amended the code to deal with this derivatives problem
we would have a much more efficient Administration.
And even though Lehman was an unplanned Chapter 11, it was
something that, responding to Mr. Johnson's comments, the
Federal Reserve Bank and the Treasury and Mr. Cox told the
board of directors of Lehman, ``You should file a bankruptcy
petition by midnight on September 14.'' And while they said it
is in the discretion of the board, it was pretty much a
command.
And then the question was, how do you deal with that
failure? I believe that the Chapter 11 bankruptcy in Lehman
demonstrates that you can deal with it and we have dealt with
it. And in fact, Lehman owns two banks. And it is through the
Chapter 11 proceeding where, in the full light of the sunshine,
full transparency, the Lehman estate has invested money in
those to banks to keep them in compliance with the FDIC. And
you have an administration there where everybody is involved
and the stockholders are being wiped out.
Mr. Conyers. Would you agree with that, Mr. Barr?
Mr. Barr. I don't, sir. With respect, I think it is very
hard to hold up the failure of Lehman Brothers and the way it
was managed as a model of how we want to deal with financial
crises in the future. It was horrible for the system, it is
horrible for taxpayers, it is horrible for consumers, it is
horrible for workers, it is horrible for our economy.
We have to set up a system that is designed to bring----
Mr. Conyers. What should we have done?
Mr. Barr. I think we need to have tougher regulation. Mr.
Miller and I are in agreement on that. As I said at the outset,
we need to make sure that these largest financial firms that
are complex and interconnected have tougher regulation, higher
capital requirements, more stringent activities and
restrictions alike, but we have to have a system of special
resolution.
If they fail we have to have humility about getting that
right and the system we have in the past, where our choice is
sending that firm into the bankruptcy or not, is insufficient
and it has really hurt the system. We can't do it again.
Mr. Conyers. But isn't the Miller description, Mr.
Krimminger, a valid one?
Mr. Krimminger. Well, I think what the Miller description
fails to recognize is that you have the light of day. You have
transparency in the bank receivership process as well. You have
access to the courts, you have determinations by Federal judges
about whether or not claims were accurately paid or not.
So while I understand Mr. Miller's understanding of the
bankruptcy code, I think you have to look at what has actually
been done in the bank receivership laws as well. There are
protections, contrary to what he said, for secured creditors.
There are protections for unsecured creditors. There are
protections for all types of----
Mr. Conyers. Maybe he hasn't studied this carefully enough
to know that.
Mr. Miller. I agree with a lot of the things that Mr. Barr
said and what we do need, but in a context of saying that if
you disagree with the FDIC and how they are handling things in
autocratic fashion you can start an action in the Federal
district court, a plenary action, it is not like going to the
bankruptcy court, which has hearings regularly, somewhat
informal. Starting a plenary action to complain about the FDIC
requires a great deal of financial backing, and that----
Mr. Barr. We are talking about the largest firms in the
country.
Mr. Krimminger. And that is why you have an administrative
process first to hear those claims and have a determination of
them, then there is the right, if you are dissatisfied with
that determination, to go to court in which there is no
deference given to the FDIC's views.
Mr. Conyers. Well, let us see. What is it that we agree on
collectively? These are three of the finest legal minds in the
country. What is it that we can agree on here and what is it
that needs to be discussed a little further?
Mr. Barr. I think that we can all agree we need to end the
perception of ``too big to fail.'' I think we can all agree we
need tougher capital requirements, tougher liquidity
requirements, more stringent forms of supervision on the
largest, most interconnected firms.
I think that we need to come to an agreement but we
apparently don't have one with Mr. Miller that the----
Mr. Conyers. Or this Committee.
Mr. Barr [continuing]. Bankruptcy regime is sufficient. In
our judgment, the bankruptcy regime is not designed for the
purpose of protecting financial stability. It is not designed
for the purpose of protecting the taxpayer. It is designed for
the purpose of ensuring process with respect to creditors. That
is too narrow a vision. I think we have a deeper
responsibility.
Mr. Conyers. What do you say, Mr. Krimminger?
Mr. Krimminger. Well, I think that we do agree on the need
for reform across the regulatory and supervisory realm, which I
mentioned both in my written statement and my oral statement.
But what we also--we think that there does need to be a special
resolution regime, if you will, only to be used in those rare
cases where the--going through the normal bankruptcy process
could create additional systemic risk.
So I concur with Assistant Secretary Barr that it is
important that in that narrow scope of issues that we have the
ability to go through a process that is designed to make sure
there is speed, make sure there is continuity in these key
contracts so that contracts where the liquidity is so crucial
can be maintained through the bridge financial institution.
That is simply what we are proposing, not some other--not a
Federal bailout--because we believe that we do need to end
``too big to fail.''
The problem is that there was not an interest by both, in
some cases policymakers but certainly in the case of also
creditors, in many cases, of putting some of these largest
firms through a bankruptcy proceeding because of the fear that
there would be a massive dumping of these financial contracts
on an already illiquid market. That is a danger that we need to
avoid, and we can avoid it without having to have a taxpayer
bailout as the only alternative.
Mr. Conyers. Attorney Harvey Miller?
Mr. Miller. I agree with almost everything Mr. Barr has
said, but when he refers to stability I need a definition for
stability. I said in my statement that Lehman's primary
problem, putting aside its other problems, the immediate
problem on the weekend of September 12 was liquidity. The
liquidity had been drained out of Lehman by a series of
different events, and finally the clearing banks just demanding
more and more collateral.
If you were looking for stability at that point in time,
the government, the Federal Reserve Bank, or the Treasury could
have done a bridge loan. And there was a request for a bridge
loan to get Lehman assistance to get to a sale.
The Treasury decided against that, and that resulted in the
unstable conditions that happened. There is no prohibition in
using the bankruptcy process, and if it is appropriate for the
Treasury or whoever, in the interest of stability, to do a
bridge loan it can be done in bankruptcy and it can be done in
the bright light of full transparency.
Mr. Conyers. Now, you don't need to qualify that statement
do you, Mr. Barr?
Mr. Barr. I think that--I think again, with respect to Mr.
Miller, it is too narrow a perspective. We are not focused on
the success of failure of Lehman. We are focused on financial
stability overall.
I think that the Lehman process obviously occurred in the
context of a massive inflow of--followed by a massive inflow of
liquidity provided into the system. There was a massive inflow
of liquidity in the system from the Federal Reserve before.
There was an enormous amount of government action taken in and
around the Lehman bankruptcy.
The Lehman bankruptcy itself is a narrow slice of what we
need to look at, and I think we have broader responsibilities.
