U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

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

91–150 PDF 2015

THE ANNUAL REPORT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JUNE 24, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–86 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

STEVEN HORSFORD, Nevada 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

June 24, 2014 .................................................................................................... 1 

Appendix: 

June 24, 2014 .................................................................................................... 61 

WITNESSES 

TUESDAY, JUNE 24, 2014 

Lew, Hon. Jacob J., Secretary, U.S. Department of the Treasury ...................... 7 

APPENDIX 

Prepared statements: 

Lew, Hon. Jacob J. ........................................................................................... 62 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Lew, Hon. Jacob J.: 

2014 Annual Report of the Financial Stability Oversight Council ............... 81 

Written responses to questions submitted by Chairman Hensarling .......... 228 

Written responses to questions submitted by Representative Huizenga ..... 250 

Written responses to questions submitted by Representative Hurt ............. 253 

Written responses to questions submitted by Representative Luetkemeyer ............................................................................................................. 255 

Written responses to questions submitted by Representative Stivers ......... 256 

(1) 

THE ANNUAL REPORT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL 

Tuesday, June 24, 2014 

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

The committee met, pursuant to notice, at 10 a.m., in room 2128, 

Rayburn House Office Building, Hon. Jeb Hensarling [chairman of 

the committee] presiding. 

Members present: Representatives Hensarling, Bachus, Royce, 

Capito, Garrett, Neugebauer, McHenry, Bachmann, Pearce, Posey, 

Westmoreland, Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, 

Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, 

Cotton, Rothfus, Messer; Waters, Maloney, Sherman, Capuano, 

Hinojosa, McCarthy of New York, Lynch, Scott, Green, Cleaver, 

Moore, Perlmutter, Himes, Peters, Carney, Sewell, Foster, Kildee, 

Sinema, Beatty, Heck, and Horsford. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

This hearing is for the purpose of receiving the annual report of 

the Financial Stability Oversight Council (FSOC) to be presented 

by the Honorable Jacob J. Lew, Secretary of the Treasury and 

Chairman of the Financial Stability Oversight Council. 

I now recognize myself for 5 minutes to give an opening statement. 

Beginning this morning, we welcome back Secretary Lew to discuss FSOC, but before we do discuss FSOC, I would be remiss if 

I did not bring up the continuing scandal at the Internal Revenue 

Service, an agency that is part of Treasury. Mr. Secretary, 13 

months ago you appeared before us and said, ‘‘My highest priority 

is to restore confidence in the IRS.’’ I think we know, Mr. Secretary, both of us, that has not yet occurred. 

Back then President Obama said of the IRS scandal, ‘‘The misconduct is inexcusable, and Americans are right to be angry about 

it, and I am angry about it.’’ He said his Administration would cooperate with Congress to uncover the truth. That is what he said, 

but regrettably, that is not what has happened. 

In just the last few days, we have learned the Administration 

has known since at least February that years’ worth of IRS emails 

of eight IRS employees at the epicenter of the scandal have simply 

vanished. How terribly convenient for the Administration, but how 

inconvenient for the American people who expect equal protection 

under the law. 

2 

The American people, regrettably but understandably, are becoming increasingly cynical and fearful of their government. There 

is a growing resentment of one set of rules for Washington and another set of rules for everyone else. In other words, no one believes 

that simply saying, ‘‘Sorry, I have lost my emails,’’ is an excuse the 

IRS would accept from a taxpayer being put through a torturous 

audit. 

Mr. Secretary, I trust you agree that the American people deserve better, and it is past time for openness and transparency 

from this Administration, which you told this committee 13 months 

ago was your highest priority. It is also past time for openness and 

transparency at FSOC, which you chair, Mr. Secretary. While you 

and other Administration officials habitually cite the purported 

dangers of financial stability posed by the shadow banking system, 

you ignore those presented by the shadow regulatory system of 

which FSOC is front and center. 

Indeed, with the exception of agencies dealing in classified information related to national security, FSOC may very well be the 

Nation’s least transparent Federal entity. The public cannot view 

their proceedings because two-thirds of those proceedings were conducted in private executive sessions. And when the minutes are 

produced, on average they weigh in at a mere 5 pages long, with 

half of the pages devoted to memorializing attendees’ names and 

resolutions considered. 

Better Markets, a public interest group that consistently advocates for more regulation of our financial sector, has stated, ‘‘The 

FSOC’s proceedings make the Politburo look open by comparison. 

No one in America even knows who they are. At the few open 

meetings they have, they snap their fingers, and it is over, and 

they are all scripted. They treat their information as it were state 

secrets.’’ 

To begin to remedy this sad situation is one of the reasons this 

committee has ordered H.R. 4387, the FSOC Transparency and Accountability Act, favorably reported to the House. The reason 

transparency and accountability are so important is because FSOC 

can designate practically any large financial firm in our Nation as 

a systemically important financial institution, a SIFI, and thus 

render effective control over it. Thus, it has the ability to render 

great damage to our economy and set back the dreams of tens of 

millions of our unemployed and underemployed Americans who are 

counting on their capital markets to work for them. 

Recently Douglas Holtz-Eakin, the former Director of the CBO, 

has estimated that designating asset managers as SIFIs could cost 

investors as much as 25 percent of their return on their investments over the long term, or approximately $108,000 per investor. 

In other words, as it operates in the shadows, FSOC can take away 

the seed capital necessary to launch a small business or to send a 

child to college. That is both unfair and unwise. 

And while FSOC seems dead set on trying to find systemic risk 

where no one else seems to find it, a review of their latest report 

indicates that they are willfully blind to the largest sources of systemic risk, with hardly a mention of Fannie Mae or Freddie Mac, 

who were at the epicenter of the last financial crisis, and without 

the leadership of the Administration to end permanent taxpayer 

3 

subsidies, they are certain to be at the center of the next financial 

crisis. 

There has been no mention of the Federal Government itself, 

which is $17 trillion in debt and growing, with more debt incurred 

under this Administration than in our Nation’s first 200 years. Our 

offices are all awash. The CBO and independent reports say the 

pace of spending is unsustainable, but rather than rein in government spending or prioritize interest payments on the debt, the Administration regrettably turns a blind eye and has even threatened 

to allow default on our sovereign debt. 

This committee has also passed H.R. 4881, to place a 1-year moratorium on further designations of nonbank SIFIs. Again, Mr. Secretary, I would call on FSOC to cease and desist with these designations so Congress can have time to conduct effective oversight 

and get answers to questions that both Republicans and Democrats 

have raised about FSOC’s decision-making process. 

I now recognize the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. 

Today I am very pleased that you are here, Secretary Lew, and 

I welcome you back. And I assure you that we are not poised here 

today to talk about the IRS. That has been done in our Oversight 

and Investigations Subcommittee. We don’t have documents. We 

don’t have emails. We don’t have any information relative to that 

issue. We gather here today to receive your annual report of the 

Financial Stability Oversight Council, FSOC, as required by the 

Dodd-Frank Act. 

To be honest, I am surprised to see so many of my colleagues on 

the other side of the aisle with us today given that the FSOC has 

joined the ranks of the Consumer Financial Protection Bureau, the 

Export-Import Bank, and the Terrorism Risk Insurance Act in becoming the latest target in a relentless Republican effort to tear 

down important engines of job creation, economic growth, and consumer protection. 

I didn’t think my colleagues on the other side of the aisle would 

have any interest in hearing about the Council’s progress or in 

your views of the financial stability of the United States. In fact, 

just last week this committee approved two measures that, under 

the guise of transparency, would compromise the FSOC and erode 

the important role it plays. These partisan bills were nothing more 

than an effort to derail this cornerstone of the Dodd-Frank Wall 

Street Reform Act. 

Mr. Chairman, the economic collapse of 2008 resulted in the 

greatest loss of wealth in a generation. Starting with the bankruptcy of Lehman Brothers, our economy quickly ground to a halt, 

leaving the American taxpayers to clean up the mess. All told, the 

financial crisis resulted in the destruction of more than $9 trillion 

in wealth and cost each American household approximately 

$50,000, while unemployment exploded throughout the country. 

One problem leading up to the crisis was that no one in the private sector or in government saw the big picture or had the responsibility to deal with emerging threats before they caused damage 

to our economy. That is why Democrats created the Financial Stability Oversight Council, that is FSOC, to fill that void and serve 

as an advance warning system to identify and address systemic 

4 

risks posed by large complex companies, products, and activities 

before they threaten the economy. 

In plain English, FSOC is charged with looking at every aspect 

of our financial system for possible weaknesses and risk, something 

that did not happen in the lead-up to the crisis. The Council’s work 

is critical to ensuring that our financial regulators are working collaboratively to identify and respond to emerging threats to financial stability. 

It remains a mystery to me why Republicans are spending the 

few legislative days we have left in this session pushing partisan 

legislation that would hamstring the FSOC’s ability to protect 

homeowners, consumers, and the American economy. And it is obvious that, like with CFPB, Ex-Im, and TRIA, the Republicans’ goal 

is to stop the program from its important work even if that means 

ending important protections for the American people in our economy. 

Secretary Lew, I look forward to your insight on areas of systemic risk the Council has identified, particularly related to mortgage servicing, alternatives to reference rates like LIBOR, and perceptions of ‘‘too-big-to-fail.’’ As we hear additional details from you 

about the risks identified in this year’s report, I will be interested 

to hear whether Republicans believe FSOC should take action to 

mitigate those risks or turn a blind eye and invite another crisis. 

Finally, Mr. Chairman, I am looking forward to hearing more 

from you about how we address concerns that I and other Members 

of Congress have raised regarding the transparency of the FSOC 

designation process. I am sympathetic to these concerns and would 

like to hear what steps you have taken and your suggestions on 

how to increase transparency in a way that continues to carry out 

FSOC’s mission. I look forward to the Secretary’s testimony and his 

insight on all of these issues, as well as what the FSOC is currently doing to monitor systemic risk and promote financial stability. 

I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from West Virginia, Mrs. Capito, chairwoman of our Financial Institutions and Consumer Credit Subcommittee, for 1 minute. 

Mrs. CAPITO. Thank you, Mr. Chairman, and thank you, Secretary Lew, for being with us today. 

We are going to learn more about the FSOC, which was created 

by Dodd-Frank with the mission of monitoring systemic risk. This 

designation can have a significant effect on the institution by requiring increased levels of regulatory capital. The costs associated 

with heightened credential standards are quite clear; however, the 

processes and methodologies for determining a nonbank firm’s systemic risk are much less clear. 

In fact, in the recent designation of Prudential Insurance, the 

one member of the FSOC with significant insurance industry experience argued that there was little evidence to support the notion 

that a large life insurer poses a systemic risk. Furthermore, we 

know little about how an institution’s designation will affect the 

end users. 

Another issue I would like to discuss with you, Mr. Secretary, is, 

are there arbitrary thresholds in Dodd-Frank that determine if a 

5 

financial institution is systemically significant? There has been a 

lot of discussion about the different thresholds, and I would like to 

dig deeper on that with you. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, ranking member of our Capital Markets Subcommittee, 

for 11⁄2 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman, and Ranking Member 

Waters, and welcome, Secretary Lew. I believe I speak on behalf 

of all New Yorkers when we say we are so proud of you and your 

many years of public service. 

This is an important hearing. The Financial Stability Oversight 

Council was one of the keys of the Dodd-Frank financial reform, 

and it provides a forum for all of our financial regulators to come 

together to discuss the risks that they each see in the markets they 

regulate, but from a broad perspective, from a systemic perspective. 

It also requires them to publish an annual report that describes in 

detail the emerging threats that they see in the financial markets, 

and this is tremendously important. 

It depends on what report you look at: the ranking member said $9 trillion; I have seen some reports that said that we suffered 

$16–$18 trillion in loss to our economy; Christina Romer testified 

before this Congress that the economic shocks we experienced in 

the last recession were 3 times greater than the Great Depression, 

and we managed it better. 

But also, economists have testified before this panel and other 

panels that it was the only financial crisis in our history that could 

have been prevented by better financial market overview and regulation. We didn’t keep up with the new products. We didn’t keep 

up with the new trends. So FSOC was created to help us prevent 

another serious, damaging, painful economic loss that we could 

have prevented with better financial management. 

I look forward to reading your report. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from New Jersey, Mr. 

Garrett, chairman of our Capital Markets Subcommittee, for 2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Today FSOC has become a sort of super-regulator whose SIFI 

designation is effectively an implicit taxpayer guarantee. Over 

time, I believe ‘‘too-big-to-fail’’ SIFIs will use their capital cost advantage to drive smaller competitors out of business. In short, 

FSOC now picks the winners and the losers in our financial markets. As FSOC aggressively asserts itself over more and more sectors of our economy, insurance companies and asset managers most 

recently, they owe the American people an explanation for what 

they are doing. 

Despite the recently released 147-page FSOC report, the vast 

majority of which is a rehash of basic economic information available on any financial Web site, FSOC’s decision-making process remains a black box. Citizens whose livelihoods are directly affected 

by FSOC have little idea why FSOC makes the decisions it does. 

As a Congressman, I can be briefed on the most sensitive intelligence in the national security information, but I am not allowed 

6 

to even sit quietly and listen in on an FSOC meeting. And companies that are designated by FSOC have only the vaguest notion of 

what aspects of their operation led FSOC to deem them systemically important. Without that knowledge, of course, they could do 

nothing to reduce their own systemic risk. 

And more importantly, when Republican Members have asked 

questions of you and of FSOC in the past, the answers we receive 

have always been bland and evasive talking points designed simply 

to give us the impression of responsiveness without actually ever 

answering any of our questions, Mr. Secretary. 

In fact, this committee asked you specifically last month for all 

the documents and all the communications between you, your Department, and the Financial Stability Board (FSB), and I have everything that you supplied us with right here in this box in response to your promise to supply us with all of those documents. 

We got absolutely nothing from you when you promised us that you 

would supply us with that information. 

Mr. Secretary, this stonewalling by you and this Department 

must stop. We have to get real answers from you and from Treasury, and I hope that today, the process begins. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Colorado, Mr. 

Perlmutter, for 11⁄2 minutes. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

And, Mr. Secretary, it is good to see you here. I want to thank 

you, and I want to thank the Administration. Since the President 

took over, since Dodd-Frank was passed, the stock market is up 

10,000 points at about $1.3 billion per point. My math takes that 

to $13 trillion. Home prices are up, IRAs are up, and we put 10 

million people back to work, and I just want to thank you for that. 

We had kind of an age-old debate a few weeks ago. Mr. Scalia 

was here saying that Dodd-Frank and FSOC had too much discretion. We had members of the banking community saying there was 

too little discretion and too arbitrary lines of demarcation within 

the bill. 

I have two areas I would like you to talk about today: first, the 

living will, what you are doing on the major institutions to find out 

if they fall apart, how you are going to take them apart; and second, I want you to talk a little bit about the GSEs. 

I am one of those who thinks that with proper underwriting, the 

GSEs actually work very well, and the private market will come 

and go as they think they can make money in mortgages. And now, 

there isn’t a lot that has to be done with respect to the GSEs. 

So I would like you to talk about living wills and GSEs, and with 

that, I thank the chairman, and I yield back. 

Chairman HENSARLING. The gentleman yields back the balance 

of his time. 

Today, we welcome the testimony of the Honorable Jacob J. Lew, 

Secretary of the U.S. Department of the Treasury. Secretary Lew 

has testified before our committee on a number of occasions, so I 

trust he needs no further introduction. Without objection, Secretary 

Lew’s written statement will be made a part of the record. 

Mr. Secretary, you are now recognized for your oral presentation. 

Thank you. 

7 

STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, 

U.S. DEPARTMENT OF THE TREASURY 

Secretary LEW. Thank you very much, Mr. Chairman. 

Chairman Hensarling, Ranking Member Waters, and members of 

the committee, thank you for the opportunity to testify today on 

the Financial Stability Oversight Council’s 2014 annual report. 

Nearly 4 years ago, President Obama signed into law the DoddFrank Wall Street Reform and Consumer Protection Act, creating 

the strongest safeguards for consumers and investors since the 

aftermath of the Great Depression. As everyone here recognizes, a 

stable, thriving financial sector is critical to our economic growth 

and prosperity, and that is why these historic safeguards were established. 

Today our financial system is more resilient, confidence in our 

markets is robust, and the agencies charged with protecting consumers and investors are in a strong position to respond to emerging threats that could hurt our economy, damage Main Street businesses, and destroy jobs. 

One of the lessons from the financial crisis was recognizing how 

important it is to detect and mitigate risks to financial stability. In 

the lead-up to the crisis, individual regulators focused on individual 

institutions, functions or markets. This siloed approach allowed 

risks to fall through the cracks. Congress changed that by creating 

the Financial Stability Oversight Council. Now regulators are obligated by statute to collectively monitor the stability of the entire 

U.S. financial system, to look over the horizon to identify potential 

risks, and to respond to threats that have been detected. In short, 

the Council’s work to detect possible risk is not only mandated by 

law; it is sound economic policy. 

That is why it both defies common sense and ignores recent history that some have suggested curtailing the Council’s ability to 

analyze information regarding particular financial sectors, firms or 

activities. The Council cannot simply cordon off any sector or activity that could pose a threat. That would be a dereliction of its responsibilities and a complete disregard for the very purpose of the 

Council. 

