on the subcommittee of financial institutions and consumer credit will come to order good afternoon and thanks to all of the witnesses for agreeing to appear before the subcommittee today today's hearing which is entitled tarp oversight is t working for main street will examine where the tarp has been successful in freeing up credit for american businesses especially the small and medium sized firms that are bydel to the u s economy we will be limiting opening statements to ten minutes per side but without objection the record will be held open for all members opening statements to be part of the record yield myself five minutes last week in his first  joint session of congress president obama stated the concern is that if we do not if we do not restart lending in this country our recovery will be choked off before it ever begins and quote i imagine that you will argue against the proposition that unfreezing the credit markets and reinvigorating lending to american businesses is how we find our way out of this recession resuming the flow of credit to the businesses on main street so that those firms can retain existing employees and even create new jobs is exactly what this tarp oversight hearing is about specifically will focus on whether the tarp funds distributed through the capital purchase program or c p p have been successful in freeing up credit for american businesses especially small and medium sized berms that are battled to the u s economy the impact of the c p p funds on small banks small businesses and lending to main street deserves examination because small firms are the backbone of the american economy small businesses employ about half of the private sector employees in the united states and pay nearly forty five percent of the total u s private payroll in my home state of illinois more than forty nine percent of the work force is employed by small businesses since the mid one nine hundred ninety s small businesses have created sixty to eighty percent of the new jobs in the u s and after additionally led the nation out of recession because small firms tend to recover faster i supported tarp and the emergency economic stabilization act that created it primarily because i felt it was necessary to unfreeze the credit markets and get capital flowing again but under no circumstances do i want the money to be held in the vaults of wall street firms to be used for executive bonuses or to pay shareholder dividends or to be hoarded in cases these institutions were threatened with insolvency when announcing the creation of the capital purchase program former treasury secretary paulson stated quote our purpose is to increase confidence in our banks and increase the confidence of our banks so that they will deploy not hoard their capital and we expect them to do so so increased confidence will lead to increased lending this increase lending will benefit the u s economy and the american people and quote congress wasn't sure that tarp and c p p funds are being used in ways that are consistent with the intent of those programs if these programs which could place a large financial burden on american taxpayers are not working in ways that benefit u s businesses and consumers then we should revisit the manner in which they are being implemented before the treasury department divides the second three hundred fifty billion dollars in the same way they did the first some critics of congress involvement in this area argue that we are setting out to force banks to le or encouraging banks to make bad loans this is a straw person argument i'm not interested in encouraging banks to make bad loans i understand and support the current environment of stricter lending standards because even under those strict standards there are thousands of businesses across the country that can qualify for loans furthermore i believe that those same strict standards should be applied to financial institutions in other words if banks will not len businesses that have made bad business or investment decisions then likewise congress should not invest in taxpayer dollars and financial institutions that have made bad investments and business decisions and which are quite frankly credit ris rather we should reward those institutions that have made sound investment decisions and stand ready to make loans in rural and urban areas all across our country it is time to shift our primary focus away from saving the wall street firms that got us into this mess and concentrate on the main street street and community oriented firms that know how to create jobs and grow the economy without a vibrant small business community this recession will linger longer investing in and medium sized firms is the one of the best we can take to economic recovery i look forward to addressing these issues during this hearing i will yield my right the ranking member mr penciling five minutes for his opening statement chairman in thank you for holding what i believe is truly a very very important hearing people all across america have questions about the tarp program the hearing is entitled tarp working  told to provide financial stability to our financial markets were supposed to help struggling families help retirement security stabilize community and the list goes on and on one can capital cushion at a time they needed it i suppose some people could argue maybe it worked i don't know unlike the chairman i did not support the statute although i think it's important that government act i think there is a legitimate crisis i think there is much pain within our society and i'm heartened to hear the comments of our chairman that a lot of the solution lies within our small businesses frankly no articulated plan that the vast majority of americans much less the markets understand and i say that about both administrations the current administration and the previous administr n what we have in some respects the second tranche of tarp was three hundred fifty billion dollars in search of a program now we know that the president yesterday included seven small business but they need certainty in the market so much capital sitting on the sidelines but they're waiting to find out if somebody's going to bail me out are they going to bail my competitor out of going to belmont customer out and i look forward to working with both of you we certainly have our work cut out for us what i've been hearing from my constituents is that our credit markets remain frozen people are having trouble getting loans and unemployment is rising that davenport who is the president of the national development council which is one of the oldest national nonprofit community and economic development organizations in the united states thank you for your work here one of the concerns that the public has a in having whom those loans have gone and exactly how that money is being spent and accounted for nor do i know if it is i don't know about the banking institutions loaned an extra fifty million dollars to whom it is loaned it other than than g m or somebody of that nature and exactly how it's been spent not just don't think we had that information which