I think we need to have a special resolution regime because we
are looking out for the taxpayer and the system and not just
for the creditors or the firm.
Mr. Conyers. Mr. Krimminger, you have less criticism of the
Miller evaluation.
Mr. Krimminger. I wish that I could provide concurrence,
but I will say again that what the Miller evaluation fails to
recognize, I think, is that the simple process that are
provided by current bankruptcy code provisions, of requiring or
allowing parties to terminate and net their contracts
immediately onto an illiquid market creates a great deal of
risk of destabilization.
A bridge loan would not necessarily solve that, but let us
presume for a second that we also adopted the Miller proposal,
say that these financial contracts were subject to the
automatic stay. That is going to create nothing but illiquidity
and concern by creditors of other entities that might be in
trouble around the financial markets that their contracts will
be subject to delay and they won't be able to get out of the
contracts.
As much as the netting provisions cause problems, they were
put in place in part to help deal with the potential
destabilization that could occur by immediate--by having
contracts tied up in a bankruptcy proceeding or other type of
proceeding. That is why the Congress, in its wisdom, did give
us the power to transfer these contracts over to a bridge
financial institution so that they could be maintained and
wound down slowly rather than being terminated immediately.
Mr. Miller. Referring to the last comment, that is what
should be in an amendment to the bankruptcy code, and that is
exactly what, as I understand it, the resolution regime would
want--the ability to assume or reject these contracts rather
than allowing the counterparties to terminate them and take
advantage of a declining market.
The other issue that I would raise is, in response to Mr.
Barr, how are you going to protect this country against the
same decision that was made on the weekend in which the
Treasury decided, ``We are not going to do a bridge loan or
anything for Lehman,'' and then on Tuesday the 16th advanced
$85 billion to AIG? How do you check that decisions?
Mr. Conyers. How can you explain that?
Mr. Barr. Mr. Chairman, obviously I was not in the
government at the time of those decisions. I don't really have
a particular judgment with respect to weekend activities. I
will say that I think it is absolutely critical--and here I
think Mr. Miller and I agree--that we change the basic nature
of regulation in our system so that there are big buffers and
we can internalize the costs. I think those are important----
Mr. Conyers. But he wants to put the law into bankruptcy
and you want to put it into a super-regulator.
Mr. Barr. I don't want to put it into a super-regulator,
sir. I think that these institutions need to be toughly,
confidently supervised at the consolidated level. I think there
need to be important checks and balances in the system for the
use of resolution authority with three keys, as under the
systemic risk approach--the Federal Reserve, the Treasury, and
the FDIC in agreement.
I think there does need to be transparency in the process
once the firm is in resolution with the opportunity for
judicial review. So I don't agree with the characterization of
this as a super-regulator.
And again, with respect, I think that we need to have
broader system interests in mind and not just the interests of
creditors of the firm.
Mr. Cohen. The Chair is temporarily going to ask Chairman
Conyers to assume the Chair and recognize the Ranking Member as
well to continue this questioning. And if the Chair would take
the Chair for just about 5 or 10 minutes, I would appreciate
it. And I will return shortly. But Mr. Franks has some
questions, but I will leave that to the Chair to recognize Mr.
Franks.
Mr. Conyers. [Presiding.] Recognize Mr. Franks.
Mr. Franks. Well, thank you, Mr. Chairman.
You know, I guess just fundamentally here I think Mr.
Miller's testimony has been very compelling to me. My original
question was, what is the primary difference between what you
are doing and the bankruptcy protocol that is already set up?
And I understand that the big difference is who is in charge
here.
And I have got to tell you, I want to be very respectful to
Mr. Barr and Mr. Krimminger because I know that you are here,
you know, at the behest of others, but you are in a position of
having to defend what I think is almost an indefensible
situation here because there is the reality of a super-
regulator, like the Chairman suggests. This is putting this
into an entirely new environment, kind of a bureaucratic
environment, and you are trying to write a whole century of law
here in a short period of time. You are trying to create an
entirely new mechanism; you are trying to essentially replace
what the bankruptcy system already accomplishes in most cases.
I have not heard any particular, clear, specific advantages
that this would offer over the bankruptcy system. I just
haven't. So let me just say that one of the things that
concerns me is under the legislation here it says--this is
verbatim--no judicial review of determination pursuant to the
subparagraph. No court may review the appropriate Federal
regulatory agency--that would be you--determination subject to
subparagraph D to disallow a claim.
In other words, the gentleman, Mr. Miller, is absolutely
correct. You could go into a Federal court and make a big
statement--I will call on you in a moment--and I just think
that you are talking about a modicum of chaos here, and there
is a lot of hubris I am hearing here that if the right people
were in charge it would all work out okay.
And, you know, I am looking at some graphs here and there
is an indicator where, when the bankruptcy by Lehman occurred
there was a little hiccup in the graph, but when the Bernanke-
Paulson testimony came and TARP was announced, boom, it was
disaster time. And I am convinced that the inept intervention
by the department is most of what catalyzed the panic. Now, I
am not suggesting that it was at the cores substance of what
the underlying problem was, but it catalyzed the panic.
The same thing here with the Dow. When the Lehman
bankruptcy occurred it bounced a little and bounced back up,
but when this announcement of this two-and-a-half-page plan to
save the world occurred the Dow just went--bottomed out because
the market couldn't understand how the bureaucrats were going
to come along and save the day.
Now, what I hear happening here is that somehow you are
going to all of a sudden have, under the FDIC, the ability to
have the same transparency, the same protective rules, the same
wisdom, the same experience as the entire bankruptcy court
mechanism that has been going on for so long. And I know I am
being a little rough on you here, but let me ask a couple
questions.
First of all, it seems to me that the additional strain and
resource demand on the FDIC of this proposed new regulation
would weaken the confidence in the FDIC's existing brand as a
guarantee and the resolver of depository institutions and a
single measure failure here by the FTC to resolve a bank
holding company, for example, Citigroup, under the new proposed
resolution would undermine the market confidence in the FCID.
And wouldn't a loss of confidence then accomplish the same
tragedy here where there is a run on the banks?
So let me ask you both, if you have got Goldman Sachs over
here on one hand, now a bank holding company, and you have got
your largest covered bank under FDIC, and both of them go into
disaster at the same time, which one is your priority? And I
will address it to Mr. Barr first.
Mr. Barr. Thank you very much, Mr. Franks. I guess I would
respectfully disagree with respect to the characterization of
the activity we are doing as creating this kind of entity you
described. What we are talking about doing is applying for a
narrow class of the largest, most interconnected firms in the
country the opportunity to apply, in narrow circumstances,
special resolution authority to be administered by the FDIC, an
institution that has carried out the same procedures through
the same protections for three-quarters of a century in the
narrow additional class.
