Senate Hearing, 111TH Congress - Hearing With Secretary Timothy Geithner

S. HRG.
111705
HEARING WITH SECRETARY TIMOTHY GEITHNER
HEARING
BEFORE THE
CONGRESSIONAL OVERSIGHT PANEL

UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010
Printed for the use of the Congressional Oversight Panel
srobinson on DSKHWCL6B1PROD with HEARING
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S. HRG. 111705
HEARING
BEFORE THE

UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010
Printed for the use of the Congressional Oversight Panel
U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON
62218
2010
For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 5121800; DC area (202) 5121800
Fax: (202) 5122104 Mail: Stop IDCC, Washington, DC 204020001
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CONTENTS
Page
Opening Statement of Elizabeth Warren, Chair, Congressional Oversight

Panel .....................................................................................................................
Statement of J. Mark McWatters, Member, Congressional Oversight Panel .....
Statement of Damon Silvers, Deputy Chair, Congressional Oversight Panel ....
Statement of Kenneth R. Troske, Member, Congressional Oversight Panel ......
Statement of Richard H. Neiman, Member, Congressional Oversight Panel .....
Statement of Hon. Timothy F. Geithner, Secretary, U.S. Department of the
Treasury ................................................................................................................
(III)
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HEARING WITH SECRETARY TIMOTHY

GEITHNER
TUESDAY, JUNE 22, 2010
CONGRESS OF THE UNITED STATES,

CONGRESSIONAL OVERSIGHT PANEL,
Washington, DC.
The Panel met, pursuant to notice, at 10:03 a.m. in Room SD
192, Dirksen Senate Office Building, Elizabeth Warren, Chair of
the Panel, presiding.
Present: Ms. Warren, Mr. Neiman, Mr. Silvers, Mr. McWatters,
and Dr. Troske.
OPENING STATEMENT OF ELIZABETH WARREN, CHAIR,

Chair WARREN. This hearing of the Congressional Oversight

Panel is called to order.
Good morning, Mr. Secretary. We appreciate your returning here
to testify before the Congressional Oversight Panel for the fourth
time.
Since your last appearance here, the panel has issued six more
reports, bringing our total to 20. Our latest reports have covered
a great deal of territory from the Governments interventions in
specific companies such as GMAC and AIG and its broader efforts
to shore up entire markets such as small business lending and
housing.
The breadth of our reports reflects in many ways the breadth of
your ambitions. Under your leadership, Treasury has launched at
least a dozen distinct programs to address different aspects of the
financial crisis. It seems clear that these efforts have had an important impact: markets have calmed greatly since the turbulent
fall of 2008.
But the size and scope of these programs also reflects the variety
of severe strains on our financial system. About 3,000 banks and
six of our largest financial institutions are dangerously exposed to
the faltering commercial real estate market. Many more banks still
have not digested the toxic assets, the toxic mortgages on their balance sheets, and are now facing new demands to pay off bad mortgages they sold to Fannie and Freddie. The financial problems of
these banks are straining their ability to lend to small businesses
that might otherwise be driving the economic recovery and reducing unemployment, and finally, it seems clear that Treasurys efforts to reduce mortgage foreclosures is not working.
As the TARPs end date approaches, this panel must know
whether Treasury has carefully monitored the financial system to
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assess potential risks. We must also evaluate whether Treasury

has diligently measured the impact of its efforts, using credible
metrics to measure the success or the failure of its programs. Put
another way: Has Treasury administered TARP with the highest
possible degree of transparency and accountability?
After all, reasonable people may approve or disapprove of your
plan to stop foreclosures, but no one questions that its progress
should be measured against clear benchmarks for success. Yet,
Treasury has provided no such benchmarks.
Reasonable people may define financial stability in different
ways, but everyone agrees that we can best gauge that stability by
rigorously measuring the condition of our banks. Yet, Treasury has
refused to call for additional stress tests in our financial system.
Reasonable people may disagree about how to help small businesses gain access to loans, but no one doubts that the solution
must begin with a clear understanding of the problem. Yet, Treasury has gathered only sparse data on the small business credit
crunch.
So the point is blunt: Without more candid data on bank stability, on commercial real estate, small business lending, and home
mortgage foreclosure efforts, the shape and depth of the risks facing our economy remain hidden. And without more willingness to
separate programs that have worked from those that have not, it
is not possible to build the best defenses.
The problems in commercial real estate, small business lending,
and home mortgage foreclosure grow more urgent by the day. In
only three months, your office will lose the capacity to substitute
better programs for those that have failed or to develop new programs to deal with coming risks. I will be very glad to see the
TARP end. But I realize that time is running out to make certain
that we have used this money to assure the stability of our financial system. Time is also running out to make certain that TARP
money is used to help families and small businesses the way it was
so quickly used to help Wall Street.
Before we proceed with the Secretarys testimony, I would like to
offer my colleagues on the panel an opportunity to make their own
opening remarks.
Mr. McWatters.
[The prepared statement of Chair Warren follows:]
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STATEMENT OF J. MARK MCWATTERS, MEMBER,

Mr. MCWATTERS. Thank you, Professor Warren.

I very much appreciate the attendance of the Secretary and I
look forward to hearing your testimony.
It is my hope that Secretary Geithner will assist the panel in addressing a number of interesting questions, including the following.
Is Treasury contemplating the allocation of additional TARP
funds to any new programs or the allocation of additional TARP
funds to any existing programs?
Is Treasury contemplating the allocation of TARP funds to any
financial or nonfinancial institution, such as AIG, Citigroup, Chrysler, GM, or GMAC?
Will the taxpayers receive repayment in fullin cashof their
TARP investments in these institutions, as well as other TARP recipients?
What is Treasurys exit strategy with respect to these institutions, as well as the other TARP recipients?
Has TARP enshrined into our law the concept of too big to fail?
In other words, has TARP established an implicit guarantee from
the Federal Government for the benefit of our largest financial and
nonfinancial institutions?
Will the pending financial reform legislation ratify and codify the
implicit guarantee standard?
Would Treasury yet again allocate additional TARP funds to
Goldman Sachs, AIG, Citigroup, Bank of America, and a group of
other systemically significant firms if they notified Treasury today
that they were experiencing a severe liquidity and solvency crisis?
How would the answer change if these institutions approached
Treasury and the New York Fed after the pending financial reform
legislation is enacted? Would the FDIC proceed to liquidate these
institutions in an orderly and complete manner? And if so, are
these institutions too interconnected with the global financial system to liquidate without triggering a cascade of unintended consequences?
Is this not what we were told in the last quarter of 2008 with
respect to Goldman, AIG, Citi, Bank of America, among others,
that certain institutions were simply too big to fail and as such
could not under any circumstances be permitted to liquidate?
In such an event, is the resolution authority included in the
pending financial reform legislation merely a modified TARP II
bailout mechanism dressed up as resolution authority?
AIG was regulated by approximately 400 domestic and international regulators and they, along with Wall Street, Main Street,
and most investment professionals completely missed the vast systemic risks that were percolating within AIG. How will the addition of one more regulator, a systemic regulator, proposed under
the pending financial reform legislation help to solve this problem?
Where do Treasury, the FDIC, the SEC, and the CFTC expect to
find these all-omniscient, sage-like, super-regulators who are competent to cull out systemic risk that others have missed?
Even if the super-regulators timely identify such a risk, how will
they convince Wall Street, Main Street, other regulators, the global
financial community, and Congress that the risks are, indeed, le-
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gitimate and worthy of prompt action at great cost to the taxpayers

and the financial community?
Why did former Federal Reserve Chair Volcker in an interview
on CNBC, and as reported by the Huffington Post, state that the
resolution authority provided in the proposed financial package is
a workable proposition for anything short of the biggest banks?
Does Chairman Volcker believe that it will be all but impossible to
liquidate in an effective manner the too big to fail financial institutions during the next financial crisis? Does he believe that TARP
II will be required?
Why did Treasury on June 11 issue a press release implying that
the TARP program has been profitable? Even the Treasury itself
expects the taxpayers to lose over $105 billion from their investments in the program, and the Congressional Budget Office expects
the taxpayers to lose approximately $109 billion.
Why did Ed Whitacre, the CEO of General Motors, imply in a television commercial that GM has repaid all of its TARP funds even
though the taxpayers have yet to receive repayment in cash for approximately $40 billion of TARP funds advanced to GM? And the
Congressional Budget Office projects the taxpayers will lose approximately $34 billion of their TARP-funded investments in GM,
Chrysler, and GMAC.
Thank you, Mr. Secretary, for joining us today. I look forward to
our discussion.
[The prepared statement of Mr. McWatters follows:]
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Chair WARREN. Thank you.
Deputy Chair Damon Silvers.
STATEMENT OF DAMON SILVERS, DEPUTY CHAIR,

Mr. SILVERS. Yes, good morning and thank you, Chair Warren.
Like my fellow panel members, I wish to express my great appreciation to Secretary Geithner for his willingness to appear before
this panel on a regular basis to discuss the progress of the Treasury Departments efforts under the Emergency Economic Stabilization Act.
Today I think that the Treasury Department and Secretary
Geithner deserve significant credit for the overall course of the performance of the assets the Government has acquired through
TARP.
As my colleague, Mr. McWatters, has pointed out in a somewhat
different tone, the cost of TARP continues to fall and is now estimated to be less than a third of what Treasury thought it would
be a year ago. And while it is hard to know exactly how to understand the full costs of the financial bailout, combining TARP with
other government interventions such as the activities of the Federal Reserve, the public should be aware that the real cost of TARP
is not at this point $700 billion or even the $300 billion that it was
thought to be a year ago, but rather something like $100 billion,
and it is falling pretty consistently.
However, there remain three very significant questions that have
been with us since the inception of TARP.
The first is, is TARP working to achieve its economic goals, reviving credit markets, stabilizing the financial system, and providing
meaningful relief to homeowners facing foreclosure? Projections of
long-term double-digit unemployment and continued high rates of
foreclosure suggest we may not have really repaired our business
credit system or our housing markets.
Second, are we continuing to manage TARPs assets effectively,
particularly in relation to the most troubled of TARPs recipients
and the riskiest aspects of the TARP portfolio. I am here particularly addressing AIG, Citigroup, and PPIP. I am recused from auto,
so I am not raising that matter.
Third, are we taking to heart in the process of regulatory reform
the lessons from TARP? As Congress conference committee takes
up the Wall Street Accountability Act of 2009, I am particularly
mindful of the lessons of our panels detailed examination of the
collapse of AIG in our June report, the lessons for regulatory reform. That report on AIG is a powerful brief for the wisdom of
keeping government-insured liabilities, whether that is insurance
policies or bank deposits, away from highly risky assets such as derivatives and leveraged equities and for the need for a strong resolution authority for systemically significant institutions, a need
which you, Mr. Secretary, have championed I think much to the
publics benefit.
It is a challenge for this panel to evaluate TARP really against
two different metrics, both of which are profoundly important.
One is TARP as literally a set of investments that the public has
made in financial institutions and in certain other firms, evaluated
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against much the same metrics that any investment would be

measured against.
The second is really the purpose of TARP, which was to ensure
that the financial system did not take our economy down. We have
moved, as our chair has noted, from an environment where the
threat really was acute to, I believe, a situation where the threat
from our financial system and the weaknesses in it is chronic. And
that, I think, is really what I hope we can take up today, in addition to the other two subjects I mentioned a moment ago.
Again, my thanks to the Secretary for his agreeing to once again
appear before us, and I look forward to his testimony.
[The prepared statement of Mr. Silvers follows:]
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Dr. Troske.
STATEMENT OF KENNETH R. TROSKE, MEMBER,

Dr. TROSKE. Thank you, Chair Warren.