is one reason i look forward to this hearing today i think it's vitally important that not only members of congress but the public understand this i've watched the stock market just collapse here in the last several months i think a lot of it is just a lack of understanding of what is going on out there and we need better information better presented in terms of what is happening you may make the argument that that not only the banking but other institutions are raising money are in some way or another raising capital for that reason are more stable than perhaps we think they are but at this point there is just a lot of doubt than in the minds of a lot of people even beyond the congress  the united states who just aren't sure what is happening out of the anybody can make conclusive argument that tarp is working or not working so what you're going to present today and then the answer your questions is vitally important to all of us and i think we have  an obligation to make sure that there is a public understanding of all this glad to see the fed has at least started to move in that direction you know back gentleman us back congressman sherman from california for two minutes thank you i usually focus on whether taxpayers are getting a good deal in tarp transactions or whether there's been undue generosity toward wall street we've all been outraged by the dividends the compensation the perks and the congressional oversight panel demonstrating the quit shortchanged by seventy eight billion dollars in terms of receiving less preferred stock that we should have have also been concerned about taxpayer money going to foreign entities as appears to be the case with the transfer of tens of billions of dollars to counter parties including what appears to be substantial transfers to foreign entities today we focus on helping main street and there are two ways that tarp can do that without going through wall street one is the use of  talent to have the bed make loans now true some of these may be generated originally by a large banks but they could also be from small banks and increasingly we could see federal agencies making the loans themselves the second is to use community institutions i look forward to seeing how we can better use community banks and i want to comment about credit unions who want to make small business loans they need capital and they're turning away deposits they can't issue preferred or common stock because of their nature they could be allowed to issue subordinated debt which is much like preferred stock and if they could sell if we in congress  so they can sell the subordinated debt either to the tarp program or to the public yet the capital except deposits that their members want to make and make small business loans the other thing we need to do is  explicitly authorize a greater amount of small business lending by credit unions so i look forward to seeing community banks and credit unions get us out of a recession that they clearly did not put us into  today will be discussing the need to improve lending to small businesses and it's clear from today's testimony they will hear that the tarp program and i think from the experience we've had in speaking to our neighbors and friends back home is largely failing to unfreeze the credit markets and allo credit worthy businesses to access credit on reasonable terms and certainly nobody is asking anybody to make loans that are not credit worthy but it's clear that the pendulum has swung wildly to the other side and it's hit the wall and it's unfortunately not lending itself to allowing these types of reasonable loans to take place i certainly agree with the recommendations take concrete action with certainty to ensure businesses can obtain the credit that is essential on the successful operation of their enterprise small businesses tend to lose jobs faster as a country and a recession but they also tend to recover faster a little more flexibility and adapt adaptability and emerging from a recession so it's even more essential that we find substantial ways to help these small businesses access the credit which is their lifeblood elizabeth warren who's the chair of the congressional oversight panel testified last week quote if this tarp program is about putting money into the hands of small businesses then you make that part of the terms of receiving the money and if someone doesn't want to do that with the money then don't let them have the money it's that straightforward seems pretty simple to me as well and i think your comments are absolutely correct and i look forward to the testimony so we can help work together to flush out the ways to restoring the flow of credit to our small business community  and i'm also a member of the swan lake working group on financial regulation which is a nonpartizan nonaffiliated group of fifteen academics who have come together to offer guidance on the reform of financial regulation but i speak only for myself today i'd like to make three main points first there's likely been a contraction in the supply of bank loans because of the poor financial condition of many large banks this poses a challenge for most firms but particularly for small firms which rely on bank loans for almost all of their financing about half their loans come from large banks and these banks appear to be cutting their lending more than our small banks thus it's important to find ways to use the supply of credit to small firms second the capital purchase program of tarp should be thought of as two distinct programs one is a support program for large troubled financial institutions some of which are systemically significant effect of this program on financial stability and credit availability is hard to measure since we cannot observe what would have happened it's absence the other part of the program is targeted at small banks this program is not a support program for troubled financial institutions but rather a program that provides capital to banks so they can increase their supply of credit the effect of this program will be somewhat easier to measure but such measurement will inevitably be imperfect third and at the heart of my testimony the government should consider expanding the capital purchase program for small banks perhaps even creating a separate program for them the problems of the big banks have no easy solutions and it is highly uncertain how and when their problems will be resolved in the meantime small firms risk losing their primary source of funding many small banks are well positioned to step into the breach given their knowledge of local markets and with an infusion of capital could do so however as with any government program one must ask why does a government need to be involved in this case one should ask why can't banks with good lending opportunities raise capital on their own the answer is that many can raise capital but are reluctant to do so in the current financial environment given extreme investor uncertainty about the health of the banking sector a bank that issue stock is likely to be perceived as one that is under capitalized on recognizes losses on its loan