In my judgment the FDIC would have the capacity to engage
in the kind of necessary approach to preserve the stability of
the financial system while also taking care of deposit
insurance----
Mr. Franks. But you are suggesting that it would be a new--
you know, you would have additional responsibilities? I hope I
could get that, because if I can't get that I am----
Mr. Barr. Yes, sir.
Mr. Franks. Okay. So what would be the main--and you
haven't told me where your priorities would be. Would it be
with Goldman Sachs or your largest bank--covered bank?
Mr. Barr. It is not a question of----
Mr. Franks. Well, that is my question.
Mr. Barr. Yes, sir. I believe that the FDIC has the
judgment and the capacity to take appropriate steps to protect
depositors with respect to a bank and also to take appropriate
steps to wind down large firms and to preserve through that
mechanism financial stability in the system.
Mr. Franks. Well, could you understand a potentially large
bank's reticence to see this situation when maybe Goldman
Sachs, which would be largely represented in the department,
and all of a sudden it looks to me like that they would say,
``Hey, you know what? These guys might favor Goldman Sachs over
the banks here because of the large political representation
that is there.'' And I am not making any--I am not challenging
anybody's loyalty here, I am just suggesting that the market is
going to consider that and what you are doing is you are
politicizing the whole process.
You have got sort of a ``bailout on demand'' mechanism here
and you are widening the ability of executive government, of
bureaucratic government, department government to intervene in
these areas that it really--that has pretty much been
determined to be what was the catalyst of a lot of the panic in
the first place. And I mean, can't you understand why the
business community would say, ``Well, they screwed it up once.
Why should we all of a sudden have this great confidence that
they can come along and rescue everything now?''
Mr. Barr. Mr. Franks, in fact I agree that we shouldn't
care at all what Goldman Sachs thinks or any other firm thinks
about anything we all do up here. The point is to develop a
system that protects the taxpayer, protects our economy, and
makes sure that we have the tools available to we need to end
``too big to fail,'' to regulate the largest firms, to have
higher capital requirement and liquidity requirement on it, and
we have to be humble about that.
We have to know that sometimes that is not going to work.
If it doesn't work we need to have the option, other than a
bailout or bankruptcy, that is actually going to be able to
resolve the firm in a way, wind it down in a way that is not
disruptive to the system. And our judgment is that----
Mr. Franks. It just occurs to me that, you know, if you
have got this additional process, that the market doesn't know
whether to trust it or not and the firms, then they think,
``Oh, well then our issue is not whether we get a bailout or a
bankruptcy. We have got this other possibility that we may
try.'' And all of a sudden there is an entirely new calculus in
the minds of some of the business leaders. And it just occurs
to me that this is a recipe for absolute confusion.
And I still haven't heard a major advantage in the process
that you are talking about that would not be--and I am sure
there may be some--but that would not be already available
under what Mr. Miller has talked about in a Chapter 11.
Mr. Barr. Could I suggest, sir, that I think that the
ability to act quickly and decisively with respect to changing
the management, with respect to providing financing for
liquidity functions, with respect to the ability to reduce
risks to financial system as a whole through knock-on effects
to counterparties, and the ability to take that kind of
decisive action, not with respect to protecting the narrow
interests of the firm but with respect to preserving taxpayer
interests and having the ability to assess on the industry as a
whole to make sure that the largest firms pay for any financing
improves market discipline and preserves the ability to
strengthen our financial system. I do not believe that
bankruptcy is adequate to doing that.
Mr. Franks. So getting back to the one question that I
asked, just as clear as you can, I know--what happens if
Goldman Sachs and your largest bank blow up on the same
weekend? What happens? What do you do?
Mr. Barr. You resolve the depository institution according
to existing bank failure law and you resolve the large
financial holding company according to the special resolution
procedures as described in our proposal.
Mr. Krimminger. May I respond to the section of the FDI Act
that you read from a moment ago?
Mr. Franks. Sure.
Mr. Krimminger. That section simply means that there is no,
like, administrative procedure act type of review of the
decision by the receiver. That is why I was saying before,
there is a de novo judicial review of the decision.
The court can't review the decision and give deference to
it; they have to review it without giving deference. And the
subsequent provision of the FDI Act, which provides
specifically for the ability to go to court, file your claim,
and get that resolved by the court. So there is a judicial
review of the claim, the decision----
Mr. Franks. But the ultimate impact is that the process
then has less transparency in the long run because, you know,
you can't possibly suggest to me that you are going to--under
this new modicum here where you don't have 50 years of
developed transparency with the bankruptcy court, you can't
suggest to me that there is the same transparency.
And Mr. Miller, would you suggest----
Yes. We have given you plenty of time here, guys, but I
want to--because my time is short too.
Mr. Miller. Thank you, Mr. Franks. There is nothing that
Mr. Barr has said that could not be done as a complement to
bankruptcy. I believe Mr. Barr is--and I think simply saying
that the Chapter 11 bankruptcy has a very narrow focus is
understating, because if there is exigent in circumstances,
certainly there is going to be a lot of public interest in it.
In terms of bridge financing and all of that, that can be
done. Now, I hate to use Lehman as an example all the time, but
before Lehman filed, the Federal Reserve and the Treasury went
to all of the major money-center banks and the major street--
Goldman Sachs and Morgan Stanley and Merrill Lynch, when
Merrill Lynch was still there--and nobody was prepared to do
anything. What do they do in those circumstances?
Mr. Barr. I think that Mr. Miller is exactly right that no
one was prepared to do anything. Our financial system was
teetering on the brink. And I think it is ironic to say the
least to hold up the failure of our financial system last fall
as the model for the kind of financial system we want to have
in the future. We can't have that kind of system in the future.
Mr. Miller. Well, I would just suggest that, you know, the
entire foundation of the crash was loans that did not perform
as those who rated them said they would perform, because
whether it is derivatives or whatever it might be, that was the
basis. If those loans had performed as they would have
traditionally, until we changed the rules and government in the
middle of it all, then the entities would have had much more to
lose and their own stockholders, all of these systems--even
Fannie Mae and Freddie Mac--their stockholders would have said,
``What? You are underwriting loans that you don't know whether
the person has a stated income, no credit history, no big down
payment. What are you doing?''
All of a sudden the traditional judgment would have entered
into the process, but when government comes in and says,
``Well, we are guaranteeing it because we are really smart; we
know how to make it all work,'' and I will suggest to you that
this is the same mistake that has littered the highway of
histories where government comes in and feels like they can
make better judgments than the market and those who are in
business and the foundational productivity sector are.
