[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]
THE ADMINISTRATION'S PROPOSALS
FOR FINANCIAL REGULATORY REFORM
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 23, 2009
__________
Printed for the use of the Committee on Financial Services
Serial No. 111-76
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California MICHAEL N. CASTLE, Delaware
CAROLYN B. MALONEY, New York PETER T. KING, New York
LUIS V. GUTIERREZ, Illinois EDWARD R. ROYCE, California
NYDIA M. VELAZQUEZ, New York FRANK D. LUCAS, Oklahoma
MELVIN L. WATT, North Carolina RON PAUL, Texas
GARY L. ACKERMAN, New York DONALD A. MANZULLO, Illinois
BRAD SHERMAN, California WALTER B. JONES, Jr., North
GREGORY W. MEEKS, New York Carolina
DENNIS MOORE, Kansas JUDY BIGGERT, Illinois
MICHAEL E. CAPUANO, Massachusetts GARY G. MILLER, California
RUBEN HINOJOSA, Texas SHELLEY MOORE CAPITO, West
WM. LACY CLAY, Missouri Virginia
CAROLYN McCARTHY, New York JEB HENSARLING, Texas
JOE BACA, California SCOTT GARRETT, New Jersey
STEPHEN F. LYNCH, Massachusetts J. GRESHAM BARRETT, South Carolina
BRAD MILLER, North Carolina JIM GERLACH, Pennsylvania
DAVID SCOTT, Georgia RANDY NEUGEBAUER, Texas
AL GREEN, Texas TOM PRICE, Georgia
EMANUEL CLEAVER, Missouri PATRICK T. McHENRY, North Carolina
MELISSA L. BEAN, Illinois JOHN CAMPBELL, California
GWEN MOORE, Wisconsin ADAM PUTNAM, Florida
PAUL W. HODES, New Hampshire MICHELE BACHMANN, Minnesota
KEITH ELLISON, Minnesota KENNY MARCHANT, Texas
RON KLEIN, Florida THADDEUS G. McCOTTER, Michigan
CHARLES A. WILSON, Ohio KEVIN McCARTHY, California
ED PERLMUTTER, Colorado BILL POSEY, Florida
JOE DONNELLY, Indiana LYNN JENKINS, Kansas
BILL FOSTER, Illinois CHRISTOPHER LEE, New York
ANDRE CARSON, Indiana ERIK PAULSEN, Minnesota
JACKIE SPEIER, California LEONARD LANCE, New Jersey
TRAVIS CHILDERS, Mississippi
WALT MINNICK, Idaho
JOHN ADLER, New Jersey
MARY JO KILROY, Ohio
STEVE DRIEHAUS, Ohio
SUZANNE KOSMAS, Florida
ALAN GRAYSON, Florida
JIM HIMES, Connecticut
GARY PETERS, Michigan
DAN MAFFEI, New York
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
September 23, 2009........................................... 1
Appendix:
September 23, 2009........................................... 49
WITNESSES
Wednesday, September 23, 2009
Geithner, Hon. Timothy F., Secretary, U.S. Department of the
Treasury....................................................... 8
APPENDIX
Prepared statements:
Bachmann, Hon. Michele....................................... 50
Marchant, Hon. Kenny......................................... 52
Geithner, Hon. Timothy F..................................... 54
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Letter from Assistant Secretary Kim Wallace, U.S. Department
of the Treasury, containing figures on Treasury's workforce
diversity, dated August 13, 2009........................... 62
Geithner, Hon. Timothy F.:
Responses to questions from Representative Kanjorski,
Representative Bean, Representative Foster, and
Representative Wilson...................................... 67
THE ADMINISTRATION'S PROPOSALS
FOR FINANCIAL REGULATORY REFORM
----------
Wednesday, September 23, 2009
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 9:33 a.m., in
room 2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Members present: Representatives Frank, Waters, Maloney,
Gutierrez, Watt, Ackerman, Sherman, Meeks, Moore of Kansas,
Hinojosa, Clay, McCarthy of New York, Baca, Lynch, Miller of
North Carolina, Scott, Green, Cleaver, Bean, Ellison, Wilson,
Donnelly, Foster, Carson, Speier, Minnick, Adler, Driehaus,
Kosmas, Grayson, Himes, Maffei; Bachus, Castle, Royce, Lucas,
Manzullo, Jones, Biggert, Capito, Hensarling, Garrett,
Neugebauer, Price, McHenry, Bachmann, Marchant, McCarthy of
California, Posey, Jenkins, Lee, Paulsen, and Lance.
The Chairman. The hearing will now come to order.
I just want to explain that there is a hearing in the
Committee on Education and Labor at which I have to testify on
the antidiscrimination bill, so I will leave and will be coming
back.
We have the Secretary, whose prior effort to testify, which
we appreciated, was interrupted by a voting pattern. We will
have the Secretary's testimony this morning. Then we will have
the other regulators this afternoon.
Tomorrow, we will have a hearing on the overall question of
regulation, including particular emphasis on how to resolve the
problem of ``too-big-to-fail'' and make that go away by
appropriate remedies. On Friday, we will have a hearing on the
bill sponsored by the gentleman from Texas, Mr. Paul, on
auditing the Federal Reserve.
And then, we will begin next week, legislative hearings on
the segments of financial reform. The media reports that it is
dead for the year are inaccurate. We will begin hearings on
specific bills. We have had a number of hearings, but people
have asked that hearings be--and this is appropriate--on
specific pieces of legislation. And, obviously, other members
are welcome to propose and circulate among the members
alternatives to that so that various drafts could be available.
But we will begin hearings next week on the legislative
pieces. We intend to mark this overall regulatory package up in
some pieces. At this point, it will be up to the leadership to
decide whether it is done on the Floor in one sector or not.
I have told the leadership that, for example, if this bill
were to come to the Floor as one piece, I would insist on at
least 3 full days of debate. I intend to do everything I can to
make sure--in fact, I will not, as chairman, call up the bill
unless we have adequate time for amendments and debate. These
are very important issues for the country, and it is essential
that they be acted on in a fair manner.
So we will begin legislative hearings next week. It will be
a very busy schedule for this committee. We will have
legislative hearings and markups. No markup will be scheduled
for a day when we will be leaving town. I expect, in many
cases, we will be talking about 2-day markups on sections of
this bill. If, in an extreme case, we have to do some more, as
long as we are seriously engaged in that, we will go ahead with
it.
And it is my expectation that the legislation we have been
talking about--which really goes back and has its genesis in
the April 2008 speech of Secretary Paulson. While we don't
have, obviously, everything in there that he wanted and we have
some things that he didn't talk about, this really is an effort
that began with that speech. And we will be voting on this on
the Floor of the House in November.
I have spoken to Senator Dodd. He has been consulting with
his ranking member, Senator Shelby. They expect, I believe,
also to be acting this year. So that is the expectation. That
is the schedule.
I would just--you know, members have been alerted this is
going to be a very time-consuming committee for the month of
October and on into early November. I do look forward, as of
Christmas, to ignoring most of the subjects we will be covering
for some period of time. But that is where we are.
Now we will begin this hearing with the Secretary of the
Treasury. I alluded in my opening comments to our schedule. I
wanted to address one particular issue that I think has not
gotten enough attention, and that is the collection of actions
that are proposed by the Administration and that we intend to
go forward with, with some changes, to deal with this problem
of ``too-big-to-fail.''
The ``too-big-to-fail'' problem is one of the ones that
most aggravates people in the country. The notion that, if
incompetence gets large enough, it should be immunized from any
kind of correction is, obviously, as unfortunate a concept as
we can have. I believe we will be putting together a package of
legislation that will substantially diminish that problem.
First of all--and this is, again, something that goes back
to Secretary Paulson in April of 2008--we will be providing a
mechanism for putting nonbank financial institutions out of
everybody's misery. There will be death panels exacted by this
Congress, but they will be for nonbank financial institutions
that will not be considered ``too-big-to-die.''
And I say that because we have this euphemism that we are
going to be resolving these institutions. It has not been my
experience--and when someone says they are going to resolve
something, they kill it. And we are talking about dissolution,
not resolution. We are talking about making it unpleasant for
the entities. This is not a fate people would want. We will do
this in several ways.
But we will begin--last year, Secretary Paulson and Federal
Reserve Chairman Bernanke and others in the Bush Administration
told us that the problem was--and we had two major nonbank
institutions to deal with in this situation: first, Lehman
Brothers; and then AIG, in quick succession.
And the approach in Lehman Brothers was to pay none of the
creditors. That led the Administration, the Bush
Administration, to believe that the consequences of that were
so negative that they could not allow it to happen again, so,
with regard to AIG, they paid all the creditors.
The problem was, as they saw it, they had no option other
than pay everybody or pay nobody, that the ability to step in
and unwind this in a more orderly fashion was not available to
them. When Wachovia failed, it did not have the same disruptive
effect.
So we will give them the mechanism to do that and the
mechanism to do that will protect the taxpayers and allow these
institutions to be put out of business in the appropriate way.
We will also have powers given to a collection of Federal
regulators to make it much less likely that we will reach that
situation with the large institutions. Remember institutions
fail frequently, and generally we have ways of dealing with
them. We will be enacting legislation, I believe, to keep them
from getting to the point where they are so large and so
overleveraged that this will be happening.
Now, one proposal--I want to say, there had been some talk
about a list being established by the Federal regulators of the
institutions that were systemically important. I believe that
would be a mistake. While those who proposed it in good faith
thought it would be a kind of scarlet letter on them, in fact,
others have seen it as a badge of honor.
So we are, I believe, going to empower the regulators to
take action to stop this from happening, but we are not going
to have a preordained list. I think we are likelier to get to
the Potter Stewart principle. As lawyers will recollect, he
said in the pornography case, ``I know it when I see it.'' The
regulators will know a systemic threat when they see it,
because the systemic threat could be one large institution or a
series of smaller institutions doing the same bad thing.
Irresponsible subprime mortgages turned out to be a terrible
systemic threat. No one institution was at that point.
When you get to that--and we are still working, and there
will be disagreements, but I think ultimately an agreement, on
who does it, what combination of existing Federal regulators
will have the power to designate and then enact restrictions.
Those institutions or those activities which are deemed to be
risky will be restrained. There will be restrictions on
excessive leverage, and there will be restrictions on
activities. Such a regulator would, I believe, have told AIG to
stop issuing credit default swaps and to begin to unwind that
portfolio in an orderly fashion and to increase their capital.
So I do want to stress, yes, there is no one magic bullet
that does away with ``too-big-to-fail.'' But you will have an
ability to resolve them in ways that protect taxpayers and give
people a disincentive to get into that situation. And you have
a power, before you reach that, to restrict their activities,
both quantitatively and qualitatively. That will be very much
what we do.
The gentleman from Alabama is now recognized for 4 minutes.
Mr. Bachus. I thank the chairman for holding this hearing.
And, Secretary Geithner, I thank you for returning to our
committee to discuss the President's proposals for regulatory
reform.
The Administration has presented to Congress a far-reaching
regulatory reform proposal which, as of today, has failed to
achieve anything approaching consensus, either on Capitol Hill
or even among the Federal regulators who would be responsible
for implementing it.
The lesson that we learned from the events that led to the
financial crisis and subsequent government actions is that our
1930 regulatory system is not up to the task of monitoring the
safety and soundness of complex financial institutions in the
21st Century. We do need smarter regulation, but not
necessarily more regulation. We need enforcement of existing
regulation, not another layer of regulation or more government
bureaucracy.
And, finally, what we do not need and what we have had too
often is government policies which encourage harmful business
practices or incentivize those practices or, when they went
terribly wrong, blessed them with bailouts.
The chairman used the term ``liquidate and resolve.'' And I
think that most of my colleagues welcome that, as opposed to
what the Administration started by saying, and the chairman,
using words like ``rescue,'' because ``rescue'' implies that
the taxpayers will be presented with the ultimate bill.
Unfortunately, the Administration's regulatory reform plan
continues the pattern that we have seen with health care and
energy of a big-government solution that replaces individual
choices with bureaucratic mandates. Their plan establishes the
Federal Reserve as the systemic risk regulator, despite the
fact that the Fed has historically done a poor job of
identifying and addressing systemic risk before they become
crises.
It tasks the Fed with identifying a class of systemically
significant firms that the market will view as ``too-big-to-
fail,'' as the chairman said, and then compounds this mistake
by creating a so-called resolution authority that will promote
continued taxpayer-funded bailouts of these institutions rather
than actually unwinding and shutting down their operations.
And, finally, the Administration plan would establish a
massive new government bureaucracy known as the Consumer
Financial Protection Agency, which consumers will ultimately
pay for on top of the numerous regulatory agencies and the
regulatory legislation and patchwork that currently exists.
Mr. Chairman, my deep-seated reservations about the
Administration's financial reform proposals, which, again, I
point out are shared by Members on both sides of the aisle and
many of the regulators themselves, should not be interpreted as
a rejection of commonsense reform. Although Republicans have
taken a different path than the Administration's, we are not
saying ``no'' to reform. Republicans are saying ``no'' to more
bailouts and ``no'' to more of the same approach of misguided
government regulations and interventions which helped bring
about the crisis in the first place.
Republicans have offered a clear alternative to the
Administration's approach to reform and will continue to do so.
The Republican plan promotes effective consumer protection by
streamlining and consolidating the functions of the bank
regulators, including consumer protection, into a unified
agency.
End the bailouts. Our plan directs all failed nonbanks to
an enhanced bankruptcy process that will force creditors and
counterparties of those firms to bear the cost of failure
rather than sticking the taxpayer with the tab. To promote
sound monetary policy, our plan relieves the Fed of its current
supervisory duties and prohibits the Fed from bailing out any
specific financial institution.
Mr. Chairman and Mr. Secretary, I thank both of you. I look
forward to working with you and my colleagues in the months
ahead as we address regulatory reform. Thank you.
The Chairman. And we have an imbalance of speakers,
although the same numbers. So I will go to Mr. Hensarling next
for 2 minutes, if he is ready. Two minutes is what was on the
sheet I was given.
Mr. Hensarling. Thank you, Mr. Chairman.
And welcome, Mr. Secretary.
When it comes to the Administration's financial regulatory
plan, not unlike their trillion-dollar health care plan, it
will prove to be terribly expensive and lead to forms of
rationing.
First, the Administration's proposal rewards regulators
with sweeping new Draconian powers, like the CFPA, to regulate
industries as diverse as car rental companies, advertising
agencies, and neighborhood department stores, all of which will
simply make credit more expensive and less available to
struggling small businesses and American families throughout
our Nation.
The Administration proposal also includes the designation
of certain companies as Tier 1 financial holding companies. The
Administration's proposal, I fear, will simply codify the
policy of ``too-big-to-fail'' and enshrine us as a bailout
nation.
Now, some maintain that bailouts have brought us to the
verge of a recovery. I hope and pray we are on the verge of a
recovery. But I remind all, Mr. Chairman, there is no such
thing as a jobless recovery. No jobs, no recovery. Since the
Administration has taken office and enacted their economic
agenda, 3 million more of our countrymen have lost their jobs,
and we currently suffer under the highest unemployment rate in
a quarter of a century.