Some have even gone so far as to suggest that the Council should 

be prohibited from simply asking questions about certain activities 

or companies that could threaten financial stability. We have to be 

allowed to ask questions. As everyone here knows, during the runup to the financial crisis, regulators should have asked more questions about institutions and activities, not fewer. 

To be clear, asking questions does not equal regulatory action. 

Sometimes questions result in a conclusion that the Council does 

not need to act; that it needs to examine the issue further, or that 

it needs to gather more information. The Council asks questions 

with an open mind and without a predetermined outcome. In that 

vein, the Council’s procedures are transparent. It has put in place 

a comprehensive delivery of approach to its evaluation of risks, and 

it solicits public input and carefully considers all points of view. 

In fact, the Council’s annual report exemplifies the Council’s 

commitment to transparency and collaboration. It reflects a collective analysis and conclusions of Council members regarding the key 

risks to financial stability, and is an important example of how the 

8 

Council shares information about its work with Congress and the 

public. 

Each annual report also provides a road map for the Council’s 

agenda for the upcoming year, what areas it will focus on, what 

areas will likely require additional attention, and how the Council 

expects to address them. 

This year’s report focuses on nine areas that warrant continued 

attention and possibly further action from its members. These 

areas include wholesale funding markets, the housing finance system, cybersecurity threats, risk-taking by large financial institutions, and potential interest rate volatility. 

Before closing, let me point out that since the Council’s last annual report, we have reached a number of key milestones in financial reform implementation. That means that homebuyers, retirees, 

and investors have better safeguards and protections. To that end, 

the Volcker Rule has been finalized, qualified mortgage standards 

have gone into effect, tough capital standards are now in place, 

over-the-counter derivatives are now moving onto electronic trading 

platforms and into centralized clearing, fines have been imposed on 

abusive actions related to manipulation of LIBOR and other financial benchmarks, and the international community is making 

progress on increasing the stability of the global financial system. 

Mr. Chairman, I want to thank the members of the Council and 

all of the staff involved with the 2014 annual report for their tireless work and commitment. As the Council fulfills its obligations to 

strengthen our financial system and limit risk to our economy, we 

will continue to work with the committee and with Congress to 

make real progress for all Americans. 

Thank you, and I look forward to answering your questions. 

[The prepared statement of Secretary Lew can be found on page 

62 of the appendix.] 

Chairman HENSARLING. The Chair now recognizes himself for 5 

minutes for questions. 

Mr. Secretary, I would like to start off with a matter that I left 

off with during your last appearance, for which I did not receive 

an answer. It is not a ‘‘gotcha’’ question, and when I receive the 

answer, I will certainly be fair and give you a brief moment to give 

it some context. 

As you know, 11 months ago the G20’s FSB, of which Treasury 

is a preliminary member, designated 3 U.S. insurers as global 

SIFIs. Did Treasury support these designations, yes or no? 

Secretary LEW. Mr. Chairman, as I mentioned the last time I testified, the FSB operates by consensus, and the U.S. participants in 

the FSB joined in the consensus at that time. 

Chairman HENSARLING. Okay. So Treasury considered in the designation, correct? 

Secretary LEW. We joined in the consensus. There was not a 

vote, but we were part of the consensus. 

But I need to really make the point quite clearly that action in 

the FSB and action in the FSOC are very different matters. The 

FSB is not a national authority. It doesn’t designate institutions in 

a way that has a legal effect. And the FSOC, when it makes its 

determination, does it on a parallel path. Now, it may ask and answer questions in a similar way, but it doesn’t necessarily. 

9 

Chairman HENSARLING. Let me ask this question, Mr. Secretary: 

Can a financial institution pose, in your mind, a systemic risk to 

the global economy without representing a systemic risk to our domestic economy? 

Secretary LEW. Mr. Chairman, I think the question of designation is a moment in time and based on analysis it had at that time. 

In the case of a designation of a specific institution, the process at 

FSOC goes through a very detailed process. 

Chairman HENSARLING. I understand there may be two different 

processes. What I am simply asking is in Treasury’s opinion, if one 

is a potential systemic threat to the global economy, must they necessarily also present a systemic risk to the domestic economy? 

Secretary LEW. And the reason I am answering your question the 

way I am is that in making a determination at the FSB level, it 

is based on the information and the analysis you have at that 

point. What you go through during an FSOC determination process 

is a very detailed exchange of information ultimately with a company— 

Chairman HENSARLING. So you are simply telling me that two 

different processes may lead to two different answers? 

Secretary LEW. It could. 

Chairman HENSARLING. So Treasury, then, you are telling me, 

could support a designation of the exact same firm as systemically 

risky to the global economy but not systemically risky to the domestic economy? 

Secretary LEW. The action taken in the FSB does not designate 

a company in the same way that FSOC does. So the only national 

authority that can designate a company for regulation is FSOC. 

Chairman HENSARLING. Okay. Well, Mr. Secretary, my time is 

limited. Let me move on. 

I think you know that Bloomberg—different subject—reported 

that when the Chairman of the SEC told the FSOC that they wanted to release the Office of Financial Research Asset Management 

study, which, as you well know, has been widely panned, 

Bloomberg reported that you personally called the SEC Chair ‘‘to 

express your displeasure.’’ Is that story accurate? 

Secretary LEW. I am not going to get into the details of private 

conversations that I may have had with other members of the 

FSOC, but— 

Chairman HENSARLING. Okay. Let me ask the question this way: 

Did you favor or oppose releasing the study to the public? 

Secretary LEW. My view was that the OFR study was going to 

be released to the public, and the public was going to be commenting on it. And the question of whether or not it would be released in any kind of a formal way asking for comments by an 

agency other than OFR is a different question. 

Chairman HENSARLING. Should the OFR— 

Secretary LEW. There was never a question that the OFR study 

would be published. 

Chairman HENSARLING. Should the OFR’s work be immune from 

public comment? 

Secretary LEW. No. On the contrary, the OFR report was meant 

to be public, and it was meant to elicit a public debate, and that 

debate occurred. So I very much believe that it should have been 

10 

public, it was public, and the only question was should it be formally put out by one or another agency for comment in a formal 

way? 

Chairman HENSARLING. Last year you said, ‘‘It is unacceptable to 

be in a place where ‘too-big-to-fail’ has not been ended. If we get 

to the end of this year and we cannot with an honest, straight face 

say that we have ended ‘too-big-to-fail,’ we are going to have to look 

at other options.’’ 

I think you may know that a few months ago your predecessor 

Secretary Geithner was asked if ‘‘too-big-to-fail’’ still exists. His answer, ‘‘Yes, of course it does.’’ 

Using your words, can you tell this committee today with an honest, straight face that we have ended ‘‘too-big-to-fail?’’ 

Secretary LEW. Mr. Chairman, we have made enormous progress. 

I am not sure we will know the answer to that question until we 

have the next financial crisis. That is the challenge that we all 

have in asking have we gone far enough. But I will say that there 

is more work under way to continue to look at the areas where we 

can have more protection, things like supplemental— 

Chairman HENSARLING. We have heard from multiple witnesses 

that the Volcker Rule will significantly reduce liquidity in the corporate bond market. The Financial Times has reported that the 

Federal Reserve is very concerned about the potential of large-scale 

withdrawals from investors and managers of corporate fund bonds. 

They are concerned about the illiquidity of the corporate bond market. So it strikes me as somewhat ironic that the Volcker Rule, 

which has been touted by you and others as necessary to ensure 

financial stability, may now be a part of financial instability. 

This committee has requested information from Treasury and 

FSOC regarding the status of our corporate bond markets. We 

haven’t received anything as yet. So has the FSOC conducted an 

analysis of the systemic risk that can result from a lack of liquidity 

in the corporate bond market? 

Secretary LEW. Mr. Chairman, we obviously are just in the early 

months after the final publication of a Volcker Rule that is final. 

It hasn’t taken effect in the marketplace yet, so it is premature to 

judge what its impact on the market is. 

I think it is actually quite an accomplishment that five independent regulators published an identical rule on the same day 

providing clarity in an area that badly needed clarity so that there 

would not be uncertainty in the industry. I have actually received 

quite a lot of positive comment that that was the result. 

Chairman HENSARLING. The time of the Chair has expired. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much. 

Some have criticized the FSOC’s designation process as being 

opaque. The GAO also made several recommendations to the FSOC 

to improve its transparency. Would you please describe how the 

FSOC has addressed these recommendations? Would you also describe how the FSOC changed this transparency policy last month? 

Is the FSOC appropriately balancing the need for transparency 

against the need to protect sensitive market and supervisory information? 

11 

This is an issue I would like to get behind us and deal with it 

in ways that would allow FSOC to do its work. And so I am hoping 

that you have not only given considerable thought to this, but to 

help us to understand how we can better make sure that you can 

carry out your mission and not have those that you are regulating 

and giving oversight to believe that somehow you are trying to do 

all this in secret. And I don’t want to spend all of my time on this, 

because I really do want to get to nonbank market servicing. So 

would you please respond to the first part of the question? 

Secretary LEW. Congresswoman Waters, I think that the values 

of openness and transparency are very important to all of us. We 

have constructed a process in FSOC which I believe respects and 

reflects those values, and it gives an enormous opportunity for companies through the designation process to engage with FSOC without prematurely making public things that would not be appropriate to be a public discussion. 

Much of the discussion in a designation process involves reviewing the internal information that is the kind of supervisory information with which regulators work. When we get to the final stage 

of the designation process, there is a back-and-forth that is quite 

voluminous with the company where the company is sharing proprietary information, information that gets to the essence of their 

business. 

So I think what we need to balance is a process that requires a 

certain amount of confidentiality with transparency. We just recently made some changes, and it is a young organization that is 

continuing to evolve where we are noticing in advance topics to be 

discussed. We are putting out minutes of meetings, notes for meetings afterwards, and we will continue to try to perfect the process. 

But I don’t think the answer is to say it should all be a completely 

open public discussion or the inquiry itself would be stymied. 

Ms. WATERS. Mr. Secretary, I would like to ask you to make sure 

that the staff of FSOC gets what the staff of this committee, and 

I would hope that the chairman would agree, so that you could 

walk through whatever changes you have made— 

Secretary LEW. I would be happy to do that. 

Ms. WATERS. —in order to have more transparency. We need to 

understand that, because as you know, with H.R. 4387, this bill 

would subject FSOC to the Sunshine Act, expand its membership 

and change voting protocols for Commission and Board members, 

and allow Members of Congress to attend and participate in FSOC 

closed-door meetings. 

Now, I think this is ridiculous, and I want to get off of that, and 

so if you will help us to understand more about what you have 

done, then hopefully we can engage with you about what we think 

about what you have done and maybe have some suggestions for 

you. 

With that, do you have a moment to talk about what you have 

done in taking a look at nonbank mortgage services? 

Secretary LEW. The question of mortgage servicers is a very important one. As they have moved out of banks into more independent businesses, the challenge is how to maintain consumer 

protections and oversight, and how to make sure that very important backbone to our mortgage finance system functions well. 

12 

I think if you look at the actions taken by the CFPB, they have 

taken on the role of consumer protection oversight in a very important way, and I think that is an area we have to continue to look 

at, understand, and, if we need to take more action, discuss what 

that is. 

Obviously, the mortgage system requires that there are servicers 

who are reliable, who are there to handle the transactions between 

the borrower and the holder of the mortgage, and it is something 

that we cannot have be fragile. So it is something we are very 

much watching, and we think that the actions taken by the CFPB 

are very positive ones, and we will continue to review the situation. 

Ms. WATERS. Mr. Secretary, let me just say, one of the things we 

discovered with the subprime meltdown was a lot of the problems 

were with the servicers: the loss of paper; the lack of understanding what their jobs really were; the inability to make determinations about whether or not people had sufficient income to 

meet a proposed modification; and on and on and on. So this is a 

serious area that— 

Secretary LEW. It is a very important area. I totally agree. 

Ms. WATERS. Thank you. And I yield back the balance of my 

time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, Mr. Garrett, chairman of our Capital Markets 

Subcommittee. 

Mr. GARRETT. Mr. Secretary, as you know, the chairman, some 

other members of the panel, and I have asked for specific documents from you, and we did so over a month ago, and you assured 

us that you would provide them. You formally responded only last 

Friday, and you did so with a nonresponse. The response contained 

none of the requested documents. 

Mr. Secretary, this committee has to subpoena those documents. 

Can you promise us here today that any emails that make up those 

documents or files that we have requested will not fall victim to 

any mysterious or unexplained hard drive crash? And are you 

doing anything now to protect those documents that we have requested and you promised that you would supply, but after a 

month you still have not done so? 

Secretary LEW. Congressman, as you noted, I did respond along 

with the Chairman of the SEC and the Chairman of the Federal 

Reserve Board to your inquiry. In that letter, we said our staff 

would work together to— 

Mr. GARRETT. So will you protect those documents? Because you 

did not provide any of the documents that we requested. 

Secretary LEW. Yes. And as the letter indicates, our staff will 

work with your staff on— 

Mr. GARRETT. Are you protecting those documents? 

Secretary LEW. We routinely protect our documents. 

Mr. GARRETT. We know the routine over at the IRS. Is yours a 

better routine than they have? 

Secretary LEW. Congressman, we have— 

Mr. GARRETT. Okay. That is a ‘‘no.’’ 

Secretary LEW. No, Congressman, that is not a ‘‘no.’’ 

Mr. GARRETT. Mr. Chairman, I would suggest— 

Secretary LEW. We protect our documents. 

13 

Mr. GARRETT. I would suggest that we consider issuing subpoenas sooner rather than later, given how fast emails are disappearing within the Treasury Department. 

I have a question for you from home. This is a little bit off topic. 

But if the IRS is conducting an audit of a law-abiding taxpayer citizen—and I have gotten this a lot over the last several weeks—and 

the IRS asks for documents, and they do not come, and they say 

that they don’t have them anymore because their hard drive 

crashed, the IRS and your response to them would be, that is okay 

because that is the routine system? 

Secretary LEW. Congressman, as Commissioner Koskinen testified last week, if that happens to a taxpayer, the practice is for the 

IRS to work with the taxpayer based on documents that are available to proceed— 

Mr. GARRETT. So I will take that as—and so we are going to be 

working with you, and that is why I suggested that we issue subpoenas now because you have not supplied the information that 

you have promised to this committee. 

Mr. Chairman, I don’t have any confidence in this Administration to be able to conduct a fair, impartial, and thorough investigation into that matter, nor to supply the information this committee 

has requested repeatedly. And for that reason, I do believe that a 

special prosecutor should be appointed to find the truth as to what 

actually happened there, and for us to go forward as quickly as 

possible with regard to subpoenas. 

Now, to return to the matter at hand on FSOC and designations, 

the chairman asked you a very simple question with regard to consensus. I think most people watching understand what ‘‘consensus’’ 

means. It means that the parties at a table consent to something. 

That is the root word of consensus. So FSB in that process said 

there was a consensus on the matter, and his simple question was, 

did you consent? And you did not give an answer. Can you say 

whether, when they went around the table figuratively, did you 

consent? Did you say yes, no, or I really don’t know what to answer? 

Secretary LEW. Congressman, I answered the question. I said the 

U.S. Government representatives joined in the consensus. 

Mr. GARRETT. So you said yes? 

Secretary LEW. I answered the question. 

Mr. GARRETT. No. And so when you made that determination, 

the chairman also asked the question, is it possible for a company 

to be globally designated but not to be designated nationally by a 

SIFI? And the answer to that one is also yes? 

Secretary LEW. Yes. I said that they are parallel processes, and 

the FSOC, which is the national authority, would make its own determination based on the process conducted at FSOC. 

Mr. GARRETT. So a company could be globally important but not 

here in the United States? How is that possible? 

Secretary LEW. The process of the FSB designation is one that 

is not binding on national authorities. Obviously, it is something— 

Mr. GARRETT. Binding doesn’t matter . It is whether or not that 

company is actually systemically important on a global basis. 

Secretary LEW. That is the reason that the FSOC goes through 

a very detailed analysis. There is more information— 

14 

Mr. GARRETT. Oh. So does that mean that the FSB process is not 

a detailed analysis? 

Secretary LEW. No, I am not saying it is not a detailed analysis, 

and I am not saying that the outcome would be different. I am just 

saying that there is a parallel national process that takes place 

and— 

Mr. GARRETT. In a legal matter, when a judge has made a decision in one case, they oftentimes have to recuse themselves when 

the same parties are involved in that or the same issues come up. 

Lawyers have to do that all the time. Will you recuse yourself from 

that deliberation process when these same companies come up for 

designation on the SIFI basis even though they are different processes? 

Secretary LEW. Congressman, the responsibility that all of us at 

FSOC have is to review all of the information and make a decision 

based on the information presented in the FSOC process, which is 

what I will do. 

Mr. GARRETT. So, the answer to that is ‘‘no.’’ 

Secretary LEW. I will do my job reviewing all the documents and 

all the analysis, and we will make a decision based on that. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano, ranking member of our Housing and Insurance Subcommittee. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Secretary, I am tempted to talk about the batting averages 

of the Red Sox, but I think I will wait for another day for that. 

That is my biggest concern right now, to be perfectly honest with 

you. 

I do want to talk about a couple of concerns. First of all, I want 

to thank you for the job you have done. I think you have done a 

great job. But like everything else, there are details that have to 

be worked out, and I have a lot of constituents who are concerned 

about questions that have not happened yet. I am very happy with 

what FSOC has done, but I have my concerns about some of the 

things they have not yet—the second shoe hasn’t dropped. 

