[Senate Hearing 111-903]
[From the U.S. Government Publishing Office]
S. Hrg. 111-903
HEARING WITH TREASURY SECRETARY GEITHNER
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HEARING
before the
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
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HEARING HELD IN WASHINGTON, DC, DECEMBER 16, 2010
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HEARING WITH TREASURY SECRETARY GEITHNER
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
The Honorable Ted Kaufman, Chair
Kenneth Troske
J. Mark McWatters
Richard H. Neiman
Damon Silvers
C O N T E N T S
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Page
Statement of:
Opening statement of Hon. Ted Kaufman, U.S. Senator from
Delaware................................................... 1
Statement of J. Mark McWatters, Attorney and Certified Public
Accountant................................................. 5
Statement of Damon Silvers, Director of Policy and Special
Counsel, AFL-CIO........................................... 14
Statement of Kenneth Troske, William B. Sturgill Professor of
Economics, University of Kentucky.......................... 18
Statement of Richard Neiman, Superintendent of Banks, New
York State Banking Department.............................. 23
Statement of Hon. Timothy Geithner, Secretary, U.S.
Department of Treasury..................................... 27
HEARING WITH TREASURY SECRETARY GEITHNER
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THURSDAY, DECEMBER 16, 2010
U.S. Congress,
Congressional Oversight Panel,
Washington, DC.
The Panel met, pursuant to notice, at 10:05 a.m. in Room
SD-538, Dirksen Senate Office Building, Senator Ted Kaufman,
Chairman of the Panel, presiding.
Present: Senator Ted Kaufman [presiding], Richard H.
Neiman, Damon Silvers, J. Mark McWatters, and Kenneth R.
Troske.
Index: Senator Ted Kaufman [presiding], Richard H. Neiman,
Damon Silvers, J. Mark McWatters, and Kenneth R. Troske.
OPENING STATEMENT OF HON. TED KAUFMAN, U.S. SENATOR FROM
DELAWARE
The Chairman. Good morning, Mr. Secretary. We appreciate
your willingness to come down here and help us.
It's easy today to forget the sense of panic that
overwhelmed our economy in late 2008. Stock market was
plummeting, employment was plummeting, home values were
plummeting. I can remember turning on the television and
flipping between news channels and seeing anchor after anchor
looking scared and frightened and confused. The American
financial system, the envy of the world, was never supposed to
collapse in that way.
Today, we know that the panic ended, and you played a key
role in that turnaround. As the Panel has stated in the past,
the Troubled Asset Relief Program provided critical support to
the financial markets at a time when market confidence was in
freefall. Combined with the Recovery Act, this restored a
degree of stability to our markets and to our economy. The
Congressional Budget Office recently estimated that, at the end
of the day, the TARP will cost about $25 billion. And I notice
you use the same thing in your opening statement. And it's an
astronomical sum, to be sure, but far less than anyone expected
even 6 months ago.
As Treasury has conducted its work to repair the banking
system, governments and business and private citizens across
the country have done their part to help build the road to
recovery. Thanks to their shared efforts, the economy is in a
tremendously better place today than it was when the TARP was
enacted. But--and it's a big ``but''--we must not forget the
pain that continues to plague so many Americans.
Fifteen million Americans still cannot find a job. As many
as 13 million families will lose their homes in foreclosure in
the next few years. The panic of 2008 has subsided, but it has
been replaced by the gnawing pain of countless men and women
who can't find work, who can't keep their homes, and who don't
know whether their economic story will ever end in recovery.
The TARP was never intended to be a complete solution to
these problems. But, even now, your authority to make major
changes to the TARP, even though your authority has changed,
you still can make steps to help strengthen the broader
economy.
For example, the Panel's report this week on foreclosure
prevention laid out a series of steps the Treasury can take to
help more Americans keep their homes. You could make it easier
for homeowners to receive a loan modification by allowing
borrowers to apply online; you could focus on helping each and
every homeowner who received a loan modification to avoid
sliding backward into foreclosure.
These steps will only make a modest difference in
Treasury's efforts to prevent foreclosures, but they illustrate
a larger point, that although TARP's broad legacy may already
have been determined, the details remain to be decided, and
these are important details. In fact, Mr. Secretary, you will
decide them. You continue to manage $54 billion in the auto
industry, $50 billion at a variety of banks, $48 billion at
AIG, and $30 billion in authority to prevent foreclosures. That
is a weighty obligation, and I look forward to hearing you
describe how you will handle it.
I really do hope we can use today's hearings to focus on
the remaining opportunities to reshape the TARP to strengthen
the economy for all Americans.
Before we proceed, I'm looking forward to other panelists'
comment. And we'll start with Mr. McWatters.
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STATEMENT OF J. MARK McWATTERS, ATTORNEY AND CERTIFIED PUBLIC
ACCOUNTANT
Mr. McWatters. Thank you, Senator.
And welcome, Mr. Secretary.
Although the Congressional Budget Office has recently
revised its estimated subsidy cost of the TARP downward to
``only'' $25 billion, such metrics should not serve as the sole
determinant of the success or failure of the program. We should
remain mindful that the TARP's overall contribution to the
rescue of the U.S. economy was relatively modest when compared
along with a multi-hundred-billion-dollar bailout of Fannie Mae
and Freddie Mac, the multi-trillion-dollar interventions of the
Federal Reserve and FDIC, as well as the incalculable efforts
of private-sector capital-market participants.
It is particularly difficult to label the TARP, or any
other government-sponsored program aimed at securing financial
security, an unqualified success when the unemployment rate
nears 10 percent, the combined unemployment and underemployment
rate equals l7 percent, and millions of American families are
struggling to modify their mortgage loans so as to avoid
foreclosure. It is cold comfort to these individuals and
families that the ``too big to fail'' financial institutions,
aided by the TARP and other government-sponsored programs, are
recording near-record earnings.
In order to better assess the TARP, I offer the following
recap of certain issues raised by the Panel and its individual
members over the past year:
Professor Troske and I noted, in our Additional Views to
the Panel's September 2010 Oversight Report, that the repayment
by TARP recipients of advances received under the program is a
misleading measure of the effectiveness of the TARP and
therefore should not serve as the standard by which the TARP is
judged. The unlimited bailout of Fannie Mae and Freddie Mac by
Treasury, and the purchase of $1.25 trillion of GSE-guaranteed
mortgage-backed securities in the secondary market by the
Federal Reserve under its first quantitative easing program, no
doubt materially benefited TARP recipients and other financial
institutions. These institutions were not--were not, however,
required to share any of the costs incurred in the bailout of
the GSEs.
In effect, the bailout of Fannie Mae and Freddie Mac
permitted TARP recipients to monetize their GSE-guaranteed MBSs
at prices above what they would have received without the GSE
guarantees and use the proceeds to repay their obligations
outstanding under the TARP, thereby arguably shifting a greater
portion of the cost of the TARP from the TARP recipients
themselves to the taxpayers. Costs such as this should be
thoughtfully considered when evaluating the TARP.
With respect to the bailout of AIG, the Panel offered the
following observations in its June 2010 report, and I quote,
``The government's actions in rescuing AIG continue to have a
poisonous effect on the marketplace. By providing a complete
rescue that called for no shared sacrifice among AIG's
creditors, the Federal Reserve and Treasury fundamentally
changed the relationship between the government and the
country's most sophisticated financial players. The AIG rescue
demonstrated that Treasury and the Federal Reserve would commit
taxpayers to pay any price and bear any burden to prevent the
collapse of America's largest financial institutions and to
assure repayment to the creditors doing business with them. So
long as this remains the case, the worst effects of AIG's
rescue in the marketplace will linger.''
With respect to the robo-signing and other mortgage loan
irregularities, the Panel offered the following observations in
its November 2010 report, again quoting, ``Treasury has claimed
that, based upon evidence to date, mortgage-related problems
currently pose no danger to the financial system, but in light
of the extensive uncertainties in the market today, Treasury's
assertions appear premature. Treasury should explain why it
sees no danger.''
With respect to the HAMP and Treasury's other foreclosure
mitigation programs, the Panel offered the following
observations in the December 2010 report, which was released 2
days ago, again quoting, ``While HAMP most--while HAMP's most
dramatic shortcoming has been its poor results in preventing
foreclosures, the program has other significant flaws. For
example, despite repeated urgings from the Panel, Treasury has
failed to collect and analyze data that would explain HAMP's
shortcomings, and it does not even have a way to collect data
for many of HAMP's add-on programs. Further, Treasury has
refused to specify meaningful goals by which the--to measure
HAMP's progress, while the program's sole initial goal, to
prevent 3 to 4 million foreclosures, has been repeatedly
redefined and watered down. Treasury has also failed to hold
loan servicers accountable when they have repeatedly lost
borrower paperwork or refused to perform loan modifications.
In concluding, it is critical to note that, although the
TARP has played a meaningful role in the rescue of the United
States economy during the closing days of 2008, its enduring
legacy may be to have all but codified the implicit guarantee
of the ``too big to fail'' financial institutions,
notwithstanding the profound moral hazard risk arising from
such action.
Thank you and I look forward to our discussion.
[The prepared statement of Mr. McWatters follows:]
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The Chairman. Thank you.
Mr. Silvers.
STATEMENT OF DAMON SILVERS, DIRECTOR OF POLICY AND SPECIAL
COUNSEL, AFL-CIO
Mr. Silvers. Thank you, Mr. Chairman.
Good morning. I would like to begin by thanking Secretary
Geithner for appearing once again before our Panel. And I would
like to also note that I, in general, appreciate and concur
with my colleague Mr. McWatters' comments and summary of some
of the issue that we have been concerned about.
The story of the Troubled Asset Relief Program over the
last 2 years is one that has two faces:
On the one hand, looked at purely from the perspective of
how much TARP will cost the American public, and the effect of
TARP on the acute crisis, and severe crisis, we faced in 2008,
the news keeps getting better and better.
Recently, as my fellow panelists have noted, the
Congressional Budget Office estimated that the total cost of
TARP will be approximately $25 billion, less than a tenth of
the original estimates. Certain individual investments, which
were entered into on terms that were clearly unfavorable to
taxpayers, in light of the risks involved, such as the
preferred stock purchases and asset guarantees at Citigroup,
have been skillfully managed by Treasury to produce significant
profits.
And I would like to commend you, Mr. Secretary, for--and
your colleagues, the TARP directors, Herb Allison and Tim
Massad--for what you have done to protect and recover the
public's money in this regard.
But, there is another and, frankly, more important way of
looking at TARP. TARP cannot be held solely accountable for the
state of the U.S. or the global economy. But, oversight of TARP
requires that we look at two critical areas of our economy that
TARP was designed to address: the availability of credit to the
real economy, and the state of the foreclosure crisis. Frankly,
on both fronts the news is grim. Witnesses have testified
before our panel, in recent hearings, that we can expect
between 8 and 13 million families to face foreclosure before
the crisis is over; millions more than we have experienced
already. Under the pressure of hundreds of thousands of
foreclosures a month, housing prices have resumed their
downward slide.
On the credit to the real economy side of things, mortgage
financing is available today, but entirely through the
assistance of government-backed vehicles, like, but not limited
to, the GSEs; but business lending remains hard to come by,
other than for those companies that can access the public
credit markets.
Bank holding companies have over $1 trillion on deposit
with the Federal Reserve System, while business lending remains
stagnant by banks, at crisis levels.
Unemployment levels today are above those projected as the
worst-case scenario in the TARP bank stress tests undertaken in
the spring of 2009.
Asset deflation, banks that won't take normal banking
risk--these are the signs of a financial system that remains
unhealthy. I continue to believe that we made a fundamental
mistake in our management of the financial crisis by not
restructuring the major banks. By not following our own
Nation's approach to similar crises in the past, we started
down the path Japan took in the 1990s, and we are reaping the
same outcomes: a sluggish and uncertain recovery, banks that
can't restructure bad loans and won't lend to business to
create jobs. But, because our financial crisis involves home
mortgages, the decision to make preserving the banks' capital
structure our highest policy goal has meant not just a weak
economy, but the unprecedented human tragedy of millions of
foreclosures. In the end, at worst, bank stockholders got
diluted. Millions upon millions of American families have been
dispossessed. And there is a difference.
I hope today we will be able to explore the question of
TARP and the mortgage crisis with Secretary Geithner and that--
and the--and explore the intersection of the mortgage crisis
with issues of systemic risk and the overall health of our
economy. I very much look forward to the Secretary's testimony.
And, once again, thank you for appearing before us.
[The prepared statement of Mr. Silvers follows:]
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The Chairman. Thank you, Mr. Silvers.
Dr. Troske.
STATEMENT OF KENNETH TROSKE, WILLIAM B. STURGILL PROFESSOR OF
ECONOMICS, UNIVERSITY OF KENTUCKY
Dr. Troske. Thank you, Senator Kaufman.
Mr. Secretary, I would like to thank you for agreeing to
appear again before this Panel. I know your previous testimony
has been quite helpful to us as we carry out our oversight
responsibilities, and I am confident that this trend will
continue.
During my time on the Panel, I have become more and more
concerned about the public's perception of TARP and the impact
this perception has on the government's ability to adopt
similar measures during any future financial crisis.