The Administration's continued bailouts of Fannie Mae,
Freddie Mac, AIG, Chrysler, GM, and the list goes on, have
hampered our economic recovery and helped our Nation pass a
very important milestone: the first trillion-dollar deficit in
our history, not to mention a budget which will triple the
national debt over the next 10 years.
There is a huge difference between adding emergency
liquidity to a panicked financial system and bailing out firms
fortunate enough to be designated ``too-big-to-fail.'' Under
the latter policy, the big get bigger, the small get smaller,
the taxpayer gets poorer, and our children get saddled with the
mother of all debts.
Clearly, reforms are needed, but the best way to end
taxpayer bailout of failed companies is to simply end taxpayer
bailouts of failed companies. The best way to protect consumers
is with competitive markets, vigorous enforcement of antifraud
laws, and effective disclosure that is easily understood.
Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
The Chairman. The gentleman from Illinois, the chairman of
the Subcommittee on Financial Institutions, Mr. Gutierrez, is
recognized for 3 minutes.
Mr. Gutierrez. Mr. Secretary, first of all, thank you for
appearing.
Exactly 1 year ago, we experienced the most agonizing week
of the current financial crisis. And this committee began to
address the root causes of the social and economic trauma that
crippled our economy and caused millions of Americans--and we
should remember this--to lose trillions of dollars of their
hard-earned wealth. Let me repeat that: Trillions of dollars of
hard-earned wealth were lost by the American people. Not so
much the guys on Wall Street, they lost, but the people on Main
Street lost.
Predatory mortgage lending, combined with risky investment
practices and poor underwriting standards, financed by some of
the largest financial institutions in this country, created the
financial and economic debacle that we must now address.
Over a decade ago, the Federal Reserve was given the power
by this committee--I was here; I got elected in 1993--to stop
predatory mortgage practices through the Homeowners' Equity
Protection Act. It took the Federal Reserve 12 years to
implement the rules and regulations that could have prevented
many, if not all, of the worst abuses by predatory lenders and
originators, abuses that were a direct and immediate cause of
our current crisis.
Why did it take so long? While there were many theories to
explain this, I believe it took the Fed this ridiculously long
time, including the FDIC, which did absolutely nothing either,
because it was distracted by their other regulatory obligations
and by a sense in Washington, D.C., of do less, do nothing,
leave it alone, it is okay.
The default of these toxic mortgages and the securitized
products based on them caused trillions of dollars in losses
and caused the 2008 freeze in credit markets, which nearly
destroyed not only our financial system but the entire
international financial system.
The message to those of us who want to restore the
stability to the financial system could be no clearer or
louder. If we do not include a strong, effective Consumer
Financial Protection Agency within our regulatory reform
legislation, Congress will have failed to address the current
and any future economic challenges facing our country.
We must also address the economic threat inherent in
institutions known as ``too-big-to-fail.'' I believe we must
work to a comprehensive, risk-based pricing regime which
eliminates the incentives for these financial firms to grow to
the point of becoming ``too-big-to-fail.''
One of the ways we can prevent an institution from becoming
``too-big-to-fail'' is through a pricing regime which
discourages banks from growing so large and interconnected. We
must not only increase capital requirements, but we should also
require decreased leverage ratios and increased contributions
to the Deposit Insurance Fund.
Let me ask that this be submitted for the record, my
complete statement, because it is clear to me, Mr. Chairman, we
are going to have, you know, our classical debate. Our
colleagues on the other side have already thrown health care
into this, big government. I hear ``socialism'' coming any
second. They are going to say, ``No, no, no. Global warming
doesn't exist, no. We don't need to do anything about global
warming. We really don't need to do anything about this.''
We do need to do something, and Mr. Geithner knows it
probably better than anybody else. We can never allow a Lehman
Brothers again to have a 30:1 ratio. We can't allow that kind
of leverage. And government is the only one that is going to
stop it from happening again.
Thank you very much, Mr. Chairman.
The Chairman. The gentleman from New Jersey, Mr. Garrett.
Mr. Garrett. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
Before I begin, I just want to say I don't believe anyone
from either side of the aisle believes that everything was done
right in the past and we can just continue going in that same
direction. I believe from both sides of the aisle everyone
agrees that reform is necessary. It is just the nature of that
reform, to make sure that we do not limit growth nor do we
provide for instability. We want just the opposite; we want
economic growth and stability to come out of reform that we do.
I think we can agree on that.
One point, the chairman raised the issue of timelines and
moving forward and what he would like to do. When I think about
that, you go back. In April, the Administration thought before
the G-20 they wanted to have a reform proposal out on the
table. That wasn't done. Then there was talk by that G-20, not
a complete proposal. Then, by the end of Memorial Day, there
was talk of doing a markup and having that done for resolution
authority. And that wasn't done. And then there was talk of
dealing with the systemic regulator and getting that through,
and that was not done. And then, of course, in July, we were
told that we were going to be dealing with the consumer agency.
And that was kicked until September. And then that was
eventually kicked to September when we came back from break.
And, of course, now that is kicked now to mid-October.
So it seems that all those timelines have not really been
met quite as they had wanted to meet them. And we really don't
have, today, any legislative text from the legislative side of
the aisle. I do appreciate that the Administration has provided
us with legislative language, which is absolutely necessary for
us to deliberate on these things. But it is appropriate, of
course, for Congress to come up with their own legislation.
Now, in the Senate, of course, we have Senator Dodd, as
some would say, throwing a wrench into the works, because he
has come up now with an idea of a single regulator. And why I
use the word ``wrench'' is because the chairman has said there
will never be any prospect of merging the OCC and the OTS. So
we are at different ends of that spectrum on that area.
So I guess what I would be curious hearing from you today
is, is there a need to be able to deal with each of these
issues deliberatively, to have time actually to have the
legislation before us, and maybe move until 2010 before we
actually have the completion of all this legislation?
I thank you, and I look forward to your testimony.
Mr. Gutierrez. [presiding] The time of the gentleman has
expired.
And now we will hear from the person that we are all
gathered to hear from and that we have many questions for, the
Secretary of the Treasury, Mr. Geithner.
Please proceed.
STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary Geithner. Thank you, Mr. Chairman, Ranking Member
Bachus, members of the committee. It is a pleasure to be back
before you today and to talk about how best to reform the
system. I am pleased to hear the enthusiasm for reform across
both sides of the aisle. And, of course, we all recognize the
task we face is how to do it right and how to get it right.
Our objective, of course, is to provide stronger protection
for consumers and investors, to create a more stable financial
system, and to reduce the risk that taxpayers have to pay for
the consequences of future financial crises. We have outlined a
broad set of proposals for achieving these. We provided
detailed and extensive legislative language.
We welcome the time and effort you have already put into
considering these proposals and the suggestions you have made,
many of you individually and collectively, have made to improve
them. As the President likes to say, we don't have a monopoly
of wisdom on these things. Our test is, what is going to work?
That is our test. What will work? What will create a more
stable system, better protections, with less risk to the
taxpayer?
I want to focus my remarks briefly on what I think are the
two key challenges before us at the center of any debate on
reform. The first is about how you achieve the right balance
between consumer protection and choice and competition. And the
other is how to deal with the moral-hazard risk people refer to
as ``too-big-to-fail.''
So, first, on the consumer challenge, our system of rules
and enforcement failed to protect consumers and investors. The
failures were extensive and costly. They caused enormous damage
not just to those who were the direct victims of predatory
practice, fraud, and deception, but to millions of others who
lost their jobs and their homes or their savings in the wake of
the crisis.
And to fix this--and I will just say it simply--we need to
have strong minimum national standards for protection. They
need to apply not just to banks but to institutions that
compete with banks in the business of providing credit. They
need to be enforced effectively, consistently, and fairly. And
there need to be consequences for firms that engage in unfair,
ineffective practices, consequences that are strong enough to
deter that behavior.
We believe we cannot achieve that within our current
framework of diffused authority with the responsibility divided
among a complex mix of different supervisors and authorities
who have different missions and many other priorities. We think
it requires fundamental overhaul so that consumers can
understand the risks of the products they are sold and have
reasonable choices, and institutions have to live with some
commonsense rules about financial credit.
Of course, the challenge is to do this without limiting
consumer choice, without stifling competition that is necessary
for innovation, and without creating undue burden and cost on
the system.
Our proposal tries to achieve this balance by consolidating
the fragmented, scattered authorities that are now spread
across the Federal Government and State government. And it is
designed to save institutions that are so important to our
communities--credit unions, community banks, other institutions
that provide credit--from making that untenable choice between
losing revenue, losing market share, or stooping to match the
competitive practices that less responsible competitors engage
in, competitors that had no oversight, that were allowed to
engage in systematic predatory practices without restraint.
Now, some have suggested that, to ensure no increase in
regulatory burden, we should separate rule-writing authority
from enforcement. But our judgment is this is a recipe for bad
rules that are weakly enforced--a weaker agency. So we think we
need one entity with a clear mission, the authority to write
rules and enforce them.
Now, just briefly on this deeply important, consequential
question of moral hazard and ``too-big-to-fail,'' no financial
system can function effectively if institutions are allowed to
operate with the expectation they are going to be protected
from losses. And we can't have a system in which taxpayers are
called on to absorb the costs of failure. We can't achieve this
with simple declarations of intent to let future financial
crises burn themselves out.
We need to build a system that is strong enough to allow
firms to fail without the risk of substantial collateral damage
to the economy or to the taxpayer. And this requires that we
have the tools and authority to unwind, dismantle, restructure,
or close large institutions that are at the risk of failure
without the taxpayers assuming the burden. It requires that
banks pay for the costs incurred by the government in acting to
contain the damage caused by bank failures. And this requires
higher capital standards, tougher constraints on leverage
across-the-board, with more rigorous standards applied to those
who are the largest, most complicated, posing the biggest risks
to the system.
Now, this package of measures is central to reform. You
can't do each of these and expect it to work. You have to take
a broad, comprehensive approach. And the central objective,
again, is to make the system strong enough so we can allow
failure to happen in a way that doesn't cause enormous
collateral damage to the economy and to the taxpayer.
As the President said last week, taxpayers shouldered the
burden of the bailout, and they are still bearing the burden of
the fallout in lost jobs, lost homes, and lost opportunities.
We look forward to working with this committee to help create a
more stable system. We can't let the momentum for reform fade
as the memory of the crisis recedes.
Thank you, Mr. Chairman.
[The prepared statement of Secretary Geithner can be found
on page 54 of the appendix.]
Mr. Gutierrez. You are very welcome.
Mr. Bachus, you are recognized for 5 minutes.
Mr. Bachus. Thank you very much, Chairman Gutierrez.
Just last night, Chairman Frank released a memo--I am sure
you have probably seen it--to his caucus where he suggested
changes to the Consumer Financial Protection Agency. And,
specifically, the chairman intends to drop, or seems to, the
plain vanilla requirement, which has received so much
attention.
The White Paper was where the Administration highlighted
that. I know Elizabeth Warren, who first proposed a financial
protection safety council, I think that was sort of the main
emphasis--that plain vanilla. And it is in your draft
legislation that the Administration sent to the Hill.
What is your position on leaving out plain vanilla? You
didn't mention it this morning.
Secretary Geithner. Thank you.
I have read the note quickly. And, in general, we are very
supportive of the changes proposed by the chairman, including
the one you referenced.
But let me just explain the basic rationale for where we
started. Our basic framework is designed to use disclosure to
make sure consumers are less vulnerable to predation.
Mr. Bachus. Of course, now, you know, Mr. Secretary, about
18 pages of the present disclosures are because of Federal
requirements.
Secretary Geithner. No, I agree. But I think, as anybody
realizes, how many of you read those disclosures and understand
what they mean?
Mr. Bachus. No, I agree with you.
Secretary Geithner. It is really a remarkable failure to
provide the kind of ability to choose that is so central to any
reasonable financial system.
So, in general, Mr. Bachus, we think it is a reasonable
idea to try to make sure consumers have the ability to choose a
simple product, not something they don't understand. And maybe
the most effective way to do this to make sure you get
disclosure right.
Mr. Bachus. Okay. Although a lot of the disclosure is
because of Federal regulation. So, I mean, that is the reason--
Secretary Geithner. But you said something that I often say
and completely believe: that, in many ways, this is about
smarter regulation. And, you know, what you cite in disclosure
is an example that you can have a lot of requirements and not
achieve the objective of clarity.
Mr. Bachus. Sure. I agree. Okay.
In your testimony, on page 8, you spent a lot of time this
morning on the systemically significant, the Tier 1. You say
that the identification of a firm as a Tier 1 will not convey a
government subsidy.
But isn't it a fact that a firm that has been identified as
Tier 1, just that identification tends to imply government
subsidy, given that creditors will know that the firm has been
determined to be so important that it can't fail?
Secretary Geithner. We are deeply worried about that risk.
And you are absolutely right, as is the chairman, to point out
the risk in any regime that creates the expectation that the
government will be there if you screw things up.
But let me just make clear what is important. It is very
important that these institutions that matter, whose future
could threaten the economy as a whole, are subject to higher
constraints on leverage in the future, more conservative
cushions of capital and liquidity so that they can absorb
losses they face when they make big mistakes.
So what we are trying to do is to make it clear that, if
you have this particular source of threat to the system, we are
going to hold you and subject you to more conservative
constraints on risk-taking.
Now, you can't do that without identifying who those
institutions are. But you have to do it in a way that doesn't,
as you said, create an expectation that the government will be
in there if they fail.
But that is why you can't just do it with tighter capital
requirements. You have to give them the tools for the
government to intervene to save them, but to act in a way that
allows them to be dismantled and restructured and--I won't use
the chairman's language--again, without the taxpayers assuming
that burden. That is the central imperative for reform.
And you are all right when you say that the key thing we
have to do is not reinforce any expectation that the government
is going to step in and protect people from losses in the
future. Our job, though, is to make sure the system is less
vulnerable to the collateral damage that can be caused when
people make big mistakes.
Mr. Bachus. But can you assure us that the government won't
step in if they fail?
Secretary Geithner. You know, Mr. Bachus, as I said, we had
a little natural experience as a country last fall in what
happens when--
Mr. Bachus. It wasn't so little.
Secretary Geithner. No, I would just say we had a test of
the proposition that you can solve a crisis by hoping it is
going to burn itself out. You saw how deeply damaging it was to
the country as a whole.
So you can't fix this system, make it more stable in the
future, by hoping and promising that you are going to--how
should I say it--
Mr. Bachus. Not have more bailouts.
Secretary Geithner. --abolish the fire station, lock the
doors of the fire station when the crisis breaks out. It is not
a strategy that works.
Mr. Gutierrez. The time of the gentleman has expired.
The Congresswoman from California, Maxine Waters, is
recognized.
Ms. Waters. Thank you very much.
Thank you very much for being with us today, Mr. Secretary.
I would like to quickly respond to some of your testimony.