I want to talk to you for a minute about the International Association of Insurance Supervisors, of which you are participating, 

and I got a response from you to a letter we had written. I want 

to read a section of that and put the letter on record. We were talking about the capital standards that are being developed by the 

IAIS and your letter stated that, ‘‘the capital standards being developed by insurance experts will not have any legal effect in the 

United States unless they are implemented by U.S. regulators in 

accordance with U.S. law,’’ which, of course, is the answer that I 

wanted. I appreciate the answer, but I need to push it a little further. 

And I say that because I am not opposed to internationalization. 

It is going to happen. I just think that we shouldn’t put the cart 

before the horse. We haven’t cleaned up our own house fully yet. 

I am not ready to pass it all over to an international standard. I 

want to make sure that in the standards correctly, though, that by 

doing so—I want to make sure how I understand that in accordance with U.S. law, I want to make sure that this is not some backVerDate Nov 24 2008 14:01 Mar 24, 2015 Jkt 091150 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\91150.TXT TERRI
15 

door way to allow some Section 4807 of some treaty with some 

country I have never heard of to overtake our capital standards 

and insurance, and say, we have a treaty that we signed 400 years 

ago, and we have to therefore give it up. That is—I presume that 

you are not looking for that back door. 

Secretary LEW. No. Congressman, I think it is worth taking a 

step back and talking about how important our involvement in 

these international bodies is. We could do an outstanding job in the 

United States putting a system in place that is safe and sound for 

all of our financial institutions, and we are still exposed to 

vulnerabilities if, around the world, the standard isn’t raised as 

well. So we simultaneously participate in international discussions, 

and in a case like this, our insurance experts are very much a part 

of shaping the international debate. 

Mr. CAPUANO. As I think you should be. I think you should be 

at the table, and I do think that you should participate, and I do 

think you should have a strong voice. I just don’t have faith at the 

moment. I may have it at some future time that the international 

standards are going to be any better than we can do for ourselves. 

Secretary LEW. And while our participation in the international 

process often leads to a result that reflects our judgment of what 

the outcome is, we retain, as do all national authorities, the right 

to make decisions. 

Mr. CAPUANO. Fair enough. 

Secretary LEW. In the case of insurance, it is the States that 

have a lot of the authority. 

Mr. CAPUANO. The other question, though, is, number one, I 

want things straightforward. I believe in FSOC, I believe in what 

you are doing, I do believe internationalization is coming, but I 

don’t want to find out the day after that, that somehow through the 

back door, we gave up our entire system of insurance regulation 

without knowing about it. If we do it, I think we need to do it conscientiously. I don’t want to find out that some treaty did it, and 

I don’t want to find out that somehow because somebody from 

Lichtenstein had a better idea, that now they run our insurance industry. And I don’t expect that is going to happen, but I need to 

put that on the record. 

Secretary LEW. That is not the way it works. 

Mr. CAPUANO. You also talk about transparency, that, as far as 

I am concerned—let me back up 1 second. I also want to go and 

find out that under Dodd-Frank, as I understand it, the Fed and 

others have oversight on insurance companies that are SIFIs, or 

they have savings and loans holding companies. Other insurance 

companies are not subject to Federal regulation, and I just want to 

make sure that there is not some back-door way to expand jurisdiction. Though I do believe that Federal optional charters will come 

someday, they are not here yet, and I just want to make sure we 

are not trying to do that in a back-door way. 

Secretary LEW. It is definitely not any kind of a back door into 

Federal regulation of all insurance, though there is a debate to be 

had, as you note, as to what is the right balance between State and 

Federal. But that has to be done directly, if it is done. 

Mr. CAPUANO. That is what I wanted to hear. 

16 

I also want to talk a little bit about transparency. You also agree 

that transparency is important, and up until now there has been 

some—there has been give and take; you get transparent, and then 

you don’t get transparent. And for me, one of the things when it 

comes to designating SIFIs is the SIFIs know what the measurements are, or the potential SIFIs know what the measurements 

are. 

My argument is, it is like a traffic cop. If a traffic cop is sitting 

on a highway, the truth is most of the time I want the blue lights 

to be flashing because I am not interested in catching somebody 

going 3 miles an hour over the speed limit, I am interested in keeping them at the speed limit, and the best way to do that is let them 

know that there is a cop on the highway. 

And the same thing here. I am not interested in catching someone into a SIFI if they want to avoid it and can avoid it. And the 

only way that can happen is if FSOC and others tell them, here 

are the measurements we are going to have. If you choose not to 

participate in these measurements between now and 6 months 

from now, you can take action to avoid it. Why is that not possible? 

Chairman HENSARLING. Brief answer, Mr. Secretary. 

Secretary LEW. I think that the standards that are used in FSOC 

actually are understood by the industry. We put out detailed rules 

early on in the process. When it gets to the point of actually engaging with a company, there is an enormous amount of give and take 

back and forth, which gives them the ability to make judgments as 

to how they want to organize their risk. 

Mr. CAPUANO. I think we have to follow up on that at a later 

time. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from West Virginia, 

Mrs. Capito, chairwoman of our Financial Institutions Subcommittee. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

As I mentioned in my opening statement, I believe that the process for designating the financial institutions should be based on activities of the institution as opposed to just arbitrary cut-off points, 

for instance, the $50 billion level, and then we have another level, 

$10 billion for the consumer supervision. 

And what we are finding, I think, is—and this sort of pivots a 

little bit off of the previous questioner—if you have these arbitrary 

deadlines at $50 billion, you could have a financial institution that 

is maybe at $35 billion that is much riskier than, say, one that is 

at $100 billion because of their business platforms, their business— 

and the way they structured their business with less and fewer 

risks. 

So I guess what I would ask is—and Governor Tarullo talked 

about this about a month ago, mentioned—just kind of threw out 

$100 billion to raise it up, because folks who are falling in those 

thresholds are having difficulty. How do you feel about that, rather 

than have an arbitrary asset limitation, to maybe look at what the 

risk profiles and base those designations on that? I know that is 

a discussion. 

Secretary LEW. The threshold does not lead to designation automatically. There is only a designation if the analysis done suggests 

17 

that there is a risk that determines that it is systemically significant. And I think that the number of designations reflects the fact 

that we have seen the nonbank utilities designated, we have seen 

two insurance companies designated. It has not been a massive 

process. 

Mrs. CAPITO. I think in the case of the banks, if they reach the $50 billion threshold, it is a— 

Secretary LEW. I thought you were talking about the FSOC designation, the thresholds. 

Mrs. CAPITO. I am talking about that in conjunction with, I 

guess, the other designations of significantly systemically important— 

Secretary LEW. Yes. As far as the banks, I think after the financial crisis the burden certainly was on us to take a closer look at 

systemic risk in large institutions, and as we go through that process, as the regulators go through their more detailed reviews of 

both the financial conditions of those banks and their systemic 

risks, I think it is a discussion that we can continue to have. 

But I think for the time being, we have to look back and forward. 

We weren’t where we needed to be in 2005, 2006, 2007, and 2008. 

We need to make sure that we have visibility into any of the institutions that could create that kind of systemic risk. And as far as 

the designations at FSOC go, the same standard, I think, applies. 

We are not looking to designate for the sake of designating. We are 

only looking to identify where are there areas of systemic risk that 

if we look back at the next financial crisis, we would say, why 

didn’t you catch that? 

Mrs. CAPITO. I think that in the case of Prudential, they would 

argue—this is a slightly different question—that if they were to 

fail, their business model would not drag down the entire financial 

system. What kind of metrics were used for that, and how does 

that—yes, what kind of metrics did you all use to make those determinations when the insurance expert on the FSOC had a deep 

question about that? 

Secretary LEW. There were detailed analyses done, and there 

was a hearing where Prudential came and exercised its right to ask 

for a hearing. 

And, I think that the kinds of questions that you ask when you 

are looking to make the determination like this don’t have to do 

with what happens if the company fails in good times; it has to do 

with what happens if there is a financial crisis and the company 

fails? What happens if it is a situation of great stress in the system? And that is not necessarily what regulators previously did, 

but when we saw what happened in 2007, 2008, at a time of great 

stress in the financial system, things do happen that don’t happen 

at other times, and that is the kind of inquiry that we went 

through. 

Mrs. CAPITO. Okay. I have asked you this, I think, every time 

you have come before us. Mr. Meeks and I have a bill out that 

would modernize and streamline the financial regulatory framework. We are hearing consistently, particularly from our community banks, but also others, that the piling on of the regulatory burden is really becoming a chiller in terms of being able to move forward with business. 

18 

And you mentioned that once every 10 years, there is an analysis 

of this. I think 10 years is too long a period, especially since we 

have gone into—a lot of these have gone into effect over the last 

4 years. So what efforts are you making in that? 

Secretary LEW. I have a certain amount of background in this, 

because when I was OMB Director, I conducted a review of all of 

the Executive Branch agencies to do a lookback, and we asked the 

independent regulators to do a similar lookback. We didn’t have 

the authority to direct them to do that lookback. 

I think that at the moment with the 10-year review coming up, 

the regulators have indicated it is their intention to do that kind 

of lookback. I think that is a very important thing. 

Mrs. CAPITO. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Hinojosa, for 5 minutes. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

And thank you, Secretary Lew, for your testimony today. 

Before the financial crisis that caused the Great Recession, the 

United States had many financial regulators, yet none took a comprehensive look at the economy as a whole. We were caught off 

guard because no one was tasked with looking at the big picture. 

Congress created financial stability over in FSOC as a cornerstone 

of the Dodd-Frank Act. It serves a critical function to keep watch 

for emerging financial threats. 

So, Secretary Lew, prior to that passage of Dodd-Frank, what 

government agency, if any, was responsible for looking at the systemic risk in the U.S. financial system? 

Secretary LEW. Congressman, I think one of the things we 

learned is that there was no single agency that had responsibility 

for looking across the system and identifying issues of systemic 

risk. One of the reasons FSOC was created was to make sure that 

in the future, agencies collectively as a body chaired by the Treasury Secretary would be charged with that responsibility. 

I think it is critically important. I don’t think that it would be 

responsible for us to go back to a world where you don’t have that 

kind of ability to look across the different silos. And that is not to 

say that the regulators weren’t regulating the industries for which 

they had responsibility. They weren’t necessarily looking at the 

interconnections and the way that the entire systemic risk profile 

developed. 

That is exactly what FSOC does. It is why it was created. It is 

why we need to be able to ask questions. And it is also why we 

need to be able to ask questions when we don’t know what the answer is. It ought not to be that we have to have near certainty that 

there is a problem in order to ask a question. We have to be able 

to turn over a lot of stones and have the good judgment to only designate if the analysis of the facts warrant it. 

Mr. HINOJOSA. So last week the committee passed H.R. 4387, the 

FSOC Transparency and Accountability Act. This bill would subject 

the FSOC to the Sunshine Act, expand its membership, and change 

voting protocols for Commission and Board members, and it would 

allow Members of Congress to attend and participate in FSOC 

closed-door meetings. 

19 

In addition, this bill, H.R. 4881, would prevent the FSOC from 

any further actions related to the designation of a nonbank SIFI, 

including even talking about the possibility of the designation for 

1 year. By undermining FSOC, we undermine our ability to avoid 

a future crisis like we have just experienced. 

Mr. Secretary, how do you view the bills passed last week out of 

this committee, and what is your primary concern? 

Secretary LEW. Congressman, I think that transparency is important. We are trying to develop policies which make that very clear. 

I also think that there needs to be a space where financial regulators can have a conversation about confidential information that 

is a protected space. And the balance is an important one to strike. 

I think the notion of complying with as much of the Sunshine Act 

as possible is something that we have reflected. Much of the Sunshine Act is reflected in the FSOC procedures. But because of the 

balance, it is not 100 percent, and I think it is the right balance 

for now, and we need to continue to work to strive for striking the 

proper balance. 

Mr. HINOJOSA. I am with you. 

Secretary LEW. As far as the participation of Members of Congress, I would just point out that Executive Branch meetings happen every day all day long, and it is not considered the norm nor 

appropriate for there to be congressional participation in Executive 

Branch meetings. I don’t think it would be appropriate here either. 

Mr. HINOJOSA. In looking at your annual report, the FSOC delineates recommendations to improve the health of our financial markets. Interest rates have been kept to a historic low in order to encourage lending and spur economic growth. To offset the effect of 

low interest rates, the banks and credit unions have increased riskseeking behavior such as extending the duration of assets and easing lending standards. 

So let me ask you this question: How much does the risk of increased interest rate volatility concern you? 

Secretary LEW. I look at all of the different moving pieces in our 

financial system to keep track of them. Obviously, low interest 

rates do produce a certain tendency for there to be a kind of rush 

to yield. We have seen a narrowing of yield curves that suggests 

that. I don’t think that—if you balance the kind of where we have 

come in our economic recovery and the policies that have led there, 

I think that we are at a place where this is a question that the Fed 

and others have to look at. But I am not going to comment on monetary policy. 

Mr. HINOJOSA. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Housing and Insurance Subcommittee. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

In his dissent, Roy Woodall, who is the FSOC’s designated insurance expert, stated that the underlying analysis for the Prudential 

designation used scenarios which were ‘‘atypical to the fundamental and seasoned understanding of the business of insurance, 

the insurance regulatory environment, and the State insurance 

company resolution and guaranteed fund systems.’’ 

Do you agree with Mr. Woodall’s statement? 

20 

Secretary LEW. Congressman, obviously the FSOC decision was 

one in which I participated. I thought the designation was appropriate, and the risk analysis warranted it. 

Mr. NEUGEBAUER. So you disagree with his statements? 

Secretary LEW. I am just going to comment on what informed my 

judgment in terms of the decision that we made. 

Mr. NEUGEBAUER. So just for the record, Mr. Secretary, what is 

your background as far as experience in regulating insurance companies? 

Secretary LEW. I don’t pretend to have been an insurance regulator. I have worked on insurance policy as a policymaker from 

time to time. But, I think that the responsibility each of us has as 

FSOC members is to look at a very detailed analysis that is prepared by all of the staffs of the FSOC. It is quite voluminous and 

detailed. In the case of the Prudential designation, I participated 

in the hearing, and you make your judgment based on the record 

that is prepared. 

Mr. NEUGEBAUER. So when you don’t have a background in that 

industry yourself, I guess one of the reasons that Congress decided 

to put these insurance people on the FSOC process was obviously 

a lot of the regulators that—for example, the Fed and the Treasury 

and others don’t really have much background or experience in regulating insurance companies, do they? 

Secretary LEW. Look, Congressman— 

Mr. NEUGEBAUER. Do they have a background or experience in 

doing that? 

Secretary LEW. For the most part, they have backgrounds in the 

field that they are in, whether it is banking or securities. 

But I think that if you look back at the financial crisis of 2006 

and 2007 and 2008, the insurance industry was very integrated 

into the financial system and was very much a part of the cause 

of a systemic collapse. So I think that the questions— 

Mr. NEUGEBAUER. The insurance industry was— 

Secretary LEW. Parts of it, yes. 

Mr. NEUGEBAUER. What part was that? 

Secretary LEW. AIG was part of it. 

Mr. NEUGEBAUER. But that wasn’t the insurance aspect of their 

business, was it? 

Secretary LEW. The inquiry about systemic risk is one where you 

look at all of the activities of a firm, and you look at whether or 

not it has transmission channels, if there is a problem in that into 

other parts of the financial system. 

And I thought, and I continue to believe, that the analysis done 

was a very high-quality one, and it warranted the determination. 

And I will just point out that there was not an appeal of the judgment either. 

Mr. NEUGEBAUER. One of the reasons for designating Prudential 

as a SIFI relates to FSOC’s asset liquidation analysis. Are you familiar— 

Secretary LEW. Yes. 

Mr. NEUGEBAUER. —which it assumes that simultaneous runs 

against its journal, and separate accounts by millions of life insurance policyholders and a significant number of annuity and other 

21 

contract holders for products with a cash surrender value, this assumes a scale for which there is no precedent. 

In other words, was there anything in Prudential that would indicate that they had ever experienced a catastrophic liquidation of 

policies or surrender of policies? 

Secretary LEW. The question is not whether something has happened, but whether there is a systemic risk in the future. And I 

think the scenarios that you look at tend to be scenarios that have 

not been experienced because your goal is to avoid having a financial crisis that you could avoid. 

Mr. NEUGEBAUER. The only problem with that, Mr. Secretary, is 

trying to forecast cataclysmic events. Really I don’t know that anybody has any expertise in doing that. And by trying to come up 

with these what-if—I could come up with a lot of what-if scenarios 

where you wouldn’t want to put your money in any financial institution. 

But the problem is, when you start going down this road, you impact the business model and the customers who rely on a lot of 

these financial products for something that you are not sure is 

going to happen in the future, that has not happened in the past. 

And then when you ignore the expertise of people who have been 

put on FSOC to give you some guidance in that area, I think that 

is one of the reasons that you hear so many of us question the mythology that is being used in this process. 

Secretary LEW. Congressman, I don’t disagree that the scenarios 

that you look at are not the likely scenarios, but that is not our 

task. Our task is to look at, in a crisis situation, is there a risk of 

financial stability being undermined. 

