U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

57–748 PDF 2010

CREDIT DEFAULT SWAPS ON GOVERNMENT 

DEBT: POTENTIAL IMPLICATIONS 

OF THE GREEK DEBT CRISIS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT 

SPONSORED ENTERPRISES 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 29, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–130 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, INSURANCE, AND GOVERNMENT SPONSORED

ENTERPRISES

PAUL E. KANJORSKI, Pennsylvania, Chairman 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

NYDIA M. VELA ́ ZQUEZ, New York 

CAROLYN B. MALONEY, New York 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

RON KLEIN, Florida 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

CHARLES A. WILSON, Ohio 

BILL FOSTER, Illinois 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

SCOTT GARRETT, New Jersey 

TOM PRICE, Georgia 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

EDWARD R. ROYCE, California 

JUDY BIGGERT, Illinois 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

ADAM PUTNAM, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

RANDY NEUGEBAUER, Texas 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

April 29, 2010 ................................................................................................... 1 

Appendix: 

April 29, 2010 ................................................................................................... 47 

WITNESSES 

THURSDAY, APRIL 29, 2010 

Duffie, Darrell, Professor of Finance, Graduate School of Business, Stanford 

University ............................................................................................................. 14 

Johnson, Robert, Director of Global Finance, Roosevelt Institute ....................... 9 

Mason, Joseph R., Louisiana Bankers Association Professor of Finance, Louisiana State University ........................................................................................ 17 

Pickel, Robert, Executive Vice Chairman, International Swaps and Derivatives Association, Inc. .......................................................................................... 12 

Sanders, Anthony B., Distinguished Professor of Finance, George Mason University ................................................................................................................... 15 

APPENDIX 

Prepared statements: 

Kanjorski, Hon. Paul E. ................................................................................... 48 

Duffie, Darrell ................................................................................................... 50 

Johnson, Robert ................................................................................................ 64 

Mason, Joseph R. .............................................................................................. 81 

Pickel, Robert .................................................................................................... 94 

Sanders, Anthony B. ........................................................................................ 103 

(1) 

CREDIT DEFAULT SWAPS ON GOVERNMENT 

DEBT: POTENTIAL IMPLICATIONS 

OF THE GREEK DEBT CRISIS 

Thursday, April 29, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CAPITAL MARKETS, 

INSURANCE, AND GOVERNMENT

SPONSORED ENTERPRISES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Paul E. Kanjorski 

[chairman of the subcommittee] presiding. 

Members present: Representatives Kanjorski, Sherman, Lynch, 

Maloney, Perlmutter, Donnelly, Carson, Foster, Minnick, Adler, 

Himes; Garrett, Manzullo, Hensarling, Neugebauer, and Jenkins. 

Ex officio present: Representative Bachus. 

Chairman KANJORSKI. This hearing of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises 

will come to order. 

Pursuant to committee rules, each side will have 15 minutes for 

opening statements. Without objection, all members’ opening statements will be made a part of the record. 

Good morning. At the request of our colleague, Congresswoman 

Maloney, we gather today to examine important policy questions 

that have arisen from the Greek debt crisis. The crisis, which 

quietly evolved over a number of years, has demonstrated that innovative Wall Street bankers, acting alone or in concert with their 

clients, have the potential to destabilize not only a single country 

but an entire economic region, especially if transactions they concoct distort transparency or heighten speculation. 

Among other things, this hearing will allow us to explore whether the titans of Wall Street act as traders of government debt by 

underwriting bonds, or traitors of governments by using credit default swaps to gamble that sovereign debt will fail. Those who bet 

on and seek to cause the default of a government are as bad as 

Benedict Arnold. 

When used for genuine hedging purposes, credit default swaps 

are an appropriate financial tool. But when these instruments are 

used for speculation, they have the potential to become a Trojan 

horse that will insidiously infect our markets. Some very smart and 

sophisticated investors have characterized naked credit default 

2 

swaps as ‘‘weapons of mass destruction’’ that can create imaginary 

value out of thin air. 

The tragic situation in Greece underscores the urgent need for 

Wall Street reform at home. Some recent news reports suggest that 

bankers crafted derivatives to hide Greek debt, and other stories 

note that the U.S. market for credit default swaps on municipal 

debt is growing. 

Congress must respond by creating more transparency in our derivatives markets, as provided for in the House-passed bill. The derivatives bill recently approved by the Senate Agriculture Committee similarly advances the goal of greater disclosure. 

Additionally, the response of the markets to the Greek debt crisis 

raises more questions about the utility of rating agencies. As we all 

know, the rating agencies greatly contributed to our recent financial crisis by failing to appropriately rate collateralized debt obligations and other structured debt. The growth in the issuance of 

these faulty financial instruments, which the rating agencies 

blessed, contributed to the explosion of the credit default swap 

market. 

While some have raised concerns, other experts have concluded 

that a large and liquid market for credit default swaps, including 

naked positions, leads the cash bond market in price discovery and 

predicting adverse credit events. If this is true, then I question why 

the rating agencies waited so long to downgrade Greece’s debt. 

After all, the costs for purchasing credit default swaps on Greek 

debt has soared for many months, but Moody’s and Standard & 

Poor’s have only downgraded the country’s bonds in recent days. 

The reform bill already passed in the House takes strong steps 

to impose a liability standard on rating agencies and reduce conflicts of interest and market reliance on them. As we proceed today, 

I look forward to understanding whether naked credit default 

swaps do indeed promote efficient price discovery and whether we 

should do more to reform rating agencies. 

The Greek debt crisis also parallels a problem in our financial 

markets: the problem of ‘‘too-big-to-fail.’’ Greece’s problems have 

placed an enormous strain on the European debt markets and the 

European Monetary Union. In fact, the European Central Bank 

president has said that a Greek default is out of the question. 

With respect to our financial markets, the demise of Lehman 

Brothers, American International Group, and Washington Mutual, 

among many others, have shown that Congress must act to mitigate systemic risk. That is why the House-passed legislation and 

the pending Senate bill include provisions to end the era of ‘‘toobig-to-fail,’’ like my amendment directing regulators to break up financial firms that have become too big, too interconnected, too concentrated, or too risky. 

In sum, today’s hearing continues to build a case for financial 

services regulatory reform. More than 2 years have passed since 

the financial crisis began, and the Senate must take swift action 

on its bill so that we can finally end Wall Street’s narcissistic pursuit of profit and change the way our financial markets operate. 

I would like to recognize Ranking Member Garrett for 4 minutes. 

Mr. Garrett? 

3 

Mr. GARRETT. And I thank you. I thank the chairman. I thank 

the witnesses who are about to testify. 

Today’s hearing is entitled, ‘‘Credit Default Swaps on Government Debt: Potential Implications of the Greek Debt Crisis.’’ There 

are really a number of roads our discussion this morning could go 

down, given that very long title. 

Now, there have been some suggestions, for instance, that CDS 

is to blame for the problem Greece finds itself in today. But frankly, I have not been shown any evidence to really support that 

claim. In fact, a good argument can be made that rather than causing the Greek debt crisis, CDS actually alerted investors to the uncertainty being felt by some in the marketplace, and to help provide greater transparency about the stated Greek fiscal affairs before the country’s conditions even got worse. 

Now, alternatives of CDS for providing transparency about the 

creditworthiness of a company or a sovereign entity, of course, are 

the credit rating agencies. But when you think about it, I don’t 

think anyone would suggest, given their recent track record, that 

the sole reliance on credit rating agencies would be the optimal 

strategy for policymakers now to pursue. 

It has also been noted that if investors can’t hedge their risk 

through CDS purchases, what will they do? They will be less willing and less likely to invest in the underlying debt itself. So any 

steps that we take to ban sovereign debt CDS, as some European 

governments have now proposed, actually can make it even more 

difficult and more costly for countries like Greece to sell their 

bonds and basically exacerbate the debt crisis. 

Another issue in today’s hearing is the parallel between Greece’s 

poor financial condition and the financial condition here in the 

United States. During the discussion over financial services regulatory reform over the last year or so, there has been a lot of talk 

about systemic risk and so-called ‘‘too-big-to-fail’’ institutions. 

But, the ultimate ‘‘too-big-to-fail’’ entity is the United States Government. And the most obvious systemic risk is the one posed by 

our ever-increasing Federal budget deficit and the accumulated 

debt here in this country. 

And we have to ask, what will it take for policymakers to get serious about cutting this unsustainable spending here in Washington? Just this past week, Federal Reserve Chairman Bernanke 

stated, ‘‘The Federal budget appears set to remain on an 

unsustainable path. Moreover, as debt and deficits grow, so will the 

associated interest payments, an obligation that in turn further increases projected deficits. Unfortunately, we cannot grow out way 

out of this problem.’’ 

But despite these warnings, we can’t get our Democrat colleagues 

here in the House to propose a budget, let alone one that will begin 

to put us on a sustainable path to fiscal health. And what makes 

our current situation even worse? As large as our official national 

debt currently is, it is not even truly stating what the real problem 

magnitude is because, like Greece and many financial institutions 

that have become easy targets for reform-minded policymakers, the 

U.S. Government is engaging in off-balance-sheet accounting that 

hides the enormity of our problem. 

4 

The obligations of Fannie Mae and Freddie Mac, the housing giants that are recipients, by far, of the largest of recent taxpayer 

bailouts are not accounted for in our budget. Some of you heard the 

verbal gymnastics, for example, that Secretary Geithner had to go 

through in this committee as he tried to explain how the government fully intends to stand behind these entities, but at the same 

time, their obligations, he said, shouldn’t be considered foreign debt 

or sovereign debt. 

I have a bill that would put Fannie’s and Freddie’s debt on the 

balance sheet. And to me, this really isn’t a partisan issue. It is 

about being transparent. As a matter of fact, the record shows I 

have 52 co-sponsors of that bill, but unfortunately, there is only 

one solitary Democrat who has joined me in that effort so far. But 

I do remain optimistic that others will sign on. 

And finally, as for the people in Greece who are finding out now 

that the fiscal health of one’s nation, when push comes to shove, 

can greatly impact its citizens’ standard of living, I know that everyone in this Congress wants to leave our children and our grandchildren with a country in better shape than we have inherited. 

But to do that, we can’t keep kicking that can down the road on 

the tough decisions. And we certainly shouldn’t be solely blaming 

CDS or credit rating agencies, some of which have been recently 

suggested that the U.S. AAA rating could be imperiled for the problems brought on by policymakers who need to come to terms with 

our precarious fiscal condition, and so do something now before it 

is too late. 

And with that, I yield back. 

Chairman KANJORSKI. Thank you, Mr. Garrett. 

The gentleman from Massachusetts, Mr. Lynch, is recognized for 

2 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. I thank you for holding 

this hearing today, and I thank Ranking Member Garrett, as well. 

The relationship between the government and debt and complex 

derivatives is one that I have been particularly interested in since 

the financial crisis began. I think we have an opportunity today to 

learn some valuable lessons from the way Goldman Sachs and others conducted themselves during Greece’s current situation. The 

role of complex derivatives in concealing and disguising sovereign 

debt in a very opaque market is one that needs to be closely examined. 

As my colleagues from California know better than most, credit 

default swaps and other sophisticated financial instruments were 

used to manage public money. I believe these instruments to be 

dangerous in some cases, when they are unregulated, and should 

not be used when managing pension funds, public bonds, monies 

from municipalities, or any other type of public money unless the 

underwriter and the marketers and the traders agree to assume a 

direct fiduciary responsibility. 

I have heard, in the defense of these instruments, that credit default swaps can be used to hedge certain risks. But I think what 

we have learned from this crisis is that what we thought was 

hedged was really just a complex instrument that was very poorly 

understood. 

5 

While it is certainly a huge step forward, I am not completely 

convinced that the derivatives title included in the House regulatory reform bill, H.R. 4173, the Wall Street Reform and Consumer Protection Act, goes far enough to protect public funds and 

pension funds and municipalities from being manipulated again in 

the future. In addition to Greece, cities and towns all over the 

country are struggling with the ramifications of using complex derivatives. 

I look forward to our witnesses’ testimony today to examine further these issues, and I thank them for their willingness to come 

before this committee and help us with our work. And I yield back. 

Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Lynch. 

Now we will hear from Mr. Bachus from Alabama for 3 minutes. 

Mr. BACHUS. I thank you, Mr. Chairman, for convening this 

morning’s hearing, and I thank the witnesses for your attendance. 

The ongoing Greek debt crisis, while tragic, is the result of decades of reckless spending, and that is something we are quite familiar with here in the United States. Without real spending cuts 

and GSE reform, the bailouts will not stop, the housing market will 

not find its footing, and the American economy will not recover. 

But so far, the response has been to pledge unlimited bailout aid. 

In fact, the GSE debt alone has already cost American taxpayers 

more than $127 billion, and puts them at risk for another $5 trillion in guarantees. 

The events of 2008 demonstrated there is a need for legislation 

to address shortcomings in the regulation of derivatives. But demonizing credit default swaps is not the answer. Used responsibly, 

derivatives are a critical tool for managing risk, including the risk 

of sovereign debt default. Thousands of U.S. companies use derivatives to hedge against unforeseen events and risk inherent in their 

business. 

With the current sovereign debt crisis in many European nations, while it is instructive about the growth in impact that sovereign CDS can have on the capital markets, Congress should not 

unnecessarily impair the important benefits that credit derivatives 

can provide. 

All of us agree derivative markets need more transparency and 

disclosure. We recognize the Federal Reserve discount window was 

not intended as a source of funds for banks to speculate with derivatives for their own account. 

However, restrictions on credit default swap contracts limit the 

ability of investors to appropriately calculate risk, as CDS spreads 

are often a more accurate reflection of credit risk than credit ratings. We have found that the credit rating agencies have not always been reliable measures of creditworthiness. 

That being the case, investors should not have alternative and effective risk management tools, such as credit default swaps, arbitrarily removed from their risk management arsenal. The growth 

of the CDS market is a reminder that market solutions are capable 

of supplying information investors need to make informed decisions. Arbitrary bans of certain derivative products would only 

force derivative dealers out of the marketplace, and ultimately increase, not mitigate, systemic risk. 

6 

Let me close by saying in The Republic, the Greek philosopher 

Plato stated, ‘‘We can easily forgive a child who is afraid of the 

dark. The real tragedy of life is when men are afraid of the light.’’ 

Mr. Chairman, when will the Administration see the light and 

realize we can no longer keep GSEs’ debts in the shadows and continue down our current path of fiscal irresponsibility? Unless we 

change course, I fear America will soon experience its own Greek 

tragedy. 

Thank you, and I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. Bachus. 

And now, we will hear from the gentlelady from New York, Mrs. 

Maloney, for 5 minutes. 

Mrs. MALONEY. Thank you, Chairman Kanjorski, for holding this 

hearing, and welcome to the witnesses. 

This is truly a critical hearing, both because of the international 

conditions concerning sovereign debt, but also because of what we 

are working on in Congress. Financial regulatory reform will mean 

significant changes to the overall functioning of the derivatives 

market. 

