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

62–680 PDF 2010

THE STATE OF THE INTERNATIONAL 

FINANCIAL SYSTEM, INCLUDING 

INTERNATIONAL REGULATORY ISSUES 

RELEVANT TO THE IMPLEMENTATION 

OF THE DODD–FRANK ACT 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

SEPTEMBER 22, 2010 

Printed for the use of the Committee on Financial Services 

Serial No. 111–155 

( 

(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) 

C O N T E N T S 

Page 

Hearing held on: 

September 22, 2010 .......................................................................................... 1 

Appendix: 

September 22, 2010 .......................................................................................... 47 

WITNESSES 

WEDNESDAY, SEPTEMBER 22, 2010 

Geithner, Hon. Timothy F., Secretary, U.S. Department of the Treasury ......... 7 

APPENDIX 

Prepared statements: 

Waters, Hon. Maxine ........................................................................................ 48 

Geithner, Hon. Timothy F. .............................................................................. 50 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Kanjorski, Hon. Paul E.: 

Written responses to questions submitted to Secretary Geithner ................ 54 

Lance, Hon. Leonard: 

Article from The New York Times entitled, ‘‘One Nation, Two Deficits,’’ 

dated September 6, 2010 .............................................................................. 57 

(1) 

THE STATE OF THE INTERNATIONAL 

FINANCIAL SYSTEM, INCLUDING 

INTERNATIONAL REGULATORY ISSUES 

RELEVANT TO THE IMPLEMENTATION 

OF THE DODD–FRANK ACT 

Wednesday, September 22, 2010 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 2 p.m., in room 2128, 

Rayburn House Office Building, Hon. Barney Frank [chairman of 

the committee] presiding. 

Members present: Representatives Frank, Waters, Watt, Moore 

of Kansas, Miller of North Carolina, Green, Cleaver, Foster, Adler; 

Bachus, Castle, Royce, Biggert, Hensarling, Garrett, Neugebauer, 

Campbell, Posey, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will convene. I, again, explain, not 

apologize, it wasn’t my decision—we had scheduled this hearing, 

and the Minority had pointed out that we have a statutory requirement to have it and we have not lived up to that, and I appreciate 

their making it clear and they were correct. 

The hearing had been scheduled on the assumption that we 

would have been voting last night and that a full complement of 

members would be here. So just as I acknowledged to the head of 

the FHA this morning, our witness, the Secretary of the Treasury, 

is testifying to fewer members than is the norm. 

I say that as an explanation, not an apology, first of all, and we 

apologize for it because we haven’t done it. 

Secondly, I have yet to meet the Administration witness who 

minded that people weren’t here. We are more often asked to apologize for the people who are here. So we can still proceed and that 

will mean we won’t have to be held—I will say to the members we 

don’t—it may not seem like a lot to others, people will understand 

this, we can sort of shoot for 61⁄2 minutes, maybe 7 minutes. We 

don’t have to hold strictly to 5 minutes, which can be a constraint. 

Now, let me begin my opening statement. I welcome Secretary 

Geithner. I think he comes to us in general with a very successful 

record. We had a situation in which the economy when he and the 

Administration took office was in terrible shape, a very deep recession. We have begun the process of emerging, more slowly than 

anyone would like for a variety of reasons, and we will be debating 

those reasons, but it is clear that in every economic area, we have 

been making some progress. 

2 

We are here particularly today to talk about the international 

area. This committee has jurisdiction over that, in a number of 

ways, including what is often overlooked, our jurisdiction over 

American relations with the international financial institutions. I 

am going to begin with that. 

We had a crisis earlier this year. We didn’t have one. Europe had 

a crisis. In fact, if you look at the trajectory of economic recovery, 

the first slowdown in the pace of recovery is coincident with, and 

I think caused by, the problems in Europe. We know how interconnected the world is, and it was the Greek debt crisis that really 

caused the first glitch, and we have not fully recovered from that. 

Europe was threatened with a significant set of problems. What 

happened was there was a European coordinated response, in 

which we participated and in which we can take a little bit of pride 

because I think much of what was done to respond to the Greek 

debt crisis and its implications built on what we did beginning in 

2008 and 2009, the joint effort of the Bush Administration and this 

Congress and carried out by the Obama Administration. People 

have gotten angrier and there has been more bitterness, but the 

events from September 2008 to early 2009 were one of the most important bipartisan efforts in American history: Republican and 

Democratic leaderships in both Houses, and first the Bush Administration and then the Obama Administration collaborating on a set 

of policies that were: (A) unpopular; and (B) successful. 

In fact, much of what was done in Europe built on that and I 

know there were criticisms of the role of the International Monetary Fund. I think events have now shown that our ability to work 

with the International Monetary Fund cost us not a single penny 

of our tax dollars and was, in fact, helpful in containing what could 

have been a serious problem, although it was serious enough to 

have been, I think, one of the things that has slowed down the 

growth. 

The second issue is coordination. I have been pleased to read articles in the Financial Times and the New York Times saying that, 

yes, Basel is a good thing, but it deals with only the banking industry in the technical sense and there is the whole non-bank financial 

industry where the problems were. 

And recently in both Ford Norsen’s comment in the New York 

Times and Patrick Jensen’s in the Financial Times, they said the 

only country that has stepped up to deal in a serious way with the 

non-bank issues is the United States with our financial reform bill. 

But we also know that having simply us do it doesn’t work. 

As I said before, Lenin did manage to cook up a justification 

called socialism in one country to explain why Marxist predictions 

that the whole world would fall to him didn’t come up. That didn’t 

work very well, socialism in one country, but regulation in one 

country would work even less well because we have a total 

fungibility of activity and money. And so what is very important 

is for us to work together. 

I am very proud that we worked very closely with the Europeans, 

the Australians, the Japanese, the English, who are somewhat separate from the Europeans here, the Canadians, and I think we 

made very real progress in pulling things together. 

3 

We have also been willing to assert our role to defend Americans’ 

economic interests. We have an ongoing situation where we intervened with the European Parliament and the European Union 

where they were talking about rules that would have discriminated 

against American hedge funds, and we have had some progress 

there. 

What we will expect the Secretary to do is talk to about our 

progress there, and I do want to reiterate the importance to us of 

a provision that was fully supported by the Administration. In the 

bill that was signed into law in July, there is a mandate to the 

Federal Reserve and the Treasury to take defensive action against 

any nation anywhere that lets its financial system be used and its 

legal system be used as a way to bypass our regulations. We are 

very serious about that. 

Fortunately, or unfortunately, we have experience in that because we have under Stuart Levy, who was a holdover from the 

previous Administration to this one, good experience in the Administration and the sanctions regime and how you deal with rogue nations. And the experience we have had in being tough there we expect to be applied to any nation that holds itself out as the haven. 

The gentleman from Alabama. 

Mr. BACHUS. Mr. Chairman, thank you for holding this hearing. 

America is the largest economy in the world, and it is actually 

larger than our three next competitors, and we got there through 

choice, competition, and freedom, not by a government running everything. And when you go to other countries, you come back to the 

United States and you know that America ultimately will be okay. 

We will have a sound economy. We may have challenges, but we 

will confront them and we will beat them. 

A famous investor once said, ‘‘I can make money no matter what 

the rules are, I just need to know the rules.’’ In the wake of this 

recession, which was brought on by Wall Street excesses and government incompetency, the American people have not asked for a 

bailout or special favors or for more government programs, and 

they certainly have not been clamoring for higher taxes. They have 

asked for two things: for the government to stop making things 

worse; and for some semblance of economic certainty. They need to 

know what the rules are. Instead, what we have been given is a 

bloated bureaucracy, more government control, and still more uncertainty. 

In response to the greatest financial crisis this country has witnessed since the Great Depression, many of my colleagues on the 

other side of the aisle have decided that the answer was not to 

identify the causes and fix them or to identify where government 

and the regulators failed. No, they decided that the solution was 

to draft 2,300 pages of legislation directing the same regulatory 

agencies that missed the crisis to come up with literally hundreds 

of new Federal regulations on top of those already in existence and 

empower a new generation of bureaucrats to exercise command and 

control over the economy for years to come. In fact, I talked to 

bankers back in Alabama, and they say, ‘‘If the regulators would 

get out of my bank I could do a better job of stabilizing the mess.’’ 

With the recent release of proposed international capital standards by the Basel Committee in Switzerland, yet another element 

4 

of uncertainty has been added. We can all agree that banks in the 

United States and overseas held insufficient capital to withstand 

the financial panic that struck the global economy in late 2008. Indeed, I pointed out when Secretary Paulson first unveiled the original TARP proposal that the major challenge the banks were facing 

at the time was a shortage of capital, not a toxic asset problem. 

But higher capital standards alone will not provide the stability 

our financial system requires to support a full economic recovery, 

and the prosperity our citizens need and demand, and for job creation overreliance on increased capital in Basel, tradeoffs that 

every member of this committee needs to consider. 

Higher capital standards means less credit. Less credit means 

fewer jobs and less economic growth. We need to make sure the 

standards we adopt really do make the financial system more resilient without needlessly sacrificing more jobs. 

But on to something as important as this, the Administration 

has failed once again to give the Americans the certainty they 

need. We don’t know how much new capital our banks will need 

to raise. We don’t know how many loans they will call in to meet 

those standards. We don’t know how many businesses and consumers will be denied credit so that the banks can comply with 

Basel III. And the reason we don’t know is that we are still trying 

to figure out how the Administration is going to implement the new 

standards and how those new standards will interact with DoddFrank. Until those questions are answered, it is impossible to say 

whether the Basel process will yield a more sustainable global 

banking system or, instead, serve as yet another obstacle to economic recovery. 

Because this is likely to be the last opportunity this committee 

has to hear from the Secretary, I hope he can provide some certainty for our markets, our businesses, our citizens, and for those 

citizens who need jobs, and our country desperately needs answers 

to all those questions. 

I thank the Secretary for being here, and I yield back the balance 

of my time. 

The CHAIRMAN. The gentleman from Illinois is recognized for 2 

minutes. 

Mr. FOSTER. Thank you, Mr. Secretary and Mr. Chairman, for 

having these hearings. 

As the author of two amendments to the House-passed version 

of the bill that actually survived the Senate negotiations involving 

both contingent capital and countercyclical capital elements, I was 

interested to see the third to last paragraph of your written testimony which references the fact they are still in play in the negotiations. I will be asking questions about the details of that state of 

play and the envelope of the negotiations because I think they are 

fundamental to making the system more stable and shock resistant, and I look forward to your testimony. 

I yield back. 

The CHAIRMAN. The gentleman from Texas is recognized for 11⁄2

minutes. 

Mr. NEUGEBAUER. I appreciate Chairman Frank for calling this 

hearing with Secretary Geithner. 

5 

The authority to set capital standards is the strongest tool financial regulators have, but it is essential that the regulators reach 

the right balance, and they haven’t always done this in the past. 

Even without the new regulatory requirements, the marketplace 

has already pushed banks to increase their capital. Although these 

standards are complex, our committee has a responsibility to understand the position taken by the United States regulators and 

the impact this agreement would have on the U.S. financial system 

and competitiveness. 

The new international capital standards can have just as much 

impact on our financial system as our regulatory bill that we just 

passed recently. 

I would like for Secretary Geithner to provide us with assurances 

that we are using good data and analysis to set these standards. 

It is unclear to me whether anyone really ran the numbers on what 

these standards would be before we agreed upon it. I am also interested to know how the United States plans to implement the agreement if it becomes final, and while there are dates set out in the 

agreement, the timing of when the U.S. regulators choose to issue 

regulations determines when these rules actually become in effect. 

And so with that, I yield back the balance of my time. 

The CHAIRMAN. The gentleman from California, Mr. Royce, is 

now recognized for 1⁄2 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. I think all of us have to 

remember that overleveraging throughout the financial sector, certainly leading up to the crisis, is what brought a lot of the conundrum to us. We had investment banks leveraged at 30:1. We had 

Fannie Mae and Freddie Mac over 100:1. So over the long run, we 

need to ensure financial institutions are sufficiently prepared for a 

downturn. 

But as the head of the Dallas Fed told us, requiring additional 

capital against risk sounds like a good idea but is incredibly difficult to implement. And since 1864, regulators have been struggling to stay ahead of the game when it comes to capital regulation. One of the problems we have here is that Europe is going to 

drag their feet. We are going to go forward, and that puts some of 

our firms at a competitive disadvantage. 

In my opinion, the most troubling aspect of Basel III is its reliance on the old model of risk weighting assets because it assumes 

that the securities which have been risky in the past are the same 

that will be risky in the future. And under this regime, banks will 

need to hold more common equity than ever against their risk 

weighted assets, which in turn incents these institutions to find 

low risk weight assets with some return since these assets can be 

leveraged much more highly. 

So, Mr. Geithner, you can correct me if I am wrong later, but this 

is going to lead to double A rated sovereigns are going to carry a 

risk weight of zero if I read this right under this proposal. So looking at the CDS spreads on Italy, on Ireland, they are far from risk 

free, and with this in mind, Mr. Geithner, I hope you can shed 

some light on exactly what will make Basel III different from Basel 

II and every other attempt at regulating capital, especially with the 

Europeans already telling us they are going to drag their feet on 

this. I don’t think history is on our side. 

6 

I yield back, Mr. Chairman. 

The CHAIRMAN. I made a miscalculation. We now have 2 minutes 

left on that side. I am just going to take one more minute, we have 

more time here, and I didn’t have others who wanted to speak. 

I just want to talk about an institutional problem that has occurred to me that we are all going to have to focus on. The European Community is still in the process of a constitutional evolution. 

The roles are not as clear. The role of the European Parliament has 

been increasing. It was initially fairly weak vis-a-vis the Commission. What we have encountered a couple of times now, particularly 

in the hedge fund, is I think a lack of clarity in Europe, in the community, between the role of the European Commission, the executive part, and the Parliament. And for example, with regard to 

hedge funds, I believe it was the case that it was the Parliament 

that was being more restrictive. I am merely following up on what 

the gentleman from California said. One of the things we are going 

to have to give some attention to is that. 

Now, we have begun meetings. We have met several times with 

the European Parliament’s committee of jurisdiction. They have 

their own problems obviously with many different nations, but that 

is one of the issues that we are going to have to look at because 

as we get to coordination—and it is not surprising, we are elected 

officials. We understand that. The kind of nationalism and resistance to international cooperation is greater in the Parliament than 

it is in the executive. 

And I just note that as we go forward, no matter who is doing 

what, that is one of the things we are going to have to be working 

with our European friends to address. 