Now, let me just suggest here, the assistance that is
talked about in this legislation for a bank holding company--
this would be Goldman Sachs--this would allow you to come in,
make loans or purchasing any debt obligation, purchasing assets
of the covered bank, assuming or guaranteeing the obligations
of the covered bank, acquiring any type of equity interest in
the covered bank, taking a lien on all assets of the covered
bank, selling or transferring all or any part of the covered
bank. That is a recipe for you just coming in and just taking
them over, and I don't know how you think that you are going to
do a better job than most of the private sector has done
without putting the responsibility on them to perform or go
bankrupt.
Mr. Krimminger. May I make a comment with regard to that
provision?
As I indicated before, we have not--we at the FDIC have
not--supported every provision in the proposed Treasury
proposal. We do not support provisions that would provide
assistance to open institutions. That is why our focus is on
the institution needs to be closed and needs to go through an
insolvency process and not be bailed out prior to closure.
Mr. Franks. Well, the Chairman has been very kind to me and
I want to give you, Mr. Barr, a last thought and Mr. Miller a
last thought, then I am finished. But obviously you could
probably guess here that I am a little bit not convinced here.
Mr. Barr. Mr. Franks, I would agree with you that we need
to be humble. We need to be humble about the ability to have
regulators. We need to be humble about the ability of managers
of large firms.
And I think that is why it is absolutely critical that we
build up large buffers in the system in the event of failure.
It is why we need tough rules on these institutions in advance.
And I think what we are talking about is just a narrower
question of, do you want a process through the bankruptcy
process, which involves a set of individuals working in the
government, or do you want a special resolution process which
involves a set of individuals working in the government to
decide the nature of the resolution? And in our judgment the
bankruptcy process is set up, designed for a different
function. It works well for most of the time for most
institutions in doing what it is supposed to do.
We are talking about in the narrow case of financial
stability--do we need a broader purpose and a carefully cabined
approach using long trusted mechanisms? We think that we do.
Mr. Franks. Mr. Chairman, considering the history of the
last year, we have seen some major intervention by government
that is unprecedented in this country, and I would just suggest
that if we had gotten back to just basics and told these
financial institutions, ``Listen, you better have enough equity
to cover your risks and you better make sure that the taxpayer
is the last one to have to intervene here, and if you don't you
are not going to go bankrupt you are going to go to jail if you
don't follow at least having the fundamental equity necessary
to cover your risk.'' And if we did that and we said, ``Okay,
buyer beware, lender beware, guys, have a good time,'' I can
tell you it would have worked a whole lot better than
government trying to come in and tell everybody how to do it
and guaranteeing everything to the extent that it threw the
whole skew of a real market out of place in the minds of any
rational participant.
And with that, Mr. Miller, I give you the last word here.
Mr. Miller. Thank you, Mr. Franks.
I go back to what Mr. Johnson said earlier this morning in
connection with Chairman Bernanke's statement about after the
experiences with AIG and Lehman we need a third option. There
is no place where Mr. Bernanke or anybody else has said, ``What
are the experiences in AIG and Lehman that requires this
special super-agency?''
I would submit to you that H.R. 3310 is a good start to
where we should go incorporating those amendments into the
bankruptcy code. We need to deal with the derivative problem.
We have to take out those safe harbors that are in the
bankruptcy code. And all of this without some cross-border
solution is not going to work.
We are dealing with firms that are global and have huge
operations overseas. In the Lehman case we now have 80 separate
insolvency proceedings. We have to deal with corporate
governance obligations and fiduciary duties in other countries
that the FDIC can't deal with, or the Treasury, in terms of
stability.
And until we have a cross-border solution the type of
solution--this regime that is being proposed simply is not
going to work. It all can be done in the bankruptcy--within the
bankruptcy law and, as I said, with full transparency.
Mr. Cohen. [Presiding.] Thank you, sir. And this has been a
very unusual manner of conducting a Committee hearing, but I
think it has been very evocative of issues, and I think it has
been very helpful to us. And I thank Mr. Miller for joining the
panel and Mr. Barr and Mr. Krimminger for participating as we
have gone long.
I would like this one last thing, Mr. Barr. I just think
there probably needs to be some type of standard when you get
out of the bankruptcy into this resolution, and the standard
ought to be spelled out in some way, like a compelling state
interest sometime that--your compelling financial economic
doomsday, you know, and define some standards that could be
met.
Mr. Barr. I would agree with that, Mr. Chairman, and we
have a standard proposed in our legislation. We would be happy
to make it available to you for your consideration.
Mr. Cohen. I look forward to that and I think--and I have
to ask you, too, how are you related to Bob Barr? Are you all
cousins?
Mr. Barr. We are not cousins. In fact, I am fairly
confident we are not related in any way. My name comes from a
long string of changes through the process of immigration and
assimilation to the United States and I believe it used to be
Kaplinski in Poland.
Mr. Conyers. But so did Barr's, I think, came from the same
place. [Laughter.]
Mr. Barr. The gulag. Maybe. Right now I am just your
neighbor up the street in Ann Arbor.
Mr. Cohen. Thank each of you and I appreciate your
testimony. And I would--you might want to find a different word
that is a better word than regime. I am afraid that may reflect
poorly. But I thank each of you.
Mr. Barr. Thank you for your advice.
Mr. Cohen. We will get the thesaurus together.
We would like to now welcome the second panel and thank our
first panel for their--oh. I thought I beat the clock----
Mr. King. Mr. Chairman, I----
Mr. Cohen. Mr. King is here.
Yes, Mr. King, you are recognized.
Mr. King. Thank you, Mr. Chairman. I thought for a moment
that you had suspended your peripheral vision and----
Mr. Cohen. I can go to my left.
Mr. King [continuing]. And I seldom do.
And I want to thank the witnesses for your testimony, and
as I look out across the list we have here perhaps I could
start with Mr. Barr and ask you this question, and that would
be, if we had simply allowed these financial institutions to go
through a normal process of Chapter 11 or Chapter 7, what would
you predict would be the results today? How would those large
investment banks have fared? What would be left? Who would have
picked up the pieces without regard to what the prediction
might have been for the global financial structure?
Mr. Barr. I think that if we had--if the Federal Government
at the time had not taken significant measures, both through
the Federal Reserve and the Treasury and the FDIC, to provide
liquidity in the system the financial consequences would have
been much more severe and lasting. Already I think that the
difficulties that have been experienced because of the
financial crisis have been quite severe to American consumers
and businesses and households and the taxpayer. I think----
Mr. King. Mr. Barr, I think I am going to need to rephrase
my question: What would the pieces look like if we had let that
happen, though? I mean, I understand that you endorse the
support that has been there for these institutions to maintain
the entities that we had as much as possible to go through
this.