You outlined some critical objectives, and you said to achieve
these objectives will require changes across the entire
financial system. And you laid out some of the changes. I would
like to add a little something to that.
On August 13th, Assistant Secretary Kim Wallace sent me
some figures on Treasury's workforce diversity. I would like to
thank you for those numbers. And I will enter them into our
record today.
And I would like to ask you to provide a little bit more
specific breakdown of workforce diversity within each division.
I am especially interested to see what roles each class of
minorities occupies. For example, how many are lawyers, how
many are policy staff, how many are administrative assistants?
And I am not going to ask you to do that today; I am going
to ask you to respond in writing. And I thank you very much.
Second, I would like to focus on the suggested language you
sent over on over-the-counter derivatives. As you know, I am
very concerned about credit default swaps, which are a type of
derivative. We allowed the SEC to ban short-selling, as it did
last fall. The SEC also created new rules to significantly
limit naked short-selling.
The rationale behind this is that short-selling was used to
improperly speculate in financial stocks. This caused what has
been referred to as a crisis of confidence, which undermined
each company's ability to operate. The same can be said about a
company's credit default swap price. A naked credit default
swap can be used to speculate on a company's creditworthiness
and drive the value of the bonds lower.
The current derivatives proposal does not have any limits
on naked credit default swaps. We already allow the SEC to ban
short-selling. We know naked credit default swaps can be used
for the same speculative purposes as short-selling. Why
shouldn't we give the SEC the authority also to ban credit
default swaps?
Secretary Geithner. An important issue and a thoughtful
question. What we do in our proposal--and this is something you
need to reflect on--is we propose to give the SEC and the CFTC
the ability--they do not now have this authority today--to
effectively deter and prevent manipulation in the derivatives
markets. And, that is a very important thing to do. We didn't
do that before. We have to fix that. We proposed a variety of
ways of doing that.
We don't think that banning what you call naked credit
default swaps is necessary or appropriate to that objective.
But we do think it is critically important you give them
enforcement authority and the tools necessary to address,
prevent, and deter manipulation in the derivatives markets. And
that should be a centerpiece of what your committee considers
in reform of derivatives markets.
Ms. Waters. Thank you very much.
Finally, I would like to ask a question about the Consumer
Financial Protection Agency. I am extremely supportive of the
Consumer Financial Protection Agency. I am a little bit worried
about the concerns that have been identified by the FDIC and
the Fed about their roles.
Are you guys working through this in the Administration, to
help everybody get online, to determine what this Consumer
Financial Protection Agency will be and what will be taken from
each and not taken from each? Can we all get together on that?
Secretary Geithner. Ultimately, the committee is going to
have to make that choice. And, as I have said before, what you
are hearing from the supervisors is just an understandable
desire to protect authority they have today and make sure that
people they have doing these jobs don't face uncertainty about
their broad future. And I understand that wish.
But let me just say it starkly: Did that system work? How
well of a job did it do? How did it work out for the country to
have that authority spread out among those agencies?
So, again, I think it is understandable they are expressing
reservations and concern. You can't expect them to do anything
different. But our responsibility is to figure out what is
right for the country, even if it is inconsistent with the
individual institutional prerogatives of individual supervisors
and even if it is going to be uncomfortable for the financial
firms who are going to have to face tougher standards, better
enforcement.
Ms. Waters. I appreciate that. It would just make it a
little easier for us if the Administration could just get its
act together with all of--
Secretary Geithner. Again, one great virtue of our country
is that these are independent agencies with independent
authority, and they have independent traditions, and they have
things that they want to defend and protect. And we all respect
that. But our job, the committee's job, the Congress' job is to
figure out what is right for the country. And I think, again,
we had a test of whether that system works, and it didn't work.
Ms. Waters. Okay. Well, finally, let me just ask you one
question about the plain vanilla products. You support coming
up with what is described as ``plain vanilla'' products. How
important do you think that is to the Consumer Financial
Protection Agency's work?
Secretary Geithner. Look, our judgment, in shaping these
recommendations, was shaped by the, sort of, simple proposition
that consumers should be given the choice of opting for a
simple 30-year fixed-rate mortgage, for example. Now, they
shouldn't be restricted from the ability to do something
different that better meets their needs, but that should be one
of the options they are able to choose. And we want to make
sure the system as a whole does a good job of providing that
choice.
But there has been a lot of concern that if you invest the
government with the ability to decide what is appropriate here
and what is there, that is going to lead you to the point where
you actually have less competition and choice.
We have been open to many suggestions many people have
raised that you find a way to have stronger standards without
creating the risk that, over time, you are going to see a bunch
of bureaucrats, frankly, narrow legitimate choice and restrict
competition.
So, as I said earlier, I think the chairman's proposals
that I have just had a chance to read very briefly are, I
think, a pragmatic, helpful way to make sure that you have a
better balance of choice with protection.
Ms. Waters. Thank you very much.
Mr. Gutierrez. Mr. Hensarling, you are recognized for 5
minutes.
Mr. Hensarling. Thank you, Mr. Chairman.
Mr. Secretary, I am hearing some things that are somewhat
surprising to me, so I want to make sure my ears do not deceive
me. I am sorry that Chairman Frank isn't here; I know he went
to another hearing.
I thought I heard Chairman Frank say that, essentially, his
vision of the resolution authority would constitute a death
panel and end in dissolution. And then I thought I heard you
say that you would not necessarily use the chairman's language.
So does that mean that--
Secretary Geithner. I only meant the phrase ``death
panel.''
Mr. Hensarling. Okay. So--
Secretary Geithner. But on the objective and strategy--
Mr. Hensarling. But under the Administration's plan, then,
a conservatorship versus a receivership would still be on the
table. Is this correct?
Secretary Geithner. Oh, absolutely.
Mr. Hensarling. Okay. It appeared that the chairman was
going in a different direction.
Secretary Geithner. But let's make sure people understand
what the choice is. Remember, what we are proposing to do is to
take a regime that was set up, a process that was set up for
small banks and thrifts that existed for more than 20 years,
set up in the wake of the S&L crisis, to make sure the
government has the ability to come in and act to help
restructure--
Mr. Hensarling. I think we understand--
Secretary Geithner. --without costing the taxpayer.
Mr. Hensarling. We understand that, Mr. Secretary.
Secretary Geithner. No, but this is really what is
important.
So what we want to do is take that model and apply it to
the largest institutions in the country, so that the taxpayer
is less exposed to risk in that context.
Now, without that authority--
Mr. Hensarling. Wait, Mr. Secretary, I am sorry, I have a
limited amount of time. I understand the point.
Something else that I thought I heard you say--I actually
am somewhat confused after your answer to the gentlelady from
California. Are mandatory, standardized products, also known as
plain vanilla, are they on the table or are they off the table?
Secretary Geithner. Those are a part of what we proposed in
both our broad recommendations and our detailed legislative
language.
But, as I said, Congressman, we are very committed to
trying to make sure that we find a balance that gets better
protection for consumers without limiting choice and
competition. And there are different ways to do that.
Mr. Hensarling. I understand that, Mr. Secretary, but it is
a fairly simple question. In the original language that the
Administration submitted, it has mandatory standardized
products. I am just trying to ask, is that off the table? Are
you now indicating there are other approaches?
Secretary Geithner. Yes, absolutely.
Mr. Hensarling. Okay--
Secretary Geithner. But hold on. I would say that, again,
these are judgments the committee is going to have to work
through. And, as I have said and we have always said, there are
different ways to find this balance.
But what is important--and I think you can see a test of
this in the credit card bill that this body passed a couple of
months ago--of an approach that tries to find a balance, that
does not limit choice, but gives better protection. The
question is how best to do it.
Mr. Hensarling. Let's speak about balance for a second, Mr.
Secretary. In your statement earlier today, you said that the
Administration's proposal addresses core regulatory failures
and weaknesses that directly contributed to the crisis and the
dangers that could lead to the next one.
As many of us look at your proposal for a CFPA, we see
something that is very broad, very Draconian. As we read the
legislative language, is it not true that ultimately Wal-Mart,
Target, and Macy's could be subject to regulation by the CFPA?
Secretary Geithner. Let's do the simple objective and the
simple imperative we share, okay? Which is, if you are in the
business of providing financial credit, that is your business,
and you are competing with banks and thrifts who do that, there
should be a common set of basic standards and protections.
If you don't do that, then we will have again what this
country went through over the last 5 years. Because what you
will do is allow one set of institutions to be subject to these
rules, and all risk and activity will migrate to where there is
no protection.
Mr. Hensarling. Okay, Mr. Secretary, I understand the
rationale. But does that mean the answer is yes, that
ultimately Wal-Mart, Target, and Macy's, if they offer credit,
can come within the regulatory ambit of the CFPA?
Secretary Geithner. Well, one of the great virtues of our
system is these are judgments the Congress of the United States
has to make and this committee is going to have to work
through.
Mr. Hensarling. But the language--I am asking you, Mr.
Secretary--the Administration's language--
Secretary Geithner. What we proposed is straightforward,
black and white. We proposed it, and it is on the table. And,
as I said from the beginning, we welcome the chance to work
with you--
Mr. Hensarling. So if these firms are engaged in the
marketing of consumer financial products or services, then they
could come within the regulatory ambit, not unlike Starbucks,
Chili's, Applebee's, rental car companies, Avis, Budget,
Enterprise--
Secretary Geithner. Congressman, I understand what you are
doing. It is a reasonable proposition, the approach you are
trying to take.
But let's do the basic imperative. If you allow
institutions that are essentially doing what banks do to
compete with banks with no adult supervision, no constraints,
and are free to engage in unfair practices, then you will
recreate again--
Mr. Hensarling. Do CPAs compete with banks?
Mr. Gutierrez. The time of the gentleman has expired.
I recognize myself for 5 minutes.
Secretary Geithner, a year ago, you were--Mr. Paulson and
Mr. Bernanke, Lehman Brothers was about to collapse and go into
bankruptcy. How much did the 30:1 leverage have to do with
Lehman Brothers and its collapse?
Secretary Geithner. Central to their vulnerability, AIG's,
Bear Stearns's, broad swaths of the rest of the financial
system, was excess leverage allowed to build up without
constraint.
Mr. Gutierrez. And when the Securities and Exchange
Commission was visited by the Wall Street heads from many of
the same companies you just referred to, and I think it was in
2005, and they said, listen, we really like not to leverage 5:1
and 6:1, but 30:1, how significant was the decision by the
Securities and Exchange Commission to allow that practice?
Secretary Geithner. Well, again, it was very significant.
The biggest part of the failure of our system was to allow very
large institutions to take on leverage without constraint. And
that is what really causes crises, what makes them so powerful.
And that is why a centerpiece of any reform effort has to be
the establishment of more conservative constraints on leverage
applied to institutions whose future could be critical to the
economy as a whole.
Mr. Gutierrez. And I ask you that because that is what I
thought, and I just wanted to see if we agree that this
leveraging of 30:1, which was actually authorized by the
Securities and Exchange Commission--you have never worked at an
investment banking firm, though, right, on Wall Street?
Secretary Geithner. I have not had that privilege, no.
Mr. Gutierrez. Well, that is good. Because it was always
interesting to me the kind of dynamics, as you were running
through this, that Secretary Paulson headed up Goldman Sachs,
and he was there trying to figure out how this leveraging was
going to get unleveraged, the same leveraging that he went to
the Securities and Exchange Commission. I want to make sure
that never happens again, that we don't have people in this
kind of situation.
So tell me exactly what we are going to do different that
isn't--okay, you are the Secretary of the Treasury. How are we
going to make sure that another part, the Securities and
Exchange Commission or somebody else, doesn't go and do
something like this that then corrupts your ability,
undermines, corrupts your ability to keep the financial markets
in check?
Secretary Geithner. You have to ensure that any institution
that poses that kind of risk to the country is subject to
conservative constraints on leverage. There is no other way to
do it.
And, alongside that, you have to make sure you have the
capacity, if they end up making mistakes that will threaten
their viability in the future, that they bear the consequences
of those mistakes without threatening the stability and the
health of the rest of the economy, the rest of the innocent
victims out there in the economy who were responsible--
Mr. Gutierrez. And I probably failed to ask, so how do we
stop--as you see this, we are done. We are done with our work.
The President signed the bill. It is going to happen, much to
the chagrin of my friends on the other side. They will do
everything--two of them already brought up that maybe you and
Barney Frank disagree about the vanilla envelope. That is the
opening thing, divide and conquer. It is not going to work. The
plain vanilla envelope, two of them have brought them up. That
is the new thing. That is the headline, ``They Disagree.''
Hopefully, it is also going to say, ``Secretary Geithner
Doesn't Bite,'' because I think that would be a mistake and
lead us in the wrong direction.
So how do we make sure that you or someone has the power,
the ability, the oversight, the capacity? You see that in the
bill that is signed by the President?
Secretary Geithner. It is central. Without that, nothing
will work.
Again, I think in many of the concerns you have expressed
on this side of the aisle, but also on your side of the aisle,
are concerns about the threat of moral hazard. The question is
how best to prevent that. I think what we learned from this
crisis is you can't expect the market to constrain excess
leverage and you can't fix a problem by hoping it will burn
itself out.
Mr. Gutierrez. Let me just ask, so how is it that we lost
trillions of dollars, and how will it be different in the
future? Because it is, like, mind-boggling to me, it really is,
that trillions of dollars could be lost, that financial
instruments could be sold on the markets. People bought these
things, all right? And it is like nobody is going to jail.
There hasn't been a grand jury investigation. You know, like,
nobody is doing serious jail time. I can't believe that all
this happened. And, I mean, for nickel-and-dime stuff in the
neighborhood, they will call a grand jury. And this is stuff
that has really caused a serious harm to our economy, and
trillions of dollars have been lost, and there is no one going
to jail.
I just want to make sure that, as we look at this, we put
some police and we police this. Because, you know, I believe in
cops on the beat. I think we need some cops on the beat around
Wall Street, too, lots of good, smart cops who are going to
help you and others enforce the law. Because I have a funny
feeling the law is only as good as the number of policemen that
you put on the beat to make sure the law is enforced and you
put people in jail when they violate the law.
That is the end of my time. We will now recognize Mr.
Garrett for 5 minutes.
Mr. Garrett. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
You know, Mr. Secretary, I just heard you say something
that actually harkens back to last time you were here, and that
is talking about the goodness of having independent agencies
and regulators out there on the one hand, but on the other hand
that you sort of expect them to take the actions that they did.
Because that was actually something that you said, and I
remember what you said, that institutions have this authority
to regulate, and they are not enthusiastic about giving up that
authority. They would just defend their traditional
prerogatives of their agencies.
And I think, frankly, all arguments need to be viewed
through that basic prism. We will have a hearing later on, and
I guess that is the prism where we will have to take their
testimony at that point in time, that they are doing it just to
represent their own turf as opposed to what we are looking to
you for, for the benefit of the country.
One of my opening comments was the timeline, and you heard
that whole perspective. Very quickly, with the immensity of
this issue, the complexity of the problems, is it realistic
that we can resolve all this and all of our differences in the
next 7 weeks and get it done and get it done right that would
not have any negative consequences in the future?
