thank you thank you this hearing of the committee on that you do jury subcommittee on commercial ministry of law and i'll come to work we'd like to recognize you for any opening statements you'd like to make or hear the brewing fight song well i'm very pleased to join this committee to have this committee hearing thank you very much you're welcome and we're honored to have you our recognize myself for a short statement today we meet to consider the critical question of whether the administration has met its burden of demonstrating that the bankruptcy code should be set aside with respect to large non bank financial institutions that are critical to the nation's financial system too big to fail in place of the regular bankruptcy process the administration proposes that congress grant enhanced resolution authority for such institutions similar to the authority that the f t s the currently has with respect to banks this subcommittee is not yet formed an opinion on the merits of the administration's resolution authority proposal given however the subcommittee is charged with sharing the effective functioning of the nation's bankruptcy system and the three party system of government that we've had for two hundred years we take a keen interest in any move to go outside that system additionally the resolution authority proposal rat race has so many trust concerned that my distinguished colleague hank johnson the chairman of the courts and competition policy subcommittee will probably address and in more you chairman johnson for his willingness to allow this for this subcommittee for scheduling purposes proponents of enhanced resolution authority get ten that the bankruptcy process is inadequate to handle of certainty in markets nevertheless this is what the constitution and the past statutes have dictated as the proper course they also contend that the mere act of a bankruptcy filing by a large interconnected financial institution could have destabilizing effect on the financial system because markets and investors react very badly to news proponents of resolution authority point to the chaotic aftermath of lehmann brothers bankruptcy filing as well as the ad hoc government financial assistance given its imminent collapse they maintain that what transpired serve as proof that resolution authority for non bank financial institutions in financial trouble is needed to provide a mechanism for the orderly restructuring  saylor liquidation of such entities in response there have been some criticisms leveled at the proposed resolution authority president's critics contend that granting resolution authority to those financial firms deemed to be systematically significant may be interpreted as a guarantee of a future government bailout should those firms run out of financial trouble thereby encouraging continued irresponsible risk taking about such others including harvey miller one of our distinguished mello the creation of a new resolution regime may in fact raise a host of transparency and due process concerns all of which have constitutional issues involved resolution mechanism independent of bankruptcy carefully crafted to avoid the creation of moral hazard and with sufficient elements of transparency in due process might be an effective way to save a systematically important institution also creating a means of orderly wind down should that be necessary the burden remains with the proponents of the resolution authority however to demonstrate to the satisfaction of subcommittee in particular the bankruptcy system truly does not offer such a mechanism are all ready with respect to non bank financial institutions and that any actions of this creation would not violate constitutional authorities that have long held this country in great esteem and which are the basis of our oath of office i hope that this subcommittee which is charged to overseeing the nation's bankruptcy system can gain some useful insight from our witnesses as it considers the merits of the resolution authority proposal accordingly i look forward to receiving today's testimony i now recognize my colleague distinguished ranking member of the subcommittee mr franks for his opening remarks well thank you mr chairman you know mr chairman i know in many areas and this committee just the nature of the committee means that we often have a starkly different perspectives and i'm sure that you're going to be some of those things exhibited here today but i want to you to know that i appreciate you for holding this unusually important hearing i want to salute you for your leadership and that of the the chairman the full committee because i really sense that there's been an effort to try to to get at what is right rather than who's right here and i'm really grateful for that and now i have to make a statement that seems to completely counterman everything i just said but it doesn't change the sincerity of any and you don't have to do that mr chairman on the just your committee we as i said often grapple with issues that are among the most important congress but even among those matters the issue today is important the question is how will congress respond to the near financial meltdown of two thousand and eight that crisis vaporized trillions of dollars in americans well through our globally interconnected economy and affected people all across the world the resume of the federal response today still hangs in the balance second guessing over the choices the executive branch of the federal reserve made particularly in september two thousand eight will course continue for decades but mr chairman we don't really have the luxury of waiting for decades for those details to be manifested and sifted by the time another crisis may come before we know it so we must choose we must ask ourselves what reforms should congress press to guard the nation against future calamity and to help with that decision mr chairman you've called this hearing and once again i commend you for that on what basis should we make this choice i believe the answer is fairly clear the less we understand what triggered the crisis we cannot hope to answer it with the right reform or solution and if we don't answer it with the right reform we may only launch the nation for the next crisis what then caused the financial crisis of two thousand and eight and boil down to the simplest answer in my sincere opinion the answers for really straightforward it was human errors of judgment in our government when faced with the choice of whether and how to intervene in our common meaning the one nine hundred ninety s and continuing into this decade washington laid the conditions for financial disaster the community reinvestment act and its implementing policies our federal government fueled an unsustainable housing bubble responding to government rules government pressure and easy federal monetary policy our financial system spread the bubbles risk throughout our car to me and the world we did so through risk laden mortgages and securitized mortgage instruments that were built from and upon them in two thousand and eight and two thousand and seven the piper unfortunately came to call as economic conditions deteriorated institutions realized a vast majority of best mortgage related instruments they held might not be worth the paper upon which they were written financial institutions holding all responsible for ensuring these interests were exposed to being called on or they simply couldn't pay in response they hoarded their capital lending began to freeze up and the financial system began to grind to a halt as the crisis intensified the government the treasury the government the treasury and the fed took upon themselves the unprecedented step of bailing out bear stearn the market took note and began to believe the government would bail out any institution that was as large or larger when lehman brothers hung in the brain hung on the on the brink in september of two thousand and eight the treasury and the fed refused to bail them out and  obviously that expectation was dashed at that point when treasury and the fed reserve of course resort reversed course days later to bail out american and international group dashed expectations and then changed her widespread confusion then when the treasury and the fed declared that the financial system was on the verge of the edge as it were of the abyss and ran to congress with only a two and a half page outline of a rescue plan full blown panic begin to ensue and we still of course are trying to recover to this day now the obama administration proposes a response to revamp our system for resolving failing financial institutions like  a but instead of responding to what actually happened in two thousand and eight the administration rests on the myth that lehman's insolvency and the simple need