We are shining a light on over-the-counter derivatives, the financial instruments that have been at the heart of the debate of economic and financial news at home and abroad since the global economic crisis began. These complicated financial instruments can be 

used for hedging or insuring against risk, which is good. But the 

lack of transparency in their use, together with the lack of regulation of the market, can combine to give them the potential to catalyze economic havoc. 

Warren Buffett has called derivatives, ‘‘financial weapons of 

mass destruction,’’ and many have argued that these instruments 

were responsible for the economic crisis in the United States. Our 

goal today is to better understand derivatives so we can ensure 

that they do more good than harm in today’s global economy. 

We have experienced the impact of unregulated derivatives in 

housing in the United States, and are still recovering from it. AIG 

was unable to pay out on insurance on residential-backed mortgage 

securities, and the effects on counterparties was massive. This 

brought our country to the brink of collapse, and the lack of transparency was a major factor. 

We are now watching the risk of derivatives play out when it 

comes to sovereign debt. As this chart on the left shows, the net 

notional amount of CDS on Greek debt, which represents the bets 

on Greeks’ ability to pay, is well over $8 billion, which is quite 

large compared to the $300 billion of outstanding debt in Greece. 

In contrast, the CDS on U.S. debt, debt which is in the trillions, 

is only one-quarter of the size. 

Today there are $1.2 trillion in outstanding CDSs. Sovereign 

credit default swaps make up 16 percent of $200 billion of that 

total, and European Union CDSs represent two-thirds, $131 billion 

of all sovereign CDSS. Greek CDS make up 6.3 percent, or $8.3 billion, of all European sovereign CDSs. 

The use of derivatives on sovereign debt has exploded over the 

last decade. Two different types of derivatives have been used by 

countries looking to gain entry to the European Union. They were 

7 

used in some instances to improve the appearance of their debt-toGDP ratio. 

In currency swaps, the infusion of cash based on outstanding 

debt in different currencies that fluctuates, the cash infusion is 

really just a loan to pay current expenses that is paid back over 

time with other resources. 

Credit default swaps can be used as a form of insurance on sovereign debt, but they also act as instruments that just allow a bet 

to be placed that a country will default on its debt obligations. 

While the use of over-the-counter derivatives has exploded, regulation of these instruments remains nonexistent. There is a need 

for regulation and transparency. This market has been almost completely unregulated because most of the deals are between counterparties, and there is no reporting requirement. 

These transactions also do not have to be cleared by an independent third party or traded on a national exchange. For these 

reasons, investors are largely uninformed about the extent of financial entities exposed to risk and about the CDSs that have been 

taken out on any asset-backed security. 

Regulatory reform will bring needed transparency into the market. It would protect investors from exposure to undisclosed and excessive overleveraging. And investors can still make bets, but they 

will have a better idea of the real odds. 

The Greek debt crisis is just a single example of the use of complex derivatives, but this hits as close to home as New York. In 

Greece, investors must now pay $711,000 to insure $10 million in 

Greek government bonds. This is up from $250,000 in the beginning of the year, almost threefold. 

Concern has also been expressed at the State level about CDSs 

on State debt, specifically in California. 

And the question is, how do we regulate over-the-counter derivatives such as sovereign debt, CDSs, so that they can be used for 

legitimate purposes without spreading financial contamination to 

other countries and other financial institutions? 

Thank you, Mr. Chairman. I ask permission to put all of my 

statement in the record. My time has expired. Thank you. 

Chairman KANJORSKI. Without objection, it is so ordered. 

Now we will hear from the gentleman from Texas, Mr. Hensarling, for 4 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman, and certainly thank 

you for calling this hearing. When I look at the title of the hearing, 

‘‘Credit Default Swaps’’ in the first part and ‘‘Greek Debt Crisis’’ 

at the end, I think it would behoove Congress to spend a lot more 

time focusing on the debt crisis in credit default swaps. 

I somehow feel to some extent, as I listen to some of the opening 

statements, that there is an element of, let’s shoot the messenger, 

the credit default swap market. Let’s to some extent say that they 

have exacerbated the Greek debt crisis. 

The lesson here for us—and I might add, to amplify a comment 

of our ranking member—the market acted more efficiently than the 

rating agencies. And theoretically, Greece had a deficit-to-GDP 

ratio and a debt-to-GDP ratio that didn’t qualify under E.U. standards. And yet they were still allowed to remain as a member of the 

E.U. 

8 

And so the early warning signals in many cases actually came 

from the credit default swap market. We need to be very cautious 

on how we approach any type of new regulatory scheme that might 

harm the ability of essentially this early warning system. And it 

is certainly an early warning system to the United States of America. 

As we know, I believe Greece is now having to restate their deficit-to-GDP ratio up to about 12 percent. Right now, we have a deficit-to-GDP ratio of 10 percent. We know also at the end of the 

President’s 10-year budget window, according to estimates by the 

Congressional Budget Office and the General Accountability Office, 

we are looking at a debt-to-GDP ratio of 90 percent. All economists 

will tell you that is when the needle enters the red zone. 

Press reports indicated that members of Chancellor Merkel’s 

party in Germany have called upon Greece to sell its sovereign territory in order to deal with its debt crisis. Sell sovereign territory. 

I hope and pray that the United States is not on the path to becoming Greece without the Aegean Sea and the Parthenon. 

But there are lessons to be learned here for us. There are also 

press reports that indicated that when Argentina defaulted on its 

debt—and I don’t believe the United States would ever default on 

our debt—but when Argentina defaulted on its debt 7 or 8 years 

ago, creditors actually tried to put a lien on their navy, their naval 

vessels. 

Here we are probably facing the most predictable crisis in the 

history of America, and yet almost each and every day, this Congress makes it worse. And when we talk about accounting being 

opaque, again to amplify comments of the ranking member, how 

can we have our Secretary of Treasury come here and say, the debt 

of the GSEs are not sovereign debt, but we are going to back each 

and every dollar? 

And somehow, again, we know that one of the causes of the financial crisis was essentially these off-balance-sheet vehicles, and 

yet we have Uncle Sam engaged in the worst. There are 127 billion 

reasons why the GSEs ought to be reformed, and yet the bill that 

is going through Congress now is stone-cold silent on the root cause 

of the problem. These are the true lessons we ought to be learning 

from Greece. 

Thank you, Mr. Chairman. I yield back the balance of my time. 

Chairman KANJORSKI. Thank you very much, Mr. Hensarling. 

And now we will hear from our final presenter, Mr. Perlmutter, for 

3 minutes. 

Mr. PERLMUTTER. Thank you, Mr. Chairman, and thank you, 

panelists, for being here today. I look forward to hearing your testimony today to find out what lessons you would have us learn. I 

think that the country, our country, has learned the lessons of tax 

cuts for the wealthiest and prosecute two wars, and then absolutely 

stand by and do nothing while major financial institutions like 

Lehman Brothers go by the wayside under the Bush approach and 

the Republican approach, is financial disaster. 

And we saw that financial disaster in the fall of 2008. And this 

country can’t afford to go that approach any longer, and I am glad 

that Democrats are now in control to try to pick up the pieces after 

9 

the mess that was left by the Republican Administration and the 

Republican Congress. 

And my friends on the Republican side of the aisle love to talk 

about Fannie Mae and Freddie Mac, and they should have been reformed earlier. And I like to remind them of what the former chairman of this committee, Mr. Oxley, had to say when he and Mr. 

Frank tried to do reform of Fannie Mae and Freddie Mac. Mr. 

Oxley is quoted in the article from the Financial Times dated September 9, 2008. 

Mr. Oxley fumes about the criticism of his House colleagues: ‘‘All 

the hand-wringing and bed-wetting is going on without remembering how the House stepped up on this,’’ he says. ‘‘What did we 

get from the White House? We got a one-finger salute.’’ 

This is the kind of situation where your testimony today is going 

to be helpful in deciding how much regulation really needs to go 

on with these kinds of derivative bets—how often they need to be 

cleared, how much margin needs to be put down, and what is the 

effect on a nation like Greece when its debt becomes overwhelming. 

This country is taking steps to get people back to work and to 

rein in the debt and institute uniform and consistent regulation on 

its financial markets, unlike under the prior Administration. And 

we hope that your testimony today will provide us with further insights. 

And with that, Mr. Chairman, I would yield back. 

Chairman KANJORSKI. Thank you very much, Mr. Perlmutter. 

And now, I have 1 minute from the gentleman from Indiana, Mr. 

Donnelly. 

Mr. DONNELLY. Thank you, Mr. Chairman. 

The American people have lost confidence in CDSs, CDOs, synthetic CDOs, and their aftermath. They have lost confidence in the 

word and in the trustworthiness of the institutions creating these 

instruments, and whether there is really any purpose behind these 

instruments other than gambling and other than opportunities to 

try to take advantage of someone else or some other organization 

or some other country. 

Transparency and trustworthiness are needed. They are a big 

part of the effort being made by this committee. And I look forward 

to this hearing. Thank you, Mr. Chairman. 

Chairman KANJORSKI. Thank you very much, Mr. Donnelly. 

Now we will hear from our first panelist, Mr. Robert Johnson, director of global finance, Roosevelt Institute. 

Mr. Johnson? 

STATEMENT OF ROBERT JOHNSON, DIRECTOR OF GLOBAL 

FINANCE, ROOSEVELT INSTITUTE 

Mr. JOHNSON. Good morning. Chairman Kanjorski, Ranking 

Member Garrett, and members of the subcommittee. I thank you 

for the opportunity to address the issues related to credit default 

swaps and their implications for government debt. 

As the Congress considers legislation on financial reform, I applaud your efforts to explore the implications of financial practices, 

financial innovation, and particularly the practice in the areas of 

derivative securities. It is my view that the explosive growth of deVerDate Nov 24 2008 16:07 Sep 14, 2010 Jkt 057748 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\57748.TXT TERRIE
10 

rivatives and the immaturity of those market systems is at the core 

of the financial dangers that we face moving forward. 

I have stated elsewhere, and continue to believe, that the overthe-counter derivatives market is the San Andreas Fault of our financial system. The interconnection of balance sheets of the socalled ‘‘too-big-to-fail’’ firms and the OTC derivatives are a cocktail 

that may force taxpayers to drink from disaster again in the future. 

Repair of the system to reduce complexity and opacity will allow 

the markets to function better when adversely shocked, as they 

were by the housing price downturn, and as they will surely be 

shocked again. 

Strong, transparent markets are well-fortified with capital buffers, supervised and examined thoroughly, and they are a means to 

help us reach our social goals. Market systems that are structured 

according to the profit imperatives of a few concentrated firms, 

firms that are supported by the backing of taxpayers, are very dangerous to the financial health of our Nation. 

The structural designs that encourage a private appetite for risk 

that exceeds the social benefits of that risk-taking are unhealthy. 

Markets are a public good, and their structure has to attain and 

maintain integrity, despite the formidable pressures that individuals, in particular big business interests, will bring to bear to refract that design for their private benefit, while being unmindful of 

the harm that they could impose on society. 

Today, our concern is with the impact of the CDS derivatives 

market on government debt. I want to emphasize the history of 

government debt growth, as many of you have commented, across 

many nations and many times, suggests that war and financial crisis are the greatest causes of extreme and rapid increase of public 

indebtedness. 

Some analysts of the budget in Washington have estimated the 

financial crisis of 2008 will result in a doubling of a U.S. debt-toGDP ratio. Therefore, the concerns about our public finances must 

be concerns about financial reform. Said another way, one cannot 

credibly claim to be a deficit hawk unless one is also a financial 

reform hawk. 

The credit default swap market has grown tremendously in recent years. The instruments played a large role in the financial crisis after the failure of Lehman Brothers, particularly with respect 

to the AIG bailout. AIG provided mirage capital and mirage protection to financial firms, and it evaporated in the crisis. It was picked 

up by the taxpayer. 

At times, innovation is worshiped as a goddess of progress, even 

when we don’t have the ability to measure the value of that innovation. It is an article of faith, but it does not appear to be the case 

that financial innovation inspires our faith any longer. 

Faith in the financial practices and wisdom of unfettered markets has been shattered. At the same time, faith in regulators and 

government action in the aftermath of the bailouts is also absent, 

and experts in financial theory now lack credibility in light of the 

scale of the crisis due to their inattention to the risks associated 

with innovation. Praying at the altar of liquidity and innovation 

rings hollow without a clear acknowledgment of the damage that 

immature market structures can influence on society. 

11 

In the market for credit default swaps, some have been tempted 

to ban the instrument altogether. It is clear, in light of recent revelations about financial practice and tremendous social losses that 

can be caused, that a profound shift in sentiment has taken place. 

At the same time, I would argue that there is a sound logic that 

underpins construction of these instruments that isolate and transfer credit risk to where it is most able to be borne. Properly structured, transparent CDS markets that are well-capitalized and regulated can contribute to our well-being. 

In these controversial times, it is important to keep in mind that 

markets are a useful tool, but a tool that must be managed and administered when constructing a balance between the social costs 

and benefits of a market for credit insurance. 

Theories that depend upon the vision of the market possessing 

a high quality of information as a maintained hypothesis may not 

always be a good guide to the behavior of credit default instruments. 

The standard, fundamental theory of pricing operates from the 

premise that a market knows what the probability of default is 

after a period of discovery, and it reflects that knowledge. Attempts 

to buy credit default risk increase the price and are met with a 

supply from those that know when the price is too high. The price 

represents the truth, and deviations from the truth are arbitraged 

away. 

The alternative perspective envisions a market filled with uncertainty and imperfect information. In this perspective, buyers of 

large amounts of CDS transmit a market signal that inspires others to believe that they know something that risk has risen. 

Drawing inference from price, market participants then sell 

bonds and stock in the belief that default risk is greater. The higher funding costs in turn depresses earnings and validate that projection of greater risk. The causation runs from price to fundamental outcome. 

Examples of market manipulation contained in the appendix suggest there is cause for concern regarding credit default swaps. 

Issues related to incentives for restructuring for impaired companies and countries potentially are also complicated by the presence 

of credit protection in effecting incentives. 

Government and municipal services are essential, and manipulative market methods may put them at risk. The hierarchy of 

human needs for basic elements of social function implies that this 

inquiry that you are holding today is a valid concern of public officials. 

The appendix that follows contains my remarks. I will just speak 

regarding the Greek crisis, and I will echo many of your introductory remarks. The Greek crisis in sovereign debt is not fundamentally caused by credit default swaps. One of you spoke about the 

messenger. I don’t even think it is a big enough messenger to shoot 

at in this case. The outstanding amount of credit default swaps in 

Greece was very small. 

Thank you. May I submit the balance of my remarks for the 

record? 

[The prepared statement of Mr. Johnson can be found on page 

64 of the appendix.] 

12 

Chairman KANJORSKI. Thank you very much, Mr. Johnson. 