Secretary Geithner. Again, that is a choice you are all
going to have to make. I think it is realistic. But let me just
say what the consequence of the alternative is. I am very
confident that, if you decide that you are going to do this
over a protracted period of time--
Mr. Garrett. But ``protracted'' could just be into next
quarter or something like that.
Secretary Geithner. Well, that is what people will say. But
there is a huge risk that it will just make it harder, because
people will say, ``Gee, it seems kind of hard. Let's not take
this on. It is difficult. The crisis receded. Things aren't
going to be so bad.'' I think that is a huge risk.
Mr. Garrett. I understand. I appreciate that.
Let me ask you about another issue, which obviously was
happening during the heat of the moment, and that is back in
the situation with the Bank of America situation and the SEC
Bank of America case. Obviously, I would assume that if Bank of
America was working with the Fed and the Treasury at that
period of time, I would have assumed, but you can tell me if I
am wrong, that you all would have been talking with Bank of
America as to what they could and what they couldn't do with
regard to the Merrill Lynch merger.
Do you remember anything about those conversations as to
what they should or should not be doing and what they should or
should not be disclosing at that period of time? Do you have
any recollection of that?
Secretary Geithner. As you may recall, that happened at a
time when I had been nominated by the President to be Secretary
of the Treasury and I was pending confirmation. And so,
throughout that period of time, I did what was the necessary
and appropriate thing, which was to recuse myself from any
engagement in any individual--on not just monetary policy, but
any individual discussion with those firms.
And so, although both the Secretary and the chairman
occasionally gave me a little update on where they were going,
I was not party to those discussions.
Mr. Garrett. Okay. So any information that they gave you,
was any of the information that they gave you indicative of
those issues that are now before the SEC, as far as what Bank
of America should or should not be doing with regard to
disclosure? I know you may not be sitting in at them, but as
far as the information that was given to you?
Secretary Geithner. No. I would say that what they did is
what I think was appropriate, given that I was being considered
for this job, was to make sure I was aware of the broad choices
they were facing in terms of whether and what it was going to
take to make--
Mr. Garrett. So is that a no?
Secretary Geithner. Well, again, I think that, as I said,
what they did was, again, appropriate, which was to give me the
occasional sense of what they thought they were going to be
bequeathing me.
Mr. Garrett. Was that a no?
Secretary Geithner. Well, again, I am trying to be fair
to--
Mr. Garrett. Well, either they talked to you about it or
they didn't talk to you about it.
Secretary Geithner. Let me say it this way. The issues that
you raised that are central to the discussion of the SEC were
not part of my discussion with them.
Mr. Garrett. Okay, so that is a no. Was not essential to
the--so that is a no.
Secretary Geithner. No, that is what I said, Congressman,
which is that the issues that you raised were not part of or
not central to what they--
Mr. Garrett. I don't really care whether they were central
or tangential. Was that part of the discussion at all?
Secretary Geithner. I would really be happy to talk through
this as long as you want.
Mr. Garrett. I only have 5 minutes. So, yes or no? Was it
brought up with you and discussed with you at any way, shape or
form; yes or no?
Secretary Geithner. Not the questions of disclosure, no.
Mr. Garrett. Thank you.
Now in the last 30 seconds to get into the meat of some of
the derivative aspect. The derivative language that you have
does not have exemptive authority in it, which raises some real
concerns for some folks out in the industry in saying that your
language has to be finite and clear enough and explicit enough
in not giving the regulators that flexibility to use. Do you
believe--are you with me open that? Do you know what I am
saying?
Secretary Geithner. I agree that you want to make sure that
you get, to use a phrase, the right balance and you don't
have--you don't have sort of, how should I say, exploitable
loopholes that allow the complicated risky stuff to shift where
there is no oversight, and that is a challenge.
Mr. Garrett. So you think it is flexible?
Mr. Gutierrez. The gentleman's time has expired.
The gentlelady from New York is recognized for 5 minutes.
Mrs. Maloney. Thank you.
Welcome, Mr. Secretary. And we appreciate your coming to
testify before us as we work to enact some of the most sweeping
financial service reforms in decades.
First, I would like to publicly acknowledge and thank you
for your leadership and efforts to help pass the credit card
reform bill. It was very valuable and greatly appreciated.
I would like to join the chairman and my colleagues on both
sides of the aisle who have raised questions about the ``too-
big-to-fail'' designation, and by designating these tier-one
financial holding companies, aren't we in essence saying that
they are ``too-big-to-fail?'' And I am concerned that with this
designation and the perception of a government automatic
bailout, these firms will take more risks. And even though we
will be limiting their leverage and requiring larger capital
requirements, it still is a huge taxpayer guarantee to have a
``too-big-to-fail.''
And my question is, aren't there some activities that are
so risky and do not have any public benefit that should be not
part of an institution that has a government guarantee? And I
would say proprietary trading, which does not have a social
benefit, it is basically making money for that particular firm,
as opposed to--why should that have a government guarantee? It
is often risk-taking and very profitable, but why should people
be able to make a profit, and then when bad times come, get a
bailout?
Former Treasury Secretary Volcker has also talked about the
concept of having certain government guarantees that we have in
the FDIC and for necessary parts of commerce, such as insurance
and commercial banking, but not having the guarantee for risky
behavior, such as credit default swaps and derivatives. Let
them go off in the corner and take all the risks they want.
I would never want to hamper the free market system, but
why should it have a government guarantee? And I use the
example of one of the most successful companies in the country
that was in my district; I was very proud to represent AIG, one
of the greatest insurance companies in the world, probably the
greatest one, brought down by risky behavior from another
division in the bank. Wouldn't it have been better to let the
risky behavior be off in the corner, not have the guarantee,
not having it pull down a great company and not costing
taxpayers now $185 billion?
But I do want to note that the TARP money is being paid
back at a 17 percent interest rate, so the taxpayers are
recouping their money. And I am proud that the private sector
is bounding back. But my question is, why should we be giving a
government guarantee for risky behavior that does not have a
public benefit? Insurance has a public benefit. Commercial
banking has a public benefit. Why should we be giving a
guarantee to risky behavior? Shouldn't we separate it out? That
is the proposal put forward by Mr. Volcker. I think it has
sound sense.
Secretary Geithner. I think we agree with you. And we are
not proposing, would not support, even if you wanted to,
providing a guarantee to those institutions or to that kind of
behavior. It would be irresponsible to do it. We would not
consider it. We would not contemplate it.
Mrs. Maloney. Even proprietary trading?
Secretary Geithner. Of course not. And nothing in our
proposal would provide that kind of guarantee.
Mrs. Maloney. Would that be separated out?
Secretary Geithner. But again, you are absolutely right; it
would be a bad thing for the country.
Mrs. Maloney. But if it is allowed to be part of the bank,
that can pull it down. So it has to be separate.
Secretary Geithner. Well, that is a slightly different
question. About the guarantee thing, again, it would be a
mistake, and we would never support providing a guarantee for
the institutions or for particular types of those activities,
would not do it.
Mrs. Maloney. Great. On the toxic assets, could you comment
on how we are progressing? Are we being successful? Have
investors used the PPIP program to purchase these toxic assets?
How much of a challenge is it? Is it moving away from our
banks? Is it still there? Could you comment on the taxpayer
assets?
Secretary Geithner. Absolutely. Toxic assets are a problem
for any financial system if banks don't hold enough capital
against those losses and if they are unable to raise capital
because the market doesn't understand the risk in those banks.
And if you measured against that, you have seen dramatic
amounts of new capital coming into the financial system because
of disclosure in some sense we force in the system. The markets
for those kind of real-estate-related loans and securities are
beginning to improve. The prices have increased. There is more
liquidity in part because of the programs we have set in
motion.
But we are just on the verge now of making the initial
allocations of capital to the fund managers, and we have some
authority to come in and buy those securities. But, again, the
suite of these programs has already had a pretty important
impact on liquidity and price in those markets, and things are
starting to improve. But the best measure of this is, again,
the amount of private capital that has come back into the
financial system because of the disclosure we forced on the
major institutions.
Mr. Gutierrez. The time of the gentlelady has expired.
Congressman Neugebauer, you are recognized for 5 minutes.
Mr. Neugebauer. Thank you.
Mr. Secretary, good to have you again. I want to go back to
something that is really bothering me and that is that I hear
you have said on numerous occasions now that the Treasury--I
mean, that some of these regulators, FDIC, the Federal Reserve,
all of these various regulators that disagree with you on this
Consumer Protection Agency, and you keep stating, well, the
reason they disagree with me is they are just trying to protect
their turf.
Secretary Geithner. I didn't say it quite that way. I was a
little more delicate in how I said it. There are principled
reasons for disagreeing with any proposal as you know.
Mr. Neugebauer. Why don't you let me get to my question.
Secretary Geithner. I am sorry.
Mr. Neugebauer. I think you were a little bit more clear in
that meeting with them about how you felt about--I understand
that you had some remarks to make to them. But I think the
question here that--we have a number of people who are in
regulatory positions here who are supposed to be smart people,
supposed to be experienced people, supposed to know what they
are doing. They are telling you that, for example, the FDIC
says that these changes would be very disruptive in the
agency's operations during a very critical time. The OCC says
its exam is conducted in integrated exams, but the CFPA could
not make supervisory recommendations to the banks to influence
consumer compliance.
So, Mr. Secretary, I get concerned that either these people
are incompetent or maybe you are not right. You are saying they
are wrong, and you are right, but we have four people, and
there are others who say they think this is not a good process.
And so I think we have to be very careful about if we don't
have competent people in place in these agencies and--because
you think that they are not looking after the best interest of
the country; they are looking after their turf, then that is a
very serious charge.
Secretary Geithner. Well, I think it is just a simple
observation.
And let me just say, I have great respect and work very
closely with all of those people, and they are doing an
excellent job under very exacting circumstances.
But if you were in their shoes and if I was, I would be
making the same basic arguments. And there is principle in
those arguments. It is not an unreasonable point for them to
make. But you have to view it for the basic imperatives that
they are defending instead of traditions and authorities that
they have lived with for some time that they are comfortable
with.
But the basic--I cannot say it more strongly than this: How
did it work in practice? Did it do what it was designed to do?
And I think there is no basis for claiming that it worked. That
is the only one way I can say it, which is a simple thing. We
had a chance to see how it worked over decades, and it did not
do what it was designed to do.
Now, it wasn't simply about how they exercised their
authority because large parts of the system were outside their
authority. And that made it harder for them in that context.
But that is why I think you have to look back and step back and
try to do something more fundamental.
Mr. Neugebauer. I think the other question, too, you have
to determine exactly what part of this of what happened in the
past was actually attributed to the consumer part of it, and
because you are making a very radical change when we really
haven't really sat down I think and done the proper autopsy to
determine how much of the activities happened because of
inadequate or lack of consumer protection.
Secretary Geithner. I think it is actually kind of simple
and stark, and if we understand one thing, I think we
understand that. To say it simply, where there were rules, they
were weak and enforced, but there were large parts of the
system without rules. And that is not a tenable balance for any
system.
Mr. Neugebauer. I want to go back to the derivatives issue
because we have had a number of companies come and testify or
come and see I think individual Members of Congress and are
very concerned about the proposals. These are companies that
use these derivatives to hedge risks that they are not able to
cover in other ways. And now that even though with the
exemption, many of these are going to be--meet the eligibility
requirements of the clearinghouses and so they are concerned
they will not be able to use the exemption. And many of them
say that with that factor and having to put up larger amounts
of cash margins, they will not be able to actually hedge those
risks. What are you proposing to make sure that we clarify this
because this is a serious issue?
Secretary Geithner. I completely agree with you and I think
you are right to point out and they are right to point out that
there are companies that make things and sell things that
people need, that need the capacity to manage their business
that allows them to hedge risks, and not all those things will
be met, needs to be met through a simple standardized product
that is traded on the exchange.
So preserving that is important. But the challenge for us
is to make sure that in preserving that, we don't create a
large loophole that allows all that stuff that needs oversight
to migrate to where there is none.
The Chairman. The gentleman from New York, Mr. Ackerman.
Mr. Ackerman. Thank you, Mr. Chairman.
Mr. Secretary, I have two issues I would like you to
comment on this morning. The first, many of us place a very
large share of the blame for what happened in the secondary
mortgage market squarely on the shoulders of the credit rating
agencies. Quite a few firms and many pension funds essentially
outsourced their own due diligence responsibility to these
credit rating agencies. The biggest of them are called
nationally recognized statistical rating organizations; that
approval bestowed upon them by the SEC. And there seems to be
in reality no qualifications for that other than that they have
a big share of the market.
Very often, these particular agencies got it wrong. In many
instances, they have conflicts of interest. They got it wrong
with complete immunity, and many investors, because they had
this apparent government seal of approval--sort of was like the
rabbi's seal of being kosher. I don't understand if some of
them aren't really acting as honest brokers. What is the
purpose of that title that they have? Is that counterproductive
and misleading, and could you tell us something about the
Administration's intentions when it comes to dealing with this
issue?
Secretary Geithner. Thank you for raising that. You are
right; it was central to the failures, and the failures this
time around were much worse than you saw in the failures of
ratings in the past, much more damaging.
The SEC I think released just--or is about to release or
just released a set of broad recommendations for trying to
address many of the problems you referred to, including
reducing the risks that there are conflicts of interests or
incentive problems that lead them to--or create greater risk of
these ratings being wrong in the future.
But in addition, we have suggested that we try to eliminate
what we call rating dependence in the regulatory capital regime
and other parts of the regulatory system, so we are not
creating greater incentives for institutions to rely on these
ratings. And as the chairman has proposed and many others have
considered, we think a critical part of the reform of
securitization markets generally is to make sure that people
who sell these securities retain some of the risk in them. And
that will help get the incentives right. And, of course, as
always, we are open to suggestions of how to make sure we
strengthen these reforms over the rating agency process.
Mr. Ackerman. I will send you my suggestions.
The second issue that I would like you to address is SIPC.
It has been over 9 months since Bernie Madoff discovered that
he was a crook and turned himself in. There are 10,000 claims
that people who have lost their dignity, their wealth, their
security, their homes, their family and whatever is left. SIPC
has contracted out a lot of their work. One of the contractors
just lost a computer, or it was stolen or whatever, and 2,200
victims' files are now in the hands of we-don't-know-who.
The problem here is that, of the 10,000 claims that have
been filed, only 543 as of July have been paid. That means 95
percent of the people are just hanging out there absolutely
desperate in most cases. How are investors supposed to have
confidence in what is going on if SIPC can't process the claims
faster and make these people whole with this insurance policy
that people believe they have?
Secretary Geithner. Congressman, you are right; it is
tragic and unfair, and the scope of damage caused by that fraud
is just extraordinary. And I would welcome a chance to come
talk to you or your staff or have us, with the SEC, walk you
through what we can do to make that process work better, not
just in this case but--
Mr. Ackerman. I want to do that. But just tell me now there
is a plan to speed this up somehow. When we couldn't get the
checks out to the auto dealers quickly enough, we found a way
of doing that. Can we speed this up?