And we know what the recession of 2008, 2009 looked like. We 

know what the Great Depression looked like. There are scenarios 

that we have gone through in our history. And it is not just pulling 

scenarios out of the air; the question is, in a time of great stress, 

is there risk? And if there is risk, it doesn’t mean that you are 

changing the business model all that dramatically. It is a question 

of, is there greater oversight and greater scrutiny? 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott, for 5 minutes. 

Mr. SCOTT. Thank you. 

Over here, Mr. Lew. Thank you, and welcome. I think you are 

doing a fantastic job. 

I want to first of all ask for a little help that you could give for 

me and my constituents in Georgia. You are familiar with the 

Hardest Hit Program? 

Secretary LEW. Yes. I am. 

Mr. SCOTT. And it is your program, thanks to the hard work of 

this committee. And I would deeply appreciate if you could assist 

us. 

We have an issue in which my State was about a year late in 

getting this money out to help the hardest hit. Subsequent to that 

we have unleashed or unloaded a number of veterans, who—it happens to be one of the fastest-growing groups of the homeless, and 

that is because they are coming home, and their houses are being 

foreclosed on and mortgages. 

22 

So within the next couple of months, in August, we are putting 

a big event together down in Atlanta. In order to get moving on 

this, your predecessor, Mr. Tim Geithner, and the Assistant Treasury Secretary who started this was Mr. Tim Massad, who did excellent work, but unfortunately both of them have gone. 

So what we need is just a nice call down to the Georgia Department of Community Affairs, first thanking them for moving, but reminding them that because of that 1-year delay, we only have 2, 

3 years left. By 2017, as you know, if we don’t get rid of that 

money, it is going. It would be a shame that we have veterans coming home, seeking employment. This is targeted just for them. So 

just a call down would be very helpful to the Department of Community Affairs, asking if there is any assistance that Treasury can 

give them, because if it weren’t for Tim Geithner and Tim Massad 

coming down to that event to light a fire in Georgia, we would not 

be moving as we are. 

I don’t want a dime of that money coming back when we have 

soldiers coming home who are living under viaducts because they 

can’t get that kind of help. 

So I appreciate your doing this, and we will get the information 

to your offices of whom to call. 

Now I have another point. I want to get to the emerging threats 

to our financial stability on the international stage. You have just 

returned from an international visit and working on—in this issue 

with some of our other counterparts. Also, Treasury is the enforcement arm for the Iran sanctions. Six months is coming up. Can you 

give us in a nutshell where we stand relative to the impact of the 

standstill, where are we are on those sanctions, and what are the 

emerging threats internationally? 

Secretary LEW. Congressman, first, on the Hardest Hit Fund, I 

would welcome the information. Tim Bowler is running that office, 

and I will have him follow up as appropriate. 

Mr. SCOTT. Thank you. My staffer will get in touch. 

Secretary LEW. As far as the Iran sanctions go and the negotiations that are taking place, three points: first, the sanctions have 

been extremely effective. They have had a dramatic effect on Iran’s 

economy. They have actually crushed Iran’s economy and brought 

Iran to the negotiating table. 

Second, the joint plan of action was very limited relief. It was 

several billion dollars of relief, not enough to reverse the harm that 

the sanctions do to Iran’s economy. And, in fact, the ongoing impact 

of the oil restrictions in the sanctions does more damage than the 

relief granted. So the impact is building up, not reducing. 

Third, we have made it clear that we are going to—we are committed to these negotiations, but not committed to a deal unless it 

is a good deal. No deal is better than a bad deal. We hope there 

is a good deal. 

We are in the final month. I think that it will be an important 

month that determines whether or not there is seriousness on 

Iran’s part to set aside its nuclear weapons program. 

Mr. SCOTT. So we are at that final month, which is the apex of 

my question. Where do we go from there? Do we go back to square 

one, or will we ask for an extension? 

23 

Secretary LEW. I am not going to prejudge what the end of the 

month is. There have been no discussions to date of an extension. 

There is also not going to be pressure to take a bad deal because 

we are hitting a deadline. I think we will have to see where we are 

at the end of the month. 

What we have said is that if the talks break down, if Iran is not 

willing to make concessions, we will look for tougher sanctions, and 

we will take no option off the table to make sure Iran does not get 

nuclear weapons. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. McHenry, chairman of our Oversight and Investigations Subcommittee. 

Mr. MCHENRY. Secretary Lew, thank you for reappearing. 

We had a hearing about the OFR asset manager report. And 

former Assistant Secretary Michael Barr testified that the OFR 

‘‘was not something I would hang my hat on.’’ 

Would you hang your hat on the asset manager report? 

Secretary LEW. I don’t hang my hat on reports, Congressman. 

Mr. MCHENRY. I guess— 

Secretary LEW. The report was one step in the process. It is not 

a decision by FSOC. It was something that FSOC asked for as one 

of the things to consider. 

We have done a lot of other work as well, an analysis within 

FSOC, and we had a public session, I believe the day before your 

hearing, where we had broad participation by the industry and by 

experts from academia, including Michael, who testified. 

I think that one of the important things to remember is FSOC 

has made no decision to designate asset managers. All FSOC has 

done is ask the question. I think it is really important to ask the 

question. The answer could be that there is no need to designate. 

The answer could be that there is some other course of action that 

is advised. And we will continue to pursue that. 

Mr. MCHENRY. And to that end, Chair White testified just a few 

weeks ago before this committee that the SEC has all the authority 

necessary; no new authority would be needed for the SEC to regulate the asset management industry. 

Do you concur with that assessment? 

Secretary LEW. I think it depends on what the answer is in 

terms of what is the appropriate step to take. And I am not going 

to prejudge the outcome of an inquiry that is not completed. 

Mr. MCHENRY. Okay. Let me try that again. Do you believe the 

SEC has the authority to regulate the asset management industry? 

Secretary LEW. I believe the SEC does have authorities to regulate the asset management industry. Whether it is the precise authority depends on what the mode of regulatory response, if any, 

would be. 

Mr. MCHENRY. Yes. Thank you for clarifying, and that is helpful 

and very forthcoming. 

And so, we have a number of other questions, obviously, but with 

the FSB, a number of us have questions about the process. And you 

have answered this to some degree, but we have—many of us have 

complaints about how nontransparent FSOC is, but FSB is even 

less so. 

24 

And so when the FSB designates G-SIFIs, and all those G-SIFIs 

within that category of an investment—investment companies are 

only U.S.-registered investment companies, it becomes problematic 

for us to see that—to judge whether or not the FSOC will take that 

same tack from the FSB. 

And so to that end, in order to help us better understand the policymaking process, would you help us with better disclosure of 

what those discussions are like and what the discussions are at the 

FSB just going forward? I think that would be helpful in terms of 

transparency and in terms of making sure that we are asking appropriate questions, and you don’t have to answer the same questions over and over again. 

Secretary LEW. Our staff does try to keep congressional—interested congressional parties informed. We will continue to do that. 

Mr. MCHENRY. Currently, I would say it is not sufficient. And so, 

we try harder to do better when it comes to transparency with 

FSB. 

Secretary LEW. I try hard to do better at everything I do every 

day. 

Mr. MCHENRY. That is a fantastic commitment. So, no hats and 

try harder. 

All right. To that end, let me ask you another question, if we can 

get to this. We have passed a couple of major pieces of legislation 

through this committee and off of the House Floor that are bipartisan in nature. Some help credit unions, and others help community banks, basically lightening a bit of the overreach that the 

large bipartisan vote in Congress has shown. One is the swaps 

push-out bill that passed 292–122 on the House Floor, and the end 

user margin bill, which passed 411–12. So, there is a way for us 

to pass bipartisan legislation. 

Give us your view. What is your encouragement for Congress to 

undertake bipartisan regulatory changes? 

Secretary LEW. Look, in principle, I endorse bipartisan legislation as a general matter. And— 

Mr. MCHENRY. But in a specific matter, would you help us with 

this process? 

Secretary LEW. On the question of Dodd-Frank amendments, 

frankly, there has been an issue for the last 4 years where the 

question is, do you just make technical fixes, or do you go back and 

make broader changes? That is an important question. We don’t 

think there should be a broad review of Dodd-Frank. 

There is also a question as to whether or not you give agencies 

a chance to implement things before you legislate again, putting an 

overlay to top of it. But I am happy to continue the conversation 

with you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair wishes to announce to all Members that at approximately 11:30, the Chair intends to call a 5-minute recess. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, for 5 minutes. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for being here. And we will also accept 

your thanks for sending Mel Watt from this committee to the Oversight Council. 

25 

Secretary LEW. We appreciate your sharing him. 

Mr. CLEAVER. Yes. 

Mr. Secretary, I have two questions. Do you believe that as a result of FSOC, we do have an authority that is accountable and responsible for monitoring the financial stability of the U.S. economy? 

Do you believe that without FSOC, the dangers would be increasingly more ominous? 

Secretary LEW. Look, I believe we have a much higher level of 

visibility into the financial stability risks. We have relationships 

between regulators that are stronger and deeper than they ever 

were before, and we have the capacity, if we need to, for people to 

collaborate together in a much more effective way. 

I think all of that leaves us much stronger than before, and to 

give that up would put us back where we were in 2007 and 2008, 

when regulators worked in their silos, and it was very hard to 

break through to look at the broader financial stability. 

Mr. CLEAVER. That is interesting, because I am wondering how 

comfortable the members of this committee should be that the expectations that an American financial institution is still ‘‘too-big-tofail.’’ These huge interconnected bank holding companies or the 

nonbank financial giants—how comfortable should we feel that the 

‘‘too-big-to-fail’’ has been either dramatically reduced or eliminated? 

Secretary LEW. Congressman, I think we have made enormous 

progress. We have much more capital in our banks. We have resolution authorities that are now in place and are being exercised so 

that institutions, if they hit a failure, have a way to unwind without necessarily causing the kind of systemic risks that we saw in 

2007, 2008. We have living wills for the largest institutions that 

have very detailed plans of what they would do if they got into distress. 

And I think if you look at the question that is often asked about 

the implicit subsidy for large banks, that is a reflection of the market’s belief that there is a willingness to step in, we are seeing that 

way lower, if not eliminated. It has been reduced by academics who 

study it. It has been reduced when the IMF looked at it. It has 

been reduced when rating agencies look at it. 

So I wish I could tell you with absolute certainty that ‘‘too-bigto-fail’’ was a thing of the past. What I can say is we have made 

enormous progress. We will continue to work at the kinds of sensible ongoing policies that will make our system even stronger. And 

the test, unfortunately, only comes when you have a financial crisis, which I hope we don’t experience. 

Mr. CLEAVER. Yes. I was going there, that we won’t know for 

sure as we didn’t—I was on the committee when Secretary Paulson 

and others came in and told us essentially that if we didn’t do 

something before the Asian markets opened the following Monday, 

that the world could fall into a depression. 

I am assuming you are saying we can have a degree of greater 

comfort, but that comfort should be measured, because we don’t 

really know and won’t know unless we hit another— 

Secretary LEW. I would add, Congressman, that many of the authorities that existed at the time have been changed in DoddFrank, and we don’t have the tools that Secretary Paulson had at 

that time. 

26 

Mr. CLEAVER. Of course, he didn’t have the tools. He made the 

tools up, by his own admission. 

Secretary LEW. There were changes made in Dodd-Frank that 

limit what both the Fed and Treasury do, so we have less ability 

to step in. And it would require—Dodd-Frank, as a matter of law, 

ended ‘‘too-big-to-fail.’’ So there is an obstacle, and that would be 

a change in the law to step in to exercise some of those authorities. 

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

Chairman HENSARLING. The gentleman yields back the balance 

of his time. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Secretary Lew, welcome. I have a quick question for you with regards to mortgage-servicing assets. FSOC seems to be intent on 

trying to implement new capital standards on these folks. And I 

guess my first question is, where is the problem? And what problem are we trying to solve? Where is the risk? 

Secretary LEW. Congressman, could I just ask for clarification as 

to which capital standards you are referring to? 

Mr. LUETKEMEYER. FSOC capital rules on mortgage-servicing assets. And what we are seeing is that the small banks, even large 

banks, are selling all their mortgage-servicing assets to nonbanks 

as a result of the capital rules that are being implemented. 

Secretary LEW. We are definitely seeing that there are higher 

capital standards for banks, in general for banks. And to the extent 

that banks choose to change their business plans and get out of one 

line of business or into another, that is obviously something that 

we need to keep an eye on. 

Mr. LUETKEMEYER. I guess—let me back up here. The Basel III 

rule was the one that really is impacting this. And it is—again, it 

is something that is concerning me from the standpoint that we are 

allowing the foreign rules and regulations, which, to my knowledge, 

they don’t have mortgage-servicing asset activity in foreign countries. So we are the only one that does this sort of activity, and yet 

we are allowing the Basel III rules, which were basically foreign 

rules, to impact our way of doing business here in this country. 

Where is the risk? What is the problem? And why are we allowing the entities from other countries to regulate a business that is 

basically American in nature? 

Secretary LEW. The capital standards that our regulators have 

put into place are actually in some ways tougher than Basel III. 

So it is not that Basel III put the capital requirements in place; our 

national authorities have to put our capital requirements in place. 

We have driven Basel III to a higher standard, because one of 

the things we worry about is that a risk that we face is that other 

countries don’t have the capital requirements that we have, and 

their banks are not going to be as sound as they need to be. 

Mr. LUETKEMEYER. This is about mortgage-servicing assets. The 

servicer of these assets, where is the risk with the servicer, somebody who services loans? 

Secretary LEW. I think the question actually is a broader one in 

terms of— 

27 

Mr. LUETKEMEYER. No, it is pretty specific. Where is the problem 

that entities that service loans need to have more capital? Where 

is the connectivity to our financial system that causes a greater 

risk, but they have to have more— 

Secretary LEW. Capital requirements are on all of a bank’s assets. So that, I think, is really the issue. But I am happy to follow 

up with you on the specific question of mortgage servicers. 

Mr. LUETKEMEYER. It is interesting, because as we go through 

this process, I think with the previous question, one of the folks, 

I think, was talking— maybe Mr. McHenry—we are talking about 

some of the stress tests that banks are doing, and the big banks’ 

modeling is allowed to be different than it is from smaller banks. 

And yet when you—we allow them to design their own modeling, 

you come up with a completely different capital ratio as if you 

would use that same modeling for smaller banks. 

And so I think, again, you are using two sizes, two different sets 

of rules with regards to big guys versus little guys, and I have a 

real problem with that, and it continues to be rampant through all 

of the things that the Treasury does. There are two sets of rules. 

Secretary LEW. The regulators have gone to great lengths to try 

and reflect the special circumstances around small banks and community banks. And it is not the banks that set the standards for 

stress tests, it is the regulators who conduct the stress tests. 

Mr. LUETKEMEYER. Yes. But Mr. Secretary, you are allowing the 

banks to also determine their own models on how they determine 

their capital, and that is not right, because you have to have the 

same set of standards for everybody. You can’t have two sets of 

standards. And it goes back to—I just have a real problem with 

that particular—let me just go—I only have about 24 seconds left. 

I am just—your comment a while ago that insurance companies 

were a part of the cause of the collapse of 2007, 2008, which I 

wrote down here, it is stunning. Absolutely stunning. I defy you to 

give me an example of one insurance company that is truly—the 

insurance part of their business, was a cause of the collapse. Tell 

me, was it insurance policy, insurance rate, insurance lack of 

claims processing? Was that a cause of 2008, 2007? 

Secretary LEW. I used AIG as the example and— 

Mr. LUETKEMEYER. Mr. Secretary, you know as well as I do that 

AIG—the financial portion of that company wasn’t the insurance 

position of that company, it was the financial portion of that company that was the problem, the connectivity of that. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, for 5 minutes. 

Ms. MOORE. Thank you so much, Mr. Chairman. 

And, Mr. Secretary, it is very nice to see you. Thank you for coming to speak with us today. 

I was looking through your testimony, and I couldn’t agree more 

that the formation of the FSOC was an important strategy toward 

having all of the senior regulators and principals look at the system across the spectrum to—because I was here, again, when Mr. 

Paulson came with this four-page bill, saying, give us $700 billion. 

I don’t want to go through that anymore. 

28 

But my question is what—I think a good process leads to good 

policy. So I guess I saw Mr. Roy Woodall, the FSOC insurance expert, dissent from the decision to designate Prudential, and yet 

they were designated as a SIFI. And then we saw the SEC push 

back against FSOC on asset managers, an aspect of money market 

mutual fund reforms, and, of course, the SEC is the expert on these 

industries. 

So I guess I would like—do you think it would be helpful for us 

to have a sense of how you see the role of the primary regulators 

in these discussions? Is there any deference to them? Did they just 

dissent from the decision so that they could—so that they wouldn’t 

be on record as being against their industry? What are we to learn 

from the experts of the FSOC seemingly having less of a voice? 

Secretary LEW. Congresswoman, I actually think all the members of FSOC have a voice, they are listened to, but ultimately not 

everyone will agree on every issue. 

I think if you look at those issues separately, I have spoken at 

some length on the review of the insurance companies before the 

designations were made. I believe the record was a robust one, and 

it warranted the decision. Obviously, not every member of the 

Council agreed. But the decision stands, and the company has not 

appealed it through the courts, as it could have. And I actually 

think the process was one that reflected rigor and analytic quality, 

and I am both comfortable with it and concur with the judgment 

that was made. 