portfolio is natural that banks have been reluctant to issue stock on their own given that doing so would likely drive down their stock price in addition most small banks are privately owned they cannot easily raise capital illiquid markets the government's commitment to purchase stock at a premium would entice small banks to participate in the program and raise capital as many have already done this program will attract more banks if it does not include the same sort of restrictions that are now suppose imposed on tarp recipients nor should this program would not be designed to put taxpayer dollars at significant risk the program will be most effective if it targets small banks that are able to leverage the equity investment by expanding their deposits are borrowing and it should target banks with expertise in business lending research i've done suggests that the existing targets and tarp investments in small banks do appear to have gone to banks that do more business lending it would be tempting to require participating banks to reach a target level of new lending equal to some multiple of the government's investment this temptation should be resisted mandates of this sort could lead result in a rash of bad loans and we do not want to turn healthy banks into unhealthy ones moreover we should probably not measure the success of the program purely on the basis of whether there is an increase in lending it will be a success if the increased lending capacity of small banks increases competition and puts downward pressure on interest rates spreads which are now at high levels of course it is important to keep in mind the limitations of such a program some of the hardest hit communities may also have many troubled banks investment in these banks may help stabilize them but that's not the sort of investment i have in mind moreover while many small banks are have relatively healthy now their condition could worsen worsen appreciably in that case the investments are unlikely to have the desired effect with these limitations in mind i believe that the government should enhance its programme of investment in small banks targeting healthy banks that are well positioned to increase lending at a time when large banks appear to be retrenching this would better enable our financial system to meet the pressing needs of small enterprise thank you for the opportunity to address you today and i look forward to answer any questions you may have thank you for rigidly following the rules of the red light everybody has five minutes when you see the yellow light that means you have thirty seconds to wrap it up mr baker secondly restoring the flow of credit and those are two very distinct purposes a second point i want to make and i perhaps i'm out of line with some of the other witnesses here and some of the other comments but i think the main cause of this downturn is we're misplacing if we see it as being in the financial system i think the main cause of the downturn is a loss of a trillion dollars in housing wealth and i'll make a couple comments on that but i think we we would be misleading ourselves if we thought simply restoring the flow of credit would be sufficient to get the economy going again and then the third point to agreeing with me the comments just made i think that they the treasury in the fed can and should try to target tarp money and other aid to smaller financial institutions because many of those are best positioned to resume the flow of credit which certainly will help with the recovery and as far as the first point just to recap the history that you all recall very well back in september and october the pressing need was the urgency that the treasury secretary  the federal reserve board chairman came to congress and said we needed tarp the pressing need was that the interbank lending had ground to a halt the live or rate to get the spread between the interbank lending rate in london and the ninety day treasury had expanded to almost five percentage points at its peak during normal times it's typically between fifteen and thirty basis points so we basically had a freeze of interbank lending this being between the major banks simply because no one could trust that these banks would be in business ninety days out we're only talking about ninety day loans that to my mind was the urgency the main purpose of the tarp and certainly i think members of congress have been right in pressing for more transparency and taxpayer certainly have a right to know where their money is going on the other hand getting the money to those banks to ensure that they did not collapse does not restore the flow of credit and perhaps our best example here is simply the case of a g e of course not a bank an insurance company but the money that we funneled the  taxpayers have funneled into is not about restoring the flow of credit it's simply about keeping it systematically important institution from collapsing and i think we do ourselves a disservice if we try to conflate the two those are not getting money does not restore the flow of credit my second point was that the downturn is first and foremost due to the loss of wealth we've lost on the order of six trillion dollars of housing bubble wealth one our way to losing on the order of another two trillion this explains the downturn almost in its entirety the basic story if you look at the housing industry itself we've seen a contraction on the order of about four hundred fifty billion a year in annual demand do the direct housing construction building in the housing sector residential sector and then on top of that the wealth effect that we would expect to see based on a trillion dollars of housing wealth would imply an additional about five hundred billion dollars in annual consumption that's sufficient to explain the downturn were seen the impact of the freezing up of the credit system obviously magnifies that but the basic story is that we had a very large bubble which led to a huge amount of in effect fictitious wealth which has disappeared over the last two years and that is the cause of our downturn now one item i like to cite is evidence that there isn't a problem or the problem is exaggerated of credit where the customers being on able to get credit is the mortgage bankers association mortgage applications index if it were the case that credit worthy customers were having different getting home mortgages we would expect to see that index soaring as people apply for two three or four mortgages just to get one and of course many people apply for two or three mortgages and still not be able to get one issued in fact this index has trailed downwards followed close sales downwards indicating that credit worthy borrowers are not having much trouble at all getting mortgages so that doesn't mean to say i don't mean to say that businesses can never have trouble getting mortgages but the main factor here is simply the loss of well finally on the last point we know that we have many large banks that are severely troubled one of the things that's been striking is many small banks have held up very well through this crisis that's not