As we indicated in our September report, the consensus
among the academic economists and other experts that we
consulted was that TARP played an important role in helping to
end the financial crisis, a view I largely share. Yet, despite
this consensus among the experts, I think it's fair to say
that, to the general public, TARP remains one of the most
vilified pieces of legislation ever enacted, viewed largely as
an effort on the part of former Wall Street executives to bail
out current Wall Street executives.
I would argue that a large part of the public's disdain for
TARP can be traced back to the original way it was proposed, a
3-page bill submitted to Congress asking for the authority to
spend $700 billion with almost no oversight, as well as how it
was implemented, changing the focus of the program from one
designed to purchase toxic assets to one where Treasury began
to purchase equity in private-sector for-profit firms. I would
argue also--I would also argue that previous--that the previous
administration's decision to classify General Motors and
Chrysler as financial firms in order to use TARP money to bail
out these firms increased public skepticism even further.
Let me be clear: I am not questioning the wisdom of these
decisions; instead, I am focusing on the public's perception of
these actions.
I recognize--in short, I recognize that, in trying to
overcome the public's hatred of TARP, you are forced to deal
with these past actions. However, I think that there are a
number of actions that Treasury could and should be taking
right now to try and help turn public perception.
One important way that any government can show its programs
are effective is to periodically have independent researchers
conduct thorough and rigorous evaluations of its programs. This
is true whether the program is designed to retrain displaced
workers, to rescue banks in financial crisis, or to assist
struggling homeowners. When performing this type of analysis, a
government needs to collect comprehensive data on both program
participants and nonparticipants in order to have a meaningful
comparison group. Yet, despite the Panel's repeated urging in
various reports for Treasury to expand--significantly expand
its data collection efforts, it does not appear that Treasury
has made comprehensive data collection for TARP programs a
priority. I would again urge you to do so, and I would also
urge you to make these data available to outside researchers.
Only by taking these key steps will we obtain the credible,
independent research that is so vital in evaluating a program
and convincing the public that TARP achieved the desired
outcomes in a cost-effective manner.
I would also suggest that we begin to recognize that there
are two parts of TARP: one, the set of programs, designed to
assist financial institutions in the midst of the financial
crisis, the other, programs that were largely directed at
stimulating the economy.
As our September report makes clear, there is a much
broader consensus about the effectiveness of the former than
the latter programs. As part of this effort, I suggest that we
need to take a careful look at how much money should have been
initially allocated to TARP. Changes to TARP in the Dodd-Frank
legislation indicate that Congress felt, in retrospect, that we
could have gotten by with 450 billion instead of the original
700 billion allocated. But, I am guessing that a more careful
analysis would reveal that some of the programs not directly
aimed at stemming the financial crisis may have been better
part of alternative legislation. In my opinion, making this
distinction would help generate more support for what I
consider the more key components of TARP that we would
certainly like to have at our disposal during future crises.
Finally, as economist Kenneth Rogoff pointed out in written
comments to the Panel for our September report, ``A proper
cost-benefit analysis thus needs to price the risk taxpayers
took during the financial crisis. Ex-post accounting--How much
did the government actually earn or lose after the fact?--can
yield an extremely misguided measure of the true cost of the
bailout, especially as a guide to future policy responses.'' I
would add to Professor Rogoff's statement that focusing on ex-
post accounting of this single program also fails to take into
account the myriad of other costly government programs which
provided significant assistance to major banks and financial
institutions.
Again, I'm not questioning the wisdom of these programs; it
is clear--but, I believe, it is clear that, by providing
additional support to large financial institutions that
received TARP funds, these programs made it possible for the
institutions to repay their TARP funds and allowed some of the
costs of TARP to be shifted to other less scrutinized
government programs. I believe that, at an intuitive level, the
American people recognize the costs of putting so much money at
risk and the ability to shift costs across programs; therefore,
the public remains justifiably skeptical of the claims that
TARP was a success because of--most of the money will be paid
back. That is why I believe we need a more comprehensive
evaluation of the true costs of TARP and the overall financial
bailout if we are ever going to convince the American people
that any part of TARP can be considered a success.
Mr. Secretary, as this Panel wraps up our oversight
responsibilities in the coming months, I believe that these are
the issues we are going to be grappling with the most: what
parts of TARP were successful, and how can we demonstrate their
effectiveness? As I indicated at the start of my comments, I am
confident that your testimony today, and any future testimony
you provide, will be of great assistance in our efforts. I look
forward to your comments today, and I thank you again for
appearing before us.
[The prepared statement of Dr. Troske follows:]
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The Chairman. Thank you, Dr. Troske.
Superintendent Neiman.
STATEMENT OF RICHARD NEIMAN, SUPERINTENDENT OF BANKS, NEW YORK
STATE BANKING DEPARTMENT
Mr. Neiman. Thank you.
Mr. Secretary, when you last testified before this Panel in
June, the major regulatory reforms that might have avoided the
need for a TARP had not yet passed Congress. Additionally, a
small business lending fund was not established, and well over
$100 billion of losses were expected for the TARP program.
In the past 6 months, however, a Dodd-Frank regulatory
regime is being implemented, and a new small business lending
fund has congressional approval. The expected cost of TARP is
much lower, with the CBO's projection of TARP's cost of $25
billion.
Given these developments, and that TARP successfully
prevented a depression-like crisis, it might be fair to expect
the public perception of TARP would be--have improved, and for
the administration to get due credit for its management of the
program it inherited.
But, public perception remains negative, perhaps because
first impressions continue to linger. The reason probably has
more deep-rooted element. Many people simply feel their lives
have not gotten better during this period, even as the
financial system has stabilized and banks have returned to
profitability. The government must continue to work to finally
fill TARP's unchecked boxes; namely, to encourage bank lending
and prevent needless foreclosures.
It is my hope to discuss these two areas today.
Specifically with regards to foreclosures, we must hold
mortgage services fully accountable for the non-HAMP mortgage
modifications they put homeowners into. These mortgage
modifications must truly be helpful to homeowners, and
sustainable. Non-HAMP modifications now outnumber HAMP
modifications by about three to one.
More importantly, looking forward, I believe Dodd-Frank's
vision of an effective CFPB must be realized in the foreclosure
area. In order to protect homeowners and promote future
financial stability, the CFPB has been specifically empowered
to write mortgage rules. This must include national standards
for mortgage servicers, who are critical players in the
foreclosure crisis. No such national standards exist today.
Some States, like New York, have comprehensive servicer
regulations in place that can serve as a model at the Federal
level. Regardless, the CFPB cannot tackle mortgage servicing
alone. The new agency will need the cooperation of the States
and the Federal banking regulators to enforce any new rules,
hopefully together in a new era of cooperative federalism.
With regards to small business lending, the public wants
and needs the small business lending fund to be successful.
But, loan supply is not the only reason bank lending is down.
Other reasons must be integrated into our collective solutions,
such as loan demand, underwriting standards, regulation, and
uncertainties.
Finally, I think, nearly 2 years after the establishment of
this oversight body, it should be highlighted that you have
been a valuable--and available to this panel. We have an
important oversight job on behalf of Congress and the American
public. You have appeared before us five times publicly and
several times privately. Your openness has helped us to do our
job better, and the public is better off as a result.
I thank you. And I look forward to our discussion this
morning.
[The prepared statement of Mr. Neiman follows:]
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The Chairman. Thank you, Superintendent Neiman.
I have to comment that each five panelists made up their
remarks separately.
[Laughter.]
The Chairman. I mean, as--I was just sitting here thinking
about how incredible it is that five people come up with
testimony that's so similar. Really, we all say the same thing.
Thank you, Secretary Geithner, for coming today, and we're
interested in your opening statement.
STATEMENT OF HON. TIMOTHY GEITHNER, SECRETARY,
U.S. DEPARTMENT OF TREASURY
Secretary Geithner. Thank you, Mr. Chairman, and all of
you. I agree with much of what you've said in your opening
remarks, not all of what you said, but I hope we have a chance
to talk about the concerns you still raise ahead, and I'll be
open with you about the things that I think are the challenges
we face going forward.
I want to provide, as you suggested, a broad overview of
the impact of these programs on our economy and our financial
system, and the challenges we face ahead.
I think it's also very important to recognize at the
beginning that it's very hard to separate the impact of TARP
itself on the economy and the financial system from the
combined impact of the broad strategy this government embraced.
And, of course, as you know, that strategy included a very
creative, powerful set of programs by the Federal Reserve, a
set of very powerful actions by the FDIC, the substantial
support, in terms of tax incentives and investments, that came
in the Recovery Act, the support for Fannie and Freddie that
was required to avoid a collapse alongside the TARP programs.
None of them would have been as effective without the overall
package. Monetary policy doesn't work without a functioning
financial system. TARP would not have been nearly as effective
without those other instruments. That's an important thing to
recognize.
I think it's important to recognize that the shock that
caused this great recession, that caused this crisis, was
larger and more powerful and more dangerous, in the view of
economic historians, than the shock that precipitated the Great
Depression. And yet, despite that, 2 years after the peak of
the crisis, and 2 years after TARP was first passed by the
Congress, the economy has now been growing for 18 months; we've
had roughly 1.2 million jobs created by the private sector,
more and more quickly than for the last two recessions;
household wealth has improved very, very substantially over
this period of time.
The tax package that was approved by the Senate yesterday
and, based on the comments made by the House leadership--both
Republicans and Democrats--that's likely to pass the House this
afternoon, provides a very powerful package of support for
middle-class families, for working families, for the
unemployed, and a very powerful package of incentives for
businesses, which we believe, and I think most economists
believe, will add substantially to our prospect for getting the
economy growing more rapidly and more people back to work in
the coming 2 years.
I think it's fair to say that the worst part, the most
dangerous part, of this financial storm has passed us, but the
crisis has left a huge amount of damage in its wake. Millions
and millions of Americans are still out of work, at risk of
losing their homes. Unemployment remains, on average
nationally, at 10 percent, but much higher in many parts of the
country. And it's going to take years, not months--it's going
to take years to fully repair the damage caused by this crisis.
Now, the government's financial programs, including TARP,
but not limited to TARP, were not designed to and cannot solve
all those problems, and cannot, on their own, solve all the
damage caused by the crisis. But, these programs did what they
had to do, what they were designed to do--which was to protect
the value of America's savings, to restore a measure of
stability to a financial system at the edge of collapse, to
reopen access to credit, and to restart economic growth. And
these programs did so much more powerfully, much more
effectively, much more cheaply, much more quickly than I think
really anyone, including the architects, thought was possible 2
years ago.
Now, you can see independent evidence of that conclusion--
support of that conclusion from a range of different sources,
including the work of the Panel. Mark Zandi and Alan Blinder
published, I think, the most definitive independent study of
the effects of these programs over the course of the summer.
And, as you know, they concluded that, without these programs,
the economy would have fallen by another 3 and a half percent,
would still be declining; unemployment would be above 16
percent; we'd be at risk of a downward spiral of deflation.
No one knows for sure how bad it would have been. But, as I
said, if you look at the magnitude of the shock that caused the
Great Depression and how that crisis turned out for this
country, against the evidence of what these policies have
provided in this brief period of time, I think it's a very good
record so far. Acknowledging that, as I said, the damage caused
by this crisis is overwhelming, still, and it's going to take
years--years to repair the damage.
Now, let me just review some of the other basic estimates
we used to judge where we are today. As many of you pointed
out, these programs achieved their objectives at a fraction of
the cost that almost any observer predicted, even as recently
as 3, 6, 9, or 12 months ago. The CBO estimates, which we all
rely on because they're independent, initially estimated TARP
would cost--TARP, itself, would cost $350 billion. Those
estimates are now around $25 billion. They are too high, in my
judgment. Ultimately, they'll be lower.
The most important thing to point out, it is that the
investment programs in TARP means the combined investments
we've put in banks, in AIG, to support credit markets, in the
automobile industry--those investments together will show a
positive return. The losses will be limited to the amount we
spend in our housing programs. The investment programs in TARP
will show a positive return, not a negative return. The
taxpayers will earn a positive return on those investments.
Now, if you look more broadly, as many of you suggested, at
the combined costs of everything the Fed did, everything the
FDIC did, the losses we still face because of what Fannie and
Freddie did before the crisis, and TARP, together, on
reasonable estimates about the future, those total costs are
likely to be less than 1 percent of GDP, which is less than
one-third of the cost of the savings and loan crisis, which, as
you know, was a much milder, much more limited financial
crisis. And if you look at the costs of crises across many
countries over time, the direct financial costs of these
programs, all in, including the GFCs, the Fed, FDIC, and these
programs, is likely to be a small fraction of what we have seen
almost anywhere in history over this period of time.
Now, we are moving very, very aggressively to exit from the
government's investments, from the guarantee programs, from the
emergency crisis response as quickly as possible. And we are
way ahead of schedule in achieving that objective.
We've recovered a very substantial fraction of the
investments in banks. When I came into office, the government
had invested--and they needed to do it, it was a necessary
thing to do--it had invested in banks that represented about
three-quarters of the entire American banking system. Our
remaining investments today are in banks that represent only 10
percent of the American banking system. That's happened in just
over 20 months. As you know, we're--and I'm happy to go through
these in more detail--we're substantially far along the road to
definitive exit from the automobile industry, from AIG, and, of
course, all the Nation's banks.