Secretary Geithner. Again, I would be happy to work with
the SEC and the other members of the board of SIPC to try to
figure out how to do that.
Mr. Ackerman. I yield back the balance of my time.
The Chairman. In the 20 seconds the gentleman had
remaining, if he would yield them to me, one of the items that
I believe should be on the agenda of the committee next year,
and of course the agenda of the committee is not something on
which I have no influence, is looking at the degree of
protection people get from the SIPC over and above Madoff. It
is clearly inadequate to the expectations, to the role that it
has played and I would hope in a bipartisan way we could look
at expanding investor protection next year. And we will--that
doesn't relieve the current issue, but it will be on our agenda
for next year.
The gentleman from Delaware.
Mr. Castle. Thank you, Mr. Chairman.
Mr. Secretary, according to all the news this morning,
yesterday there was a discussion draft of the Consumer
Financial Protection Act distributed by the chairman of our
committee to the Democratic members of the committee. My
question to you is, were you or the White House in some way
consulted about that, and are you familiar with it at this
point?
Secretary Geithner. The only thing I have seen is a 2-page
note that the chairman circulated, which as I said earlier, I
had a chance to look through briefly. And we were not consulted
in advance of the note itself, but we have been spending a lot
of time, both sides of the aisle, walking through a range of
concerns and questions people have raised with the legislative
language we have proposed.
Mr. Castle. I hope it will be fair to ask if you could
comment, perhaps in writing, at some point on that. Obviously
there are some major, according to what we are reading, some
major aspects of change there that we would be interested in
your views on them. I would like to--
Secretary Geithner. I would be happy to do that. But as I
said, I think the broad thrust of those proposals looks very
encouraging and promising to us. And there is nothing in there
at first glance that troubles me significantly in terms of its
practical value.
Mr. Castle. Along the same lines, worrying about the CFPA,
I am concerned about the whole mission creep aspect of this.
There are clearly problems, and you are absolutely right; I
think we all agree there are things we need to do. I am
concerned about mortgages. That could have been spelled out
better. We have already dealt with credit cards to a degree,
and the Federal Reserve actually had a good plan on credit
cards, which we pretty much emulated to a degree. And there are
subjects like student loans, which may go by the wayside if the
new legislation on direct lending goes through the Senate, etc.
But there are many things that financial institutions,
particularly banks, do that have not been questioned in terms
of how they carried out--commercial lending, I don't think, has
been questioned; the way they handled deposits, for example,
even auto loans. And you could go through perhaps 10 or 12
subjects. And I am concerned that if we get a very activist
agency, that the agency may go beyond where it belongs and all
of a sudden be disruptive to normal banking procedures in the
United States. I cannot tell you what percentage of customers
were actually impacted negatively by problems that perhaps
could have been prevented. My hunch is it is a relatively small
percentage, versus those satisfied with their banking. But at
agencies like this concerns me and the authority that we are
giving them. Do you have any thoughts about how to restrict
what they could do, other than, obviously, we could do it
legislatively, or are taking that up with the Administration as
you prepare--
Secretary Geithner. I agree. I think the legislation has to
make sure that it is clear what authority they have and do not
have. And one thing we proposed is to make sure they have a
board as a check and balance against that risk that has on it
representatives of the supervisors and others who have a stake
in this. And I think you are right to point out the risks that
we overdo it at this time. That was not the failure of the
past.
The past was probably we under-did it, and that did cause a
lot of damage and does put at risk potentially a lot of what
was desirable, healthy productive economic activity by
financial institutions. So I agree with your concern and I
think there are lots of different ways to make sure that you
don't create too much unbridled authority that would be
damaging to what is an important part of our financial system.
Mr. Castle. You can take this as a comment. And I heard
your comment earlier about the regulators who exist now and the
question is, how good a job did they do? Did you know they were
going to be testifying later this afternoon? And more than one
of them, at least three of them have made comments about
particularly the CFPA that are somewhat critical and negative.
And I heard your response, which was, well, they are
protecting their jurisdiction in what they are doing to a
degree. But in just reading their comments, and I haven't heard
what they are going to say this afternoon yet. I haven't read
the comments this afternoon. It seems to me there are some
constructive points in there, and I would hope the
Administration is listening to that, not necessarily in terms
of doing everything that they are requesting, but listening to
constructive comments that could help as far as consumption and
the use of banking products is concerned.
Secretary Geithner. Absolutely. Again, as I said, our test
is what is going to work.
Mr. Castle. Exactly. Very quickly on another subject that I
think Congresswoman Maloney brought up which is the whole TARP
business. We are at about the 1-year anniversary now of the
enactment of the legislation on the TARP. As we know, it wasn't
used quite as we expected it to be used. And some concerns
remain, as expressed by the recent Congressional Oversight
Panel report that these toxic assets still exist on the balance
sheets of financial institutions. And you talked about this to
a degree.
You indicated, with capital improvement, etc., prices are
improving, and it is better at this point in time. But I am not
sure where the public-private investment program currently
stands on where we are in that area. I think I have run out of
time. If you could submit that in writing, I would appreciate
it.
Secretary Geithner. Absolutely.
Mr. Castle. Perhaps we can share it with everybody here.
Secretary Geithner. Absolutely.
Mr. Castle. I yield back, Mr. Chairman.
The Chairman. I thank the gentleman for that suggestion.
And if we haven't already said it, we will have general
leave, without objection, for anybody to submit any documents
they want. And the Secretary has always been very good about
responding to questions. So any supplemental questions people
have, we will get.
The gentleman from California, Mr. Sherman.
Mr. Sherman. Thank you, Mr. Chairman.
I know you can justify just about any transfer of power
from Congress to the Administration by pointing out that you
and your successors are patriotic, cautious, and no matter what
power we give you, you would only use it in the best interest
of Americans and only under emergency circumstances. That being
said, I take a look at section 1204 of the legislation you have
proposed and can only describe it as TARP on steroids. When we
passed the TARP bill, we limited the Administration to $700
billion. Section 1204, unlimited, we limit it to a certain
number of years. Section 1204 is there forever. In the TARP
bill, we provided that if the taxpayers lose any money under
certain vague provisions, you should go get that flown somebody
in the financial services industry.
None of us think that is going to happen because--but in
any case, it is in TARP and a similar provision is in the
legislation you proposed.
In TARP, there are all kinds of special oversight,
including Elizabeth Warren. In your proposal there is no
special oversight. And in TARP, those institutions that benefit
have all those--have at least some restrictions on executive
compensation. In your proposal, there are no such restrictions.
Now, section 1204 allows the FDIC to go spend an unlimited
amount of money buying the debt obligations of, making loans to
or assisting any systemically important institution in time of
trouble? And that is in the first instance taxpayer money?
Would great harm be done to this statute if we limited the
Executive Branch's authority to a mere $1 trillion and said
that if you want to commit more taxpayer money than that,
notwithstanding the fact that you hope to get it back from
someplace else, but if you need more than a trillion, perhaps
you ought to come to Congress? Or is there an assumption on
Wall Street that Congress makes the wrong decisions, is a bunch
of people who cannot be trusted and that Wall Street cannot be
safe unless they have access to unlimited funds without further
congressional action beyond that which you propose?
Secretary Geithner. Congressman, I don't recognize most of
your concerns in the approach we recommend. But I understand
the concerns. And I think you are right to point out, as are
many of your colleagues across the aisle, that it would be a
mistake for us as a country through the reform process to
harden or create an expectation that if you get yourself in
trouble, that the government is going to come in and save you--
Mr. Sherman. Mr. Secretary, I have such limited time. A
trillion dollar limit, okay with you, not okay with you?
Secretary Geithner. Congressman, again, you are taking a--
first of all, you are fundamentally mischaracterizing.
Mr. Sherman. Let us say I am fundamentally
mischaracterizing. If I have an amendment to this section
saying it is limited to a trillion dollars, is the Treasury
going to oppose that, or are they going to support it?
Secretary Geithner. Congressman, it is important to make
people understand and make sure people understand the following
thing, this Congress put in law, after the S&L crisis, a very
important authority to allow for resolution--not a great word.
Mr. Sherman. Mr. Secretary, I have asked you a simple
question. I have very limited time. Would you support it or
oppose it? And then let me move on.
Secretary Geithner. I would not support proposals that
would put this country in the position we were in, in 2007 and
2008, where we did not have the ability to act to protect--
Mr. Sherman. The key thing then is that the Executive
Branch have the power to commit, not just $700 billion, but a
trillion or more without having to have Congress be involved at
the time of the crisis.
Secretary Geithner. No. That is not--would not be a fair
description of our strategy. And again, the critical test is,
do you want to put this country in the position again where we
come into the worst financial crisis in generations without the
ability to protect the taxpayer--
Mr. Sherman. Reclaiming my time. The problem for Wall
Street is that Congress had to be involved. It was embarrassing
that they didn't get their money for a few days.
But let me focus on the one other question, and that is the
only companies that are ever going to benefit from this are the
systemically important institutions.
Secretary Geithner. No, that is not true.
Mr. Sherman. Well, it is limited to systemically support--
Secretary Geithner. Look, the only rationale, Congressman,
and you think that the experience of last year would make this
compelling to people, that if your strategy--
Mr. Sherman. In order for a company to benefit--do you want
to look at Section 1203(b) 1 and 2 of the statute you
presented?
Secretary Geithner. You are mischaracterizing the benefit.
The Chairman. The gentleman's time has expired. The
gentleman has one last comment.
Mr. Sherman. I would say, you can claim that all Americans
benefit from a provision that can only help about 20
institutions, but they will have a release of their moral--an
elimination of moral hazard. They will have lower cost of
capital, and either the taxpayer will pay or the medium-sized
banks will pay if it is ever used. I realize--
Secretary Geithner. I hear your concern. But if we were
proposing that, I would not support it. If you proposed that, I
wouldn't support it. But you are right about the concern. The
question is about how to get the balance right. Look what
happened to the country when we allowed a system to build up
where we had no choices in the event of failure between
stepping in or letting it cause enormous damage.
The Chairman. The gentleman's time has expired.
The gentleman from Oklahoma, Mr. Lucas.
Mr. Lucas. Thank you, Mr. Chairman.
And Mr. Secretary, let us come at this from a slightly
different perspective but along the lines of my colleagues. You
have used the phrase ``in practice'' several times, and I
appreciate that tremendously because this is not just an
academic exercise; there are practical consequences to
everything we do.
My constituents, small financial institutions and what some
would define as nontraditional institutions out in the
countryside are very nervous about the Consumer Protection
Agency bill, and their nervousness is not I think so much about
protecting the consumer. They all support that.
But there is a fear out there in the countryside, and this
comes before Chairman Frank's memo, there is a fear out in the
countryside that the biggest institutions in this country with
larger staffs, with greater budgets, with greater volumes of
business will have the ability to meet these standards in a
more cost-effective way than they will be, and that the
ultimate net result, at least of the Consumer Financial
Protection Agency, as envisioned by the Administration, will be
to raise their cost disproportionately to the bigger
institutions.
And they are very concerned about that out there. That is
an issue I think we need to address as we move through this
process.
And to touch on a slightly different subject and then
whatever comments you might have, sir, on the derivative side
of the equation, sitting on the Ag Committee, we have a little
bit of involvement in those issues. I have a number of
constituents and constituent industries back home in Oklahoma
that use these kind of products to provide some sort of price
stability for the commodities they sell over the period of
time. Otherwise, they are a day-to-day--a day-to-day price, and
that is a very difficult thing to do. They have expressed
extreme concern to me, and I think there is some legitimacy to
this, depending on how in the Administration's proposal we
address these capital and margin requirements, they are
concerned, and I think legitimately, that potentially they will
be driven, because they still need the price stability--they
have to have the product--if we dramatically increase capital
margin requirements or place them in a fashion that is
counterproductive, they will be driven to the biggest financial
institutions because they will have to have someone who can
afford to not only engage in the contract with them, but who
can finance all these other options. Once again, the fear
being, Secretary, that they will wind up having fewer people to
do business with, and it will be a small handful of the
biggest, which runs contrary to I think what we have been
saying on this side of the aisle, which is ``too-big-to-fail''
is unacceptable, untenable, and yet there are real concerns out
in the countryside that these pieces of legislation as proposed
will drive more business to the biggest, will put the biggest
at an even greater advantage over everyone else. So let's visit
for a moment about the practical consequences about these
issues.
Secretary Geithner. I understand both concerns, and I agree
with much of what you said about them. On the cost issue for
community banks, we think we found a way, but I think the
chairman's notice helped with clarification on this to give
people reassurance that we can do this change in authority,
reallocation of authority, without increasing costs.
I think that is an important thing to do. And I think that
is achievable. Again, it is not that there are no people in the
country who are doing this job now. It is just that they spread
across a range of agencies, and we want to take that authority
and consolidate in a place where it can be done with less
distraction. But I understand the question. I think that is the
concern.
I think we can achieve what is important to you and to
those community banks. On the derivatives thing, you said well,
again, we very much want to make sure we preserve the capacity
of people in many different industries to use derivative
markets, to hedge and protect themselves against the risks they
confront. And we have tried to provide a way that gives them
comfort for that. But we are obviously happy to work with you
and your colleagues and with the FTC and the CFTC on how to
provide the clarification and the assurance necessary, because
again, we want to preserve that.
Of course, the challenge again, as I said, is to do that
without creating just a huge loophole that allows people to
evade the basic protections we think the country needs. But I
think you framed the concern right, and we are very much
willing to work with you on how to do that.
Mr. Lucas. Because, after all, Secretary, in my region, we
went through both an agricultural and energy property boom,
bust, and bubble in the 1980's. We were slaughtered
economically. We did not receive capital injections. Our
industries were not propped up. It took us, 10, 15 years in
some segments to recover from it. We do not wish that on anyone
else, but by the same token, let us not make the matter worse
because the feud back home is, it was the big boys that damn
near killed us all, not the little players.
Secretary Geithner. And I think you are right. The people
who provide that protection, write those commitments, whatever
the form is, they need to hold margin and capital so it allows
them to meet those commitments. And that was the big failure in
the system.
Mr. Lucas. Thank you, Mr. Secretary.
The Chairman. The gentleman from North Carolina has
returned from passing a bill under this committee's
jurisdiction on the Floor. And he is now recognized for 5
minutes.
Mr. Watt. Thank you, Mr. Chairman.
I hope my colleagues will support that bill when it comes
to a vote. Actually, we passed it by voice vote, so you all are
not even going to vote on it, the Defense Production Act
Reauthorization.
Mr. Secretary, my good friend, Mr. Lucas, was talking about
practical considerations, and I am kind of into practical
considerations, too. And I have been looking at this Consumer
Financial Protection Agency proposal and how we got to where we
are on account of a practical basis. It seems to me that we
gave the Fed and the FDIC and the other regulators substantial
consumer protection authority. Each one of them had consumer
protection authority. But we also gave them an expectation, a
mandate, just like the consumer protection ``mandate'' that we
gave them to assure the safety and soundness of financial
institutions.