Now the gentleman from Texas, I believe, has 2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I am certainly glad that the Secretary is here to address Basel 

III, and I want to take advantage of an infrequent occasion to 

agree with the Secretary, having read a portion of his testimony, 

that indeed the liquidity and capital standards were a major contributor to the economic crisis that we had, and clearly, internationally, capital standards were not applied consistently, which 

in some respects begs the question, why did we pass legislation, the 

Dodd-Frank bill, that goes so far beyond capital liquidity standards, getting into bailout mechanisms, product banning authorities, 

price controls, and the list goes on. 

Nonetheless, as important as Basel III is, we know that it doesn’t 

take effect until 2013. The American people are more concerned 

with where are the jobs today, why does unemployment continue 

to hover around 10 percent for almost every month that the Obama 

Administration has been in existence? The American people are 

asking after two consecutive trillion dollar plus deficits, when will 

the madness end, when will this President and this Congress take 

their foot off the spending accelerator and put it on the brake as 

they drive down the road to national bankruptcy? 

Fundamentally, this economy is not suffering from a lack of capital. It is suffering from a lack of confidence. Between the health 

care bill, the tax increases, the financial regulation, the cap-andtrade and mind-boggling debt, job creators are mired in uncertainty 

and feel nothing but hostility from this President and this ConVerDate Nov 24 2008 17:11 Dec 16, 2010 Jkt 062680 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\62680.TXT TERRIE
7 

gress, and I hope in the question-and-answer portion that the Secretary will have an opportunity to address these topics. 

Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. Mr. Secretary, you are now recognized. 

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Thank you, Chairman Frank, Ranking 

Member Baucus, and members of the committee. I am going to confine my opening remarks to what I regard as the most important 

elements of international financial reform. 

You gave us a very strong hand in the Wall Street Reform Act, 

in the Dodd-Frank bill, and we are trying to use that hand to play 

a leadership role internationally in trying to make sure we put in 

place global standards that help protect American interests. And 

last week, the Federal Reserve, the Office of the Comptroller of the 

Currency, and the FDIC reached agreement with their major foreign counterparts to substantially increase the levels of capital that 

major banks will be required to hold. By forcing these institutions 

to hold more capital, we will significantly reduce the risk of future 

financial crises and reduce the damage caused by future financial 

failures. 

Failures in our system of capital requirements were a major contributor to the crisis. Where we had capital requirements, they 

were too low and they were not supplemented with complementary 

liquidity requirements. Furthermore, there were no meaningful 

capital requirements in place for the shadow banking system of investment banks, AIG, and a diverse mix of large non-bank banks 

and finance companies. 

Finally, capital standards were not applied consistently around 

the world. Banks in many parts of the world were allowed to run 

with low levels of capital relative to the risks they took on. 

I want to highlight what I regard as the most important elements of these new global standards. First, the amount of capital 

that banks will be required to hold relative to risk will, as I said, 

increase very substantially. Under this new agreement, major 

banks will be subject to two tiers of requirements. All firms will 

need to hold a substantial minimum level of capital, and in addition, they will be required to hold an additional buffer of capital 

above the minimum. And these two separate requirements have 

been set to ensure that the major banks hold enough capital, that 

they will be able to withstand losses similar to what they faced in 

the depths of this recession and still have the ability to operate 

without turning to the government for extraordinary help. 

Second, banks will be required to hold more capital against the 

more risky assets, against more risky products and more risky activities, including derivatives that caused a substantial role in the 

crisis. These assets and exposures are held predominantly by the 

very largest firms, meaning that this aspect of the new reforms will 

fall most heavily on the large banks and have only a very modest 

impact on small banks. 

Third, the Basel agreements will improve the quality of capital 

that banks hold. The new requirements are set in terms of high 

8 

quality common equity, tightly defined to mean capital that will 

truly be able to absorb losses when firms get into trouble. 

Taken together, these new agreements will impose a very substantial increase in capital requirements on the major banks that 

operate around the world. The changes in the ratios themselves 

represent a more than threefold increase. 

But in addition to this—this is important—the new, more restricted definitions of capital and the more stringent assessment of 

capital against risk will raise the capital requirements even further, and again, these additional effects will fall most heavily on 

the largest, most interconnected, most systemic institutions in our 

markets. 

Now, in addition to these new capital requirements, the Basel 

Committee has agreed to impose new global standards for liquidity 

management. These new liquidity standards are designed to ensure 

firms can withstand a severe shock to liquidity without facing a 

deepening crisis. 

And finally, the agreement offers the promise of a more level 

global playing field with less risk to us, less risk than we faced before this crisis, that other countries will be able to allow their 

banks to operate with lower standards than those that will apply 

to the major U.S. banks. These are very tough standards, and they 

will require banks to run with less leverage, with more capital and 

more stable funding than was true before the crisis. But if we were 

to apply these standards too quickly, we could hurt economic 

growth and recovery. And to limit that risk, that possible risk, the 

agreement gives banks a substantial transition period to meet the 

new standards. 

Now, it is important to note that because we moved so quickly 

with the bank stress tests in early 2009 to force our banks to raise 

more common equity, the U.S. financial system is in a very strong 

position internationally to meet these new global rules. For the 

most part, our major banks should be able to meet these new requirements through future earnings over time, which will also help 

protect the economic recovery now under way. 

This is a major milestone in the process of global financial reform, but we still have some more work to do. The liquidity requirements will need more work before they are fully implemented. 

And I want to emphasize that it is very important to us that 

these new standards are implemented by national authorities 

around the world in a way that generates a level playing field. It 

is not enough just to have a clear measurable minimum floor on 

required capital. There needs to be tight, consistently enforced limits on the ability of banks and national supervisors to apply these 

standards in a more permissive way for their institutions. 

These new standards have to be implemented at the national 

level. The agreement that was just reached and the Basel III proposals must be fully implemented through national regulations by 

the end of 2012. The United States is committed to meeting those 

deadlines. 

I want to emphasize, Mr. Chairman and Ranking Member Baucus, that we will continue to work closely with this committee as 

we implement the financial reform bill and as we work together to 

9 

strengthen global financial standards so that we have a level playing field. 

But I want to conclude my remarks by just noting for the record 

that we are about to close another chapter in the work of this committee to end this financial crisis. This morning, Assistant Secretary of the Treasury Herb Allison announced he was stepping 

down as the head of the Office of Financial Stability. He and his 

team, working with Lee Sachs, who was then counsel to the Secretary of the Treasury, were the architects of what is increasingly 

regarded by outside experts as one of the most successful emergency programs in financial history. 

And I want to mark that event in the upcoming formal end of 

TARP authority by praising the political courage of President Bush 

and Secretary Paulson and those in Congress, Republicans and 

Democrats, who voted at that grave moment of financial peril to 

give the government of the United States the authority to solve 

this financial crisis. 

If you are a conservative Republican, you can celebrate the fact 

that we solved the most dangerous part of this financial crisis 

largely with private capital, not public capital, and you can welcome the fact that we have reduced those investments in the American financial system to a tiny fraction of those I inherited, and 

every day we are working to extract the government from those remaining investments. 

If you are a fiscal conservative, you can celebrate the fact that 

CBO now estimates that losses on the TARP investments will be 

in the range of $66 billion, less than 10 percent of the $700 billion 

in authority provided by the Congress. 

If you are a liberal or a progressive, you can welcome the fact 

that after a lost decade for the middle class and a crisis which left 

millions of Americans out of work and living below the poverty line, 

we did not have to spend hundreds of billions of dollars of scarce 

taxpayer resources on banks, which gives us more room to protect 

investments in our critical priorities of the country. 

If you care about manufacturing, you can celebrate the fact that 

the American automobile industry is stronger and leaner today 

than it was before the crisis, and that businesses across the country find it easier now to raise capital to access credit than they did 

before the crisis and in the peak of the crisis when we took office. 

And of course, all Americans should be relieved that their savings today are safer and more valuable than they were in the fall 

of 2008 and that we were careful custodians of their scarce resources. 

Now, I know a lot of people who voted for TARP decided later 

that they had to distance themselves from that vote by disparaging 

the programs, but I think they should be proud of the votes they 

cast. They were on the right side of history. 

Thank you, Mr. Chairman. 

[The prepared statement of Secretary Geithner can be found on 

page 50 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Secretary, and I will probably 

see the Republican leader, Mr. Boehner, later today and I will pass 

along to him your thanks. He was of course one of the staunch supVerDate Nov 24 2008 17:11 Dec 16, 2010 Jkt 062680 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\62680.TXT TERRIE
10 

porters of the TARP. I don’t know if I will run into Senator McConnell, but I will be glad to do the same with him. 

I was just reading Secretary Paulson’s book and noted his quote 

of the comment from Mr. Boehner, ‘‘We would be crazy not to rescue AIG.’’ So I appreciate that. 

I want to talk about one piece of this, and that is the automobile 

piece. There is a lot of discussion today in this country about our 

need to protect and, in fact, expand the amount of manufacturing 

we have. There is a repudiation of the notion that we can exist as 

a successful economic nation, offering a full range of opportunities 

to all of our citizens at various levels of skill and education, if we 

don’t have a significant manufacturing component. So manufacturing support gets a lot of rhetorical service. 

It seems to me that the single most successful effort of public policy to advance manufacturing and to make sure it stays here 

doesn’t get that respect, and that was the decision initiated by 

President Bush, because again, I think you are correct about the 

bipartisanship, and then carried out further by this Administration 

with the authority a bipartisan Congress had given, to intervene on 

behalf of both General Motors and Chrysler. 

And we ought to be clear that while Ford was not itself the beneficiary directly of those funds, Ford strongly supported the funds 

being made available to General Motors and Chrysler from the 

standpoint of keeping manufacturing in America because Ford feels 

that if General Motors and Chrysler went bankrupt and were to 

substantially diminish their activity and perhaps Chrysler disappeared, one result would be that the amount of manufacturing 

that went on for the auto industry, the supply chain in the Umited 

States would have been damaged, and Ford would have been at a 

severe disadvantage in trying to keep its manufacturing going. 

So I would ask you to reflect not just on the financial aspect, because I gather with General Motors when you are talking about 

them beginning to repay or they have already begun to repay some, 

what would the effect have been on this very important sector of 

American manufacturing, automobiles and the supply chain for 

automobiles, if the Bush Administration had not initiated and your 

Administration had not followed up on an intervention in the automobile industry. 

Secretary GEITHNER. I think you are absolutely right, Mr. Chairman. The effects would have been devastating. You would have 

seen thousands and thousands of jobs lost, hundreds and hundreds 

of small suppliers affected by the collapse, and it would have dramatically amplified the damage caused by this recession. 

And if you care about our capacity to make things in America 

again and to make sure that we are strengthening our ability to 

make things in this country again, you have to look at that intervention, that strategy, again initiated by President Bush, and view 

it as an incredible success. 

I don’t want you to understate, though, the importance of the financial changes because the great strength of the American economy over the decades was the fact that our financial system was 

the best in the world at providing capital to people with an idea 

that could build a growing business. We lost our way along the way 

and created a system that had too much risk and that was a devVerDate Nov 24 2008 17:11 Dec 16, 2010 Jkt 062680 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 K:\DOCS\62680.TXT TERRIE
11 

astating mistake, but we are substantially along the way to restoring that fundamental strength of the American system. 

The CHAIRMAN. Let me build on that because one of the arguments against the intervention is from people who say, look, the 

intervention might in and of itself be a good thing but it becomes 

addictive and that there is no such thing as an intervention and 

then a withdrawal, that what you then have is what should be the 

private sector becoming dependent. 

My view is that what we had with both the financial system and 

with the automobile manufacturers, certainly with GM, was a specific intervention, but the intervention worked in that the entities 

are now doing well on their own, and we are in the process of withdrawing that. So the argument that once you intervene you own 

this and you can’t get back to the private thing has been repudiated by the experience. Would you comment? 

Secretary GEITHNER. I agree, and no one should ever have to be 

in a position to take these steps, but in that case, because they 

were forced to go through a deeply wrenching restructuring process, they are emerging sooner, more profitable than anybody expected, and they can stand now on their own, and that is also now 

true for the American financial system as a whole. 

So it is not just that the system is stronger today than it was 

before the crisis, certainly when we came in office, but that we 

have let the weakest parts of the system go away and those that 

survived were able to meet a market test, being able to raise private capital on the strength of their franchise, their basic solvency. 

So I think we have been very careful to design these programs 

in a way that makes it very likely people would look at the prospect of government intervention in the future as being an easy, attractive option for them; it was devastating for the firms involved 

but our system, our country is stronger for it. 

The CHAIRMAN. The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. 

One thing I might say about the making money, House Republicans, particularly this committee, Republicans on our committee 

stood strong against the original proposal to the toxic assets, which 

proved to be a real boondoggle, and it was not done, and we actually insisted on dividends and warrants, and that is the part of the 

program that has made money. 

Secretary GEITHNER. I compliment you on that, by the way. You 

said at that beginning, and you are absolutely right, that at that 

time—and this was the principal cause of the crisis and the most 

damaging part of the dynamic was a perception that U.S. firms did 

not have enough capital. 

Mr. BACHUS. That is right. 

Secretary Geithner. But if you look at the program, where the returns to the taxpayers have been the highest is because those capital investments have earned a very substantial positive return, 

more than $20 billion in positive returns to the American taxpayer. 

It was the most effective use of taxpayers’ money that you could 

conceive of doing to help resolve a crisis like this. 

Mr. BACHUS. And actually, Chairman Frank stood with the 

House Republicans, who actually on the first meeting proposed 

those dividends, proposed capital injections. 

12 

We did oppose AIG. In fact, when Secretary Paulson—and I corrected him when he put in his book that he informed all of us. He 

failed to call me and inform me of the AIG intervention, and when 

I called him, he acknowledged that fact. 

The CHAIRMAN. If the gentleman, because there was a lot of camaraderie there and we should be clear, the AIG intervention was 

unilateral by the Federal Reserve, and at the time didn’t need any 

congressional approval. Subsequently both sides, though we had 

some differences in the financial reform bill, in both versions of it, 

we repealed the provision, section 13(3), by which the Federal Reserve did that. 

Mr. BACHUS. I am just saying that Congress has gotten some 

credit for some of the programs which lost money when actually— 

the programs that made money, we insisted on that protection for 

the taxpayers, and I am proud of Roy Blunt and I am proud of the 

subcommittee ranking members on this side and Jack Reed on the 

Senate side and Chairman Frank and others who supported that. 