Now, as many of you said, a key test of crisis response is:
Are you leaving the system stronger than it existed before the
crisis? And, in contrast to what you said, Mr. Silvers, the
American financial system today is in a much stronger position
than it was before the crisis. There's been a very dramatic
restructuring of our financial system. The weakest parts of the
system no longer exist today. The remaining institutions had to
pass a very rigorous test for market viability. They have much
stronger capital positions than they had before the crisis, and
they are much higher capital positions than is true for their
international competitors.
And the Dodd-Frank bill gives us tools for oversight, for
crisis prevention, for crisis resolution, to limit moral hazard
risk, that I believe will be the model for the world going
forward, and address the critical weaknesses that helped cause
this crisis.
So, for those reasons, because the system is in a much
strong position today, if economic growth in the future proves
weaker than we would hope, it will not be because of the
remaining challenges in the financial system; it'll be because
this was a crisis caused by millions and millions of people
taking on too much debt, and it takes time to grow out of this
crisis. It will not be because the financial system is
providing a constraint on access to credit on a scale that
would limit future growth.
And, Mr. Chairman, you--could I just make a few final
remarks then----
The Chairman. Sure.
Secretary Geithner [continuing]. I'll move into----
The Chairman. We'd like--questions and then----
Secretary Geithner [continuing]. I'll move into conclusion.
The Chairman. Yeah.
Secretary Geithner. Now, we face a lot of challenges ahead,
and we're going to go through those. I just want to list what
those are, in my perspective.
Obviously, there are housing; small banks; access to
credit, for small businesses in particular; the challenge you
referred to, Mr. Chairman, of winding down prudently,
carefully, protect the taxpayers' interest in what's a--still
very complicated set of investments in the remaining financials
in the system; implementing Dodd-Frank; and laying out a broad
reform for the GSEs and the housing finance system. That is a
lot of work.
Overwhelmingly, though, the biggest challenge facing the
country is how to get the economy growing at a more rapid rate
so we can bring down the unemployment rate as fast as possible.
That's the most important thing we can do for housing, for
small banks, for access to credit more generally, and that's
going to have to be the principal focus of the administration
and the Congress's efforts.
I want to just conclude briefly with two final remarks. I
think it's very important that--you have been very gracious,
but it's important to step back and give credit to my
predecessor, Secretary of the Treasury Henry Paulson, to the
Federal Reserve Board and staff, to the men and women of the
New York Federal Reserve Board, and to Chairman Sheila Bair,
and the architects of these programs at the Treasury,
including--and I want to list them for you, principally--they
are Lee Sachs, Herb Allison, Tim Massad, and Matt Kabaker. They
designed a very complicated set of programs in a very short
period of time, for which there had been no precedent, in
modern financial history, which, as you have acknowledged, have
been much more successful than almost anybody expected. And, of
course, they did the necessary thing.
And I want to conclude by just acknowledging how important
the work of this panel and the other oversight bodies that were
established to look at what we were doing.
I think one of the great strengths of our country is that
we subject the judgments of public officials to very difficult,
rigorous, independent oversight. I don't agree with all the
judgments that you have made or the judgments that the other
oversight bodies have made, but you have--you play a necessary
function. It's part of rebuilding confidence in public
institutions of the United States. And we have been very
careful, where you've made recommendations that we were
confident would improve our programs, we have adopted those
recommendations, and, of course, will continue to do that as we
go forward.
I welcome a chance to talk about these things with you. And
I look forward to being able to respond to some of the other
observations you made in your opening remarks.
[The prepared statement of Secretary Geithner follows:]
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The Chairman. Thank you, Mr. Secretary. In your written
testimony--and member of the panels have said this--discussing
the CBO $25 billion number--are you comfortable with that
number as being the total cost for----
Secretary Geithner. I think it'll----
The Chairman [continuing]. TARP?
Secretary Geithner [continuing]. Be a little high. You
know, these things are very uncertain. It depends hugely on
what happens to the overall economy and to financial markets.
But, based on the things you can observe today, where there's a
market price for an investment, and based on what's reasonable
to expect, I think, about the trajectory of our housing
programs, I suspect the number will be high.
The Chairman. You've talked in panels too, about how well
things are doing right now in the financial system and
corporations and things like that. What--you know, and the main
reason for this hearing is kind of figure out, What do we do to
finish this out and do the best we can, realizing October 3rd,
limited modifications we can make? What's your thoughts on what
you can do, in the rest of TARP, to get the banks to start
lending more money?
Secretary Geithner. TARP's contribution to the financial--
to the remaining challenges in our finances, is largely over.
We have authority, still, to continue this set of housing
programs to make sure they reach as many people as we can.
Beyond that, TARP's contribution will be very limited. The
principal thing we can do to help small banks manage through
this, is to make sure that we're doing as much as we can to
reopen access for small businesses to credit. The burden for
that is going to fall on the small business lending facility
that Congress passed in September of last year.
The Chairman. So, just--I mean, you basically feel that,
under TARP, there's--the fact that banks are--have all this--
trillions of dollars on hand, and not loaning, is something
that has to be dealt with in a different way, other than under
your TARP.
Secretary Geithner. Yes. I think this is a really important
thing to look at. What matters in crisis response is to get
credit flowing again, because it's the oxygen that economies
require to recover.
How should you measure how effective these programs were in
this context? The only real measure you can look at is what
happens to the price of credit--how much it costs for somebody
to borrow, a business to borrow, for a person to send their kid
to college, for a municipal government to borrow to finance
critical services, the costs of a mortgage. And all those
measures of the costs of credit, as you know, were at panic
levels in the----
The Chairman. Sure.
Secretary Geithner [continuing]. Fall of '08. And were at
panic levels in early '09----
The Chairman. Right.
Secretary Geithner [continuing]. And then have come down
dramatically. If you look at how much banks are actually
lending, lending volumes are lower than they were before the
crisis.
The Chairman. Yeah.
Secretary Geithner [continuing]. But, that is no surprise,
because this was a crisis brought on by the reality that people
had borrowed too much. And when the economy shrinks, the actual
outstanding volume of loans is going to fall. But, the test of
whether credit is more available or not----
The Chairman. Right.
Secretary Geithner [continuing]. Has to be measured in the
price of credit.
The Chairman. I got it. And I understand. And that's a
major objective of TARP. But, I think--a number of panels
talked about perceptions, and I think one of the real problem--
when I travel around, I talk to people that go to banks and
people--not just in the home-building market; small business
people, everyone--it's like, ``The banks won't lend me the
money.'' Now, again, they, many times, say it's the regulators.
I don't--and many times I don't believe it is the regulators. I
think they just don't want to loan the money. And so, I'm just
saying--and I understand everything that you said--we--I may
agree--I agree with most of it, I may not agree with all of it.
But, in the next--you know, with the rest of the TARP--for the
balance of the TARP, you do not feel there's anything really--
--
Secretary Geithner. Not through TARP.
The Chairman [continuing]. Under that----
Secretary Geithner. Again, the----
The Chairman That's a good enough answer.
Secretary Geithner. Right.
The Chairman. That's good enough.
Now, how about--now, the other problem we have--again, it's
not a perception, though; it's a real problem. People are out
there not having jobs. And corporations have--earnings are up,
Dow Jones is doing great. You know, you--and you have
corporations with trillions of dollars on their balance sheet,
in cash, and they're sitting there. And some corporations are
going to the point of actually, you know, buying back their
stock. And you're sitting there saying, ``Hey, man. This is
like, `let 'em eat cake.' ''
So, my point is, is there anything you can do, under TARP?
And I--and the reason I raise this is because everyone here,
all six of us, have talked about TARP successes, credit, all
those things, but we've all said the same thing, and that is
that the problem we have out there now is, people don't have
jobs and people can't borrow money to get their house or to get
their companies going. So, that's why I'm zeroing in on this.
There may be--a perfectly okay answer is ``no,'' but I'm
just saying, when you look at the corporations and where
they're structured, is there anything you can think of that we
can do? Because it's so important.
Secretary Geithner. Well, I think the--again, the most
important thing for the government, in terms of economic policy
now, is to put in place things that'll help raise the rate of
economic growth and speed the path of getting more Americans
back to work. TARP itself now has done what it had to do----
The Chairman. Right.
Secretary Geithner [continuing]. Which is to get the
markets to reopen for credit. But, the burden for achieving a
more rapid pace of growth, getting more investment back to work
in the United States today, is going to have to come through
other policy instruments.
The Chairman. Oh, to Mr. McWatters. I'm sorry.
Mr. McWatters. Thank you, Senator.
Mr. Secretary, when you consider the potential legal and
economic consequences of the following five things, and I'll
read them:
One is the foreclosure documentation irregularities; the
robo-signing problem; the failure of some securitization trusts
and others to obtain properly endorsed mortgage loan notes and
properly assigned mortgages and deeds of trust, as required by
local law; the challenges presented by the Mortgage Electronic
Registration, or MERS, System; the exercise of put, or
repurchase, rights by securitization trusts, as well; number
five is the filing of wrongful foreclosure suits and other
legal actions.
Are you concerned that any of the largest financial
institutions will experience a solvency, liquidity, or capital
crisis as a result of these items?
Secretary Geithner. No. I think they pose very substantial
challenges to the system, still. And I should be careful to
acknowledge that, because of the seriousness of these problems
we have a task force, chaired by myself and Sean Donovan, that
includes 11 Federal agencies, bank supervisors, FHFA, the FHA,
the Department of Justice, the FTC, that is undertaking a very
careful, comprehensive look at all those concerns so we can get
a better handle on their potential risk, but, more importantly,
so that we can fix them and make sure that people who were
disadvantaged by the mess are provided some relief, to make
sure that, looking forward, homeowners still at risk are given
a better chance of staying in a home they can afford, and to
make sure we fix the system for the future. Very substantial
challenges, still. That task force is likely to be in a better
position to provide an evaluation of where we are, what's next,
sometime in the first quarter; I hope early in the first
quarter.
Mr. McWatters. But, do you foresee having to implement a
program to purchase distressed RMBS or trouble loans from the
financial institutions themselves?
Secretary Geithner. I do not.
Mr. McWatters. Okay. So, as far as you can tell now, no
TARP-2.
Secretary Geithner. No.
Mr. McWatters. Okay.
What about rating agencies? Do you believe that rating
agencies themselves may take a different perspective? And once
these, particularly, put-rights are exercised and a judgment or
two comes down--and the judgments may very well be large--do
you think the rating agencies will react properly, overreact,
downgrade the stock?
Secretary Geithner. I would never want to predict that
rating agencies will react appropriately. Rating agencies, by
their nature, because the future is uncertain and these are
complicated, are--you know, not to be unfair--react slow and
late on these things. So, I wouldn't make any judgment on
whether they're going to be prescient or wise or early or late
on those things.
Mr. McWatters. Okay. So, to recap, there may be some
systemic consequences, but they do not rise to the level of
needing a TARP-2 or needing an across-the-board repurchase
program.
Secretary Geithner. No. I didn't use the word ``systemic.''
I just said they would--they're going to present--these are
going to present serious challenges to the system, as they have
for a long time. You know, we're not in the first inning of
this housing crisis. This started and peaked at the end of
2006. And it's going to take some time, still, for investors,
for rating agencies, for creditors to fully evaluate the
financial implications of this for individual institutions. The
market is finding its way now to feel a little more comfortable
about how to dimension the potential risk, but it's going to
take--that's going to take a little more time.
Mr. McWatters. Do you anticipate that the Federal Reserve
may use part of the funds in QE2 to purchase some of these
distressed assets off the books of these financial
institutions, much as the Fed did in QE1?
Secretary Geithner. You know, I'm very careful not to talk
about monetary policy anymore. I respect the basic tradition
that the Secretary of Treasury should never talk about monetary
policy. So, you should direct that to them. But, I would not--
well, I shouldn't go further. You should direct that question
to them.
Mr. McWatters. Okay, because my concern is, what I said in
my opening remarks, that the reason the Fed was able to
purchase a trillion-250-billion dollars of government-backed-
mortgage-backed securities was because of the bailout of Fannie
Mae and Freddie Mac. If that had not--if Fannie Mae and Freddie
Mac had been left to fail, then the Fed could have still done
QE1, but it would have purchased at a market price, which would
have been below face. So----
Secretary Geithner. Well, can I--could I respond to that?
Because I think----
Mr. McWatters. Sure.
Secretary Geithner [continuing]. That, without talking
about the Fed, I--because I'm not sure they understand your
suggestion. I believe--and just because I believe it doesn't
mean it's true--but, I don't think there was any plausible
argument to suggest that the U.S. economy could have withstood,
or could withstand today, the effects of letting those
institutions, with $5 trillion in guarantees and portfolio
outstanding, default on those obligations.
And that is why a conservative Republican President decided
it was in the interest of the Nation, and Congress gave him the
authority to intervene to prevent that outcome, and to allow
those institutions to be managed down more gradually over time.