to deal with it in bankruptcy triggered the entire crisis and acting on that myth it would take the largest non bank financial its financial institutions out of the the system create a new authority for federal agencies to intervene with them and let those agencies like the treasury the fed did in two thousand eight decide who survives and who does not define the endeavor it gives agencies a new bailout check book now mr chairman i really believe that this is a recipe for supercharging the disaster it institutionalizes vulnerability to human error in the executive branch it institutionalizes the temptation for large firms to take excessive risks banking on government bailouts and it concentrates risks in those same institutions by encouraging their consolidation and extending the competitive advantage of a safety net smaller firms will simply not have mr chairman that's exactly the wrong direction which really does country it's imperative that we on the judiciary committee press for the clear alternative options strengthening the bankruptcy code so that fair transparent and impartial courts can be relied upon without question to resolve these firms insolv precisely that an option is embodied in h r thirty three ten in which i join ranking with member smith as a co sponsor now i look forward to discussing the bankruptcy option in depth with you today and to working together on the right path forward for delegates thank you mr franks and thank you for your working with us on this i was surprised you didn't have the section we agreed on that acorn was not going to be able to use this resolution authority at any time in the future right and no abortions will be provided either no that's right i now recognize the chairman of the committee the distinguished chairman from the state of michigan in the city of detroit honorable john conyers for an opening statement thank you chairman going we're privileged to have distinguished the witnesses that are coming to help guide you know jim jordan and i are in a very similar situation as representatives and michigan we've been particularly hard hit by this downturn and i want trent franks to know that we're looking very carefully at three three one zero  and i'd like to meet with you about it as soon as my staff is digested all of the intricacies of th measure and i thank you for bringing it forward  last fall our nation's economy was on the edge of a financial meltdown there some say we still i mean this is not like a piece of history that's gone by and no everything's ok what caused the crisis was the mistaken belief shared by republican and democrat ministrations in the past that the financial industry could be relied on to regulate itself without significant government oversight and depression that has never been comparable to anything else our economic system has  who can you really seriously rely on police itself anyway no instead of demanding from the financial industry and insisting that we're cooperatively with the regulators what the financial system from this perspective was temporarily stabilized on the backs of the american taxpayer credit can get small business right this minute after trillions of dollars have been shoveled  and as the trouble asset relief program oversight reported nearly two million homes have already been lost to foreclosure welcomed and before i recognize my fellow chairman i thank the opposite end of the big ten x is here michigan state should be recognized for a statement mr jordan the chairman thank the chairman of the full committee for his comments  about the economic situation in the midwest and ohio and michigan and frankly cross cross the country i'll just make this point as the chairman was going to the history of the tarp program i do think it's important to remember as well that you know we gave this unprecedented authority to the government and the results have not been i think about not been what we expected not been well i guess some us maybe expected those of us voted against it but think about what took place that that whole package was sold to united states congress that they were going to get this money and go in and purchase the troubled assets free up the dollars that need to be put to use right now in our economy and they still haven't purchased the first troubled or toxic toxic asset in fact i would almost argue that and we had hearings on this in another committee that when the program was sold to the congress of the you wonder if there was any misleading going on because nine days after this came out in testimony during the bank of america nine days after the program pas the treasury and the fed had already changed directions and simply went to injecting capital into these institutions and so i would be concerned about any new power we start giving to government in light of what took place in that area which i think was a just a wrong move and the wrong kind of approach to a tough situation we had to deal with with last year and with that mr chairman i would i would yield back thank you mr jordan  appreciate your remarks we've got but we've got time for the opening statement from the chairman of the committee that has been so kind to work with us today mr johnson of georgia thank you jim and cohen thank you for holding a hearing and i'm its big players are the same people that are now prospering from seven hundred billion dollars that they have been given relatively johnson before we leave it for about thirty five minutes i want to recognize accept this statement of mr smith and of the record of mr maher smith that will be done without objection we will return in about thirty five minutes and letter that we have received from mr conyers from mr bernanke concerning the subject matter and he has a different approach than several of those opening statements concerning the need for through their salaries does make it difficult to continue to support such actions but the letter will be like to thank all the witnesses for participating in today's hearing without objection your written statements will be placed into the record and we would ask that you five minutes you will know we have a lighting system that starts with a green light for minutes it turned yellow and then read it five minutes when it gets to read you should have concluded your remarks or be wrapping them up after you present your testimony subcommittee members be permitted  secretary for financial institutions as such he's responsible for developing hoarding treasury's policies on legislative and regulatory issues affecting financial institutions previously served during the robert rubin treasury period as a special financial system i want to begin today by briefly outlining how president obama's comprehensive approach addresses the challenge of those firms who could threaten the stability of the financial system and then focus on the administration's proposed resolution authority in the growth of significant growth of large highly leveraged substantially interconnected firms these firms benefited from the perception that the government could not afford to let them fail of course during the financial crisis the federal government did stand behind many of these firms that action was necessary but there is no question that unless we act meaningful reform of our financial system the problem will have been made worse we must end to the perception that any firm is too big to fail first the biggest most interconnected firms must be subject to serious accountable comprehensive oversight and supervision sakin we need tougher standards the largest most interconnected firms should be a significant higher capital and liquidity requirements for potential regulation we aim to give these firms a positive incentive to shrink to reduce their leverage their complexity and their interconnectedness and we aim to ensure that they have far greater capacity to absorb their own losses when they make mistakes we need to make clear that among the largest most are not connected firms does not come with any guarantee of support in times of stress the presumption must be the opposite shareholders and creditors should expect to bear the cost of failure that presumption needs to have real weight that means the financial system itself must be stronger and more able to handle the failure of any financial firm in this last crisis it was not and as part of our proposal we've also called for firms repair would have been called a living will a credible plan for their rapid resolution in the event of distress this requirement will leave us better prepared to deal with the firm failure and will provide another incentive for firms to dimple fide organizational structures and improve risk management by building up capital macwhich throughout the system by increasing transparency and key markets our plan will