So I would like to start again, as the other panel members have
done, by thanking Treasury Secretary Geithner for appearing before us today.
As the newest member of the panel, I have not gotten a chance
to hear you testify before us, and I am looking forward to hearing
your thoughts about the financial crisis we have just been through
and what we can expect going forward.
In my opening statement today, I would like to focus on questions I still have about why financial markets in this country have
not behaved as I believe they should have if they were truly a well
functioning, competitive market. I have spent most of my professional life studying how markets function, but there are several aspects about these firms, these markets, and the recent financial crisis that I find both surprising and confusing. I would not have expected to see the events that we have seen if financial markets
truly were well functioning, competitive markets.
While I have not been closely involved in studying this sector,
you, Secretary Geithner, are someone who has played a key role in
dealing with the financial crisis and also are trying to understand
how to prevent a similar crisis from occurring in the future. I feel
that one of the main purposes of the panel is to comment on the
long-run implications of TARP and to comment on the effectiveness
of TARP in minimizing the size of the financial crisis. So your insights are obviously valuable as we try to accomplish these goals.
One of the aspects of the financial sector I find confusing is the
existence of systemically risky or too big to fail firms. The argument has been made repeatedly that the Government needed to
step in and bail out firms such as AIG or Citigroup because the
standard bankruptcy process is slow and disruptive and if these
firms had been allowed to enter this process, it would have resulted
in enormous disruptions in financial markets.
Of course, U.S. bankruptcy laws have been in existence for a long
time, and numerous companies, both large and small, have entered
bankruptcy in the past. So market participants should have been
well aware of the difficulties large financial firms would have faced
if they failed. Given this knowledge, as firms grew they should
have faced increasingly higher costs of capital because of the increase in the cost of potential bankruptcy risk. By imposing higher
capital costs on large companies, the market would have placed a
limit on the size of financial firms below the too big to fail threshold.
Instead, it appears as if these large financial firms faced lower
costs for both debt and equity than smaller financial firms. This allowed these firms to borrow enormous sums of money which they
then used to purchase a variety of increasingly risky assets, and
an upward cycle of growth, access to cheaper capital allowed these
firms to grow even larger and break the too big to fail barrier.
In a well functioning market, this should not have occurred.
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Another aspect of the financial crisis that I find surprising is

that while the market was sending clear signals that the residential mortgage-backed securities were risky, traders purchasing
these assets seemed to simply ignore these signals. Basic financial
theory teaches us that in order to earn an above-market return,
one needs to purchase an asset with above-average risk. This is
simply a formulization of the age-old adage that economists often
use, there is no such thing as a free lunch, which in turn is the
formulation of something mothers tell their children, if something
seems to be too good to be true, it is.
Unfortunately, participants in mortgage-backed security markets
ignored what they were taught in econ 101 and what their mothers
warned them about. Since these securities were earning an abovemarket return based on the level of perceived risk, people who
were purchasing them should have realized that the historic returns were not supportable despite what they were being told by
credit rating agencies. Over time, people learned that these assets
were quite risky. The efficient market hypothesis worked vigorously and many of these assets are now worth much less than what
was paid for them.
In addition, managers seemed to have done an extremely poor
job assessing the riskiness of the assets they purchased. Yet, few
managers have been penalized for their poor performance. These financial companies were essentially purchasing boxes filled with
residential mortgages. These boxes were stamped on the cover by
one of the rating agencies. Managers then chose a combination of
boxes to buy, depending on the overall risk they wanted to achieve.
They threw these boxes in the corner and just waited to cash dividend payments produced by these boxes to arrive. It does not appear that they ever opened any boxes to check to see whether what
was stamped on the cover was an accurate reflection of what was
inside. Additionally, it does not seem that they ever tried to assess
the covariance between boxes which is key for understanding the
amount of risk faced by their firms.
In other sectors, these managers would be out of a job. In the financial sector, they seem to still be working. This is hard to understand.
This all leads me to conclude that the financial sector is simply
not a well functioning, competitive market, and I am trying to understand why.
One of the things I think we need to consider is that part of the
problem is that the Government has long backed up creditors and
insured them at 100 cents on the dollar. This has then led creditors
to be willing to lend money to these financial institutions at a
below-market rate.
[The prepared statement of Dr. Troske follows:]
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Chair WARREN. Thank you, Dr. Troske.
Superintendent Neiman.
STATEMENT OF RICHARD H. NEIMAN, MEMBER,

Mr. NEIMAN. Thank you.

Mr. Secretary, thank you for being here again to speak with the
panel and to the public about important issues impacting financial
stability and economic recovery.
It has been over a year since our first hearing with you in April
09, so it is perhaps fitting to briefly take stock of where we stand
in comparison to that period in history.
First, it goes without saying that progress has been made in restoring financial stability. Although difficult challenges remain, the
crisis levels of last year have receded and capital markets are beginning to function more normally.
Second, a significant amount of TARP funds have been successfully repaid. This is an impressive accomplishment, as many banks
have been able to privately raise capital and increase earnings in
a market that is still constrained by recession.
Finally, many of the causes of the financial crisis that put American taxpayers on the hook in the first place are being addressed
in Congress as we speak.
However, in other areas, needed change has not come as quickly
as desired over the past year. And unfortunately, these are some
of the very areas where Americans are hit the hardest. I may now
be the panels virtual broken record on foreclosure prevention, but
it is critical that families at risk of losing their homes have options
that work. I am particularly concerned with yesterdays Treasury
HAMP report indicating that there are now far more families
whose HAMP trial modifications have been canceled than there are
families whose trial modifications have been converted to long
term.
Further, I think we all agree that small business lending is key
to entrepreneurship and job creation. Yet, we continue to hear that
viable small businesses are unable to access the credit they need.
This was a recurrent theme from witnesses in our recent hearing
in Phoenix. I am encouraged that the House recently approved the
creation of the administrations proposed small business lending
fund. The fund would provide capital to the community and regional banks that are at the heart of small business lending. I
would like to explore small business credit access and other lending
issues with you this morning.
Finally, with the financial reform work near completion, the
United States finds itself in a unique and, some critics say, precarious position. Our country is doing our part in setting an example
as a world financial leader. But as you are more aware than anyone, there are challenges we face within the global community between balancing our role as a leader of financial reform with the
future of our international competitiveness. Time permitting, I
would like to discuss this challenge with you so the public can
more fully gain your perspective on moving our Nation toward reform while at the same time strengthening our position in a global
economy.
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I look forward to your views.

[The prepared statement of Mr. Neiman follows:]
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Chair WARREN. Thank you, Superintendent Neiman.
Secretary Geithner, I would like to recognize you for five minutes. Of course, your written statement will be part of the record.
We will try to hold it to five minutes so there is plenty of time for
our questions and answers. Secretary Geithner.
STATEMENT OF TIMOTHY F. GEITHNER, SECRETARY,

U.S. DEPARTMENT OF THE TREASURY
Secretary GEITHNER. Thank you, Chair Warren and members of

the panel. A pleasure to be back up here again to review progress
and our challenges ahead.
You know, as you know in the fall of 2008, as we confronted the
worst financial crisis this country has seen in more than 70 years,
Congress and the previous administration mobilized an extraordinary financial response. Their actions started the process of stabilizing a financial system that was on the verge of collapse, and
when President Obama came into office, he took the necessary
steps to start to finish that job, to start to save the economy from
what could have been a second Great Depression.
Now, last December, I outlined for this panel an exit strategy for
the Governments emergency programs. This morning I just want
to update you briefly on the impact those programs have had on
our recovery, on the progress we have made in shutting them
down, and their ultimate cost.
First, because of the actions we took to put out the financial fire,
alongside actions of the Federal Reserve and the Recovery Act, the
economy is growing again, exports are rising, manufacturing output is on the rebound, businesses are investing, and so far this
year, the economy has created half a million jobs in the private sector.
Because of our actions, the financial system is in a much stronger position, and because of that, the cost of credit for homeowners,
for consumers, for businesses has fallen significantly. Rates for conventional mortgages and auto loans, for example, are at historic
lows. By acting quickly and with overwhelming force, we were able
to avoid a much deeper recession, a much more costly recession.
Second, we are now in the process of ending our emergency programs and recouping our investments. As you know, we have shut
down most of the programs that characterized that initial phase of
the emergency response, the capital purchase program, Treasurys
emergency guarantee for money markets, and the Federal Reserve
has wound down the vast majority of its special lending programs.
All those programs are on track to generate a significant profit for
the taxpayer.
We are making significant progress getting the taxpayers money
back. To date, more than half of all the money disbursed through
the TARP has been repaid. TARP investments have generated $24
billion in additional revenue for taxpayers. When President Obama
took office, nearly $240 billion of TARP funds had been invested by
the previous administration into our Nations banking system.
Today we have recovered three-quarters of that money, and we are
making progress getting out of AIG and out of GM and Chrysler.
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Third, as many of you have pointed out, the expected overall cost
of TARP continues to fall. Last August, we projected potential
losses at $340 billion. Today that estimate is down to $105 billion.
We view that as a conservative estimate. We expect it to fall further. And as you know, the President has proposed a financial crisis responsibility fee to make sure that the Nations largest institutions that benefited most from these programs bear the cost of any
ultimate losses on this program. That way we will be able to say
to the American people they did not have to pay a penny of their
hard-earned dollars to cover the losses that we may still face in
TARP.
We are on track to shut this program down as scheduled, and we
expect to do so without having used hundreds of billions of dollars
in authority that Congress gave us initially. To say it differently,
we are going to return hundreds of billions of dollars of authority
unused to the Congress to devote to reducing our future deficits
and meeting the long-term needs of the country.
Now, as you said, we all look forward to the day when these programs are history. It is important to recognize, though, they did
what they were supposed to do. There is no job growth without economic growth, no economic growth without access to credit, no access to credit without a stable, functioning financial system. And
our emergency programs played an essential role in starting that
process of recovery and repair.
Now, the damage caused by this crisis is still affecting the lives
of millions of American families and thousands of businesses across
the country, those struggling to find a job still, to make a mortgage
payment, finance their retirement or their kids education, or the
small business owner who still cannot find access to credit on affordable terms.
And that is why in these final months, we will commit to use
TARP authoritycontinue to use that authority to promote and
maintain stability in the housing market and to improve access to
credit for families and small businesses. That is why we are working with Congress and I think are quite close to getting Congress
to adopt a new small business lending facility to help meet the
needs of small business on the credit side, and that is why, of
course, we are urging the Congress to act quickly to enact financial
reform.
We are not prepared to leave future generations of Americans
vulnerable to the devastating effects of the financial crisis, and
they should never again have to be asked to bail out a financial
system in crisis.
The House and the Senate are now very closeI am wrapping
upvery close to enacting the strongest set of reforms we have
considered as a country since the Great Depression. I would be
happy to talk about those in more detail, but it is now time to provide the clarity and certainty about what the new rules of the road
will be. Doing so will help recovery, help strengthen growth, help
make sure that this financial system does a better job in the future
of meeting the needs of Main Street businesses and families, and
it will help restore confidence that our financial system will be a
source of stability, not instability, for the U.S. economy and the
global economy in the future.
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You began with excellent questions. I will be happy to spend