And to suggest--and maybe you're not suggesting this--that we
would have been better off, as a country, financially,
economically, if we had chose an alternative path, I think, is
not a credible argument. And the idea that the overall cost to
the economy and to the taxpayer would have been less because of
that is not a judgment I would support.
Mr. McWatters. No, that is not the point I'm making. The
point I'm making is that the bailout of Fannie Mae and Freddie
Mac should be considered when we judge the TARP program.
Secretary Geithner. Yeah, that I totally agree with you.
Mr. McWatters. Right.
Secretary Geithner. And that's why I said it as I did. And
I think this is very important to recognize. When you look at
the overall cost of this crisis, you have to look at two
things. One is the direct financial costs of all these
programs--FED, FDIC, Fannie/Freddie, TARP, Money Market
guarantee fund, et cetera. Now, you have to look at the
economic costs, too, and the overall fiscal costs of lost
revenues, the cost of unemployment insurance, things like that.
But, on that broad measure of direct financial costs, including
the interventions in Fannie and Freddie, the overall costs will
be incredibly small in comparison to almost any experience we
can look at, in the United States or around the world, even in
much milder, much less damaging crises. And that's because of
the effectiveness of the overall response.
Mr. McWatters. Okay. I agree, all factors should be
considered, but sometimes those factors are not mentioned in
the sound bites.
That's all.
The Chairman. Thank you, Mr. McWatters.
Mr. Silvers.
Mr. Silvers. Thank you, Mr. Chairman.
And before I--Mr. Secretary, before I ask my first
question, I think you mischaracterized my opening remarks, to
make me more of a critic of your work than I am.
Secretary Geithner. Didn't mean to.
Mr. Silvers. I don't think the financial system is weaker
today than it was in 2007 or 2008. I think it's clearly
stronger. I think it's, nonetheless, weak.
Now, Mr. Secretary, at our last hearing, your colleague
Phyllis Caldwell appeared before us. And it gave me some
concern about the administration's policy around foreclosures.
I think I perhaps took that concern out on her more than
perhaps was warranted, given that you--it may be more warranted
to be taken out on you.
Secretary Geithner. I would welcome that. And she's really
excellent at what she's doing. And--but, she can take it, too.
[Laughter.]
Mr. Silvers. Well, Mr. Secretary, I concur with your
judgment on Phyllis. And I--but I wanted to make--to raise
these matters with you directly.
In her testimony, Ms. Caldwell stated in--that slowing down
foreclosures--and this is in the context of the debate about a
foreclosure moratorium--slowing down foreclosures, quote, ``May
exert downward pressure on overall housing prices both in the
short- and longrun.'' Now, Mr. Secretary, I would like you to
respond to the question, a very simple question, which is: In
the view of the administration, do more foreclosures equal
lower housing prices or higher housing prices?
Secretary Geithner. Could I ask you a question first?
Mr. Silvers. Sure.
Secretary Geithner. Just for context. Do you support a
compulsory national moratorium?
Mr. Silvers. Do I? I personally support a moratorium as
part of a larger solution. I think, by itself--and here, we may
agree--I think, by itself, a moratorium is not an answer. Like
any kind of delay, for instance, it doesn't get you where you
need to go. I have felt, for years, going back to 2007, since
you mentioned 2007, that a moratorium would be a helpful
incentive to the parties to reach private solutions.
But, Mr. Secretary, the question is--I'm happy to answer
your question, but----
Secretary Geithner. No, I--that's----
Mr. Silvers [continuing[. This is my turn to ask questions.
Which way--more foreclosures--which way do housing prices
go, up or down?
Secretary Geithner. Well, I don't think that's quite the--
--
Mr. Silvers. All other things being equal.
Secretary Geithner. I don't think that's quite the way to
think about it. You're absolutely right; if you could prevent--
if you can slow the pace of avoidable foreclosures, as we did,
effectively, through these programs, that was one factor that
contributed to bringing a measure of stability to house prices
at a time when house--most people thought house prices were
going to fall another 20 to 30 percent.
But, that's not really the right question to ask, in terms
of this debate right now. The right question to ask now is:
Would a broad, comprehensive, compulsory moratorium----
Mr. Silvers. No, Mr. Secretary, that's not the question I
asked. Because, actually, I don't see that--I don't see the
moratorium as the--the moratorium is a subset of a basic
question that I think the administration's statements over the
last few months have clouded, which is: Are foreclosures good
for our country, or not?
Secretary Geithner. No, foreclosures are not good for the
country, but----
Mr. Silvers. And are they not good for the country because
they lower or raise housing prices?
Secretary Geithner. Well, again, I'm not trying to really--
let me--well, maybe try it this way. If you were to stop
foreclosures from happening and suspend the process nationally
for an indefinite period of time, what would that do to house
prices? It could hurt house prices, because it would--it might
mean that demand for housing slowed, people are unwilling to
buy, and people sitting in neighborhoods in homes where--at the
epicenter of the foreclosure prices, might see their house
prices fall further because the markets would recognize that it
was going to take a much longer time to work through this
process. So, there's a reasonable economic----
Mr. Silvers. Mr. Secretary, isn't that only true if you
assume that, in the end of the day, everyone gets foreclosed
on?
Secretary Geithner. No. I don't think that's true at all.
No, I think that--well, let me say what I think the right
approach is to this. I think that--and we have made this very
clear, and I think we will be successful in achieving this. We
do not believe that banks should move to initiate a foreclosure
process, or continue it, if they cannot be certain that they
have the legal basis for doing so, and if they have not given
that homeowner every opportunity to participate in a mortgage
modification program.
Mr. Silvers. Right.
Secretary Geithner. Now, that approach will----
Mr. Silvers. But, Mr. Secretary----
Secretary Geithner [continuing]. Slow the pace of
foreclosures----
Mr. Silvers. But, Mr. Secretary, that approach--it would
appear to me, perhaps naively, that approach would appear to be
founded on a belief that foreclosures--all other things being
equal, more foreclosures are bad for our society and bad for
our economy. I don't understand why the answer isn't simply
yes, that they're bad. And one of the reasons that they're bad
is because they lower housing prices. And if I were--might
refer to Phyllis Caldwell's testimony again, in her testimony
she said that 25 percent of current home sales are out of
foreclosure. That would appear to be a potent downward force on
housing prices. Do you disagree?
Secretary Geithner. I disagree with your assessment of the
impacts on it and the merits of that approach as an
alternative. Yes, I do disagree with that.
Mr. Silvers. Well, you disagree with the notion that 25
percent of the total sales in the housing market being forced
sales under foreclosure----
Secretary Geithner. I don't think that's the----
Mr. Silvers [continuing]. Forces the prices----
Secretary Geithner. I don't think that's----
Mr. Silvers [continuing]. Housing prices down? How can you
possibly disagree with that?
Secretary Geithner. I don't think that's right way to think
about it. Look, the----
Mr. Silvers. I don't understand why this administration
can't answer the simple question of whether or not foreclosures
drive housing prices up or down. It seems to me that you're
covering for something.
Secretary Geithner. [Laughing.]
Mr. Silvers. And my time is expired.
Secretary Geithner. Mr. Chairman, may I just offer one
thing?
The Chairman. Finish, absolutely.
Secretary Geithner. You know, Mr. Silvers, you're asking a
interesting economic financial question. It's a question for
economists. You know both sides of that argument. I think it's
pretty good on one side. But, I understand your position on it.
But, I think that's not really the question we face. The
question we face is, What is the most effective, responsible
thing we can do, as a country, to make sure that people who are
at risk of losing their home, but have a chance of staying in
their home, have that chance to do so? That is our basic
objective. Now, we have a lot of other things to worry about,
too, because we have to worry how to clean up this mess for the
future, make sure we don't get into this kind of mess in the
future again. But, our overwhelming preoccupation now is, What
can we do to make sure that we're helping people stay in their
homes, who can afford to, and make sure we get through the
damage remaining at least risk to the innocent people that have
suffered so much in this crisis?
Mr. Silvers. We'll take that up in the next round.
The Chairman. Thank you, Mr. Silvers.
Dr. Troske.
Dr. Troske. Mr. Secretary, so in my opening statements I
read a quote from Professor Kenneth Rogoff about how a proper
cost-benefit analysis would be conducted and that ex post
accounting can--that it's important to take--that needs to
price the risk taxpayers took during the financial crisis.
So, given that, I guess I'd like to get your thoughts on
what Professor Rogoff said, the importance of understanding--we
put a lot of--the entire financial--you know, all of the
financial risk--you put a lot of taxpayer money at risk. And
how do we assess that and think about that as a cost?
Secretary Geithner. Well, I have a huge amount of respect
for Professor Rogoff; I've worked with him in the past. And, of
course, what he says is fundamentally right; you have to
measure--as any investor would do, you have to measure return
against risk. And there's a very thoughtful set of questions
you--one should ask about whether we price these investments
appropriately. And looking just at the financial return,
independent of that, is not a fair way to evaluate whether we
got that balance exactly right. But, I believe we did.
And let me tell you the basic theory of the approach we
offered, and some evidence for that suggestion. And this is
not--this is oversimplifying a little bit, but in a financial
panic--in a financial crisis,--what you want to do, where you
have to make emergency assistance available, you have to price
it below the cost of credit in the market at that time. Because
credit is not available--or is at a prohibitive cost--this
would be below that--but it has to be more expensive than
credit would cost in normal conditions. And the virtue of doing
it that way is, as things normalize, you're more easily able to
wean the dependence of the market from those programs, because
your credit--your investments will then become expensive,
relative to the market.
Now, there's no perfect place between those two things.
But, you can't say, ``Because we've priced our investments
below the cost of credit that was available in the market, in a
time of a financial panic, that we underpriced those
investments.'' That would not be a fair way to evaluate it or a
sensible way to run a financial emergency. In that case, I
think we passed what, you know, the central bankers would call
a classic ``lender of the last resort'' classic doctrine. And
the best test of that is how quickly we've been able to get out
of these investments; how quickly, for example, the Fed's
emergency credit programs were wound down; how quickly we were
able to get out of the other emergency guarantee programs. They
were--they proved to be expensive, as growth started recovering
and credit markets started to reopen.
Dr. Troske. Next, I--I certainly--I guess I agree with
you--I certainly agree with you, that the Zandi-Blinder study
is the most comprehensive study out there on the impact of the
financial crisis. I guess my own reaction is, I consider that
to be very disappointing, given that I would--I feel that it's
a fairly cursory study, a fairly short 9-page paper. I usually
make students write much longer papers. It's hard to see how,
in 9 pages, you could do a fair job evaluating, you know, this
complex situation. I think it's--they provide very little
documentation of the methods that they use, make some fairly
strong assumptions, and consider what I feel to be a fairly
faulty methodology.
And so, in my opinion, we need a much more comprehensive--
we need--we still are--we're looking for much more
comprehensive studies. And again, I think that part of that is
going to be function of the information that's out there that
is made available.
In my opening statements, and as we've said a number of
times, we've pushed Treasury to provide more data and more
data, and collect more data. The most recent report does--
continues that.
I guess, you know, give me your thoughts about the--your
efforts to do that, and to do a comprehensive--or to allow a
comprehensive analysis of the financial situation to be done.
Secretary Geithner. First, I completely agree that a
necessary condition for people to evaluate is better data. You
know, we've been very transparent with all the financial terms
of our programs. You can judge their market impact very easily.
And I'm happy to continue to look at ways to get more data out
there. The financial reform legislation does establish, within
the Treasury, the Office of Financial Research, with very broad
authority to improve the overall data available to markets,
going forward. And again, I'm happy to look at other ways we
can get better data out there.
I think we've--there's much more out there than was there
before we came in, on all these programs; that provides a rich
body of evidence for you to evaluate their effectiveness, but I
am happy to try to do better.
Dr. Troske. My time is up.
The Chairman. Thank you, Dr. Troske.
Superintendent Neiman.
Mr. Neiman. Thank you.
Mr. Secretary, as you could tell in my opening statement, I
spend a lot of time focusing on the non-HAMP modifications,
those proprietary mods performed by banks and servicers outside
of the HAMP program. In fact, 6 months ago, when you were here,
we discussed the same topic and you agreed this was an
important part. And I think, because of the additional
information that the Treasury has shared since that time, we
now know it's even more important. In fact, 70 percent of the
modifications are now in non-HAMP mods, really three to one.
What is--do you agree that--what's your assessment? Are
these the way forward? Are they sustainable? And what's your
assessment on these proprietary modifications?
Secretary Geithner. I've actually spent quite a bit of
time, in preparation for this hearing, asking this--very
similar questions. How much do we know about those
modifications? And the quality of debate is not so great, so
far. But, I think the general sense of my colleagues is that
the majority of those modifications are lowering monthly
payments quite substantially. And the--one of the most valuable
things we did, in setting an industry standard for
modifications, was set a bar that people could strive to. But,
I would like more data on that. And we're going to look at ways
to do that.
Mr. Neiman. So, because--and you're right, I think the
information that's coming out about the reduction in
modification payments is out there, generally, with respect to
non-HAMP mods. But, isn't the heart of the issue the
sustainability and the length of those modifications? Under
HAMP, those modifications are 5 years; and then reset to the
historic low rates of today, we don't know the information,
with respect to the non-HAMP mods.