Let me make a point—I failed to do that—that we will make the 

entire statements of the witnesses a part of the record. And we request that we hold ourselves to 5 minutes. We will give you a little 

leeway, though, because we are interested in what you are saying 

and we appreciate your testimony. 

We will now hear from Mr. Robert Pickel, executive vice chairman, International Swaps and Derivatives Association, Incorporated. You must be a popular man this week, Mr. Pickel. 

STATEMENT OF ROBERT PICKEL, EXECUTIVE VICE CHAIRMAN, INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC. 

Mr. PICKEL. I would like to think so. 

Thank you, Mr. Chairman, Ranking Member Garrett, and members of the committee. Thank you again for the opportunity to testify before this committee. I have testified at least on one other occasion before this committee. And this time I look forward to discussing credit default swaps and government debt. 

I have submitted my statement for the record, so let me just 

summarize some of the key points I have raised in that. I will talk 

a little bit about the varied purposes and motivations for parties 

who utilize credit default swaps. I will talk about the important information and signaling function that they can provide. 

I will briefly highlight the many industry efforts that are going 

on as it relates to credit default swaps, but also derivatives generally, in the areas of systemic risk, transparency, and infrastructure. And then we’ll talk a little bit about manipulation, focusing 

on the unique nature of these products and why that nature in fact 

provides significant protections against the ability to manipulate 

through credit default swaps. 

The classic use of a credit default swap is to hedge credit risks 

that a company might have, typically a bank which has lent money 

or a company that owns the bonds of an institution. That is the 

traditional hedging purpose of a credit default swap, buying protection. 

But there are many other purposes for using credit default swaps 

beyond that traditional hedging function. Investors in the debt or 

equity of companies in a specific country may use sovereign CDS 

as a proxy hedge against potential shocks to the economy of that 

jurisdiction. Investors with real estate or other corporate holdings 

or other investments in a country may similarly use sovereign CDS 

to protect against their investments in those countries. 

Portfolio managers may use sovereign CDS to hedge against 

country, liquidity, and market risk. Large banks, who typically do 

not, with highly rated sovereigns, post collateral or receive collateral from those sovereigns, may use CDS to provide some element 

of credit protection against that uncollateralized exposure. 

And then, of course, anyone who sells protection to anyone who 

is buying protection by definition is taking on credit risk, and 

therefore may wish to use credit default swaps to hedge some of 

the exposure that it has. Even banking supervisors in central 

banks can use the price signals provided by the CDS market to asVerDate Nov 24 2008 16:07 Sep 14, 2010 Jkt 057748 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\57748.TXT TERRIE
13 

sess default risks in their system. So there are many different purposes for utilizing credit default swaps. 

They do provide, as I think has been alluded to by a number of 

the opening statements, important information to the marketplace, 

information that 5 or 10 years ago did not exist. We are not suggesting that credit default swap information should replace the 

other information that exists out there, whether that be credit rating agencies, an investor’s own due diligence, but we think it is important additional information. 

And in fact, we know, from talking to treasurers or companies, 

that they are watching their credit default swap spreads as closely 

as they watch their stock price. It is a regular assessment by the 

marketplace of how the company is doing. 

So more information is certainly better information, and I think 

finance ministers of countries can utilize the credit default swaps 

on their sovereign CDS similarly to get an assessment of the marketplace’s assessment of the running of their economy. 

We have, as an industry, undertaken a number of different initiatives relating to credit default swaps and derivatives generally. 

We have focused on reducing systemic risk and the interconnectedness risk that we saw in 2008. That is primarily through establishing central counterparties, clearinghouses, and utilizing a process of compression to reduce the outstanding number of obligations 

outstanding. 

We have also increased transparency by establishing trade repositories, and the information that is on the chart over here is 

drawn from that trade information warehouse that has been established and up and running for the last 3 or 4 years, sponsored by 

the Depository Trust Clearing Corporation. So that information is 

readily available and is extensively used as parties look at the exposure that is outstanding on any particular company or country. 

Then finally, I wanted to just briefly respond to suggestions 

about manipulation through credit default swaps. And to look at 

this, we need to understand the fundamental nature of these products, these bilateral transactions. It is two parties who are entering 

into this transaction. Anytime one is going short in a transaction 

implicitly, by definition, another party is going long, taking the— 

selling the protection position. 

So that is a natural tension that exists in the bilateral relationship. And it is very hard in a series of bilateral relationships, bilateral contracts, to have the type of manipulative effect that has been 

suggested for credit default swaps. 

And the fact of the matter is that there are other mitigating factors relating to potential allegations of manipulation. Mr. Johnson 

referred to the fact that the amount outstanding of credit default 

swaps as it relates to sovereign debt is very small, certainly in the 

Greece situation as well as other situations. Also, the majority of 

sovereign CDS investors are likely hedging legitimate economic 

risks, even if they don’t hold the actual bond. 

And then finally, sovereign CDS may actually serve to moderate 

downward pressure on troubled countries because if the CDS market did not exist, the only alternative would be to sell the bonds 

or not take on the debt exposure to begin with. 

14 

So those are the main points that I have raised in my testimony, 

and I look forward to the questions of the committee. Thank you, 

Mr. Chairman. 

[The prepared statement of Mr. Pickel can be found on page 94 

of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Pickel. 

And we will now hear from Mr. Darrell Duffie, professor of finance, Graduate School of Business, Stanford University. 

Mr. Duffie? 

STATEMENT OF DARRELL DUFFIE, PROFESSOR OF FINANCE, 

GRADUATE SCHOOL OF BUSINESS, STANFORD UNIVERSITY 

Mr. DUFFIE. Thank you, Chairman Kanjorski, and Ranking 

Member Garrett. 

As several committee members have mentioned in their opening 

remarks, concerns have been raised that speculation in credit default swaps has been responsible for raising the borrowing costs of 

Greece, California, and other government borrowers. 

My written testimony contains empirical evidence, charts, and 

statistical evidence, with Professor Zhipeng Zhang of Boston College, showing that there is no evidence that speculators have been 

responsible for raising these borrowing costs. 

First, as has been mentioned by Mr. Johnson and Mr. Pickel, the 

amounts of credit default swaps that have been used to either 

hedge or speculate against Greece is relatively small compared to 

the amount of Greek bonds outstanding. It is under 3 or so percent. 

Similarly, the amount of credit default swaps on California is 

under 2 percent of the amount of debt outstanding. 

Second, there is no evidence of large swings in the amount of 

protection that has been brought. Charts in my testimony show 

that the changes from week to week of credit default swap protection is rather small. 

Third, changes in the amount of credit default swaps written on 

these government borrowers and other weaker European sovereign 

borrowers are not related to the credit default swap rates demanded by investors in this market. In other words, this sort of 

speculation, if it is speculation, or hedging, is actually not related 

to changes in Greek borrowing costs or the borrowing costs of these 

other sovereigns or California. 

And finally, as several of you—Chairman Kanjorski and Ranking 

Member Garrett—have suggested, the credit default swap rates 

have actually risen in advance of information that has been revealed about the true indebtedness of Greece. 

And as that information has come into the market, we have 

learned that Greece is likely to be unable to pay back its debt on 

its own, and it is this fact that has raised its borrowing costs. It 

is quite hard to imagine how speculation by credit default swap investors has caused Greece to borrow more than it can pay back. 

Also, I would like to say that the external support that has been 

provided to Greece does not, however, imply that Greece will avoid 

default. The CDS rate for Greece, which is a close proxy to its borrowing rates, has gone to 10 percent in the last few days, indicating a significant chance of default. 

15 

The debt crisis faced by Greece has profound implications for 

other Eurozone countries right now. Eurozone governments issue 

debt in a common currency. If one of them is unable to pay its own 

debt, other Eurozone countries have an incentive to come to the 

rescue and to protect the stability of the Euro on which they commonly depend. 

In the long run, however, there can be an erosion of the incentives of fiscally stronger Eurozone countries to support fiscally 

weaker Eurozone countries. Economists call this a free rider problem. Each time a Eurozone country spends more than it can pay 

back, the fabric of the Eurozone is weakened. This is important to 

the interests of the United States because the stability of the Euro 

contributes to global economic growth and security. 

Regulations that severely restrict speculation in credit default 

swap markets could have the unintended consequences of reducing 

market liquidity, which raises trading execution costs for investors 

who are not speculating, and of lowering the quality of information 

provided by credit default swap rates regarding the credit qualities 

of these issuers. 

Regulations that severely restrict speculation in credit default 

swap markets could, as a result, increase sovereign borrowing costs 

somewhat. In any case, speculation could continue via short selling 

of the underlying sovereign bonds to the extent the bond market 

is liquid. 

Proposed reforms of the over-the-counter markets for credit default swaps and other over-the-counter derivatives will improve the 

safety and soundness of these markets. Data repositories will eventually give regulators the opportunity to police those who would 

manipulate these markets or would take positions whose risks are 

too large with respect to the capital backing them. 

Central clearing, if done effectively, will also bring needed stability to this market. Transactions price reporting will add additional transparency and improve market efficiency. 

Thank you for the opportunity to present my views. 

[The prepared statement of Professor Duffie can be found on 

page 50 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Duffie. 

And now, we will hear from Dr. Anthony B. Sanders, distinguished professor of finance, George Mason University. 

Dr. Sanders? 

STATEMENT OF ANTHONY B. SANDERS, DISTINGUISHED 

PROFESSOR OF FINANCE, GEORGE MASON UNIVERSITY 

Mr. SANDERS. Mr. Chairman and distinguished members of the 

committee, on November 5, 2009, Reuters published a story entitled, ‘‘Greek Debt Reached 120.8 Percent of GDP in 2010.’’ Everyone around the global is aware of how Greece’s excessive debt fiasco had led to a meltdown of the European economy, potential 

meltdown, at only 120 percent of GDP. Things became even more 

critical when Greece discovered it had overlooked $40 billion more 

of debt. Markets do not like surprises. 

These stories about the Greek economy beg the following question: Was the cause of the fiscal collapse of Greece perpetrated by 

credit default swaps, or was it out-of-control spending and borVerDate Nov 24 2008 16:07 Sep 14, 2010 Jkt 057748 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\57748.TXT TERRIE
16 

rowing by the Greek government that led to Greece being, in popular parlance, broke? 

Credit default swaps play two important roles in the market for 

credit. First, they facilitate liquidity by allowing investors to hedge 

against negative outcomes—for example, defaults—and second, 

CDS provide vital information to other market participants about 

the risk of a particular investment. 

This price or spread conveys information to potential investors, 

communicating the level of risk involved in an investment, and 

helping them to make a more informed and prudent investment decision. Restricting either of these roles makes credit less widely 

available and markets less transparent. 

CDS is the current villain du jour in the Greek debt fiasco. The 

Greek crisis is the result, again, of massive government spending 

and debt issuance to fund that spending. In fact, CDS in Greek 

sovereign debt actually served a positive role: It alerted everyone 

around the globe that Greece was in fact in a death spiral from 

credit. 

CDS is often misunderstood. Essentially, it allows investors to 

hedge their positions in debt, in this case, default of Greek sovereign debt. An investor may hold Greek sovereign debt long and 

may want to partially or fully insure against that default on debt. 

By limiting or abolishing CDS, you not only decrease liquidity for 

investors, which is a terrible idea, but you actually decrease liquidity in the underlying asset, in this case Greek sovereign debt. 

As can be seen in Exhibit 1 in my report, CDS spread started 

to widen in October and November of 2009. By December 2009, 

CDS spreads widened even more dramatically. That is when the 

120 percent GDP story came out. 

Now, consider further the Greeks’ surprise when on April 2, 2010, a story revealed that Greece had another $40 billion of unknown debt, and CDS widens. For a country that is already deep 

in trouble making its debt payments, the discovery of another $40 

billion came as a rude surprise. I also show that in my exhibits, 

how devastating this is. 

So focusing on the instrument as the cause of the problem, in 

this case CDS, misses the real culprit, the behavior of the underlying asset. With Greece, CDS reacted to the behavior of the underlying asset, the debt. Just as in the housing crisis, CDS has been 

blamed for exacerbating the crisis, but really, it was the behavior 

of the underlying asset, housing prices and mortgages, that was the 

issue. 

If you are looking to place blame, don’t blame the instrument. 

Blame the behavior of the underlying asset. Greece hid its debts. 

Markets found out and reacted appropriately. This is a lesson we 

learned well for the United States. Our own sovereign debt has a 

Greek surprise component, too. It is called GSE and agency debt. 

As Secretary Geithner tried to emphasize in a recent House hearing that I was involved in, the Federal Government’s support of 

Fannie Mae and Freddie Mac does not change the legal status. In 

addition, he said, the corporate debt of the GSEs is not the same 

as U.S. Treasury debt. 

Secretary Geithner went on to say he wanted to eliminate this 

ambiguity. I completely agree with Secretary Geithner. But to end 

17 

that ambiguity, we need to at least recognize the GSE corporate 

debt on the Federal budget along with projected guarantee book 

losses. 

An argument can be made against requiring that the guarantee 

books be brought on balance sheet, and an argument can be made 

to bring them on balance sheet. As I had mentioned before, the 

CBO has projected that these losses will be about $400 billion over 

10 years, which could be higher or lower depending on future economic conditions, interest rate, and tax rates. These guarantees are 

supported by cash flows from borrowers, so it’s less critical to bring 

them on the Federal balance sheet, although the losses that are expected should be recognized. 

Lastly, I would err on the side of fiscal conservatism by raising the projected guarantee charges for $400 billion to a higher number 

based on stress tests by the CBO in the same way that Fannie and 

Freddie run stress tests and alternative scenarios. FHFA has the 

stress test results, and we should prepare for the possibility of a 

double dip in housing prices in a few of the recessions, which is 

going to drive those losses much higher. 

Thank you for allowing me to share my thoughts with you today. 

[The prepared statement of Dr. Sanders can be found on page 

103 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Dr. Sanders. 

And finally, we will hear from Mr. Joseph R. Mason, Louisiana 

Bankers Association professor of finance at the Louisiana State 

University. 

Mr. Mason? 

STATEMENT OF JOSEPH R. MASON, LOUISIANA BANKERS ASSOCIATION PROFESSOR OF FINANCE, LOUISIANA STATE 

UNIVERSITY 

Mr. MASON. Thank you, Chairman Kanjorski, Ranking Member 

Garrett, and members of the subcommittee for inviting me to testify today on this important and timely topic. 

While it is widely held that unprecedented monetary and fiscal 

policy responses of countries worldwide have been successful at 

preventing a worst-case scenario repeat of the Great Depression, 

the combination of rising fiscal deficits and continued monetary 

policy accommodation has raised concerns about the sustainability 

of public finances and fears of inflation. As a result, the recent uproar about Greece’s fiscal woes and possible debt default are viewed 

by many as merely a canary in a coal mine. 

It is hard to argue that Greece is not to blame for its difficulties. 