some time with you walking through the challenges ahead.
[The prepared statement of Secretary Geithner follows:]
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Chair WARREN. Thank you very much, Mr. Secretary.
I think your point about the accomplishments of TARP are quite
significant and your emphasis on the importance of a stable, functional financial system is what I would like to talk about. We have,
obviously, made enormous progress in that direction, but part of
oversight is looking where the problems still lie. I do not have to
remind you that in just over three months, Treasury will no longer
be able to initiate or redesign programs under TARP. What we do
not do now we cannot do in the future. So we need to make sure
that we have a good assessment of the problems that lie ahead and
whether our proposed solutions are working.
So I wanted to start with small banks. This panel has written
about the coming troubles in commercial real estate. About half of
the 1.4 trillion in commercial real estate loans held by banks will
be underwater by the end of this year, which will make refinancing
almost impossible for tens of billions of dollars of loans. About
3,000 of the 8,000 intermediate and small banks have lending portfolios that are heavily concentrated in commercial real estate. We
estimate that banks could be facing $200 billion to $300 billion in
losses on these loans.
So, on the current course, that means that hundreds, or even
thousands, more small banks could capsize. What is Treasury doing
now to prepare for these coming problems? Do we need to be reworking any of our current programs, Mr. Secretary?
Secretary GEITHNER. Excellent question. And you are right to
emphasize, as I tried to do, that we are going to be living for a long
time with the lasting effects of this crisis. The damage was extraordinary. It reached far and broad across the American economy, and
if you were in the real estate business, if you were in parts of the
country that have exceptionally high unemployment rates, if you
ran your business on access to credit that got washed out in this
basic crisis, it is still an enormously challenging environment.
And as you are right to point out, the small banks too came into
this crisis, many much more conservatively managed than their
Wall Street competitors, but many of them got themselves in a position where they had exceptionally high, regrettably high, unacceptably high levels of exposure to commercial real estate, and they
still face a very difficult process of adjustment ahead.
We have a set of programs still in place. The fuse on those programs will last beyond the formal expiry of TARP because as TARP
was designed, we still preserve the capacity to implement those
programs after the formal expiry of TARP.
My view is the most effective thing we can do for the credit problems still ahead in the economy and the challenges still facing
small businesses, small banks, because of the pressures on small
businesses, is for Congress to enact this set of credit programs for
small businesses.
The way these programs are designedand it is worth spending
a minute on thisthey do two very important things. One is they
provide a modest amount of additional resources to States across
the country that have programs in place to help provide support to
small banks and small businesses. But alongside that, we propose
a new small business lending facility that small banks will be able
to access by coming to apply for investments from the Government,
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and the more they increase lending, the lower the rate they pay on
those investments.
Chair WARREN. Mr. Secretary, if I could just stop you there to
emphasize a different part of the question. And I understand the
reasons for supporting this when we talk about small business
lending.
But the question right now is that 3,000 of our 8,000 banks
across the country have heavy concentrations in commercial real
estate. As I read it, for example, the new initiatives on small business lending, that is money that is not designed to go into banks
to help them repair broken balance sheets. It is money to go into
the healthy banks, the ones presumably that do not face the serious problems associated with their commercial lending portfolios.
So the question I want to ask and that I want to press on is
when you talk about the stability of the American banking system,
we have 3,000 banks at serious risk that may not survive. What
is Treasury doing about that? Or is the answer we are going to let
them go?
Secretary GEITHNER. As you know, Chair Warren, I cannot associate myself with your basic numbers about the magnitude of problems. That is an issue where really the FDICs basic framework is
probably the most reliable reference we have. I do not know what
their numbers are, but
Chair WARREN. I am sorry, Mr. Secretary. Just so we are all
clear on this, the numbers about concentrations of commercial real
estate come from the banks examiners. Those are not numbers we
generated. They have been generated by those who examine their
books on a quarterly basis.
Secretary GEITHNER. I am agreeing with you about the challenges. I just did not want my agreement with you about the challenges
Chair WARREN. Fair enough.
Secretary GEITHNER [continuing]. To be associated with your
numbers on the picture because that I want to rely on the supervisors to paint that picture.
As you know, we have a very elaborate process, well designed
across this country that our supervisors run with the FDIC for
dealing with the challenges facing our Nation of 9,000 community
banks and thrifts. That process was designed in the wake of a series of past crises. It is a very well designed process, in many ways
the envy of the world, and that gives the Government the ability
to help those banks manage through, but also for making sure that
we can help facilitate the restructuring ahead for that system.
Now, those banks who are under pressure have lots of options.
They can go raise capital. They can shrink lending to bolster their
balance sheet positions. And you are also right to point out that the
programs we designed from the beginning for very important reasons are only available for banks that we believe would be viable
as an approach. But these are very important programs because
what they will help do is make sure the banks face less need to
shrink their balance sheets and have more capacity to expand their
lending to businesses. So they could be very helpful as a complement to the basic programs that the FDIC and the bank supervisors run.
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Chair WARREN. So I am over and I am going to take this off my
time on the next question, but I just want to make sure. What I
am hearing you say is, no reason to change anything. We will stay
steady on the same course.
Secretary GEITHNER. Well, you know, I am a very careful person
and a very pragmatic person, and I am open to any ideas for how
to make sure we are using our authority appropriately to help the
country still manage through the challenges ahead.
But at this stage, I believe that this suite of programs we have
in TARP, alongside the existing programs that the FDIC and the
supervisors manage, with this new small business lending initiative the Congress is considering, is the best mix of solutions that
we have found at the moment.
Chair WARREN. Thank you, Mr. Secretary.
Mr. McWatters.
Mr. MCWATTERS. Thank you.
I will start with an easy question, a softball over the plate. Does
the Administration plan to ask Congress to extend TARP beyond
October of 2010?
Secretary GEITHNER. No.
Mr. MCWATTERS. So TARP will be dead on October 3rd, 2010.
Secretary GEITHNER. This hearing should be a eulogy for TARP.
Mr. MCWATTERS. Yes. Fair enough. Fair enough.
Secretary GEITHNER. As I said many times, we are working very
hard to put this program to rest, put it out of its misery. It is not
going to solve all the problems facing the country. It was not designed to. We are not going to use it that way. We use it very carefully, but it has done the essential thing it was designed to do and
therefore our expectation is it will be allowed to expire
Mr. MCWATTERS. Off to the sunset. Right? Okay.
Secretary GEITHNER. Mr. McWatters, can I just sayyou said
one thing in your opening statement I just want to correct. You referred to a June 11th press release where you said we implied that
the overall program would be profitable.
Mr. MCWATTERS. Yes.
Secretary GEITHNER. I would never have done that. In fact, in
that press release, we were very explicit that the latest cost estimates were in the $100 billion range. I think those are a little
high, frankly. But we have been very careful.
Now, for the bank piece of the programyou know, for many
Americans, the program was defined by the really incredible act of
the Government of the United States putting capital in banks that
represented three-quarters of our Nations banking system. That
was a focus of most of the deep public outrage and angerthat this
country got itself in the position where, to protect the economy, we
had to put money in the institutions that played such an important
role in causing the crisis. It is very important for Americans to understand these were investments. They came with dividends, and
on every estimate I have seen of the bank piece of these programs,
they will return a positive investment for the American taxpayer.
But every time we say that, I always make clear to sayand our
numbers always showthat we still face a very substantial risk of
losses on the range of other programs that Congress gave us the
authority to enact, including the ones we inherited from the pre-
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vious administration, as well as the new commitments we have
made.
But I just want to make sureI would never make that mistake
and will never make that mistake. We always make sure that we
tell people that we are still exposed to a very substantial risk of
loss on the programs we inherited
Mr. MCWATTERS. Right.
Secretary GEITHNER [continuing]. And on some of the things we
have done like in housing.
Mr. MCWATTERS. But the metrics were sort of curious, the $194
billion versus $190 billion. I mean, to a lot of people, it looked like
you were trying to say there was a $4 billion profit there when, at
the end of the day, there is really a $105 billion loss according to
your own numbers.
Secretary GEITHNER. One of the necessary, very important things
about the way we in the United States Treasury have done these
programs is we put out regular estimates, including by independent analysts, of the potential cost of these programs. It is very
hard to find any country around the world that, in the wake of this
crisis, has explicitly identified and provided regular, independent
estimates of ultimate cost to the taxpayer. And I am very committed to that and we will keep doing that. People will come to
their own judgments about ultimately what it will cost. All we can
say is
Mr. MCWATTERS. Sure, and the CBO does that and OMB does
that also.
Secretary GEITHNER. And they will change. You know, life is uncertain. But these programs will cost a fraction of what the critics
feared and what the architects of the program thought was likely,
a very small fraction. And the best way to measure this is to look
at these projected costs relative to, for example, the S&L crisis in
the 1990s, a much more modest crisis, much more simple to solve,
still devastating for the communities affected, but dramatically
higher costs from a much smaller crisis. But anyway, these are
things that people are going to be able to look at independently
over history.
Mr. MCWATTERS. But at the end of the day, $105 billion is a lot
of money.
Secretary GEITHNER. Absolutely, and that is why we are working
so hard to make sure we sure we bring those costs down and we
are doing everything we can to minimize our risk of exposure to future losses.
Mr. MCWATTERS. Well, let me ask you this. Is Treasury contemplating the allocation of any TARP funds to any new programs before October 3rd?
Secretary GEITHNER. No. As I said in response to Chair Warrens
question, at this stage we are not contemplating any new programs
using this authority. Again, we have got an obligation of care and
prudence in this. We are very reluctant to do things unless we
think there is a very, very high return on the taxpayers investment, and we think this is the set of programs today that strikes
that balance.
Mr. MCWATTERS. How about additional TARP funds to any existing TARP programs?
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Secretary GEITHNER. No. We have no plans of adding to the current estimates we have put out of these programs.
Mr. MCWATTERS. Okay.
Secretary GEITHNER. First of all, for perspective, most Americans
think we went in and spent $700 billion, and we are never going
to see it again. In fact, we actually have put out about half of that.
We have got more than half of that back already, and we have substantially reduced the estimates we started with about how much
we would ultimately commit to these programs.
Mr. MCWATTERS. Okay. My time is up.
Chair WARREN. Mr. Silvers.
Mr. SILVERS. Mr. Secretary, I hope I conveyed in my opening remarks my sense that the analysis you just went through is absolutely correct, and I think you and your team are to be commended
for getting where we have gotten.
With that intro, I want to shift to the question of the interaction
of TARP with the larger economy. I asked our staff to give me an
updated list of the metrics of lending. It comports with your written testimony that we are continuing to see declines in loan levels
pretty much across all the different ways in which they are measured. As our chair noted, we think there are some deficiencies in
how much data we are collecting. We would love to see you all collect more.
My question to you is this. Given that data at a time when I
think the Administrations view is that we are in a recovery mode,
the economy is growing, it appears as though the private credit
system is acting as a lag on the growth of the economy. That would
appear to be not what we were trying to get out of TARP. Can you
give an analysis of that and what steps you think need to be taken
to address it?
Secretary GEITHNER. This is a very complicated question, and
you are right. It is the heart of any evaluation of the effectiveness
of any financial strategy like this.
But I have a somewhat different view, which is that I think that
if you look at most measures we can point to of the cost of credit,
of overall financial conditions, they do not suggest that the financial system today is a source of weakness for the overall economy.
In fact, I would say the opposite. There is not a chance that this
economy would have started to grow again in the second quarter
of last year. There is not a chance we would have had this level
of economic growth and this early a return to an economy still
starting to create jobs again, adding hours, incomes growing again,
without the dramatic actions we took, however unpopular, to bring
down the cost of credit and stabilize the system. Now, this is not
something that you can know for certain.
It is absolutely the case that in the housing market, in the commercial real estate market, in the context of small businesses that
were unlucky in their bank or in parts of the country that are still
at the epicenter of the housing crisis or have high unemployment
rates, that credit is still very hard to get. But I do not think on
the available evidence today you can say that the financial sector
itself is operating as a significant drag on the recovery.
One of the reasons why we decidedI am going to finish quite
quickly. Just give me one second.
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Mr. SILVERS. Yes.
Secretary GEITHNER. One of the reasons we decided to act so
forcefully to recapitalize the banking system early on in the crisis
was we wanted to make sure the system was going to be able to
finance recovery, finance growth, and would not operate as a drag
on growth. And I think we are in a very good position to achieve
that outcome, again acknowledging that there is still a lot of damage out there that is going to take some time
Mr. SILVERS. But, Mr. Secretary, I think maybe you are not confronting what I was asking quite head on. I do not disagree with
you that it could have been much worse, that the situation as it
was in 2008 and early 2009 is significantly worse than today. My
concern is that the situation today is not what it should be at this
moment in an economic recovery in terms of the behavior of the
private credit system, not so much in housing. But it is not clear
we really have a private credit system in housing at the moment
with the level of Government support that remains there on the
Feds side, but more on the business side, which is where the job
growth needs to come from. And that brings us back to what I said
in my opening statement about a chronic problem replacing an
acute one.
I wondered if you could focus more specifically on that question.
Secretary GEITHNER. Again, let me try a slightly different approach.
The best measure we have about whether the financial system
is a constraint on growth is what is the price of a loan, credit. So
look at the cost of municipal borrowing, mortgages, business credit
in almost any sector. They are not just lower than they were at the
peak of the crisis. They are very low.
Another example on this question is if you look at the balance
sheets, how much cash businesses have on hand across the American economyagain, the averages mask lots of variation, but the
business sector as a whole has very, very strong balance sheets and
is sitting on a lot of cash.
Now, I completely agree with you about the basic risk, which is
we do not want to have a recovery that is constrained by credit
that is too tight. And credit is still too tight in significant parts of
the American economy.
But on those two measures, I would say I do not believe that we
face a risk of a chronic problem. I would not use that word. But
we are going to keep making sure that we are doing things to make
sure this economy is growing again as strong as it can and that we
are improving the process of repair that has started across the system.
Mr. SILVERS. I think most economists would say that the fact
that businesses are sitting on a lot of cash is not necessarily a good
thing in relation to our recovery. What is your understanding
Secretary GEITHNER. That I would agree with. But again, I was
saying as a measure of financial headwinds, it is a good measure.
Mr. Silvers, I would say that, again, this economywe still have,
I think, roughly eight million Americans still out of work. People
are still living with a basic level of financial insecurity that they
have not experienced in decades. So you are absolutely right about
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that, and we are still at the early stage of fixing what was broken
in this economy. That is going to take more time.
Mr. SILVERS. The Chair was kind enough to give each of us the
same time she took. So I am going to use it.
What I am pushing on is that if you look at those reserves of
cash, although you may have data I do not have, I believe that they
are weighted toward those companies that have access to public
credit markets where the recovery has been more dramatic. If that
is not so, I would appreciate hearing about that. Our anecdotal experience doing hearings and the like, and our reports, suggests that
if you have to deal with the banks as your source of credit, you
have got a much tougher situation as a business person and the
fact that the price of creditlet us put it this way. I think the testimony we have heard from small business people is that the bank
may post a rate at the window, but it is not available to them. The
money is not available at that rate. And that feels like a serious
problem, does it not?
Secretary GEITHNER. Well, I agree with you it is a serious problem. I totally agree. That is why we have asked Congress to enact
a set of legislation that would help mitigate that problem. So I am
not sure that we disagree.
I would just say that on your basic question about whether on
the available evidence you have a financial system today that is a
source of restraint on growth, I do not believe that would be a fair
characterization of the overall average of the American economy.
Absolutely, in parts of the country, in particular sectors, that is the
case. And it would be surprising if it were not the case, given the
extent of this.
Dr. Troske.
Dr. TROSKE. Thank you.
So I guess I would like to start off by getting your thoughts on
or have you respond to concerns expressed by many that for large
financial institutions and their creditors, the Federal Government
has essentially privatized profits but socialized the losses. I think
that seems to be one of the main frustrations that a lot of people
feel about the TARP program. So maybe you could give me your
thoughts on that.
Secretary GEITHNER. I thought your opening statement was very
interesting. I listened very carefully and it is worth going back to
let me just answer a little bit of what I think about why we got
into this mess.
Dr. TROSKE. Okay.
Secretary GEITHNER. You are absolutely right. Market discipline
failed. The market failed to constrain risk-taking by financial institutions. That had two causes.
One was a classic moral hazard risk, the expectation that the
Government would come in and insulate private creditors from
losses. That was acute and conspicuous in the case of the GSEs.
But the crisis had another cause and it was much more powerful
in the moment, and that was that the market, financial markets
had financed a huge growth in leverage in a set of institutions that
were allowed to operate outside the constraints of regulation on
capital and leverage. For example, in AIG and many of our invest-
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ment banks and a vast range of nonbank financial companies, some
of whom called themselves thrifts, those institutions were able to
operate outside the set of constraints and in overwhelming cases
without any history or expectation of government support.
Now, that is not something you can attribute to moral hazard.
That was just a classic lack of judgment by people financing these
firms that we might face a recession with acute losses in housing
prices.
But the key thing is, do we have a set of reforms now in prospect
that will address that risk? And what these reform bills doand
this is fundamentally importantis to make sure that those institutions that essentially operate like banks, whatever you call them,
and take risks as banks are important to the functioning of the
economy. We will constrain their risk-taking. Whether you call
them AIG or you call them Goldman Sachs or you call them J.P.
Morgan Chase, we will constrain the leverage and risk they can
take on. And this is very important. And if they mess up in the future, if they end up getting themselves in a position where they
cannot survive on their own, then we will step in and dismember
them safely, minimize risk of loss to the taxpayer, make sure that
they can be broken up by a quasi-bankruptcy type mechanism.
That is what this reform bill does.
The absence of that authority to constrain risk-taking in the crisis prevention context and the absence of tools to manage their
unwinding is what forced us to take those exceptionally offensive
measures in the fall of 2008 and the first half of 2009 to put out
the financial fire.
Dr. TROSKE. Well, I guess the example of Long-Term Capital
Management would be one of a financial firm and not a bank
where the Government did come in and backstop the firm. Now,
they did not provide taxpayer money, but they did arrange a rescue
of that firm which perhaps would lead one to think that that is
what the Government was going to do for these other firms as well,
that rescue became an expected norm in this.
There are entities out there, presumably credit holders and equity holders, who are supposed to be regulating these firms. The
creditors who do not experience the upside gain are the ones that
have the most to lose and should have been the ones doing it. It
is not a large stretch to think that they were failing in that role
because they felt that they were going to be guaranteed a return
regardless of what happens.