Secretary Geithner. I agree. I think that the three
measures you want to look at are: What is the magnitude of the
payment reduction? How long is it in place? And what is left,
in terms of the remaining balance of obligations, after the
modification period expires. And, as I said, we're--we'll look
for ways we get better information out there to assess those
programs.
Mr. Neiman. And the HAMP monthly reports have really been
improving month over month, and have, now, greater information
distinguishing the performance by servicer. Last week, in the
New York Times, in a big story focused on large servicers, non-
HAMP modifications, and highlighting the differences. So, in
the cases of borrowers who were denied a HAMP modification,
only 14 percent, for example, received a non-HAMP mod at B of
A, but over 40 percent received a non-HAMP mod at Wells Fargo.
How do we explain these differences?
Secretary Geithner. I don't actually know. I think--but,
it's a very good question. And again, I'm happy to pursue that
with my colleagues and see if we can give you a better sense.
Mr. Neiman. Yeah. I--to the extent that this type of data--
and we had the same discussion with Phyllis Caldwell. She said
a lot of this data is held by supervisors. And when we talk to
the supervisors, it's supervisory material. So, to the same
extent that this data has been voluntarily provided, with
respect to the HAMP modifies, I think the information, with
respect to the non-HAMP mods, would be extremely important to
assessing the program.
Secretary Geithner. Yes, I agree. And again, we're happy to
take suggestions. As you noted, one of the things we have
done--and we did it early, in successive waves--is put out very
detailed metrics of performance by individual servicers on
modifications under HAMP, but also on a whole range of other
measures of customer service, which, as you know, has been
abysmal. And if there are other ways we can improve the quality
of information out there, that would be good. And it's
valuable, not just because it gives a chance for people to look
at it, it's valuable because it changes behavior.
Mr. Neiman. Yeah.
Secretary Geithner. It's a--it serves as a form of
conscience.
Mr. Neiman. Because I think even the data that I cited,
with respect to the Times article, may be misinterpreted. It
doesn't necessarily mean that Wells is three times better than
B of A. The portfolio itself may have characteristics that
drive those. So, I think--we've talked about, in the past, also
the need for a mortgage performance data system, similar to
what we have on the origination side, under HMDA. Do you have
a--you know, a view as to the need at this point? Do these
types of data needs demonstrate the need for a--national
reporting requirements for performance data?
Secretary Geithner. Well, I completely agree that we can do
a much better job of having much better data out there for the
world at large. And again, I'm happy to look for ways we can do
that.
Mr. Neiman. Thank you.
The Chairman. Thank you, Superintendent Neiman.
Looking forward and, you know, trying to figure out what we
can do in the remaining days. In your written testimony, I was
interested that you talked about both the second lien program
and the unemployment program. The second lien program is
something that I have become more and more convinced is a
major, major problem, especially where you have a servicer that
has a second lien and the bank has a first lien and the
servicer doesn't want to make a modification. And so, I think
the second lien's a program, but it's been around for a while
now, and it's kind of, you know, based on the data we see, not
as--not what we'd all like to see--and I think I can say all--
everybody.
So, do you have any thoughts about how we can get the
second lien program up and running and funded and moving and--
--
Secretary Geithner. It took a very long time to get up and
running. It's only been in place for a very short period of
time. But, I think it's very promising, in the sense that it
achieves the simple imperative: If the first lien is modified,
the second has to be modified.
The Chairman. Right.
Secretary Geithner. We now have the capacity to do that, we
have better incentives to do that. And so, I think it's very
promising, but it's going to take a little more time to
evaluate the full extent of it.
The Chairman. Do you have any idea how much money you're
going to be able to spend on that program--be able to invest in
the program?
Secretary Geithner. I thought you might ask me about new
estimates of----
The Chairman. Yeah.
Secretary Geithner [continuing]. How much we spend, and----
The Chairman. Only because I'm trying to get--you know, is
this--I mean, I really look at this as a way--and I think the
panel does, if you look at the report--this is a big problem.
Secretary Geithner. Right.
The Chairman. And so, the extent that we can get--and I
know--and I also realize this is an incredibly complex problem,
so getting up to speed's going to take a long time.
Secretary Geithner. Yeah.
The Chairman. And I'm just trying to get a feeling, Is
there anything we can do, or you can do, or anybody, to get
this program to be all that it can be?
Secretary Geithner. We're doing everything we can. I
really--we have a tremendously talented group of people, who
know a lot about the financial markets and about housing, who
are on this all the time. And so, we'll do everything we can to
do that. We'd like the reinforcement. And again, the more we
can shine a light on relative performance of servicers, the
better we can do.
On the cost estimate, I don't know how much we'll end up
spending on this. And, you know, we're in the process of
looking at doing another reevaluation of how much we expect to
spend across these programs. We probably won't be in a position
to reveal that until the budget. But, you'll have a chance, at
that point, to look at the estimates.
The Chairman. Good. And the unemployed program, too. While
the--you know, right now it's not budgeted for any money,
because there are no incentives.
Secretary Geithner. Right.
The Chairman. But--yet clearly we start out on the HAMP
program, we weren't going to have any unemployed. And now--I
mean, it just shows the difficulty of the problem. So, now we
have some--when you look at the debt-to-income ratio on many of
these people that need modifications, the reason is because
they're unemployed. So, an unemployed program, like a second
lien program, is really key to making this whole thing work.
So, what are your thoughts about the unemployed program?
Secretary Geithner. I totally agree. And, you know, under
our programs, servicers are required to provide a period of 3
months forbearance. Usually, that comes later in the
unemployment period of an individual; it comes, you know,
probably months 5 to 8 in their period of unemployment. So, it
has more value than people think, when they just think about 3
months. The other program we have, of course, is our program
with a variety of State housing finance agencies; we're
providing resources to help them run programs that help the
unemployed.
And you made the central point, which is that the principal
factor which is driving foreclosures today is not what was at
the heart of foreclosures at the beginning of the crisis, which
was, as you know, a set of broader lending practices. Now it's
really about unemployment. And that's why I think it's very
important to emphasize that the most important thing that's
going to affect the trajectory of house prices, the overall
number of foreclosures, ability of people to stay in their
home, is what the government is able to do to get the
unemployment rate down much more quickly.
The Chairman. And a remaining question: Since now HAMP is
the--TARP's ramping down, HAMP's ramping down--do you have any
thoughts about programs--I mean, this is such an important
issue and so much has been learned and--on this--is there some
suggestions that you could come forward--don't have to do it
right here at the table, but--I think, more and more, that this
should be the subject of legislation, that, you know, a new
program funded--this is still going to be a problem. You said
it, and I agree, that this is a program that's--years out. This
is absolutely key to the recovery and, you know, we've earned a
lot in the TARP program. But, now we're stymied, in that you
can't make any modifications. So, if you would think about--if
you have any thoughts, I'd like to have those, but also some
kind of a statement on paper.
[The information referred to follows on p. 77]
Secretary Geithner. I would be happy to think about that
and come back to you, and I'm sure my colleagues would be happy
to talk about that in more detail. But, could I just make one
point in response----
The Chairman. Sure.
Secretary Geithner [continuing]. To that? Because I think
it's important to recognize. There have been a lot of people,
very capable people, that spend a lot of time looking at
different strategies to address the housing crisis. And there
are people in this room and people around the country who have
suggested much more dramatic departures of approach in the
past. Of course those would all require legislation, and some
would require substantial additional resources.
But, I think the fundamental question really is a different
question, which is: How many people do you think you can reach?
And the principal gap between the roughly 5 million Americans
today that are delinquent in their loans and the number of
people that are likely to get a modification ultimately is
really about the following. And, let's just look at those
numbers in broad terms. Of that 5 million, roughly 2 million
are now potentially eligible for HAMP and the FHA modifications
programs. The other 3 million Americans that are currently
delinquent on their loans fall into a bunch of different
categories, but many of them are individuals who took out loans
for houses that are really quite expensive, above $625,000, or
whose mortgage burden today is below 31 percent of income,
meaning they can afford to stay in their house, or were
investors, or who had a second home. Now, that's not all the 3
million. Some of that 3 million are loans with servicers who
aren't--don't participate in our program. Some it is people
who--there's no economic case for helping them stay in their
home, it's better to help them, in other ways.
But, if you're going to think about a more dramatic change
in approach, that would reach millions more Americans, you have
to fundamentally decide whether you want to extend the benefits
of these programs, using taxpayers' money, to those classes of
Americans that fall into those categories. And that's something
we looked at very carefully. We did not think that was a
reasonable public policy choice, not a good use of taxpayers'
money, because, again, a very substantial fraction of those
people were investors who had a second home, bought an
expensive home, or who can clearly afford to meet their
payments.
The Chairman. But, there's still--and I'll just touch base
for a second--there's still--you talk about 3 million people
out there who are not in that situation, who need help, who
we've learned a lot about how to deal with them, we've learned
about the servicers and the problem----
Secretary Geithner. Right.
The Chairman [continuing]. With servicers, we've learned
about second liens; we've learned about the unemployed; we've
learned about all these things to kind of get those 3 million.
And they are extremely important to whether we're going to deal
with what everybody on the panel and you have said, and that
is: How are we going to get out of this thing? We've stabilized
things. How do we move to the next step? And if housing doesn't
start being more productive, we--we're in deep trouble.
So, you've got a combination here of people that--the kind
of moral obligation to help people that were not subprime
people, people that--exactly what you said, people that did it
right, they were in the thing, now they've been unemployed,
through no fault of their own, and they're about to go belly-
up. We have an obligation to help those people, morally. But,
what really makes it binding is, we also have an obligation to
do it economically, to get the economy moving, so all of us can
move on and move on to the next step.
So, that's why it's going to be--no one's--you know, my
mother used to have a saying, ``Nothing in life that's
worthwhile is easy.'' This is very, very, very, very, very
difficult, but it's also very, very, very important.
Secretary Geithner. I agree with that. And I think that, as
I said, our work is not done.
The Chairman. Right.
Secretary Geithner. We're--the government is not done. The
damage is still profound and tragic in its dimensions. And it's
going to take a long period of time. And again, the most
important thing for governments to understand in financial
crises is that you have to keep at it, you have to keep working
on it, you can't stop----
The Chairman. Right.
Secretary Geithner [continuing]. Too early. And, as you
know, just in looking at the foreclosures at risk still, and
unemployment at 10 percent, we got a lot of work to do as a
country.
The Chairman. That's right. And I--but I think the thing
is, what we're going to do--and one of the things to do in the
next 3 months is put it together so that next time this
happens, God forbid, there's a much--and, as Dr. Troske said,
you know, some way--and as you said--some way to approach the--
to deal with the whole thing. But, in the interim, you know,
we're still here, as you said, and we----
Secretary Geithner. Right.
The Chairman [continuing]. We're in a deep hole.
Secretary Geithner. Exactly.
The Chairman. And, you know, anything that we can use, from
what you've learned and what your people have learned from
HAMP, we shouldn't just, you know, say, ``Okay, it's now April
3rd, goodbye,'' in terms of anything.
Secretary Geithner. No, no. We're going to be at this, in
HAMP, for a much longer period of time than that.
The Chairman. But, I think we're going to need something
more--as you said, there's lots of things that HAMP is not
going to be able to do----
Secretary Geithner. Right.
The Chairman [continuing]. Based on the way it's presently
structured. And I am sorry for taking so much time.
Mr. McWatters.
Mr. McWatters. Thank you, Senator.
Mr. Secretary, in your opening statements, you said that
the financial institutions are basically stronger today than
they were a few years ago; that they have stockpiled around a
trillion dollars, at the Fed and excess reserves, earning 25
basis points. So, when we approach the question of lending,
when it's not a really question of insufficiency of supply,
there's a trillion dollars they can loan tomorrow, if they
wanted to, so there has to be a problem with demand.
Why is there a problem with demand? I mean, from my
perspective, over the last 2 years there's been a great amount
of uncertainty interjected into the economy; to people, who sit
around their offices, drinking bad coffee out of Styrofoam
cups, who really make decisions on hiring one person or two
people at a time, have simply said, ``You know, I think we'll
hold off on that decision.'' What's going to change in that
perspective over, say, the next 6 months to a year?
Secretary Geithner. I think the principal source of
uncertainty remaining is uncertainty about what is going to be
the pace of growth and demand for someone's products. That is
principally a question about, How fast is our economy and the
global economy going to grow?
There is more uncertainty about that than is typical
because of the scale of the damage caused by the crisis and the
basic shock provided to confidence in the depths of the panic.
And the scars of that panic last a long time; I mean, it's just
understandable. People are much more--are still more
economically insecure or uncertain today than they were,
really, anytime in generations in this country, because the
crisis was so severe. That's going to take some time to heal,
but it is healing.
Now, the best measure of whether this is getting better
again is what's happening to the underlying pace of demand,
what's happening to the forecasts for demand. And those show
gradual healing. And if you look at how companies are behaving,
it also suggests a little bit of growing confidence and
optimism. I'll just give you one--a couple measures of that:
As I said, the private-sector job growth is faster,
stronger than happened in the last two recoveries. And business
investment spending in equipment and in software ran at a rate
of about 20 percent, the first 6 months of this year; about 12,
15 percent in the third quarter; and still looks quite strong.