make it easier for the system to a financial stability which is why bankruptcy will remain the dominant option for handling the failure of a non bank financial institution a large one the last two years however have shown that the us government simply does not have the tools to respond effectively when debility that is why our plan permits the government in very limited circumstances to resolve the level just invest interconnected financial companies outside the traditional bankruptcy  orderly fashion that limits collateral damage to the system the resolution authority we're proposing the government to impose losses on shareholders and creditors without exposing the system to disorderly failure that puts everyone special advisor for policy to the chairman of the involved in issues involving regulatory restructuring and resolution authority mortgage market development banking charter and capital international in large bank resolution initiatives derivatives and other similar financial people feel that mr paulson chose his friends goldman sachs and other friends in the financial market to take care of them let other friends the laws are supposed to be applied fairly and the bankruptcy code is fair due process transparent system where people there are laws and the judges are supposed to work in that how can you assure the public and those of us who voted for the tarp although reluctantly that if we have such a resolution corporation formed that there will be parent transparency rather than favoritism played when it's outside of the bankruptcy system which has fairness built into it thank you very much mr chairman under the missed it but i think you said something about the terms of the largest financial institutions is there a definition of what the largest financial institutions would be so that they would all be within the same class and not be determined favoritism under our  would make a determination that a firm that is large connected and high the leverage such that its failure would pose a threat to financial stability could be designated for stricter tougher or more stringent forms of supervision with higher capital standards higher prevention requirements that required a living will the tougher set of standards i outlined very quickly in my just just before this hearing and what do you believe about his suggestion that that the problem was a lack of liquidity and that that suggestion the treasury's authority be expanded in certain circumstances and that we needed to authority for the failure of the largest most interconnected firms that might pose a risk to the system the resolution authority is designed to meet different objectives from the bank of the bank because as you know far better than eyes focused on the process with respect to creditors the resolution regime is really designed to protect all of us to protect the economic system from the collapse of a significant financial f m that blows through its capital buffers so we think whatever the committee decides to do with respect to bankruptcy it's absolutely essential that we have resolution authority thank you mr brymer for recognize mr price the problem we've got an act of concur with much of what you have said and what mr bernanke says mr geithner but when you said that the resolution authorities to protect all of us with that as a belief you know i tepidly push the green button but it's difficult to do that when you see what the people on wall street are doing with the money and how well they live and how arrogant they are and it's hard to think it's really it's about them it's their crowd it's not our crowd if i would mr chairman i think that  people are rightly outraged at that kind of behavior i know i certainly am as well i think that it's incumbent on us to design a system in the future that protects us from excessively risky behavior that requires firms to pay their own way and by that i mean having big capital cushions so they take their own losses and financial trouble in the future that the largest firms are the ones that pay for it not do you think there should be something in your legislation to work in the legislation so we don't come back later and fight another special interest group when we have a dozen individual bills to have some control over over executive compensation maybe in the bill when somebody comes into your  compensation in the firm not just for the highest paid executives but throughout the firm in judging the firm's risk management practices so i do think those are important principles they're important principles and i think they ought to be something pacifically in your legislation if you hope to pass it that makes the public realize it's not going to be another fight and i would agree mr chairman there are these two provisions that would be essential to the reform package we put forward in a legislative manner organizations police themselves and i think he's right i think it's very difficult for any group to police themselves even though i have i think they have a responsibility to do so but ultimately they're it's wise to have a third disinterested party that it would be difficult for them to police themselves any better than anyone else i mean in this week's news for the white house pay czar is slashing corporate pay by ninety percent the tarp inspector general says we won't get our tarp funny's funds back unemployment's up in forty nine to fifty states and the kind of the surreal events in our economy the list goes on and now what i hear in all due respect because i know you guys are here to advocate a position and there's no personal disrespect intended but what i hear is that you're asking us now to give the government new power to seize citi group and the bank of america the rest of the largest financial institutions we have  and i just think you're on the bases of both the bush and obama administrations in the last year i don't know how we can possibly trust government with the bureaucratic aspect of government to use that authority without blowing it up again in everyone's face  and i guess i'm convinced that unless we get back to some basics and make sure that these financial institutions have basic requirements to where they're the ones that are at risk when they make these decisions that there will never be enough policeman to take care of it as a way to get organizations to police themselves as as chairman conyers said i think is to create critical mistake when they were inconsistent in responding to bear stearns and lehman brothers later i think they made another mistake when they came to congress and declared that the financial says would collapse if they were not get granted this rescue authority but they failed to present a full thought out rescue plan in my judgment two and a half pages is what they brought us now john taylor of sanford and other eminent economists say that those two mistakes played a major role in triggering the all out financial panic after september nineteenth so if we couldn't trust these two experts to make two decisions in the course of a month to avoid a  how do we entrust the entire future to the same experts again working with lesser experts in the f b i and the f c c i know that's kind of a convoluted question but i'm just suggesting what i hear mr crimmins you're saying you know about the process of how you would administer the end of life decisions of a major company as it were they sound an awful lot like the bankruptcy process and i'm just wondering how does the  continue the process of selling off i don't interrupt you mr why can't that process what you're talking about sounds good but why can't that occur under bankruptcy right now where the difficulties with the largest financial institutions is that you need to have pre planning a level of expertise in dealing with the types of contracts we're talking about that you need to be able to have the ability to continue without having to rely on better possession financing which at times of the crisis last fall can be difficult to acquire so guess i would use my time is up but i'd just like to suggest that if i in the financial source to one of these companies and they are going under this into this process i would be much more likely to give money or to encourage the process to continue under a bankruptcy setting then i would sort of an charted untested bureaucratic takeover of the process it just simply doesn't make a lot of sense to me because i think that the whole process becomes politicized and those critical resources that are necessary to even animate or process like this become completely  certain about doing anything and i think they take a hands off approach that's just my opinion we'll back thank you now recognize the gentleman from wayne county michigan wayne state university full range of tools available to address