true everywhere obviously if you're in the middle of a bubble market you work it hard but if we look at the f b i data we see that in the category of banks with assets of one hundred million to three hundred million they actually manage to increase their loans modestly in the fourth quarter a period in which the economy is declining at a six percent annual rate that suggests that those could be an engine that could move the economy out of this downturn and i think congress should be well advised to look to try to get them the capital they need to sustain lending thank you thank you very much mr that import mr chairman and members of the committee i want to thank you for the opportunity to testify today regarding the effect of tarp on main street bob davenport impreza the national development council in organization that was created in one thousand nine hundred sixty eight after the tragic death of dr martin luther king and robert f kennedy and our mission is very simple to end discrimination and create opportunity in low income communities fundamentally we provide training we provide technical assistance and we do financing in low income communities we finance affordable housing we do small business lending and we finance a whole variety of community facilities such as medical centers and libraries and educational facilities and youth involved in financing in low income communities and we do need another source of capital until the banks return to our market we need tarp and we believe not because we're doing poorly but because we're doing well well we need to increase our liquidity and we need to replenish our capital in order to meet the increasing demand that we're that we're finding in our communities as the conventional banks and here's how the here's how the pullback has affected directly first of all i smaller community banks that you're going to hear from two alternative financial institutions such as community development financial institutions and if they were if it was offered to those financial institutions to replenish their  and to increase their capital because they have made loans and they will continue to make loans they don't need the tarp funds because they might make loans they are making loans driven institutions have no desire community business because they drive the economy and create jobs in our community in addition to the general business community we also are reaching out to the minority community through town hall meetings with the black chambers of commerce in baton rouge such policies would be very destructive to the american economy my early consulting experience is especially relevant to the subject of this hearing ask for over a decade i consult with a small medium sized businesses on a broad range of financial matters including obtaining bank credit i also work with business insolvencies those experiences brought home to me the importance to small businesses of having sufficient equity capital which is safely leveraged banks credit lending standards clear returning to earlier prudent standards from the excessive la of recent years that return to prudent standards is crucial both for the recovery from the current recession as well as for the longer term health of the american economy this is absolutely the wrong time for congress to force banks to whether through tarp rules or otherwise to launch a new round of imprudent lending where the small businesses or homeowners or whomever regarding the small businesses it is important to realize that the primary reason why a business cannot obtain credit it believes it needs is it lacks sufficient equity capital and or it cannot demonstrate to the lender that it can properly employ the credit being sought it is vitally important to realize that credit is not a substitute for equity capital rather credit can only be reasonably leveraged of a sufficiently strong equity capital base in this regard non financial businesses are no different than banks he said that for good reason non financial businesses cannot operate with as much leverage as banks other financial intermediaries because lending tears are returning to normalcy businesses of all types cannot operate with as much leverage they could a few years ago nor should they try the underlying cause of insufficient credit for businesses including small businesses is inadequate equity capital as i mentioned rather than beating on banks to lend more congress should address the tax incentives working against equity capital accumulation within business to put this another way the internal revenue code is a principle underlying cause of the current financial crisis addressed the tax laws and ten other public policy causes of the crisis in an article which will appear shortly in the cato journal i'd be glad to submit an article for the record when it appears in print later this month while there are many aspects of the tax laws which fueled the housing bubble and the gross over leveraging of the american economy working together they encourage businesses and individuals to over leverage by incenting overspending and under saving thereby discouraging accumulation of capital to nominators equity that is rather encouraging savings which builds equity on a balance sheet the tax laws actively discourage savings and equity capital cumulation through the relatively heavy taxation of profits for property for for profits represents a generation of equity capital at the same time the tax deductibility of interest expense by businesses and homeowners encourages borrowing and therefore over leveraging when a pretax cost of equity capital is easily fifteen percent or more in the prime rate is three and a quarter percent as it is today it is an apparent no brainer for business to finance as much of his balance sheet as it can with that capital and as little as possible with equity capital in addition to funding a portion of a business bank balance sheet equity capital also services as its last cushion the same role equity capital plays and bank balance sheet that last question becomes vital to a businesses survival during a recession ford is equity capital not debt capital which must absorb any business losses and serve as a foundation on which borrowing during tough times must be based far too often i have seen business owners to do during good times by seemingly cheap debt only to suffer losses during the tough times that exhausted too thin equity capital foundation i will close this portion of my testimony by posing this thought experiment what would be the condition of the american economy today and the availability of credit for businesses of all sizes of interest was not a tax deductible business expense and business profits were not taxed at a business i strongly suspect that america would not be in recession and it would enjoy a much more profitable and much less leverage business sectors and as i will close by discussing a potential threat threatened loss of bank capital and therefore reduction bank lending capacity the twenty basis points a positive sure and special segment of the proposed a levy on the nation's business partner michael