So, businesses are spending again, because they want to make
sure they have the ability to participate in the recovery
that's coming. And that's encouraging.
And again, that's going to take a little bit of time to
heal, still. But, I'd say the best thing to say is: gradual
healing, gradual improvement in confidence. But, ultimately
what's going to generate more confidence is just the reality of
growth getting gradually stronger.
Mr. McWatters. Okay. Thank you.
November 17th, the Federal Reserve announced another round
of stress tests, but, for reasons which I'm not sure if I fully
understand, these stress tests will be kept secret, they will
not be disclosed. I doubt if you made that decision, but can
you comment on it?
I mean, I guess I'm troubled that, somehow, transparency in
this is not complete.
Secretary Geithner. Well, I think, as you know, I am a very
strong advocate and, of course, was the principal architect of
the decision, back in early '09, to force our major
institutions to go through the stress test, and to disclose the
results in enough detail so investors could assess on their own
whether they were realistic and appropriately conservative. And
that was a remarkably effective approach, because it allowed
these firms to go out and raise a lot of capital much earlier.
And if you contrast that experience with what Europe is
still going through, you can see the benefits of having a very
detailed level of disclosure on conservative assumptions about
potential losses. It's a very good strategy. And I am very
confident that a regular part of risk management and
supervision in the future for our system will be regular public
disclosure of stress tests by major institutions. I can't speak
to any of the specific things about what the Fed announced
recently, but I'm very confident that, looking forward, we, as
a country, will go through regular publicly disclosed stress
tests of our major institutions.
Mr. McWatters. Yes. I know, though, but every day we read
in the papers about putback rights, lawsuits, MERS, robo-
signing, and a lot of these stress tests, I think, were
initiated based upon that. So, I think it would be helpful to
disclose.
Let me ask one other quick question. Do you believe that
Fannie Mae and Freddie Mac should ride down the principal of a
large number of their underwater mortgages through
participation in the FHA's short refinance program?
Secretary Geithner. There are--you know, we have a
principal reduction program in our--Treasury's housing
programs. And we--and the FHA's--what's called, in shorthand,
their ``short Refi'' program--both those things, we think, have
a lot of benefits. And we think there's a pretty good economic
case for Fannie and Freddie to participate in those programs.
And we're in the process of talking to the FHA about those--
about the merits of those programs, about their concerns. And I
can't say, at this point, whether I think they're likely to
adopt them, or not. Again, we're trying to make sure we
understand their concerns, and they've got a different set of
objectives; in some ways, different constraints. But, I'm
hopeful that they're going to find a way to participate in many
of these programs as possible.
Mr. McWatters. Okay. I need to finish up here.
But, if you are successful in encouraging them--and I think
some news reports have said, the Treasury's actually
``pressuring''--that's not my word--what's your projected cost
of doing this, riding down those loans?
Secretary Geithner. Well, the--you--there's two ways to
think about the costs in this. You remember the--Fannie and
Freddie and the government own all this risk today. So, if you
do things that improve the odds that house prices will be
higher in the future, that defaults will be lower in the
future, then you're going to improve the overall quality of the
portfolio of these entities of government, and reduce the
overall losses to the taxpayer. So, we have to link it--look at
the financial implications of these programs through that
broader prism, which is what we do, of course, and we want to
encourage the individual agencies to do, as well.
Mr. McWatters. Okay. My time's up. Thank you.
The Chairman. Thank you, Mr. McWatters.
Mr. Silvers.
Mr. Silvers. Mr. Secretary, first let me say, I appreciated
very much your answers to Mr. McWatters' questions. I thought--
on both the macro part and your final answer about the FHA/GSE
issues, I think you're spot on.
I'd like to follow up some more on the question of--that my
colleague, Superintendent Neiman, raised about non-HARP--non-
HAMP modifications.
But, first let me ask you this. The CBO, in the--as part of
their $25-billion number, is projecting a--only a $12-billion
expenditure out of a potential 75. Do you agree with that
projection? And do you think that--is that good news or bad
news?
Secretary Geithner. I think it's bad news, but I think it's
a little low, based on what we know today. I think it's too
low, too pessimistic. What we set aside was more like 45 or 50.
They expect we will spend only 12. I think it's too low. But,
as I said, we're going through a comprehensive assessment now
of what we think we're likely to spend in these programs. And
we'll probably be able to share that with you sometime in the
first quarter.
Mr. Silvers. So, you're not satisfied with the type of
overall impact that that projection would sort of--it would
appear to presume.
Secretary Geithner. Look, my obligation is to make sure
that these programs reach as many people as possible. And the
more people we reach, the more we will be spending. I think
it's a good use of the limited resources we have as a country,
because the returns, in helping the country through this
housing crisis, are very high, overall.
Can I just say one quick thing, Mr. Silvers? I want to say
one thing in response to the question about how you evaluate
risk and return on these things. And I think this is
straightforward. You have to look at, not just whether you got
a--you know, we got a 20-percent return on some of these
programs. You could ask, ``Relative to what risk?'' But, you
know, we're the government, we're not a investor, we're not a
hedge fund, we're not a vulture fund. And the impact of these
programs should be judged by, What did you do to overall
economic growth, access to credit, as a whole? So, when you
think about the return to the taxpayer, the most important
return is not the financial return to the Treasury and
investments, it's about the broad impact of these programs.
Sorry, Mr. Silvers.
Mr. Silvers. No, in fact, Mr. Secretary, that--your remark
is very helpful to me, because I wanted to ask you about
precisely that issue, in relationship to your--the--a term you
used several times, around foreclosure--around mortgage
modifications, which is the question of what the homeowner can
afford.
What exactly do you mean by that term? Do you mean what the
homeowner can afford--consistent with what? Because, if the--to
try to be more precise about this, the--we know what the
homeowner can--it may be that there's a gap between what the
homeowner can afford--all right?--and what a financial
institution views as the point at which they would start to
lose money on the mod.
Secretary Geithner. Well, I----
Mr. Silvers. Why don't we think about that gap, in light of
what you just said about the larger negative externalities of
foreclosures, which is what I was trying to get at in my
earlier questions.
Secretary Geithner. Right. Well, the--no perfect answer to
this--the standard we've used in our programs is to say that we
want people's payments to be reduced to 31 percent of income.
Mr. Silvers. Right.
Secretary Geithner. Why 31 percent of income? Because, on a
bunch of evidence, that's something that suggests that people
can sustain over time----
Mr. Silvers. But, Mr. Secretary, that's not what I'm
asking. I mean, I know what the number is. But, when that
number supports a payment that's ``here''--right?--and the NPV
model, which is essentially a model of the economics to the
banks, supports a payments that's ``here,'' that the homeowner
can't afford--right?--but--so then there's a gap between what's
in the bank's interest and what's in the homeowners' interest.
If that gap--right?--means that you go to foreclosure, then
all that negative stuff that comes down on our economy, you
were describing earlier, happens. Now, if--in order to close
that gap, you've got to hit--you've got to take a hit to
principal--all right?--and the bank takes a hit, which they
don't like--all right?--which--is that a--it seems like we're
basically saying--when that gap opens up, we, basically, let
the bank make the call. Am I right about that, or--and why does
that make sense? Why shouldn't we be asking--and I think Mr.
McWatters sort of gets at this a number of different ways, as
well--Why should we be asking the banks to take something of a
hit, so we get more of a--across a whole real estate market,
better outcomes?
Secretary Geithner. It's a very good question. And, you're
right that part of the difference between the number of people
we've reached through permanent modifications and those we
haven't is where there's a--but it's a relatively small number
of people--are where the--to use the technical term, ``the NPV
return is negative.''
But, let's think about the implications of what you're
suggesting. I think to decide that we're going to take the
taxpayers' money so that people can afford to stay in a home
that is really beyond their capacity to afford, because we want
to avoid the broader negative consequences, collateral damage
of more foreclosures, is asking, really, Is that a fair use of
the taxpayers' money? And how do you feel about----
Mr. Silvers. But, Mr. Secretary, I wasn't asking about the
taxpayers' money. I'm asking about the banks' money.
Secretary Geithner. Well, you--I think, as you know--but,
again, this is a broader question that goes to the question
that your Chairman raised earlier, is--we do not have the legal
authority to compel certain types of performance by banks in
this stuff. Now, Congress could decide to give it to us; I
suspect they would not. They could. But, that option is not an
option available to us at this time. It was not available when
we designed the programs themselves.
Mr. Silvers. But, then--Mr. Secretary, can I just--I mean,
I disagree with your characterization of the leverage you have
around this question, because I--which I think is implied by
your statement about not having legal authority. I think the
web of relationships that exist with the GSEs, with the Fed,
and the like, give you, I think, a fair amount of ability to
open that question up.
But, I want to take you to one last place, with the
Chairman's permission. Given this--given the fact that this is
a difficult problem, and given, I think, the--what is clearly,
as a matter of numbers, the increasing reliance on non-HAMP
mods across the market, to drive the mods, I am puzzled by what
I read--and maybe I read incorrectly--to be Treasury's
opposition to having the State agencies, among the uses of the
money that they've gotten from HAMP, use that money to help
homeowners get counsel so that they can then have a better shot
at negotiating mods. I----
Secretary Geithner. Are you referring to----
Mr. Silvers [continuing]. I think I'd like to----
Secretary Geithner [continuing]. Legal aid?
Mr. Silvers [continuing]. Understand that----
Secretary Geithner. Are you----
Mr. Silvers. Yeah, legal aid. Yeah.
Secretary Geithner. It's a good question. We've looked--
we've spent a lot of time looking at this. And, of course, we
do provide resources to help homeowners determine eligibility
for the program and participate in the programs. The specific
question a number of Members of Congress have raised is, Can we
use these this authority to help provide more financial
assistance to legal aid itself? And the way the laws of the
land are written, we cannot legally use TARP or HAMP resources
for that purpose. There's some amendments pending before the
Congress--there's some laws--legislation pending that would
change that----
Mr. Silvers. How did you come to that conclusion, that----
Secretary Geithner. Very carefully----
Mr. Silvers. No, I meant specifically under whose advice?
Secretary Geithner. Oh, we consulted with, of course, a
broad range of lawyers across the government. And I'm very
confident their judgment is right. And I think that's
recognized in the fact that some Members of Congress have
proposed to----
Mr. Silvers. The press reports that you relied on outside
counsel with significant conflicts. Is that----
Secretary Geithner. No.
Mr. Silvers [continuing]. True?
Secretary Geithner. No, absolutely not. We--well, first, we
would never do that. We have, like, plenty of lawyers at the
Treasury and in the Justice Department to make those judgments.
Mr. Silvers. So, you did not ask--it's a false report that
you asked a particular law firm--if you give me a moment, find
the name of it. It's a--it's just false that you asked----
[Pause.]
Secretary Geithner. I think I can help you.
Mr. Silvers. Yeah, you can help me. What's the name of the
firm that I'm trying to find?
Secretary Geithner. I have no idea. I'm sure we asked
people for advice across the--as you expect us to do----
Mr. Silvers. Right.
Secretary Geithner [continuing]. But we don't rely on
judgment--we--the judgment we rely on is the judgment of the
responsible people in executive branch. And I think that legal
judgment is the correct judgment, although I'm not a lawyer.
Mr. Silvers. The letter from your counsel says that,
``Legal aid services are not necessary or essential to the
implementation of the loan modification program.'' Is that the
core of your finding?
Secretary Geithner. No. And I don't think you were quoting
the letter in full. And again,----
Mr. Silvers. No, I'm not.
Secretary Geithner [continuing]. I'd----
Mr. Silvers. If I read it in full, it would take a long
time.
Secretary Geithner. I'd have to go back and read the letter
again. But, I think it's a--can I make a more simple legal
argument, which I think----
Mr. Silvers. Well----
Secretary Geithner [continuing]. I'm not going to do----
Mr. Silvers [continuing]. I'd like you to address why--I
mean, we know----
Secretary Geithner. If Congress, by statute, authorizes and
provides funding for a particular function of government, then
the general judgment of lawyers is: we cannot use another
source of funds to supplement or enhance those--that separate--
--
Mr. Silvers. But, isn't----
Secretary Geithner [continuing]. Authorization. This is an
understandable judgment by lawyers.
Mr. Silvers. But, wasn't that particular authorization
passed after the initial decision not to fund?
Secretary Geithner. I don't believe that's----
Mr. Silvers. Not to allow funding?
Secretary Geithner. I don't believe that's the case. But,
in any case, Mr. Silvers, I'd be happy to respond in writing to
any more questions about the legal basis for it.
[The information referred to follows.]
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Secretary Geithner. I want to say that I think you were
right that there's a very good public policy case for using
resources to help people take advantage of government programs,
manage through a very complicated, difficult modification
process. There's a very good case for doing that. And I have
been, personally, very, very supportive of more government
resources for counseling, for legal aid, generally. And, where
we had a legal authority to do that, we have made TARP funds
and HAMP funds available to help reinforce that objective, for
the reasons you support. But, there's a legal constraint on the
amount--our ability to use TARP for legal aid directly, that
law would have to be changed to rely on.