the problem of too big to fail we do need to the perception too big to fail is an absolutely critical element i think we're in agreement on that i think we need to have tougher standards to do that the question is what do you do in the event of extremity in a crisis and i think our judgment is consistent with ranking member ranks earlier statement we need to be humble about the ability regulators we need to be humble about the ability of managers a large firms people are going to make big mistakes and you need to have big boppers in the system when they do so that taxpayers aren't on the hook industry in the financial industry have to be on the hook for they've got to be in the legislation there's got to be an assessment on them so that in the event any financing is required or any working capital wired that the largest firms are required to pay not the taxpayer that's an essential part of our reform that awesome those other big firms are going to have a big not to have any form going to resolution because they're going to they're going to get the system right my responsibilities the department has begun to wind down many of the major programs in the tarp with a recognition that we're beginning to see some signs of financial stability i think they're important it's important to maintain the flexibility to act in the future and i do believe that i do believe that we will be able to protect taxpayers in that process and  directly within my area of responsibility but what we are seeing repayments coming into the treasury department to make firms pay their own way to internalize the costs they pose on the system to make sure that taxpayers are protected because assessments to be paid by the large firms in the event of financing is needed  a solution process that literally does close down and terminate existence going forward so that but one that allows for the continuation of critical financial services during a bridge  asked about the tarp money being used to pay down the debt i think he was to the end and i know it's not your area but i think the answer is no it's not it's going back into the tarp that not be correct and you all are continuing to use the money that's being repaid for other tarp type funds that come back into the tarp program to the extent that they're not used for financial assistance  are held at the treasury department and the response i gave to mr coble would say those funds the extent that they're not needed in the event of financial crisis would help reduce  debt but in our judgment it's important to retain some flexibility while the system is still recovering i do think that i do think that there will in the long term be  program is that just because of the whole approach that this is going to make the economy better and save us from disaster or suppose you think there will actually be some dollars reserve return to the to the treasury to be used for debt reduction there will be right now but if there is a downturn then you'd want to have flexibility available if we don't see that additional crisis then there would be remaining on both through repayment as well as an extended  amount that would be available to help reduce the debt over time do you have any idea how much as an expanded i'm sure that the department be happy to respond to the committee without i don't have that figure in my  bernanke earlier this month noted that the bankruptcy code does not sufficiently protect the public's strong interest in ensuring orderly resolution of a non bank financial what would be the difference what would be different things to be able to move quickly to make sure there's not a collapse of the markets that might be caused by the lack of liquidity or the lack of certain transactions but you would still have the ability as a creditor to challenge the claim new resolution regime is to make sure that market is actually brought to bear on the largest great white sharks out of the financial sector so that they will have to bear the same risk as the smaller i think that's going to have a much agree that after the lehman and experience there is little doubt that we need a third option that between the choices of bankruptcy and bail out for non bank financial firms and they were happy and the expectation that certain financial institutions are too big to fail but my question is what would be the fresh out for intervention by the resolution authority i'm assuming that you're not suggesting that there be intervention for every non bank financial f for three quarters of a century so i think that's how we would proceed how would the administration's resolution possible guarantee that stakeholders would be no worse off by regulating regulators of this story than would be in the case of and if you take it out pro rata it should be at least a quarter of a million now why would it not be appropriate to keep it at the same level as a was in one hundred eighty one which i wouldn't want to really express an opinion on that but certainly we've looked we've done some analysis and looked at yes there's i ask you another question major financial institutions move on godly amounts of money trillions of dollars across a global economy and affect and in many many countries considering the amount of money that these major financial institutions move and across so many countries have the capacity to run to resolve all these big institutions if they get into a crisis situation but we certainly would believe that we have minute let me go in to the secretary of state you're the secretary for financial institutions for the department of the treasury yes sending myself in the decision making process i just want to make clear that the department of judgment i share that judgment certainly was quite involved in that judgment my responsibility to get that judgment enacted got it it's ok to admit it here you have a right to a lawyer you're right i don't i don't especially need one i'm happy to have you heard me accountable for anything i say about the resolution exist again mr chairman with respect to with respect to firms that are subject to the special resolution regime those firms would be subject to the resolution process let's talk about union contracts the claims out of the union contract would be to be paid in accordance with a priority system for the bank receivership because once the bank is closed the charter is charters terminated there is no longer a right of course to the employment organization proceedings whereas chapter seven is liquidation and the resolution of the bank is the closing of the bank so that there is no longer organization of that bank but the sale of its assets over to other private entities proceeding could we start off with a yes or no and then the explanation yes they would be protected the same way as in the chapter seven liquidation proceeding as in a liquidation procedure to winding up othe that mr chairman but this is some of the most fantastic questioning and responses that i have received a long time here in the committee  apologize for taking so much time liquidation we have a insolvent closed entity that no longer continues in operation our goal with the resolution authority that we would support is to end too big to fail so that the entity is propped up in some the ordinary i'd like to ask mr miller to come up to the panel not be recognized because i think everybody recognizes in the past he's kind of our black's law dictionary on bankruptcy sometimes and ask him with that introduction if he can give us basis of his knowledge on bankruptcy did respond to some of the questions the chairman's asked of the witnesses have to murder on mr the question is an assortment of questions that the chairman asked you may want to ask you directly about bankruptcy law and have might be distinguished from resolution and as far as union protection as far as the justice department and any trust as far testimony and concept of the f b i see is that because the charter of the bank is terminated there's no longer an employer and therefore there's no longer and you no longer a union contract and all of these other contracts have effect terminated under the bankruptcy code if it's a chapter eleven bankruptcy there are protections for pensions there are protections for labor contracts and very specific procedures that have to be followed and a chapter eleven does not have to be a reorganization many chapter eleven today liquidation with those protections under eleven fourteen and eleven thirteen in place so there are extra protections under the bankruptcy go under chapter seven which is a liquidation those provisions do not apply but if a chapter seven trust the one to sell the assets to another company or a purchaser who wanted to run that business there's still the possibility for a trust the two is soon to assume the union