genovese in my journey james to the final i think the committee for inviting us to participate in this crucial hearing i sincerely believe it is essential that there interest of all she was time that the voices of small business owners are h and those struggles are reported on the owner of mr b fun orleans we have been there in the city of chicago for thirty years we have built their reputation a thriving business in addition i am the owner along with michael genovese downturn has had its impacts on my business to the loss of jobs and from local residents that live in work in the near downtown chicago many small businesses are being needed lines of credit or having their lines of credit not renewed upon maturity not only have i seen and heard this from a variety of small business owners and i have personally lived this nightmare i have two loans that are relatively small that have matured in october and november of last year these loans have been paid every month and i continue to payments i do not have the funds to give the entire loans that are amount to bag which received eighty five million dollars in tarp funds will not big banks are not even the slightest bit interested in our using the tarp money to inflate their own revenue we have been actively submitting loan packages to various banks and loan brokers in order to extract from the situation our current loans  my situation is just one example i am fortunate to have a successful business in downtown chicago there are other business owners who are not there at the end of the day we are at the mercy of the banks who have no willingness or obligation to help us within the local banking industry for coming here today i implore this honorable committee to set my mind at ease i do not need nor do i need a bailout from the taxpayers i only want the banks to be fair and refinance  congress needs to take action congress needs to know that small businesses drive the economy and that we are fighting every day to keep our doors open thank you barbie people employed it is time that tarp funds come with requirements that the big must actively seek out and help lower small businesses interest rates or expenditure of loans or other lines of credit that are that we are performing on behalf of myself my partner michael genovese my attorney james to close the bottle and all the small mister i'll open up with five minutes first of all i want to thank you for the for what i know is a difficult task to come before the committee and tell your story and for the courage that it takes i know you're very fearful because of what the financial institutions and the kind of replication by complaining about them might cause you and your business since you're here i'd like to make clear to everybody just what's going on so that we can see so midwest bank holes how much in loans to your to your businesses what's the total amount three hundred thirty five thousand three hundred thirty five thousand dollars in those loans maturity is that correct they mature yes they short and they won't refinance those loans we asked them to refinance they would and they received eighty five million dollars in tarp money they sent us a letter saying that they received eighty five million me ask you something if were you ever late on any of the loan during the time you had the loan with them a loan with mid west bank you paid it on time every month along came to maturity they refused to renegotiate the terms of the loan you were never late and you continue to this day to pay the loan and the amount of money owed to as you tr  our last appraisal which was i think done in november of two thousand and eight was about three million dollars three million dollars so that's where it's on a piece of land worth three million dollars and you are three hundred thousand dollars on  that on that loan that they refuse and what's the value of the other property because there's two of them there's the other restaurant what's the value fifteen twenty three chicago avenue is i want to say about three point one million so you have appraisals for six million dollars is that correct of it's about five point three five point my point three million dollar properties are combined what is the total amount of money that you owe everything the three hundred thousand dollars that won't be renegotiated by and the other permanent financing that you have what's the total amount about three point four three point five million so we see that as an over leverage he has appraisals for five point three million dollars in an economy where small businesses loans so that they won't be repaid to the financial institutions but we hear this story and they out in my office and i know in offices across the united states of america that people who have thriving businesses the choking of the lines of credit is such that it is causing our economy harm even if you have a business that makes money they will not extend to you the credit unless of course outside the regular banking system even more onerous interest rates in order to get this done i don't think that's where we want to take america in terms of where our small businesses i want to thank you  representatives at the recommendation of our chairman mr zucker i was certainly look forward one day when i'm in the windy city to go to your restaurant if that doesn't violate house rules and i'd be happy to have you b with all due respect to all of my colleagues i don't think there are many people here who probably know how to run a bank just like when we were in our hearing with the c e o s of the tell me in your longstanding history within the industry what are your fears what historic precedent are they based upon and what would you see as the consequences of such actions on the part of congress well  first of all there is i think a mistaken ideas that the banks are being given tarp money they're not being given tarp money the government is making an investment in the banks it expects to be repaid on that with what effectively is interest in the form of  dividends and hopefully the taxpayer will not end up losing any any money so i think it's very important to realize that there is not a presence here second of all banks don't lend very little in  way of capital their capital serves primaries the last cushion most of the money that banks lend is actually the deposits that they bring in and they're borrowing from institutions like the federal home loan bank so i think that it is a mistake to somehow some kind of lending mandates being imposed on banks or certainly has been that discussion which i find unfortunate because the fact that banks have been increasing their lending the federal reserve data on this are very clear reserve to provide liquidity and stability in the financial marketplace are there additional steps or changes in any of the current programs of the federal government should consider to ensure credits flow into our small businesses the comments on th credit standards have tightened things did get too loose of what the small businesses have to focus on is trying to raise equity capital so as to improve their credit worthiness