Mr. Silvers. Mr. Secretary, it puzzles me that when hedge
funds get TARP money, under PPIP, I believe they get to pay for
lawyers. And it puzzles me that a vast amount of TARP money has
been expended on legal counsel for the benefit, obviously, of
the government. It seems as though lawyers are understood to be
a necessary and essential component of all the transactions
that TARP--that HAMP and TARP under--that TARP undertakes,
except when homeowners need the lawyers. It----
Secretary Geithner. It puzzled----
Mr. Silvers [continuing]. Troubles me.
Secretary Geithner [continuing]. Me and troubled me, too,
when I first was confirmed. And I spent quite a lot of time
trying to figure out how we could fix it, but I'm very
confident that the legal judgment our lawyers and Justice made
is the right one. And we'll figure out--see if we fix that
through legislation.
Mr. Silvers. Well, I appreciate your engagement with me on
that. Thank you.
The Chairman. Dr. Troske.
Dr. Troske. Mr. Secretary, I--I think I'm going to switch
gears here a little bit. I mean--and we'll maybe talk about
cars for a little bit.
So, as you're aware, in December of 2008 the decision was
made to use TARP funds to provide financial support to the--
General Motors and Chrysler. Would you have done that? Would
you have made--reached the same decision, if you had been
Secretary at the time?
Secretary Geithner. It was not my decision to make, as you
implied. But, I was aware of the--the merits of the choice at
the time. And I thought what my predecessor did was the right
thing.
Dr. Troske. So, I guess--I mean, and essentially this was
for them to avoid going into bankruptcy, with--I think that was
the alternative at the time. In--and you made the--you alluded
to the estimate that a million jobs would have been lost
through bankruptcy. So, firms as large, if not larger than
General Motors and Chrysler, such as Texaco, United Airlines,
Delta, American, and Polaroid have gone through bankruptcy, as
did Lehman Brothers, and our economy survived. So, would the
world really--would the world today really have looked much
different, had General Motors and Chrysler gone through
bankruptcy in December of 2008? How different would the
unemployment picture be? And so--and tell me why--whether you
think that's true, and what you based that decision on. You
know, what are your thoughts on why it would look different?
What's different?
Secretary Geithner. Look, market economies require failure.
They don't work unless you allow firms to be--to fail when they
cannot make things people want to buy. And, in normal
recessions even, not just in normal expansions, bankruptcy is a
central part of the functioning of a market economy. But,
everything is different when you're in a financial crisis like
what we faced in the Great Depression or what we faced in this
basic crisis. And, in those circumstances, bankruptcy itself
cannot provide an effective way to protect the economy from the
collateral damage of, for example, the failure of major
financial institutions, or in--even in the auto case, the
failure of a concentrated number of major providers. And I
think that--so you have to think about those two different
worlds.
In a crisis, you have to do things you would never do in a
normal recession, and certainly would do in an expansion. And I
think that bankruptcy never works, of course, without there
being a source of lending that is in a position with financing
to help facilitate a reorganization, because companies need
funding to go through that. And in a financial crisis, there
will be no source of Debtor-in-Possession financing on
significant scale. And so, in some cases, the government has to
step in to provide that temporary financing. But, what matters
most--and this is true in the auto case--is, if you do that,
you have to do it on the condition that you bring about a
restructuring that will allow the firm to emerge profitable
without government assistance. And that's what the auto piece
of our strategy was able to achieve. And I think there's no
doubt that unemployment would have been much higher, there
would have been millions more jobs lost, if we hadn't gone
through that. And I thought that was a very well-designed use
of government resources in an acute crisis.
Dr. Troske. Let's talk about GMAC a bit, and the exit plan.
The government's relatively speedy exit from General Motors
contrasts with the lack of clear exit strategy from the
government stake in GMAC. The GMAC management team has
discussed publicly the idea of a 2011 IPO. Given that the
company has reported three consecutive quarters of profits,
what is the current thinking on a timetable for an IPO?
Secretary Geithner. As quickly as we can do it. I think
you--if you look at what we've done across the board, and if
you--again, we're way ahead of anybody's expectations--we are
going to move as quickly as we can to replace the government's
investments with private capital, take those firms public,
figure out a way to exit as quickly as we can. And we're
working very hard with the management and board of GMAC to
achieve that outcome. I don't quite--I don't know how quickly,
but it's going to be much sooner than we thought 6 months ago.
Dr. Troske. To change subjects again and talk about
executive compensation a bit, when Mr. Feinberg testified
before our panel, he stated that if the culture of pay on Wall
Street is not changed in the wake of the TARP, then I think our
work has not been successful and it's not being--and, if it's
not being followed, it is a problem. Do you agree with him?
Secretary Geithner. I would agree with that. If that were
the case, I would completely agree with that.
Dr. Troske. And do you think that's not the case?
Secretary Geithner. Very good question, and a good time to
be asking that question. And I guess I would say the following:
We did two things over the last 6 months or so, one in the
Dodd-Frank Reform Act and one in a set of standards that the
Fed is responsible for enacting--for enforcing, to try to bring
about very substantial changes in compensation practice,
looking forward. The first was a requirement for disclosure and
to give shareholders the right to vote on compensation
packages. That's the SEC's responsibility. And the second is a
set of standards on the design of compensation incentives that
that Federal Reserve and the bank supervisors are responsible
for enforcing. And we'll know more about the results of both
those things on behavior in the early part of next year.
To date, what you can say is, there's been a substantial
shift in compensation. So, there's less in cash, more in
equity. It vests over time. It's more at risk of being clawed
back if firms don't end up performing as well as people had
hoped. That's very good. But, I would say, you cannot say
today--I would not claim that we have seen enough change yet in
the structure of compensation. And that's a very important
thing for us to achieve, because, as you know, those incentives
were so skewed to encouraging risktaking that they played a
material role, I think, in what caused the crisis itself.
The Chairman. Thank you, Dr. Troske.
Superintendent Neiman.
Mr. Neiman. Thank you.
Mr. Secretary, I think you may have anticipated my
questioning around servicer performance, because you may have
preempted me by characterizing servicer performance as
``dismal'' during our last exchange. But, I do believe, you
know, it deserves further discussion.
In fact, Speaker Pelosi, who appointed me to this panel,
made public a letter that she sent, along with other members of
the delegation, to the Department of Justice, to the Fed, and
to the OCC, a letter that describes, in 20 pages, excruciating
detail of examples of real stories from homeowners in dealing
with servicers. It demonstrates their frustrations and clearly,
despite good-faith efforts on the part of the homeowners,
failures of--by the servicers. You know, it highlights areas of
failures to respond in a timely manner; the timeliness of
proceeding with foreclosures while at the same time proceeding
with modifications; as well as a continual evidence of losing
and misplacing documentations.
Do we need national standards for mortgage loan servicers?
Secretary Geithner. I think we do.
Mr. Neiman. Do you--you know, there are a number of States,
including New York, that have models out there. We, over 2
years ago, have put in place, not only a registration of
mortgage loan servicers, but one of the most comprehensive in
the country, that imposes ``duties of care,'' specific conduct
of business rules around fair dealing with customers, with
homeowners, in requiring modification, requiring trained
personnel, and requiring data reporting requirements. Is this
something that could serve as a model at the Federal level?
Secretary Geithner. I think it could. I'm not familiar, in
detail, with what you've done in New York, although I know a
number of people think very highly of it. But, we'll look at
that model and others. But, I think you're making the right
point.
Mr. Neiman. In the--in your efforts to stand up the CFPB,
do you see this as an early priority, this as one of the
mortgage areas, one of the mandated statutory responsibilities
for rulemaking?
Secretary Geithner. I'm not quite sure how early that will
come, realistically. And, of course, as you know, right now
we're focused, overwhelmingly, on trying to make sure we're
fixing the existing problems in servicer performance and making
sure enough people--that we reach as many people as we can, in
terms of modification programs. But, it'll be a very important
priority. You know, as you know, we have a whole set of
complicated work on defining new underwriting standards,
defining what's a qualified residential mortgage, what should
be the basic future of the housing finance system, more
generally. You have to look at these things all together. Not
that we want to take too much time to do them, because it's so
consequential, but we have some time. This is--we got this
terribly wrong, as a country; we want to make sure we get it
right; and we're going to do everything we can to make sure we
have a durable set of fixes.
Mr. Neiman. So, how do we proceed with national standards
to avoid 50 States proceeding down the road, requesting data
from servicers in 50 different formats? Does not this have to
be a priority? If not----
Secretary Geithner. Oh, it will be a priority. I just don't
know yet--I can't be honest with you and tell you whether it's
something where we'll have a proposal in 6 months or 12 months.
Just can't tell you. But, it's absolutely very important. And
again, we'll look to the model in New York and other States to
see what's the best way to proceed.
Mr. Neiman. With respect to the CFPB, do you see a new era
of cooperation? My reference to a cooperative federalism,
particularly between States and the agencies----
Secretary Geithner. I----
Mr. Neiman [continuing]. Particularly the CFPB?
Secretary Geithner. I think we do. And, you know, we're
going to have a test of that in the--in how we deal with this
broad--these broad set of mortgage documentation problems that
have been the subject of many of your earlier comments, where
we have a broad task force of agencies looking at this and
working very closely with the State AGs. We've got a standing
mechanism we call the ``financial fraud task force,'' that
works very closely with the State AGs. The council, that the
Congress established by law to look at financial stability,
gives a seat at the table to representatives of State
securities regulators, insurance regulators, and banking
regulators. You know, we're a country, and we have a national
financial system, and so, if we're going to do a better job, in
the future, of preventing future crises, we have to make sure
that these entities are working much more closely together.
Mr. Neiman. Well--thank you, my time is expired.
The Chairman. Thank you, Superintendent Neiman.
Just a big question. What's the current systemic risk from
troubled assets remaining in banks? Do you think it's just--how
do you see it?
Secretary Geithner. I believe that the U.S. banking system
has very substantial capital on their books today, in the form
of common equity against the assets they hold and the risks
they're taking. And I am much more confident today that we made
the right judgments in forcing enough--that much capital into
the system earlier, and that that'll give us a--very reasonable
prospect of coming out of this stronger. So, I think that what
matters is the capital, relative to the potential exposure
still. But, firms are working down those assets. And most
measures you see of performance of those assets now are
improving, have been improving for some time, even in
mortgages.
The Chairman. The financial system may be stronger, but we
still have more concentration, in terms of the banking system.
What are your feelings today on, you know, Dodd-Frank,
resolution of authority, if in fact one of--because what's
happening more and more is people are just saying--
discussions--what--in our hearings here and everything else,
it's like it's just assumed we'd be in big trouble if one of
these bank fail. So, what's your feeling, right now, based on
the increasing concentration of the big banks?
Secretary Geithner. Of course, you're right that the system
is more concentrated today than it was before the crisis. And
that's sort of an unavoidable consequence----
The Chairman. Right, exactly.
Secretary Geithner [continuing]. In a financial crisis.
But, I--we're much less concentrated than anything other major
economy, in the banking system. You know, we still have roughly
8,000, 9,000 banks, and that's a great strength to our system;
we want to preserve that. But----
The Chairman. But the vast--you--we've got a few banks that
are just extremely big.
Secretary Geithner. We do, but they--again, not to
underestimate----
The Chairman. Yeah.
Secretary Geithner [continuing]. The consequences of this
stuff, but they are much smaller, as a share of our economy,
than is true for any other country, too. So, if you look at the
comparison--you look at Canada, the U.K., Western Europe,
Japan--even our largest banks are much smaller, relative to the
size of our economy, than is true for them, as a whole. If you
look at a list of top 50 financial institutions in the world,
in terms of overall size today, the U.S. banks are not
distinguished on that list, in terms of their relative size.
So--now, that's not to say that it's not a big problem for----
The Chairman. But----
Secretary Geithner [continuing]. The system----
The Chairman [continuing]. In many of these countries, the
banks and the government are so closely aligned. I mean, we did
have--like the Scotland Bank--we did have a----
Secretary Geithner. We would not want to be like them.
The Chairman. Right.
Secretary Geithner. I agree with you.
The Chairman. Exactly.
Secretary Geithner. Yeah.
The Chairman. So, I mean, just--under the resolution
authority, these are still----
Secretary Geithner. They are, but----
The Chairman [continuing]. Banks.
Secretary Geithner [continuing]. The--you know, the most
important things----
The Chairman. Right.
Secretary Geithner [continuing]. That Dodd-Frank did were
to give us the authority----
The Chairman. Right.
Secretary Geithner [continuing]. To force these large
institutions to hold much more capital, recognizing----
The Chairman. Right.
Secretary Geithner [continuing]. The significant risk they
pose to the system as a whole--we have achieved that; to give
us the authority to apply those requirements for capital, those
constraints on leverage, to institutions that are banks, even
if they don't look like banks, like AIG or investment banks or
a range of other institutions that were not regulated as banks
before; and, as you said, resolution authority, which is like a
bankruptcy authority for banks, so that, in the event, in the
future, a bank like that makes mistakes that cause it to fail,
the government can step in and unwind them, put them out of
their misery, break them up, without the risk of collateral
damage to the taxpayer or to the rest of the economy as a
whole. So, I think we're going to be in a much better position
in the future to prevent crises of these magnitude, and to
manage them more carefully. We will have crises in the future,
but the reform bill, to the credit of the architects in
Congress today, will help us fix the fundamental failures that
caused this crisis.