Had we not, if we had decided that ``too big to be allowed
to fail'' really didn't apply, that the free enterprise and
free markets and the risk of failure as a deterrent for future
imprudent investments or risks on lending institutions, what do
you think would have happened in the function of the, say,
bankruptcy court, for example, of those large investment
institutions that were bailed out?
Mr. Barr. Sir, in my judgment let me just say, I don't
really care at all about the firms themselves or what pieces
would have been left of them or what----
Mr. King. But I do, Mr. Barr. That is why I asked the
question.
Mr. Barr [continuing]. What new pieces arrive. It is not
about protecting the firm, so the key question is what is
necessary, in terms of imposing the discipline on them in the
future, making sure they have higher capital standards, higher
liquidity requirements, bigger buffers in the system, tougher
forms of prudential supervision. We have to make sure they are
supervised on a consolidated basis so you don't have a firm
like AIG that really is a loophole in the system with respect
to bank holding companies.
And then the question is just, in the event of crisis if
all that is crashing down and has failed, should the government
have the ability to throw those firms into a resolution
procedure? I think the answer is that in some cases maybe yes,
and that is why there is this narrow authority that is provided
in that special circumstance with respect to these largest
interconnected firms.
Mr. King. Thank you, Mr. Barr.
If I could direct that similar question to Mr. Miller, and
also ask Mr. Miller if you have gamed this out and anticipated
or tried to predict what would have happened if the government
hadn't intervened. And as a person who takes care of my money--
when I invest it in a business startup, for example, I do so
with the prudence of the realization that if it doesn't work
out I lose my money. When I borrow money or loan money it is
done so with the prudence of the judgment of being allowed to
fail.
And that deterrent was taken away, and I think it was taken
away implicitly some years ago. In fact, some of the top
financial people that I have heard from 2 years ago were,
``What you do in this business is pretty much what everybody
else does. That way, if they are making money you make money
but if everything falls apart you get bailed out with the rest
of them.'' What would you say about that subject matter?
Mr. Miller. Mr. King, I would respond in this context: If
the firms went into bankruptcy--Chapter 11 or Chapter 7--the
survival of the firms would be minimal at all. The assets would
have been offered for sale, they would have been broken up.
If the economy was in a stable condition there is a thing
called--a capitalist term called constructive destruction, or
something like that, that part of capitalism is failure, and
when there is a failure other elements of the economy take over
that deceased, let me call it, entity. I think the problem in
September of 2008 was the systemic risk, where it wasn't a
question of Lehman; it was the question, was Merrill Lynch
next? Was Goldman Sachs next? Was Morgan Stanley next?
And if you had a successive set of bankruptcies for each
one of those firms the consequences to the overall economy, I
think, would have been disastrous.
Mr. King. I thank you, Mr. Miller, Mr. Barr, all the
witnesses.
I appreciate it, Mr. Chairman, and I yield back the balance
of my time.
Mr. Cohen. Thank you, Mr. King.
And now we will conclude the first panel, and we are going
to quickly go because we are going to have to vote at 3'ish, or
whatever.
Mr. Barr. Thank you, Mr. Chairman, Chairman Conyers.
Mr. Cohen. You are welcome, sirs. Thank you very much.
Second panel, come in. I am sorry I have been probably
derelict in recognizing your expertise and just deferring to
Mr. Miller but it made for a good panel discussion.
The first witness we are going to hear from is going to be
Mr. David Moss. Professor Moss is the John McLean professor at
the Harvard Business School, teaches business, government--
senior economist at Abt Associates and he joined the business
school faculty in 1993. And we will recognize Professor Moss
now for his statement.
Professor Moss, if you would start in the interest of time?
TESTIMONY OF DAVID MOSS, HARVARD BUSINESS SCHOOL
Mr. Moss. Thank you, Mr. Chairman.
Mr. Chairman and Members of the Subcommittee, I appreciate
your inviting me here today, and I am very pleased to have the
opportunity to speak about the proposal for a resolution
mechanism for systemically significant financial institutions.
I actually support--I do support the broad idea of a resolution
mechanism, and the reason I support it is that I believe it
could be helpful in navigating a rather narrow path and a
treacherous path between----
Mr. Cohen. If I may interrupt, at the suggestion of the
Chairman we will go through a continued unorthodox policy in
this Committee, which I am happy to be the initiator of because
I am very unorthodox in more ways than one. And what we would
like to do is ask Mr. Moss, first, Professor Sagers, Professor
Skeel, and Mr. Weissman to comment--you can incorporate some of
what you had in your opening statements, all of which will be
put into the record, but also to comment on what you have heard
in the testimonies of Mr. Barr and others and give your opinion
of their testimonies and how you--safeguards or non-safeguards
you think we should look for in having a resolution group
rather than bankruptcy.
Professor Moss, you start.
Mr. Moss. It was quite an interesting discussion to begin
with. I guess I would start that I am not sure that the choice,
which has been framed here is, in fact, the choice we face. The
choice that was framed in this discussion back and forth was
one between a resolution mechanism and bankruptcy, and I
realize that that may seem like the choice but I don't think it
is.
I think the choice, sadly, is between resolution and
bailout. I think that in the--what we have seen is that there
is now a sufficiently widely held belief, perhaps correct, that
bankruptcy of enough very large financial institutions could
have catastrophic effects for the financial system. And given
that, it is not clear that policymakers from any party at any
time, in my view, would allow that to happen.
And I think as a result, although the law on the books
would say to put the firm in bankruptcy, it is not clear to me
that in fact that would be followed in a crisis. It was not
followed in this crisis by either administration, Republican or
Democrat. I don't think it would be followed in the future
either.
And, as a result, I don't actually think the choice is, in
fact, between resolution and bankruptcy. I think it is between
resolution and bailout.
Between those two choices I will take resolution. I
recognize its problems.
I will say that your predecessors, it seems to me--I had
not prepared to talk about this, but--your predecessors have
excluded financial firms quite regularly over the course of
American history from bankruptcy law. The original 1898 act, as
I recall--Mr. Miller, I am sure, would know better than I--but
I believe excluded all corporations from voluntary bankruptcy,
but banks in particular were excluded from involuntary
bankruptcy, so they were already excluded. Banks, of course,
were subsequently brought under FDIC.
And insurance companies are also excluded, if I am correct,
from bankruptcy law. So I think the idea of excluding financial
companies from bankruptcy law is not a new phenomenon.
Maybe I can just make one more comment--I know you want me
to be brief. I have two significant concerns about the idea of
a resolution mechanism. Broadly I think it is necessary, but I
have two concerns.