and i realize that this is a very difficult environment to do that that banks are going to be forced to make loans that they otherwise would not keep in mind the banks are in the business of lending this is how they make money and we shouldn't assume that banks are just sitting on the tarp money and not looking  the opportunities they are but in this environment they want to understandably make good loans and i add one additional point what i hear from bankers across the country is that they are getting a lot of criticism from their bank examiners the the pain is going to take a much longer period of time and i would tell you there's two things you learn in the banking business very early on one concentration and what we've done is we've concentrated all the assets in this country in deposit to make this credit flow so we can get this economy revived and moving again well let me give you one example about it i mean i woke up last week and found out that most second quarter profits are totally gone and they go into the i'm going to have to pay a premium of twenty cents which is about one point six million in my bank my premiums up four hundred eighty percent last year because i have to pay the losses that the big banks have gotten i mean you know to feel like we feel like a second class citizen is an understatement and you know i didn't fly on a private jet and i don't live that way but i think the first thing congress should do is drag the regulators in here the treasury secretary secretary of treasury say what are you going to do for the thank you may want to take this in just a slightly different direction but what mr hanson lane started out with i thought was right on the mark and i think we keep picking on mr ely here but i liked one of the comments that i read in your  testimony and that was the comment don't push banks to make bad loans pretty simple premise but i believe over the years in congress we've we've helped initiate some of the problems that we now see today and one thing that i've learned over the years in business and unfortunately i think in congress we keep trying to think that there is a magic pill that's going to get us out of these problems that we face and it i'm proud of the fact that i have many community banks in my district who have had sound lending practices they haven't had their hands out there and they're the ones who are still making loans in my district to for example farmers who are need cash to keep their opera operations running and so i agree with you that the tarp funds unfortunately i think in some cases have been misplaced and getting back to that point on regulation i'm deeply concerned because unless there's a known bottom to this market you have a lot of people sitting on the sidelines and not knowing what the rules are and that applies to banks my personal concern is that this although may sound idea was to have good intentions in fact will have the exact opposite i believe that by allowing bankruptcy judges to have the power to rewrite or modify your primary mortgage would be very detrimental to the market and to banks my concern is i think that it would raise interest rates and it will further a lemonade the  flow of capital and i'd like to hear your your thoughts on that well i have those same reservations about i am down the essence of the cram down provision would be to empower the bankruptcy court to modify  terms on a primary residence and what that would do is increase certainty in lending on mortgages and banks and other lenders would have to take this into consideration in their loan pricing going forward and  wise of them not to assume that as a new risk in lending and what this would do would be to hurt those who are the most credit constrained in borrowing and it would have the effect of pushing  appropriate mortgage modification what was not what i would be concerned about during that time which could be for many years that you would have a great uncertainty across the judicial circuit as  to what was appropriate or not appropriate in cram down in a cram down and that would add even more uncertainty i think we're open up pandora's box in doing very much so let me let me one question for mr coote and i apologize gentlemen that we're not bank up there not the same as a boy to go and say thank you so much daley so i think if we look at a little different regulations for the size of the institution in the complexity and realize that when you talk and congress i'm talking about individually i think it would make a  apparently nobody in the lending business knows much about politics or government how we respond to the economic panic of twenty twenty five has almost nothing to do with what congress does in two thousand and nine i don't know what the politics will be i don't know if the democratic party or republican party will be in existence so if somebody wants to make loans in two thousand and twenty assuming that they know what the law's going to be in tw five i don't think reading the history books of two thousand and nine is going to tell them much i do realize it would be unprecedented but i for one can't tell you what the law's going to be in tw very low and in twenty ten they're not going to be doing the same sub prime they used to but if we pass a law in two thousand and nine designed to deal with the abusive lending of two thousand and eight and somebody makes a legitimate loan in two thousand and ten i'll tell you i do know enough about politics we're probably not going to pass a cram down law in two thousand and eleven applicable to mortgages written in two thousand and ten i'm not going to ask for your response because you're the expert except when it comes to predicting congress then we don't really need to bring in outside experts to give us advice to be represented sherm if i could just comment on that very briefly i think actually the effect that was referred to here is exactly what you want that in the event we saw a sort of crazy period of lending as we actually had in zero four zero five zero six we would precisely want the banks to be worried that congress might take action to make it more difficult to collect those loans that was what we want they had that concern i'm i'm i'm not looking for for for for that particular fear and i certainly don't want them to not make a good loan because they're worried  that two or three percent of the good loans they make are going to go bad and then there's going to be crammed down for those i would hope the cram down would exist only for laws prior to an act and that is what the statute before the congress would provide and yes it takes the unprecedented and makes it president but it certainly provides only the slightest bit of guidance as to how congress is going to legislate with regard to mortgages issued in future years the focus of a lot of attention is why aren't the banks lending and there are a few benign reasons for that first i remember the good times of two or three years ago constituents would always intimate telling me their dreams are being crushed because nobody will make the loan they want so we start with a a background base