As of December 2009, Greece had the highest fiscal account imbalance, as a percent of GDP, in all the Euro area countries and Britain at negative 7.7 percent, and its projected 2009, 2010, and 2011 

balances were second only to Ireland. 

With a long history of fiscal stress and four previous defaults in 

modern history, investors are right to be suspicious. As of this 

hearing, Spain, Ireland, Italy, and Portugal are being pressured for 

similar good reasons, not mere contagion. 

Defaults are nothing new, even for sovereign entities and municipalities. There exists a long history of defaults throughout the 

world as well as U.S. history. The definitive guide to the history 

18 

of U.S. State and municipal defaults shows that even in the Great 

Depression, States with serious default problems took on far more 

debt in the decade than States that had no defaults. Hence, even 

historically, default is not a threat without a substantial debt load. 

More recently, S&P reports that the 5-year transition rate for 

AAA-rated local and municipal debt over the period 1975 to 2009 

was 27.4 percent, with 10.9 percent of that resulting from ratings 

that were withdrawn and 16.4 percent resulting from ratings that 

were downgraded. S&P reports that the sovereign speculativegrade-rated 15-year default rate over the same period was 29.66 

percent. The point is, sovereign defaults happen. 

A real problem in the sovereign CDS market, however, arises because of the concentration in counterparty risk. Whether that concentration is at a central counterparty or a small group of market 

participants, the risk remains. Recently, the IMF has opined that 

the magnitude of risk to be assumed at the proposed CCP on behalf 

of unmargined market participants is of an order of magnitude in 

the neighborhood of some $200 billion, and is rising daily with further exemptions. That estimate should not be dismissed or the 

amount will surely precipitate a future crisis. 

Some have pointed to CDS as creating problems for sovereign 

debt financing. It is hard, however, to see the case. While CDS provide transparency by aggregating market views of the probability 

of default and recovery, CDS in and of themselves do not create additional volatility to those views. 

The view of CDS as creating volatility comes from observations 

that CDS spreads can widen quickly before a credit event, reflecting demand from CDS protection buyers. Some of the furor arises 

because CDS markets may be dominated by fast-moving hedge 

funds, while cash bond markets are dominated by buy-and-hold 

real money investors. 

While it can seem that the signals from the two markets may be 

at odds during distress, the apparent divergence has been shown 

to be bounded by some fundamental institutional and value distinctions between CDS and the underlying debt contracts. 

CDS do contribute greater information to markets than credit 

ratings, but no degree of rating agency liability, not even that 

greater than the PSLRA that would make them responsible for 

even Goldman Sachs’ alleged fraud, will change that relationship. 

Overall, the danger that a CDS buyer may deliberately trigger 

a credit event remains theoretical. There are no known cases of adverse behavior that have directly impacted debt borrowers because 

those borrowers are known to be struggling financially anyway. 

In sum, therefore, I am not convinced that sovereign CDS deserves its current negative press, and fear that a ban or restriction 

on trading could easily backfire. Bans on trading activity tend 

largely to reduce liquidity, forcing a reversion to a world where 

sudden and unhedgeable price jumps occur when information about 

underlying fundamentals is occasionally priced into an illiquid 

market, that is, when someone finally trades. 

Sovereign CDS provides an efficient way to trade and to hedge 

credit exposures to governments, as well as a more continuous way 

for governments to poll their fiscal decisions more continuously in 

19 

the marketplace. If governments do not like that transparency, it 

seems they doth protest too much. 

Thank you. 

[The prepared statement of Professor Mason can be found on 

page 81 of the appendix.] 

Chairman KANJORSKI. Thank you very much, Mr. Mason. I thank 

the entire panel for their testimony, and now we will move to the 

questions. I will take the first 5 minutes, and at the conclusion of 

my 5 minutes, I will ask Mrs. Maloney to take the chair. 

I am not sure what I am supposed to gather from the testimony 

of all five witnesses other than that CDSs obviously are not the 

problem, but we have a big problem out there. Is that true, relatively speaking? We just have not done a postmortem to determine what really constitutes the problem, and how it can be solved. 

Is that reasonable? 

And the reason I ask you that is over the last 3 or 4 weeks when 

the Greece problem was called to international attention, it started 

at $45 billion, a need for a $45 billion underwriting or infusion 

from the European Union, and now it is up to $120 billion and 

climbing. And somebody today stated that there is no way that 

they can work a rescue here without a restructuring. 

I would like your reaction to that opinion, if any of you have one. 

Is that a correct or a likely conclusion? 

Mr. DUFFIE. Mr. Chairman, could I address that? 

Chairman KANJORSKI. Surely. 

Mr. DUFFIE. You are correct. The estimates of how much will 

have to be loaned to Greece have gone up—tripled in the last few 

days. And again, relying on the CDS markets, as we have said, 

there seems to be a perception that Greek sovereign debt has a significant probability of defaulting anyway. 

One of the reasons for that is that these monies coming from the 

IMF and the Eurozone countries are not donations to Greece. They 

are loans. They have to be paid back. So they will actually increase 

Greece’s indebtedness, although the terms of the loans are rather 

generous. 

The other issue is that some of these loans to Greece in external 

support may actually come in ahead of Greek sovereign debt in 

terms of who gets paid first. And that actually causes concerns to 

some Greek sovereign debt holders. If the IMF, for example, gets 

paid before them, maybe there won’t be enough left for them. 

So in summary, I think it is not at all clear that Greece will 

avoid a restructuring of its debt or an outright default, and only 

time will tell. 

Mr. SANDERS. Chairman Kanjorski, I would like to first of all 

agree completely with my esteemed colleague, Professor Duffie. But 

I would also like to point out that it is just not Greece; it is also 

Portugal—Spain is about to blow up; Ireland; Iceland. Great Britain is on the brink, too. 

So we are talking about a substantial amount of—some of those 

are non-Euro countries, but that Europe in general is having a severe meltdown due to, again, excessive spending. And it is biting 

them really hard right now. 

Chairman KANJORSKI. What sort of potential—obviously, we do 

not have jurisdiction to intrude into the European Union. But I am 

20 

dealing with them on financial matters on a regular basis now because we are trying to do our regulatory reform consistently, with 

the E.U. and the United States being on an equal footing. 

This is rather shocking, though, that suddenly someone can dis- cover $75 billion of new debt that was really unrealized just 3 or 

4 weeks ago. And it is true, when you talk about Spain, Portugal, 

Italy, and Ireland, if you throw them all in, the one commonality 

they seem to have is that they have violated the rule for entry into 

the Euro Union in that they went—they are all over 60 percent in 

debt, as opposed to the other countries that were far more stable 

and were in the union originally. I guess it proves that whoever set 

that formula up knew what they were thinking or talking about. 

But like anything that can be contagious, and we saw that recently in the credit crisis in the United States when things started 

to tumble, suddenly what are reasonable assets become valueless 

or almost valueless. And that obviously, probably, is happening to 

some extent in these countries. 

How do we put a stopgap in there, and how do we prevent that 

constant rolling motion that would take everything down, eventually the entire European Union? Is there some thinking on that? 

And maybe somebody wants to grab it and run with it? 

Mr. MASON. If I may, one substantial element that was left out 

of the European Union construct was a way to address individual 

country difficulties through some type of central bank action. In 

fact, that is why we designed the U.S. Federal Reserve System as 

a system of central banks able to address regional needs, even if 

the entire Nation did not need a stimulus. 

That is a fundamental flaw, and that is what creates the risk of 

being unable to address specifically Greece, Italy, and Spain while 

leaving, for instance, Germany and France relatively untouched. 

But you are exactly correct that the E.U. entry rules set the 

stage for off-balance-sheet finance. By arbitraging this rule, by 

keeping funding off-balance-sheet, they could stay within the debt 

limits, at least based upon the formula, but not in any real economic way. 

And that is a very, very important lesson that I want to point 

out here that happened in the United States with securitization in 

commercial banks. And I really would like to stress to the committee to see how that application is very robust to a number of 

different rules, even some rules that may be considered today in financial reform. 

Chairman KANJORSKI. Thank you very much. 

Yes, Mr. Johnson? 

Mr. JOHNSON. Characteristically, when officials are doing a workout, the rule of thumb is to do too much rather than too little, in 

other words, to get ahead of the curve and do something so profound in restructuring that you essentially what you might call 

stop all of the emotion that leads to contagion in its tracks. You 

stop people from drawing inference about propagation. 

What is particularly difficult about this situation once it has 

taken place, and Professor Duffie mentioned this, is the free rider 

problem, which is at this point Greece knows that it is not just its 

own fate that is in its hands. Greece knows that it can take Italy, 

Portugal, and possibly the whole Euro structure down with it. And 

21 

their incentives in bargaining now reflect more than their own fate. 

They think they have more leverage than if it was just an isolated 

country. 

So at some level, doing something that would, how should I say, 

not call Greece’s bluff, but would acknowledge that they are going 

to perceive those side effects require a bigger offering from the 

other side of the table. Right now, Germany doesn’t want to offer 

that. And they have a traditional concern about inflation in their 

past, and they don’t want to do that right before an election when 

their population is not necessarily that fond of the Euro anyway. 

But the basic concept is you have to do more than you think is 

necessary in order to quell those anxieties once it takes place. 

Mr. PICKEL. Mr. Chairman, if I could just return to your first 

question. I think it’s important to understand the nature of these 

contracts as they are sovereign CDS versus corporate CDS. 

In a corporate CDS, the triggering events for a settlement are 

typically bankruptcy and failure to pay. For a sovereign CDS, the 

relevant events that would trigger a settlement of the credit default swap would typically be restructuring or a moratorium or repudiation of debt. 

And so, it is certainly true that participants in the credit default 

swap market are watching the current discussions very closely to 

see what the nature of the support from the IMF of the Euro might 

be because it could in fact be those events that might trigger a 

credit event under the contract. 

Because countries don’t go bankrupt. Countries always have the 

ability to tax. But they may restructure their debt or they may 

miss a payment, and that would trigger a settlement. 

Chairman KANJORSKI. Thank you, Mr. Pickel. 

I am now going to recognize the gentleman from New Jersey, Mr. 

Garrett, for 5 minutes. And may I request Mrs. Maloney to take 

the chair? 

Mr. GARRETT. I thank the Chair, and again thank the witnesses. 

And I guess my opening thoughts and comments were that this 

committee and this title, ‘‘Credit Default Swaps and Government 

Debt,’’ could involve itself into a bunch of different areas. 

I guess the first takeaway from this is, taking the lead from the 

chairman and also from Mr. Johnson’s opening testimony, and everybody else right down the row, is that CDS were not the underlying cause of the problem that we see in Greece right now. So 

from that, then we can sort of explore and say, well, what should 

we learn from this experience? 

Mr. Johnson, I know in your testimony you conclude, ‘‘The Greek 

crisis in sovereign debt—sort of saying what I just said—is not fundamentally caused by CDS. It is caused by a profile of spending 

and tax revenue, and a dynamic of government debt accumulation 

that is fundamentally unsustainable.’’ And I mentioned in my remarks what Chairman Bernanke said, that here in this country we 

are not going to be able to grow our way out of it, which is some 

people’s suggestion as to how we solve our problem. 

So I would just be curious for your take on our problems here 

in this country is in order to avoid the situation that Greece sees 

themselves in. Is it like a lot of the experts who testify over in the 

budget committee hearing, that our first and fundamental area 

22 

that we need to address is the entitlement spending in this country, and somehow or other we have to rein that in, and that is our 

Greek problem, if you will? 

Mr. JOHNSON. You are calling me back to the days when I was 

a staffer on the Republican Senate Budget Committee under Pete 

Domenici, so I will have to dust off those memories. 

What I would say is that there are many tools that reflect social 

priorities, and that the United States, after this financial crisis and 

definitely if we had a recurrence, would be reaching what Congressman Hensarling talked about, the red zone, which Ken Rogoff 

and Carmen Reinhart talk about as a debt-to-GDP ratio approaching 90 percent. 

I do think that structural reforms have to be made. Whether 

those structural reforms take the form of further health care legislation that reduces the price of care, or whether it involves entitlement reform in terms of the extent or quality of care, whether it 

involves taxation, or whether it involves the military budget, any 

of those things logistically fit into the what you call menu, theoretical menu, of tradeoffs that one could invoke. 

It is really a question of social preferences as to how you get 

there. And I do believe that we face that challenge. We have to define those preferences. 

Mr. GARRETT. And then turning to Mr. Duffie, I noted your one 

comment, and then there was like a pregnant pause after it, and 

I don’t know if it was intended or not, saying that speculation did 

not force the excessive borrowing, or spending first and then borrowing by Greece. 

Do you have any other comment to follow up, after your pregnant 

pause? 

Mr. DUFFIE. I would like to address the issue of whether speculation has any benefits at all. And one of the ones that has been 

mentioned by all of the panelists, I believe, which is that it provides an early warning system to the market. I think that has been 

quite helpful in this case. It has caused people to dig into the true 

financial condition of Greece, as Professor Mason suggested. 

Another benefit of speculation is that when someone needs to lay 

off some risk, they have to find someone to take it on, and speculators will usually do that in return for an expected profit. If we 

didn’t allow them to participate in this market, it would be harder 

for investors to either exit their positions or hedge their positions. 

So I would encourage regulators generally not to clamp down on 

speculation, but to clamp down on manipulation, which is a different aspect. 

Mr. GARRETT. One last question. My time is coming up here. Mr. 

Sanders and others alluded to the fact that a lot of this that happened in Greece, the triggering was the finding of new information, 

the $40 billion, or what-have-you. I have legislation in to say that 

we want to make sure that all of our information in this country 

is clear and transparent, and to say that all of our debt should be 

apparent to the public. 

I would think it is apparent, but I think the clearer way is to 

put it on the budget. Is there any reason why that would not be 

a legitimate avenue for Congress to go down and say, all of our 

23 

GSE debt, if it is really sovereign debt or whatever the Treasury 

Secretary says it is, should not be transparent and on our budget? 

Mr. DUFFIE. I think that is correct. I think Supreme Court Justice Brandeis at one point said, ‘‘Sunlight is the best disinfectant.’’ 

And I think that is exactly what is needed, as much transparency 

as possible. 

Mr. GARRETT. Let’s flip it around. Does anybody disagree with 

that? 

Mr. SANDERS. I agree completely with that statement. I think it 

really should be brought on it because we do want to avoid another 

Greek surprise. And if we leave it off, it just begs for another surprise in the market that is a negative. 

Mr. GARRETT. And Mr. Mason, it looks like you— 

Mr. MASON. I also agree that we need to be clear about our own 

off-balance-sheet exposures, so to speak. But we also need to pay 

attention to the resolution of the consumer problems in today’s 

marketplace in terms of what we have talked about in restructuring in the Greek context. 

If you think about a restructuring for today’s consumers, by offering the modification and therefore taking a loss on the secured 

debt, while leaving the unsecured debt of the consumer intact, we 

have actually violated an absolute priority rule in the restructuring 

of the consumer in a way that has confused and shocked markets. 