As far as the issues you raised with regard to the SEC, obviously 

FSOC spoke to the money market fund issue before I was Chair 

of FSOC. It is an issue that was, again, at the heart of the financial crisis in 2008, and there was, I think, an urgency that was felt 

by FSOC to underscore that more action on that and on other 

issues that relate to the area of shadow banking was important. 

The SEC has the direct regulatory authority. They are working 

on a rule. I am very hopeful that they will complete a rule this 

summer. 

Ms. MOORE. Mr. Lew, thank you so much. I don’t have much 

time, but I do think the SEC did push back on aspects of money 

market. That ‘‘breaking the buck’’ thing was resolved. 

Finally, I guess you have heard the complaint that prior to designation, which is a big deal if you are designated as a SIFI, this 

is not an opportunity at all for the designee to present their case 

to the full board of principals of the FSOC, even to directly address 

the final information charges that are being presented to justify the 

decision. This seems to be just a little bit contrary to what we 

know as due process. I just want to know what your response to 

that is. 

Secretary LEW. That is not correct. First, let me go back to the 

money market fund issue. I just want to remind everyone on this 

committee that there was a real problem in money market funds 

in the financial crisis, and the challenge to solve that crisis fell not 

on the SEC, but it fell to the Fed. So it was quite appropriate for 

FSOC to take a view, and, frankly, it is very appropriate for us to 

continue to take a view to make sure good action is taken. 

Ms. MOORE. I only have a second. I do want you to answer that 

other question, Mr. Lew. 

29 

Secretary LEW. Remind me of the second question. 

Ms. MOORE. It is the people don’t get a chance to present their 

case. 

Secretary LEW. Oh, yes. That is not correct. There is extensive 

back-and-forth between a company and the FSOC during the stage 

3 process. 

Ms. MOORE. Stage 3. 

Secretary LEW. Yes, extensive. And there is no designation until 

till the end of that. At the end of the stage 3 process, they have 

a right to a hearing. And only one company has sought it, but we 

had a hearing. And then, they have judicial rights of appeal after 

that. So there is a robust due process. 

Ms. MOORE. Stage 3. Okay. Thank you so much, Mr. Secretary. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The committee will now stand in recess for 5 minutes. 

[recess]. 

Chairman HENSARLING. The committee will come to order. 

The Chair now recognizes the gentleman from Alabama, the 

chairman emeritus of the committee, Mr. Bachus, for 5 minutes. 

Mr. BACHUS. Thank you. 

Secretary Lew, this whole the-dog-ate-my-homework defense that 

the IRS and Lois Lerner is using, I don’t—the American people are 

not buying it. But, more importantly, I think it calls into question 

the integrity of the process, and I think it is very disturbing to all 

of us. 

We have computer crashes in our office from time to time. I 

think every Member has had them. And you immediately call in 

the technology people, you make sure that the hard drive is preserved, and you don’t lose emails. 

So I hope you will investigate this as Secretary of the agency and 

find out what happened. 

Secretary LEW. Congressman, I think we all know that hard 

drives do crash, and that is what happened here. In 2011, when 

the hard drive crashed, efforts were made to recover what could be 

recovered. And subsequent to that, after it became a matter of interest, extensive efforts were made to put back together what could 

be put back together. 

I believe that Commissioner Koskinen has testified to this. A report has been sent to Congress in great detail. 

Mr. BACHUS. I am just saying the American people are still waiting on a good explanation. 

Let me ask you this: Orderly liquidation has always struck me 

as a convoluted and kind of highly subjective process that does little to end ‘‘too-big-to-fail,’’ and it gives an enormous amount of discretionary power to regulators. And FSOC makes resolution advice 

or gives recommendations to the FDIC. 

The Judiciary Committee, with the Financial Services Committee, is looking at possible changes, several possible changes, in 

the Bankruptcy Code. We believe that a properly constructed bankruptcy would be a better way to deal with the resolution of failing 

institutions. There are established precedents. 

Do you think that it is a worthwhile process for Congress to consider this approach? 

30 

Secretary LEW. Congressman, I think that orderly liquidation authority actually is an effective implementation of the law in DoddFrank. Obviously it is not the same as bankruptcy, but it is a process that has actually become one that the world is now looking at 

to see if a single point of interest system— 

Mr. BACHUS. You don’t think the bankruptcy process— 

Secretary LEW. I would actually be interested in following up 

with you on what the changes in the Bankruptcy Code would be. 

What I was going to say is I don’t think that all wisdom was contained in the actions taken in the wake of the crisis. 

Mr. BACHUS. We would like to work as partners on this as we 

go forward because I— 

Secretary LEW. And I don’t know that it is instead of the orderly 

liquidation authority. I would not take the orderly liquidation authority away, and I don’t know what proposals are, but I would be 

happy to look at them. 

Mr. BACHUS. And I am not sure we do yet. 

Six months ago, Congress was told that there would be more coordination and guidance on the implementation of the Volcker 

Rule. Unfortunately, I have not heard of a lot of follow-through on 

this pledge. 

Would you review with us what is being done to provide financial 

services providers with guidance they need to comply with the 

many complexities of the Volcker Rule, and give us some assurance 

that implementation questions that were posed to the working 

group will be answered? I know 6 months later, only 6 of those 80 

questions have been answered. 

Secretary LEW. Congressman, I think the fact that an identical 

rule was issued on the same day by all the agencies actually was 

an important step to giving guidance. My fear was there would be 

differences that caused confusion, and I think it is very important 

there is one rule. So I actually think that is the foundation. 

It hasn’t actually gone into effect in terms of compliance yet. And 

the regulators are working amongst themselves as they go into the 

implementation stage to stay in close contact, because there is obviously the risk that you end up with common law in each of the 

agencies going in different directions. That is not an area we have 

direct responsibility over at Treasury or at FSOC, but I think it is 

an important question, and it is one that I ask the regulators as 

well. 

Mr. BACHUS. Right. They still need more guidance in complying 

with Volcker, and I appreciate your willingness to give that. Thank 

you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Delaware, Mr. 

Carney, for 5 minutes. 

Mr. CARNEY. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for coming in today. Thank you for all 

your good work. I have been reading through the FSOC annual report. There is lots of good information and data in there. 

One of the things that is discussed in the annual report is the 

repo market as an area of vulnerability for our financial system. 

And, in fact, in a hearing back in February before this committee, 

Governor Tarullo cited the repo market as the second greatest 

31 

threat to the stability of our financial system after adequate capital 

requirements. 

Do you share Governor Tarullo’s concern? And what steps can be 

taken to prevent adverse consequences in the repo market during 

stress markets? 

Secretary LEW. I think that the short-term funding issues are 

quite significant. That is why, whether you call them short-term 

funding or shadow banking, we are putting so much attention into 

them. 

The risk that one day you open for business, and you don’t either 

have the repo or the money market funding that you expected, we 

saw in the financial crisis, can cause an immediate collapse, and 

it is a collapse with an accelerant on it. 

I think if you look at the amount of funding that is in the repo 

market and the money market funds, it is considerably down from 

where it was at the time— 

Mr. CARNEY. So, less of a risk. But what can be done to prevent 

some of the adverse effects? 

Secretary LEW. I think on both those issues, on triparty repo and 

on money market funds, it is important that the regulators continue to look at the issue and take action. So the Fed has a responsibility in the area of repo, and the SEC has a responsibility in the 

area of money market funds. I know that both are working on additional steps that could be taken to further reduce the exposure. 

There is an efficient market there until there is not. 

Mr. CARNEY. Right. 

Secretary LEW. And the question isn’t what happens when it is 

working well; the question is what safeguards do you have that you 

won’t see in a moment where it collapses. That is why I think the 

Fed is looking at what actions it can take and why it is so important that the SEC finalizes the money markets rule, because I 

think they are really parallel kinds of risks. 

Mr. CARNEY. Moving on to GSE reform, there has been some discussion about it. Unfortunately, my colleague, Mr. Perlmutter from 

Colorado, is not here. He and I have kind of a different perspective 

on it. 

Your report identifies it as an important issue, but it doesn’t say 

too much about the negative consequences of not doing reform. 

I have been working with Congressman Delaney and Congressman Himes on a piece of legislation that would provide a government backstop with a more explicit guarantee. What is your view 

on the risk of not doing reform in the short term? 

Secretary LEW. Look, I believe that housing finance reform is 

really the unfinished business that didn’t get addressed in the immediate wake of the financial crisis. And we have seen only recently with the estimates of the exposure that taxpayers ultimately 

have to the GSEs that, were there to be another crisis, we still 

have the same system that we had before, which wasn’t very 

good— 

Mr. CARNEY. With greater exposure. 

Secretary LEW. Greater exposure. 

So I believe that housing finance reform is very important. I 

think there is a lot of progress that has been made in the Senate 

working towards a bipartisan approach on this. I think there has 

32 

to be a bipartisan solution. And the key to a solution is making 

sure that there is access to finance; making sure that there is a 

clearly delineated responsibility that is not a government responsibility in terms of losses, particularly first losses; and to the extent 

that there is any remaining government backstop, that it be extraordinary circumstances and well-defined. 

Mr. CARNEY. Right. 

Secretary LEW. I think that the process in the Senate didn’t 

make great progress on that. It is obviously not finished. And I 

would hope that a bill can get to conference so that it is an area 

in which we can see bipartisan legislation. 

Mr. CARNEY. I hope so, too. 

I don’t have much time left. But there has been a lot of discussion, and actually a couple of pieces of legislation introduced here 

in the House about differentiating among financial institutions, 

banks, based on different criteria than just size. In fact, Governor 

Tarullo mentioned a few weeks ago that maybe the SIFI designation should be on firms that are $100 billion or greater. What are 

your thoughts on that? 

We have legislation here that Mr. Luetkemeyer and my colleague 

Ms. Sewell have introduced that would differentiate on qualitative 

measures. Do you have any views about— 

Secretary LEW. I think that it is hard to have a hard view that 

there is a size that makes you financially significant and creating 

the risk. The question is, does a combination of your size, your 

structure, your interconnection to the system, and it is something 

that requires our ongoing analysis. 

Mr. CARNEY. Thanks. Thanks very much. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Welcome, Secretary Lew. It is nice to see you back at the committee again. 

Just a couple of questions on emails: How does the Treasury 

back up their emails currently? 

Secretary LEW. The main Treasury, I believe, has an auto 

backup, but I would have to get back to you on the specific details. 

Mr. DUFFY. So after all of the information about emails and 

backups and IRS and Treasury, Housing, you have no idea how 

your emails are backed up? 

Secretary LEW. I will just say that the main Treasury is much 

smaller than the IRS. It has a different volume. So it is a different 

kind of an email system. 

Mr. DUFFY. How about with the White House? 

Secretary LEW. It is generally my assumption that everything is 

backed up. 

Mr. DUFFY. Okay. How about the White House? How does the 

White House back up its email? 

Secretary LEW. I am not an IT professional, Congressman. 

Mr. DUFFY. Neither am I, but I know as a former State prosecutor how the State of Wisconsin backs up our emails. I know how 

the House backs up our emails as a Congressman. You were the 

33 

Chief of Staff, and you are the—I am not an IT expert either. But 

you can’t tell me how they are backed up? 

Secretary LEW. When I was at OMB, and when I was at the 

White House, there was auto backup, but there also were occasionally periods where machines broke. So it— 

Mr. DUFFY. And in regard to machines breaking, when you were 

the Chief of Staff at the White House, did you have a hard drive 

cash? 

Secretary LEW. My personal hard drive? 

Mr. DUFFY. Yes. 

Secretary LEW. Not that I recall. 

Mr. DUFFY. Okay. When you were the Chief of Staff at the White 

House, did you have meetings or a meeting with any IRS employees? 

Secretary LEW. I do not remember. It was quite awhile ago, and 

there has been a lot since then. I would have to go back and check. 

Mr. DUFFY. So you haven’t pondered that question with all 

these— 

Secretary LEW. I did not—I certainly— 

Mr. DUFFY. If I could ask the question, then you could respond, 

please. 

Secretary LEW. No, look, I am happy to go back. There were 

meetings that involved people from different agencies. We talked— 

Mr. DUFFY. So the answer is, yes, you did meet with IRS employees? 

Secretary LEW. The answer is, I don’t remember, but I would go 

back and check if I could. 

Mr. DUFFY. Okay. I am sure you can’t recall. 

Secretary LEW. I never had a meeting on any IRS policy matter 

that I recall. The question you are asking— 

Mr. DUFFY. I mean political matters. 

Secretary LEW. No, not on political matters either. I— 

Mr. DUFFY. Did you have any email correspondence with anyone 

at the IRS? 

Secretary LEW. Not that I recall. 

Mr. DUFFY. When did you first learn about Lois Lerner’s emails 

being lost, her hard drive crashing, those emails from 2010 and 

2011 going missing? When did you learn about that first? 

Secretary LEW. I only learned about it at roughly the same time 

the Congress did, when it was— 

Mr. DUFFY. So you learned about it in the press? 

Secretary LEW. —when there—pardon? 

Mr. DUFFY. You learned about it in the press? 

Secretary LEW. No, no. I learned about it right before the report 

was made to Congress. 

Mr. DUFFY. So you were just given what, a day’s notice? On the 

12th of June, you learned about it? 

Secretary LEW. I don’t remember the day, but I believe— 

Mr. DUFFY. A week before? 

Secretary LEW. No. I believe it was more like the day before. 

Mr. DUFFY. Okay. So you are the Secretary of Treasury, the IRS 

is the biggest bureau in Treasury, and you only learned about this 

the day before we did. 

34 

But isn’t it true that Treasury was notified by the IRS that these 

failures existed, and they were notified in April? And then it was 

Treasury who notified the White House in April that the Lois 

Lerner emails were gone. But you only learned about this in midJune. 

Secretary LEW. The timeline, as I understand it, is that the lawyers at IRS and Treasury discussed the matter. They were notified 

about it. 

Mr. DUFFY. In April. 

Secretary LEW. In April. And— 

Mr. DUFFY. And you didn’t know anything about this, right? 

Secretary LEW. And the guidance that was given at that time, I 

think appropriately— 

Mr. DUFFY. You didn’t know anything about this. Is that your 

testimony? 

Secretary LEW. The guidance that was given, as I understand 

it— 

Mr. DUFFY. So you didn’t know anything about the emails, all 

the news about it. And the lawyers knew, but Mr. Lew, the poor 

Secretary of the Treasury, had no clue what was going on in the 

agency. Is that fair to say? 

Secretary LEW. Congressman, I am happy to answer your question if you give me a moment. 

Mr. DUFFY. If you would answer the question, I would appreciate 

it. 

Secretary LEW. You ask the questions; I can answer the questions. 

Mr. DUFFY. Well, you don’t answer the question. That is the 

problem. 

Secretary LEW. The lawyers at Treasury advised the lawyers at 

IRS, I believe correctly, to make sure they— 

Mr. DUFFY. And did not advise you? 

Secretary LEW. Congressman, I am happy to answer the question 

if you give me— 

Mr. DUFFY. You are not answering the question. 

I just—there is a level of frustration not just in this committee, 

not just throughout Congress, but with the American people. The 

arrogance that the Administration has shown, that the IRS has 

shown, that Treasury has shown with regard to this investigation 

is unbelievable. 

And why wouldn’t you be arrogant? You say, listen, we have the 

Presidency, we have the DOJ, we have the FBI. Why not be arrogant? We have the press. No one is going to report us for this. We 

are not going to answer your questions, we are not going to be 

forthright, we are not going to be honest, because who is going to 

come after us? 

I have to tell you, this is a sad disservice to the American people 

the way this crisis has been handled. 

I yield back. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now— 

Secretary LEW. I would be glad to answer the question if I would 

be given an opportunity. 

35 

Chairman HENSARLING. I suspect there will be Members on this 

side of the aisle who will be more than happy to accord you more 

time, Mr. Secretary. 

The Chair now recognizes the gentlelady from Alabama, Ms. Sewell, for 5 minutes. 

Ms. SEWELL. Mr. Secretary, I will give you more time. You can 

use some of my time to answer his question, if you would like to, 

but I think that it is better served that we talk about the matter 

at hand, what you are here for— 

Secretary LEW. I agree. 

Ms. SEWELL. —which is your annual report for FSOC. 

I would like to return back to the SIFI designation. In your testimony you highlight that designation is not the only alternative to 

address potential risk posed by firms and their activities. 

What are some of the other policy options FSOC could look at? 

And how does the FSOC weigh the pros and cons of the different 

regulatory mechanisms in your toolbox? 

Secretary LEW. Congresswoman, the initial inquiry is whether or 

not there is systemic risk, and if you don’t make the determination 

of that risk being there, then one option is to do nothing. So there 

is always the option not to designate. 

The question then becomes, what is the risk? Where is the risk? 

Is the risk in a firm? Is it in a product? Is it in a business line? 

And depending on the answer to the question, it could lead to different actions. 

So I believe that there has been a kind of oversimplification of 

the process, which is if you ask the question, then the next step 

is designation. I actually don’t think that is the case. I think that 

there will be many instances where the right answer is that there 

is not a risk, or the right answer is that you don’t need to designate the firm. Regulators have sufficient authority, and there will 

be some cases where it will be a product as opposed to a firm that 

is the issue. 

So I think we need to let the process run its course, and that 

means have full analysis, full awareness of the facts, and not be 

in a place where we are afraid to ask the question because the answer might be designation. I think that we have a responsibility, 

if we are going to have a system that prevents financial crises in 

the future, to ask those kinds of questions and not prejudge the answers. 