Secretary GEITHNER. I think you are right that all financial systems have this expectation, this risk of moral hazard, this expectation that in the extreme event it is possible the government would
act. And that is the job of oversight and policy and government, to
make sure that because of that risk, you have tough, well designed
constraints on leverage that are imposed and enforced across the
system ahead of the crisis. So none of us run a system and no country runs a system on the expectation that market discipline alone
is adequate to constrain risk-taking. All countries constrain leverage through capital requirements. Some do better than others. We
did it quite well in some parts of the system, but did it very poorly
or inadequately or not at all in large parts of our system, and that
is something we are going to change.
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Dr. TROSKE. And you have mentioned this, the systemic risk regulator or whatever you want to call it. I mean, under the current
system there was the Presidents Working Group on Financial Markets which was supposed to be assessing overall systemic risks to
the economy. At least, that is my understanding. You would certainly know more about it than me.
So what is the difference between what we are setting up going
forward and what we have nowbecause it is the same players as
far as I can tellmany of the same players. What powers will they
have that are different than what they have currently?
Secretary GEITHNER. Excellent question, and both you and Mr.
McWatters have made the basic point. I will tell you what I believe.
We are not going to design a system that depends on the foresight and wisdom of officials sitting in Washington in those agencies to come in and preemptact preemptively to diffuse all future
sources of risk and crises. We hope that will happen in the future.
Maybe it will happen, but that is not the premise on which we are
reforming the system.
What we are doing is to make sure there are clear, public, enforceable constraints on the types of risks that can imperil a system through constraints on leverage and capital and liquidity. We
think that is the most realistic way to make sure that the system
runs with much greater cushions against future sources of loss,
shocks, uncertainty, stress. We will not know where those are
going to come from.
And I agree very much with the premise of both your questions
that if we design the system to work only if regulators are perfectly
wise and brave and preemptive, then we will be consigned to a fate
of future crises like this, and that is not the reforms we are supporting. And I agree with your skepticism about that approach.
Dr. TROSKE. One more. I guess ultimately if the Government is
faced with another crisis in which several institutions are failing
simultaneously, is there anything that will prevent them from enacting a TARP II in the situation in which there is a Bear Stearns
and an AIG and a Lehman, and everybody is failing at approximately the same time? Nothing that I have seen would change anything from what happened in the past.
Secretary GEITHNER. Excellent question. That was the system we
had, and that is what put the Government of the United States in
the outrageous position of having no choices but to come in and
commit an extraordinary amount of resources to put out that financial fire. That was the necessary, unavoidable situation, given the
system we had.
But the reforms that are on the verge of enactment here really
do help fix that problem because again, apart from the crisis prevention authority that they give the Government, which the Government did not haveit did not have the ability to constrain risktaking across vast swaths of the American financial system because
they did not call themselves banks, and we let them operate like
banks. It fixes that problem, but it alsoand this is very importantmakes sure that if, in the end, an individual firm gets itself
in the mess like so many did in this crisis, we will be able to let
them fail, ensure they fail, dismember them safely, wind them
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down, not to give them the chance to survive again, operate again,
but to put them out of their misery without the taxpayer being
forced to absorb these losses or the businesses and families across
the country left with all the collateral damage of their basic mistakes.
These are not great metaphors. But what you want in a crisis is
you want to have the ability to step in. There is fire in a firm or
a set of firms because they were imprudent. You want to be able
to ensure you can draw a line around that fire, prevent the fire
from jumping the fire break and infecting and imperiling the stability of the rest of the system. And that is what this reform does.
Chair WARREN. Mr. Secretary.
Secretary GEITHNER. Thank you.
Mr. NEIMAN. Thank you.
Mr. Secretary, I would like to start off with the HAMP program
and foreclosure prevention. In the Treasury report issued just yesterday, trial modification cancelations nearly tripled from March to
May. The number of families that have received permanent modifications under HAMP at 350,000 is now surpassed by the number
that have been pushed out of the program, almost 430,000. It is
deeply troubling that the homeowners who relied on and trusted
this Government program may be left out in the cold. From the report, of those who were dropped outthe 150,000 in May alone
over 70 percent of those individuals have been making timely payments for 6 months or more.
First, we need to really understand why these hundreds of thousands of modifications were canceled. And while the report issued
yesterday cites several reasons, can you share with us the primary
reason that people were dropped out and what assurances can we
give them that they were appropriately considered?
Secretary GEITHNER. The overwhelming reason is they were unable to prove income and therefore unable to demonstrate that they
were eligible for the program. We made a conscious choice last
summer in putting this program in place, which is that we would
do everything we could to maximize the number of families who
were potentially eligible for this program to get immediate cash
flow assistance. Because of that strategy, we had roughly, at the
peak, 1.2 million Americans benefit from temporary loan modifications that, as you know, substantially reduced their monthly payments. But we let them do that on stated income, knowing that we
would have to go back and be able to demonstrate that they were
truly eligible for that.
Now, that inevitably put us in the position where we are today,
which is that by erring on the side of speed, we put ourselves in
the position where we were inevitably vulnerable to the possibility
that many of those homeowners who thought they were eligible,
said they were eligible, were unable to prove income. Therefore, we
are in a position today where we are, as you said, canceling some
of those modifications.
Now, more than two-thirds, I think, of those people who, as you
said, are in that category of canceled modifications are benefitting
from other modification programs that their banks offer that we
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are not supporting. So that helps temper a little bit the consequences of not being eligible for this program. But again, we
have a careful balance to strike, which is to make sure that we are
devoting these scarce resources to people that are able to prove
they are eligible for the benefit.
Mr. NEIMAN. So what kind of verifiability, audit compliance can
we provide to document this? We hear anecdotal information about
documents being lost, and servicer error in verifying income and
processing other documentation. How can we assure and provide
that level of comfort that servicers are acting properly?
Secretary GEITHNER. I think it is very important to say that
servicers have done a terrible job of making sure that they are
doing everything they can to meet the needs of their customers who
are facing the possibility of losing their home and the most important part of their financial security. They still have some distance
to go to try to make up for that series of basichow should I say
itmistakes, inadequacies in performance.
So what we have tried to do is simplify and reduce the documentation burdens. And we have put enormous pressure on
servicers by putting out very detailed public metrics of performance
so that people can judge for themselves who is doing a good job on
the service side of meeting the needs of their customers and who
is lagging behind in that case, and we will continue to put as much
pressure as we can on them to improve the quality of service they
are giving their customers.
Mr. NEIMAN. Now, you made reference to the fact that a majority
of those who have dropped out of the programwhose trial modifications were canceledwere offered non-HAMP modifications,
these proprietary modifications by the servicer. But is it not true
that the true test will be whether the borrower is better off? Until
we see the statistics on those non-HAMP modifications tosee if
there has been an increase in the cost or the monthly payment
will we know whether those are truly sustainable?
Secretary GEITHNER. I completely agree with you, and that is a
very hard thing to measure, but I completely agree with you.
I think I would say the following. Unlike the situation two years
ago before the Government put out this basic standard for modifications, most of the private modifications out there did not meet
that test. They left the borrower with as much debt, if not more
debt than they had coming in.
But since thenagain, the general impression I have is that the
Government standard has improved and raised the standard of
those private mod programs, and that helps, a little bit, mitigate
that risk. But you are right about the basic
Mr. NEIMAN. Do you expect that the public will be seeing any
data? Has the Treasury been requesting, even if on a voluntary
basis, some of the key elements of those non-HAMP modifications?
Secretary GEITHNER. We are continuing to look for ways to do
that and would be happy to try to be responsive about explaining
what we think is achievable in that area.
Mr. NEIMAN. You know, another surprise that we keep hearing
from borrowers who are now being presented who have been
dropped from the program is that they are responsible now in some
cases for lump sum payments for the discounted amount of prin-
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cipal and interest that was foregone during that trial modification.
And even some borrowers are being assessed late payments for the
six, seven, or eight months they were in the program.
Secretary GEITHNER. Well, as I said, I do not believe that any of
the banks that are at the center of this problem are doing an adequate job now of making up for the mistakes they made and helping their customers get through this problem. And we are going to
continue to, as I said, put enormous pressure on them to try to
make sure they are doing a better job day by day in meeting those
basic obligations to their customers.
Mr. NEIMAN. One provision that I think would be extremely helpfulI have been calling for this for a whileis the creation of a
homeowners advocate within the Treasury. Senator Franken has
proposed an amendment that has passed the Senate, and I would
hope with the Administrations support, we would see a provision
like that and seek your support that it would be adopted.
Secretary GEITHNER. I am happy to consider that.
We are fortunate to have some very talented people who know
a lot about housing involved in essentially designing these programs. We do so alongside the excellent people at HUD led by
Shaun Donovan, and we have a series of hotlines, appeal process
to try toagain, we are moving in that direction. But I would be
happy to consider that.
Mr. NEIMAN. Having an appeal process that people know they
can reach out to Treasury would be a critically important part in
my opinion.
Thank you very much.
So, Mr. Secretary, I want to go back to this question about stable, functional financial systems. We talked about the small banks,
the 3,000 out of 8,000 that have these potentially dangerous concentrations in commercial real estate.
I want to look at the top end. Six of the 19 stress-tested banks
hold commercial real estate loans that exceed 100 percent of their
tier one capital. As you know, the stress tests that were performed
in February of 2009 calculated possible losses only through December of 2010, but the commercial real estate losses, because of the
way they are set up, are likely to be much larger in 2011, 2012,
and on into 2013.
How can you be confident about the stability of these financial
institutions without re-running the stress tests to account for the
coming troubles in commercial real estate lending?
Secretary GEITHNER. As I said, these loans and losses and assets
are going to be an ongoing source of challenge to these institutions,
absolutely. But I think overall it is fair to say, although this is
really a question for the supervisors, that actual losses on the
books of the institutions that were subject to the stress test are
coming in significantly under those estimates on average overall.
And that is really the ultimate test of this stuff.
We are able to say todaybut again, this is a question we look
at all the time on an ongoing basisthat based on what we have
seen so far, the losses are doing better than projected and therefore
the capital positions of these institutions are even better than we
thought we were achieving at the time of the stress test.
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Chair WARREN. But at the time of the stress tests, we only accounted for losses through 2010, and we know that the losses on
commercial real estate, because they were on five-year resets unlike the subprime residential mortgages, are coming up for major
resets in 2011, 2012, and 2013. That is outside the range of the
original stress test.
So I am glad that you think the numbers look better that you
had anticipated for 2010
Secretary GEITHNER. I would say even projected losses
Chair WARREN. Does this mean you are running a mini-stress
test?
Secretary GEITHNER. Well, again, what our supervisors have
doneand they did this, again, on a plan that we designedis they
have put in place a much higher level of disclosure on the exposures the U.S. banking system retains, subjected them to much
more rigorous estimates of potential losses in an extreme scenario
than was true for any of the countries that went into this crisis.
And you are seeing now countries move to adopt that basic framework. And the virtue of this approach was we pushed a lot more
capital into the financial system at an early stage. And again, the
best way to measure this is to look at how the market is judging
the adequacy of capital levels here relative to potential risks. I
think that, again, relative to expectations, is better than we would
have expected. There is still a lot of challenge ahead though.
Chair WARREN. I have a feeling I am going to hear the same answer, but let me just try it again with second liens. Big banks are
still carrying second liens on their books at inflated values. Many
analysts believe there should be a large portion of these loans
should be written off.
As of March 31st, 2010, the four largest banks held $444 billion
in second mortgages and had total tier one capital of only $505 billion.
Do you have any concerns about what this means? Now we are
doing commercial real estate. Now we are moving on to second
mortgages?
Secretary GEITHNER. Well, of course, banks have on their balance
sheet stilleven though they have produced assets to some extent,
they still have a lot of exposure to the challenges ahead facing the
American economy. The question is how much capital are they
holding against those potential losses?
Again, in the judgment of our supervisorsand I think you can
see this judgment validated by the financial markets today, although as many of you pointed out, they are an imperfect measure
of risk and loss. The general sense is that projected losses are less
than they were expected, and therefore more capital is now held
against those losses than we thought would be the case back a year
ago, and that is a good thing.
Now, of course
Chair WARREN. Let me try one more. Fannie and Freddie are
pushing mortgages back to these large financial institutions because they say that the mortgages that were sold to Fannie and
Freddie were not of the quality that they was represented, that
there are some serious problems with them. Fannie does not dis-
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close the requested buy-backs, but Freddie alone requested another
$5 billion in buy-backs at the end of March.
So the first question is, does Treasury have a good estimate of
what the total exposure is to our large financial institutions from
the requests from Fannie and Freddie to buy back bad mortgages?
Secretary GEITHNER. I do not know the potential scale of that
again, but I think it is very unlikely to change this basic judgment
that our supervisors have that the major banks of the country now
hold a level of capital against potential risks that puts them in a
much stronger position than we expected even a year ago when we
included this process. And that goes to each of the things you
pointed out, each of the sources of potential loss still ahead.
Now, again, this is an uncertain world still. We want to be very
conservative in making these assessments, as we were a year ago.
And our supervisors willand this is a great strength of our systemthey continue on a regular basisone of you say in your
opening remarks that we do not contemplate stress on an ongoing
basis, but that is absolutely not the case. A centerpiece of the basic
reform design that we contemplateand again, I hope this will be
a global standardis to say regularlyregular, quarterlydifficult, challenging, forward-looking assessments of potential losses
at least for the major banks that dominate our financial systems.
Chair WARREN. So are you saying that those are ongoing now or
they will be ongoing if regulatory reform passes?
Secretary GEITHNER. Both.
Mr. McWatters.
Mr. Secretary, earlier you said there would be no new TARP programs, but with respect to existing TARP
Secretary GEITHNER. I said right now, we do not contemplate
putting in place new programs or adding resources beyond the
amounts we initially identified.
Mr. MCWATTERS. Okay. So that means there will be no more
money going to AIG or GMAC.
Secretary GEITHNER. Again, I will answer your question again.
We do not anticipate at this stage putting more money into those
existing programs or into those institutions beyond the levels that
are out there that are subject to public knowledge now.
Mr. MCWATTERS. And the same would apply for Chrysler and
GM.
Secretary GEITHNER. Yes. Again, let me tell youlet us do the
other side of your question. We are now on a path to exit from
those companies much more quickly at a much lower estimate of
losses than any of us anticipated. We are starting that process.
AIGwe are bringing down the risks very dramatically, we already
have sold successfully significant parts of that company. We are
going to continue to move as aggressively as we can to get the Government out of those investments, which we only took, of course,
under extreme duress extremely reluctantly. We are making the
same basic strategy in GM and Chrysler. Again, those are commitments we inherited. We are trying to reduce them as quickly as we
can at as low a risk of loss to the taxpayers as we can.
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Mr. MCWATTERS. If there was a double-dip recession and Goldman and Citi and Bank of America and the usual group of too big
to fail institutions came to your office and said we are experiencing a liquidity crisis, would you advance them money under
TARP until October 3rd?
Secretary GEITHNER. I do not ever answer those kind of questions just because they are sort of unanswerable, but if financial
reform is in place, then we will have the benefit of a very well designed quasi-bankruptcy process and a set of emergency measures
to contain the risk of a panic that we did not have in place in the
fall of 2008. And that would give us better choices at that stage.
Mr. MCWATTERS. So assuming those are not in place and we
have the last quarter of 2008 again
Secretary GEITHNER. You are talking about in the 12 weeks remaining
Mr. MCWATTERS. Yes.
Secretary GEITHNER [continuing]. Of this program?
Mr. MCWATTERS. Yes.
Secretary GEITHNER. Well, again, our job and my responsibility
is to make sure we are safeguarding the basic strength of the
American financial system, but again, our system, because of the
actions we took, is in a much stronger position still to manage
through these challenges ahead than any of us expected, and I
think that is a remarkable thing and a very important thing. And
we are going to do everything we can to safeguard that.
Mr. MCWATTERS. Okay. Let us say financial reform is in place.
The same people come to you and say, you know, there is a systemic regulator. The systemic regulator was supposed to look into
a crystal ball and see stuff and
Secretary GEITHNER. Mr. McWatters, that is not what this reform does. And as I saidI will say it againwe are not designing
a financial reform program that rests on the ability of supervisors
to look into some early warning system and have perfect foresight
and judgment and be able to come in and preemptivelywe are not
designing a system that requires that. We will do our best at that,
but we have fundamentally different strategies to say that we are
going to force the system to run with less leverage, less risk of
funding, less exposure to catastrophic risk than was true before.
And that is the best protection we have against systemic financial
crises.
Mr. MCWATTERS. Yes, but the problem with that is that AIG was
not a mystery to people. Most people on Wall Street understood
that AIG was writing trillions of dollars of credit default swaps.
Most people understood that AIG was purchasing billions of dollars
of residential mortgage-backed securities. The problem was, even
though people recognized it, they did not recognize it as a risk.
They did not look at that as risky behavior.
Secretary GEITHNER. I do not agree with that. I think this crisis
is littered with examples of people failing to foresee risks that end
up causing catastrophic damage.
The AIG failure is just a differentand it is a more simple failure. There was nobody responsible with the authority and the capacity to constrain risk-taking by that institution. There were, as
you said, tens and tens of regulators across the United States and
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across the country, but none of them were responsible for constraining the risks that AIG as a group took on, and that was an
avoidable mistake, easy to avoid frankly.
Mr. MCWATTERS. Yes. AIG had 400 regulators throughout the
world.
Secretary GEITHNER. A remarkable thing.
Mr. MCWATTERS. But, I mean, you are saying if there is one
morethere is a systemic regulator
Secretary GEITHNER. You said something else in your remarks
that is not quite not right. We are not adding new regulators. We
are actually reducing the number of regulators in our system. All
we are doing, frankly, is making sure that the people whose job it
is to manage financial stability for the country have the authority
to constrain risk-taking where those risks could cause catastrophic
damage. That did not exist before this crisis. It is why we had the
crisis, and that is not something we are prepared to live with in
the future.
And AIG is the perfect example but it is not the only example
because you can look at Lehman or Bear Stearns or Merrill Lynch
or a whole raft of non-bank financial companies who were taking
substantial risks. The tragic feature of our system was nobody had
the tools and responsibility for constraining those risks ahead of
time. And when they messed up, we did not have the tools or the
choices to be able to let those failures happen without catastrophic
damage.
Mr. MCWATTERS. But that assumes you know what the risks
are
Secretary GEITHNER. No, no.
Mr. MCWATTERS [continuing]. That you can look into the future.
Secretary GEITHNER. Again, the great virtue of capital-constraining leverage is to recognize the fact that we live in an inherently uncertain world. No one will know with confidence what the
risk is or probability is of potential losses associated with some future recession. You do not know that.