The Chairman. But, as you said earlier, when you're in a
situation of a financial crisis, bankruptcy or anything like
bankruptcy is something you really want to avoid.
Secretary Geithner. You cannot--you can't have liquidation
be a solution to a financial panic; it just doesn't work.
The Chairman. So, it's better to do it when it's not.
Secretary Geithner. Yeah, that's right.
The Chairman. Thank you.
Mr. McWatters.
Mr. McWatters. Thank you. I'll keep this short, because I
know time is fleeting.
To follow with what the Senator said, there's a trillion
dollars of distressed mortgages on banks' balance sheets today.
If those mortgages were mark-to-market and the losses booked
and the capital impaired, would we have a systemic problem?
And, if so, is this thing being--basically being held together
today by accounting convention?
Secretary Geithner. No. That's what the stress test did.
The stress test--what the stress test did was to disclose to
the market the scale of potential losses that banks might face
in the event we had a much worse recession then we ultimately
did, and to force those institutions to hold capital against
those potential losses. And because of that, because we brought
a level of disclosure and reality to those balance sheets,
those firms, on balance, were able to go raise a very
substantial amount of capital from private investors. And
that's the best measure of the risks banks face, looking
forward.
Mr. McWatters. So, if those assets are mark-to-market, the
losses were booked, there would not be a systemic problem.
Secretary Geithner. The major banks in this country have
the capacity to manage the remaining risks they face on their
balance sheets that they took on in the crisis.
Mr. McWatters. Okay. Fair enough.
That's all for me.
The Chairman. Thank you, Mr. McWatters.
Mr. Silvers.
Mr. Silvers. Just briefly.
The firm I was looking for on the foreclosure issue, on the
legal aid issue, is Squire Sanders and Dempsey. You did not ask
their advice?
Secretary Geithner. I have no idea who they are. But, I'm
sure we've asked lots of people for advice, as we do all the
time. But, that's not really the relevant question. The
question is: On whose judgment and what quality of judgment do
we make those decisions? And the judgments are--of course, I'm
accountable for those judgments, but they're made by the
government's lawyers.
Mr. Silvers. Mr. Secretary, I'd--I would appreciate knowing
whether or not you asked that firm for advice. Not now----
Secretary Geithner. I'll be happy to----
Mr. Silvers [continuing]. Obviously, but if you could----
Secretary Geithner [continuing]. Get that to you.
Mr. Silvers [continuing]. Pursue that.
Now, secondly--and this is, I think, much in vein of the
Chair and the prior--and Mr. McWatters' question--there's a lot
of numbers in our banking system. I watch one of them, because
I feel like I understand it. And that is the value of second
mortgages on the books with Wells Fargo. And there's about $100
billion on the--on its books, and that number hasn't changed
very much over the last 2 years. That makes me wonder a lot
about (a)--the fact that that number's there and the size of
Wells's service--first mortgage servicing portfolio makes me
wonder about two things.
One is, Does that number bear any relationship to economic
reality, per Mr. McWatters's question? And, more broadly, do
similar numbers on the balance sheets of the other major four
banks bear any relation to economy reality? And (b), if you
take that number and the putback risk number, and the
continuing inability of at least this panel to understand what
the underlying holdings in toxic first-mortgage assets are--
going back to our August 2009 Report--take those three things
and add them up. They seem to represent a threat to the capital
levels of the four large banks. You seem to be quite confident
they don't. Can you explain why? And I don't mean with respect
to Wells, in particular, but with respect to the picture as a
whole.
Secretary Geithner. I mean, there's no certainty about
judgments. And they're all a probabilistic judgment, and they
depend a lot on what is going to be the path of the economy in
the future. But, we helped--what we helped do--and this is a
necessary thing for any system to function--is put enough
disclosure in the market about the composition of those assets,
their quality, the losses you may face on them, how they're
performing, so individuals across our financial marketplace,
credit agencies or creditors, can judge for themselves whether
the capital the banks hold is sufficient against those losses.
And again, I would say the judgment I'm reflecting is the broad
judgment of most people, that these banks all hold very
substantial amounts of capital against the risks they still
hold, they took on in the crisis. But, you can look at
extraordinary detail every quarter, if not more frequently,
about how that stuff is performing and make your own judgments
about how it's likely to perform in the future.
Mr. Silvers. If I might be allowed one final comment, Mr.
Chairman.
Do you then feel--do you disagree with--the thing that
haunts me about those numbers in relation to the question of
the strength of our banks is that when you then take that and
connect it to mortgage modifications--and while the--and there
seems to be just a very fundamental question there, which is:
Are we in a zero-sum game between the strength of those banks--
all right?--and our ability to modify mortgages, and thus, both
the well-being of the American public and the strength of our
housing markets? And I know you--and I can clearly tell, by
your gestures, that you don't believe we're in a zero-sum game.
But, the evidence that I--that comes before this panel strongly
suggests we are. Can you explain why you think we're not?
Secretary Geithner. It would require a little more time
than I have. And I think it's a fundamental question, I agree.
And I think there is a broad perception, you share, that the
principal barrier to reaching people we should be able to reach
through modifications is weakness, in some ways, among the
Nation's major banks. And----
Mr. Silvers. Can I just say----
Secretary Geithner [continuing]. I know, Mr. Silvers----
Mr. Silvers [continuing]. I'm sorry.
Secretary Geithner [continuing]. But the----
Mr. Silvers. My Chair is----
Secretary Geithner [continuing]. Can I----
Mr. Silvers. I----
Secretary Geithner. Maybe we should pursue this in more
detail subsequently. But, you have to come back and look at,
What's the source of the difference between people who are
being reached through modifications today and those who are
not? And, as I said earlier, it's principally about how we
define eligibility, not about the incentives problem banks
face.
The Chairman. Thank you.
Thank you, Mr. Silvers.
Dr. Troske.
Dr. Troske. Mr. Secretary, I want to return to a comment
you made, or, you know, expand a little, get you--push you a
little on a comment you made earlier about executive
compensation and risktaking. And I guess I would argue that a
major part of the excessive risktaking was the result of a
perception of ``too big too fail,'' which, you know, after a
certain point, firms simply didn't worry about what the left
tail of the distribution looked like. And so, I guess I'd like
to--do you think we've fixed--have we put situations in place
that are pushing firms--that are going to require firms to
actually start thinking about what the left tail of the--you
know, the likelihood of an extremely bad loss?
Secretary Geithner. I think you're exactly right, which is
that the two sources of financial crises, classically, are
moral hazard, the perception the government will insulate you
from the consequence of your mistakes, and a fundamental
uncertainty or excessive optimism about how dark the future
might be, how you--using the technical term, how adverse the
tail is in the extreme event.
I think, in this crisis, both were at work. Of course,
moral hazard was the central part of what happened, what went
wrong in the GSEs.
But, the failures across the system, in my view, were not
principally about moral hazard, they were a much more
systematic failure of people to anticipate what might happen in
the event we had a deep recession, where house prices actually
fell very substantially, because that was not in the memory of
most people alive today. Most people ran their banks, their
businesses, their personal finances on an expectation that
house prices would not fall. House prices fell dramatically, as
you saw; and that failure to anticipate and plan for the
potential adverse risk was fundamental to that. In parts of the
system, moral hazard made that worse, like the GSEs; but the
failures were much more systemic from that.
Now, have we fixed that? We'll never fix that completely.
But, what the Dodd-Frank bill does is allow us to constrain
risktaking with constraints on leverage to offset moral hazard
risk and set up a system where, in the event these large
institutions are at the risk of failure again, we cannot save
them, all we can do is dismember them safely, break them up
with less collateral damage. And that will help reduce the
expectation in the market, that is pervasive in any financial
system, that in the future, when there's a risk of failure, the
government will insulate the firm from the consequence. And so,
you can't correct it completely, but we're in a much better
position to reduce that risk, going forward.
Dr. Troske. So, let me--I mean, just--and so, one final
question, just building on that. Until that actually happens--I
mean, until we see that situation and we see--firms, businesses
see how the government's going to deal with that, do you think
that--I mean, do we need to see that before they start
believing that that's the case? Or do you think that they
actually have started responding to it with just--on the belief
that, okay, now----
Secretary Geithner. We're----
Dr. Troske [continuing]. All the--everything's changed?
Secretary Geithner. Remember, you can't run the system on
the hope that they behave or market discipline works that way.
You have to be--you have to do two things. You have to
constrain risktaking, force firms to hold more capital against
the risk of a very deep shock. That's a function of government;
the government failed to do that. You have to do that, as well
as make sure you have the ability to let firms fail without
causing collateral damage. The reform bill gives us those two
authorities. That's fundamental.
Now, again, we're going to have crises in the future, and
how they are managed in the future will depend on the overall
cost of them, but we're in a much better position to prevent
them being this severe than we were before.
The Chairman. Thank you, Dr. Troske.
You also have to anticipate where problems may develop with
particular firms, right? I mean, that's the----
Secretary Geithner. That's really important.
The Chairman [continuing]. The third part of the----
Secretary Geithner. Right. And I think that obviously, you
want people running the institutions, running the central bank,
running supervision, that have that capacity to anticipate.
But, you have to recognize the reality that we don't know what
the future is----
The Chairman. But, it----
Secretary Geithner [continuing]. And that----
The Chairman [continuing]. It is one of the three things--
--
Secretary Geithner. It's one of the key things. But,
fundamentally, you have to make sure your system is strong
enough to compensate for the failures of individuals to
anticipate. Because that will happen. And that's why capital is
so fundamental.
The Chairman. I know. But, I--it's a three legged stool.
Secretary Geithner. Yeah.
The Chairman. If you don't anticipate--because, as you
said, when you get to a bankruptcy, it's a totally different
deal if you're in the middle of a crisis than it is if they're
not.
Secretary Geithner. That's right.
The Chairman. Right.
Thank you, Dr. Troske.
Superintendent Neiman.
Mr. Neiman. Two quick questions. Mr. Secretary, we both
mentioned, in our opening statements, the unfinished work in
bank lending, particularly by smaller banks. Over 50 percent of
the loans to small businesses are made by banks under 10
billion, even though those banks only hold 20 percent of all
bank assets. Could you give us an update on the status of the
implementation of the Small Business Lending Fund?
Secretary Geithner. We are working very hard to put out a
term sheet in public very quickly so that we can get capital to
banks on a large scale as quickly as we can. And we're very
close to being able to do that.
Mr. Neiman. Very close. Will you--be any more specific?
Secretary Geithner. Soon.
[Laughter.]
Mr. Neiman. Soon.
Secretary Geithner. As soon as possible.
Mr. Neiman. And then, finally, you know, in June, when you
were here and talking about the fund, you were relatively
optimistic about bank participation. What's your assessment
today on bank participation? Will it--will the structure of
that program, as you envision it, overcome the TARP stigma that
was of concern?
Secretary Geithner. I hope so, but I can't tell for sure.
There's two types of deterrents--discouragement for banks to
participate. One is the stigma that it's a sign of weakness.
Mr. Neiman. Okay.
Secretary Geithner. It's hard to correct, because, you
know, people aren't going--getting capital from the government.
The other source of deterrence was the fear of conditions,
actual perspectives, that would make the assistance uneconomic
or not attractive. That was the principal reason why a
relatively small amount of the Capital Purchase Program went to
small banks; why hundreds of banks withdrew their applications.
I think we've probably fixed that problem. I can't be sure we
fixed the other problem.
Mr. Neiman. And I think that's the concern we're hearing.
And, you know, I think of it in two buckets: those that are
currently in--those 600 or some banks that are already in the
TARP and--will they view this as a Refi?--or the banks who are
not in the TARP program. And I think the question they have--
and I'd appreciate your assessment--it--will that loan demand
be there for them to utilize that capital?
Secretary Geithner. The--you know, the question of what's
going to happen in loan demand is an excellent question. I
think it's worth--it is worth noting that, if you look at the
balance sheets of the American private sector, nonfinancial
corporate sector, it's not just the big firms; people have a
lot of cash. Now, that's not--the averages mask a lot of
differences and, of course, lots of small businesses are not
sitting on a lot of cash. But, what happens to the loan demand
will depend on, not just how quickly the economy recovers, but
how quickly people start to work through those balances of cash
that they accumulated before the crisis, and built up--many of
them built up, even in the early stage of recovery.
Mr. Neiman. Thank you.
The Chairman. Mr. Secretary, thank you for coming today.
I just want to say that, you know, we have 4 months more to
go. And, in light of the problem out there--the problems out
there, which you talked about and every panel member, we are--
we were looking forward to working for you for the last 4
months, right up to the very end, to do what we can to see if
we can get one more person employed and one more person into a
house without a foreclosure.
So, I want to thank you for your service. And I want to
thank you for your testimony here today.
The record of the hearing will be open for 1 week so that
the panel may submit questions for the record.
This hearing is adjourned.
[Whereupon, at 12:02 p.m., the hearing was adjourned.]
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