Secretary GEITHNER. Mr. Bachus, could I just reinforce one point 

you are making? I am very confident when we look at this crisis, 

that if you look at the full complement of what the FDIC did, they 

will have been even to making money. The Federal Reserve programs, in totality, all of them, looked at together, will also offer a 

substantial return to the American taxpayer. 

Mr. BACHUS. And let me say this, I am not debating that, but 

a lot of the actions that were taken, Congress did not approve or 

participate in. They were unilateral and made by the Federal Reserve. 

Let me just ask you one question. The President recently appointed Elizabeth Warren to head up really I think the most powerful agency that has been formed by the government in the last 

30 years, which I think is a credit—and also has the power to allocate credit and to set fees. Many of us oppose giving them that 

carte blanche effect. Now, he has gone around Senate confirmation, 

despite the fact that Article II, Section 2, says ‘‘advise and consent 

of the Senate,’’ and he did that on Constitutional Day, which was 

sort of an ‘‘in your face.’’ My first question is, is he going to go to 

the Senate or is he going to just avoid that? 

Second, because he appointed her as a Presidential appointee on 

the White House, he could claim executive privilege in her testifying before us. Is he going to assert executive privilege? 

And third, the bill is written to where actually this agency has 

a right, the Federal Reserve, to pay as much as $680 million to 

fund that agency. Is Congress going to have any control over that, 

which I think the Constitution also provides that we at least control the spending? 

The CHAIRMAN. If the gentleman would yield, and I will give him 

extra time, before you answer, Mr. Secretary, I want to join in one 

part of that. I was supportive of that process, but I would be very 

unhappy if there was any obstacle to Ms. Warren testifying before 

the Congress, and I hope we will get an affirmation that will in no 

way be an obstacle to her testifying. 

Mr. BACHUS. Thank you. Mr. Chairman. 

Secretary GEITHNER. Congressman, let me start with the following. 

13 

There is no risk that this agency—although it is true it has been 

given substantial authority—has the authority to allocate credit 

and set the price of credit across the American financial system, 

and I would not be part of it, would not support it if it did; that 

is not in the law. 

What this bill does do, though, is take a bunch of authorities that 

were spread across multiple Federal agencies and put them in one 

place so there is one place with a dedicated mission to provide 

Americans better protection for their financial security; that is, it 

was a necessary, just act. 

The President is going to nominate a person for the Senate to 

confirm to lead this agency over time. What he has asked Elizabeth 

Warren to do, with my full support, is ask her to come play an advisory role to us as we help stand up this agency and figure out 

how to make the best use possible of that basic law. And I want 

to say that we are absolutely committed to making sure we do this 

in a way that strikes a careful balance. 

I will give you an example. The first thing we have done was yesterday, we convened a group of experts around the country to talk 

about how to make mortgage disclosure more simple, more accessible. Why is that important? Disclosure is one of the most powerful tools we have for making sure people can make sensible financial decisions, can shop for the best possible deal, can protect themselves from being taken advantage of. 

Mr. BACHUS. Mr. Secretary, we all support the Treasury. Let me 

just ask this: Can you guarantee us that she will not exercise any 

rulemaking authority until Senate confirmation? 

Secretary GEITHNER. She can’t—I didn’t speak to the question 

about—I just said that the President will nominate a director for 

confirmation by the Senate. 

Mr. BACHUS. And do you know when that will happen? 

Secretary GEITHNER. On the specific question of testimony, I am 

a little reluctant to say this, I want to make sure I get it right. It 

is my expectation, of course, that she would be obviously happy to 

testify with respect to her duties at the Treasury in this role as adviser to me and the President on the initial design of this agency. 

Now, on the question of rule-writing authority, the statute makes 

it absolutely clear what authority the agency has before there is a 

confirmed director and before the date of transfer, I think. And it 

is fair to say that until that authority is transferred, which will not 

happen before July of 2011, and before there is a confirmed director in place, this agency, by statute, has very limited authority to 

actually write new rules. But we are going to try to use that interim period to try to build a stronger consensus among the major 

players on how to improve disclosure and things like that. 

Mr. BACHUS. Of course, if she picks the rulemakers, that is kind 

of a stacked deck, too. 

Secretary GEITHNER. No, but again, that authority is with the 

President and me, and it is not something that falls anywhere else, 

and of course none of can have any powers that the statute didn’t 

give us. 

Mr. BACHUS. We disagree with a lot of that statute. 

Thank you. 

14 

The CHAIRMAN. I would notice, disagreement with the statute 

that has been signed into law doesn’t have a lot of legal force. 

Mr. BACHUS. I believe in the rule of law. 

The CHAIRMAN. That is the statute that you disagree with. 

Mr. BACHUS. No, I am not advocating disregard for the law. 

The CHAIRMAN. If the gentleman would yield, when we wrote 

that law, it did occur to us that Senate confirmation might be problematic. So it is not accidental that there were abilities to function 

until the Senate confirmed someone. 

Mr. BACHUS. But we also wrote in that law that he or she would 

be appointed by the Senate. 

The CHAIRMAN. Not appointment by the Senate. 

Mr. BACHUS. Advise and consent of the Senate. 

The CHAIRMAN. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Mr. Secretary, we have all focused on what went wrong in the 

financial crisis, and appropriately so, but I think it is equally important learn to from the responsible actors and build on their successes. So, last month, the Oversight Subcommittee I chair held a 

field hearing in Kansas to listen to, and learn from, responsible 

Midwest banks and credit unions who were not the cause of the financial crisis. While these smaller firms were clearly not ‘‘too-bigto-fail,’’ many raised the question to what extent the Dodd-Frank 

Act and the Basel III agreements finally end ‘‘too-big-to-fail.’’ I believe they will over a short period of time, but I would like to hear 

from you, how will Basel III specifically help end ‘‘too-big-to-fail?’’ 

Secretary GEITHNER. Excellent question, and to answer, you have 

to look both at the capital requirements and their effect and what 

the Dodd-Frank Act did to our ability to dismember a major institution without causing huge damage to the American economy. 

Capital is important because it reduces the risk that any individual firm will fail, but it has a more powerful separate effect, 

which is that it raises capital requirements for everybody else, too. 

They are much more likely to be able to absorb the trauma, the 

loss, the shock that could happen when a major firm collapses. So 

it has that huge effect of reducing the risk of failure, reducing the 

probability of a major crisis and the losses associated with the crisis. 

But what the bill does is essential, which is it also says if in the 

future, a major firm manages itself to the point where it can’t survive without exceptional assistance, we have no option but to put 

them through an orderly dismemberment that allows us to reduce 

any risk to the taxpayer and protect the innocent from the collateral damage that we saw that was so traumatic in this crisis. 

So the combination of the bill, that framework, the authority for 

capital and to dismember are the most effective ways we know for 

ending the problems associated with ‘‘too-big-to-fail,’’ and very important is this bill and these capital standards put much tougher 

restraints on the big institutions than they do on the small, because we want to preserve a financial system that allows for the 

great diversity of strength we get from having a system of 9,000 

banks, community banks, small banks, credit unions across the 

country that provide critical financial services to Main Street 

America. 

15 

Mr. MOORE OF KANSAS. Thank you, Mr. Secretary. 

The recent Basel agreement with respect to capital standards appears to be very good. I am a little concerned that the implementation period is too long or may be too long, but tripling the capital 

ratios appears to be a very good step in strengthening financial stability. 

I am also pleased the new agreement is countercyclical, building 

on key provisions that the New Democratic Coalition, led by Representatives Bean and Foster, pushed to have included in the 

Dodd-Frank Wall Street Reform Act. 

Mr. Secretary, will you please profess how the countercyclical nature of these new Basel capital standards will strengthen financial 

stability? For example, if these rules had been in place 10 years 

ago, would they have helped mitigate the recent financial crisis? 

Secretary GEITHNER. Just to start where you ended, absolutely. 

Our system would have been much more stable, much more resilient, much better positioned to handle a recession like this if we 

had tough requirements in place. 

And just to echo something the chairman said at the beginning, 

one of the most important things the Dodd-Frank bill does is make 

sure we can apply capital requirements to those who are in the 

business of taking risk in lending. In the previous system, we could 

only apply them to banks. They didn’t exist for a whole range of 

institutions that competed with banks and were allowed to take on 

much more leverage and risk, and that was very catastrophic for 

the system. So Dodd-Frank allows us to apply them evenly across 

institutions that are in the business of banking, regardless of what 

they call themselves. 

Now what this agreement does is—I will give you two examples 

of how it makes the system more resilient, less procyclical, more 

stabilizing in boom. What you want to do of course is reduce the 

tendency to euphoria in a boom and to panic in a crisis, and the 

best way to do that is to make sure that people operate in a boom 

with higher requirements so that they can dip into those as they 

face the losses that happen in downturns. 

And what this agreement does is allow you to—you have to run 

with 7 percent against risk, which is more than triple the previous 

standard, but as you face losses in a recession, you can dip into 

that cushion of capital. Now, if you go past a certain point, you 

have to start to conserve capital, stop dividend payments, stop 

share buybacks or raise capital, reduce compensation, and that feature should make the system less procyclical than it was in the 

past. 

But as I will say in response to Congressman Foster’s questions 

later, we are still examining whether we can complement this 

framework with other forms of contingent capital, countercyclical 

capital so that again we make the overall system less vulnerable 

to booms and less vulnerable to panics in the future. I don’t think 

we have found the adequate answer to that question, but this puts 

us in a much better position than we were before the crisis. 

Mr. MOORE OF KANSAS. Thank you, Mr. Secretary. 

The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Secretary. I appreciate you 

being here. 

16 

One of the things I am a strong proponent of is making sure that 

these entities are adequately capitalized, and I believe that part of 

the problems that we faced where we did have some entities that 

didn’t have the capital to sufficiently cover the risk that they were 

taking. And as I read about the agreement that was reached, I see 

a couple of things there. One is that we are going to increase the 

capital requirements across-the-board and then we are going to increase also or more clearly define what capital counts towards 

meeting those goals. 

But there is a point out there with capital, and what you are 

going to do with those entities is going to raise the cost of capital 

for them in many ways. So, across-the-board, you are going to have 

all these entities out looking for additional capital. It is going to 

raise the cost of capital. 

And so in order to be able to continue to generate the returns 

to the investors in these entities, obviously there is going to be 

huge pressure on them to increase their income or their revenue 

streams. And so one of the questions that kind of pops into my 

mind is, is there a point there where we put so much restraint and 

capital requirements there that we actually encourage riskier behavior in order to meet the returns and to pay for this capital, and 

so how do you balance that? 

Secretary GEITHNER. Excellent question. It is a thing worth worrying about. I think the architects of this were very careful to take 

that into consideration. 

Maybe this is one way to explain how it does that, which is to 

say if you take more risk, you have to hold more capital against 

that risk. Now, if you again look at the mistakes made prior to this 

crisis, you could say that people were able to hold on to all sorts 

of assets that they thought were risk free that actually had a lot 

of risk in it, and that was a costly failure. So by raising the risk 

you have to hold against the complex, inherently much more risky 

activities, you reduce exactly the incentive problem that you described. 

Now, capital doesn’t solve all problems. You have to make sure 

that you have a risk management system, you have a set of internal controls, you have tough supervisors looking over the stuff to 

make sure that people can’t get around these constraints and evade 

them, and you have to be careful about going too far because if you 

get these capital requirements too high, then you will raise the cost 

of credit unnecessarily, and you will encourage people to move their 

risk outside of the banking system again, and that would not create 

a more stable system. So you have to get a balance right, and I 

think this is a very strong agreement and has a much better balance than we had before the crisis. 

Mr. NEUGEBAUER. One of the questions, though, and you make 

a point, is that one of the key parts of that then is the regulatory 

structure, making sure that the risks are being identified and recognized, but the question I have is, let’s take bank A in the United 

States and they have a 7 percent capital requirement that they are 

meeting and we have a bank in another country that says we are 

meeting the 7 percent but their regulatory structure may not be as 

rigorous as the U.S. regulatory structure. So, in fact, that bank is 

17 

able to engage and leverage their risk in a different way than the 

U.S. bank is. How do we protect the markets in that way? 

Secretary GEITHNER. We are very worried about that for the obvious reasons you are, and again, if you look at what the system 

was like before the crisis, there was very, very substantial scope for 

countries to let their banks run with much lower capital than our 

banks were forced to run with. The required minimums were lower. 

They could count all other sorts of stuff as capital that we didn’t 

allow people to count, and in addition, we don’t think they were as 

tough on how they accounted for risk as our supervisors are. And 

I know that if you look at the mistakes we made in the United 

States, it is hard to understand this, but in fact the requirements 

we had in place for our banks were substantially tougher than was 

true for banks in many of the major economies around the world. 

So what this agreement does is substantially narrow the capacity 

for countries to have their system run with lower standards, because it is much tighter definitions of what counts as capital, much 

tougher risk weights on risky assets, and a higher overall minimum standard. And I think the combination of things give us 

much more confidence that it will be applied evenly. It is not 

enough, though. We have a lot of work to do to, as I said in my 

remarks, to make sure that as the regime is operating we don’t let 

too much discretion seep back into the system that would put us 

at a competitive disadvantage. 

The provisions in the bill give us a strong hand and we are going 

to make the whole system much more transparent, so there will be 

a good market test all the time about how much capital these guys 

are actually allowed to run with. And we are going to be and have 

to be very careful, monitor very carefully and pursue much more 

aggressively any signs of differential standards. 

Mr. NEUGEBAUER. So will it be specific risk premiums, a prescriptive way on certain types of assets that everybody across the 

spectrum will be required to use in analyzing the amount of capital 

and the risk in that portfolio of assets? 

Secretary GEITHNER. It is not quite that, and there is risk in that 

approach, too, because then if you do that, if you have the government just sit there and prescribe the risk weight, then there is a 

real risk people can just get around that, arbitrage around that, 

and leave the system more risky. 

What it does is make sure that there is a common framework 

you have to use for how you measure risk, and that basic framework has to be common across countries. It is not perfect. There 

is still a lot of risk. People will operate it with different degrees of 

rigor, which is why we are going to have to be on this for a sustained period of time. 

But we have a much better chance now that we will be able to 

watch this stuff on a quarterly basis and see where firms who compete against each other are operating with different actual standards of leverage. 

The CHAIRMAN. The gentleman from North Carolina. 

Mr. MILLER OF NORTH CAROLINA. Thank you. 