And in the restructuring, we do need to be very careful to communicate directly to investors, previous investors, what they are 

liable to get even after loans from the outside come in to bail out 

the— 

Mr. GARRETT. And just so I understand what you just said, that 

means that all the work that we do as far as restructuring on the 

secured debt, which is mortgages and all those programs, we have 

to be careful of the implications on what that does as far as the 

unsecured debt and going forward as far as whether lenders want 

to engage themselves in that activity? 

Mr. MASON. We have seen that directly by modifying first lien 

mortgages before second lien mortgages, and of course the second 

lien holder was able to avoid a loss where they would have otherwise, according to the rules of the game, taken a loss. It has been 

confused. 

Mr. GARRETT. Right. Thanks. I appreciate the clarification. 

Mrs. MALONEY. [presiding] Thank you. The Chair recognizes herself for 5 minutes. 

The first time CDSs came to national spotlight and attention was 

during the AIG crisis. And I would like to ask the panelists, starting with Mr. Johnson and going down, if anyone would like to comment on it. 

What would have been necessary to avoid the AIG bailout in 

terms of CDS reform? 

Mr. JOHNSON. Would you like me to start? 

Mrs. MALONEY. Yes. You start, and then Mr. Pickel and Mr. 

Duffie, if you would like to comment. 

Mr. JOHNSON. I think there are a couple of things that come to 

mind, the first of which is the way in which premium income is 

booked by those who wrote CDS during that period, allowed them 

to book it as income and not have set-aside or loss provisioning, 

24 

whereby—how do I say it—they built a war chest or a contingency 

fund in the event that they had to pay out. 

But I want to be a little bit careful about that. CDS is an unusual contract. It is not as if there is a stream of payments that 

when the event is triggered, the insurer just assumes a stream of 

payments. They actually have to deliver on the whole loss for the 

outstanding bond. 

And you go from collecting a premium, which is a flow each year, 

to having a huge liquidity demand on as the writer. And obviously, 

when we had a giant storm like that, it is not clear to me that even 

a well-provisioned system would have withstood that shock. 

The second dimension, I think, is that a systemic risk regulator 

needs to understand the distribution of exposures, ex ante, and 

they need to have a very clear sense of that pattern of exposures 

because when they are called upon to resolve any impaired institution, they may be triggering an event that is not necessarily emanating from the balance sheet of that institution. 

If one bank fails, two other banks may have transferred risk on 

the CDS on the failing bank. And unless there is a unified awareness of that exposure map, by taking action, putting the failing 

bank into receivership, you may drag somebody else over the wall 

with you and lead to contagion. 

Understanding those consequences will make it much easier for 

the resolution authorities. So that information system, I think, is 

very important. 

Mrs. MALONEY. Mr. Pickel, would you— 

Mr. PICKEL. I think it is important to understand the differences 

between the nature of the transactions done by AIG and the transactions that are the focus of this hearing, the sovereign CDS or 

even the corporate CDS. Those credit default swaps were written 

on super-senior tranches of CDOs which had exposure to underlying real estate risk. 

And in fact, those were—there is all this discussion about naked 

credit default swaps or situations where you actually have the underlying risk. The people who bought that protection from AIG actually had the underlying risk. So those would be—even if you 

wanted to ban naked credit default swaps, those could still be done. 

I think it is also a function of the fact that the AIG individuals 

who were involved in these transactions didn’t have a full understanding of the nature of the risks. They were looking at the potential for them to have to pay out. They did not take into account the 

mark-to-market risks that they had. 

It was compounded by a reliance on AAA ratings and refusing to 

provide collateral. Collateral is a very important tool in the OTC 

business, widely used, and it provides not just credit protection, but 

provides indications as to the exposure that you have under your 

underlying positions that you can adjust to. They compounded that 

by agreeing to downgrade provisions so that at the very worst time, 

when they lost their AAA rating, they had to come out with massive amounts of collateral because of the mark-to-market exposures. 

So I think you need to have the information that Mr. Johnson 

refers to. Clearing wouldn’t help in that situation, but greater utilization of collateral in those transactions would be quite helpful. 

25 

Mrs. MALONEY. Would anyone else like to comment? Mr. Duffie 

and Mr. Mason, and then my time is up. 

Mr. DUFFIE. Briefly, there are four measures in the legislation 

that your committee has proposed to reform the financial system 

that address this. 

First of all, the supervision by the Federal Reserve of systemically important financial institutions would include a firm like 

AIG. Hopefully, they would do a much better job than the Office 

of Thrift Supervision actually did at the time. 

Second, the legislation proposes a new method for resolution of 

systemically important financial institutions, and that would allow 

AIG to be taken apart without necessarily a lot of collateral damage. 

Third, data repositories are in the new derivatives legislation. 

This would provide regulators with the opportunity to see how 

much credit default swaps AIG would have held. 

And then finally, as Mr. Pickel said, the new legislation will require substantial amounts of additional collateral, and that will 

also improve the situation. 

Mrs. MALONEY. And Mr. Mason, and then my time is up. 

Mr. MASON. Thank you. I would like to emphasize Mr. Johnson’s 

remark about information, but also take it a slightly different direction. The information that we needed to understand AIG’s exposures was there. DTCC had it. We just needed to think to ask 

them. 

After my own experience in the bank regulatory agencies, it has 

been amazing to me that bank regulators would not ask outside of 

banks for additional market information or even information about 

direct bank exposures, whether it is CDS or off-balance-sheet 

securitized entities. 

To me, that is the important element that can be solved fairly 

simply in financial reform. Instead, financial reform, as currently 

drafted, is asking for the entire trading book of every systemically 

important institution, which is information overload. Any attorney 

knows if you want to fight off an attack, you either withhold information or you give them too much to digest. 

That would be far too much to digest, and I think the best starting point is to allow bank regulators and other Federal regulators 

access to information sources, common on Wall Street, that they 

cannot afford right now, and sometimes even, because they are not 

a qualified institutional buyer, cannot even legally access. That 

would give the greatest bang for the buck, so to speak, of the legislation. Thank you. 

Mrs. MALONEY. Thank you. Mr. Bachus is recognized for 5 minutes. 

Mr. BACHUS. Thank you. First, I want to say that your testimony, which arrived yesterday afternoon, our staff reads that, and 

they refer that to us—not always; they will recommend that we 

read it or not. And we then will review some of it or look at it or 

use it. 

And I want to say the staff and I both want to compliment you 

on your testimony. We found that it was very insightful in all 

cases, and did what it is supposed to do. So if you had a Member 

who stepped out during your testimony, he probably read it or will 

26 

read it, and he certainly had a staffer that highlighted certain 

things to him. So I commend you on that. 

Mr. Duffie, let me start with you. Credit default swap spreads, 

I think, are a reflection of Greece’s economic condition. I know the 

Greek government’s difficulty refinancing its debt is a direct result 

of not the CDS—sovereign CDS market, but of legitimate concerns 

about its financial health. 

Would those concerns—or let me say this: Is it correct to say that 

the sovereign CDS market alerted us to the problem the Greeks 

had, as opposed to contributed to it? Many people have blamed it 

on the sovereign CDS market, or part of that. But what is your 

view? 

Mr. DUFFIE. Based on the statistical evidence, that is certainly 

my conclusion, Mr. Bachus. 

Mr. BACHUS. That— 

Mr. DUFFIE. That the CDS market, rather than causing Greece 

to have borrowed too much money or to be currently in a debt crisis, it actually alerted investors that Greece would have borrowing 

problems. 

Mr. BACHUS. Right. And it served a very useful purpose in that 

I think it caused people to confront the problem. 

Mr. DUFFIE. Yes. It provided both an early warning system, and 

of course, for those who needed to get rid of some of their risk, it 

provided a way for them to transfer it to others. 

Mr. BACHUS. Right. I appreciate that. Mr. Sanders, the Federal debt stands at $8 trillion, and GSE 

debt stands at an additional $8 trillion. That represents 110 percent of our GDP. What are the implications of an unsustainable 

debt load? And actually, Chairman Bernanke said that our debt 

projected was unsustainable. 

Mr. SANDERS. Actually, the Federal debt load is over $12 trillion. It is just that $8 trillion of it is public debt. And of the GSEs, the 

guarantees are a large part of that $8 trillion. There is a lesser 

amount, which is a little less than 50 percent, is the GSE corporate 

debt. But it still amounts to a large chunk of GDP, and this is before all the real massive entitlement programs, etc., kick in. 

And then once we hit that, I think the unfunded liabilities, depending on the source of it, can be upwards of $110 trillion and 

growing. We are at $8 trillion plus GSE debt plus, remember, my 

good friend Joe has always talked about the off-balance-sheet issue. 

I wrote a paper a few ago called, ‘‘Banks: The Next Enron,’’ warning that off-balance-sheet financing is devastating unless you put 

it on the balance sheet. 

And for the government, it is especially true. We have pension 

programs which are currently off balance sheet that, like Wall 

Street, are only recognized if there is a loss. And really, we have 

to end that. We have to bring it all on balance sheet so, as Professor Duffie—according to Justice Brandeis, sunlight is a great 

thing. We should have all this stuff visible because it is 

unsustainable. 

And as I quoted in my paper, presentation, I said that 2 percent 

of United States households have $250,000 or more of income. But 

if they are bearing the brunt of all these entitlement programs and 

war spending—let’s just say all spending—and we add these up, 

27 

that ends up being that each household that makes $250,000 or 

more is responsible for $47 million per household. 

Now, I would call that unsustainable. And it also scares the living heck out of me, too. 

Mr. BACHUS. I appreciate that. I also appreciate that Chairman 

Frank and Congresswoman Maloney and Subcommittee Chairman 

Kanjorski selected our witnesses. They did a good job this time. 

Thank you. 

Mrs. MALONEY. Mr. Sherman? 

Mr. SHERMAN. Thank you. Mr. Sanders, just a comment, and 

that is you seem to be focusing on income taxpayers rather than 

Social Security taxpayers. People earning much less than $250,000 

are paying the bulk of that Social Security tax. And if you are talking about who is going to pay for the entitlements, it is chiefly 

those who are paying Social Security tax. 

One could design a society where the greatest rewards went to 

science and engineering. But we pay the largest salaries to those 

who study under Mr. Duffie and go into Wall Street. And that is 

justified on the theory that capital allocation is very important. 

But the question is whether Wall Street is engaged in capital allocation or just naked betting. Gambling is usually thought to serve 

no particular social purpose, and if anything, imposes social costs. 

George Soros a couple of days ago, in commenting on synthetic 

CDOs, but this also applies to naked CDSs, said that they serve 

no social purpose and build up the amount of debt, thus creating 

a larger crash when the crash occurs. 

What social benefit, Mr. Johnson, occurs from those who bet on 

Greek currency for no good reason, nothing to do with their regular 

business, just because they think they are smarter than the market 

and they can guess whether it is going to go up or down? 

Mr. JOHNSON. I have to refer to the distant past in my resume 

before answering you, just to be very clear. I used to be— 

Mr. SHERMAN. I have limited time. Please answer my question. 

I will learn about your resume later. 

Mr. JOHNSON. I used to be George Soros’s partner and a currency 

speculator in the early 1990’s, and I just want to preface with that. 

I believe that there are times when price systems get out of balance. You referred to the excessive incentive to allocate our best 

talent to Wall Street, probably because we had a lot of embedded 

subsidies in the system that blew up a year or so ago that made 

Wall Street firms excessively profitable, and they could pass their 

risk off onto the taxpayers. 

That is being corrected now, and I don’t expect Wall Street to 

draw quite as much talent as in the past. I don’t think that gambling on currencies for its own sake, as an action, has much redeeming quality. But I would say that when a price system reequilibrates, a society gets back on track sooner. 

Greece right now is—how do we say—harming future generations, and the price pressure coming to a head, and violent, may 

represent those future generations. 

Mr. SHERMAN. Reclaiming my time, one issue that comes before 

us is whether we should impose any fees or taxes on the casinos 

on Wall Street. I would point out that every other town in America 

where they have a casino, there is a tax. And at least then, there 

28 

is some social benefit that accrues from allowing the gambling activity to occur. 

My next question relates to why California is facing a valuation 

of its debt below that is Kazakhstan, Croatia, Brazil, Bulgaria, and 

even Thailand—at least, I haven’t checked Thailand recently; they 

have some problems there—where you have to pay 200 basis points 

for insurance. That is only 3 times what you pay on Greece. 

My reason is not just that the California economy is many score, 

or at least 20 times, that of Greece—at least many times that of 

Greece. The debt in California is considerably less. But also, as a 

matter of law, if California doesn’t pay, courts will step in and divert revenue streams of California to pay the bondholders. 

In contrast, when a sovereign, a true sovereign, goes bankrupt, 

an independent country, they can simply disclaim their debt, declare it void, and there is—100 years ago, we would send in the 

Marines to Haiti and collect their revenue and give it to the creditors. But since those days, it seems to be in the interest, the shortterm interest of Greece, at least, to repudiate its debt. They make 

$300 billion in one day. 

So why is the cost of insuring Greek debt, where the Greeks can make over $100,000 per family of 4 in 1 day with no court able to 

enforce the debt—why is that in the same ballpark, even, as the 

cost of insuring California debt, where if California doesn’t pay, a 

court comes in, takes our income tax and sales tax revenue, and 

makes sure that large chunks of it go to the debt holders? I am 

looking for—Mr. Pickel, do you have an answer? 

Mr. PICKEL. Yes. I will try to respond to that. 

You are right that repudiation is certainly an option for a sovereign, and that would trigger the settlement of the credit default 

swaps. That is an event that would trigger for Greece or a country. 

Mr. SHERMAN. And what would Greece lose if it renounced its 

debt? We see what it gains. It gains $300 billion. It loses the ability 

to borrow. 

Mr. PICKEL. Right. 

Mr. SHERMAN. But on a cash flow basis, if your debt service exceeds your borrowing—first of all, I don’t know anybody other than 

the IMF and the European Union who is going to loan any money 

to Greece. 

Mr. PICKEL. Right. 

Mr. SHERMAN. But even if they could, they are going to borrow 

less than their debt service. So why isn’t Greece defaulting? It is 

a $300 billion payday. 

Mr. PICKEL. I will maybe defer to some of the economists on the 

panel. But I think that there is that reputational issue of being 

able at some time in the future ever to get back into the capital 

markets to borrow in the future. So that is certainly a concern. 

Mr. SHERMAN. Let me turn to one of the economists quickly. If 

Greece honors its debt, nobody is going to want to lend them 

money for 2 or 3 years anyway. And if they dishonor their debt, 

in a decade, people will be loaning them money again. So, Mr. 

Duffie, why don’t they just renounce? 

Mr. DUFFIE. I think there is— 

Mrs. MALONEY. The gentleman’s time is up. 

Mr. SHERMAN. I will ask you to answer the question, please. 

29 

Mrs. MALONEY. Answer the question. 