And I guess my question to you is, you have been in one of
these agencies. You came out of one of these agencies. You were
with the Federal Reserve. If I look at you and tell you that
your obligation is to assure the safety and soundness of the
institutions that you have responsibility to regulate and I
look at you and I say, okay, I am also going to give you the
authority to do consumer protection, tell me, just as a
practical consideration, practical consideration, which one of
those things are you going to do come crunch time?
Secretary Geithner. Well, I think you say it right. The
risk is if you have a range of different priorities, not one,
than you are going to do less of a good job at focusing on the
consumer side.
Mr. Watt. But what is your highest priority if you are the
ultimate regulator for the safety and soundness of financial
institutions? Isn't that far and away disproportionately a
higher priority for you as a regulator in that scenario I just
painted for you?
Secretary Geithner. That is the risk in combining those
responsibilities in a bank supervisory--
Mr. Watt. You are being very kind when you say it is the
risk. Actually, the Federal Reserve in a hearing had a witness
up here that said that they really never thought of that as
being on an equal plain with the mandate that they were given.
It was kind of a second class authority that they had, but they
never really thought about it until we got to this crisis. That
is in testimony that we took before my subcommittee.
Secretary Geithner. I don't quite think that. I don't know
who made--I wouldn't quite agree with that, because there are a
lot of people who are good at this, who spent a lot of time
looking at it, and it occupied an enormous amount of time.
Mr. Watt. I am sure that is true.
Secretary Geithner. But I think that the really important
thing to recognize--I agree with what you are saying, but it
was partly that. But a large part of it was the fact that there
were all these other institutions that were allowed to compete
with banks in providing credit that had no effective
supervision, constraints, and oversight.
Mr. Watt. I am not minimizing the people who were outside
any regulatory framework, but folks who were inside the
regulatory framework got involved in these things with
regulators that had responsibility first and foremost for their
safety and soundness which they didn't do a real good job of
either, as it turned out, because of these bad consumer
products. But even when they turned their attention to it,
their primary focus was getting out of the ditch on safety and
soundness and getting the economy back on an even keel. Even
then, it really wasn't about consumers.
And it seems to me that if we are going to talk about
practical considerations, the only way you are going to solve
that practical consideration is to create an agency that goes
to work every morning saying, my primary responsibility is to
protect consumers. And if I run into a conflict between that
and the safety and soundness regulator, then there is a
mechanism for resolving that conflict, but there is no question
what responsibility I have every day of the week when I go to
work. Do you agree with that?
Secretary Geithner. I completely agree with you. I believe
in accountability. You want people waking up every day,
figuring out how they are going to do a better job in
preventing this from happening in the consumer area.
Mr. Watt. Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman from Illinois, Mr. Manzullo.
Mr. Manzullo. Thank you, Mr. Chairman.
Thank you, Mr. Secretary. Mr. Secretary, would you agree
that the root cause of the financial collapse of this country
was the fact that subprimes were not regulated too closely?
Secretary Geithner. No, I would say that it was one of a
number of factors, but it was not the most important.
Mr. Manzullo. But if people had not been allowed to buy
homes they could not afford, that was the bad product in the
first place; isn't that correct?
Secretary Geithner. I agree that is what--the basic--what
happened to housing prices was partly facilitated by what
happened to subprime mortgages made everything more perilous
and worse. There were other things happening than simply the
subprime.
Mr. Manzullo. A lot of people believe that if the Fed had
done its role, statutory role, which is to govern instruments
and underwriting standards with regard to those mortgages, that
we wouldn't have had this meltdown. In other words, the basic
product that gave rise to the derivatives and the CDOs would
have been sound.
Secretary Geithner. I don't think I would say it quite that
way. Remember, as we just said, a lot of what happened in the
system was that we allowed institutions to underwrite a bunch
of stuff, sell a bunch of stuff to people who couldn't afford
it. They were outside any scope of authority provided by the
Congress with no effective deterrence. You can't look it quite
through the prism of the authority that Congress gave the Fed
and the other supervisors because of the absence of any
authority over--
Mr. Manzullo. No, I understand. But the Fed had the
authority, did it not, to require, as it will beginning October
1st of this year, that there be written proof of a person's
income when applying for a mortgage?
Secretary Geithner. Again, for the system to work--
Mr. Manzullo. I understand it. But did I make the correct
statement or not?
Secretary Geithner. Well, again--I don't think we are
disagreeing. As I said many times before, I think the failure
not just of the Fed--
Mr. Manzullo. If we are not disagreeing, why don't you just
say what I just said was correct?
Secretary Geithner. I believe that the system would have--
this crisis would have been less damaging, there would have
been less damage to the economy as a whole if authority had
been stronger, used more effectively, used earlier by a bunch
of other authorities.
Mr. Manzullo. I understand. The point I am trying to make
is the authority was there from the beginning with the Fed to
stop the mischief.
Secretary Geithner. I don't think that is quite right. I
think that you are right to say that if that authority had been
used more effectively earlier, things would not have been as
damaging.
Mr. Manzullo. Well, call it not as damaging or whatever it
was. Okay? The point I am trying to make is that the Fed had
the authority--and actually, this was pre-Chairman Bernanke. By
the time he got appointed, it was too late. But the Fed had the
authority to come in and say, we are going to stop the practice
of giving people mortgages when they can't even make the first
monthly payment. They could have done that in two ways: getting
rid of teaser mortgages, which is the instrument; and also
saying that you have to have written proof of your earnings.
That is where it started.
And I guess the problem that we are having is the very
agency that had the authority to stop it, you want to give them
more power. And--well, you do. You want to make the Fed the
super regulator of all of this which you are proposing, going
from a plain vanilla to what I believe is Rocky Road at this
point.
Secretary Geithner. Let me say it starkly, what we are
proposing is the clearest thing. We are proposing to take that
authority away from the Fed and put it in an entity that we
think we can do a better job of doing it in the future.
Mr. Manzullo. I am talking about the super regulator.
Secretary Geithner. Again, that is not a fair description
of what we are proposing.
Mr. Manzullo. Call it--you can characterize it the way you
want. It is giving the Federal Government more authority.
The Chairman. Would the gentleman yield?
I think there is a confusion. I believe my colleague is
talking about the systemic risk function, and you are talking
about the consumer protection function. And I think that is
where the--
Secretary Geithner. Even on the systemic risk, the
stability's function, which is so important, what we are
proposing to give the Fed is the authority to make sure they
can actually supervise and apply conservative capital
requirements on these large complex institutions; they can make
sure that the payment system, which is what spreads crisis,
runs with tighter capital margin requirements. Those are
important authorities that are not as clearly established in
the law as we think is necessary. That would be a good thing
for the country.
Mr. Manzullo. I guess the point I want to make is, when you
take a look at the 600 pages of legislation that you have
proposed, if you take a look at Chairman Frank's memo today
talking about exempting different groups from this new Consumer
Financial Protection Agency, to me it is going to be almost
chilling for groups to know who is, in fact, regulating them.
Banks right now are being chilled to give money because of
oppressive tactics by the regulators. Good loans in the past
have now become bad loans, because of the mixed messages coming
from the regulators. And now there will be exemptions as to who
is exempt from this new Consumer Protection Agency. I am glad
lawyers are, auto dealers. It says accountants and other
businesses that perform tax preparation services, but
accountants that do business planning evidently would not.
So what you are proposing here are whole new sets of
regulations, and the people, first of all, won't even know
whether or not they are regulated and, second of all, what laws
would apply under the regulations.
The Chairman. The gentleman's time has expired. We have
some time for my intervention. So the gentleman's time has
expired and--
Mr. Manzullo. Thank you.
The Chairman. The gentleman from New York is now recognized
for 5 minutes.
Mr. Meeks. Thank you, Mr. Chairman.
Mr. Secretary, good morning. Let me just go slightly with
some questions I have that has an international tinge to it.
And the first question is dealing with the risk of regulatory
flight. It seems as though and it seems pretty clear, I think,
that it is a myth that firms are going to pick up and move away
from the jurisdictions. Everything that I have looked at shows
that is not going to happen. But there is a lingering question
about whether financial firms with existing operations in
multiple countries may relocate resources internally among
these regional headquarters, potentially to the detriment of
the United States. I was wondering if you could address this
issue, you know, about that?
Secretary Geithner. It is a real concern. You are right to
point it out. That is why we made it clear to the Congress and
to the world that as we, as the Congress considers putting in
place stronger rules, we need to make sure that the world
outside of the United States does so, too, so that we have a
level playing field that can be enforced more evenly, and so
that risk can't just migrate to where it is going to face less
strict supervision and oversight.
So we have proposed that the major economies come together
and agree to a new international accord on capital, a range of
other agreements to put in place stronger standards across all
the major financial institutions so there is a level playing
field. It is an important thing to do, and I think, actually,
there is a lot of consensus on that basic strategy.
Mr. Meeks. But likewise, I don't know if you know--you may
or may not know. Last week, for example, I dropped a Sense of
Congress Resolution dealing with the Lehman bankruptcy in the
U.K., and I know that part of that number of investors thought
that their money was being invested in the United States, and
it ended up in the U.K., and it is caught up in this bankruptcy
process. And a number of these are foundations and universities
that I have been talking to that are very concerned because it
is going to have an effect on them.
I don't know what is going on with it, but--in my
resolution, I was asking for the U.K. and the United States to
work more closely to try to make sure that we do this in a more
timely manner. But likewise, then, when you talk about
international--is there any talk about an international
resolution authority so that this problem does not occur again?
And can you also tell me or give me an update as to where we
are with the Lehman bankruptcy?
Secretary Geithner. I would be happy again to talk to the
SEC and the U.K. authorities and help--and to the courts
involved to help make sure that process is moving quickly.
On the basic question you raised about the future, what you
need--what Lehman illustrated is we did not have here and was
not in London an adequate mechanism for managing that failure
in a way that caused less damage. And to fix that, you need to
change the law here. You need to change it in the U.K. and make
sure that it is done in a consistent way so these globally
active firms can be handled--
Mr. Meeks. Is that dialogue going on now?
Secretary Geithner. The dialogue is going on now. But, as
many of your colleagues have observed, it is a very complicated
difficult thing. You are not going to be able to do it just by
sitting around a table and talking with the other supervisors.
It requires changes in the laws and regulations in each of our
countries. So we are trying to make progress on that.
Mr. Meeks. Would that be subject at all to the conversation
at the G-20 that is coming up in Pittsburgh?
Secretary Geithner. It will. And you will see in the
broader recommendations and reforms that are laid out there an
update on progress in that area and a reference to where we are
trying to go.
Mr. Meeks. Also, the role of the IMF, and I know that
President Obama and other leaders are calling for a more stable
and sustainable global trade system. For example, with
countries like China and Germany are recess dependent on
export-driven growth, and the United States is dependent on
cheap international capital to finance deficit-driven
consumption. There is talk, from what I understand, of the IMF
playing a greater role. Can you share your thoughts on how this
would actually work and how we could make it enforceable on an
international basis?
Secretary Geithner. Very hard to make it enforceable. I
think probably not achievable. But what we want to make sure
the world understands, that as we save more as a country, which
we are already doing and we are going to have to do going
forward, they are going to have to find future growth more from
domestic consumption in those countries, and if they learn
anything from this crisis, it is that basic imperative. So
that--the strategy we are suggesting is that we try to get
countries to commit to reforms that will help produce that and
that the IMF plays its natural role as an independent assessor
of whether countries are doing things at all that contribute to
a more balanced pattern of growth globally. But you can't
expect in a world of sovereign states, and I would never
recommend that this country, cede basic responsibility over
basic economic policy to a committee of other nations or to the
IMF.
The Chairman. The gentleman from Georgia.
Mr. Price. Thank you, Mr. Chairman.
Welcome, Mr. Secretary.
My background is health care. So I know that as a
physician, if you don't make the right diagnosis, you can't
treat the patient correctly. And if the patient gets well, it
is by luck.
To the point of diagnosis, there are some individuals who
believe we are in our current situation, in the current boat we
are in, because--they will say this--because of a failure of
capitalism and a failure of deregulation.
My sense in talking with folks is that simply isn't the
case. I think that is very concerning because if we conclude as
a society that the reason we are here is because of a failure
of capitalism and a failure of deregulation, then I suggest
that the solutions that we will come up with will not, in fact,
correct the problem. Would you comment on those two matters? Do
you believe we are where we are because of a failure of
capitalism?
Secretary Geithner. No, I would not use that phrase.
Mr. Price. Do you believe we are where we are because of a
failure of deregulation?
Secretary Geithner. To some extent, we are. I think we
screwed up regulation is a simple way to say it.
Mr. Price. By having a system that wasn't flexible or
nimble and wasn't minding the store?
Secretary Geithner. Partly that. But partly we had a system
where parts of the system and people were crawling over these
institutions yet didn't prevent excessive risk-taking; parts of
the system, where there was nobody looking at it. It is not a
sensible way to run a system. So I would--it is not as elegant
as the phrase they used. I would say we just screwed up the
regulatory system.
Mr. Price. So you have folks who are crawling all over
people, not doing their right regulatory job, and some products
out there in the marketplace that aren't being watched?
Secretary Geithner. Well, it is institutions and markets
where there were no effective constraints on risks that could
threaten the economy as a whole.
Mr. Price. And I would agree with you, I think.
If one believes that, then why wouldn't one have as a
solution to simply charge the regulators that we currently have
with the job of regulating the different products and
institutions that are out there as opposed to creating a new
bureaucratic institution that will take all of the time that it
takes to get up and running, usurpation of authority from other
individuals, who--I suspect we are marching down the road again
of, who is minding the store?
Secretary Geithner. I think, actually, we are trying to fix
that. Because right now, it is hard to know who is responsible,
who is principally responsible. One of the virtues of
accountability is nobody will be confused if we do what we are
proposing about who is responsible. And that is a good place to
start. If you give that responsibility to a bunch of different
people, better responsibilities, then you can't hold them
accountable for performance on that.
Mr. Price. Have you read our proposal, the proposal from
the Republican side of the aisle?
Secretary Geithner. I have, although I read it when it
first came out, and I haven't read it again recently, but I
would be happy to go through it again.
Mr. Price. Do you have any--the way that we addressed that
was to take the current regulators and say, you all have to do
your job, one, and if there are new products or financial
institutions that are out there that aren't being watched,
somebody has to watch them, and you are charged with
determining who is going to watch them. Is there something
wrong that?
Secretary Geithner. I just don't think it goes far enough.
Again, just due to practical reality, I think that would leave
the current system basically intact, and we would be at too
much risk of repeating this down the road. And I think that,
again, a basic failure in our system was we left a bunch of
institutions doing the same thing. Mortgages, credit cards, a
bunch of credit-type products competing alongside banks where
there was no effective deterrence enforcement. And I don't
think you can fix the system without fixing that problem. And I
don't think you can--I will say this more starkly than we need.
But I don't think you are going to fix it by creating a
committee.
Mr. Price. Well, I would suggest that the last thing that
this government needs is another regulatory agency that may, in
fact, repeat the same ills of the last.