Mr. Secretary, I am committed to try to get as much of our 

money back, taxpayer money back as possible that has been expended or loaned as a part of all of this, TARP, as well as the conVerDate Nov 24 2008 17:11 Dec 16, 2010 Jkt 062680 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 K:\DOCS\62680.TXT TERRIE
18 

servatorship of Fannie and Freddie. A couple of months ago, in 

July, FHFA, the Fair Housing Finance Agency, sent 64 subpoenas 

to try to determine if there were legal claims arising from their private label mortgage-backed securities. In the Bush Administration, 

they were pushed to take on the highest—fill the housing goals 

that they have ever had, and they were allowed to meet those goals 

by buying the mortgage-backed securities, frequently subprime, 

generally subprime mortgage-backed securities issued by their bitter rivals, their heavy competitors. And those mortgage-backed securities appear to be one of the many areas of losses. We now have 

$145 billion or more into that conservatorship. The subpoenas seem 

to be aimed at a couple of different claims. One is outright fraud, 

but another is simple breach of contract, which is a lot easier to 

prove than fraud, that there were representations, there were warranties about the mortgages that were in the pools that had been 

purchased from the securitizers, for the most part, the big banks. 

And Mr. Kanjorski, Ms. Speier, and I sent a letter to President 

Obama last month urging that all of those claims be pursued vigorously, any available legal claims that will limit the losses to taxpayers. Mr. Frank since then has supported that position. Do you 

support pursuing with enthusiasm legal claims that we may have 

to minimize our losses? 

Secretary GEITHNER. Absolutely. 

Mr. MILLER OF NORTH CAROLINA. Okay. So you support the subpoena, the request for information? 

Secretary GEITHNER. I don’t think I can speak with sufficient 

care or clarity about the precise legal tools we have available to us, 

but it is very important to us that we are very aggressive in pursuing the taxpayers’ interest in limiting the scale of losses that 

were inherited at the time of conservatorship. 

Mr. MILLER OF NORTH CAROLINA. Do you have any or was potential liability on these theories taken into account at all in the stress 

test? The securitizers who presumably would be the defendants in 

any litigation are the 19 biggest banks that got the stress test. Was 

there potential liability taken into account at all in the stress test 

a year ago? 

Secretary GEITHNER. I don’t think so. I would have to refer that 

question to my colleagues in the Fed, but the broad parameters of 

losses that were estimated in the stress test on mortgage exposures 

were very, very tough. Very, very tough. In fact, the loss rates that 

underpinned the stress test assumed losses higher than the U.S. 

banking faced in the Great Depression. 

Mr. MILLER OF NORTH CAROLINA. But of course, those mortgages 

were off their books at that point. 

Secretary GEITHNER. Some were on the books, some were off, but 

they were very careful to also try to capture the contingent off balance sheet exposure that these firms run with. But I will refer to 

the Fed your question about precisely whether— 

Mr. MILLER OF NORTH CAROLINA. There was also pending litigation that so far has not gotten past certain procedural defenses but 

may well end up getting past those procedural defenses by the private purchasers of those mortgage-backed securities, for the most 

part pension funds, insurance companies, some hedge funds, that 

would have substantially identical claims to the claims that Fannie 

19 

and Freddie would have that FHFA would be pursuing in the conservatorship. It seems that if they get past—and the litigation 

brought by the Massachusetts Attorney General seems to show 

that almost all of those mortgages failed to meet—the subprime 

mortgages in the mortgage-backed securities failed to meet representations and warranties. Could you also consider that or let me 

know if that potential liability was taken into account in the stress 

test? 

Secretary GEITHNER. Again, I will be happy to refer those questions, and of course, we have your letter and we are looking 

through exactly the issues you raised in your letter and how best 

to respond to those. But we will be happy to pursue those with you. 

Mr. MILLER OF NORTH CAROLINA. Mr. Chairman, my time is 

close enough to having expired. I yield back. 

The CHAIRMAN. The gentlewoman from Illinois. 

Mrs. BIGGERT. Thank you, Mr. Chairman. 

Secretary Geithner, you said in response to Ranking Member 

Baucus that until July, the CFCB, this new agency, will have very 

limited authority to write new rules and sort of acknowledged that 

before next July that it will plan to do that. 

But I noticed yesterday that you and I guess it is Advisor Warren—is that what she will be called—hosted a closed meeting about 

mortgage disclosures. And in the Treasury press release you were 

quoted as saying, ‘‘Moving quickly to improve mortgage disclosures 

is in a series of concrete steps we are taking.’’ And you continued 

that, ‘‘Whenever possible, we are committed to expediting completion of the law’s requirements ahead of statutory deadlines.’’ 

Changing the mortgage disclosures required under RESPA and 

TILA to me is costly to small businesses. We have been working 

on whether the—trying to get the Federal Reserve and HUD to 

work together on ironing those out, and that seems to be a long 

process that didn’t really get there, I don’t think. But with this endeavor or any other rule or regulatory change spearheaded by you 

and Ms. Warren, do you plan to consider the consequences for 

small businesses and how do you plan to do that? 

Secretary GEITHNER. Let me just say that I think it is very hard 

to look at the existing body of regulations in these areas that were 

designed to improve disclosure and protect consumers and be proud 

of what they have achieved, both in terms of the burden that they 

impose on people providing financial services as well as the benefit 

they provided to consumers. And I think, my own personal view, 

is where we have authority, like in this area, to try to combine 

these forms, bring convergence or put new protections in place, it 

is an obligation on us to try to make sure we can find ways to 

streamline the existing body of rules that have outlived their usefulness or did not meet their stated objectives. I think we have a 

very substantial scope to do that; and I think it is very important 

to us, to the whole credibility of this effort, to try to demonstrate 

that we are not just putting new rules on top of old bad ones, that 

we are cleaning out the underbrush and trying to lighten the burden on people who have to—are in the business of trying to help 

people borrow responsibly. 

Mrs. BIGGERT. If I might, you have, under the law that says that 

for a covered agency, a description of the steps the agency has 

20 

taken to minimize any additional cost of credit for small entities. 

And this going to be such a problem with what businesses are facing with looking at what is the law right now and how it is going 

to change. They have spent so much money in trying to work out 

with the new RESPA and TILA that has been put into place and 

then to changing this. 

And, also, Advisor Warren has criticized the Treasury’s data as 

sparse. And she said that reasonable people may disagree about 

how to help small businesses gain access to loans, but no one 

doubts that the solution must begin with a clear understanding of 

the problem, and yet Treasury has gathered only space data on the 

small business credit crunch. 

Do you agree with that or is this something that is going to have 

to be done? 

Secretary GEITHNER. No, I don’t agree with that, but I can take 

this opportunity to say that the Congress is on the verge of passing 

a set of very powerful, not just tax benefits for small businesses, 

which we think are very well designed to make a big impact on improving investment in this country more quickly than otherwise 

would take place, but a very well designed set of programs, credit 

programs, limited to community banks that will help give them the 

resources to lend more to growing small businesses. 

And my own view, again probably based on our experience with 

the initial investments we made under the TARP, is that those programs have a—can have a very substantial positive effect on increasing the availability of the credit that small businesses are still 

living with the scars caused by this crisis. I think that the Senate 

passed this bill last week, and I am told that the prospects are 

quite good that it will be the law of the land quickly. 

Mrs. BIGGERT. What are Treasury’s plans to assess the impact of 

the new rule or regulation on— 

Secretary GEITHNER. I am sorry, Congresswoman. You are right 

to say that the Dodd-Frank bill does also have a set of requirements that you refer to in making clear that we have to carefully 

examine the effect on small businesses. 

But just to cite the example you said, I find it—I am very confident that improving disclosure and simplifying forms will not just 

make it easier for consumers to shop for best financial products but 

do so with a lower burden on the people who provide those financial services. I cannot believe—this is not rocket science—we can 

do a much better job than we have done to date in reducing the 

burden on people in part by simplifying these kind of forms in disclosure. 

Mrs. BIGGERT. I would hope so, but will there be a comment period, public comment period? 

Secretary GEITHNER. Absolutely. Again, one of the great things 

about the United States is we have a set of important basic disciplines, obligations on transparency requirements for comment 

and we will meet those obligations. 

Mrs. BIGGERT. Thank you. 

The CHAIRMAN. The time has expired. 

I will just make an announcement, since it came up, that I will 

be at the Rules Committee at 5:00 today to ask for a rule on that 

small business lending bill. And it is our intention to ask the 

21 

House to accept, after swallowing hard, the Senate version of that 

bill tomorrow. 

The gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

I thank the Secretary for appearing. Good afternoon. Sorry that 

I arrived a little bit after your testimony. We have quite a busy day 

on the Hill today, a number of hearings. 

Let’s talk for just a moment about the alternative. We have a 

proposal. Can you explain to us what the alternative is? It seems 

as though there is a notion that there is something much, much 

better that we could be doing if we would but only do that something that is much, much better. What are the alternatives? If we 

don’t increase capital requirements, what is the alternative? 

Secretary GEITHNER. Congressman, I believe there is no credible 

alternative. You can debate how much is enough, how much is too 

much, how quickly people should have to build capital to achieve 

the new minimums. And we can debate and we will continue to 

work on ways to make this system more resilient, make these 

shock absorbers work in a way that, as Congressman Foster and 

others have suggested, that makes the system less procyclical. And 

we have more work to do on that. 

But there is no credible alternative to less leverage, higher capital requirements, more stable funding requirements on institutions. Financial crises all have in common that single basic failure 

that firms were able to operate with less leverage. That is what 

makes them vulnerable to panics and runs, and that is what 

brought our economy to the edge of its knees. 

Mr. GREEN. Now, what you are attempting to do and we are attempting to do is make this as global as possible. Would you please 

address the transparency necessary to implement this in a global 

market? 

Secretary GEITHNER. A clear, measurable, simple standard that 

countries not just have to commit to abide by but they have to pass 

national regulations to make those rules apply to their institutions. 

Disclosure requirements so that the world can look at those institutions every quarter and see whether they are holding enough capital to meet those requirements. A long, ongoing effort to monitor 

enforcement by supervisors on as consistent a framework as we 

can. Those are the principal elements of what gives us the hope 

that we have a much tighter set of constraints and a more level 

playing field globally. 

Mr. GREEN. And, finally, the definition of a bank that will be universal such that we won’t have some country that concludes that 

these institutions, while they look like banks and they lend like 

banks, they are really not banks. 

Secretary GEITHNER. Unfortunately, that was uniquely an American problem. In really almost every other major economy around 

the world, they had the authority to apply capital requirements to 

institutions that operated as banks even if they called themselves 

merchant banks or housing finance companies or banks or investment banks or commercial banks. 

Our system was unique in basically saying we had two worlds, 

a set of banks that had rules and a set of all sorts of other institutions with different types of names that didn’t have rules. And that 

22 

is why consumer protection was such a failure and that is why this 

crisis was so much more severe, because people were able to take 

a huge amount of risk without being subject to those constraints. 

So I do not believe that we face material risk, that countries 

have been scarred by this experience and this crisis—and it was in 

many ways harder for other countries and even was for us in the 

United States—will decide they are going to let people evade those 

basic rules. And if that happened, we would work very hard to convince them that in their own interest, they would want to extend 

those protections to those nonbank institutions. 

Mr. GREEN. I thank you very much, and I look forward to hearing alternatives from those who contend that this doesn’t work. 

And I thank you for the time. 

Mr. Chairman, I yield back. 

The CHAIRMAN. The gentleman from Texas. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Secretary, I think it was the day before yesterday that the 

Nation awoke to the news that, by a narrow definition of economists, the recession ended 15 months ago. Clearly, there had been 

no celebrations in the street, for obvious reasons. 

I really don’t have a specific question, but I have a statement 

and a request. Having spent months now speaking to people not 

only in my own congressional district, but Fortune 50 CEOs, billionaire investors, and, most importantly to me, small business people in Mineola, Palestine, and Athens, Texas, one word continues 

to come to the forefront of the discussion: uncertainty. Uncertainty. 

You have probably seen the NFIB poll of small business confidence 

had a generational low. Hopefully, you are hearing their voices. 

The chief economist, Bill Dunkelberg, for the NFIB talked about 

how the tax rates, health care, discussion of the deficits ‘‘scare us 

to death.’’ 

The Business Roundtable: The voice of big business, government 

isinjecting uncertainty into the marketplace making it harder to reduce capital, create new business. 

The U.S. Chamber: It is fundamental uncertainty that is holding 

business back. Look at the tax costs. Look at the health care bill. 

Now, again, I know that the Administration is not going to relitigate and Congress is not going to unpass the health care bill, much 

less the FinReg bill. But the sheer volume of rulemakings that will 

take place under this legislation by any historic standard, although 

perhaps the recession may have ended by some narrow definition, 

clearly the recovery hasn’t started. The recovery will not start until 

this Administration, working with Congress, fundamentally begins 

to remove the uncertainty and listens to the voices of job creators. 

And I do not believe that voice has been heard heretofore. 

So that is a combination of a statement and a request. Now, in 

that vein, I do have a question. You mentioned earlier about this, 

and I believe you said we have legislation pending for tax incentives for small business. But, unfortunately, you also have proposed 

legislation that would impose taxes on small business, specifically 

the Administration’s plan to increase marginal rates for the top 

two brackets. And according to JCT, the Joint Committee on Taxation, that includes 50 percent of all small business income. The 

Tax Foundation has reported that the top two brackets, that twoVerDate Nov 24 2008 17:11 Dec 16, 2010 Jkt 062680 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\62680.TXT TERRIE
23 

thirds of that revenue produced will come from business income. 

And so, on top of the uncertainty, now we are adding yet another 

tax on business in general, small business in specific. Why? 

Secretary GEITHNER. Congressman, let me just start with something you said in your opening comments before you asked that 

basic question. This reform bill will correct mistakes in how we 

have managed our financial system that caused devastating damage. And as we bring clarity to the rules that will prevail, as my 

colleague Chairman Bernanke and others did last week on capital, 

that has been helpful to provide clarity. 

If you look at how the markets responded to that, they were, 

frankly, reassured that the rules struck a good balance between 

stability and basic growth. And it is very important to us as we 

move forward to move this bill that we bring that same standard 

of balance and we are going to do it as quickly as we can. 

Now, I talk to businesses across the country all the time as well, 

and I would say— 

Mr. HENSARLING. Unfortunately, my yellow light has already 

gone off. Could you address the question? 

Secretary GEITHNER. Yes, I absolutely want to get to your question. 

I talk to businesses across the country as well and I would say 

that it is unmistakably true that businesses across this country, as 

are average Americans, are still living with the deep scars caused 

to their basic confidence caused by the basic crisis. And their principal question, frankly, is how fast is the economy going to grow 

in the future? 