Mr. DUFFIE. I think there is a significant probability that Greece 

will default on its debt for exactly the reasons that you suggested, 

although, as Mr. Pickel suggested, it is costly to do that because 

in the future, Greece may need to borrow again. 

Mrs. MALONEY. Thank you. Mr. Neugebauer? 

Mr. NEUGEBAUER. Thank you, Madam Chairwoman. 

I would like to kind of continue down that same line of the discussion because—and I think it was Mr. Johnson who said that the 

whole European Union is somewhat in a fragile position right now. 

And I referred to it yesterday as kind of a house of cards, and that 

two or three of these cards fall and it puts an extreme amount of 

pressure on the E.U. 

Probably the United States is the beneficiary of that right now 

because people are—that is probably what is giving the Treasury 

Secretary the ability to keep borrowing money and dollars to support these huge deficits. 

But I think the question I have for the panel is if this begins to 

happen in Europe and we have some defaults—Japan is not in just 

the best of shape itself. A lot of people don’t—that is not on their 

radar scope. The Chinese have said on a number of occasions that 

they are kind of like my banker back home. They are getting a little nervous. 

So what is the implication of us continuing these deficits, and 

then we have some fairly major defaults, or potential defaults, in 

the E.U., and what does that do to the United States? I would get 

concerned at some point in time here we are going to have an auction or two fail here just because, one, there may not be enough 

money in the economy to sustain all of these credit needs; but secondly, just the nervousness of when countries start to default, what 

that does—how people are looking at our debt as well. 

So Mr. Johnson, do you want to start? And just go down the— 

Mr. JOHNSON. I think currency and international investing is always the business of assessing the lesser of relative evils. And at 

this point, the acute anxiety and the new information that pertains 

to Europe is actually encouraging funds to so-called flight to quality to the United States. 

The dollar is likely to strengthen. Given our trade deficit, the import-competing industries and export industries will receive a negative incentive in terms of the expansion they would like to undertake. 

In the longer term, I think you point to a heightened anxiety 

about sovereign debt and what we might call a renewed scrutiny 

or skepticism, and people will be very concerned about our debt dynamics, though as a snapshot at the moment, I think the first effect, the lesser of evils, is the dominant influence. In the medium 

term, it may make it more difficult to sustain deficit spending. 

Mr. NEUGEBAUER. Thank you. Mr. Pickel? 

Mr. PICKEL. Yes. I think there are those two effects that Mr. 

Johnson refers to, the ‘‘beneficial one’’ of a flight to quality and 

lower rates on U.S. debt and a stronger dollar. But that, of course, 

has implications for the economy longer term competing against a 

weaker Europe. 

Mr. NEUGEBAUER. Mr. Duffie? 

30 

Mr. DUFFIE. The United States depends heavily on the ability to 

export to these countries. And even though there is a flight to quality effect that temporarily benefits our currency and our bond markets, and even though our bonds are very, very, very strong and 

the United States has, despite its heavy debt load, extremely large 

abilities to borrow more, it can’t help the United States to have our 

neighbor countries in Europe and Japan become economically 

weaker or even default. That is definitely bad for us. 

Mr. SANDERS. One thing we haven’t discussed so far is that 

Greece may default. But they also may become a zombie state, in 

which they have the IMF and other countries loaning them money 

just to perpetuate them. They will have no incentive to actually cut 

spending. They will just exist on the dole from the international 

market. 

The problem is that we can probably do that for one country. But 

then as they all start to fall, it is going to get incredibly more expensive around the globe to keep propping up zombie states. Japan 

already is in that state. Their banks are—our top banks are almost 

zombie banks at this point. 

We have a lot of problems because we are not letting anyone go 

to bankruptcy, whether it is on a corporate level. Even countries 

can actually find out they have—I wouldn’t call it extortion rights, 

but they can threaten to collapse the market and get more IMF 

money or more money and not ever do anything. So it is an outcome that might occur. 

Mr. MASON. I would like to add—just make a separation between 

fundamentals and contagion here. There is not a lot of evidence for 

pure contagion in economics, where just I happen to fail, but I have 

no linkages with Mr. Sanders here, but because I fail, he fails. 

There are linkages there. 

Now, economics is amoral, and markets are amoral, and they will 

root out those linkages. And that is one of the social benefits of secondary market trading. Primary market trading is about allocating 

capital. Secondary market trading is about rooting out inefficiencies, and secondary market traders will find those inefficiencies. 

Countries that default will resume. Resumption is costly. The 

only country that hasn’t resumed in anything near modern history 

that wasn’t invaded was the Soviet Union, which still has—that is, 

not the Soviet Union, pre-Soviet Russia, I am sorry—which still 

has debt outstanding that trades at a half a cent on the dollar or 

so. But it does trade. 

But really, the more important aspect that we have to deal with, 

not only with the U.S. sovereign situation but also with financial 

reform and consumer policy, is we have made a concerted effort to 

centralize losses from this credit crisis, from this bubble in real estate—which was a bubble, and it is not coming back, we don’t want 

it back—and we have made a conscious decision to centralize those 

losses up to the sovereign entity. 

And this kind of gets to where we started out today talking about 

CDS markets. Sovereign CDS markets are especially concentrated, 

and that concentration creates the systemic risk, the biggest risk 

out there. 

31 

So Greece has a lot of losses concentrated in its sovereign debt, 

particularly, mind you, through its overly generous pension allocations, which are far too—just far too— 

Mrs. MALONEY. Would the gentleman sum up? The time has expired. 

Mr. MASON. The point is, the GAO in 2006 already suggested a 

significant number of U.S. pensions are underfunded. Markets lost 

40 percent since then, or more. We know the United States is in 

a similar situation. Let’s see the linkages for what they are. 

Mrs. MALONEY. Congressman Lynch? 

Mr. LYNCH. Thank you, Madam Chairwoman, and I want to 

thank the witnesses. This has been very helpful. 

Now, Mr. Johnson, I appreciate your statement that in the Greek 

cases, credit default swaps is probably just a smaller portion of the 

problem, and that Wall Street didn’t create their crisis. However, 

in some ways I think we may have—Wall Street may have exacerbated it. 

But now I am wondering about not just the credit default swaps 

that Goldman and others might have sold to the Greek government. I am also worried about what they sold to Spain, what they 

sold to Portugal, what they sold to Ireland, because as others have 

pointed out, the E.U. as a group is our largest trading partner. And 

if we start seeing defaults here, that will have a tremendous impact on our economy from an import/export standpoint. 

And also, we sort of talk like the IMF, like they have their own 

money. But we are a major contributor to the IMF. So that is—the 

IMF is us, is the American taxpayer as well. 

And I guess one of the most troubling aspects of the credit default swap practice in Europe, and even with our own municipalities and pension funds, is the concealment aspect of this, and that 

these deals, off balance sheet, allowed Greece to conceal debt that 

was there. It allowed them to conceal the fact that certain major 

aspects in their country were encumbered. 

Airports: They actually pledged future revenues from their airport to cover the collateral on the debt to Goldman. And also, they 

pledged—they have a national lottery. They took their lottery proceeds from the next 10 or 12 years, or 20 years, and pledged that 

as well. But an innocent person coming in would not know about 

that. It was all hidden. 

And let me get to my question. Is there not a greater obligation 

here, when this is sovereign debt or when you are dealing with a 

municipality, where behind that deal stands the full faith and credit of the taxpayer? We are picking up the tab, just like a lot of this 

debt in Greece—all of it, all the sovereign debt—is really being put 

on the taxpayer. But they are completely ignorant of what is going 

on here. 

It is the same with the debt associated with the pension funds 

and municipalities. Those pensioners, those current and future retirees, are completely ignorant of what is going on here. And the 

same thing with deals entered into by municipalities. These are 

being made without the knowledge of the townspeople, the residents, the taxpayers, who are standing behind these deals. 

I just wonder, is there not an obligation for us, when parties 

enter into these deals and the taxpayer is behind them, should we 

32 

not require the parties, the people who assemble the credit default 

swaps, the people who market them, the people who trade them, 

to all—and the people who underwrite them—to all assume a fiduciary responsibility to the people who are standing behind that 

debt? 

It just seems that at least in the public dimension, it is something we should require. We could talk about private parties later 

on. But I think there is a special exposure here that we haven’t 

really acknowledged. 

And I just wonder, should we require a greater obligation, this 

fiduciary duty, for these parties that are dealing with public debt? 

Mr. Johnson? 

Mr. JOHNSON. You raise a whole series of issues. One thing I 

want to clarify is, I don’t think it was the credit default swap that 

created the deception about Greece’s indebtedness or deficit which 

allowed them to get into the European Union. But it was a derivative transaction— 

Mr. LYNCH. Right. It was a currency—they fashioned it as a loan, 

so it went off balance sheet. But it was a structure— 

Mr. JOHNSON. I just want to clarify that because we are talking 

about CDS today along with this problem. 

Mr. LYNCH. Right. 

Mr. JOHNSON. But it was a different dimension. I believe every 

aspect of the capital market, whether it is municipal, sovereign, or 

corporate depends upon accounting standards and disclosure standards so that we can properly value things. And in every dimension 

of that process, more integrity, more transparency, is imperative. 

I alluded in my testimony that when you are talking about the 

needs of communities, when you are talking about basic services in 

life, which sometimes are financed by municipalities or State or 

Federal Government, it is very important to have those things, that 

integrity, in place. 

One thing that concerns me a great deal now, as I am listening 

today, I can see coming over the horizon a tremendous concern 

about our Federal finances. 

And I am concerned in the current legislation on derivatives 

about so-called end-user exemptions because when I have informally polled CFOs about why they are so attracted to playing in 

these OTC dark markets, some of what I pick up—I am not saying 

I have a smoking gun—is their earnings management and their 

ability to manage tax liabilities, not unlike the Greek government 

did with Goldman Sachs, is a risk in terms of the revenue-based 

tax collection and the future of our national finances. 

Mr. LYNCH. I agree. 

Mr. PICKEL. Mr. Lynch, if I could just comment on the fiduciary 

duty, these transactions—and I mention this in my remarks—are 

bilateral transactions. So if I am dealing with a government entity 

and I am paying them fixed, they are paying me floating, say, on 

an interest rate swap, we are in those transactions are principals. 

I am acting as a principal on the swap. They are acting as their 

principal on the swap. 

They may be well-advised to get some advice as to whether that 

is a good transaction for them. But in that particular transaction, 

it is two parties interacting and making their own decisions as to 

33 

whether the transaction makes sense or not. That is the fundamental nature of these transactions. 

There is a role for advice, and an advisor would have a fiduciary 

capacity. But in that particular transaction, it is I buy, you sell. I 

go long, you go short. I pay fixed, you pay floating. 

Mr. LYNCH. Thank you. Thank you, Madam Chairwoman. 

Mrs. MALONEY. Mr. Manzullo? 

Mr. MANZULLO. Thank you, Madam Chairwoman. 

I am sorry I came late. I have read through a good part of the 

testimony. One of the uses of derivatives in the credit default 

swaps occurs when a giant U.S. manufacturer such as John 

Deere—and their VP for finance testified here several months 

ago—that in exporting to a market, they will get involved in the 

CDS for the purpose of protecting the price of their machinery 

when it is sold. 

Could somebody comment on that? First of all, do you agree with 

me on that? 

Mr. DUFFIE. I will address that. 

Mr. MANZULLO. Thank you. 

Mr. DUFFIE. Yes, Mr. Manzullo. That is one of the primary uses 

of derivatives, for a corporation such as John Deere to lay off risks, 

such as currency risks or interest rate risks or commodity risks. 

They are very useful for that purpose. 

Mr. MANZULLO. Could you walk us through? The reason I ask 

that is I spend most of my time on manufacturing, and I am from 

northern Illinois so it is a heavy industrial area. Most people in the 

country really do not understand the connection between manufacturers who export and the credit default swaps. 

Could you walk us through a transaction of, say, John Deere selling a giant piece of equipment to Greece? How would they do to 

protect their price? 

Mr. DUFFIE. Okay. So in this case, John Deere would be receiving Euros in return for its tractors. But it might not get them until 

next—the Euros might not come until next year. 

So, being concerned about that, John Deere might enter, for example, with Morgan Stanley or Credit Suisse, an over-the-counter 

derivative security by which it would effectively sell the Euros now 

to that bank when they arrive next year at a price to be agreed 

now so that it wouldn’t suffer the risk that those Euros would decline in value in the meantime. 

Mr. MANZULLO. Why would they not get payment until next 

year? 

Mr. DUFFIE. For example, they may have just signed a contract 

to deliver 1,000 tractors in return for 10 million Euros next year. 

Mr. MANZULLO. Next year would be the date of the delivery? 

Mr. DUFFIE. Correct. 

Mr. MANZULLO. Okay. Mr. Pickel? 

Mr. PICKEL. I was just going to add, from a credit default swap 

perspective, John Deere may have sold to, say, a Greek company 

those thousand tractors, and they may be concerned about the 

creditworthiness of that company a year down the road. 

If it existed, if there was a credit default swap on that company, 

the most efficient way for them to hedge that credit exposure that 

they have would be to buy protection on that name. 

34 

But very likely—and I am not sure there are many Greek companies that you can buy protection on, so they might actually buy 

protection on Greek sovereign debt as a proxy for the fact that if 

there is a problem in Greece, it is going to affect the ability of that 

company to pay on that obligation, and therefore it is a proxy for 

that exposure that they have. 

Mr. MANZULLO. Does anybody there have an idea as to the percentage of CDS that would be reflected by the manufacturers engaging in that activity? One percent, 10 percent of the total value? 

Anything? 

Mr. PICKEL. It is a relatively small amount at this point. 

Mr. MANZULLO. A small amount? 

Mr. PICKEL. One percent is probably close. It certainly wouldn’t 

be any more than 5 percent, I think. The CDS is largely, in the financial world, in terms of dealer kind of parties, hedge funds, asset 

managers, and others. 

Mr. MANZULLO. Private companies. So what could John Deere 

do? The OPIC, Overseas Private Investment Corporation, I don’t 

think guarantees against a currency collapse. It would by a seizure 

by coup or something like that. What would John Deere do in the— 

if they couldn’t guarantee that they would get payment, if they 

couldn’t use a derivative? 

Mr. DUFFIE. They would have to take the risk. They would expose their shareholders to that risk. And the shareholders might 

themselves try to hedge it, but it would not be as efficient as having John Deere hedge it. 

Mr. MANZULLO. We had a company back home, now out of business, that sold paper machines, paper-making machines to Indonesia several years ago. And their economy collapsed, and the 

American company went bankrupt. 

What would the proposed restrictions on derivatives—how would 

that impact a company such as John Deere? 

Mr. DUFFIE. I will take that briefly. Some of the proposed restrictions are to allow hedging but to eliminate speculation. The unfortunate issue is that if John Deere were to look for a hedging opportunity, most likely it would be provided by a speculator who would 

be willing to take that risk. So by eliminating speculation, you actually make it much harder to hedge. 