Secretary Geithner. If we did that, that would be a
mistake. But again, what we are proposing is to take authority
that is diffused around a bunch of people and other things and
move it to a central place. It is not fair to characterize it--
although I understand the risk--that is some new bureaucracy we
are imposing on top of the system. It is more like more
accountability and clarity so people know where to go to; you
know where you go to when you see systematic failures.
Mr. Price. I would encourage you to take a look at our
proposal once again. I would love to have your feedback on
that.
Secretary Geithner. Absolutely.
Mr. Price. Before my time expires, I want to address the
issue of TARP. And I am sorry I wasn't here for an earlier
comment, but my understanding is that your sense and the Fed
Chair's sense is that we have moved on from this remarkable
threat that we had to our Nation a year or so ago and that
TARP's timeline was to be temporary and finite and hopefully
end at the end of this year.
Are you planning on ending TARP at the end of this year?
Secretary Geithner. Can I say it slightly differently?
Because of the force of the actions that the Congress
authorized we took, we did pull the system back from the edge
of the abyss, and we are able to wind down some of the
emergency authorities necessary to rescue the system.
But we still have a very damaged system. There is a lot of
challenge ahead for the economy. As many of you observed, we
are only just now seeing the economy start to grow again. And
it is too early for anyone to declare victory, say this is
behind us. And I think anybody who lives in this world would
say that there is still a lot of pressure the system is going
through.
So, it is important that we not declare victory too soon,
walk this stuff back prematurely.
Mr. Price. Thank you.
The Chairman. The gentleman from Kansas.
Mr. Moore of Kansas. Thank you, Mr. Chairman.
Mr. Secretary, how do we end ``too-big-to-fail?''
I don't know if you have seen the recent proposal by
Chairman Tom Hoenig from the Kansas City Federal Reserve. The
proposal on resolution authority lays out explicit rules of how
a large financial institution like Lehman Brothers or AIG could
be resolved so that debt holders, shareholders, and management
would be accountable and responsible before taxpayers step in.
If you haven't seen the proposal, I would be happy to get
you a copy, and would appreciate your comments in writing.
Others suggest we require the largest financial firms to
undergo a regular stress test that would have aggregate
information publicly released even in good times.
I know some have argued the list of these firms should
remain confidential, but doesn't the market already know who
these firms are based on the last round of stress tests? How do
we create the right incentives for firms to maintain reasonable
leverage ratios and strongly discourage ``too-big-to-fail?''
Secretary Geithner. I have a lot of respect for Tom Hoenig.
I haven't looked at his proposal, but I would be happy to do so
and react to it. Anything that meets the objectives that you
described I would be very supportive of.
I think, again, to say it simply, to prevent the moral
hazard that is inherent in any financial system, you can't
leave the market to do it. You have to put in place constraints
on leverage in the form of capital requirements that help the
institutions make sure they hold enough resources to cover
losses.
And you have to make it clear that the government has the
ability, if you screw it up, to wind you down, restructure you,
in effect put you out of existence without imperilling the
health of the rest of the system. That is the basic, simple way
to describe what you need in this approach.
And, of course, we have also proposed that institutions
have to pay for any losses the government absorbs in this
context over time. That is helpful, too.
But those are the two core pieces of any effective
strategy.
Mr. Moore of Kansas. Thank you.
Mr. Secretary, would you support creating a financial
watchdog council where financial inspectors general would meet
on a quarterly basis and be required to provide an annual high-
risk report on the greatest risks and gaps in our financial
regulatory system that need to be addressed?
Secretary Geithner. Again, I would be happy to consider
that.
And I do think that one thing that is important to do is to
make sure that you have a group of people looking at the whole
system, trying to look over the horizon to identify early
things that are happening that could threaten the system in the
future.
But I would be happy to look at that specific proposal.
Mr. Moore of Kansas. Thank you, Mr. Chairman. I yield back
the balance of my time.
The Chairman. The gentleman from California has now
returned to claim his time.
Mr. Royce. Thank you, sir. I had a couple of bills on the
Floor, Mr. Chairman.
Let me ask you, if I could, Mr. Secretary, to what degree
did bank regulators contribute to the drafting of your
regulatory reform proposal? Were they involved in that?
And let me just finish my thought, and then maybe you can
explain. The reason I am asking that is because, as we look
toward creating a more stable financial system and one that is
focused on benefitting consumers, some regulators have
expressed serious concern about the creation of a Consumer
Financial Protection Agency and the separation of safety and
soundness regulation from that consumer protection regulation
authority.
I was just going to read a quote from Sheila Bair of the
FDIC. She said, ``Separating consumer protection regulation and
supervision into different organizations would reduce
information that is necessary for both entities to effectively
perform their functions. Separating consumer protection from
safety and soundness would result in similar problems. Placing
consumer protection policy-setting activities in a separate
organization, apart from existing expertise and examination
infrastructure, could ultimately result in less effective
protections for consumers.''
So Ms. Bair is expressing what appears to be a common
sentiment among regulators. Bifurcating these two regulatory
objectives will actually weaken protection for consumers, from
the standpoint of a number of people who have looked at this.
And I know the argument that they are simply trying to
protect their regulatory turf. But when you listen to some of
the economists and others that look at the past experience with
bifurcating these two functions, there seems to be a point
here. And I wanted to ask you about that.
Secretary Geithner. Again, I want to do this carefully. I
think that they are right to raise that potential concern, and
I think I share that concern. And we would not be enthusiastic
about a proposal for reform that would create that risk.
But, again, we have had a lot of experience, as a country,
with combining those authorities together. And we have been
able to watch what happens when you put them together. And I
think what you saw is a system that didn't work. And I think it
is absolutely within our capacity and the committee's to find a
way to separate those without having us undermine the capacity
of bank supervisors to do safety and soundness.
Remember, bank supervisors have on-site supervision. They
can live in those institutions. There is no risk if you take
the consumer authority away from them that they are going to
have a more difficult job doing safety and soundness. And there
is no reason to believe that consumer protection would not,
frankly, be done better if you have clear accountability for
people whose job it is to worry about that.
Now, you can protect against the risk that you raise by
making sure, as we proposed, there is a board with some checks
and balances where supervisors are present. So if there is
conflict--and the chairman in his note proposes some other
things that I think are very helpful--that can be resolved.
Mr. Royce. I just look at the way in which--when we look at
the GSEs, Fannie Mae and Freddie Mac, I just look at the way in
which that bifurcation between the mission over at HUD and then
OFHEO, with safety and soundness, I just look at the goals that
were stressed at one end obviously in conflict with safety and
soundness, and all of the overleveraging that went on and the,
sort of, the mandates for the portfolio that half of it had to
be subprime in the portfolio or Alt-A loans. I look at that and
I see why the regulators are nervous. And that, also, is a
chapter that we have experience with.
But let me ask you another question, because I was going to
ask if you believe the perceived government safety net under
our financial system distorted market incentives and
contributed to the financial collapse, especially in the
housing boom and bust. Can the moral hazard from the perceived
safety net itself, in other words, have something to do with
the ballooning of the housing market?
I am thinking of Fannie and Freddie there. That could be a
contributor.
Secretary Geithner. Absolutely. And that is the central
risk in any system, in any reform proposal. And that is why we
need to make sure you can't ever again have institutions that
are allowed to operate with the expectation of government
support with no effective constraint on risk taking. That is
the lesson, in some ways, of the GSEs, but also of other parts
of the financial system.
Mr. Royce. Well, in 1999, about 27 percent of all of the
liabilities of firms in the U.S. financial sector were
explicitly guaranteed by the Federal Government. Another 18
percent enjoyed at least some implicit support. That is an
estimate of 45 percent back then. It is increasing today; the
moral hazard is increasing.
The Chairman. I am going to recognize myself and take my 5
minutes. I want to pick up on a couple of things here.
First of all, with regard to the regulators, I must say I
am struck by their newfound interest in consumer protection. I
have been on this committee since 1981. I have been the ranking
member or the chairman since 2003. I do not remember the FDIC,
the Federal Reserve, the Comptroller of the Currency, the OTS
ever, ever volunteering anything about consumer protection. I
guess it was the threat of absence made the heart grow fonder.
But their record of consumer protection is abysmal.
There was on the law books a requirement or an
authorization to the Comptroller of the Currency to prevent
unfair and deceptive practices, the UDAP. The Comptroller of
the Currency in 2002, 2003 was a Bill Clinton holdover--
Comptroller, not partisan. He promulgated a very sweeping
preemption that killed a lot of consumer laws. The former Chair
of the Oversight Subcommittee, the Republican, Sue Kelly from
New York, was appalled by this. We asked him what he would put
in its place. Nothing. Because they hadn't used their authority
to promulgate the unfair and deceptive practices code.
The Federal Reserve--the gentleman from Illinois mentioned
it--they were given in 1994 authority to regulate mortgages. It
wasn't until after this committee acted that Mr. Bernanke began
to use the authority. Yes, the Federal Reserve has taken some
consumer actions--in every single case, after this committee
acted. They had the authority to promulgate that UDAP code.
Only after this committee passed a bill taking it away from
them and got it through the House, because they had never used
it, did they use it. It is simply not the case that they have
paid much attention to it.
It is also the case, I believe, that the GSE example does
not hold. The problem there was that the OFHEO was given too
little authority. I was skeptical of that argument at first. By
2005, I joined the Republican chairman of the committee, Mr.
Oxley, in trying to give them more authority.
I agree it was a mistake when there was, first in the
Clinton Administration and then in the Bush Administration, the
serious ratcheting up of the mandate to sell houses to people
who shouldn't have bought them. And I objected to it at the
time.
But let's get back to the regulators. It is turf. They
never cared about consumer affairs. And I will now ask--and I
will follow this up--I am going to ask every one of those
regulators to give me the list of their consumer affairs
activity.
We had an Assistant General Counsel, the Deputy General
Counsel of the Fed testify--the Minority asked that he
testify--against transferring their consumer authority. I asked
him--he said he had gone to the Board, it was under his
jurisdiction--how much discussion there had been at those
meetings. He said none.
There was one Fed Governor, Ned Gramlich, who cared about
consumer affairs. He was roundly ignored, as he acknowledged,
and they wouldn't do anything about it. So let's be clear.
Now, it is not that they are bad people. It is, in fact,
safety and soundness is their main concern. They regard
consumer affairs as a kind of a nuisance.
And I do not think that there is anything inherently wrong
with the consumer statutes, but we also, as the Secretary said,
will have mechanisms so that if the regulators think safety and
soundness is being interfered with, if they think that not
jacking up people's credit card rates unfairly is somehow going
to keep the bank from failing--maybe if that is the only way a
bank can stay in business, it ought to fail--but that will be
where we are.
So I want to be very clear that this--I am now going to be
asking the regulators, I will follow this up, I would like them
to submit to me their record in consumer protection. It is not
very impressive.
Now, Mr. Secretary, I will ask you one question.
Internationally, you mentioned, with regard to the question
from Mr. Meeks, the IMF issue. One of the legitimate concerns
we have had from the businesses here is that they will be at a
competitive disadvantage if we are tough and others are not.
I do know, when I became the chairman-in-waiting of this
committee in 2006, I was told that we had to repeal Sarbanes-
Oxley or there would never be an IPO ever again in America, and
they would all flee to the light-touch regulation of the
Financial Services Authority, the head of which has
subsequently said the era of light-touch regulation is over.
What are the assurances we can give American financial
institutions they will not be put at competitive disadvantages
if we were to adopt our rules?
Secretary Geithner. We are going to negotiate an
international agreement on a set of standards that apply a
level playing field, that people can understand, that can be
enforced. And we are going to do that so that U.S. firms are
not put in the position where their competitors will be able to
profit from being able to operate with lower standards. That is
a--
The Chairman. Will we be able to take some action if we
find others trying somehow to undercut us?
Secretary Geithner. I think that is an important thing to
do. But I think the important thing--my basic feeling is the
strategy is, you get them to commit to this standard; you ask
them to put it in regulation and enforce it for their firms.
And it is pretty black and white if they are meeting it or not.
That is the basic strategy to do it.
And we have laid out a very detailed proposal with a
timeframe for putting it in place so that we can all move
together.
The Chairman. Thank you.
Mr. Secretary, we are going to try and wrap this up to get
you out of here by noon.
Mr. Marchant?
Mr. Marchant. Thank you, Mr. Chairman.
Mr. Secretary, I would like to go and talk about Lehman
Brothers for a minute. In the Lehman Brothers case, it was not
the amount of leverage that they had, but it was the fact that
they were funding that leverage with overnight funds. I think
it probably was the case with Bear Stearns, as well.
As a result of that, you had the money market accounts went
bust. And while a decision was made that there was no systemic
risk--I guess that decision was made--and there would be no
intervention on the part of Lehman Brothers, there was
subsequently an intervention to guarantee the buck, basically,
on money market accounts. And since that, basically, money
market accounts have not been the preferred vehicle of
investment by Americans.
Is there anything in this regulation that would have
regulated, not the percentage of leverage with Lehman, but the
fact that Lehman and most of these guys were keeping major
parts of their portfolio in their capital portfolio, these
mortgage-backed securities, and then holding 30-year maturity
instruments and funding them with overnight funds? Is there
something that will regulate that? Who would be the regulator?
And do you see that as--I mean, to me, that was the systemic
risk involved.
Secretary Geithner. I think you are exactly right, that it
is not just the scale of leverage but the extent to which we
are reliant on very short-term funding that can flee in a
heartbeat. And that is what brought the system crashing down.
And so, when we use the word ``capital,'' more conservative
capital requirements, we are using it as a shorthand for longer
funding requirements, more stable funding requirements,
stronger liquidity cushions against losses to reduce that basic
maturity mismatch, which is what creates the vulnerability to a
run.
So you are absolutely right about the diagnosis. And we are
just using a shorthand when we say more conservative capital
requirements.
Mr. Marchant. So who will be the regulator?
Secretary Geithner. Oh, I am sorry. We are proposing,
again, for the large, complex institutions that those
requirements are set and enforced by the Federal Reserve, which
is quite close to the system today, now that investment banks
are bank holding companies. But we want to make sure that is
absolutely clear, so there is more accountability. But the
rules need to be more conservative and better designed to
reduce that run risk.
Mr. Marchant. So that there will be consideration given
to--in all financial institutions, the consideration given to
the source of the leverage?
Secretary Geithner. Exactly. How you are funded is as
important to how much risk you take. In fact, they are totally
and completely related. And it is this mismatch between very
short-term liabilities that can run and long-term assets that
are liquid that allow the risk in them that creates the
inherent vulnerability to crisis.
So you need to both constrain leverage and make sure there
is more conservative funding.
Mr. Marchant. In the future, do you see--well, do you see
in the system now--there is this continual mismatch. Has this
corrected itself?
Secretary Geithner. Well, again, banks operate with that
mismatch. What they do is they take deposits and they lend them
to people who need to buy a home or a business who wants to
finance investment. That is inherent in any well-functioning
financial system. But what you need do is to make sure that,
again, you constrain leverage so that there is enough capital
against risk and that there is as stable a funding base as you
can achieve.