One is that we should not fool ourselves to think that a
resolution mechanism will solve all the problems. There is
still the basic problem of systemic risk and the basic problem
of moral hazard, and as we try to solve one we increase the
other. A resolution mechanism is an attempt to provide a
balancing act, but it is not a perfect one.
The more serious problem--and I think this is one you ought
to consider if you go forward with the resolution mechanism--is
that in a crisis, in a crisis it is not clear that we would, in
fact, follow a resolution mechanism. The question is, is the
resolution mechanism credible? Just in the way that we have to
ask, is bankruptcy credible? Over the past year-and-a-half it
has not been. At every opportunity we avoided it.
At every opportunity--it seems to me that if we are not
careful we could create a beautiful resolution mechanism and it
would be circumvented in a crisis. So we need to create a
mechanism, and a system, that is credible.
I would be glad to talk about how to do that. I have some
ideas. But I will just remind you that with FDIC--which, by the
way, I think the resolution mechanism works quite well with
FDIC--but it is attached to an insurance system that protects
depositors. I suspect that if that insurance system did not
exist we would be very reluctant to put a major bank into
resolution for fear that it would spark runs on other banks by
fearful depositors.
So there is a question of how we stabilize the broader
financial system, whether we put a major financial institution
into bankruptcy or resolution. Do we have a system for
protecting the healthy institutions at the same time? I would
be glad to talk about that in more detail if that would be
helpful, but those are my broad comments.
[The prepared statement of Mr. Moss follows:]
Prepared Statement of David A. Moss
__________
Mr. Cohen. Thank you. And we will come back and hopefully
have time for discussion.
We are going to go to Professor Sagers next because Mr.
Miller has let us know his thoughts and participated in the
colloquy that we previously had. Professor Sagers practiced law
for 5 years in D.C. at Arnold & Porter and Shea & Gardner,
involved in large-scale litigation, public policy matters, and
different issues of commercial affairs.
Professor Sagers, your thoughts and opinions?
TESTIMONY OF CHRISTOPHER SAGERS,
CLEVELAND-MARSHALL COLLEGE OF LAW
Mr. Sagers. Thank you very much, Mr. Chairman. It is my
great privilege to be here.
I am more than happy to scrap my prepared statement because
I think that I can be of use here in precisely one way, which
is to answer Chairman Conyers' specific question, does the bill
change existing antitrust law with respect to these entities?
And I can give a yes or no answer. I have the disability of
also being a lawyer, so I would like to expand on it a little
bit if I could, but the simple answer is yes, it does change
existing law.
In deference to Secretary Barr and Mr. Krimminger, I gather
they are not antitrust lawyers primarily, and in drafting the
bill and preparing their testimonies they were advised by
antitrust counsel, and in their defense they gave answers which
were not literally false. There is an existing--and I don't
mean to cast any aspersion there---- [Laughter.]
Mr. Cohen. Criminal defense lawyer? [Laughter.]
Mr. Sagers. The short answer--a short way of saying what is
really a very complicated answer--is that it is true that bank
merger review has always existed as something of a special case
under our antitrust merger review system. And it is also true,
as they testified, that that system contains a series of
emergency safety valves that can make the process go really
fast if the banking regulators decide that one of the banks is
in danger of failure.
I think we need to beware--I do want to say, by the way,
that there is one significant change. There is one technical
legal change made to the law that really is potentially
breathtaking. But even before getting to that, it is a bit
misleading to say that we have addressed competition concerns
because we just incorporate antitrust law that we have always
had for bank failures.
The antitrust law that we have always had for bank failures
is extremely problematic. It has never ever incorporated any
concern for systemic risk; it has repeatedly approved the
merger of immense banking institutions and conglomerate
financial institutions even over strenuous objections about the
increase in systemic risk that is being caused.
And I don't think that--even if that system weren't put
into an incredibly rushed procedural framework under this bill,
as it will be, it wouldn't--that existing system of bank merger
law wouldn't be very well designed to handle the competitive
risks, which are both systemic risks and also the more
traditional competitive risks that we deal with in merger law.
That system wouldn't be very well set up to deal with mergers
of entities of this immense magnitude.
All right. That is all in answer to the question whether
existing bank merger law is really adequate to deal with these
problems even if it is not going to be changed by the bill. In
one important respect existing bank merger law is changed by
this bill, and that is that the bank holding companies that can
be subject to the resolution authority under this bill include
``financial holding companies''--that is, those businesses that
are allowed to own both banks and other financial businesses.
It is clear under the bill that if one of these resolution
actions is undertaken and an entire financial holding company
or big pieces of it are given away--sold, rather; they wouldn't
be given away but sold to other large competitors--there will
be merger review, and moreover, the non-banking piece of any
financial holding company that is taken into receivership, that
transfer of that piece will be reviewed not under bank merger
law, but under the Hart-Scott-Rodino Act, or as the familiar,
more normal review of antitrust merger review.
And that is how it would happen under existing law, except
that this bill provides that that non-banking piece of the
financial holding company that is to be transferred to a
competitor, possibly a really big competitor with a lot of
market share, that transfer will be judged under the Hart-
Scott-Rodino Act, just exactly as it would under existing law,
except that the antitrust agencies won't be allowed to make the
so-called second request for additional information, they won't
be allowed to request any extension of time for reviewing the
merger.
So what we are basically going to have is transactions
involving transfers of truly the largest non-banking financial
institutions reviewed by DOJ or FTC under extremely tight time
constraints and with very limited information, and those
agencies are either going to be forced to rubber stamp these
transactions or just challenge all of them so that they can get
them stopped and the courts can review them. So the testimony
that was given is, to some extent, incorrect and I think quite
misleading.
[The prepared statement of Mr. Sagers follows:]
Prepared Statement of Christopher L. Sagers
__________
Mr. Cohen. Professor Sagers, thank you for your addendum to
their testimony.
Mr. David Skeel, professor of corporate law at Penn, author
of ``Icarus in the Boardroom''--the history of bankruptcy
laws--publications, received several distinguished recognitions
and honors, corporate law, bankruptcy, and sovereign debt, law
and religion, and poetry in the law.
Thank you, Professor Skeel.
TESTIMONY OF DAVID A. SKEEL, JR.,
UNIVERSITY OF PENNSYLVANIA LAW SCHOOL
Mr. Skeel. Well, thank you for that plug. I wish I had
brought a few of my books to have outside to try to sell to
people before we are done today.