Ms. SEWELL. I also wanted to know if the FSOC in its examination of an industry or individual firm indicates that a particular activity or business practice may cause systemic risk, are companies 

given an opportunity to address those concerns? 

One result of additional notification throughout the designation 

process could be to encourage companies to reduce their own risk. 

And so, would the FSOC consider establishing a process by which 

a company would be given the opportunity to reduce its own risk 

profile before designation as a SIFI? 

Secretary LEW. It is not only a question of does the company 

have the ability to modify in some way its business structure before, but FSOC looks on an annual basis to see whether or not the 

designation’s continuing is indicated and what the status is. So 

companies have the ability afterwards to make changes. 

36 

As far as the involvement with the company goes, it begins in the 

middle of the process, not at the beginning of the process, I think 

for good reasons. We have a lot of information that is available 

within both the public record and that regulators have, and that 

you don’t need to create a situation where by asking a question you 

trigger a public debate at the first instance of asking the question. 

If it is serious, there is a huge amount of back-and-forth between 

the company and the FSOC staff. 

Ms. SEWELL. I would like to—my last question is really about cybersecurity. I sit on the House Permanent Select Committee on Intelligence. I think cybersecurity is one of the biggest threats to disruption of the financial industry, along with the operational risks 

that it poses. 

I want to know what the FSOC thinks about cybersecurity and 

what its recommendations have been to its firms. 

Secretary LEW. Cybersecurity is something that I must say I, as 

Treasury Secretary, as Chair of FSOC, think about constantly. It 

is one of the kind of new frontiers of risk exposure. I believe that 

we have in the financial services sector made more progress than 

some of the other sectors of our economy, but there is still a lot of 

work to do. 

Ms. SEWELL. Would you be open to information-sharing and reducing the liability so that companies can share? 

Secretary LEW. I think information-sharing is very important. 

There is a big difference between what we see and what companies 

see. The information needs to flow in both directions. 

I also think there is a big difference between what large companies have the capacity to do and what smaller businesses have the 

capacity to do. And where they are working together either directly 

or through an intermediary, whether it is a utility or a contractor, 

makes a great deal of sense. 

We have sought legislation on cybersecurity. The President has 

issued an Executive Order that goes as far as he can with his executive authority, but legislation in this area would be very important. I think the industry would be very pleased to see more ability 

to collaborate. 

Ms. SEWELL. Thank you, sir. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Virginia, Mr. 

Hurt, for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for being here and presenting us 

the FSOC annual report. 

I do want to ask some questions about that, but I was curious, 

based on just a follow-up to Mr. Bachus’ questions about the IRS 

issue, it seemed to me your response was, well, in 2011, there was 

a hard drive crash, that is life, and that the IRS really has done 

everything it can to comply with congressional requests. 

Do you think that it is important for Congress to get answers to 

its questions? And is it important for Congress to be able to see 

those emails, whether we recover them from IRS or some other 

agency? Do you think that is important? 

Secretary LEW. Not only do I think it is important, I think that 

is what the IRS has been trying to do. And Commissioner Koskinen 

37 

has been working to assemble the emails to provide them for review, the Lerner emails. 

Mr. HURT. But in your role as Secretary of the Treasury, and ultimately the authority over the IRS, do you believe you have the 

authority to independently look at what the IRS is doing to make 

sure that this gets done? What have you done, and what are you 

going to do to make sure that we pull out all the stops to get these 

emails? 

Secretary LEW. I believe that they are working quite hard. The 

number of hours and man-years, person-years that have been put 

into this, the amount of money that has been spent is astronomical. 

They have made an enormous effort. Commissioner Koskinen has 

testified at length on it. Obviously, it is not a situation that anyone 

chose to have. There was a machine failure in 2011. But they have 

worked as hard as they could to reconstruct, and 70,000 emails, I 

believe, were turned over for review. 

Mr. HURT. I understand. But obviously it is a very critical time 

period, and I guess what I would love to hear, as a Member of Congress who has constituents who are very worked up about this, is 

I would love to know that the Secretary of the Treasury is exercising everything within his power to make sure that the IRS is 

doing that. It does not sound like you have taken any direct role 

whatsoever, and that concerns me. 

Secretary LEW. No. When I became aware of this, what I was 

told was that the message had been sent from Treasury, I believe 

appropriately, find out everything you can, find whatever you can, 

and give a complete report when you have that. 

That report was completed, I concur with the advice that was 

given, and if there is any more that can be done, it should be done. 

Mr. HURT. But you are the doer. It seems to me that is a passive— 

Secretary LEW. What I can’t do is make a hard drive that broke 

not be broken. 

Mr. HURT. I understand that— 

Secretary LEW. What they have gone and done is they have 

looked at all the recipients of emails to pull them out from the recipients’ email records. They are doing everything they can, and an 

enormous amount of information has been provided. 

Mr. HURT. All right. Thank you. 

Let me just ask my—I only have 2 minutes left, but let me just 

ask you this question. I represent Virginia’s Fifth District, a rural 

district, with a lot of Main Street small businesses, family farms, 

and working Virginia families. Access to capital is very important, 

and community banks and credit unions play a huge role in reaching the people whom I represent. 

In the last 30 years, I am sure you know these figures, we have 

gone from seeing 18,000 community banks that held 40 percent of 

bank assets, 18,000 to now, today, fewer than 7,000 community 

banks, 18,000 to 7,000, and assets amounting to 40 percent to now 

down to 15 percent. 

And I guess my question is, as a part of the mission of the Financial Stability Oversight Council, in your role as Chair, does that 

trend concern you, the idea that we are reducing the number of 

community banks and the assets that are held there? And does 

38 

that in and of itself present its own systemic risk when you have 

the consolidation of these assets in banks the way we have seen it 

the last 30 years? Does that concern you, and if it does, what do 

we do about it? What can you do about it? What is the FSOC doing 

about it? 

Secretary LEW. Congressman, as the different agencies with the 

responsibility for implementing Dodd-Frank have taken action, 

each and every one has made efforts to try and treat community 

banks in a way that reflects the importance that they play in our 

economy and the fact that they are different from large institutions. There is a lot of discussion about it, there is a lot of attention 

to it, and I believe the rules reflect that. 

We have a dynamic changing landscape in the financial services 

world. We have to keep an eye on what those changes are. I think 

the community banks play an important part in it, and we, as we 

have acted, have tried to reflect that. 

Mr. HURT. But does that trend concern you? Where do we—I 

yield back my time. 

Mr. HULTGREN [presiding]. The gentleman’s time has expired. 

Mr. HURT. Thank you. 

Mr. HULTGREN. The gentleman from Illinois, Mr. Foster, is recognized for 5 minutes. 

Mr. FOSTER. Thank you. 

I would like, if we could, to turn our attention first to the upcoming July 20th deadline for the talks with Iran, which, obviously, 

these can succeed, fail, or come to some intermediate result. What 

sort of contingency plans are you looking at for the financial part 

of the sanctions, which may have to be strengthened or weakened 

or held in place? 

And, second, what is the role you envision for Congress in the 

overseeing and concurring on any changes to the financial sanctions that may result as a result of these negotiations? 

Secretary LEW. Congressman, we have kept in place the architecture of our Iran sanctions even during the period of negotiations. 

The Joint Plan of Action had very narrowly defined, denominated, 

one-time relief, and the rest of the sanctions stay in effect. Since 

we began the negotiations under the Joint Plan of Action, we have 

taken over 60 enforcement actions on the underlying sanctions. So 

we don’t have to do anything to put it into place; it remains in 

place. 

The question really is, what happens if the talks fail? Do we then 

go for tougher sanctions? We have made it clear that if the talks 

fail, there would be, I believe, the need to take tougher action on 

sanctions. 

Mr. FOSTER. But my question is, do you have contingency planning for the possibility of tougher sanctions, the possibility of effectively monitoring relaxed sanctions if there is a— 

Secretary LEW. In a world where there is an agreement, that is 

obviously a very different situation. And I am not going to prejudge 

what the sanction regime would be after that. We have multiple 

sanction regimes with Iran, and I can tell you that we will be vigilant about implementing all sanctions that remain in effect after 

an agreement. 

39 

If there is an agreement, obviously there will be some change, 

but we are not announcing in advance what that is. Frankly, we 

are not at the point yet where we are ready to say that we have 

seen a basis for making the decision to do that. We are going to 

have to see Iran making the kinds of concessions that it has to 

make, which means not having nuclear weapons. 

Mr. FOSTER. Okay. 

In your report, the section on data gaps and data quality, which 

were some of your systemic concerns, you mention that they are 

still unable to effectively monitor securities lending transactions 

and reinvestment of the cash collateral. 

So what is the nature of that situation? What action is needed? 

How worried should we be about that? 

Secretary LEW. Look, I think that there is both an increasing 

concentration of activity in certain places because we now, for example, in commodities have a registration, so it is transparent, 

what is happening. That puts more transactions in one place. 

We also have the challenge of communicating amongst systems 

which are different systems. 

The reason it was highlighted as a risk there is we do have more 

work to do on that. It is both a technical challenge, but it is also 

a question, ultimately, of the stability of the system. So I think 

that the observations in the report reflect the fact that we are 

going to keep working on it. 

Mr. FOSTER. Do you feel like you have all the legislative authority you need in that specific area, or is this something where Congress might have—it is my recollection that, during the crisis, 

something like 40 percent of AIG’s losses were from their securities 

lending business. 

Secretary LEW. Right. 

Mr. FOSTER. So this is not a trivial thing, despite what was said 

earlier in this hearing. And so— 

Secretary LEW. We obviously have a lot more tools now. We have 

a whole set of rules, particularly in the derivatives area, that 

weren’t there before. So we have made a lot of progress. 

I actually don’t know the answer to the question of whether we 

have all the authority we need, and I would like to follow up as 

we learn more. 

Mr. FOSTER. Okay. 

I will do everyone a favor and yield back early. 

Secretary LEW. I’m sorry? 

Mr. FOSTER. I yield back. 

Mr. HULTGREN. The gentleman from Illinois yields back the balance of his time. 

The gentleman from North Carolina, Mr. Pittenger, is recognized 

for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Secretary Lew, thank you so much for being here today. I am always impressed by your presentations. You are a very eloquent 

man, even when we don’t hear what we would like to hear. 

You have an amazing pedigree: Harvard undergrad; Georgetown 

University; you worked for Speaker of the House Tip O’Neill; for 

Bill Clinton, been in the White House. You are one of the most 

powerful people in the world today. 

40 

My background is a little bit different. I grew up in central 

Texas. I went to the University of Texas, a fine university. I can’t 

tell you I was one of the better students; I was not. My daddy told 

me, he said, ‘‘Son, if you want to be smart, you need to hang 

around a lot of smart people.’’ 

I built a real estate investment company, and one thing I did was 

hire a lot of smart people. We have half a dozen attorney groups 

who work with us around the country. I am no longer part of this 

company. We hired securities attorneys, we hired real estate attorneys. We hired market analysis people. I hired an economist that 

we kept for 25 years. 

Their good work and counsel kept us out of a lot of trouble. I can 

say that after 25 years and a couple thousand investors and maybe 

60 or 70 partnerships, we never had a failed one. That is by the 

grace of God, but really a lot of good, smart people telling this little 

boy from central Texas what he ought to be doing. 

Today, we are looking at the operations of FSOC and what it is 

doing and its designations, and that is important to a lot of people. 

It is going to affect a lot of companies in the impact of this country. 

A lot of families will be affected. 

Yet, when I read some of the input from some of the individuals 

who would be associated with FSOC and aware of it, I find that 

they take a different position than the position that you have. 

I look at Doug Elliott with the Brookings Institution, which you 

have been a part of yourself, who says that heightened prudential 

standards would cause broad economic harm because the insurers 

of one of the largest providers of long-term investment funds, and 

limiting the ability of insurers to make long-term investments 

would be unfortunate, since many commenters have pointed out 

that they need to increase the supply of such funds, especially with 

regard to massive investments in U.S. infrastructure that are needed in the years ahead. 

We look at Roy Woodall, an FSOC member, appointed by the 

President. His comment was that he felt that the FSOC’s analysis 

relied on scenarios antithetical to a fundamental and seasoned understanding of the business of insurance and the insurance regulatory environment. 

Barney Frank, a former chairman of this committee, stated that 

it was not his intent that asset managers be designated for heightened prudential standards or supervision by the Federal Reserve 

Board because they do not pose a systemic risk. 

Mr. Lew, my point is that many of us believe that these designations undermine the market discipline, they allow some companies 

to be favored, to believe that they are protected from further losses. 

Some of us see that there are structural flaws at FSOC that allow 

this to continue. 

I think the thing that is troubling to me is that you are a bright 

guy, you are nobody’s fool, you didn’t get to where you are by just 

slothing through, but you have some capable people who understand the business, like the folks who understand my business, 

that you don’t appear to be listening to. And I would hate to think 

that, years ahead, you will look back and say, maybe I should have 

listened to those people a bit more. 

41 

And the concern that I have and frankly, a lot of my constituents 

have, is that the folks in Washington think they have superior 

knowledge, they are smarter than everybody else, they have it all 

figured out. And I would just commend to you that there is safety 

in good counsel, wise people who understand the business, like Mr. 

Woodall. He understands this business. 

So that is really my comment, and we have 30 seconds left, and 

you are welcome to say whatever you like. 

Secretary LEW. Congressman, first, I appreciate the kind personal remarks. 

The process we go through in FSOC is, one, is a level of great 

detail and great rigor. And all the members of the Council have 

views that are worthy of being heard and considered. There isn’t 

always a unanimous view. I believe the record that was built justified the action taken in the cases where designations were made, 

but I don’t believe it always will. 

And I just would point out that, particularly in the asset management area, no decision to designate has been made yet, so it is 

premature to know the outcome there. 

Mr. HULTGREN. The gentleman’s time has expired. 

Mr. PITTENGER. Thank you. 

Mr. HULTGREN. The gentleman from Michigan, Mr. Kildee, is recognized for 5 minutes. 

Mr. KILDEE. Thank you. 

And welcome, Mr. Secretary. It is always good to have you here. 

Secretary LEW. It is always a pleasure to be here. 

Mr. KILDEE. I just want to say how much I appreciate your participation, your candor, but also your demeanor in this hearing. 

And I concur with Mr. Pittenger’s commentary—while I might not 

agree with his conclusions, I concur with his commentary and applaud his demeanor, as well. I wish that were more the norm. But 

your patience and politeness is noted, at least by some of us here. 

I do agree that you don’t necessarily get smarter when you come 

to Washington. I also have concluded that there is a certain 

amount of evidence that the trend is in the other direction. But I 

will say to you, I appreciate—and I am not speaking of you; I am 

talking about some of us on the other side of the dais—I appreciate 

your politeness. 

I want to talk to you quickly about two things. One has to do 

with the Department of Treasury’s TARP program. As you are 

aware, TARP includes a program called the Hardest Hit Fund. Mr. 

Scott mentioned it. It is intended to assist those communities and 

homeowners in communities that have been most negatively affected by the financial crisis. 

Some communities have had a much more difficult time coming 

out of that crisis, largely because many of the communities that 

were hit by the crisis had already been hit by a long-term crisis 

in housing—depressed values, abandonment, et cetera. 

So last fall, myself and my staff worked with your team at Treasury; it was specifically Former Assistant Secretary Tim Massad. 

And we were able to secure $100 million to be reallocated from the 

particular uses that Hardest Hit allowed to demolition. 

What I would like you to consider, and you will be getting a letter from me later this week on this, is whether there has been any 

42 

consideration or discussion within Treasury to extend the use, the 

available uses, eligible uses, of Hardest Hit that could be used for 

demolition beyond just residential properties but to look at specific 

commercial properties and residential communities that have negative externalities and are depressing the value of property. 

I say that because before I came to Congress, I was involved in 

doing a lot of work and research and activity in this area, and we 

were able to conduct a number of studies that measured the impact 

of demolition on surrounding property values. 

In Flint, Michigan, my hometown, for example, we took a few 

million dollars, and were able to demolish several hundred homes, 

and saw surrounding property values have a positive impact. In 

fact, just several million dollars unlocked the value of local properties to the tune of about $112 million. Changing that value equation obviously is one of the factors that mitigates future abandonment resulting in foreclosure. 

Is that something that you might consider at Treasury? 

Secretary LEW. Congressman, the decision on using the Hardest 

Hit Fund for housing demolition was one of the first issues that I 

made a decision on when I became Secretary. And I— 

Mr. KILDEE. You made a good decision. I appreciate that. 

Secretary LEW. —believe the analysis was very solid, that if your 

goal is to keep houses from going underwater or get them from 

being underwater to being above water, having abandoned properties on the block was something that had a material impact. And 

since the purpose of those funds is to help homeowners get out 

from underwater, the relationship was quite direct. 

I haven’t looked at the question of commercial property. I would 

be happy to look at it. But it would have to meet a test that is permissible under the TARP program. 

And I will just add, I had the pleasure of being in Michigan the 

day that the demolition began— 

Mr. KILDEE. Right. 

Secretary LEW. —in the Marygrove neighborhood in Detroit. 

Mr. KILDEE. Right. 

Secretary LEW. And you go block to block in that neighborhood, 

and you see where abandoned houses have been allowed to sit for 

a year and where they have been demolished. It has everything to 

do with the stopping the decline and helping the rebirth of a neighborhood. I think we made the right decision, and I was very 

pleased to be able to join the mayor there. 