Mr. MANZULLO. Anybody else? 

Mr. JOHNSON. I think the—I would guess that all of us on the 

panel believe that there is a very important use for derivatives in 

this insurance-like feature, where the currencies, interest rates, 

and the full spectrum of market possibilities should be offered to 

someone like John Deere. 

The question is more in what context should the market-making 

systems—how do you say—be set or structured because they do 

have collateral influences on the integrity of the financial system, 

propagation of financial disturbances, and impact on the taxpayer 

to the extent that the— 

Mrs. MALONEY. The gentleman’s time has expired. If you would 

wind up, Mr. Johnson. Are you—the gentleman’s time is expired. 

Mr. Perlmutter? Mr. Foster? 

Mr. FOSTER. Thank you, and I would like to thank the witnesses 

for their excellent testimony. And I share their conclusions that the 

35 

CDS on Greek debts, amounting to less than 2 percent of their outstanding debt, cannot be a major contributor to Greece’s woes. 

I also share with my colleagues on the right their sincere regret 

that we did not leave in place the fiscally responsible policies prior 

to the Bush Administration which, as we all know, would have paid 

down the debt essentially to zero at this point had we left them in 

place. 

I am happy also to see them embrace the concept that we cannot 

grow out way out of this since this was, after all, the philosophy 

that they used to justify the fiscally irresponsible policies that got 

us into this mess. Perhaps, given the $17.5 trillion of household net 

worth destroyed in the last 18 months of the previous Administration, they believe that we can shrink our way out of this crisis. But 

I digress. 

What I would like to raise is the limits to the concept of an insurable interest, as we have chosen not to apply it to derivatives 

markets. As you all know, we do not allow people to take out fire 

insurance on their neighbor’s house, at least in part because that 

provides an incentive to firebomb their neighbor’s house. And we 

have chosen not to apply that principle to derivatives markets. 

And so my question: Do you see any role at all for the principle 

of insurable interest in the derivatives markets? And I will open 

up to anyone that— 

Mr. PICKEL. I think I will start off there. As I highlighted in my 

testimony, there are a lot of different risks or reasons for entering 

into credit default swaps beyond that actually holding the underlying bond at a loan. Sellers of protection may in turn want to 

hedge their exposure. You may have investors who have exposure 

to that particular country in the sovereign situation. 

So I think the notion of what is an interest that might be insurable is a very broad concept. And certainly if you were to go down 

that path, you would have to recognize the diversity of those interests. 

I think, as Mr. Duffie said, there is a role for speculators here. 

It provides liquidity to the market so that when somebody does 

need to hedge, they know that they have a deep, liquid market that 

they can turn to. I think those are some of the principal reasons 

for that. 

I think it is also important to keep in mind that in a derivative 

situation, the exposures are mark-to-market. So if I have bought 

protection at a low price because the perception was that the credit—the reference entity was creditworthy, and they go down in 

their credit rating, I am going to see the price increase. 

I will be in the money as the buyer of that protection. You will 

be out of the money as the seller of that protection. And we will 

typically exchange collateral—footnote: AIG didn’t do that; that 

was one of the big problems—but in most of the situations, there 

would be collateral moving back and forth to protect that exposure. 

And if either party defaulted, whether that is the buyer of protection or the seller of protection, they would have to make the other 

party whole for that fluctuation, unlike in insurance, where if I 

don’t pay my premium, I just can’t get the protection when I need 

it. 

36 

Mr. DUFFIE. Could I add to that? Ironically, there is a reverse 

concern on my part. If I, for example, were to lend money to Mr. 

Sanders and was responsible for making sure that he pays me 

back, I would need to monitor him and take care that he is going 

to pay me back. 

If I were to turn to Mr. Johnson and buy protection from him on 

this loan so that I was no longer concerned about Mr. Sanders paying me back, there is a moral hazard. First, I won’t be doing my 

job properly in monitoring Mr. Sanders’ ability to pay me back. 

And secondly, poor Mr. Johnson is going to be bearing the risk that 

I won’t be doing my job. 

So it can be the case that exactly when I have an insurable interest, that the use of credit default swaps can lead to a problem. Disclosure is the way to deal with that problem. It should be disclosed 

to Mr. Johnson that I do have a loan to Mr. Sanders. 

Mr. MASON. And I would like to follow up that the 2009 Fitch 

Global Derivatives Survey produced results that suggested most 

market participants are really not concerned with that type of misuse. It seems to be overblown outside the financial world. 

I think the key is observability. And I think this gets back to an 

earlier issue of fiduciary responsibility. I think the appropriate fiduciary responsibility is to make sure that enough information is 

reported so that good decisions can be made. 

Consider, maybe, I am a leader of a country. I am arming my 

army, getting ready to invade next door. And I want to take out 

a lot of CDS coverage on that, just like firebombing my neighbor’s 

house. In the case of insurable interests in the standard kind of life 

insurance or fire insurance example, that would not be known to 

the outside world. That would not be known to the other side that 

is providing the contract that I am aggregating this coverage. 

In the credit derivatives market that we envision developing and 

that is developing, we have significant reporting such that the information is available to the other side that has to provide the insurance on the contract. Once we see an aggregation of exposure, 

that risk can be priced in even if we don’t know specifically what 

risk is there. 

Mr. SANDERS. Mr. Foster— 

Mrs. MALONEY. The gentleman’s time has expired. 

Mr. Perlmutter, and we have been called for two votes, gentlemen, so we will have to adjourn in a moment. 

Mr. PERLMUTTER. Do you want me to go ahead? 

Mrs. MALONEY. Yes. Go ahead. 

Mr. PERLMUTTER. Somebody was going to finish the answer. So 

please, go ahead and finish. 

Mr. SANDERS. Oh, well, thank you very much. I was just going 

to remark to Mr. Foster, I hear your point about the firebombing. 

I have been asked that numerous times. Bear in mind those are 

felonies and— 

Mr. FOSTER. As is market manipulation. 

Mr. SANDERS. Wait a minute—but again, that is one of the purposes of regulation, is to prevent felony-type transactions and to 

monitor and to look for those things, not necessarily to tie it up in 

knots. But that would be covered by proper regulation if it was ocVerDate Nov 24 2008 16:07 Sep 14, 2010 Jkt 057748 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 K:\DOCS\57748.TXT TERRIE
37 

curring in financial markets. But we don’t really have any evidence 

that it happened with Greece. 

Mr. PERLMUTTER. My question—and I appreciate the gentlemen 

from Illinois, Mr. Manzullo and Mr. Foster, sort of zeroing in on 

something—but mine is so much more basic, and it applies to a response. 

What is the difference between hedging and speculating? 

Mr. DUFFIE. Hedging means you are getting rid of risk. Speculating means you are taking on risk in order to make a profit. 

Mr. PERLMUTTER. But you have to have—it is like you were saying, somebody is going long, somebody is going short; somebody is 

buying, somebody is selling. If you are going to hedge, you have to 

speculate. Right? 

Mr. DUFFIE. In some cases, you can get lucky and the person who 

is hedging can find someone else who needs the hedge in the other 

direction. But that is somewhat unusual. 

Mr. PERLMUTTER. One of you mentioned you might want to 

hedge against the Greek company from going broke next year, as 

opposed to hedging against some currency. But you are hedging 

against the Greek company going broke. I am not sure which one 

of you— 

Mr. PICKEL. I think that was me, yes. 

Mr. PERLMUTTER. And so in hedging against the Greek company 

going broke, John Deere goes and finds somebody who says, okay. 

We are going to do our due diligence, and we think this company 

is an upstanding company, and the chances are slim that it is 

going to go broke. Sure. We will provide you some insurance. Is 

that how that works? 

Mr. PICKEL. Yes. They would go typically to a dealer, one of the 

large banks, and ask them to sell protection to John Deere to hedge 

that exposure. 

Mr. PERLMUTTER. But, the bank supposedly does some due diligence, I would assume— 

Mr. PICKEL. Yes. 

Mr. PERLMUTTER. —to figure out how much insurance they are 

going to provide and at what cost. 

Mr. PICKEL. Yes. The bank, if it is a global bank, may have relationships with that company in Greece. They may have exposure 

to Greece. So they are monitoring credit generally. 

Mr. PERLMUTTER. Let’s narrow it down even further. I am just 

trying to figure out how far the insurance extends. Let’s say you 

are worried about the head of the company. He really is the guy 

who runs the show. Am I, in effect, buying—I am John Deere. I am 

worried about my distributor in Greece. Am I buying key man insurance on him? Can I go to Bank of America and buy insurance 

on the guy who is the head of the company? He might die next 

year? 

Mr. PICKEL. No. I don’t think that would be permissible. And I 

don’t know what the insurance laws would be as to whether you 

would have a sufficient insurable interest in the CEO of major customer to purchase insurance on that person. 

Mr. JOHNSON. Usually, that kind of key man clause is in a bilateral contract you make with the company, so if the CEO departs, 

the contract has to be adjusted or voided. 

38 

Mr. PERLMUTTER. When we start getting into this subject of derivatives and swaps, and who is covering whom and why, and what 

the risk is, and who is analyzing the risk, so long as there is somebody posting some margin or keeping some reserve someplace that 

I can find, or that every so often you see if the insurance is still 

good, then I am less concerned about it. 

The AIG situation kept posting insurance, insurance, insurance, 

insurance, but never could cover. How do I find out if Bank of 

America has enough—what should I be looking for to make sure 

that the swap can be covered? 

Mr. PICKEL. I think in these markets, in the OTC markets, it is 

collateral that is the significant portion. For the more liquid products, the more standardized products, clearing could provide a significant risk reduction. But in a situation like the AIG transactions, those were not capable of being cleared, weren’t then and 

aren’t now because of the customized nature of them. 

But there it is even more important to have collateral so that as 

the exposure, the mark-to-market exposure, fluctuates, collateral is 

moving back and forth. And keep in mind, it could move from the 

buyer of protection to the seller of protection, or the seller to the 

buyer, depending on where that price—where that contract was 

struck, what the price was, and what the current market price is. 

Mr. JOHNSON. There is a dimension to this that is fascinating 

that you raise, which is when you buy insurance from one company 

on the other company, you are getting rid of counterparty risk visa-vis the company you bought insurance on, and you are incurring 

it from the provider of insurance. So you do have to understand the 

financial integrity of the insurance provider in order to weigh the 

balance of those two risks. 

Mrs. MALONEY. Congressman Himes? 

Mr. HIMES. Thank you, Madam Chairwoman, and thank you to 

the witnesses for your excellent presentation today. I have a couple 

of questions. 

First, you have spoken—basically sung from the same hymnbook 

with respect to whether, in fact, CDS contributed to Greece. Hypothetical, though. 

What about—and this I offer to anybody, and just ask that it be 

answered quickly—what about situations that we saw, for example, 

in the subprime market, where you had CDS activity that in many 

instances was multiples of the value of the underlying asset? 

Would you encourage us to think differently in that situation than 

you have encouraged us to think with respect to this case? 

Mr. PICKEL. I think the situation of multiples was typically the 

gross notional, which is the total amount of protection. What I 

think is relevant and I think what the chart here highlights is the 

net notional. 

So in an active market, you have a lot of buyers and sellers, and 

overall, that market will reflect either a net short position or a net 

long position. And it is that—really, it is that number that should 

be focused on. 

So I think if you focus in the subprime market or if you focus 

in the corporate market on net notional versus debt outstanding, 

you don’t see those multiples to the same extent. 

39 

Mr. MASON. I think it is really important in regulation, especially 

in reg reform, to get to principles of regulation. And principles of 

regulation, especially for systemic risk, have to follow kind of principles of crowd control. You can’t have regulators everywhere to 

monitor everything. 

So you need to look for either non-fundamental movements or aggregations that would suggest there is something going on here. 

Securitization RMBS was one of the fastest-growing sectors in financial services. As a result, you might want to look there for 

something going on, including CDS and related technologies. 

Similarly, with regard to infrastructure and other kinds of offbalance-sheet funding, if you look at hedge fund activities and you 

really talk to hedge fund investors, you find they have been involved in infrastructure deals for a while now. Why? Because it is 

a great way to provide secured funding to these undercapitalized 

countries, but avoid the country premium because you have the 

capital as long as, of course, property rights hold up. 

So if you do follow financial markets, they are telling you the information that you need. But again, you can’t be averse to the signals that you find because you may find things you don’t like. 

Mr. HIMES. Thank you. I have a question for Professor Sanders. 

Professor Sanders, you in your testimony drew an analogy between 

the GSE debt and the Greek surprise. You say our own sovereign 

debt has a Greek surprise component to it. This is something we 

hear talked a lot about lately, and I want to explore this a little 

bit. 

The situation in Greece—correct me if I am wrong here—this 

Greek surprise came because, in fact, financial markets didn’t understand the esoteric, technical, untransparent characteristic of 

some debt mechanisms that they had employed. Is that correct? 

Mr. SANDERS. Actually, I would state it a little differently. I 

would state it that Greece, like many other countries, used heavy 

off balance sheet and didn’t bring anything on balance sheet. That 

is why we couldn’t observe— 

Mr. HIMES. Right. But airport deals and foreign currency swaps 

designed to look like debt, this stuff was pretty untransparent. 

My question is this: Markets don’t like surprises; I get that. Is 

there any uncertainty or lack of transparency with respect to the 

amount, the tenor, or the characteristics of GSE debt right now in 

the minds of the market players who focus on this stuff? 

Mr. SANDERS. First of all, once again, Greece could have solved 

the problem by bringing everything on balance sheet and making 

it transparent. But in terms of the GSEs, the answer is yes. We 

have absolutely no idea in the near future whether housing prices 

could take a big second dip and Freddie and Fannie are on the 

hook for billions and billions more. We just don’t know. So— 

Mr. HIMES. But there are—we don’t know that about any security. We do have some sense, based on market values, what the 

value—some sense, with some uncertainty around it, what the 

market values are of the debt that the U.S. Government has effectively guaranteed. Okay. 

So were we to all of a sudden move the GSE debt on balance 

sheet, there would be no incremental new information to the market. So my question to you is, if we took that step—which may or 

40 

may not be a good idea; I haven’t thought a lot about it—but would 

you expect, if we simply took the step of moving that information 

onto the Federal budget, would you expect any change in the rate 

at which the United States Government funds? Would you expect 

any change in the willingness of the creditors of the United States 

Government to fund as a result, all other things being equal, of 

that accounting change? 

Mr. SANDERS. Yes, sir, I do. 

Mr. HIMES. Why? 

Mr. SANDERS. And the reason for that is the same thing Secretary Geithner said at the last hearing I was at with him. Ambiguity is a very dangerous thing. The more ambiguous it is whether 

the government is going to bail out Fannie and Freddie or not— 

right now they said, it is not sovereign debt, but we are going to 

guarantee it. 

But remember, go back years, Fannie and Freddie were denying 

they even had an implicit guarantee. And suddenly they said, oh, 

well, we do have an implicit guarantee. 