I think I have three quick points in response to the
commentary I have heard so far. The first is, although Harvey
Miller and I do not agree about everything--there are a few
things in bankruptcy we are not completely on the same page
on--I pretty much agree completely with everything Harvey has
said thus far. To elaborate on that just a tad, Professor Moss
made the comment that our real choice is resolution versus
bailout. In my view that is not quite right. I think our real
choice is bankruptcy versus bailout.
In my view, the proposed resolution authority would just
institutionalize the bailouts we have seen in the last year. If
we had that resolution authority in place, what would happen if
we had another Lehman or AIG is they would be bailed out before
they got to the resolution authority decision. And I think it
is not either accidental or unimportant that the trigger
decision--the decision whether to invoke the resolution
authority--is a purely political decision being made by bank
regulators. So that is my first point.
My second point is, with respect to Mr. Krimminger and Mr.
Barr--and I am sorry they are not here now; Michael Barr is a
friend of mine; I have not previously met Mr. Krimminger--they
repeatedly referred to 75 years of beautiful FDIC history
resolving bank failures. In my view, the reality is the FDIC
was not tested from the 1930's until the 1980's. We didn't have
bank failures, for the most part, and that is one of the
beauties of post-war America.
The first time the FDIC was truly tested was in the banking
and S&L crisis of the 1980's. By most accounts their
performance was quite poor. And as a result of that poor
performance we put new banking laws in place in 1989 and 1991
that really forced the FDIC's hands.
We have prompt corrective action rules, we have least cost
resolution rules. Those work pretty well for small banks and
maybe for medium-sized banks as well. But they effectively
don't apply to the very institutions we are talking about
today.
They do not apply to large banks. When they run into
trouble the FDIC is able to do whatever it wants, exaggerating
just a little bit. And the FDIC's history with the big banks is
not a good history. I think the Indymac example from last year
is a good example.
So to the extent the FDIC is effective, it is only
effective with small and medium-sized banks. It is not
effective with large banks and there is not good reason to
extend its authority beyond banks to other financial
institutions.
Finally, in my view the key question--what I would hope you
all will be thinking about and talking about in the coming
months--is how we can make a bankruptcy system that works
really well even better. And the answer to that, it seems to
me, has to do with derivatives.
Over the past 20 years, as part of the their campaign
against regulation derivatives lobbyists together with the Fed
and the Treasury persuaded Congress--that is you all--to exempt
derivatives from several key core bankruptcy provisions, the
most important of which is the automatic stay. What I hope you
all will be talking about is how and how much to reverse that
deregulation of the last 20 years and reimpose the stay.
One approach to that would be a blanket reversal, a stay of
all derivatives. Another would be the approach that has been
suggesting in H.R. 3310. Either of those, I think, are very
good approaches and I hope that is where you all end up before
the dust settles.
Mr. Cohen. Do you have a poem to close with?
Mr. Skeel. I will work on one before--give me a couple more
hours. I can----
Mr. Cohen. A limerick will do----
Mr. Skeel. Let us go now, you and I, while the evening is
spread against the sky. [Laughter.]
Mr. Cohen. It is not for us to do or die.
Mr. Skeel. We are reading from the same script. That is for
sure.
[The prepared statement of Mr. Skeel follows:]
Prepared Statement of David A. Skeel, Jr.
__________
Mr. Cohen. Mr. Weissman has written extensively. He is our
next witness--Robert Weissman, Public Citizen president. That
is a pretty heady title. Expert on economic, health care,
trade, and globalization, electoral property, and regulatory
policy, and issues related to corporate responsibility and
commercialism.
Written extensively over the years. Prior to joining Public
Citizen he was director of corporate accountability
organization Essential Action, editor of Multinational Monitor,
that tracks corporate actors worldwide, and an attorney with
the Center for the Study of Responsive Law.
Mr. Weissman, you are on.
TESTIMONY OF ROBERT WEISSMAN, PUBLIC CITIZEN
Mr. Weissman. Thank you very much, Mr. Chairman. I am sorry
that I am afraid I won't be able to offer any poems or a--
perhaps concepts achieve pristine insight of poetry.
I want to thank you for holding the hearing and emphasize,
I think, the importance of an antitrust approach to considering
the ``too big to fail'' problems in the structure of the
financial sector. I think antitrust offers us a lot of tools
and principles to think about how to handle the sector.
With Chairman Greenspan I am happy to say that we agree
that an appropriate application of antitrust principles is to
actually directly break up the largest institutions. They are
too big to fail. I agree with all of the proposals that Mr.
Barr put forward on the front end to deal with systemic risk,
but they are not enough. The largest institutions will always
find a way to get around narrow, traditional agency
regulation--prudential regulation.
But if they are smaller they are more able to be grappled
with. We can avoid a lot of the problems that we are spending
this hearing talking about if we go ahead with an aggressive
breakup strategy.
It is feasible, can be done in an aggressive, top-down way,
or it can be done in a more gentle way by the institutions
themselves. Citigroup, for example, is itself now stripping
itself down effectively on the model that I might be
suggesting.
Second, I think antitrust teaches us about the importance
of structure and also looking to revising Glass-Steagall itself
or Glass-Steagall-like principles and separating out the super-
risky activities of the investment banking operations from the
commercial banks. And again, we are here very happy to side
with Chairman Volcker on this point.
There are more modest ways to achieve these kinds of
objectives--for example, unwinding the recent set of mergers
which have made the ``too big to fail'' problem much worse, or
at least saying there should be a standstill on future mergers
that are going to exacerbate the problem going forward.
We should also be enforcing existing concentration limits
which have been breeched in the last round of mergers, and
there should be examination, I think, by Congress over new
forms of concentration limits, both in terms of the depository
institutions but also thinking about asset categories other
than depository institutions, where it is not obvious what kind
of standards you would impose.
Finally, in terms of trying to avoid problems before they
emerge, I think antitrust teaches us not just to look at
traditional regulation but a set of conduct remedies that are
different in approach from what traditional regulators do. And
to just quickly highlight some of the things we--I think it is
worthwhile for Congress to consider both avoid systemic risk
problems, enhance the ability of regulators to understand what
is going on in the super large institutions, and to offer
increased consumer protection.
For this category of institutions that still are super
large, there should be a prohibition on the use of offshore tax
havens and off-the-books accounting, both of which make it too
hard for our regulators to understand what is going on. There
should be affirmative obligations that bonuses are tied--
executive pay and bonus compensation is tied to long-term
performance to avoid the wrongful incentives that exist with
the short-term bonus structure that we have now.
There should be, as Mr. Barr said, increased capital
reserve standards, and I think also increased consumer
protection obligations on the largest institutions. To the
extent they are permitted they can continue to exist.