The only thing you can doand this is a fundamentally conservative instinctis to force these institutions to run with less risk
against the unlikely but possible risk of another great recession.
And that is an effective tool of constraining risks. Firms that run
with less leverage in a crisis do much better than those that run
with more leverage. That is an achievable object of reform.
Mr. MCWATTERS. If you define a risk appropriately, and you enforce the rules appropriately, that is the only way.
Secretary GEITHNER. Well, again, we think the basic lesson of
this crisis is simple, an objectively measurable set of basic constraints on leverage. Banks should fund more conservatively. They
should not be exposed to the possibility that overnight people
would withdraw tens of billions of exposure and leave them with
the choice of liquidating or doing massive liquidation and
deleveraging that can put huge pressure on the rest of the system.
So I mean, you should judge these things by the alternative. I
am not aware of any credible argument that there is a more effective basic tool than constraints on leverage through capital requirements and liquidity funding as a safeguard. Now, they will not prevent all firms from failing, and we are going to run a system where
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firms can still fail. That is an important part. It helps improve
market discipline. But I do not know of any credible alternative
and no other fundamental feature of financial oversight that does
not begin with well designed, measurable, simple constraints on leverage. They will not prevent all crises. They will not prevent countries from taking too much risk, but they will protect the system
from the kind of damage we saw in this crisis.
Mr. MCWATTERS. Okay, thank you. My time is up.
I will just close by saying I am not sure, with 400 regulators with
volumes of regulations, that adding a few more regulations or another regulator is necessarily going to solve a problem which will
come in the future from creative investment bankers and an investment community that will derive new types of instruments that, for
example, 10 or 15 years ago we did not see. So I will leave it at
that.
Secretary GEITHNER. But, Chair Warren, let me just say maybe
we agree more than you think.
But again, the feature of our system was not that AIG was
crawling with supervisors with the authority to constrain their
risk-taking. That was absent not present in our system. Now, you
are right. If it was present, then you are right. Then changing the
deck chairs in the supervisory community would not be an effective
response and we are not going to do that. That is not our proposal.
It is a much more simple prescription which is to say institutions
that take risk to play this important role of fundamentally banking
in our system need to be subject to conservative constraints on leverage and risk-taking. AIG was not. We will make sure it is.
Mr. Silvers.
Mr. SILVERS. Well, I cannot resist continuing this line of discussion.
Let me observe first, Mr. Secretary, that I think that your fundamental observations about this set of questions are absolutely correct. Our report on AIG showed two fundamental things. One was
that the lines of business that led to the collapse of AIG were those
that were unregulated despite the presence of the 400 regulators.
The 400 regulator number is, in fact, just an indication of the fact
that AIG was a global insurance company and there are insurance
regulators in every country they operate in.
The second thing that I think our report showed was that although I think that we as a panel may disagree with you, Mr. Secretary, about some aspects of what you did with the choices you
had, it is very clear that the choice you did not have in your former
role at the Federal Reserve Bank in New Yorkyour predecessor
at the Treasury, the Fed Board of Governorsthe choice you did
not have was to access a resolution authority that would have enabled you to pick and choose what to do with different creditors in
a systemic crisis.
So I just want to observe that I think your analysis of those two
matters is spot on.
Now, I want to take it a little further from there, though. We
learned as a paneland it is reflected in our report on AIGhow
powerful certain aspects of AIGs structure as a holding company,
what a powerful force they exert on the choices available during
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the crisis, in particular, the way in which the unregulated,
unguaranteed subsidiaries were tied to the regulated guaranteed
subsidiaries of AIG. That is, the derivatives arm and the insurance
companies were tied together by credit rating considerations and
by interlocking default terms in the various credit agreements in
that big, complicated firm.
That seems to me to be a powerful argument for making sure
that in the future financial firms that have government guarantees
behind them, insured deposits, insurance companies are not so tied
up with very risky lines of business, derivatives, proprietary trading, hedge funds and the like, and thus is a powerful argument for
two items currently being debated in the financial reform bill.
The first is the Volcker Rule, the notion that we ought to basically say bank holding companies cannot do proprietary trading,
cannot invest in hedge funds, cannot invest in private equity firms
because it gives rise to this kind of problem.
The second is section 716, the section that essentially requires
that derivative dealers not be within bank holding companies or,
as some have proposed, that they at least be a separate entity
within bank holding companies.
In the spirit of that analysis, I would like you to explain what
the Treasury Departments view is on those two issues today.
Secretary GEITHNER. Excellent question. And as you know, the
members of the Commerce Committee and the chairmen involved,
including Chair Lincoln and Chairman Dodd, are carefully going
through those provisions to try to figure out how to make sure we
come to an appropriate balance. I am very confident, on the basis
of our conversation with them, that they are going to come to the
right place in this stuff. I think I would just highlight the following
key objectives that are guiding our approach to this stuff.
One, as you said, we want to make sure that institutions that
own banks are not able to take risks, like through proprietary trading or in derivatives, if they use derivatives for proprietary trading,
that could either imperil the stability of the bank or allow the firm
to benefit from the access to the safety net that banks enjoy as a
privilege and extend that benefit to those activities that we do not
believe are central to the functions of banking.
On the other hand, it is very important to point out that the
basic business of banking requires banks having the ability to
hedge risks, and a central part of banking is helping their customers hedge their risks, whatever those are. And we want to
make sure that the bill ultimately preserves that ability for banks
to hedge the risks they take on as banks and are able to help meet
the needs of their customers in hedging their risks.
As I said, I am very confident we are going to come to a good
balance on these provisions, and this bill will do an exceptionally
important thing of bringing comprehensive oversight and restraint
to derivatives markets that still have enormous benefits to the
economy as a whole but, as we saw in this crisis, present enormous
risks and would still present enormous risks if we were unable to
enact these reforms.
Mr. SILVERS. Mr. Secretary, there are press reports that efforts
are being made with respect to both measures I indicated to essentially weaken them through de minimis exceptions. And you
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spoke for a moment about that issue in the area of section 716 in
derivatives.
Can you speak to the question of whether banks will be allowed,
in the guise of a de minimis rule, to put meaningful amounts of
capital into sponsored hedge funds and private equity funds.
Secretary GEITHNER. For reasons you will understand, just out of
deference to the legislative process, I am not going to comment on
the details of those provisions.
Mr. SILVERS. Oh, no. I am talking about Treasurys view, not on
what the members of the committee will do.
Secretary GEITHNER. Still, I think we need to let this process
work, and the members of the committee are doing a very difficultthey are facing a very difficult job still trying to find a set
of measures that will command broad support. But again, I am
very confident this bill will do the necessary thing of making sure
that we are constraining risk-taking by these institutions, bringing
derivatives markets under comprehensive oversight, and establishing the type of quasi-bankruptcy process for institutions that
are so important.
Mr. SILVERS. I would just observeand my time has expired, but
I would just observe that when you are talking about leveraged investments under a bank logo, that a de minimis exception could
very easily blow up a capital structure and that it would seem to
me that the lesson of our AIG report is do not allow that.
Secretary GEITHNER. We are not going to support an outcome
that would create that risk, and we are alsocould I just elaborate
on this for one second? We also do not want to support an outcome
that will recreate the basic balance of risk-taking we saw in this
system where people put a bunch of risks in separate affiliates
with no capacity to constrain those risks, and that was not a good
outcome for the system.
Chair WARREN. Dr. Troske.
Dr. TROSKE. I would like to talk a little bit about the CPP program and the use of that program for the small, or the non-stresstested banks. I guess I would like to hear sort of your rationale for
why liquidity was invested in this part of the banking system, why
this program waswhat the goals were from this program.
Secretary GEITHNER. Sorry. For the?
Dr. TROSKE. The use of these funds for the small, the non-stresstested banks.
Secretary GEITHNER. Excellent question. Two simple reasons.
The first of these just guided everything we did in the crisis.
Again, the central rationale for the Governments emergency actions were to make sure that credit, which did not exist at that
time, was going to be open again to American businesses and families because without that, there would be no recovery, no growth,
no job creation.
So for that reason, small banks, as you know, get about half of
their credit fromsmall businesses get about half their credit from
small banks. For that reason, we thought it made sense and it
would seem fair to make sure that they had the same access to the
capital programs that were initially put in place to stabilize the
system. So for the reason of fairness and for the pragmatic reason
that they play an important role in the provision of credit to busi-
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nesses, we thought it was important to make sure they had the
same access to these programs as did the major Wall Street institutions.
Dr. TROSKE. So staying with the smaller parts of the banking
sector, our understandingwell, I did not work on the report but
I did read the panels May report. It seems like many of these
banks suffered some significant stigma associated with taking
these funds. Large banks also seem to suffer from perhaps rules
that they did not know that they were going to face going into the
program, the rules regarding the payment of dividends and the
payment of their executives, leading them to scramble rather
quickly to get out of the program. And clearly this was an effort
to inject liquidity into the system, something that is important to
be able to do in a financial crisis.
Looking forward, if we ever have another financial crisis, have
these programs impaired our ability to inject liquidity into the system given the reluctance of many of these banks tothe seeming
reluctance of many of these banks to participate under this current
program?
Secretary GEITHNER. I hope so in the sense that, again, the central challenge you face in designing reforms over the financial system is to reduce expectations that the Government will be there to
protect you from your mistakes in the future. And that is why
these reform bills are so important because they give us the tools
to definitively alter those expectations, and that is very important
because of the things that we had to do in the crisis to put out the
financial fire.
Dr. TROSKE. I guess I would make a distinction between injecting
liquidity into the system and providing support for failing institutions. They are very different roles, as you are well aware. So I
think it is important to maintain the ability to inject liquidity into
the system because I view the support that was given to small
banks as more of an injection of liquidity since presumably, as you
indicated already, they were healthy banks. They were not failing
institutions.
Secretary GEITHNER. I, of course, completely agree with you that
a necessary part of the arsenal tools you need in a financial crisis
is to make sure that institutions that are solvent can fund themselves. Without that, nothing is possible and the system will come
crashing down, as our system almost did. Back in September 2008,
we were on the verge of a classic run on a banking system, something we had not seen since the Great Depression. So for that reason, I completely agree with you that a central part of the arsenal
of response is to make sure that governments have the ability to
meet the funding needs of solvent institutions.
But, again, in doing that, preserving that flexibility, you will also
have to make sure that people do not make judgments about how
much they lend to institutions, how much risk they take on the expectation the Government will be there again if they were mistaken or imprudent in their judgments. And that is the classic vital
challenge of reform.
Dr. TROSKE. Let me change gears just a little bit and turn to the
housing market, which has been mentioned a couple times before.
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For almost 30 years, between 1965 and 1995, the rate of home
ownership in this country was stable at 65 percent. Starting in
1995, it grew quite dramatically through actions of a variety of different people to about 69 percent.
My own view of the housing market is, one, we are not going to
return to stability until we return to a rate in which 65 percent of
households own their own homes. We are currently somewhere between 68 and 67 percent.
Many of the programs that have been enacted seem to sort of
simply extend this process through which we get back to a rate of
home ownership that is more sustainable. Would a better program
not be one which was designed to move people into a more appropriate housing situation as opposed to keeping them in one that is
just not sustainable over the long run?
Secretary GEITHNER. I think you are describing exactly the objectives that have shaped this program, which is why it is subject to
so much criticism from people who had hoped that the program
would be designed to keep a much larger fraction of Americans in
their homes. Our program was designed exactly as you said, to
make sure that those Americansand there are manywho have
a realistic prospect of staying in their home, who can afford to stay
in their home in that context, have the option and the chance to
do that. But this program was not designed to prevent foreclosures.
It was not designed to sustain home ownership at a level that
would be unachievable and imprudent to try and do. There is no
perfect way to strike that balance, but we have tried to do something that is very close to the test you laid out.
Dr. TROSKE. Thank you.
Chair WARREN. Superintendent Neiman.
Mr. NEIMAN. Mr. Secretary, I would like to come back to your recent remarks about community and regional banks as a key source
of credit for small businesses, because much of the public focus and
our prior COP reports have been on the largest TARP recipients
that were part of the stress tests. Our July report that we are
working on at this very moment will provide a unique kind of window into the performance and health of the hundreds of banks participating in the program and to attempt to assess the effectiveness
of the TARP program for those banks below the top 19.
So to help us to focus on thatand before assessing Treasurys
effectivenesswe need to understand the clear goals. I think you
just referenced two: one, fairness and providing small banks with
the same access to capital as the larger banks and two, lending.
Do you want to expand upon that or are those the two critical
issues? Was the focus on lending? Was the focus on the health of
the community banks together, maybe as too many to fail as opposed to too large to fail?
Secretary GEITHNER. Basic objectives of our strategy again are to
make sure we are safeguarding the financial security of Americans
and that we have a financial system that is able to meet the credit
needs of Main Street America. So everything we did was shaped by
those two basic objectives.
Now, because as you said, you know, we are a Nation of 9,000
banks, not 12 banks, not 25 banks, 9,000 banks and most small
businesses get most of their credit from small banks.
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Mr. NEIMAN. And as I recall I think we had only about 700 community banks participating in that program.
Secretary GEITHNER. Exactly. Right now we have roughly $11
billion of investments remaining in banks that are below $10 billion in assets. Somewhat less than 600 banks meet that test.
Again, we did that for the simple reason of fairness. We thought
they should have the same access to this set of investments that
we gave the major institutions, and we did it because we thought
it would be important to try to make sure that their business customers and individual customers had a better chance of getting
through this with access to credit on affordable terms. It is a simple, pragmatic rationale. But as you said, it is still a challenge for
many of those banks and therefore for many of their business customers.
Mr. NEIMAN. What would be your assessment of the program in
meeting those goals and particularly how those banks utilized that
capital?
Secretary GEITHNER. The available evidence on how they use the
capital is quite favorable. Just to give you one basic measure, if you
compare small banks that took TARP capital against those that did
not, the former category increased lending at about twice the rate
of banks that did not take TARP capital. That is a pretty good,
simple measure. We are happy to share with you all the details of
that assessment.
And of course, for many banks, access to TARP capital meant
they did not have to reduce lending to meet their capital requirements. So you have that test again.
Again, the best test is what has happened to the cost of credit,
but it is still hard to get. But I think that it has been available.
Now, having said that, fundamentally this program did not meet
our objectives because, as many of you have pointed out, because
of concern about the conditions that might come in the future, because of concern about the stigma of the appearance that you participated in these programs out of weakness and not out of
strength. We had banks by the hundreds I think pull back their applications from the Treasury and from their primary regulator for
capital because they did not want to be subjected to either the stigma or to the fear of conditions, which is why we have legislation
now pending before the Congressit has been pending now for six
monthsto build outside of TARP and outside of those risks a very
carefully designed set of programs at the State level and the federal level to help small banks get through this.
Mr. NEIMAN. And your level of confidence that that program will
overcome the TARP stigma and attract demand?
Secretary GEITHNER. Very high. But, again, you have to judge it
relative to the alternative. We looked at a whole range of alternatives. This seemed to offer the best prospects of breaking that set
of constraints.
Mr. NEIMAN. We have a program in New York that you may well
remember from your days at the Fed, the New York Business Development Corporation. It is comprised of member banks which not
only provide equity but wholesale funding and it acts as a lending
consortium for loans to small businesses, and it makes loans that
were marginal credits that the individual funding banks may not
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have made. So we have raised this on a number of occasions and
would offer it to you as a suggestion maybe for consideration at the
national level because of not only taking second looks at loans
passed up by member banks but also spreading risk and providing
expertise in a particular business lending. I do not think it is clear
under the SBLF that the banks could utilize this capital to leverage investments or lending to bank consortiums.
Secretary GEITHNER. Well, I actually think we have this thing we
call the State option that exists in this draft legislation alongside
the small business lending facility, and that option is designed to
provide support for exactly those types of programs. There is a
great diversity of those programs across the country with a long
history people can look at to figure out what makes the most sense.
Again, the virtue of the way we designed this is you have a new
Federal program designed so that if you increase lending, the rate
of dividends you pay the Treasury goes down. That is a pretty good
incentive for using it to increase lending, but also we are providing
a significant amount of assistance to States across the country that
have those programs so that we are, in a sense, financing a greater
diversity of programs as well.
Mr. NEIMAN. Great. Thank you.
I was surprised by your answer to Dr. Troske about the metric
for success on the home mortgage foreclosure program. So I had
not intended to ask you about this, but I want to go back. I pulled
out some numbers and looked at this.
Over the 15 months that the program has been in effect, there
have been 347,000 so-called permanent modifications. Fitch now
has come out with an analysis that says about two-thirds of those
are going to fail. So that means that over 15 months, at least by
their estimateand correct me if you think you have a better estimatebut over 15 months, the HAMP program may save 120,000,
that is, permanent modifications, people who do not slip and lose
again. That is against about 186,000 every month that are newly
posted defaults and foreclosures.
So now I am caught in the question of what is your metric for
success here.
Secretary GEITHNER. Let us step back for just one second and
look at the basic strategy that the President put in place alongside
the Fed.
First, we acted to bring down mortgage interest rates. That was
very important to put some floor under house prices, and we acted
to make it more likely and more possible that millions of Americans would be able to refinance their homes to take advantage of
lower interest rates.
Chair WARREN. Mr. Secretary, I am familiar with all that you
think you have done to support housing overall.
Secretary GEITHNER. Right. But the
Chair WARREN. The question is HAMP is designed to deal with
families facing foreclosure. More than a million families this year
will lose their homes to foreclosure. The best estimates are that
will happen next year and the year after. We are talking about literally millions of families who will lose their homes to foreclosure.
HAMP is it, by and large, for them.
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Secretary GEITHNER. No. Well, again, what HAMP does and
what HAMP is designed to doit was not designed to prevent all
foreclosures. It could not be designed to do that.
Chair WARREN. I understand that. So my question is what is the
metric for success?
Secretary GEITHNER. What HAMP is designed to try to do is to
make sure that a set of people facing the risk of foreclosure have
the chance of being able to afford the challenges of staying in their
home.
Again, on the numbers, more than 1.5 million were offered trial
modifications. 1.2 million received trial modifications. As you said,
only part of those are being converted to permanent, but a substantial fraction of those that are not are being able to take advantage
of other loan modification programs and therefore have a chance to
stay in their homes.