We are having, frankly, a very welcome debate about what is the 

best mix of policies that is going to encourage investment in the 

United States and future growth. And let me tell you what separates us now, Congressman, because I think it is important to say 

this. 

Mr. HENSARLING. The seconds are really ticking down, Mr. Secretary. So do you push back on the data? Are you not proposing a 

tax increase on 50 percent of small businesses? 

Secretary GEITHNER. I welcome the question, and I want to explain it to you. 

The CHAIRMAN. I would ask unanimous consent that we have 3 

additional minutes for the gentleman of Texas. We have a fairly 

significant debate going on here, and if there is no objection, we 

will do another 3 minutes. 

Secretary GEITHNER. So let’s discuss what we agree on and what 

separates us, okay? 

We hope you will join us in passing this set of very powerful tax 

incentives for small businesses in the small businesses bill. I will 

give you an example: 100 percent expensing up to a certain limit 

for small businesses for any capital investment. Zero capital gains 

on investments in small businesses. These are very well-designed 

tax incentives that Republicans have supported with fervor in the 

past. 

We have proposed that Congress join the President in proposing, 

for a temporary period, full expensing for 1 year for capital investments by all businesses in the country, again, to give them the inVerDate Nov 24 2008 17:11 Dec 16, 2010 Jkt 062680 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\62680.TXT TERRIE
24 

centive to make those investments today to help get Americans 

back to work. 

We have proposed that the government start a multi-year program of improvements in public infrastructure that will help not 

just put more people back to work but improve future growth rates. 

Now, where we—and we have proposed, and I think Congress 

would support this, to decide soon to extend the middle-class tax 

cuts that go to not just 97 percent of working Americans but to 97 

percent of small businesses across the country. 

Now, where we disagree— 

Mr. HENSARLING. But it is still 50 percent of the income, Mr. Secretary. 

Secretary GEITHNER. Congressman, I am getting to that. That is 

a deeply misleading, as you know, characterization. 

Mr. HENSARLING. No, I don’t know, Mr. Secretary, or I wouldn’t 

have cited it in the first place. 

Secretary GEITHNER. But I am going to come to it. 

Mr. HENSARLING. It is my time, is it not, Mr. Chairman? 

I would say, listen, Republicans want to work with you on the 

immediate expensing, certainly on the capital gains tax relief. I 

would say, though, that what you give with one hand, this Administration more than takes away with another hand. 

Secretary GEITHNER. Not so, Congressman. 

Mr. HENSARLING. So, at the end of the day, Mr. Secretary, I don’t 

think this Administration with its proposals is fundamentally addressing the uncertainty that is keeping job growth to almost nil 

in this economy. Otherwise, again, we wouldn’t continue to be 

mired in almost 10 percent unemployment almost every month of 

the existence of the Administration. So I suppose we will just have 

to agree to disagree. 

The chairman was generous in giving an additional 3 minutes. 

In the time I have remaining, I do want to move on to one— 

Secretary GEITHNER. Mr. Chairman, can I just respond to that? 

The CHAIRMAN. I will ask for an additional minute for a 30-second response from the Secretary, and then it is the gentleman from 

Texas’ time. 

Secretary GEITHNER. If you look at the full impact of our suggestions, we extend today the middle-class tax cuts, our proposals for 

enhanced business expensing for 1 year for all businesses, and our 

proposal to jump start a multi-year public investment program, the 

net impact on growth for this country at this time of grave challenge would be much, much more powerful, a substantial multiple, 

than simply deciding to extend those tax cuts that go to 2 percent 

of small businesses and 2 percent of the most fortunate Americans 

in the country. 

The CHAIRMAN. I think you got your point across. 

The gentleman has the remaining time. 

Mr. HENSARLING. Thank you, Mr. Chairman; and, unfortunately, 

Mr. Secretary, in this particular forum I am allowed to have the 

last word. 

I do think, though, it is curious that one of the most single-mostquoted economists by Democrats is Mark Zandi, who said, ‘‘It 

would not take much more of a pullback by the affluent than anVerDate Nov 24 2008 17:11 Dec 16, 2010 Jkt 062680 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\62680.TXT TERRIE
25 

ticipated to derail the recovery,’’ when he advocated not raising 

taxes on the top two brackets. 

In the roughly 45 seconds I assume I have remaining, one of the 

questions I have you may only be able to respond to in writing. 

I understand the Keynesian argument behind the stimulus. I 

don’t agree with it. I think it has been ineffective. You believe that 

it is effective. We will postpone that debate. Here is what I don’t 

understand. At a time where we are absolutely drowning in debt, 

where we know that gross debt is now over 90 percent of GDP, that 

history tells us we could lose economic growth because of this, why 

in your 10-year budget plan do all you do is extend the deficits, extend the debt in the outyears? Surely you do not believe under your 

policies we are still going to be mired in this recession 3, 4, 5, 6 

years from now? What explains the spending and the doubling of 

the debt in 5, tripling the debt in 10, debt held by the public? 

Secretary GEITHNER. In the spirit of your question, Congressman, you are asking me to go out and borrow $700 billion from investors 

around the world to extend tax cuts from President Bush that 

would expire for 2 percent of the wealthiest Americans in the country. There is no plausible argument that that is a fiscally responsible action for the Government of the United States at this time. 

Mr. HENSARLING. Mr. Secretary, you could have reduced spend- ing, and it is going to cost $2 trillion. 

The CHAIRMAN. The gentleman’s time—this is the last answer. I 

don’t think I have been tough on time. 

Mr. Secretary, conclude your answer, and we will go on to the 

next one. 

Secretary GEITHNER. I was just going to observe that the proposals the President made in his budget would reduce our deficit 

by more than half as a share of GDP if you join us in approving 

those proposals over the next 5 years. 

The CHAIRMAN. The gentleman from Missouri, the long-suffering 

gentleman from Missouri. As a minister, he certainly knows how 

to do that. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Thank you for being with us, Mr. Secretary, and thank you for 

the very difficult job you perform, but it is appreciated. 

Let me just start out, in the 1870’s, Thomas Edison created a 

phenomenal little deal called a light bulb, and afterwards we ended 

up having the creation of a major corporation called General Electric. And we had this unique little creation born here in this country. 

At the end of this month, GE will discontinue making incandescent lights and the plants will be closed. This light will not be 

made anywhere in the United States. There is a reason. The CFLs 

actually use about 75 percent less electricity. But the negative part 

of it is that, because it is circular, there is a lot of hand labor involved, and now the United States will import almost all of the 

CFLs from China, which gives me great pain. 

The stimulus also provided some opportunities for the Department of Energy to help companies get involved in green technology. 

I mention all that because in your September 16th testimony in 

the Senate you said, ‘‘We are committed to promoting policies in 

both the United States and China to create new opportunities for 

26 

Americans and grow jobs in the United States and we are not leaving these outcomes to chance.’’ And so I am wondering what—tell 

me and, hopefully, others—what the Administration is doing that 

would make certain that we are not leaving this to chance, considering China is probably making some big mistakes. Because as 

they are underwriting many of the factories that are doing this 

work and doing big land deals which could conceivably cause them 

to have a real estate crisis later on. But I am interested in your 

response. 

Secretary GEITHNER. Congressman, a very important question, 

and I would suggest the following: 

It is very important that we do things in the United States that 

increase incentives for Americans to invest and build things here 

rather than overseas. And the proposals you referred to, they were 

in the Recovery Act to provide very substantial incentives for investment in new technologies. Basic science, research, and development in new energy technologies are part of that process. But we 

are going to have to do a lot more in that context, and it is very 

important to us for us to recognize that the most important thing 

we can do for manufacturing in the United States is going to do 

a better job of improving the incentives for companies to invest 

here rather than outside the United States. 

That is not enough, though. It is very important that our companies face a level playing field around the world, and that is why 

it is so important that we continue to try to encourage China to let 

their exchange rate reflect market forces and to end practices that 

discriminated against U.S. companies. And we are looking for ways 

to—we are making a little bit of progress, but we have a long way 

to go on that front. But you have to do both. You have to do both 

those things. You have to invest more here and make sure we are 

being as effective we can in making sure other countries are not 

pursuing policies that put our firms at a disadvantage. 

Mr. CLEAVER. Mr. Secretary, thank you for your time and your 

thoughtful response. 

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

The CHAIRMAN. The gentleman from Delaware, Mr. Castle, is 

now recognized for 5 minutes. 

Mr. CASTLE. Thank you, Mr. Chairman. 

And, Mr. Secretary, sort of following along the lines of Mr. 

Hensarling’s questions, one of the things that I hear about out 

there—and you do, we all do, I guess—is the lack of certainty with 

certain of our policies that we do here in Congress, that perhaps 

the White House does. Tax policy is obviously one. Regulatory policy is another. 

We, as you know, had passed legislation involving credit cards, 

and we had passed other legislation involving banks, etc. To the 

best of your knowledge—the broad question may be on your testimony here today, but to the best of your knowledge, is the Administration focused on this and perhaps the need to introduce stability to get whatever it is we have to get done and leave it alone 

and make it permanent so businesses can make decisions based on 

whatever the laws are and not what they might be 1 or 2 years 

from now? 

27 

Secretary GEITHNER. Absolutely. And that is one reason why we 

don’t think Congress should wait on providing clarity to the tax 

treatment that is going to be so overwhelmingly important to, 

again, 97 percent of working Americans and small businesses. And 

if we can work together to give them additional incentives to invest 

here, I think it is very important we do that. 

It is not rocket science. It doesn’t take a lot of time to do. Certainty would be better. 

I am very concerned by the extent to which, you talk to businesses and individuals across the country, they think there is some 

risk Congress won’t act to extend those middle-class tax cuts. And 

that is a remarkable thing. Because it would be a deeply irresponsible act to leave them with uncertainty longer than we need to 

about what that tax stream is going to be. 

On the regulatory front, I can only speak to the issues that are 

part of the financial reform legislation; and there we have a challenge. These are very complex rules. It is very important that we 

get them right. 

The legislation gives a set of deadlines we have to meet. Those 

are very tight deadlines, but they still mean for the next—we are 

going to be in a 6-, 12-, 18-month, 24-month process before we 

bring those all down to earth. And I think the best way we can provide a little bit more confidence that we are going to get the balance right, like we did in the capital rules, is to make sure we are 

listening carefully to people on how to design them, everyone affected by them, and try to, again, demonstrate by our actions, like 

we tried to do on capital, that we are going to get the balance right. 

And, again, capital is a good example, and we should hold ourselves to that high standard. When the rules were clarified, that 

certainty was very helpful. I don’t comment on markets ever, but 

I am just saying if you look at what happened to how the world 

looked at the financial system when the rules were clarified, they 

were more confident that they knew what they were going to mean, 

and our banks are in a very good position to meet them. 

But that is a high standard. We are going to try to meet that. 

And I absolutely agree with you that bringing more certainty to 

what these new rules are going to be would be very helpful. We 

will do it as quickly as we can. 

Mr. CASTLE. I met with Senator Carper and our bankers in my 

State, Delaware. And one of their complaints was that the various—they have varying regulators, obviously. But one of the regulators is being so restrictive in the kinds of loans that they can 

make that they can’t really help the economy as much as they 

would like. They claim that they are making loans and the regulators—and they have made their cuts because they knew they had 

to do this. And then the regulators are coming in and saying you 

have to really go further than you have already gone, and it is really restricting them in terms of what they can do. 

I can’t—I have no idea of the accuracy of that statement, but it 

is concerning. If we are somehow by our own regulatory policies, 

etc., cutting off the possibility of investments that might help our 

economy recover, that would be a problem. I am sure you have 

probably heard this complaint. Any comments you have about that 

I would appreciate. 

28 

Secretary GEITHNER. I have heard that concern from banks 

across the country as have you and your colleagues. And I know 

that Chairman Bernanke and Chairman Bair and the OCC are 

very aware of those concerns, and they are trying to make sure 

that their supervisors or examiners don’t overdo it. 

But the biggest challenges facing small banks across the country 

still are that many of those banks got themselves too exposed to 

commercial real estate, just don’t have quite enough capital, and 

are finding it hard to raise capital in these markets. That is still 

a much more powerful concern for most of those banks than the 

concern you referred to, and that is one reason why we hope this 

bill gets through. 

Because what this bill will do is give those banks the ability to 

come to the Treasury and get an investment from the Treasury at 

a very economically attractive price. And if they expand lending, 

we reduce their dividends even lower, so it creates more incentive 

for them to put that capital to work to expand lending, and that 

is why we think it is such a promising bill. 

Mr. CASTLE. A final question—and I missed the beginning because I was at other meetings—but did you comment or would you 

comment, if you didn’t, on where we are with the GSEs? I know 

that you are working on it, and I know we are going to hear something pretty soon. I still believe that was the genesis of a lot of our 

problems. 

Secretary GEITHNER. You are absolutely right that the GSEs 

were a substantial contributor to the financial crisis. And as you 

all are aware, the losses they accumulated and the decisions they 

made before conservatorship are very substantial. We have begun 

a process, as has this committee, to look at a range of options for 

how to replace the institutions with a better, more stable system. 

And we are running a very careful process of bringing experts together and looking at ideas on all sides. A bunch of staff members 

from the Republican side and the Democratic side came to a conference we held at the Treasury last month on this. 

And, again, we are trying to make sure we look at all ideas with 

no presumption on it. And our obligation under the law is to bring 

forward legislation, I think, Mr. Chairman, early next year. In any 

case, that is the timeline we expect to meet. 

Mr. CASTLE. Thank you, Mr. Secretary. 

I yield back, Mr. Chairman. 

The CHAIRMAN. The gentlewoman from California. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Thank you for being here, Secretary Geithner. 

You and I have disagreed a bit about whether or not government 

should basically deny or discontinue certain risky products. You 

have said to me many times you believe that you manage those, 

you regulate, but you don’t use the power of the government to discontinue products. Do you still feel that way? 

Secretary GEITHNER. I believe that there are certain practices, 

activities—I will give you an example. Paying a mortgage broker 

to steer a customer into a loan they can’t afford that generates 

more fees in the short term is not a practice we should support or 

condone. But I think the best way to manage the risks in financial 

innovation in a market financial system is to make sure that we 

29 

require institutions to hold more capital against the more complex 

financial products. And I still believe that is a more effective approach. 

Ms. WATERS. I am sorry. If I may, I see that where you basically 

talk about banks will be required to hold more capital against more 

risky products and activities. But what I am concerned about is 

whether or not you think Alt-A or no documentation loans are 

something that you should hold more capital against that kind of 

risk when you are not documenting income, etc., etc. Why should 

that product be on the market in the first place? 