of people who would be disappointed even in the best of times we then have the fact that up until very recently lending standards were way too loose so a lot of people were getting loans that shouldn't then everyone is a worse credit risk now than they were a year ago and  finally the banks themselves or the big banks at least are somewhere between insolvent and under capitalized so the big banks are still lending more money than they're getting from tarp they're mending less money than they used to and i have no way of calculating whether they're lending more money than they would have had there not been a tarp but the bigger issue is not are they lending more than they would have if we hadn't adopted the program but rather how do we configure a program dollar for dollar imposed on the taxpayer the most in lending into the economy  how would you compare taking the next one hundred two hundred billion dollars of tarp money and giving it to the big banks in one form or another versus going to bring the distribution of the tarp funds among the large banks and the small and had some information reviewed before it came to the committee that gave a list of all the banks in america all office and then the testimony we're hearing that the small banks many of the banks are going to the healthy banks are really going to give the tarp money back at their earliest opportunity because they don't like the restrictions you're involved with  need and their risk and their risk factor but so that it would be distributed pretty well to affect lending across america if you begin to have the healthiest banks and the small banks and the healthy and give the tarp money back and the way i understand the legislation if the money is repaid i don't think it goes into the treasury and then pay the debt down i think the money comes back into the system into the dark system and then the tarp system then gives the money back out so that you could have a situation where the y give the money back into tarp and then it begins to be distributed then to the least healthy institutions and in a matter of time there's no need for new injections  of tarp but all of the money flows and gets concentrated in the institutions that are the least able in the least likely to then land and i'd like some reaction that belief and i think a understandable one that tarp funds should not go into really weak institutions that might be under verge of failure that instead those institutions ought to be merged into stronger well there's been a lot of criticism of it i think that's  are paid back into the treasury let's say the northern trust of the world that that is money that could be reinvested in other banks but with the proviso that it wouldn't go into really  banks so possibly you might find it at the end of the day not all the tarp funds would be invested or they would be unveiled available for investment outside of the banking industry i think it's extremely unfortunate that the significant and we don't want those to go under and then you've got a set of healthy banks that have also received capital i think it's important to separate these programs and i think the problem is that you know putting lots of restrictions on the smaller banks i mean green completely mystically about i think that's a real problem and i don't think the subsidy to the small banks is a big one i think that they're investing they're basically sound institutions and the kind of transfer that  is occurring from taxpayers to large institutions is a much bigger transfer than anything that is going to the small banks and so i don't think it's appropriate to have the same level of restrictions on the small banks back you know there's a  program that guarantees the debt issued by by banks small banks haven't opted into that and i think it'd be a good thing if they could opt into a program where they could get the equity from the government i think a newly designed program for small banks and then leverage that equity by borrowing potentially with government guarantees i think it's important to be able to invest in healthy banks that here so that basically it's going to be at last resort many of us were very nervous last week about how that language was and we changed the language that's why the bill was actually pulled last week and taxpayer money but basically you that i wanted to ask i understand from your testimony that nonprofit organizations cannot presently participate in tarp through the capital purchase program because they are not structured to issue warrants or accept investments as required it seems to me however that the community financial institutions like us can make sound inefficient use of tarp funds  maintained its level large banks is a different story the large banks big increase in their lending right after lehman brothers failure but that was largely in voluntary lending as a number of very large companies drew down on their existing revolving credit facilities g m tribune company which later went bankrupt so there was a big bump up in large bank lending but then it has come down dramatically in the ensuing four months so you know i don't know the specifics of what exactly is happening there but if you look at the data it seems that small bank lending has maintained its level and it's really the large banks and there's a whole problem with the large banks syndicated lending for large large companies to sort of a separate issue we had the large banks here saying they were lending billions and billions of dollars out lending billions of dollars out and yet we're hearing that we can't get any money into the system if i could address the federal reserve data on commercial bank lending to show that bank the you know what is inflation going to look like i mean you know there's a lot of concerns out there i mean i deal with i go from one crisis to the other pretty much all on bases and i know many of your bankers your state of minnesota spent a lot of time up there it's a great state and i w tell you they are very concerned up there also so that we get this clear he says they are lending to big banks are lending and your point is well if you if you look at the data i mean it really does look like the large banks had an initial bump up in kind of involuntary lending but it's coming down hard to track in some ways because a lot of the lending that most lending that banks make is actually in the form of extending lines of credit which are not well reported in the fed data and i think the reporting change would actually allow us to better measure the actual expansion of credit so we can see if you look at the data looks like it's actually coming down thank you mr scott for five minutes thank you mr chairman this is a very good hearing and really gets right to the meat of the issue far as i'm concerned because i've always felt that we rushed to try to get the right answer without having the right problem presented before us in the very beginning and sometimes you can figure out you need to try to figure out how you got into a problem in order one hundred billion dollars what is left of it and that's one thing i'd like to