Mr. KILDEE. I very much appreciate it. It is definitely a direction 

that makes sense. The application of the funds to commercial properties within neighborhoods, I think, will have as dramatic, if not 

a more dramatic effect. So I will be communicating with you on 

that in the coming weeks. 

And rather than ask a question, I just want to reiterate, on a 

completely different subject, my support for the work that Treasury 

continues to do in implementing sanctions regarding Iran. As you 

may be aware, I have a constituent who continues to be held in an 

Iranian prison; his name is Amir Hekmati. And it has certainly 

made a difference. The sanctions are what have brought the Iranian Government to the negotiating table. I can’t prejudge what 

will happen in the P5+1 or with July 20th soon approaching, but 

43 

we know we wouldn’t be in a position to even have the possibility 

of an agreement without those sanctions. I appreciate your work on 

that. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus, for 5 minutes. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. Good afternoon, now that we have 

passed the noon hour. 

Just a few days after you testified before this committee in May, 

Douglas Holtz-Eakin, the former Director of the Congressional 

Budget Office, released a study in which he estimated that if the 

FSOC designates asset managers as SIFIs, investors could see 

their returns reduced by as much as 25 percent over the long term. 

As he puts it, designating asset managers could cost each investor 

more than $100,000. 

And while the OFR’s asset management study considers farfetched in the remote hypothetical situations, it never considers the 

costs that will be imposed on investors and on the economy if the 

FSOC designates asset managers, nor does it consider whether the 

benefits of designation outweigh those costs. 

Shouldn’t the FSOC’s SIFI designation process consider the costs 

of designation as well as its benefits? 

Secretary LEW. Congressman, I just want to underscore that no 

decision has been made on whether to designate the asset managers or not. So the OFR study was one piece of analysis as part 

of a process. 

Mr. ROTHFUS. And should they consider costs of designation? 

Secretary LEW. The designation process is one that is aimed at 

determining whether or not there is systemic risk. It is not a— 

Mr. ROTHFUS. So there is no consideration for the costs that will 

be imposed? 

Secretary LEW. The statute creates a standard that we use, 

which is whether or not there is that level of risk that warrants 

a decision. 

Obviously, as regulators, if they take responsibility for an area, 

they then weigh different approaches in terms of how to regulate, 

and then it is a different issue. But the statute does not actually 

create a cost-benefit standard. 

I can’t speak to the analysis that you are describing. Obviously, 

I am aware of it, I have seen it. But it makes assumptions about 

actions that have not been taken yet, so I think it is premature for 

anyone to draw a conclusion— 

Mr. ROTHFUS. If you could take a look at the OFR’s, the Office 

of Financial Research’s September 2013 report, OFR argues that 

mutual funds with a floating net asset value are risky because they 

could create a run on redemptions during a time of stress. Then, 

when I look back to FSOC’s attempts to subvert the SEC’s jurisdiction over money market funds in 2012, FSOC proposed a floating 

NAV for money market funds. 

These two examples seem to be contradictory. Doesn’t this just 

reinforce the reason why regulating this industry should be left to 

the SEC, who has the needed familiarity and expertise? 

44 

Secretary LEW. The SEC, as I mentioned earlier, is in the process 

of considering a rulemaking with regard to money market funds, 

and I certainly hope that they reach a conclusion that provides the 

kind of oversight of the— 

Mr. ROTHFUS. Should that be within the discretion of the SEC 

and not the FSOC? 

Secretary LEW. The FSOC reached a conclusion, with the SEC 

being very much a part of the process, that this was an important 

area to address. The FSOC made recommendations; now the SEC 

has a rulemaking. 

And I will also add that, in the process of going through the 

asset manager review, the SEC is fully a part of that process. They 

review drafts of the OFR study. They are part of the decision that 

FSOC will make, because the Chair is a voting member of FSOC 

and the staff work on all the preparation to it. So— 

Mr. ROTHFUS. I would like to ask a question getting back to ‘‘toobig-to-fail’’ and whether it has been ended. 

The President and this Administration have a sad history of 

overselling its policy objectives and initiatives. They oversold an 

$800 billion stimulus saying that it wouldn’t cause—or, if you 

passed it, unemployment wouldn’t go above 8 percent. They oversold the Affordable Care Act with the famous, ‘‘If you like your 

healthcare plan, you can keep it.’’ They shockingly oversold, I 

would say misled, about the impact of a video in Benghazi. They 

oversold the ability to reset relations with Russia. They oversold 

the record-retrieval capacity of the IRS with the email scandal. 

They oversold their ability to manage the VA. They oversold the 

demise of Al Qaeda. 

Now, as recently as July 2013, you stated, as a matter of law, 

that Dodd-Frank ended the notion that any firm is ‘‘too-big-to-fail.’’ 

And you also said, if a financial firm fails, the taxpayer will not 

bear the cost of that failure. 

Now, Secretary Geithner—or, today, you seemed to backtrack on 

that. When the chairman asked you if ‘‘too-big-to-fail’’ has been 

ended, you testified, ‘‘We won’t know until the next crisis.’’ But that 

is not how Dodd-Frank was sold to the American people. 

Secretary Geithner now says that, of course, the ‘‘too-big-to-fail’’ 

still exists. 

Would you agree that the Administration oversold the promises 

of Dodd-Frank? 

Secretary LEW. Mr. Chairman, can I have a few seconds to answer? 

Chairman HENSARLING. A brief answer, Mr. Secretary. 

Secretary LEW. Congressman, I had tried to address that issue 

at some length earlier, but I believe we have taken enormous steps 

to make our financial system more safe and more sound and to 

make it so that, if a bank fails, a financial institution fails, they 

will bear that risk themselves. That is what the capital is going to 

help do; that is what the resolution rules will help do. 

What I said in the response to the earlier question is a matter 

of fact. The true proof comes at the time of the next financial crisis. 

I believe we have taken very dramatic steps and made very dramatic progress. 

Chairman HENSARLING. The time of the gentleman has expired. 

45 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck. 

Mr. HECK. Thank you, Mr. Chairman. 

Mr. Secretary, thank you so much for your presence here today. 

As you know, in 2012, when the Congress reauthorized the extension of the Export-Import Bank, the Secretary of Treasury in 

your department was directed to enter and pursue negotiations 

with other major exporting companies, with an objective of substantially reducing and then—and with the goal of eliminating the 

role of export credit authority subsidies of goods sold. 

I am curious as to whether or not, as a result of that process or 

any of your other conversations with finance leaders from other 

countries, has there ever been an indication to you of a willingness 

on the part of those other countries to ‘‘substantially reduce’’ their 

export credit authority. 

Secretary LEW. Congressman, there actually is a working group 

on export credit subsidies that met at Treasury 2 weeks ago, and 

there were 15 countries represented at that. 

The issue has come up in my conversations from time to time 

with other finance ministers, and I have made the same point to 

them that we have made in public, which is that there has to be 

a level playing field. It cannot be a question of the United States 

unilaterally withdrawing from these kinds of programs while other 

countries stay in, because that would put our firms at a disadvantage. 

So I think the working group is a good thing, and a level playing 

field is the goal. 

Mr. HECK. Have any of those countries indicated a willingness to 

do away with their export credit authorities? 

Secretary LEW. I am not sure they have gone that far yet, but 

that is obviously one endpoint that would leave a very level playing 

field. But it can’t be that the United States steps back while everybody else is subsidizing their exports. 

Mr. HECK. As you are aware, China is, as we sit and speak, developing a commercial aircraft for sale, the C919. It is my impression that it is being substantially subsidized by China in its development. Would that be your impression, as well? 

Secretary LEW. I do understand that there is a Chinese aircraft 

industry, and I don’t know the exact structure of it, but they do 

have many state-sponsored enterprises. 

Mr. HECK. And they also have a state-sponsored enterprise to develop small aircraft, which are being sold with the assistance of 

China’s export credit authority already. 

What would your opinion, then, Mr. Secretary, be as to whether 

or not China, in absolute dollars and as a percentage of GDP, about 

the largest export credit authority on the face of the planet, what 

is your opinion about whether or not the Chinese export credit authority would engage in financing of the sale of their C919s once 

they are developed? 

I realize that no memo has been issued by them, but you are a 

worldly guy with a strong, firm grasp of how the economy works. 

Would you fully expect China to provide export credit authority for 

the sale of their commercial aircraft? 

46 

Secretary LEW. I think we have seen in the commercial aircraft 

industry worldwide that there is a willingness of governments to 

provide export support. I have no reason to believe that China 

would choose not to do that. I don’t know of the specific intention. 

I do think that it is a case where we either all have to agree to 

not do it or the United States has to maintain the Export-Import 

Bank kinds of support so that our industries can compete on a fair 

basis with other manufacturers who have access to export support 

programs. There is not a place for the middle ground where we 

withdraw and others don’t. 

Mr. HECK. I don’t want to put words in your mouth, to be sure, 

so let me do a little reflective listening. Here is what I think I 

heard you say: If our future is that Airbus is provided export credit 

authority for purchases of financing sales and the Chinese-made, at 

some point in the future, C919 aircraft is provided with Chinese 

export credit authority financing assistance and airplanes made in 

the United States of America are not provided with export credit 

authority financing, that would put us at a material disadvantage 

to compete in the global market. 

Secretary LEW. Yes, I think that is correct. 

And I also think that our Administration’s support of the ExportImport Bank has been clear. We think it is an important aspect of 

how not just our aircraft industry but many large and small U.S. 

firms can play on a level playing field in a world where other exporters have access to credits. We can discuss a world where there 

were no such credits, but in a world where others engage in that, 

we can’t unilaterally disarm. 

Mr. HECK. Thank you. Fair enough. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from New Mexico, Mr. 

Pearce, for 5 minutes. 

Mr. PEARCE. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for being here today. 

Mr. Secretary, you had written in your comments on page 2 that 

we learned from the 2008 financial crisis that regulators should 

have asked more, not fewer, questions about the institutions and 

the activities they oversaw. 

So why do you think that we weren’t asking enough questions 

going into this 2008 time period? 

Secretary LEW. I can’t go back and tell you exactly why different 

institutions and individuals behaved the way they did, but I think 

we saw the results, that there was a financial crisis— 

Mr. PEARCE. No, I am— 

Secretary LEW. —that took everyone by surprise. 

Mr. PEARCE. I think it wasn’t the institutions themselves. It is 

that regulators should have asked more. Why were the regulators 

not asking more questions? 

Secretary LEW. There was no regulator that had broad responsibility for looking across the financial horizon and asking about financial stability. Regulators each had their siloed areas of regulatory authority. And in their areas, they asked questions the way 

they had in the past. 

Mr. PEARCE. There hadn’t been anything in the past that had 

caused people to say, hey, we need to start asking more questions, 

47 

we ought to work back and forth across these silos? Nothing had 

come up about that? 

Secretary LEW. In retrospect, there were people saying that there 

were questions about that which needed to be asked, but the system didn’t respond. And— 

Mr. PEARCE. When you say the system didn’t respond, what does 

that mean? 

Secretary LEW. I think that in the 1990s, there was the debate 

about derivatives, and in the early 2000s, there was a run-up in 

the housing market and development of highly leveraged— 

Mr. PEARCE. What system was not responding? 

Secretary LEW. Depending on the issue, it was different regulators. You had relatively lax regulation in some of the banking 

regulators. You had— 

Mr. PEARCE. Was anyone calling attention to that? 

Secretary LEW. Was anyone calling attention to it? 

Mr. PEARCE. Yes, sure. Anyone in your field of interest, your 

sphere of interest. 

Secretary LEW. I was not in Washington at the time, so I don’t 

want to pretend to have been participating. But the build-up in 

mortgage credit on riskier and riskier terms was viewed as a narrow housing issue, not a systemic issue. 

Mr. PEARCE. But nothing in your experience gave you cause 

where you would elevate the concerns? 

Secretary LEW. It was not my set of responsibilities at the time, 

but— 

Mr. PEARCE. If I would take a look back at 1994 to 1997, you 

were Deputy Director of OMB, and in 1998, you were made the Director. And when I take a look at the Web page for OMB, it says 

that it is oversight of agency performance, oversight of all agency 

performance, measures quality of agency programs, policies, and 

procedures. 

Now, it was exactly during that period that long-term capital did 

almost exactly the same thing. They almost collapsed the world 

economy, according to the leading articles of the day. And, under 

your watch, you had the ability to see that this extremely dangerous thing was occurring in the markets. 

And what they were doing was ramping up their asset—or they 

were taking their asset value down as low as 3 percent. That is exactly what Bear Stearns did 10 years later, down to 3 percent. And 

it was one of the original partners at Long-Term Capital who was 

the head of Bear Stearns. 

So, we had 10 years to assess. And the system knew exactly 

what was going on. You were the one in charge of the OMB; you 

were the one in charge at the White House. And yet, you make the 

statement here that regulators should have asked more, not fewer, 

questions. You were the one who should have been saying to the 

regulators, ‘‘Your system is not working.’’ This is a very dangerous 

thing that went on. 

And, yet, now and today, we are sitting here, and on page 3 you 

say, ‘‘As the distance in time since the financial crisis grows, we 

must not forget the financial and emotional pain endured by millions of American families who lost their homes or retirement savings or jobs.’’ 

48 

It would be nice if that same perspective had been kicked out 

after the Long-Term Capital failure, saying, let’s not let this happen again, but instead, 10 years later, the same thing happens 

again. And I find your statements to be surprising. 

I yield back, Mr. Chairman. 

Secretary LEW. Congressman, if I could just respond briefly. 

Mr. PEARCE. If I have time, sure. 

Secretary LEW. First of all, when I was at OMB, the Office of 

Budget and Management has relatively limited insight into independent regulatory agencies, their rules, and the actions they 

make. They are independent regulators. 

One of the reasons FSOC was created was to have a place where 

there was an ability to look across all of the independent regulators 

and work together. I think FSOC actually is an important solution 

to that problem. 

Mr. PEARCE. Again, the warning sign was there. We almost collapsed the world economy. You were the guy in charge of checking 

the economy. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman, for 5 minutes. 

Mr. SHERMAN. Thank you. 

Mr. Secretary, the last 2 or 3 times you have come here, I have 

focused your attention on the worldwide unitary system of taxation. 

Last time you were here, you said that your Assistant Secretary for 

Tax Policy had reviewed that and was anxious to talk to me about 

it. He hasn’t reviewed it. 

I would hope that you would commit now that your Department 

would devote some serious high-level time to reviewing what would 

be a system that would increase our tax revenues by over $1 trillion over 10 years and is the system that has been used by the 50 

States to deal with multi-jurisdictional income taxes long before 

globalization occurred and multi-jurisdictional income tax meant 

international rather than multi-State. 

Can I get a commitment that you and your Department are going 

to look at the— 

Secretary LEW. Congressman, he has reviewed it. If he hasn’t 

been in touch with you, I will make sure he gets in— 

Mr. SHERMAN. Oh, no, he was in touch. He basically—we talked 

for a few minutes, but he had not looked at the issue. 

Secretary LEW. My understanding is that there are people in his 

office who have looked at it. I will make sure they contact you. 

Mr. SHERMAN. They are streamed on other things. 

I have read Ayn Rand. Ex-Im Bank is not mentioned in any of 

her books. I dream of a world in which all competition is fair and 

as uninfluenced by government as possible. 

Do you think you could be successful in getting Germany and 

France and Japan to eliminate their analogs to the Ex-Im Bank if 

we would just eliminate ours first? 

Secretary LEW. I don’t know the answer to that question. Obviously, the engagement that is under way is aimed at trying to answer that question. 

What I do believe is that it would be wrong for us to unilaterally 

withdraw from the Export-Import Bank while other countries are 

49 

providing export subsidies, putting our manufacturers and exporters at a disadvantage. There needs to be a level playing field. 

Mr. SHERMAN. It is strange, because I am on the Foreign Affairs 

Committee, where sometimes Members of our party are accused of 

being in favor of unilateral disarmament, and then I come here and 

it is folks on the other side in favor of—or at least some, in favor 

of unilateral disarmament. 

Secretary LEW. And I don’t disagree with the notion that it 

would be a good thing if there were no export subsidies. The two 

positions are not inconsistent. 

Mr. SHERMAN. Right. But if we eliminated the Ex-Im Bank, 

wouldn’t our foreign trading partners have absolutely no incentive 

to eliminate theirs? 

Secretary LEW. I think if we did it on a unilateral basis, yes. If 

it was part of a negotiation, that would obviously be very different. 

Mr. SHERMAN. Right. That would be like doing missile control 

with the Soviet Union by eliminating all our missiles and then 

going to the missile control— 

Secretary LEW. I am not sure I would want to compare the 

stakes, but I understand the analogy. 

Mr. SHERMAN. Okay. 

You have to define SIFIs. The tendency is to define SIFIs based 

on the size of their assets. I want to urge you instead to look at 

the size of their liabilities. 

What causes a SIFI to bring down the entire economy is that 

people were expecting that they would meet their obligations and 

they are unable to do so. For example, if you had a company with 

a great name but modest assets that went out and incurred a trillion dollars of contingent liabilities by writing a bunch of credit default swaps, that entity would be a SIFI, assuming defaulting on 

a trillion dollars of credit default swaps would bring down the economy—maybe the number would be bigger—regardless of the size of 

its assets. As a matter of fact, the smaller its assets, the worse situation we are in, if they are engaging in more than a trillion dollars of credit default swaps. 