Secretary GEITHNER. I believe it is very important—and the law 

gives us new authority and a mandate to do this—to make sure 

that banks, when they make loans to people, have to be able to 

demonstrate that the individual can afford those loans when—their 

capacity to pay, and I think that is very important. And if we do 

a better job at that as a country, it is inconceivable to me that we 

will get back into the business of letting people get a loan with no 

documentation, no proof of income. 

Ms. WATERS. Mr. Secretary, have you ever heard of a 30-year 

fixed adjustable rate mortgage? 

Secretary GEITHNER. I have, and I find them appealing in their 

simplicity in terms of their terms and benefits. 

Ms. WATERS. A 30-year fixed adjustable rate mortgage is a contradiction within itself. That is number one. 

Number two, if there is something called a 30-year fixed adjustable rate mortgage that is marketed to a 60-year old couple where 

it will reset every year up to 10 percent interest and by the time 

they are 75 or 80 years old, it will be substantially more than what 

they got into it for, do you think that is a decent product? 

Secretary GEITHNER. I misspoke. I thought you meant just a classic 30-year fixed rate. 

Ms. WATERS. No. I said 30-year fixed adjustable rate mortgage 

that is being marketed. And I use that as an example of products 

that are on the market that should not be on the market. There 

should not be anything called a 30-year fixed adjustable. It is a 

contradiction. 

Secretary GEITHNER. Having listened to you more carefully, I 

apologize. I understand your concern completely, and personally, I 

would not want to be associated with anything like that. I think 

that is the kind of practice that should not be possible in our postreform financial system. 

Again, it should not be possible for banks or brokers to steer people into mortgages that they cannot understand and cannot afford. 

It was a mistake for us to allow it, and I think this new law gives 

us the power to prevent it. 

Ms. WATERS. Thank you very much. 

Mr. Secretary, let me just say this: You keep talking about steering. They should not be steered into that kind of product. That 

kind of product should not exist. It is not that the product is all 

right as long as people are not steered into it who can’t afford it, 

that product, Alt-A product, certain adjustable rate products; and 

I am hopeful that our Consumer Protection Financial Bureau will 

be able to get the kind of support from you and others that will 

take those kind of products off the market. 

30 

So I keep asking you this every time I see you, because I am hoping you are going to change your mind, and you are going to find 

that there is just some product out there that you would ban tomorrow if you had the power to do it. 

The CHAIRMAN. Will the gentlewoman yield? 

Ms. WATERS. Yes. 

The CHAIRMAN. I do believe with regard—while there is not a 

general power in the consumer bureau to do this, the mortgage section is a more specific section. And I believe that the mortgage— 

in the mortgage area, for instance, with prepayments, etc., there is 

the power to ban certain products if mortgages—that they have a 

greater power in the mortgage area than in other areas. 

Ms. WATERS. I certainly hope that Ms. Warren will get that kind 

of support. 

And, finally, if I could indulge for 30 seconds, Mr. Chairman. 

The CHAIRMAN. Certainly. 

Ms. WATERS. There is something in the Wall Street reform bill 

called the creation of the offices of minority and women inclusion. 

Are you aware of it? 

Secretary GEITHNER. Absolutely. 

Ms. WATERS. And have you started your agency on the implementation? 

Secretary GEITHNER. We have started, but we are not there yet. 

Ms. WATERS. And you know you have to have it done in 6 

months? 

Secretary GEITHNER. I do. 

Ms. WATERS. And you know that some of us have worked very 

hard to put it in there? 

Secretary GEITHNER. I do, and I very much respect the reasons 

why you did it. 

Ms. WATERS. Okay. Thank you very much. I yield back. 

The CHAIRMAN. The gentleman from New York, Mr. Lee. 

Mr. LEE. Thank you; and, Mr. Secretary, thank you for coming 

before us today. 

I wanted to start off by addressing two issues which are near and 

dear to me based on my background in manufacturing and in seeing what has transpired with manufacturing in this country over 

the last decade and its demise. I know last week you were in front 

of the House Ways and Means Committee regarding the undervaluing of Chinese currency. And you expressed concern similar to 

that of the U.S. Trade Rep that the currency reform for fair trade 

is not a viable option because of a belief that it may not be WTO 

compliant. 

At the same time you said, ‘‘The Administration is using all the 

tools available to ensure that American firms and workers can 

trade and compete fairly with China.’’ 

It has been apparent for years that China’s currency is pegged 

to the U.S. dollar and it is severely undervalued, yet the Administration refuses to officially list China as a currency manipulator 

and, based on yours and Ambassador Kirk’s statement, also refuse 

to discuss a legislative option. Mr. Secretary, if these issues are off 

the table, I would like to know specifically what the Administration 

is doing to address our disparity with China and create a level 

playing field for American manufacturers who are hurting. 

31 

Secretary GEITHNER. Can I just clarify one thing you said? I actually was very careful last week not to comment on the basic 

question about whether that particular draft legislation was consistent with our international obligations. You implied that I said 

it wasn’t, but I did not say that. 

We obviously want to make sure that any legislation that is 

passed is consistent with our obligations. Because, if it weren’t, it 

wouldn’t give us much leverage to go after those things. 

I believe, as I said last week, the two most important things for 

us to do as a country are to work with countries around the world 

to encourage countries—China to let their exchange rate appreciate 

in response to market forces, which we are working very hard at 

doing. They are starting that process, but they haven’t done much 

very yet. 

Mr. LEE. At a very anemic level. 

Secretary GEITHNER. I agree, and I said that very clearly last 

week. And we believe, as I think you do, that the exchange rate 

is significantly undervalued. 

Mr. LEE. As we say, we can’t dictate what they pay their workers, what their regulation is. But when you are talking about something as basic as market forces with currency, a 30 to 40 percent 

disadvantage is killing American manufacturing. 

Secretary GEITHNER. I think it has a very substantial adverse 

material effect on our economy and our interest, but that is not 

enough, and I want to make it clear on this. 

In addition—and this is a real problem for us—we face a number 

of practices by the Chinese government that do discriminate 

against American producers in the United States and those who 

operate in China, and we are trying to encourage them to end 

those basic practices, and we want to do both. 

Mr. LEE. And I think we should. Because if we keep kicking the 

can down the road for a few more years, we will not have manufacturing in this country as we know it today. 

I just want to switch to something else, because I know I have 

limited time. But it is another issue that, again, is very important 

to me based on having a lot of retirees in my district. 

Last year, I spoke to you during one of your visits to our panel 

and asked your thoughts on the inequitable treatment of pensioners for more than 20,000 Delphi salaried retirees, the majority 

of which suffered significant cuts in their pension during the restructuring of GM and the Treasury’s Auto Task Force. You replied 

that your team would sit down with me and provide answers as to 

why these salaried workers were treated differently than the hourly retirees when pensions were topped up, presumably with TARP 

funds provided by taxpayers. 

To date, despite multiple requests directly to you, the Auto Task 

Force, and the President, I have not received any substantive reply 

to my request. 

I have now tried a different avenue and have secured official investigations through SIGTARP and the GAO, but, frankly, I would 

like to try one more time to hear from you, Mr. Secretary, exactly 

why the Administration, your Department, is refusing to make 

public all the documents concerning how unfair and unjustified this 

decision has been? 

32 

Secretary GEITHNER. Absolutely. We will work with you and the 

range of bodies that oversee these programs to make sure they 

have all the information to reach those judgments. And I will reaffirm my commitment to you to have those people come up and meet 

with you and your staff to talk through this very complicated, very 

difficult problem. 

Mr. LEE. And I will take you at your word on that. Because this 

is something we have now been working on for 18 months, and we 

have a lot of retirees who have been drastically impacted. I meet 

with them on a regular basis, and it boils down to fairness, period. 

All they are looking for is to be treated as—if they had to take a 

haircut, let’s do this thing equally. But it appears that they have 

really been singled out, and I will hold you to that. 

And with that, I will yield back. 

The CHAIRMAN. Will the gentleman yield? 

I would just add, Mr. Secretary, I just received a letter from 

three of our colleagues—Senator Sherrod Brown and Representatives Charlie Wilson and Tim Ryan—on that identical issue. So I 

would agree, of course. They asked for something similar, and I am 

going to have them join with Mr. Lee, and we will work on that. 

The other thing, I just wanted to clarify that we have gotten an 

answer, which is, under the consumer bill that was passed, there 

is a particular section on mortgages, and there is greater power on 

mortgages than in general; and the product that the gentleman 

from California mentioned could, in fact, be banned under that special mortgage power. 

The gentleman from Illinois. 

Mr. FOSTER. Thank you, Mr. Chairman. 

I guess, I would like to start out by asking for recognition that 

the sufferings of a scientist are no less than those of a minister 

when you listen to this politicized debate here. Anyway, also, but 

actually— 

The CHAIRMAN. If the gentleman would yield? I will give you 

back your time. 

He got me backwards. I said the minister could bear it more easily. No question, you are more impatient. I will give you that. 

Mr. FOSTER. But, also, as someone who started a manufacturing 

firm myself, I would like to associate myself with the comments of 

my Republican colleague there. The Chinese currency manipulation 

is a fundamental problem that has to be fixed and fast. You are 

going to find lots of friends on both sides of the aisle for pushing 

you, and if there is a role for Congress in playing bad cop in this, 

we are happy to play that role. 

Let’s see, a couple—actually, one quick historical comment on the 

ultimate cost of TARP which you mentioned. And it is interesting 

to compare that to the ultimate taxpayer cost of the savings and 

loan bailout that happened under the Bush—the Bush I and 

Reagan years, which was $160 billion of 1990 dollars or about 3.2 

percent of GDP. The numbers you just quoted—which I had not 

heard yet—were $66 billion, or less than half a percent of GDP. So 

expressed as a fraction of GDP the ultimate taxpayer cost of this 

emergency intervention will be about one-fifth that of the savings 

and loan bailout, which is a very interesting comparison. 

33 

Now, the question I had, there had been recent stories in the 

press about the toxic assets and whether or not they have actually 

cleared. And so my question to you is, at the time that the Basel 

requirements actually take hold—first off, are these continuing to 

do damage on the balance sheets of financial firms and will that 

damage largely have cleared by the time the Basel stuff kicks in? 

Secretary GEITHNER. I do not believe—let me say it in the affirmative way. Because of what we did in the early stage of 2009, the 

major U.S. banks that account for a substantial fraction of banking 

assets in the country now hold very, very substantial levels of capital against the risks that they retain on their balance sheet. So I 

do not believe that those potential losses now are a material source 

of risk to the recovery or the stability of those institutions, and 

that is a remarkably important accomplishment. 

Now, it is still true that community banks across the country 

that got themselves exposed to commercial real estate are still facing really tough, tough problems, and they have a long way to go 

to work through that. And for some of them it is harder to raise 

capital, again, which is one of the reasons why this small business 

lending program is so important. 

Mr. FOSTER. In regards to Basel, are there requirements in the 

pipeline having to do with institutionalized stress tests, standards 

for risk management treatment of sovereign debt risk in the standards? 

Secretary GEITHNER. It is our view—and I am not sure I can 

speak with the right degree of precision about what the law requires and what the consensus in Basel is at this stage, but I think 

it is very important for supervisors around the world on a regular 

basis to conduct stress tests that try to capture the potential risk 

of loss that banks might face in the future recession, and that is 

a very good test over time about whether the capital requirements 

that are in place are actually delivering enough capital over time. 

So I am very much in favor of that and will work to make sure we 

do that on a regular basis going forward. 

Mr. FOSTER. They must be standardized. If they end up being 

what drives the capital structure of these large financial firms, 

they are as important as the basic Basel formulas. 

Secretary GEITHNER. They should be standardized in the sense 

that they need to capture a crisis with the same level of severity 

and loss. In that sense, I totally agree with you. 

Mr. FOSTER. And can you say a little bit about the state of play 

of contingent capital a little more? 

Secretary GEITHNER. I would say it this way, which is there is 

still tremendous appeal to us in designing a form of continuing capital that would, again, make the overall banking system less prone 

to periods of mania, euphoria, and less prone to panics and the 

trend-amplifying margin spiral dynamics and deleveraging you see 

in a crisis. We are looking at and there is a group of experts in the 

United States and around the world that are looking at a whole 

range of ideas of how to design those instruments in ways that 

would work. 

And you have thought a lot about this, and I respect very much 

your views on this and happy to talk about in more detail elsewhere, but the problem we find is how you design it in a way that 

34 

would be real, really available in a crisis, not be punitively expensive, and not come with the risk that you have to require the uncertain judgment of officials, bureaucrats, around the world to trigger their— 

Now there are ways around those problems, but we haven’t 

found the perfect thing yet. 

Mr. FOSTER. Thank you. I yield back. 

Ms. WATERS. [presiding] Mr. Lance. 

Mr. LANCE. Thank you, Madam Chairwoman. 

Good afternoon, Mr. Secretary. 

You have certainly given us your position, Mr. Secretary, on the 

tax cuts. My position is that they should be extended for all tax 

brackets. I believe we agree, however, that certainty is required. 

Mr. Hensarling has raised this, Mr. Castle, and I raise it again. 

In the Administration’s judgment, when should we engage in certainty on the tax cut issue? In other words, should we do that now 

while we are still in session or should we wait until after the election to the lame duck session of Congress? 

Secretary GEITHNER. That is really a question for the leadership 

on both the Democratic and Republican side. 

Mr. LANCE. And I think it is a question of the Administration. 

Does the President, and do you as Secretary of the Treasury, have 

a position on that? 

Secretary GEITHNER. My view, as I said many times, and the 

President said this, that since there is very broad agreement on the 

merits of extending the middle-class tax cuts that, again, go to 98 

percent of working Americans and small businesses, that why not 

act to extend those as soon as we can. And we can still have a debate about what to do about the rest of them, but why hold those 

hostage to the debate we have to have, again, on whether it makes 

sense for us to go out and borrow $700 billion to add to our deficit 

to extend those high-income tax cuts? 

Mr. LANCE. So could you be a little more definite in what you believe the time period should be? 

Secretary GEITHNER. Not on the legislative question. Again, that 

is a question where the leadership of both Houses on both sides 

would have to come to a judgment. 

Mr. LANCE. Regarding your indication of your belief of borrowing $700 billion for the top two brackets, what percentage of income is 

that? You indicate 2 or 3 percent of taxpayers. What percentage of 

total income is that? 