Mr. HIMES. But now those guarantees—those guarantees are 

very explicit now, are they not? 

Mr. SANDERS. Then why not bring them on balance sheet? 

Mr. HIMES. Right, right, right. But my point is that the market 

understands that debt is fully guaranteed by the U.S. Government, 

for all practical purposes is, in fact, U.S. Government debt. So what 

I hear you arguing is that the simple accounting change of moving 

it on budget would somehow impact the market. That just confuses 

me. 

Mr. SANDERS. Let me rephrase it to help out. I apologize if I 

wasn’t clear. It still is ambiguous if it is off balance sheet. The 

market is never going to be convinced. How do we know that in 2 

years, the Obama Administration or Treasury will not come back 

and say, ‘‘No, we have changed our mind. We are not going to guarantee this.’’ 

We don’t know that. In fact, they have not made any permanent 

commitment to a bailout of Fannie and Freddie. So that is ambiguity. Once you bring it on balance sheet, mystery solved. We are 

on the hook for it. That is what I mean. 

Mr. HIMES. I get it. Okay. I think I understand the distinction. 

So you are saying if we just, in a sense, permanently guaranteed 

it, which you are saying would be the effect of moving it onto the 

balance sheet, that would remove the ambiguity. Yes. I think I am 

out of time, but if the chairwoman would— 

Mrs. MALONEY. Absolutely. This is an important point. Mr. 

Duffie, if you want to add to it? 

Mr. DUFFIE. I just wanted to suggest that one could actually 

quantify the effect that you are describing. Right now, the United 

States Government, at the Treasury, borrows at a lower interest 

rate than do Fannie and Freddie. 

If, in the event that the Fannie and Freddie debt were explicitly 

guaranteed by the government, the cost to the government of borrowing would rise to the blended average interest rate of the Treasury and the agencies, which would be a higher number, that is, our 

borrowing costs would go up. 

41 

Mr. HIMES. Are you sure that would happen, though? Because, 

then you would do away with the ambiguity. Right? That would become sovereign debt. And you are sure that it would rise to the 

blended rate rather than removing the ambiguity and therefore reducing the GSE debt to the U.S. rate? 

Mr. DUFFIE. It is not a guarantee. But the United States indebtedness would rise as a result of the explicit guarantee. We know 

that because the agencies are borrowing at a higher interest rate. 

So it wouldn’t necessarily rise all the way to the current blended 

average, but it would rise somewhat. 

Mr. HIMES. Great. Thank you. I know I am out of time. 

Mr. GARRETT. And through the Chair, since I think this is a 

great point that the gentleman just raised, the fact that—I think 

you made an interesting point. The fact that there is a difference 

right now in the borrowing rate between the Federal Government 

and the GSEs tells me that as far as the markets are concerned, 

they are still—probably had tuned into this hearing back when 

Chairman Bernanke was here, and he says he can’t tell us whether 

they are sovereign debt or not. And they probably tuned into the 

other hearing when Secretary Geithner says that is an accounting 

decision; he really couldn’t tell us, either. 

So there must be that ambiguity out there. Otherwise—correct 

me if I am wrong—if there was no ambiguity at all, if the market 

said, GSEs, you are just like the Federal Government because it is 

all guaranteed until 2012, then the rates should be exactly the 

same. Right? 

Mr. DUFFIE. Correct. 

Mr. GARRETT. Okay. And also—one last question—and also, because the Secretary only has this authority until 2012, right, this 

unlimited authority, that is the other reason why we have ambiguity. Mr. Johnson, it sounds like you wanted to— 

Mrs. MALONEY. The gentleman’s time has expired. We have been 

called for a vote, so I would like to ask a question and get a yes 

or no answer. And you could write—get more questions in general. 

Earlier, Mr. Johnson, you said that if AIG had cleared through 

a clearinghouse, it would not have removed the systemic risk or the 

challenge of that particular situation. In your opinion, is just having derivatives clear through a clearinghouse enough to remove 

systemic risk? Yes or no, would you say? 

Mr. JOHNSON. No. 

Mrs. MALONEY. No? Mr. Pickel? 

Mr. PICKEL. I would say no. It goes a long way, but— 

Mrs. MALONEY. Okay. It is a big part of our reform. That is why 

I am interested. 

Mr. Duffie? 

Mr. DUFFIE. It is a very good move, but it doesn’t do it on its 

own. 

Mrs. MALONEY. Mr. Sanders? 

Mr. SANDERS. I agree. Plus, they will find another way to do it. 

Mrs. MALONEY. Mr. Mason? 

Mr. MASON. I agree. No. 

Mrs. MALONEY. No? Okay. Now, if that is not going to remove 

systemic risk, how will we deal with the risk of the clearinghouse 

itself? Mr. Johnson, and go down the line. 

42 

Mr. JOHNSON. Very quickly, the question of clearinghouse, its 

capitalization, its collateral, and its integrity is very important. 

And one of the dangers is if you have multiple clearinghouses, 

there can be a competition in reducing margin, and it can create 

a systemic risk. So we have to be very careful about who defines 

and maintains the thresholds of capitalization at the clearinghouses. 

Mrs. MALONEY. That is a very important point, and we will have 

a series of questions to all of you to respond in writing. Treasury 

is at the Senate today, and they likewise said they would respond 

in writing to any questions. 

There was a lot of— 

Mr. HIMES. Would the chairwoman yield for just a second? 

Mrs. MALONEY. Yes. 

Mr. HIMES. Sorry, just one follow-up question, because I am very 

interested in this point. 

Quick question: If we, in fact, took the recommendation of some 

that we brought the GSE debt on balance sheet, is there agreement—because I sensed agreement—that would cause an uptick in 

the cost of financing of the United States Government? Does anybody think the answer is no? 

[No response.] 

Mr. HIMES. So everybody thinks the answer is yes. If we move 

this on balance sheet, the interest paid by the U.S. Government 

would rise. Correct? 

Mr. JOHNSON. I don’t necessarily agree with that. I don’t think 

it would—it would cause a downtick in GSE financing, but—how 

would I say—what we are really talking about is the duration of 

guarantees. There is a guarantee through 2012. If you extend the 

duration of the guarantee, there probably is some minuscule sense 

in which— 

Mrs. MALONEY. I would ask the gentleman to respond to the gentleman’s question in writing, and I invite all my colleagues to. 

I would like to ask, what are the worries you have about manipulation? There have been allegations about manipulation in Greece 

and in the American economy, in the sovereign markets and in city 

governments and State governments. Is there a concern about manipulation? 

Mr. GARRETT. Will the panel be submitting this in writing, too, 

or are we going to a second round at this point? 

Mrs. MALONEY. My time has expired. Okay. 

Mr. GARRETT. It expired a couple of minutes ago. 

Mrs. MALONEY. All right. Then submit it in writing. And the gentleman is recognized for 5 minutes. We have 15 minutes to get to 

the Floor. Okay? You have questions? 

Mr. GARRETT. Then, we will just—I thought we were through the 

second round. Just clarification, then, on the differentiation on the 

interest rates that you were going to. Does anyone else want to 

speak on that as far as putting it online or not, differentiation? No? 

Mr. SANDERS. Yes. What I would like to say is on the GSE debt, 

by making it unambiguous, meaning that it is on balance sheet, 

that might lower the GSE debt, the rate on that debt, to what it 

would be on the Federal. That is the good news. The bad news is 

43 

that it reveals that our actual debt loads are much bigger than we 

thought, which would then probably raise the cost of borrowing. 

Mr. MASON. And the financial way to look at it is we are currently holding an option to take on this debt. And if we exercise 

the option, then we realize the value, we lose the option value. So 

we could estimate directly the amount. 

Mr. GARRETT. Great. Would anyone else like to comment? 

Mr. JOHNSON. I would just say the increment in the cost of the 

Treasury debt is dependent upon the change in your beliefs when 

the option is exercised. If you say for all intents and purposes it 

is full faith and credit now, by making it explicit and perpetual and 

blending it in the secondary market—and I think the Treasury 

market is slightly more liquid—you probably get most of the benefits and not a lot of cost. 

But if you believe that there is a significant risk that in 2012 

they would reverse course, you would have to say that bringing it 

on raises the cost of Treasury debt. 

Mr. GARRETT. The bottom line is, I guess, the one thing we can 

learn from the Greek situation is no matter whether they are hiding it or not, or intentional or otherwise, I guess the thing the public wants most is to have that transparency, and for someone to 

make that decision and to carry forward so we know exactly what 

we are dealing with from today to 2012 and going into the future. 

Thanks again to the entire panel. I commend the Majority for the 

panel selection, as the ranking member did, and I thank you all for 

your testimony today. Thanks. 

Mrs. MALONEY. If I could go back to my other question, and get 

a yes or no answer, and then further follow-up in writing, are you 

worried about manipulation in the municipalities in our country 

and smaller sovereign markets with the credit default swaps and 

derivatives in general? Yes or no? Are you worried about manipulation? 

Mr. JOHNSON. Yes. 

Mrs. MALONEY. Mr. Pickel? 

Mr. PICKEL. No. 

Mrs. MALONEY. Mr. Duffie? 

Mr. DUFFIE. I think it should be policed, but I don’t see it right 

now. 

Mrs. MALONEY. Mr. Sanders? 

Mr. SANDERS. I am more worried about the manipulation by the 

governments themselves not reporting all the debt they have on 

balance sheet. 

Mrs. MALONEY. Mr. Mason? 

Mr. MASON. I am in agreement. I am not explicitly concerned 

from the investor side. 

Mrs. MALONEY. Thank you. And who are the major sellers of 

CDSs in these sovereign, muni, and government credit derivative 

markets? Who are the major sellers? Can anyone tell us who they 

are? 

Mr. JOHNSON. I believe it is primarily financial institutions, large 

financial institutions here and abroad. 

Mr. PICKEL. Yes. It would be the large financial institutions. You 

may have some hedge funds which would sell protections, and that 

was true in the Greek situation. In the past, you would have had 

44 

the insurance companies, the monolines a little more active, potentially, in that area, but not now. 

Mrs. MALONEY. What is the relationship between the CDS market and the underlying market? Which one leads which? 

Mr. DUFFIE. In a large, liquid market, they are very close together. It is hard to tell. But in a market such as Greek debt, the 

CDS probably moves slightly first because it is somewhat more liquid and easily obtained. 

Mrs. MALONEY. Mr. Johnson? 

Mr. JOHNSON. Yes. I agree with that. I think, when we talk 

about the price discovery role of CDS, I often scratch my head because I look at bond spreads and I don’t know what incremental 

information I get from the CDS. 

But in the case of Greece, it is sometimes difficult for people to 

borrow in short bonds as speculators. And so the CDS market, 

being a lower transaction cost and more liquid medium, will tend 

to reflect that information sooner than will a bond that has what 

you might call hiccups with shorting. 

Mrs. MALONEY. And following up on that, Mr. Johnson, how are 

prices set on instruments when the underlying has so few credit 

events or defaults? 

Mr. JOHNSON. It is set with subjective probability. You are estimating what the likelihoods are. It is not like a deck of cards in 

the sense that you know there are 52 cards and you know what 

suit and what rank they are. It is a much more what economists 

call radical uncertainty, where you are trying to infer prospects 

that are unprecedented, or largely unprecedented, events. 

Mrs. MALONEY. And Mr. Pickel and Mr. Duffie, how could a CDS 

or other credit derivative be used to keep a normal restructuring 

from happening for a firm in the real economy? Should we worry 

about this happening in the future, hindering the restructuring? 

Mr. PICKEL. If I could just also add to that, the market assessment of the price of the CDS is essentially the market’s assessment 

of the probability of default of the underlying entity and the recovery rate, potential, if there actually is a default. So those are kind 

of the factors in that. 

As far as the influence on restructurings, there has been a lot of 

discussion. Henry Hu at the SEC has written about this. We think 

it is probably worth some additional analysis. 

But our feeling—we have written a piece as an organization on 

this we can send to you—is that while superficially it suggests that 

somebody who has a CDS position may be motivated and 

incentivized in a different way when they are engaged in restructuring discussions, that has not really been proven in any particular instance. But it is something I think is worthy of some additional analysis. 

Mrs. MALONEY. Thank you. And Mr. Duffie, could you respond to 

a statement by Federal Reserve Chairman Ben Bernanke at a recent JEC hearing where he said that the Fed had seen little exposure to Greek debt or CDSs within the financial institutions that 

he supervises here in the United States. 

However, is it possible that U.S. financial institutions are vulnerable via their exposure to German or French banks, which are believed to have a large exposure to Greek debt and CDSs? I do know 

45 

that in many of our—some of our bailouts, we were bailing out 

counterparties in foreign countries. Do you see this as a challenge, 

for anybody to comment? My time has expired, and we are being 

called to a vote. But your comments? 

Mr. DUFFIE. Sure. Some very large European banks are exposed 

to Greece significantly. I don’t think there is a contagion effect for 

U.S. banks because the sovereigns of those large European banks— 

for example, in France and Germany—would protect those large 

banks from failing. They are still ‘‘too-big-to-fail.’’ 

Mrs. MALONEY. I want to thank all of your for your excellent testimony. The panelists have mentioned to me, the Members of Congress, that they have future questions. We will submit them in a 

bipartisan way, and hope that you can give us your best thoughts. 

The Chair notes that some members may have additional questions for this panel, which they will submit in writing. And without 

objection, the hearing record will remain open for 30 days for members to submit their opening statements and questions. 

The meeting is adjourned, and we are rushing to a vote. Thank 

you so much. 

[Whereupon, at 12:27 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

April 29, 2010 

48 


57748.001
49 


57748.002
50 


57748.003
51 


57748.004
52 


57748.005
53 


57748.006
54 


57748.007
55 


57748.008
56 


57748.009
57 


57748.010
58 


57748.011
59 


57748.012
60 


57748.013
61 


57748.014
62 


57748.015
63 


57748.016
64 


57748.017
65 


57748.018
66 


57748.019
67 


57748.020
68 


57748.021
69 


57748.022
70 


57748.023
71 


57748.024
72 


57748.025
73 


57748.026
74 


57748.027
75 


57748.028
76 


57748.029
77 


57748.030
78 


57748.031
79 


57748.032
80 


57748.033
81 


57748.034
82 


57748.035
83 


57748.036
84 


57748.037
85 


57748.038
86 


57748.039
87 


57748.040
88 


57748.041
89 


57748.042
90 


57748.043
91 


57748.044
92 


57748.045
93 


57748.046
94 


57748.047
95 


57748.048
96 


57748.049
97 


57748.050
98 


57748.051
99 


57748.052
100 


57748.053
101 


57748.054
102 


57748.055
103 


57748.056
104 


57748.057
105 


57748.058
106 


57748.059
107 


57748.060
108 


57748.061
109 


57748.062
110 


57748.063
111 


57748.064
112 


57748.065
113 


57748.066