And what we did not do well as a country is that there were
large institutions, very important, very complicated, very
risky, that didn't have effective constraints on leverage and,
as you said quite correctly, were allowed to fund themselves
overnight with very, very high vulnerability to a run in a
panic.
And so, you need to make sure that both the capital
requirements and the liquidity requirements, margin, etc., are
applied to that set of institutions who present those kind of
risks. If you don't do that, we will be in this mess again.
Mr. Marchant. And my last question will be, if you require
in this new regulation that there be a retained portion of the
portfolio retained by the institution, if you do not put rules
with that retained asset, then you will end up forcing them to
have this mismatch.
The Chairman. The gentleman's time has expired. If he can
respond in writing to the gentleman's question.
And next, the gentlewoman from New York, I believe. Oh, no,
I am sorry, you got flipped, so it is the gentleman from Texas.
Mr. Hinojosa. Thank you, Mr. Chairman.
Thank you, Mr. Secretary, for coming to visit with our
committee.
Assistant Secretary Barr requested a meeting with me to
discuss some of the concerns that I had on this legislation we
are discussing, and we recently met in my office. During that
conversation, I expressed my concern about the negative impact
the CFPA, as recommended by the Department of the Treasury,
could have on the local economies across the country. In
particular, I said, we were concerned about the impact that
this was going to have on the community banks, credit banks,
and regional banks that played no role in the global financial
meltdown.
According to him--or, rather, according to the Secretary
for Financial Institutions, the Treasury wants a level playing
field. He wants all financial institutions to be examined and
enforced by the CFPA.
And I disagree. I think that the community banks and credit
unions and regional banks should be exempted from that CFPA
umbrella. They didn't cause the problem; they did not create
the financial crisis. In fact, as I and many of my colleagues
here on this committee believe, community banks and credit
unions provided some liquidity to local markets at a time when
the large banks and the nonbanks had frozen the market
liquidity.
Thus, Mr. Secretary, why should they be punished for
actions of others?
Secretary Geithner. They shouldn't be. And I agree with you
that one of the great strengths of our country is we have a
system with 9,000 banks, including thousands and thousands of
community banks that, as you said, were not part of the problem
and are playing a very important role in providing credit. We
need to preserve that.
But we have to make sure that, again, we are protecting
them from the risk that competitors who are not subject to any
regulation can take business away from them, and they are
forced to try to compete with them by lowering standards,
engaging in the same practices. That is why you need a more
level playing field more broadly applied.
But you are raising, of course, understandable concerns
about this. We are very sensitive to those, too. And we would
be happy to work with you and your colleagues to figure out how
to get that balance right.
Mr. Hinojosa. I appreciate that.
Also, I have worked in conjunction with Congresswoman Judy
Biggert on financial literacy over the years and hope a
provision on financial literacy will be incorporated into the
bill.
Mr. Secretary, will you support our literacy provisions
being included?
Secretary Geithner. Can I take and make sure that I talk to
my colleagues to take a careful look at them before I commit? I
would be happy to get back to you.
Mr. Hinojosa. Absolutely. And we will be glad to work with
you to make sure that it is in a way that is going to help our
consumers. Because I represent an area in deep south Texas
that, had they had that financial literacy education, I think
they would have refrained from signing so many predatory
contracts and loans.
Secretary Geithner. I could not agree with you more. We
need to make sure that public education in this country does a
better job of equipping people, as they go through school, with
some basic understanding of finance and economics. And I
completely agree with the emphasis you are giving to us doing a
better job of financial education and financial literacy.
Mr. Hinojosa. We are trying to do the same on the Education
Committee by requiring it for families wanting student loans to
be able to better understand their choices and make better
choices, thus saving the family a big cost.
With that, Mr. Chairman, I yield back.
The Chairman. The gentleman from Minnesota.
Mr. Paulsen. Thank you, Mr. Chairman.
Thank you, Mr. Secretary.
An area of fertile discussion has been the area of risk
management. And most firms understand the risks that they run,
but they don't often have the strength or the will or the
foresight to say no. The competitive dynamic among firms
creates the situation. And this is where a regulator with an
eye towards aggregate risk in the system would be most
beneficial, I think we could agree.
How do you intend to have the regulator calibrate that
aggregate risk so that the benefits of competition that accrue
to society will be able to go forward, as opposed to creating
another disaster or go too much in the opposite direction where
it is going to really burden innovation?
Secretary Geithner. I think it is a very difficult,
complicated task. And I do think it is important to recognize
that we can't have a system that relies on the wise exercise of
discretionary judgment by supervisors, because they will never
be able to fully understand soon enough where those sources of
risks are coming from. And that is why we put so much emphasis
on trying to make sure that firms run with bigger cushions
against the uncertainty we all live with.
I think that is the only effective defense against this.
And it is why--well, you can look at this in highway safety,
all sorts of other examples of regulation where you need to
have at the underpinning of stability some basic protections
that are easily enforceable. Again, basically force firms to
hold more cushion, resources, rainy-day funds against the
losses they might face in an uncertain future.
But that future will be uncertain. You don't know where the
source of risk is going to come from. And you can have risk
management, all sorts of fancy, sophisticated risk management,
but if you get that basic judgment wrong about how much and you
are left with inadequate resources against losses, then you
will have a more risky system.
Mr. Paulsen. Okay.
Mr. Secretary, I will switch gears a little bit. What is
the nature of the guarantee right now that the Federal
Government is providing for toxic assets? We have had
discussion about that. Are there any private-sector solutions
that are less costly? Is your office receptive to having
private-sector solutions from parties outside of the government
come forward? And which ones might have the most merit?
Secretary Geithner. Of course. Of course. And, again, we
have been very transparent about the detailed financial terms
of these funds we proposed to use to bring private capital in
alongside the government so people can look at the economics of
that. But, of course, we are open to any suggestions on this
stuff.
And, ultimately, of course, this only works if you get the
private market to come back. And you need investors to start to
take risk on their own if you are going to see these markets
start to heal and improve again.
Mr. Paulsen. And let me ask this, Mr. Secretary. The
Federal Reserve, in particular, has made so many dollars
available right now that we have seen the devaluation of the
dollar. And you have talked about our relationship with China
and with foreign countries in the past.
But the market is kind of telling us right now, at least
with the trade-weighted dollar that is out there right now,
that there is concern about the Fed creating too much money in
the system and the Treasury overspending. You know, the dollar
is telling us we are not providing that much restraint.
I mean, shouldn't that be part of the feedback loop that we
have right now, kind of watching that? Do you have concerns
about that? The Fed kind of being the parent and the Treasury
Department overspending? In other words, do you think there is
a chance that we might be stimulating the economy too much in
the short term?
Secretary Geithner. We can't take that risk. And I don't
think that is a risk now we face. I mean, we have an
independent Federal Reserve whose job is to make sure that we
keep prices low and stable over time, growth sustainable. And
they are committed to doing that. They have an exceptionally
good record of doing that over time because they are
independent.
But, as a country, on the fiscal side, we are going to have
to go back to living within our means to bring these deficits
down. But our big risk still at the moment is that we make sure
we have a recovery under way that is led by private demand. And
we want that to be strong enough and sustainable before we step
on the brakes.
Again, you know, the big lesson of the United States in the
1930's and Japan in the 1990's, countries throughout history,
was to move too quickly out of the hope it was all going to be
okay, and put on the brakes in a way that deepened the
recession, raised the ultimate costs of recovery. We need to
make sure we avoid that risk.
But you are absolutely right to emphasize the importance,
and no one feels more strongly about it than I do, about the
importance that we go back to living within our means and that
we walk back these exceptional measures necessary to fix the
crisis as quickly as possible.
And if you look at what we have done, you are already
seeing dramatic reduction in the amount of support the
government is providing to the financial system as we, you
know, see things starting to improve.
Mr. Paulsen. Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman from Missouri.
Mr. Clay. Thank you, Mr. Chairman.
Very quickly, Mr. Secretary, welcome back. And perhaps the
most interesting aspect of the economic data pointing to a
modest recovery is that it ignores the fact that foreclosures,
the problem that imploded the financial markets and the economy
in the first place, continue to rise.
Already, this year, more than 1.5 million families
experienced foreclosure in the first 6 months. Just in the
month of August, a total of 358,000 properties went into
default or foreclosure. Although the pace of new foreclosures
slowed between July and August, this rate is up 18 percent year
over year.
Does Treasury adequately address the entire issue of
foreclosure and what started our financial crisis in your
proposals?
Secretary Geithner. Congressman, we do not have the ability
to prevent all foreclosures. It is just not a realistic
objective for us.
But we are making a lot of progress and bringing more
stability to the housing market and making sure that people are
allowed to take advantage of a loan-modification program that
reduces their monthly payments to a more affordable level. And
we expect, within the next several weeks, to be in a position
where half a million households are benefitting from
modifications that substantially reduce their monthly payments.
You are already seeing, of course, interest rates of
mortgages at historic lows. Housing is more affordable today.
There is a little bit more stability in housing values now. And
people are able to refinance their mortgages even if they are
underwater. And those things are helping together.
But you are right to emphasize the fact that there are
still a lot of people in this country who are facing the risk
of foreclosure. And we are going to reduce that risk, but it is
still with us. It is one of the reasons why we don't want to
leave people any illusion that we are through the worst of this
crisis and it is time now to dial back and wind down those
programs.
Mr. Clay. Would Treasury have an interest in private
investors creating market instruments, for example like real
estate trust investments, to which the government attaches a
Federal guarantee, in order to encourage banks to remove toxic
assets off their balance sheets?
Secretary Geithner. Well, again, we are pragmatic people.
We are open to anything that we think will work. And I would be
happy to look at any proposal. We look at a range of proposals
all the time. But I think I would be very reluctant to--well,
let me say it differently.
We want to make sure we are not exposing the taxpayer to
losses they shouldn't have to bear by subsidizing a bunch of
new activity in this area. And we need to figure out ways to do
these things at the least cost to the taxpayer and that are
going to have the most impact on credit flows.
But I would be happy to look at any proposal, though.
Mr. Clay. And I do understand the reason for caution here.
And I will yield back.
The Chairman. Thank you. We will just finish with Mr.
Lance. And Mr. Baca has one request he will make.
So, Mr. Lance, you will be the last questioner.
Mr. Lance. Thank you very much, Mr. Chairman.
Good morning, Mr. Secretary.
The books close a week from today on the fiscal year. As I
understand it, the deficit will be this year $1.6 trillion.
What is your current estimate, Mr. Secretary, regarding next
year?
Secretary Geithner. Congressman, in the mid-session review
that OMB put out in August, there are revised assessments of
the Executive Branch about the deficit. I don't have those
numbers before me, but I would be happy to make sure you get
that.
But the government, of course, the way the system works,
will provide another estimate of that in the President's budget
submission for the 2011 fiscal year in, I believe, January or
February.
Mr. Lance. I certainly hope that we are we moving in the
direction of trying to lower that, since, as I understand it,
this is the highest annual deficit as a percentage of GDP since
1945.
Secretary Geithner. And we agree with you, we are going to
have to bring that down over time.
Mr. Lance. Yes. Well, thank you.
As I understand it, the GAO said last week that if AIG
misses its fourth equity dividend payment due on November 1st,
you have the authority to appoint directly at least two members
of the AIG board of directors.
Have you begun examining that possibility yet?
Secretary Geithner. The AIG board--we have seen a
substantial transformation and, I think, strengthening of the
board of AIG already. And, as you know, there is a new
management team now in place helping to get this institution
back in a position where we get our money back.
Mr. Lance. Thank you. But, as I understand it, you will
have the ability to appoint new board members if the payment is
not made. So I would hope that you would examine that situation
by the 1st of November.
Number three, regarding the tariff situation on Chinese
tires, your opinion, sir?
Secretary Geithner. My opinion?
Mr. Lance. Yes.
Secretary Geithner. Oh. Well, the President acted to
enforce the basic rules established not just by the United
States but internationally, as part of Chinese accession to the
WTO. And, you know, for our system to work, people have to have
confidence that the rules that are there will be enforced.
Now, of course, we are completely committed to making sure
that we preserve an open trading system. As a country, we have
a huge stake in making sure that markets overseas are open to
U.S. exports and products. And we are working very hard to find
ways to expand those opportunities for American exporters.
Mr. Lance. And, finally, and I know you have addressed this
before, but I am still concerned regarding how the Tier 1
companies will work. And if they are not announced publicly and
yet there are higher capital standards, then that will
obviously be recognized by the market. It seems to me that you
are sort of between a rock and a hard place if you don't
announce what companies are in Tier 1, and yet you have the
higher capital standards.
If you could elucidate us further on that. It is a very
complicated topic. I know you have addressed it this morning,
but any further comments you might have on it, Mr. Secretary.
Secretary Geithner. You can't have a fixed list. It is
going to have to evolve over time. It is going to require a
careful judgment of who poses the most risk to the system. But
the most important thing, I think, as you said, is they need to
live under appropriately conservative constraints on leverage.
And they are going to have to know what those constraints are.
Mr. Lance. Thank you, Mr. Secretary.
I yield back the balance of my time, Mr. Chairman.
The Chairman. Mr. Secretary, thank you for the time. But
the gentleman from California had an important point. I
recognize him for a minute.
Mr. Baca. Thank you very much, Mr. Chairman.
Mr. Secretary, the regulatory plan proposes moving all
standardized derivatives to some sort of clearing process to
help bring more transparency and understanding to the market.
When Chairman Gensler came before us in July, he said that
initially he would envision it being four to five
clearinghouses competing with one another.
My question concerns this competition. Wouldn't this
situation create the same conflict of interest that exists with
credit-rating agencies, in that they would be funded by the
same institutions whose products they would be reviewing?
And my question is, are you concerned about the potential
problem? And what kind of oversight do you envision in working
to prevent against this?
As the chairman indicated before, it wasn't until 2003 that
we began to have the oversight and accountability, especially
as it pertains to capitalism and deregulation.
The Chairman. If we could, let's get to the answer. I think
the question has been well put.
Mr. Secretary?
Secretary Geithner. Again, it is very important that the
SEC and the CFTC have the authority to make sure that central
counterparties operate with enough resources to protect
themselves against the risk in central clearing. And there
needs to be a level playing field evenly enforced. That is the
only protection against the risk that competition erodes those
standards, leaving with us a more risky system.
The Chairman. Thank you, Mr. Secretary. I think if you
could elaborate on that in writing, it would be--and I guess
the concern would be, would they compete by offering, sort of,
lower margin requirements? And is there some way to prevent
that from happening?
I thank the Secretary.
We will reconvene at 2:00 p.m. I will say for people on the
Democratic side, we will begin in the questioning at the
seniority level where we left off. On the Republican side, I am
told because everyone who was here was able to question, they
will start again. But we will begin in the middle of our second
row.
The hearing is adjourned.
[Whereupon, at 12:04 p.m., the hearing was adjourned.]
A P P E N D I X
September 23, 2009
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