Secretary GEITHNER. Obviously, it is a larger share of total income. But the right way to think about it economically I think is 

to look at the overall effects on the economy relative to GDP of extending them. And I think there are— 

Mr. LANCE. What percentage of income is it, do you know? 

Secretary GEITHNER. It would be a very small fraction of GDP, 

which is overall national income. But I think the right way to think 

about it, if I could say, is that I think it is very hard to find an 

economist that would argue that if the economy needs more support and we are a country with not infinite resources that that is 

the best use— 

Mr. LANCE. Mr. Orszag, your former colleague, has indicated he 

favors extending all of the tax cuts for 2 years. 

35 

Secretary GEITHNER. First of all, I can’t—I won’t speak to his 

opinion. But our view is that the best thing to do for the country 

is to extend those tax cuts for middle-class Americans and small 

businesses as quickly as we can. And if we believe the economy 

needs additional reinforcement, as we do, then let’s find a way to 

give additional incentives to businesses to invest here in the United 

States. Let’s do that as soon as we can. 

Mr. LANCE. Thank you. 

Madam Chairwoman, is it permissible for me to place in the 

record the op-ed piece of Mr. Orszag that was in the New York 

Times on this issue? 

Ms. WATERS. Without objection, it is so ordered. 

Mr. LANCE. Thank you. 

In another area, Mr. Secretary, Professor Warren has been 

named an Assistant to the President. I understand that. Is she 

technically a person who is on the staff of the White House or on 

your staff, Mr. Secretary, or on the staff of both the White House 

and the Department of the Treasury? 

Secretary GEITHNER. She is an advisor to the Secretary of the 

Treasury. Her office is in the Treasury. But she is also—has the 

additional title as Assistant to the President. 

Mr. LANCE. So, sir, does she report to you or to the President or 

to both of you? 

Secretary GEITHNER. As the dual title implies, and as the President made clear, she reports to the Secretary of the Treasury and 

the President of the United States. 

Mr. LANCE. And do you favor an early appointment of a Director 

so that appointment might go appropriately before the Senate? 

Secretary GEITHNER. I do and it will. 

Mr. LANCE. And could you define with a little greater precision 

what your definition of ‘‘early’’ might be? 

Secretary GEITHNER. Early in the sense that I think it is the best 

interest of getting this agency up and running to have a confirmed 

Director in place as soon as we can. 

Mr. LANCE. During this session of Congress or would it be in the 

next session of Congress? 

Secretary GEITHNER. Again, that is sort of a question for the 

leadership. But, as I said, I think early would be good. 

Mr. LANCE. I think it is a question for the President and the Administration, since it is the President who has the constitutional 

responsibility to appoint the Director. 

Secretary GEITHNER. He does, and he will meet that responsibility. 

Mr. LANCE. At an early date? 

Secretary GEITHNER. At an early date. 

Mr. LANCE. Thank you. 

Madam Chairwoman, I yield back the balance of my time. 

Ms. WATERS. Thank you very much. 

Mr. Watt. 

Mr. WATT. Thank you, Madam Chairwoman. 

Thank you for being here. I am sorry I didn’t have the benefit 

of your testimony or the prior questions. 

Is there still a shadow banking system out there that we need 

to be concerned about that is still not appropriately regulated? 

36 

Secretary GEITHNER. It is a shadow of its former self, but yes, 

there are still institutions that are not legally banks that operate 

in the credit markets, financial markets, and play a significant 

role. And part of one of the most important initial tasks we have 

under the Dodd-Frank bill is to designate what universe of institutions should be subject to the capital requirements we are discussing in this hearing today. 

Mr. WATT. So that shadow banking system will continue in place 

until we get those rules in place, is that what you are saying? 

Secretary GEITHNER. Yes. One of the most important provisions 

of this bill is it gives us the authority for the first time to make 

sure that for institutions that play a critical role in our financial 

system, whatever you call them, banks or nonbanks or investment 

banks, that they come into a common framework of rules on leverage so we protect the system from their risks. 

Mr. WATT. I think I am driving at a slightly different issue that 

some of the minority members of this committee, racial minority 

members of the committee tried to raise this. There are some shadow institutions in our communities that have a profound impact on 

what is going on in our communities that don’t have a systemic impact on the system. Those are the ones that I am asking the question about. Have we done enough in this bill to rein in or regulate 

those institutions that don’t necessarily have systemic risk to bring 

down the whole system but still prey on communities, prey on consumers, who really have very few options for credit or transfer of 

money in, at least they perceive, in the regular banking system? 

Secretary GEITHNER. Apologies for misunderstanding your question. 

Absolutely. What the bill does is give us the authority for the 

first time to make sure that basic protections consumers need to 

borrow responsibly are extended not just to banks but to consumer 

finance companies or mortgage brokers to pay the lenders. 

Mr. WATT. Now, who will have the primary responsibility for 

that? Will that be the Consumer Financial Protection Bureau or 

some other agency? 

Secretary GEITHNER. The Consumer Financial Protection Bureau 

will be the single Federal entity charged with that responsibility. 

But their work will have to be reinforced at the State level by the 

State authorities whom we expect have to play a key role in enforcing these rules on a range of, let’s call them, consumer credit finance companies. 

Mr. WATT. So with respect to those kinds of entities, you envision 

that the Consumer Financial Protection Bureau will be playing the 

same kind of regulatory role that the other regulators are playing 

with respect to the traditionally regulated institutions. Is that 

what you are saying? 

Secretary GEITHNER. Yes. And, actually, the way the division of 

labor in the bill is designed is for the large banks in the country 

and for the nonbank institutions you are referring to—the Consumer Protection Agency will have the primary enforcement authority. For small banks— 

Mr. WATT. Let me ask one more question. Is there the risk of a 

shadow banking system internationally, and how will that be regulated? 

37 

Secretary GEITHNER. There is always a risk that countries will 

seek to build a financial business by attracting business with the 

promise of lower standards. And we will have to work very hard 

to reduce their opportunities to do that like we do in the tax area, 

like we have done, as the chairman referred to initially, in the 

broad area of terrorism finance, and we are going to have to do it 

in the financial area as well. 

Mr. WATT. Is Basel focused on that at all? 

Secretary GEITHNER. Absolutely. And the Basel Committee has 

around the table countries that represent, I think, more than 85 

percent of GDP around the world. That still leaves some people 

outside that process, but we want to extend the rules to them as 

well. 

Mr. WATT. Thank you. 

Ms. WATERS. Thank you. 

Mr. Paulsen. 

Mr. PAULSEN. Thank you. Mr. Secretary, I want to touch on two 

subjects. First, we have had a lot of discussion about taxes and jobs 

and getting the economy back. But can I just touch quickly on the 

free trade agreements? The President has made it his goal to double exports in the next 5 years, and in light of that goal, can you 

explain a little more forcefully why the Administration hasn’t encouraged at least more forcefully the majority party here to act on 

some of the pending free trade agreements that we have right now 

that will increase exports and produce jobs? I know there has been 

some progress on South Korea, but Europe has moved in the direction now and has already come to an agreement with South Korea. 

I am just wondering, sir, when will this hurdle actually move forward? 

Secretary GEITHNER. I agree with you, and the President agrees 

with you, that one of the most important things we can do to expand exports and increase jobs in this country is to make sure we 

are playing a major role in those growing markets. And, as you 

know, the President, in June, committed to bring to conclusion the 

free trade agreement with Korea so that he can present it to the 

Congress, we hope, by the end of this year. And to make that possible, of course, we have to demonstrate this is an agreement that 

is a good deal for Americans; and we need to find a way to get 

enough support in this body and in the Congress that we can actually pass it. But it is very important to us as a country that we 

don’t leave those markets to our competitors. 

Mr. PAULSEN. So it would be your opinion, Mr. Secretary, that 

the ratification of those pending agreements would create jobs and 

would help? 

Secretary GEITHNER. Can I say it slightly differently? We have 

to make sure that we have agreements in place that provide a good 

deal for American businesses and American workers. So where we 

have strong agreements that meet that test it will be very important to us to make them law. 

Mr. PAULSEN. I want to follow back up, because—the Basel discussion earlier on the capital standards, I want to ask a question 

just about capital formation. The financial reform bill that is now 

law changed the net worth test for meeting the accredited investor 

standard. I am just wondering, did you support those changes? Do 

38 

you believe that altering the accredited investor standard will impact the ability now of entrepreneurs to raise capital and take their 

companies public, some of those standard changes? 

Secretary GEITHNER. You are testing my memory of the origin of 

that provision, and I will be happy to look at it in more detail and 

get back to you. 

But my general view—and I think it is supported by how the 

broader financial markets and the investment community had reacted to this bill—is that this will provide a better system for companies to go raise capital and a better system—a better way for us 

to make sure that the entrepreneurs in the future, businesses in 

the future, can go out and raise capital at attractive terms. 

Mr. PAULSEN. I just spent some time talking with some of these 

folks who do this private investing; and they include the assets of 

their home, etc., as a part of meeting the accredited investor standard. And with the changes that have occurred there is a concern 

that they are not going to have the liquidity to actually provide— 

and they have invested in companies. They have helped create 

companies that have actually provided job growth. And that is, 

again, part of that uncertainty equation out there, which is why I 

raise that. 

Secretary GEITHNER. I would be happy again to ask my colleagues to take a closer look at the potential impacts of that provision. Because I think we share the same objective, which is we 

want to make sure that—we want to make our system more stable, 

because we saw how devastating it is when it is not. But we also 

want to make sure that it goes back to the business of providing 

ability for people to raise capital on appropriate terms. 

Mr. PAULSEN. And without that access to capital, of course, business slows. Without a regulatory certainty, capital disappears. 

I guess in November of this year, I think it is November 18th, 

the SEC is going to convene some sort of a gathering of a 2010 government finance forum on small business capital formation. And in 

advance of that meeting can you tell us or describe whether you believe that a small company should be subject to the same regulatory demands that a Fortune 500 company, for instance, might 

be required to shoulder as a part of the discussion that could take 

place? 

Secretary GEITHNER. Can I answer slightly differently? But I 

would be happy to come back to the broader question. 

I believe that small banks should not be subjected to the same 

basic standards that are necessary for the large systemic institutions; and what we propose is a much tougher set of rules on the 

large institutions, tough enough that they will be more stable but 

still competitive but a lower standard of protections for small 

banks. 

Mr. PAULSEN. Thank you, Mr. Secretary. Thank you, Madam 

Chairwoman. 

Ms. WATERS. Thank you. 

Mr. Royce, let me just say, the Secretary has to leave—we promised that he can leave about 4:00, so let’s see what we can do to 

help him. 

Mr. ROYCE. Thank you, Madam Chairwoman. 

39 

I want to go back just for a minute to my colleague’s opening argument there about the light bulb. The government didn’t invent 

the light bulb. The private sector did. It was the government’s job 

to protect the patent for the light bulb, and back when it was invented, our government did that pretty effectively. But today, I 

don’t think our government would protect that patent from being 

duplicated in China; and that is a huge problem. 

But, on top of it, back when the private sector was as robust as 

it was and we hadn’t had the growth of government as we have, 

we had a very different situation than we have today with the massive, massive increase in the size and scope of government with the 

corresponding shrinking of the private sector. And I don’t think it 

is a particularly enlightened position. I think it is going to leave 

us in the dark. 

I wanted to ask you because from the standpoint of us being the 

tax collector for the welfare state, do you think it is logical—the 

comments you made, I think not increasing taxes would be treated 

the same as government expenditures, all right, under your assumption. Not increasing taxes is the same as government expenditures. Human reaction is not going to be the same. If you increase 

tax assessments on people to 100 percent, would you get 100 percent of that revenue, do you think. 

Secretary GEITHNER. Congressman, it is a very complicated set 

of issues and I know we are not going to agree on them completely, 

but I would just start with the following: We do not believe that 

governments create jobs. Businesses create jobs, and our job as policymakers, people involved in governing, our job is to make sure 

that we are providing better incentives for businesses to invest 

here at home and create jobs here in the United States. 

Mr. ROYCE. That is right, and one of those issues is tax rates. 

If we have tax rates, remember, there are taxes on income at the 

State level and Federal level. If you hike that up over 50 percent, 

the idea that you are going to get 50 percent, the economic studies 

I have seen show that maybe the maximum—because when you set 

the tax rates at 28 percent, maybe about there is when people give 

it their all in terms of their overtime, in terms what they are willing to risk, in terms of how much they put on the table, in terms 

of not seeing the tax avoidance issues and you collect more. 

But you get up—you hike that rate up over 50 percent as we are 

going to do next year between the combined State and Federal tax 

rates, and all of the sudden you diminish the amount of the take. 

So I just don’t buy into your basic thesis that automatically you are 

going to be able to hike those rates up and see that kind of income. 

I think it is going to be a lug on the economic engine. 

But another concern I had that I wanted to ask about quickly 

was, Basel III treats many high risk sovereigns as essentially risk 

free, and I would just ask you, do you think that Italian debt really 

is risk free? We had the same problem under Basel II with Fannie 

Mae and Freddie Mac, right? It was treated basically as risk free. 

It did not turn out that way, and it certainly helped collapse those 

financial institutions. So I would ask you your opinion on that. 

Secretary GEITHNER. I am going to start with the tax question. 

Mr. ROYCE. Yes. 

40 

Secretary GEITHNER. I just offer two things in response. Obviously, since we can’t do everything, we have to balance two basic 

objectives. We want to have the best incentives for growth and investment in the United States by businesses, by individuals, and 

we have to find a way to do it in a way that is fiscally responsible. 

And if we agree—and I think we do—that our challenge now is 

to find ways to give more reinforcement to economic growth and investment in the United States, then we should have a debate about 

how to do that. Again, our judgment is the most responsible way 

to do that and the biggest, most powerful return for those dollars 

is to give businesses more incentives to expand investment, not extend the tax cuts that are set to expire for just that top 2 percent 

of Americans. 

But one observation is, of course, marginal tax rates matter for 

incentives—you are absolutely right—but we have a good experience to look to about the effects of those. And for the period I was 

last in Treasury, in the late 1990’s, when those tax rates were in 

place at roughly that same level, we had the best record of private 

investment, the best record of productivity growth, the broadest big 

gains in income, and we had a remarkable improvement in our fiscal position. 

So I believe— 

Mr. ROYCE. Even in a recession, you believe in hiking the taxes? 

Oh, I get it. I get it. But let’s go to that last question. 

Do you think that Italian debt is risk free, because under Basel 

III, that is the assumption. That has to be a problem. 

Secretary GEITHNER. That is a very important question, and I respect your concern about this, but again, what this— 

Ms. WATERS. We are going to have to move on to Mr. Campbell, 

please, so that we can get the Secretary out. 