contract and transfer it to the purposes so i would submit there are greater protections that are being proposed in the resolution regime may i respond briefly yes or just to be clear about this if you have a chapter if you have a bank resolution and you create a bridge bank contracts can be deterred can be terminated by the fact there is no further employer but you can also transfer a contract as one of the powers of the receiver what i was talking about continuity  would have the authority to transfer those contracts over to the bridge bank in tact so that just like a chapter eleven there could be similar type of protections for union pension or other contracts that were viewed as being important to the first place you can transfer a contract that's why i'm saying it's very similar in many ways to bankruptcy law you can transfer a contract by the receiver over to the bridge bank you can also terminate reject a repudiation pending upon your preference ter those contracts as well so they don't flow over to the bridge but it doesn't seem to i can completely with mr miller because there is also the power to continue those contracts over to into the bridge b which has a long history and established protections in it and in particular circumstances that are rare that she'd be extended to a further category of institutions that would have a regime that has the same protections that have been used in bank failure laws for many many years i think i suggest that we should not forget that what was the fourth largest non bank financial holding company is currently in bankruptcy and is being administered in bankruptcy very efficiently and without a single dollar of federal assistance in a proceeding in complex estate for well over a year and if it had the protection of the automatics in connection with the derivative contracts would be a much more valuable state today i would submit to committee that this whole many of whom took control because of the way the statute is written i don't believe the f b i ever had any experience with the relatives and how you feel them and how and how you there were some consequences from the leaving failure that were created by drying up a liquidity i'm not going to say that was all caused by the lehman failure but certainly there were consequences that th natural problems in the financial system our judgment which would agree with treasury on this is that it's important to have an alternative and we had the most the largest firms involved in a potential collapse we have had experience working had a bank failure regime that's been in place for three quarters of a century special resolution regime for financial firms we're talking about applying that in rare circumstances to an additional group of companies  collapse which were included excessive risk taking which should have been subject to some regulation for regulation and the general autonomy which was suffering from the takeover of and as well as the growing enormity of the subprime crisis and you can you can trace back to the subprime crisis many of the problems what i was addressing myself to was when failure occurs how do you deal with that failure and the bankruptcy code in a bankruptcy courts allow you to deal with that failure with all of the protections which congress has already put in and if you amended the code to deal with this derivatives problem we'd have a much more efficient administration and even though lehman was an  midnight on september fourteenth and while they said it's in the discretion of the board it was pretty much a command and then the question was how do you deal with that i believe that the chapter eleven bankruptcy of lehman demonstrates that you can deal with brothers in the way it was managed as a model of how we want to deal with financial crises in the future it was a blow for the system it's horrible protect consumers it's horrible for workers and before our economy we have to set up a system that really hurt the system we can't do it again but the miller description valid i think what the miller description fails to recognize is that you have the light of day you have transparency in the bankruptcy  process as well you have access to the courts you have determination by federal judges about whether or not planes were accurately paid or not while i understand mr miller's understanding of the bank the well let's what is it that we agree on collectively three of the finest legal minds in the country what is it that we can agree on here and what is it that needs to be discussed a little further i think that we can all agree we need to end the perception of too big to fail i think we can all agree we need tougher capital requirements tougher liquid think that there does need special resolution regime if you will only to be used in the rare cases where where the going through the normal bankruptcy process could create additional systemic risk so i concur with  secretary bar is important that in that narrow scope of issues that we have the ability to go through a process that is designed to make sure there's make sure there's continuity in these contracts so that the contract where the liquidity is so crucial can be maintained to the bridge by angela and that's simply what we are proposing not some other not a federal bailout because we believe that we do need in too big to fail the problem is that there was not an interest by those in some cases policy makers are certainly in the case of also creditors in the cases of putting some of these largest firms through bankruptcy because of the fear that there would be a massive dumping of these financial contracts on an already a liquid market that is a danger that we need to avoid and we can avoid it without having to have a taxpayer bailout as the only alternative attorney i agree with almost everything is the bar  on the weekend is september twelfth was liquidity the liquidity had been trained by a series of different events and finally the clearing banks manning more and more collateral if you will looking for stability at that point in time the government the federal reserve bank of the treasury could have done a bridge loan and there was a request for a bridge loan to get lehman assistance to get to a sale the treasury decided against that and on the success or failure of laymen we're focused on financial stability overall i think that the layman process obviously occurred in the context of a massive inflow of followed by a massive influx provided to the responsibilities i think we need to have a special resolution because they're looking out for the taxpayer in the system and not just to the creditors of the firm you have less criticism of the miller market their contracts will be subject to delay and they will be to get out of drugs as much as the netting provisions cause problems they were put in place in part to help deal with the potential destabilization that occur by media by having contracts tied up in a bankruptcy proceeding rather that's why that congress has wisdom to give us the power transfer those contracts over to abridge financial institutions as i understand it the resolution was the regime would want the ability to assume or reject these contracts rather than allowing the counter parties to terminate them and take advantage of a have a declining market the other issue that i would raise in response mr barr how are you going to protect this country against the same decision that was made on the weekend in which the treasury decided we are not going to do a bridge loan or anything and then on tuesday the sixteen events eighty five billion dollars how do you check that decision how can you explain that mr chairman obviously i was not in the government at the time of those decisions i don't really have a particular judgment with respect to weekend activities i will say that i think it's absolutely critical and here i think mr miller and i agree that we change the basic nature regulation our system big buffers and we can internalize the costs i think but the put the law into bankruptcy and you want to put it into a super regulator i don't want to put it into a super regulator i think that these respect i think that we need to have a broader system interest in mind and just not just the interest of creditors of the firm but the chair is temporarily going to ask chairman conyers to assume the chair and recognize the ranking member as well to continue this this questioning and the chair would take the chair post about five ten minutes out appreciate it and i will return shortly mr franks has some questions but i will leave that to the chair to recognize well thank you mr chairman you know i guess just fundamentally here i think mr miller's testimony has been very compelling to me my original question was what is the primary difference between what you're