Chair WARREN. Well, as Superintendent Neiman saidand we
will find out what the consequences of that are, whether they are
good or badwe know that the early modification programs actually got people into more trouble, raised their overall payments,
had them owing more principal than they had started out with.
This is HAMP. You set aside $50 billion and what do you have to
show for it?
Secretary GEITHNER. Well, again, what we have is 1.2 million
Americans who got an average of a $500 reduction in their monthly
payments at an early stage in this crisis that was critical and
therefore a chance to keep their homes. That was enormously effective.
Chair WARREN. And passed up other opportunities they might
have had to deal with their homethey might have fought their
foreclosures. The point is they ultimately lost their homes.
Secretary GEITHNER. No, no.
Chair WARREN. What is the metric for success here? Is it 120,000
families saved over 15 months at a time when 186,000 are posted
for new defaults and foreclosures every month? Is that a successful
program? How do we decide when the program is working?
Secretary GEITHNER. You look at its results family by family,
foreclosure by foreclosure, change in monthly payments by change
in monthly payments, but recognizing thatand on this, I think we
agreethese programs were not designed and could not have been
designed responsibly to try to prevent a set of foreclosures that
tragically were probably unavoidable
Chair WARREN. Then help me with a metric. The question I want
to understand, are you telling me that preventing one foreclosure
would have been enough for our $50 billion?
Secretary GEITHNER. No, no. I am just
Chair WARREN [continuing]. No. So what is an appropriate metric? Did you have an estimate when you started this of how many
families you could save?
Secretary GEITHNER. Our challenge is we have tried to reach as
large a fraction of eligible homeowners as we could, and we are still
working toward that objective. And again, the virtue of the approach we have laid out is we have given everyone detailed numbers that they can look at not just on
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Chair WARREN. Forgive me, Mr. Secretary, but you say we designed the program from the beginning, in effect, you are saying,
not to save everyone. I understand that point. But you designed it
around servicers. You designed it around servicers whoI wrote it
down when you said it. Servicers have done a terrible job. You designed it around voluntary participation, relying on these servicers.
We only have three months left with hundreds of thousands of
families facing foreclosure. Is it time to rethink whether or not a
mortgage foreclosure prevention program that is based on a group
of servicers whom you describe as having done a terrible job is a
program that perhaps should be redesigned?
Secretary GEITHNER. As I said, these programs will outlast the
expiry of TARP. Because the way TARP was designed, we have the
ability to continue to execute these programs going forward, and
we will do that. And as you have seen, we have added to the basic
framework of the loan modification scheme a series of additional
programs, again, to help improve the odds that we reach as many
people as we can reasonably expect to reach to meet at this point.
We are going to keep working on that.
And, Chair Warren, I will never stand before this body or any
other body and over-claim for what this program is delivering. And,
again, the reason why we have put out these numbers is because
you can see, therefore, where servicers are getting better. You can
see
Chair WARREN. We must stop, Secretary Geithner. I am running
over and it is not fair to my colleagues.
Mr. McWatters.
Mr. Secretary, if you could turn back the clock to the last quarter
of 2008, what changes would you make to EESA and the TARP legislation? What can we learn from your experience?
Secretary GEITHNER. I do not feel in a position today to answer
that question thoughtfully enough. Again, the best thing I can tell
you today is that the reforms we proposed, that Congress is on the
verge of enacting, would give us a much stronger set of tools for
preventing these crises from happening and managing them with
less cost to the taxpayer and the economy in the future. And what
we are focused on doing is getting that passed and enacted and
making sure it is followed by a set of well-designed constraints on
risk-taking so that we can, again, tell the American people that we
have a reasonable chance of preventing this from happening again.
And that is what I am focused on at the moment.
On the details of how you design financial crisis rescue programs, the basic framework in that reform bill is a very strong
framework, much better than what we had coming into this crisis.
Mr. MCWATTERS. Okay. By unanimous vote of the panelit was
a 40 vote, completely bipartisan with the recusal of Superintendent Neimantwo weeks ago, the panel adopted its report on
the bailout of AIG. Even though the report exceeds 300 pages,
allow me to read five of the key conclusions reached by the panel.
The Government failed to exhaust all options before initially
committing $85 billion in taxpayer funds to the bailout of AIG.
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The rescue of AIG distorted the marketplace by transforming
highly risky derivative bets into fully guaranteed payment obligations.
Throughout its rescue of AIG, the Government failed to address
perceived conflicts of interest.
Number four, even at this late stage, it remains unclear whether taxpayers will ever be repaid in full.
Number five, the Governments rescue of AIG continues to have
a poisonous effect on the marketplace.
I think it is only fair that you be permitted to respond.
Secretary GEITHNER. Well, I do not agree with those conclusions
except perhaps for the fourth which says, as I say all the time, that
the Government is still exposed to substantial risk of loss in AIG.
But it is worth just making the following observations.
This mess that we were handed in the peak of the crisis ultimately required, to stabilize the firm, commitments of, I think if
you add them up together, something in the range of $180 billion.
On the basis of the independent estimates of CBO and others, the
ultimate risk of loss now has come down dramaticallyit is still
significantbut dramatically, a tiny fraction of that ultimate exposure because we have been so successful and careful in managing
this process to lower the risk of the taxpayer in this case. And we
are going to be continually focused on trying to make sure that we
are bringing down the risk, we are selling off these companies to
maximize the return and minimize the risk of loss. And we are
working very hard, as you know, to make sure that we have a set
of reforms in place and financial reforms that would prevent that
from happening again and give us better choices.
And I am very confident, based on the strength of the provisions
on derivatives, on risk-taking, on resolution authority, the basic
package of these protections, that we will be in a position to both
prevent and better manage mistakes like that that AIG and its
shareholders, its board of directors, its executives made.
Mr. MCWATTERS. On a slightly different, but I think related note,
when does the Administration plan to return Fannie and Freddie
to the private sector?
Secretary GEITHNER. I am not sure I would frame it quite that
way, but let me answer it this way.
We are deep into a process of examining what set of reforms
should replace the current system we have in the housing finance
market. Those will require fundamental changes to the GSEs, but
we are not going to stop there because, as you know, the range of
things that contributed to this mess went well beyond the basic incentive problems, moral hazard problems that pervaded the GSEs.
I expect that after we pass this first wave of financial reforms, that
we will be able to turn quickly, as will the banking committees, relevant committees in Congress, to examine those sets of options.
And I have said publicly that we expect to recommend a set of
broad reforms sometime early next year, which means roughly six
months from now.
Now, it is very important to point out that the losses that we still
face in these institutions are losses we inherited. They are the
product of the judgments made before the Government stepped in.
At our insistence, they have put in place much more conservative
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underwriting standards. They are charging more for their guarantees to remedy some of the mistakes they made. They are bringing
down risk in the rest of the institution quite significantly. So the
institutions today are being run much more conservatively, as you
would expect.
I think we are going to findI hope we will findquite broad
support in Congress, Republicans and Democrats, for putting in
place the kind of fundamental reforms that these institutions and
the housing market obviously needs.
Mr. MCWATTERS. Thank you, Mr. Secretary. My time is up.
Mr. Silvers.
Mr. SILVERS. Mr. Secretary, I want to take you back for a moment to your response to a question from my fellow panelist who
cited home ownership levels from 1965 to 1995 as something we
ought to be aspiring to. And you responded something to the effect
of that is exactly where we are trying to get to.
I want to give you the opportunity to modify that answer.
Secretary GEITHNER. To rephrase my response?
Mr. SILVERS. Yes, because from 1965 to 1995, that flat number
reflected essentially the systematic denial of credit to communities
of color. That cannot be our goal to return to that time.
I would also like to give you an opportunity to modify your response in light of what has troubled me about our discussion about
housing throughout this morning, which is that the shift to unemployment-driven foreclosures, which I think is evidenced in your exchange with Superintendent Neiman, around the question of peoples ability to pay. It cannot be our policy that we think that people who are the victims of long-term unemployment should be
thrown out of their homes. So I would like you to
Secretary GEITHNER. Excellent questions.
Mr. SILVERS [continuing]. Give yourself some time to clarify
these matters.
Secretary GEITHNER. Excellent questions. And I agree with the
way you characterized that little history of evolution in our financial system and how it met the broader needs of the country.
What I want to say is this. Our policies are not designed to sustain home ownership rates at a level that we think is not sustainable. It should not be our objective, cannot be our objective. And
I think it is true that although there have been huge gains from
the broad evolution of our financial system in meeting the needs
of not just low-income and minority communities, but more generally across this country, it played a huge role in financing innovation among small businesses too. We are going to do our best to
preserve those gains but not leave the country and our financial
system and the economy vulnerable to the excesses that we saw.
Of course, as you pointed out, those big gains in access to credit
that our system generated also came with huge opportunities for
predation and fraud and abuse. That happened not because of the
presence of regulation. It happened because of the absence of regulation on a whole range of institutions that were allowed to provide
credit without basic protections. One of the virtues of this reform
bill is it protects that.
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Now, we do not have a perfect judgment about what is a sustainable rate of home ownership. What we do know is we had a whole
range of incentives across the American financial system that were
designed to encourage home ownership. And I think those, probably on balance, went a little too far.
What I think is important to recognize in our broad housing policiesand this will be true for our reforms to the GSEs and the
housing finance marketwe are going to try to remedy some of
those problems in balance, try to preserve what is fair and important in trying to make sure that Americans have access to affordable housing programs, but not try to sustain or recreate a level
of investment in housing that was part of this basic crisis.
Now, having said that, I have forgotten your second question.
Mr. SILVERS. Unemployment.
Secretary GEITHNER. Yes. Thank you for doing that.
We have done a continuous series of innovations and changes to
these programs from the beginning, as you heard me describe. And
one of the things we did, starting earlier this year, was introduce
programs that are designed to directly help the unemployed reduce
the risk that they would lose their home, but also to shift the balance of benefits in this program to encourage greater principal reduction.
And also, much like what I said to Mr. Neiman on the small
business credit side, we have introduced a program where we give
States hardest hit by the crisis, States with the steepest drops in
house prices, highest levels of unemployment, or a combination of
those two factors, access to significant resources to finance a range
of programs to help the unemployed in their States, to help encourage greater principal reduction, a range of other types of innovative
programs at the State level.
That is a sensible use of public policy, a sensible use of resources
again, because as you said, unlike the early stage of the foreclosure
crisis, the principal driver we see today is the result of the fact that
unemployment is still so high.
Mr. SILVERS. Two points in response, Mr. Secretary. One is I
think there is an issue of scale in relation to the unemployment
problem. The scale of the resources simply is not adequate. I think
we have models, the HEMAP program in Pennsylvania, for how to
do that at scale. You have got three months. I hope you are thinking about that.
Secondly, in relationship again to the question of the level of
homeownership, I think the data shows very clearly, contrary to I
think what some of my colleagues would say, that we made significant progress in reversing decades of redlining during the 1990s,
and that starting around 20022003, we saw a set of unsustainable
and exploitive practices take over. I think that kind of gives you
a way of marking what constitutes a sustainable level of home
ownership and what does not.
Secretary GEITHNER. I think that is a very good perspective, and
that is one good way to think about it.
But you also have to look at the combination of all sorts of other
incentives we created and it is hard to find the right balance.
Can I correct one other thing I said, Ms. Warren?
Chair WARREN. Yes, Mr. Secretary.
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Secretary GEITHNER. I said at some point in my remarks earlier
that 8 million Americans were out of work because of the crisis.
The number is about double that, but roughly 8 million have lost
their job in this crisis.
Dr. Troske.
Dr. TROSKE. I guess I would like to clarify that I certainly do not
believe that we should have a process which denies people ownership of a home or financing for a home by any reason other than
income. But I do think it is important to point out that no one
should be homeless. But those are two different things. And I think
it is also important to recognize that not everyone needs to own a
home. Renting a home is a perfectly viable option. And I think it
is important to match people correctly to the ownership situation
that best fits their financial situation.
So one of the things I was suggesting is that maybe programs
that help move people out of a situation which is not appropriate,
given their financial situation, into one that is appropriate, even if
it is not owning a home, but instead renting, which seems like a
perfectly viable option in a number of other places in this world.
What might be a better use of resources than trying to keep people
in their homes, especially since our experience with loan modification and programs designed to keep people in their homes in the
Great Depression suggests that they are not particularly effective?
So maybe you could comment on that.
Secretary GEITHNER. I have some sympathy for that perspective,
and we do have a set of programs that we are supporting that are
consistent with that basic recognition and reality.
But I think it is important to step back for a second and recognize the things we got wrong in this area because they should
guide how we think about reform going forward. Again, not to oversimplify it, but the two most damaging mistakes that Washington
made in this crisis were, one, not to constrain risk-taking in the
mortgage finance market by the GSEs, and the other was not to
provide Americans basic protections against predation, fraud, and
abuse in the credit market. Those were devastating in their consequences. We are still living with the consequences of that. We are
going to be living with them for a long period of time.
And a fundamental responsibility of Washington is to try to help
make sure that we are repairing those mistakes and helping people
who were damaged by those mistakes have a chance to repair their
lives in that context. And that is a responsible, good use.
Now, we recognize that we cannot reach everyone, and different
solutions are going to be appropriate for different people, and that
we have got a lot of challenges ahead in that area, but those two
mistakes are things that we have to make sure we fix in financial
reform and I am very confident we are going to be able to do that.
Dr. TROSKE. So maybe we will stay on the housing market for a
minute to build on some of the comments that have been made previously.
Do you think the Federal Government should be involved in a
significant way in the future of financing in the mortgage market?
Does the Federal Government have any particular advantage over
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the private sector which would suggest that the Federal Government needs to maintain a role in that sector?
Secretary GEITHNER. Excellent question. I have testified on this
before and I do not want to change or alter the basic framework
I have laid out in that context. So I would say it this way.
I think there is going to be a good public policy case for the Government still promoting the objectives of access to reasonable housing options for low-income Americans. That is an important objective. I believe in that objective. We are going to make sure we are
doing it as carefully as we can going forward.
I also believe it is likely that we will determine that it is going
to be an appropriate role for the Government in providing some
form of guarantee to help make sure that their broader housing finance markets are able to provide credit to housing in recessions
and downturns. That is a very important basic debate. We are
going to have that debate when we talk about reforms. But having
looked at a variety of different models in our experience, I think
that we are likely to conclude that there is going to be a reasonable
case for retaining a limited role for the Government providing that
kind of basic guarantee. How to do that is a challenge. We want
to make sure that where you do that, firms have to pay for that
guarantee and that the firms that provide that guarantee run with
adequate capital against risks. But I want to be careful not to add
to anything I have said in the past about this, and these are the
kind of questions that we are looking at in the context of reform.
Dr. TROSKE. So maybe I can finish up with one more question.
You seem to be much more positive about the effectiveness of
TARP than the American public. Could you tell me why you think
that is? What do you know that the American public is not aware
of, and why has that not been conveyed to the American public?
Secretary GEITHNER. I think that the American public was left
with the impression that the Government of the United States
came in and wrote checks for $700 billion to our Nations largest
financial institutions and that they will never see that money
again. And that initial perception that was created by the critics
of this program hardened and has been a challenge, as you on this
committee have found, particularly those who were here from the
beginning.
The reality, of course, is very different. As I said, we have only
put out about half of that authority. We have more than half back.
This administration came into office, did not write a single check
to our Nations largest banks. We wrote $7 billion of checks to
small community banks across the country. And as I said, this program on the bank side is generating a very substantial, positive return to the American people, and we are going to return hundreds
of billions of dollars of authorityhow often does that happen in
Washingtonto the Congress so they can help reduce our future
deficits and meet our long-term needs.
Those are the facts and realities of this program, and if you compare that record, not just against the expectations of the critics, not
just against the expectations of the architects, but against the experience of this country in past crises or the experience of almost
any major country in a crisis, it is a remarkably effective program,
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highest return on the use of a dollar of taxpayers money than I
think almost anything the Government has done in this crisis.
Now
Chair WARREN. Mr. Secretary, this is your time, and we are over
the time. I still want to give Superintendent Neiman a chance for
a last round of questions. So if you will bear with us. We are past
the time. It is your time.
Secretary GEITHNER. But acknowledging that this caused a huge
amount of damage, we are going to be living with the aftershocks
of that for a long time, and we are still in the beginning of repairing that basic damage and it is going to take more time.
Mr. NEIMAN. As I mentioned in my opening statement, Congress
is finalizing financial reform that will have implications for decades, both domestically and internationally. Many of us are glad to
see the U.S. acting as a first mover in regulatory reform. I have
been told on a number of occasions by foreign government officials
how they are very pleased that we are moving ahead, though they
probably are not saying this as publicly as they should.
I am especially proud of particular areas where we are ahead of
the rest of the world, things like the Volcker Rule, like proper
alignment of executive pay and risk. However, we all know that
acting as a first mover does raise issues around global competitiveness, regulatory arbitrage, and regulatory gaps around the world.
Would you mind sharing with us the standard that you apply
when determining when the U.S. must lead and when the U.S.
must act in global concert?
Secretary GEITHNER. We are trying to do so together. We are acting, as you know, to fix the things we got wrong, but at the same
time we laid out our basic objectives for reform, we negotiated
internationally a broad consensus on a set of broad objectives internationally that would parallel very much the basic strategy we
adopted here. And you are going to see when the G20 leaders
meet in Toronto on Saturday and Sunday a remarkable commitment across the major economies to that set of basic principles for
providing better oversight, better transparency and disclosure, better protections against risk-taking on a more even standard across
the major institutions and markets.
We could have decided to move here and then try to put in place
high standards here and try to pull the world to those standards
over time. We decided to move together so we would reduce the
risk that risk would just move from the United States to those
other countries.
Now, we have a very difficult challenge ahead in negotiating a
new set of capital standards for the globally active banks, and that
will be the critical test of our capacity again, to pull the world to
higher standards. But we come to that with a remarkably strong
position because we were able to move so quickly in the United
States to recapitalize our system with private capital to replace the
Governments investments early and, therefore, our firms on most
measures have less leverage, more capital, more of the kind of capital that you need, common equity, against future losses. And that
gives us a very strong position in those discussions.
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But again, the best way for us to shape that consensus is to