Mr. ROYCE. For the record, I am going to ask on another issue, 

on EU regulations regarding alternative investment firms, I am 

going to ask for some response but you have already been involved 

in this. 

Secretary GEITHNER. Let me say quickly that this new Basel 

agreement does a much better job of making sure banks hold more 

risk against products that have risk regardless of what their rating 

is, and that is very important to us. 

Mr. ROYCE. Thank you. 

Ms. WATERS. Mr. Campbell. 

Mr. CAMPBELL. Thank you, Madam Chairwoman. 

Mr. Secretary, I just have one question for you. There are several 

of us—a bunch of us actually on this committee who are perplexed 

as to why, given the current interest rate environment, Fannie and 

Freddie were not selling off some of that portfolio, 106 and 107 

cents on the dollar, reducing the taxpayers’ exposure, investment, 

etc. 

So we wrote a letter to the Director of FHFA, and in the letter, 

in part, he says, and I will read just one sentence: ‘‘Other than a 

few limited exceptions, any Enterprise sale of assets not considered 

ordinary course of business require Treasury consent.’’ Essentially 

kicking the football to the Treasury, I think, on this. 

41 

So I would like to ask you, are you in favor of Fannie and 

Freddie doing that or against it, and what is the reason for either 

position? 

Secretary GEITHNER. To do justice to this, I probably should respond to you in writing, but I will say the following to you. 

Mr. CAMPBELL. I will be happy to address it to you in writing. 

Secretary GEITHNER. I hate to invite letters. It is very important 

to us that we do everything we can to reduce the ultimate losses 

we are going to face because of the decisions that were made before 

conservatorship. The basic businesses, beginning today, we believe 

by any reasonable calculation are going to be very profitable ongoing businesses for the institution, but we will keep looking at ways 

to make sure we are managing those investments in a way that 

maximizes the ultimate return to the taxpayer. Beyond that, I 

don’t want to say more in public on it, but I will be happy to try 

to do it carefully in writing. 

Mr. CAMPBELL. Thank you, Mr. Secretary. I yield back. 

The CHAIRMAN. The gentleman from New Jersey, I guess, is up. 

Mr. GARRETT. You guessed right. So very quickly, on AIFMD, the 

Alternative Investment Fund Management Directive, my understanding is that they have set up some or at least proposed some 

proposals that would be protectionist— 

Secretary GEITHNER. This is the European directorate? 

Mr. GARRETT. Yes. And I also understand some of them are illinformed from our perspective. I also understand that you wrote to 

the Commissioner on this a few months back, and I think you also 

wrote back in March of this year, to express our concern. So a few 

quick questions on this: what has the response been then; are you 

still concerned; and are you committed to make sure that U.S. 

firms have as complete and open access as we are providing to foreign firms? 

Secretary GEITHNER. Yes, we are concerned, and yes, we are committed to achieving that outcome. And I guess my basic sense, Congressman, is that they have listened to our concerns. They have acknowledged them. They have moved in some ways, but I do not believe we have solved this to our satisfaction yet. 

Mr. GARRETT. But you are still— 

Secretary GEITHNER. We are on it. 

Mr. GARRETT. Also out of the Commission last week is proposed 

legislation on regulation of the derivatives market. My understanding there is they are doing it differently than we are doing 

it. They will not subject the end users to clearing and margin requirements as we see in the Frank-Dodd bill. So couple of questions there, and also I understand some of our regulators here are 

considering subjecting some end users to, as I call them, bank-like 

regulation with respect to derivatives that are put in place, as we 

call it, to manage their risk. 

So very quickly, since there is a limited time here, do you believe 

that our regulators over here have that authority that we hear that 

they are considering to put in place? And would that be in contravention, if they are, to what that letter from Dodd and Lincoln 

after the final bill went through, you may recall, expressing the 

concerns in that area? I will have a quick question on that to follow 

up. 

42 

Secretary GEITHNER. I will tell you what my sense is. It it is not 

clear what the Europeans are going to do yet. I think they have 

moved very, very close to the broad outlines of what is in the DoddFrank bill on derivatives, and we are going to work very hard to 

make sure that those regimes are as close in design as possible for 

the obvious reasons that we don’t want to just see this stuff migrate over there. 

Mr. GARRETT. Right. 

Secretary GEITHNER. So we have a team of people at the Federal 

Reserve, the SEC, and the CFTC that are not just working on designing our regs but are working with their counterparts to try to 

make sure that these different oversight frameworks are as closely 

aligned as possible. 

Mr. GARRETT. And if that doesn’t happen to the extent you are 

satisfied with, does that put us then at a competitive disadvantage? 

And the other question also I previously asked was with regard to, 

do you believe that our regulators here have the authority in essence to put margin requirements on all end users? 

Secretary GEITHNER. I want to respond to that specific question 

in writing because I want to make sure I do it carefully, and it is 

a very complicated question. 

On this first question, if we end up with a system where it puts 

our firms at a disadvantage, how can we reduce that risk, I am actually very confident we can reduce that risk. But we are not at 

the point yet where we know with confidence how it is going to 

come out, but we are very focused on it, and it is very important 

to us again that these things are as closely aligned as possible because again we just don’t want to create a new arbitrage opportunity for people to evade the tougher rules here. 

Mr. GARRETT. Seeing I have time left, going back to the issue 

with CFCB and Elizabeth Warren, I think what we heard here in 

this committee, oddly enough during the creation of the bill and the 

CFCB, that constitutional evasion was part and parcel of the drafting of the bill. By that, I mean the chairman said we understood 

this thing would not be set up—confirmation would not be done for 

some time, and so therefore, his comment was made we want to 

make sure that it would function before the Senate made those appointments, which I think might be just trying to skirt the issue. 

The CHAIRMAN. Would the gentleman yield? 

Mr. GARRETT. Sure. 

The CHAIRMAN. That was the ranking member who said the Senate made these appointments. The Senate does not make appointments. But I never said before the Senate made the appointments. 

Mr. GARRETT. Reclaiming my time, what the chairman did say 

was you want to have this function before the appointments are approved by the Senate, which basically as I said is, in essence, trying to evade the constitutional requirements which seem to be part 

and parcel of the discussion in crafting of the bill. 

But specifically, as to where we are right now, you talked about 

executive privilege and you talked about Ms. Warren being compelled to testify. Thank you for that. Does she have to comply with 

the Administrative Procedures Act? 

Secretary GEITHNER. I will talk to our lawyers about that, but I 

guess my basic sense is, of course, but I am not a lawyer. 

43 

Mr. GARRETT. Get back to me? Is her appointment right now to 

both positions a violation of the Vacancies Act, to have someone 

running the CFCB without nominating them and subjecting them 

to Senate confirmation? 

Secretary GEITHNER. I do not believe so, but again, I would be 

happy to respond to that in writing. But maybe I could respond, 

Mr. Chairman, just more generally on this. 

The law, carefully crafted, I know there is a lot of concern about 

it, but carefully crafted, gives us a set of authorities for trying to 

improve consumer protection. We don’t have authorities Congress 

didn’t give us. We will use those authorities carefully, but it is important to recognize that most of that consolidation of authority 

only happens when there is a transfer date established, which we 

have now set for next July, and the additional authorities that 

don’t come then only come when there is a confirmed Director in 

place. So it is substantially in our interest and I think in the interest of the Congress for us to have a confirmed Director in place as 

soon as we can, but of course we can only nominate and we need 

the consent of the Senate for that to happen. 

The CHAIRMAN. The gentleman’s time has expired. The gentleman from Florida. 

Mr. POSEY. Thank you, Mr. Chairman. Thank you for coming, 

Mr. Secretary. 

When we had the regulators in here, we asked them about common sense without forbearance, and they were all about that, but 

what they told us and what is going on in Florida right now are 

not the same. Regulators will mark down a performing loan because they don’t think you should be able to make it. The evidence 

of a performing loan used to be whether or not it is performing. 

Now it is whether or not in the examiner’s wildest imagination it 

shouldn’t be performing. I hope you can have some input on that 

in your position. 

Secretary GEITHNER. I would like nothing better. Let me just to 

say to you that I agree it is still a problem. It is a hard problem 

to fix because people’s tendency is to overreact in a crisis like this 

because they want to be careful, but if they overdo it, it is a problem. 

Mr. POSEY. One question I have is whether or not you agree with 

academics who claim the recession is over. 

Secretary GEITHNER. I am not an economist, and I am not an 

academic, and I would just say the following: This is still a very 

tough economy. Absolutely. 

Mr. POSEY. I know, but you are supposed to be the smartest guy 

in the Nation on that subject. 

Secretary GEITHNER. Not a chance. 

Mr. POSEY. And if you don’t know, nobody knows. Do you think 

we have bottomed out? Do you think the recession is over? 

Secretary GEITHNER. I would say the following, which is the best 

measures we have of how the economy is performing today tell the 

following story. We have now been growing, the economy has been 

growing, incomes have been growing now for more than 12 months. 

The private sector, not the government, the private sector has been 

creating jobs. 

44 

Mr. POSEY. Please just tell me yes or no, to the best of your 

knowledge, swag it, don’t be afraid. Just say, I think it is over or 

I don’t think it is over. That is all I want to know. 

Secretary GEITHNER. I am very confident, absolutely very confident, that this economy is on a path to a gradual steady improvement in economic growth that will— 

Mr. POSEY. I think we all are. If we don’t bust, we will recover 

in a year, 2 years, 3 years, 4 years, 5 years— 

Secretary GEITHNER. You are asking me— 

The CHAIRMAN. It is the gentleman’s time. If he wants to talk, 

he can talk. The Chair will listen. The gentleman may talk. 

Mr. POSEY. Thank you, Mr. Chairman. I was just hoping that 

you would shock a bunch of people and man up and say yes or no. 

Secretary GEITHNER. I just don’t—I just think the question about 

what economists think about recessions is— 

Mr. POSEY. Forget what economists think. I want to know what 

you think. I know what the retired people in my district think. I 

know what the working people in my district think. I know what 

the husbands and wives, what they think, but I want to know what 

you think. You are the Secretary of the Treasury. Do you think we 

are out of the recession? Do you agree with the academics or not? 

Secretary GEITHNER. I think we are in agreement, Congressman, 

that this is still a very tough economy, and we are still living with 

the deep scars caused by this crisis, absolutely, and we have a lot 

of work to do to repair that damage. I think we are agreeing, not 

disagreeing. 

Mr. POSEY. It is just such incredible effort just to get a yes or 

no out of anybody in Washington. I think that is what frustrates 

the public, that is what makes the public distrust us more. Again, 

you are the highest authority in the land on this right now, and 

I just asked you what time it is, and you want to describe a clock. 

Just say, yes, I think we are out of it, I agree with the academics; 

or no, I don’t think we are out of it. 

Secretary GEITHNER. We are absolutely out of the worst stage, 

worst, most gravest, most severe, most at risk point of this crisis, 

absolutely, absolutely. 

Mr. POSEY. We are getting warmer. Go ahead, Mr. Chairman. 

The CHAIRMAN. Would the gentleman yield? I just want to say 

I obviously took the gentleman’s time and I will give him extra 

time. But I am disappointed that you would pursue it in that fashion. The gentleman from Texas asked some questions and we had 

some thoughtful debate. I would hope that we could have a serious 

economic discussion, not play ‘‘gotcha.’’ 

The gentleman can have extra time if he wants to respond. 

Mr. POSEY. This isn’t a ‘‘gotcha,’’ Mr. Chairman. I get asked by 

my people back home every day, when are we going to get out of 

the recession; what do you think about the recession? I am asking 

the person that I think would be the foremost authority— 

The CHAIRMAN. He is trying to give you a thoughtful answer. If 

you didn’t like the answer, that is one thing, but he wasn’t evading 

the question. 

Mr. POSEY. Listen, if I ask you a question that is a yes or no 

question, and you want to dance and just say—the honest approach 

is to say, ‘‘I am going to refuse to answer the question.’’ 

45 

The CHAIRMAN. If the gentleman would yield, what if they say 

that is not a very thoughtful question; that is a question which 

takes categories that I don’t think are realistic and that excludes 

the ability to give a good answer. The National Bureau of Economic 

Research is a private group; it is not the government. If the gentleman has a quarrel with them, he ought to write them a letter. 

Mr. POSEY. They have an opinion, I have an opinion, I am sure 

you have an opinion. I was just wondering what the Secretary’s 

opinion is. There is nothing diabolical, sinful, mean, evil, wicked, 

nasty, partisan about that. I just wonder if he personally believes, 

like the academics do, that the recession is over or if he doesn’t 

agree with the academics, that it is not over. This is supposed to 

be the smartest guy in the world and he is not answering a simple 

question. 

The CHAIRMAN. If the gentleman would yield, that is kind of an 

interesting concept. It is an insult by excessive compliment. The 

Secretary has never claimed that. The gentleman can have as 

much time as he wants, but I am disappointed that he takes that 

tone. He has never claimed that. He is a very thoughtful guy, but 

that kind of denigration by hyper compliment I don’t think advances the discussion. 

Mr. POSEY. Mr. Chairman, it is not a hyper compliment. It is sincere. My question is sincere. There is no ulterior motive. 

The CHAIRMAN. Does the gentleman sincerely believes he is the 

smartest man in the world? 

Mr. POSEY. I beg your pardon? 

The CHAIRMAN. Does the gentleman sincerely believe that the 

Secretary of the Treasury is the smartest man in the world? 

Mr. POSEY. On this subject. 

The CHAIRMAN. Oh, you didn’t say that. 

Mr. POSEY. On this subject, I sure hope he is. 

The CHAIRMAN. But see, that is the problem with yes and no. On 

this subject, I didn’t get a yes and no when I asked you— 

Mr. POSEY. How about that, yes. 

The CHAIRMAN. I asked you if you believed he was the smartest 

man in the world and you didn’t give me a yes or no. You said on 

this subject. 

Mr. POSEY. I will tell you yes, right now. He is the second smartest man in the world. You have to be the smartest. 

The CHAIRMAN. No, I would say I might have been, but not after 

engaging in this conversation. No one would think I was very 

bright. Time has expired. The hearing is over. 

[Whereupon, at 4:20 p.m., the hearing was adjourned.] 

(47) 

A P P E N D I X 

September 22, 2010 

48 


62680.001
49 


62680.002
50 


62680.003
51 


62680.004
52 


62680.005
53 


62680.006
54 


62680.007
55 


62680.008
56 


62680.009
57 


62680.010
58 


62680.011
59 


62680.012