doing and the bankruptcy protocol that's already set up and i understand that the big difference is who's in charge here and i've got to tell you i want to be very respectful to mr barr and mr premature because i know that you're here you know at the behest of others but you're in a position of having to defend what i think is almost an indefensible situation here because the there is the the reality of a super regulator like the chairman suggest this is putting this into an entirely new environment kind of a bureaucratic environment and you're trying to write a whole century of law here in a short period of time you're trying to create an entirely new mechanism trying to  what the bankruptcy system already accomplishes in most cases i have had no i've not heard any particular clear advantages that this would offer over the bankruptcy system i just happened so let me  just say that one of the things that concerns me is under the under the legislation here says this is a rebate on a no judicial review of determination pursuant to the sub paragraph no court may review the appropriate federal regulatory agency determination subject to paragraph d to disallow a claim in other words the gentleman mr miller is absolutely correct you could go into a federal court and make a big statement and i'll call in you know moment and  i just think that you're talking about a modicum of chaos here and there's a lot of hubris i'm hearing here that if the right people were in charge it would all work out ok and you know i'm looking at some graphs here and there there's a there's an indicator where when the bankruptcy by lehman occurred there was a little hiccup in the graph but when the bernanke paulson testimony came a tarp was announced soon it was disaster time and i'm convinced that the inept intervention by the department is most of what catalyzed the panic now i'm not suggesting that it was at the core substance of what the underlying problem was but it catalyzed the panic the same thing here with the the doubt when the lehman bankruptcy occurred it bounced a little bounce back up but when this announcement of this two and a half page plan to save the world occurred the dow just went bottomed out because the the market couldn't understand how that bureaucrats were going to come along and save the day not what i hear happening here is that somehow you're going to have all of a sudden have under the f b i see the ability to have the same transparency the same protective rules the sane wisdom the same experience as the entire bankruptcy court mechanism that's been going on for so long i'll be a little rough on you here but let me let me ask a couple questions first of all it seems to me that the additional strain and resource demand on the f d i c of this proposed new regulation would weaken the confidence in the f b i existing brand as a guarantee in the result of depository institutions and a single measure failure here by the f t c to resolve a bank holding company for example citi group under the new proposed resolution would undermine the market confidence in the f b i and wouldn't a loss of confidence then accomplish the same tragedy here that we're there is a run on the banks so let me ask you both if if you've got governments actually here on one hand now or a bank holding company and you've got your largest covered bank under f d r and both of them going to disaster at the same time which one is your priority and i'll address it to mr barr first thank you very much mr frank  i guess i would respectfully disagree with respect to the characterization of the activity we're doing is creating this kind of entity you describe what we're talking about doing is applying for a narrow class of the largest most interconnected firms in the country the opportunity to apply in narrow circumstances special resolution authority to be administered by the f b i in that it carried out the same procedures with the same protections for three quarters of a century in this narrow additional class in my judgment the f d a would have the capacity to engage in the kind of necessary approach to preserve the stability of the financial system  the main and you haven't told me where you where your priorities would be would be with goldman sachs your largest bank not a question it's not that's my question yes or i believe that the f b i has the judgment in the capacity to take appropriate steps to protect depositors with respect to a bank and austin to take appropriate steps to wind down large firms and to preserve through that mechanism financial stability in the system looks to me like that they would say you know what these guys like to might favor goldman sachs over the banks here because of the large political representation is there and i'm not making any i'm not challenging anybody's loyalty here i'm just suggesting that the market is going to consider that and you're what you're doing is you're politicizing the whole process you've got sort of a bailout on demand mechanism here and you're you're widening the ability of executive government bureaucratic government department government to intervene in these areas that it really that has pretty much been determined to be what was the catalyst of the of a lot of the panic in the first place and i mean if you can't understand it why did the business community say well they screwed it up once why should we all of a sudden have this great confidence that they can come along and rescue everything now miss phrases like i agree that we shouldn't care at all what goldman sachs thinks or any other firm thinks about anything we all do up here the point is to develop a sometimes that's not going to work if it doesn't work we need to have the option other than a bailout or bankruptcy it's actually going to be able to resolve the firm in a way winding down a way that's not disruptive to the system and our judgment is first to me that you know if you've got this additional process that the market doesn't know whether to trust it or not and the firms then they think oh well then our our issue is not whether we get a bailout or a bankruptcy we've got this other possibility that we ma and all of a sudden there's an entirely new calculus in the minds of some of the business leaders and it just occurs to me that this is a recipe for absolute confusion and i still haven't heard a major advantage in the process that you're talking about it would not be i'm sure there may be but that would not be already available under what mr miller's talked about end of chapter eleven could i suggest sir that i think that the ability to act quickly and decisively with respect to changing the management with respect to providing financing for liquidity functions with respect to the ability to reduce risk to the financial system is a whole through knock on effects to counter parties and the ability to take that kind of decisive action not with respect to protecting the narrow interest of the firm but with respect to preserving taxpayer interest and having the ability to assess on the industry as a whole to make sure that the largest firms financing improves market discipline and preserve the ability to to to strengthen our financial system i  do not believe that bankruptcy is adequate to doing that and so getting back to the one question that i asked just to clear it clear as you can i know what happens at goldman sachs in your largest bank blow up on the same weekend what happens what do you do you possibly suggest to me that you're going to under this new model come here where you don't have fifty years of developed transparency with the with the with the bankruptcy court you can't suggest to me that what i think that mr miller is exactly right that no one was prepared to do anything our financial system was teetering on the brink and i think it's ironic today to lead to hold up the value of our financial system last fall as a model for the kind of system we want to have in the future we can't have that kind of system in the future when i would you suggest that you know the entire foundation of the crash was loans that did not perform as those who rated them said they would perform because whether its derivatives or whatever it might be that was the basis of those laurens loans had performed as they would have traditionally and so we changed the rules and got underwriting loans that you don't know whether the person has they have a stated income no credit history no big downpayment what are you doing all of a sudden the traditional judgment would have entered into the process but when government comes and says because we're really smart we know how to make it all work and i will suggest to you that this is the same mistake that is littered the highway of history as were government comes in it feels like they can make better judgments than