On the specific issue of resolution authority, we do think
that there is a good case to be made for resolution authority
to avoid the bailout problem, but with some caveats and with
some suggestions. One is that there should be a presumption
that the institutions are not provided with new financing
unless there is some very affirmative showing made that there
needs to be external financing made available. So you really
are talking about winding down the institution and you are
avoiding the problem of the subsidies that were given to AIG
counterparties.
The AIG bailout, by the way, was really not a bailout of
AIG so much as it was a bailout of AIG counterparties, which
is, I think, an important consideration to keep in mind.
There should be also, I think, a directive--this speaks to
Professor Sagers' point--there should be a directive to any
resolution authority that as it is doing the resolution a
central and maybe overriding objective must be to avoid a
worsening of ``too big to fail'' problems, that as they are
breaking up banks or merging them, whatever they are doing, it
should not be to create new even bigger institutions, the
bigger great white sharks of Mr. Johnson's metaphor--maybe I do
have some poetry in my after all. We ought to be avoiding
worsening that problem.
And finally, there should be conditions attached on the
resolved enterprises, either in whole or when parties are
broken up, replicating, I think, some of the things that I
mentioned in the area of conduct remedies. Those things
including, as you pointed out properly, compensation limits and
competition standards ought to be attached. If taxpayers are
going to be involved and intervening in these institutions it
is reasonable that we have some reciprocal demands on what goes
on with them after they are put back into the private sector.
[The prepared statement of Mr. Weissman follows:]
Prepared Statement of Robert Weissman
__________
Mr. Cohen. Thank you, Mr. Weissman. I appreciate it.
Mr. Miller, who has been on our panel--he is our Black's
Law of bankruptcy; he is also associated with NYU and Columbia
Schools of Law and the firm of Weil, Gotshal & Manges.
Last thoughts?
Mr. Cohen. Microphone.
Mr. Miller. Thank you.
Professor Skeel stated my position much more eloquently
than I can, and I will rely upon his statement.
Mr. Skeel. He has a sense of humor, too. [Laughter.]
Mr. Cohen. Mr. Conyers, do you have questions of the panel?
Mr. Conyers. Well, I think we have covered it all except
that I would think that in the next 2 to 3 weeks, if not
sooner--Mr. King, I would like you to hear this, as well,
because I would want to get the concurrence of this Committee--
first of all, I think the selection of these professors,
lawyers, experts is very, very much needed. I think that we may
have to reassemble to monitor what the Congress does and what
further--we have got to go over this transcript. There is an
incredible amount of material that we have got to digest and
evaluate.
We have had experts all over the place here, and I want to
try to elicit an agreement that our panel would be able to come
back and that we would be able to have them back as we proceed
in a somewhat informal way that the Chairman has conducted this
meeting, but it has been important.
Why do you need a 5-minute rule? We are talking about the
economic future of the Nation, and we are asking somebody to
summarize in 5 minutes where this should go. And I appreciate
the way that this has been conducted, and I commend all of you
for what you have contributed to that.
And I think Mr. Miller might want to comment in here, and I
would like to yield to him if I can, Mr. Chairman.
Mr. Cohen. Mr. Miller, briefly. We have got 10 minutes and
Mr. King. But Mr. Miller, you are on.
Mr. Miller. I think I have said all I want to say about my
position and I would be happy to answer any questions.
Mr. Cohen. Thank you, sir.
And thank you, Mr. Chairman.
Mr. King, briefly please?
Mr. King. Thank you, Mr. Chairman. I am happy to expedite
this, and I would second Chairman Conyers' recommendation and
suggestion. There is far too much knowledge and expertise here
to dispense with it in 5 minutes of testimony each and a
printed testimony. I hope we can find a time to do this in an
environment where we can dig into this in depth.
I had the whim to request a beer summit with all of you. I
think that would be a constructive thing to do.
But the testimony that I have heard and the testimony that
I have read is engaging, and a lot of it concurs and overlaps,
but the contradictions especially--those disagreements--I think
we need to take some time to explore it in an intelligent
fashion. And so rather than have me drill into one component of
this I would really look at it at the broad perspective and
second the recommendation of Chairman Conyers and ask that we
do come back together and do justice to the quality of the
witnesses we have today.
I thank you and I would yield back.
Mr. Cohen. Thank you, Mr. King.
I appreciate all of the witnesses. I apologize for the
timing. We are going to be out for another hour. We may, if you
are kind enough to return, ask you to return at a future time
for another hearing. Your prepared remarks will be part of the
record.
We had, I think, a very good discussion and I appreciate
Mr. Miller coming up. He is the only one of the panelists who I
was familiar with, and I am sure that each of you could have
contributed as well, but it would have not been maybe as--it
might have been unwieldy. So I thank you for allowing me to
have that type of discussion, which I think was helpful to us.
It is an issue--bankruptcy versus resolution--and maybe it
is another issue because people talked about the bailout. And
when do you--the compelling interests of the--but you lose
some--some of the people lose out if you go to resolution that
don't lose out in bankruptcy. They have to be thought about.
And there is a concern in this Nation that we have done too
much, as I think Barney Frank talks about the collateral
benefit that to help the whole country we have had to help some
people who aren't deserving of help because they are not
appreciative and they are such gluttons that they poison the
water to where nobody wants to swim there again. And we might
have to go there again, but it will be difficult because of the
great white sharks that are out there swimming in that water.
Mr. Conyers. Would the Chairman yield for----
Mr. Cohen. Yield to the Chairman of the Chairman----
Mr. Conyers. I just wanted all of you to know that we have
been in consultation with Chairman Barney Frank, and that both
the Judiciary Committee and the Finance Committee are moving
together--we are not at odds or in competition. We met before
this hearing, and we will certainly be meeting before we all
reassemble again. So the thoughts and recommendations that you
accumulate in preparation for this next Committee hearing, we
will be looking forward to.
And again, I want to extend my thanks to each of you for
what you have done and contributed here today.
Mr. Cohen. Thank you, Mr. Conyers.
And I would like to thank all the witnesses for their
testimony and their--today.
Without objection, Members have 5 legislative days to
submit any additional written questions which we forward to the
witnesses, and we would ask you to answer promptly as you can
to be made part of the record. Without objection the record
remains open for 5 days for submission of other materials. And
I thank each Member for their time, their patience, their
forbearance for the way I ran the Committee and the time that
we took.
This hearing of the Subcommittee on Commercial and
Administrative Law is adjourned.
[Whereupon, at 3:11 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Material submitted by the Honorable Lamar Smith, a Representative in
Congress from the State of Texas, and Ranking Member, Committee on the
Judiciary
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Material submitted by Michael S. Barr, U.S. Department of Treasury
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