make sure that we come to the table, having acted to fix the things
we got wrong in the United Statesand I believe that the reforms
Congress is about to enact will be a good model for the world and
will give us enormous credibility in trying to, again, pull the world
to those higher standards.
Mr. NEIMAN. Are there other examples like capital where the
U.S. has to act as a first mover if there is not global concert in that
particular area?
Secretary GEITHNER. Again, we are going to try and make sure
we are moving in parallel. Derivatives is another good example.
Any financial product of consequence today can move very quickly
to seek the weakest regulation. In the basic standards of disclosure
and transparency that have been such a source of interest for this
committee over time, again, we want to make sure that all these
firms and all these markets are operating under much more rigorous standards for disclosure and transparency. Otherwise, the
risk will move to where it is dark and that will leave us with more
risk in the future.
Mr. NEIMAN. My time has expired.
Secretary GEITHNER. There are many other examples, though,
but you are right about the basic imperative.
And again, we are going to try to make sure that we dramatically strengthen the competitiveness of the U.S. financial system
by, as we have done well in the past, making sure that we put in
place very high standards for protection for investors in the U.S.
marketplace. And we are going to do everything we can to make
sure the world joins us in that cause.
Chair WARREN. Thank you. We now bring to a conclusion our
21st hearing of the Congressional Oversight Panel. We want to
thank you, Mr. Secretary, for being with us today.
The record will be held open for any additional questions.
With that, this hearing is adjourned.
[Whereupon, at 12:10 p.m., the hearing was adjourned.]
[The responses of Secretary Geithner to questions for the record
from the Congressional Oversight Panel appear on the following
pages.]
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77