the market and those who are in business and the foundation or purchasing any obligation purchasing assets of the covered bank assuming or guaranteeing obligations of the covered bank acquiring any type of equity interest in the covered bank taking a lien on all assets the covered by selling or transfer selling or transferring all or any part of the cover back that's a recipe for you to come and take them over and i don't know how you think that you're going to do a better job than most of the private sector has done and without putting the risk of the responsibility on them to thought mr miller last thought and i'm finished but i i just obviously you can say you could probably guess here that i'm a little bit not not convinced here mr frank i would agree with you that we need to be humble we need to be humble about the ability of regulators we need to be humble about the ability of managers of large firms i think that's why it's absolutely critical that we build up large buffers in the system in the event of failure it's why we need tougher rules on these institutions in advance and i think what we're talking about is just the narrow question of do you want it a process through the bankruptcy process which involves a lot of individuals working in the government or do you want to special resolution process which involves  individuals working in the government to decide the nature of the resolution in our judgment the bankruptcy process is set up designed for different function it works well for most of the time for most institutions in doing what supposed to do we're talking about in the narrow case to financial stability do we need a broader purpose carefully cabin approach using long trusted mechanisms we think that we did mr chairman considering the history of the last year we have seen some major intervention by government that is unprecedented in this country and i would just suggest that if we had gotten back to just basics and told these financial institutions listen you better have enough equity to cover your risks and you better make sure that the taxpayers the last one to have to to intervene here and if you don't you're not going to go bankrupt you're going to go to jail if you don't follow at least having the fundamental equity necessary to follow your to cover your risk and if we did that and we said ok buyer beware lender be where guys have a good time i can tell you what works a whole lot better than government trying to come in and tell everybody how to do it and guaranteeing everything to the extent that through the whole skew of a real market out of place in the minds of special super agency i would submit to you that there are thirty three ten is a good start to where we should go in cooperating those amendments into the bankruptcy code we need to deal with the derivative of problem you have to take out those safe harbor is better in the bankruptcy code and all of this without some cross border solution is not going to work we are dealing with terms that are global and have huge operations overseas in the lehman case we court order solution to the type of solution to this regime that is being proposed simply not going to work it all could be done in the back within the bankruptcy law as i said with full transparency thank you has been a very unusual manner of conducting a committee hearing but i think it's been very evocative of issues and i think it's been very helpful to us and i thank mr mr miller for joining the panel and mr barr and mr premature for participating as we've gone along i would like this one last thing mr barr i just think there probably needs to be some type of standard when you get out of the bankruptcy into this resolution and the standard ought to be spelled out in some way like a compelling state interest sometime that compelling financial economic doomsday and define some standards that could be met i would agree with that mr chairman and we have a standard proposed in our legislation would be happy to  make it available to you and for your consideration i look forward to that nothing and i have to ask you to how are you related to bob barr your cousins we're not cousins fairly confident we're not related in any way buyers i think came from the same place the gulag maybe right now i'm just your neighbor up the street in an arbor thank you each of you know appreciate your testimony and i what you might want to find a different word whether the clock chairman of mr king is here yes mr king you're wrecked thank you mr chairman i thought for a moment you had suspended your peripheral vision and i can go to my left and ask you this question and that would be if we had allowed these financial institutions to go through a normal process of chapter eleven or chapter seven what would you predict would be the results today how would those large investment banks have fared what would be left to pick up the pieces without regard to what the prediction might have been for the global financial structure i think that i think that if we had if the federal government at the time had not taken significant measures both through the federal reserve and the treasury and the f b i to provide liquidity in the system  financial consequences would have been much more severe and lasting already i think that the difficulties that have been experienced because of the financial crisis have been  institutions to maintain the entities that we had as much as possible to go through this had we not if we had decided that just to be allowed to fail really didn't apply that  of the judgment of being allowed to fail and that was taken away and i think it was taken away implicitly some years ago in fact some of the top financial people that i have heard from two years ago were well what you do in this business is pretty much what everybody else does that way if they're making money you make money but if everything falls apart you get bailed out with the rest of them what would you say about that subject matter  respond in this context if the firms went into bankruptcy chapter eleven or chapter seven this is viable it would be minimal at all the assets would have offered for sale they would have been broken up if the economy was in a stable condition there's a thing called a capitalist arm  called constructive destruction or something like that that part of capitalism is failure and when is it the other elements of the economy take over that let me call it entity i think the next was morgan stanley next and if you had excessive set of bankruptcies each one of those firms the consequences to the overall economy i think would have been disastrous i thank  second panel come in i'm sorry you've been i've been did probably derelict in recognizing your expertise and just to bring to mr miller but it made for good good panel discussion the witness is the first witness we're going to hear from this could be mr david moss professor me here today and i'm very pleased to have the opportunity to speak about the proposal for a resolution mechanism for systemically significant financial institutions i actually support i do support the broad idea of a resolution mechanism and the reason i support it is that i believe it could be helpful in navigating a rather narrow path and a treacherous path between if i may interrupt at the suggestion of the chairman we will go through a can continue to an orthodox policy of this committee which i'm happy to be the initiator of because i'm very unorthodox in more ways than one and what we'd like to do is ask mr moss fessor sagers professor skeel and mr wasn't in them to comment you can incorporate some of what you had your opening statements all of which will be put into the record but also to comment on what you have heard in the testimonies of mr barr and others and give your opinion of their testimonies and  e safeguards are not safeguards you think we should look for in having a resolution group rather than bankruptcy professor moss you start it was a quite interesting discussion to begin with  i guess i would start that i'm not sure that the choice which has been framed here is in fact the choice we face the choice that was framed in this discussion back and forth was one between a resolution mechanism and  bankruptcy and i realize that that may seem like the choice but i don't think it is i think the choice sadly is between resolution and bailout i think that in the in what we've seen is that there is now of a sufficiently widely held belief perhaps correct that that bankruptcy of very large financial institutions could have catastrophic effects for the financial system and given that it's not clear that policymakers from any party at any time in my view would allow that to happen and i think as a result although the law on the books would say to put the firm in bankruptcy it's not clear