ask you all from your own understanding of how much is left of this how much are we talking  billion went to so when you look at i think it would do us well but try to get an accounting of what we do have left here to work with and if we're going to bring his loan that's where the person who is going to open up the beauty parlor the small business which makes about seventy percent of our labor force that's where they go identify in order of priority the challenges that community community banks are faced with right now respect with respect to lending and then secondly i there anything that we here in washington can do with the tragic department whatever moves we can make to it that whatever we have left of this  whenever somebody can get their hands around what we do have a lot to see how we can channel in more directly get down to the small community independent banks that in my estimation will be the in the community banks all the backbone of america and you know i want to make it clear again and i want to thank his committee so much for letting us the small banks have a voice today and it is not my opinion that we are not being heard it is  opinion of the american people that when they turn on the television that's all they see is the automobile execs and the big bankers and whatever but i think it is to continue to be a local dialogue with the community bankers of america to continue to be in community banks for the government to make and do you think it should be under the tarp program or do you have another kind of program in my terms of how the government allocates the budget i don't think it should be a conceptual separate program the idea that i'm sort of pushing is this notion that if the large banks are under financial stress and in difficulty potentially insolvent it stands to reason they're going to be cutting back on their lending about half of small business lending comes from large banks and so my thought is that if we can encourage small banks to take the space that is left open by the large banks the retrenchment of the large banks that that would actually help our economy help small firms about twenty three percent twenty five percent of the assets in small banks let's say banks under five billion have received tarp money ok i think that there's potential to expand that and i but i think the way to expand it is that we've got to recognize that it's not a major subsidy that it's of same kind of thing that's going on with the with the investments in the wall street firms with the with the big banks and therefore it should not be associated with sort of onerous measures and i think that's the way banks and lending back community banks most of them will give up a great deal of income this year about fifty percent and i can tell you it's going to make the community banks across america retrench and you know because you going up the safety net o gentleman has expired thank you mr green for our final five minutes thank you mr chairman thank you and the ranking member both of whom are your friends and i think that this is a timely hearing mr chairman i do believe that if you know the truth it will set you free and i also believe that the truth can free capital for just a moment i'd like to take the facts of truth slam it into the tree of circumstance and let the chips fall where they may let's talk for just a moment about the program which was a two hundred fifty billion dollars purchase program of non voting  preferred shares i assume that everybody agrees with this and senior preferred shares were issued such that they qualify as tier one capital everybody agrees with this i'm sure one capital now is important to know what tier one capital is tier one capital generally speaking is used to protect against unexpected losses tier one capital unexpected losses their tier one capital generally speaking is not money that lynn banks make loans from deposits and from money that they can borrow some would say they borrow cheap they borrow from the government and then they lend that money so if you have to or one capital that general speaking you cannot live larger institutions were in a position where they had a problem with unexpected losses that had become expected because we know that th have a certain amount of what i'm going to call a tier one money in reserve so that they can make a loan the truth is that many of these banks can't make loans because they need to be well capitalized and the tarp money which was given to them has to be well capitalized now i just want to deal in truth because if we're going to fix it testified at the katrina hearings you and i had a good exchange about what was happening during katrina and i've always appreciated that let me tell you you know my testimony if you notice i said we started a campaign the minute after we got t twenty million in top money alone two hundred fifty million dollars al goal was to bring in deposit to make loans but what has happened pretty much in a regulatory environment is that now they have increased the capital requirements on bank they're now understand what's happening that we can lend money at some point but you have to understand what is what the problem is before you can solve a problem generally speaking i have to move to something else quickly i'd like to say more about this and i have a lot more that i could say but i do want to talk about now something that's near and dear to me called the law to red green i'm in met at green as an al green and i'm concerned about it because this is an amendment that allows us to have that transparency with reference to how the money is being utilized anyone who would oppose banks giving us intelligence about new lending based on tarp money has received anyone see a problem banks that we have labeled too big to fail so do you think that maybe what we ought to do is to  encourage more community banks to participate in tarp so that they will make loans to the small businesses that i think both sides are interested regulatory reform is going to be something coming up in congress i think one thing that i learned in texas and oklahoma in the eighty's is that congress has to come up with a plan a part of the banking system relief regulatory rewrite i would encourage congress to very much look at going back to the models of increasing community banks around america increasing the banks in the state and i would a study which happened in texas oklahoma we lived through place their responses in the record i think there is a new bipartisan truth small business is important and vital to our economic prosperity and survival and that we need to work to encourage those kinds of dollars flowing to the need to reexamine we need to look at the new insurance requirements and the impact that they're going to have and we need to ensure that we're getting correct data and information in terms of just who is lending and how much they're lending and  hope you can say i am my staff want to sit down and talk to you a minute of in very kind to extend a warm hand of help to you we want to do the same right after this hearing thank you all so much without objection this he