Senate Hearing, 111TH Congress - Hearing With Secretary Timothy Geithner

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Senate Hearing, 111TH Congress - Hearing With Secretary Timothy Geithner

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S. HRG.

HEARING WITH SECRETARY TIMOTHY GEITHNER

CONGRESSIONAL OVERSIGHT PANEL

HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010

Printed for the use of the Congressional Oversight Panel

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HEARING WITH SECRETARY TIMOTHY GEITHNER

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HEARING WITH SECRETARY TIMOTHY GEITHNER

CONGRESSIONAL OVERSIGHT PANEL

HEARING HELD IN WASHINGTON, DC, JUNE 22, 2010

Printed for the use of the Congressional Oversight Panel

U.S. GOVERNMENT PRINTING OFFICE

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For sale by the Superintendent of Documents, U.S. Government Printing Office

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Opening Statement of Elizabeth Warren, Chair, Congressional Oversight

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HEARING WITH SECRETARY TIMOTHY

CONGRESS OF THE UNITED STATES,

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OPENING STATEMENT OF ELIZABETH WARREN, CHAIR,

Chair WARREN. This hearing of the Congressional Oversight

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assess potential risks. We must also evaluate whether Treasury

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STATEMENT OF J. MARK MCWATTERS, MEMBER,

Mr. MCWATTERS. Thank you, Professor Warren.

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gitimate and worthy of prompt action at great cost to the taxpayers

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