to me that in fact that would be followed in a crisis it was not followed in this crisis by either administration i don't republican or democrat i don't think it would be followed in the future either and as a result i don't actually think the choice is in fact between resolution and bankruptcy i think it's between  resolution and bailout between those two choices i'll take resolution i recognize it's a problem i will say that your predecessors it seems to me i'm not prepared to talk about this but  predecessors have excluded financial firms quite quite regularly over the course of american history from bankruptcy law the original ninety eight act as i recall mr miller i'm sure would know better than i but i believe excluded all corporations from voluntary from bankruptcy law so i think the idea of excluding financial companies from bankruptcy law is not a new a new phenomenon maybe i can just make one more comment i know you want me to me to be brief i have two  significant concerns about the idea of a resolution mechanism broadly i think it's necessary but i have two concerns one is that we should not fool ourselves to think that a resolution mechanism will solve all the  serious problem and i think this is one you ought to consider if we go forward with a resolution mechanism is that in a crisis in a crisis it's not clear that we would follow a resolution mechanism there's a question is is the resolution mechanism credible would it just in the way that we have to ask bankruptcy credible over the past year and a half at every opportunity we have why today at every opportunity  seems to me that if we're not careful we could create a beautiful resolution mechanism and it would be circumvented in a crisis so we need to create a mechanism that is credible i'd be glad to talk about how to do that i have some ideas but i'll just would be very reluctant to put a major bank into resolution for fear that it would runs on other depositors so there is a question of how do we stabilize the broader financial system whether we put it major financial institutions into bankruptcy or resolution do we have a system for protecting the healthy institutions at the same time i'd be glad to talk about that in more detail to be helpful but those are my broad thank you we'll come back and hopefully have time for discussion we're going to go to professor  segars your thoughts and opinions at thank you very much mr chairman it's my great privilege to be here i'm more than happy to scrap my prepared statement because i think that i can be be of use here in precisely one way which is to answer chairman conyers specific question does the bill change existing i trust law with respect to these entities and i i can give a yes or no answer i have the disability of also being a lawyer so i'd like to expand on it a little bit of if i and preparing their testimony they were advised by by and i trust counsel and in their defense they gave answers which were not not literally fall there is an existing and i don't mean to cast any aspersion criminal defense lawyer but the short answer it is a short way of saying what is really a very complicated answer is that it's true that bank merger review has always existed as something of a special case under our and i trust merger review system and it is also true as they testified that that system contains a series  of emergency safety valves that can make the process go really fast if the banking regulators decide that one of the banks is in danger of failure i think we need to be where i do want to say by the way that there is one significant change there is one technical legal change made to the law that really is potentially breathtaking but even before getting to that it's a bit misleading to say that we have addressed competition concerns because we just incorporate antitrust laws that we've always had for bank failures the n h s a lot of we've always had for bank failures is extremely problematic it's it's never ever incorporated any concern for systemic risk it has repeatedly approved the merger of immense banking institutions and conglomerate financial institutions even over  strenuous objections about the increase in systemic risk that's being caused and i don't think that even if even if that system weren't put into an incredibly rushed  procedural framework under this bill as it will be it wouldn't that existing system of bank merger law wouldn't be very well designed to handle the competitive risks which are both  risks and also the more traditional competitive risks that we deal with in merger law that system would be very well set up to deal with mergers of and of these of this immense magnitude all right that's all in answer to the question whether existing ba merger law is really adequate to deal with these problems even if it's not going to be changed by the bill in one important respect existing bank merger law is changed by this bill in that is that the bank holding companies that can be subject to the resolution authority and of this bill include quote unquote financial holding company that is those businesses that are allowed to own both banks and other financial businesses  it's clear under the bill that if one of these resolution actions is undertaking and an entire financial holding company or big pieces of it are given away sold as they w sold to other large competitors there will be a merger review and moreover the non banking piece of any financial holding company that's taking into receivership that transfer of that's that's how it would happen under existing law except that this bill provides that that non banking piece of the financial holding company that has to be transferred to a competitor possibly a really big competitor with a lot of for additional information they won't be allowed to request any extension of time for reviewing the merger so what we're basically going to have is transactions involving transfers of truly the largest non banking financial institutions reviewed by d o j or f t c under extremely tight time constraints and with very limited information and those agencies are either going to be forced to rubber stamp concurrence of this committee first of all i think the selection of these professors lawyers experts is very very much we got to go over the transcript there's an incredible amount of material that we've got to digest and evaluate we've had  experts all over the place here and i want to try to elicit an agreement that  has conducted this meeting but it's been important what do you need a five minute we're talking about the economic future of the nation and we're asking somebody that i've read is engaging in a lot of it concurs and overlaps but contradictions especially those disagreements i think we need to take some time to explore it in an intelligent fashion and so rather than have me drill into one component of this i'd rather look at the broader perspective then and second the recommendation of chairman conyers and ask that we do come back together and and do justice to the quality of the witnesses we have today i thank you and i deal back but i thank you mr king  i appreciate all the witnesses i apologize for the timing we're going to be out for another hour we may if you're kind of up to return ask you to return at a future time another hearing your prepared remarks will be part of the  record we had i think a very good discussion i appreciate mr miller coming up he's the only one of the panelists who i was familiar with i'm sure that each of you could have contributed as well and but it would not mandate maybe as that might have been unwieldy so i thank you for that allowing me to have that type of discussion which i think was helpful to us it is an issue bankruptcy versus resolution and maybe it's another people talked about the bailout and  and compelling interest to but you lose some of the people who lose out if you go to resolution that don't lose out in bankruptcy they have to be thought about and there is a concern in this nation that we've done too much as i think barney frank's talks about the collateral benefit that to help the whole country we've had to help some people who aren't deserving of help because they're not appreciative and they are such gluttons that they poison the water to where nobody wants to swim there again and we might have to go there again but will be difficult because of the great white sharks that are out there swimming in that water with the chairman of the new year of the chairman i just wanted written questions which we part of the witnesses and we'd ask you to answer promptly as you can to be made part of the record that objection iraq remains up for five days for submission of other materials and i thank each member for their time their patience their from the way i ran the committee in the time that we took th