With that in mind, as to mutual funds, they don’t have liabilities, 

except if they are leveraged, except for one thing, and that is they 

have the contingent liability that if the custodian function is not 

handled correctly and you open the safe and there is nothing there, 

then they have a liability. 

So I would hope that when you are dealing with an unleveraged 

mutual fund with extremely strong custodian functions that you 

would not be designating that as a SIFI. 

I don’t know if you have a comment? 

Secretary LEW. As I have said a number of times this morning 

and afternoon, we have not made a decision yet, but we definitely 

understand that there are different kinds of assets in asset management funds, custodial funds. I understand the important difference between leveraged and unleveraged funds. 

We will complete this process and reach a determination as to 

whether or not there is a basis for designation. But asking the 

question does not mean we decided to designate. 

Mr. SHERMAN. Okay. 

50 

And, likewise, insurance companies seem to be well-regulated. It 

is when you let the unregulated portion of AIG write credit default 

swaps that you have a SIFI problem. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. 

And thank you, Secretary Lew, for being here. 

I want to follow up on how we can work together in a bipartisan 

and constructive manner, as Subcommittee Chairman McHenry 

had questioned a few minutes ago. 

As he noted, we have passed a couple dozen bills by super-majorities out of this committee, including many by voice vote, and 

many of those have passed the House, as well, that made sensible 

reforms to Dodd-Frank. 

Notably, even former Fed Chairman Ben Bernanke, in his last 

appearance here, when asked where Congress should focus and 

where the Fed would be interested in engaging, he stressed a couple of different things: first, he stressed swaps push-out, which creates more systemic risk and impacts end-users’ ability to hedge; 

second, he mentioned end-user margin, which Congress never intended and where regulators need clarity; and third, he said regulatory relief for banks, especially smaller financial institutions. 

I wonder, does the Administration intend to support any of these 

sensible reforms? And does Treasury have a list of bipartisan reforms that we can work on? 

Secretary LEW. Congressman, as we have indicated, we think 

that many of these issues are premature, that regulators are dealing with these issues and that the need for legislation is not yet 

clear. 

And as I mentioned in my response to an earlier question, the 

idea of going in and amending Dodd-Frank, if it is a question of 

truly technical fixes that don’t open other issues, obviously is different than if it is part of an effort to take a broader look at DoddFrank. 

We have not thought that the legislation was appropriate up 

until now. That continues to be our view. But we look forward to 

working with you going forward. 

Mr. HULTGREN. I would say, please hurry. People are suffering 

under these things. Again, as Chairman Bernanke recognized, 

these do have an impact. And further delay is absolutely impacting 

the economy and many of these institutions that are just trying to 

get answers and trying to figure out how to work. 

And, again, when these are done in a super-majority way, to me, 

it would seem like it would draw light to the Administration and 

to the Treasury that this is important, that this isn’t just something that we are tinkering with or pushing on, but instead this 

is what we are hearing from people who are trying to respond in 

a very difficult climate already. And I would say delay and confusion is making it worse. 

Let me move over a little bit to oversight function of FSOC. I believe oversight is extremely important, that this committee has to 

be engaged in this because of the design of FSOC, which really 

51 

makes it much more opaque and unaccountable than other regulatory agencies. 

Certainly, this includes broad statutory discretion that the FSOC 

has to designate certain companies as SIFIs. We have talked about 

that a lot today. That is why I am a cosponsor of Chairman Garrett’s bill, the FSOC Transparency and Accountability Act, which 

would implement commonsense reform measures to the FSOC that 

would improve the SIFI designation process. 

One example of FSOC’s inadequate structure is how it constitutes who a voting member is. I wanted to ask you some questions on this. The FSOC is dominated by the heads of bank regulatory agencies: the Chairman of the Federal Reserve; the Comptroller of the Currency; the Chairman of the National Credit Union 

Administration; and the Chairman of the Federal Deposit Insurance Corporation. Not surprisingly, these regulators have a 

bankcentric view of the world. 

Secretary Lew, I wondered, can you explain to the committee 

why it is that the expertise and judgment of bank and credit union 

regulators should be substituted for that of the SEC in the case of 

asset managers, or State insurance regulators in the case of insurance companies, when determining how these firms should be regulated? Are these persons really qualified to vote on whether to designate nonbank financial institutions as SIFIs? 

Secretary LEW. I think the statute was set up quite correctly to 

require all of the members of FSOC to look across our financial system and look at risks that cut across the responsibilities of different regulators and that might not be visible if you looked at it 

just in one channel. 

The view of each member of FSOC is important. And I think that 

the nature of the debates, the discussions within FSOC are very 

collegial and very respectful. And if you look before FSOC existed, 

there were barely relationships between many of the regulators. 

So, we have come a long way in terms of closing a gap that was 

part of what contributed to the financial crisis. 

Mr. HULTGREN. I think the problem is so much of it is 

bankcentric-focused and not seeing that there are very different 

risks out there, depending on the group that we are talking to. 

And let me, in the last few seconds that I have, shift over to ask 

about the possibility that certain mutual funds could be designated 

as SIFIs. 

Mutual funds use little or no leverage. In fact, the 14 largest 

U.S. funds had an average leverage ratio of 1.04 to 1, compared to 

U.S. commercial banks, which had an average ratio of 9 to 1. 

Does the fact that mutual funds are not leveraged make it impossible for them to fail in the same way that banks do? 

Secretary LEW. Look, we are in the process now of looking at the 

asset management industry and the products of the industry, and 

the answer to your question will come at the end of our inquiry, 

not now. 

Mr. HULTGREN. My time has expired, and I yield back. But I do 

want to say, this has an impact on industry, and the sooner, the 

better. This is taking a long time. 

Thank you. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

52 

The Chair now recognizes the gentleman from Nevada, Mr. 

Horsford, for 5 minutes. 

Mr. HORSFORD. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

Mr. Secretary, thank you for being here today. 

I want to ask a question about the effect of the housing crisis on 

the majority of U.S. homeowners who are still struggling to recover. 

I am from Nevada. Unfortunately, our State is still the third 

highest in the country for foreclosures, with 1 in 717 housing units 

currently in or pending foreclosure filing, and some 34 percent of 

Nevada homes are still seriously underwater, the highest in the 

Nation. 

As part of the Administration’s response to the housing crisis, 

the Treasury, under TARP, established two central programs, the 

Making Home Affordable and the Hardest Hit Fund. And I noticed 

your media advisory yesterday about an announcement that you 

will be making this Thursday at the Making Home Affordable Anniversary Summit on new housing initiatives. It is my understanding that you plan to announce additional policies to assist 

struggling homeowners, provide more affordable housing options 

for renters, as well as expand access to credit for borrowers. 

Can you provide any further details about these initiatives or the 

announcements that you plan to make on Thursday? 

Secretary LEW. Congressman, we have been looking hard at all 

aspects of the authorities we have and that regulatory agencies 

have that affect access to credit and relief that might be available 

to homeowners. 

I would refer back to the announcements made by the FHA and 

the FHFA to deal with this issue of put-back risk that is closing 

down the credit box so that people who are fully creditworthy are 

not getting access to mortgages. I think that is going to make a big 

difference. 

We need to finalize the risk retention rules so we eliminate any 

remaining uncertainty as to what the final rules are. 

And we are constantly looking, in the Making Home Affordable 

program, at what can we do with authorities we have to, based on 

the current situation in the market, provide appropriate relief to 

homeowners. And I hope to be able to make some more comments 

about that on Thursday. 

Mr. HORSFORD. Wonderful. I am eager to hear about the Treasury’s efforts in this regard, particularly for struggling homeowners, 

as you said, like those in my home State of Nevada. 

And I would like to ask if I can meet with you and members of 

your staff following your announcement on Thursday so that I can 

make sure that these initiatives are helping the people who need 

the relief the most at this time. 

Secretary LEW. I am happy to have our staff follow up with 

yours. 

Mr. HORSFORD. Thank you very much. 

Mr. Secretary, as well, are there any other areas that you see, 

particularly around the housing area, where this committee should 

be working with you and other leaders to help provide the relief 

that homeowners are seeking? 

53 

Secretary LEW. Congressman, that is obviously a very important 

question. If we look at the recovery to date, we are doing pretty 

well in most areas, most sectors of the economy. The place that has 

not been recovering where it should is construction and housing. 

Some of that is a question of market conditions. We had a financial crisis with a huge overhang of inventory and credit-stressed institutions and investors and borrowers. I think, as we now get to 

the point of a more healthy economy, we have to make sure that 

creditworthy people have access to credit and that we don’t have 

the pendulum go to the point where it is blocking out of the market 

people who are not a risk. 

It is certainly not that we need to return to the days of before 

the crisis when we had low-doc, no-doc loans, people who got into 

mortgages they couldn’t afford. But if you have somebody with a 

FICO score of 740 who can’t get a mortgage, then the system has 

overcorrected. And the put-back decisions, the announcements on 

put-back risk, should have an effect on that. I have talked to CEOs 

of banks who think it will have a material effect. 

As we go through the process of seeing what the effect of what 

we have done administratively is, I would look forward to continuing the conversation as to whether there are other actions, 

other tools that we don’t have the authority to do on our own. 

Mr. HORSFORD. One other area, in my concluding time, that I 

would like to have a conversation about is the review of the criteria 

that credit reporting agencies use in which to measure consumers. 

That is an area that I think needs review. This committee has not 

had a hearing on that in well over a year. And we are in a different 

landscape and setting today than we were pre-2008. 

Secretary LEW. I think that is correct. And I think it is also the 

case that there are many people for whom the credit rating agencies miss the test of their true creditworthiness because they are 

paying their utility bills and other things on a regular basis. 

Mr. HORSFORD. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross, 

for 5 minutes. 

Mr. ROSS. Thank you, Mr. Chairman. 

Mr. Secretary, let me ask you quickly, if I can, because I know 

your time is coming to a close here, companies are notified under 

Stage 3 of the SIFI designations that they have been designated as 

a SIFI, correct? 

Secretary LEW. That is correct. 

Mr. ROSS. And there is really no other opportunity to be notified, 

though, other than Stage 3? 

Secretary LEW. We all know notification is Stage 3, and there is 

plenty of time in Stage 3— 

Mr. ROSS. The SIFI designation states, ‘‘In general, this analysis, 

Stage 2, will be based on a broad range of quantitative and qualitative information available to the Council through existing public 

and regulatory sources, including industry- and company-specific 

metrics beyond those analyzed in Stage 1 and any information voluntarily submitted by the company.’’ 

54 

It just seems kind of odd that if they are not aware until Stage 

3, how would they know to volunteer any information at the Stage 

2 level? 

Secretary LEW. The— 

Mr. ROSS. I guess what I am getting at is it is almost like a 

‘‘gotcha’’ situation. Because they don’t want to be a SIFI if they 

don’t have to be, and so they would like to work with you— 

Secretary LEW. Companies know if they meet the Stage 1 standard, because the Stage 1 standard is a publicly available— 

Mr. ROSS. But they are not notified that they are being reviewed. 

Secretary LEW. No, but the companies know that if they are in 

the group of companies that meet the threshold, that they can voluntarily provide information. 

Mr. ROSS. Yes, but they don’t know if they are in Stage 2. Don’t 

you think it would be better and more transparent if there was an 

opportunity for notification in the Stage 2 level of a company that 

is under review for SIFI purposes? 

Secretary LEW. The process was actually set up in a very careful 

way to try to get information that was available to use to make 

preliminary determinations before engaging a company in a process 

where— 

Mr. ROSS. And it should be a cooperative process, I agree. 

Secretary LEW. But if a company is notified, that creates all 

kinds of other issues, which— 

Mr. ROSS. But it could cause self-correctness. 

Secretary LEW. It could what? 

Mr. ROSS. It could cause self-correctness. In other words, they 

could—look, they would want to cooperate, I would think. And not 

only would they want to cooperate, but I think other companies in 

the same industry may also want to have the opportunity to prevent them from being under that review. 

Wouldn’t that be a more transparent, a more cooperative process? 

Secretary LEW. I think the tension—the transparency of the process is very high, because Stage 3 is where the detailed back-andforth with the company and FSOC goes on. 

Mr. ROSS. I do agree. All I am saying is, if they can have some 

opportunity to avoid Stage 3, wouldn’t that be better and enure to 

the benefit not only of the company but also— 

Secretary LEW. I am not sure it would benefit the company. I 

think that, for many companies, if there was a kind of preliminary 

designation they were notified of, that would create a sense that 

they were about to be going through Stage 3. They may have to 

disclose it; it could have an effect on their business. 

Mr. ROSS. But most companies don’t know really that they are 

even going to be Stage 3. 

Secretary LEW. I think the financial firms that are at the Stage 

1 threshold level do understand that they are there. 

Mr. ROSS. Let me change topics here. Just recently, the International Association of Insurance Supervisors came out with their 

plan to implement capital standards for insurance companies, 

hopefully on a global basis. Unfortunately, they seem to be rushing 

things. And I think that the NAIC’s head, former Senator Ben NelVerDate Nov 24 2008 14:01 Mar 24, 2015 Jkt 091150 PO 00000 Frm 00058 Fmt 6633 Sfmt 6633 K:\DOCS\91150.TXT TERRI
55 

son, has expressed his dismay and concern that they are going at 

breakneck speed. 

My question to you is, if the United States doesn’t participate in 

these global standards for capitalization for insurance companies, 

really they don’t become global. And, in fact, there may be other 

countries that may follow our lead. 

Can you give us some assurances from the Treasury and the FIO 

that everything is being done to make sure that the interests of domestic insurance carriers are being advocated and protected as we 

go through this process of assessing— 

Secretary LEW. Congressman, there is robust participation by insurance commissioners and others who are expert in the U.S. insurance industry in that process. And I can tell you that it is with 

a great deal of input from the United States that the discussion 

goes forward. 

Mr. ROSS. And with regard to statutory accounting procedures 

and generally accepted accounting procedures, those two being at 

odds, too, most insurance companies now having to potentially 

have to keep two sets of accounting principles, which would be very 

duplicative, very costly. 

Can we get some assurances from Treasury that we will focus on 

not a duplication but rather a continued streamline process for accounting principles such as the SAP, or statutory accounting principles? 

Secretary LEW. I will have to get back to you on the specific issue 

regarding the insurance accounting principles. 

I can tell you, as a broad matter, my view has been, if we can 

in international conversations eliminate some of the noise between 

different systems— 

Mr. ROSS. And duplication. 

Secretary LEW. —it would be a good thing. The problem is that 

it is not always as easy to accomplish as you would like. 

Mr. ROSS. I agree, which is why we would like your advocacy in 

that regard. 

Secretary LEW. Yes. 

Mr. ROSS. With that, Mr. Chairman, I will yield back. 

Chairman HENSARLING. The Chair intends to recognize the gentleman from California, followed by the gentleman from Kentucky, 

and then we will excuse the Secretary. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, chairman of the House Foreign Affairs Committee. 

Mr. ROYCE. Thank you, Mr. Chairman. 

At the outset, I would just like to set the record straight on an 

issue that I think was raised twice today, and that is the story of 

AIG. 

If I could submit for the record, Mr. Chairman, the story that ran 

in last week’s American Banker? 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. ROYCE. Thank you. 

It is by Hester Pierce. It is entitled, ‘‘AIG’s Collapse: The Part 

Nobody Likes to Talk About.’’ And that part, of course, is the securities lending portfolio run for the benefit of the State-regulated life 

insurance subsidiaries of AIG. 

56 

And if I could briefly quote from the article: ‘‘Government rescue 

money was critical to the recapitalization effort of AIG. Taxpayer 

funds were also critical in meeting securities borrowers’ demands 

for cash. Securities lending counterparties received $43.8 billion in 

the last quarter of 2008, comparable to $49.6 billion in collateral 

postings and payments to AIG’s derivatives counterparties.’’ 

The record is pretty clear here. The taxpayer bailout associated 

with AIG, which I opposed, by the way, applies both to its Financial Products unit in London and to its State-regulated insurance 

arm right here in the United States. 

But on to my question here for the Secretary. 

Secretary Lew, as you know, the U.S. and the EU are currently 

engaged in trade talks as part of the TTIP negotiations. And with 

regard to banking and securities regulation, the EU has put forth 

a limited but reasonable proposal to strengthen U.S.-EU regulatory 

cooperation and to create a more results-driven dialogue that 

avoids market disruption and regulatory fragmentation. It is focused on consistency of regulation, limiting extraterritorial impact, 

and laying the foundation for recognition where appropriate. 

So the EU has made this a top priority. Do you not believe that 

enhancing this dialogue is an important objective and could lead to 

a high-standard comprehensive regulatory regime? 

Secretary LEW. Congressman, I believe that both TTIP and TPP 

are very important trade negotiations. And I have spent a great 

deal of time working with my counterparts on the aspects of those 

trade negotiations that fall in my area. 

I do think there are challenges in TTIP, particularly with regard 

to financial services, that we have not yet reached an agreement 

on. 

Mr. ROYCE. Right, right, but this would be a way to get there. 

If you feel that financial services regulatory issues being part of 

TTIP discussions would be important, this would be a way to 

bridge that. 

Secretary LEW. Our view—my view is that, to the extent that the 

question is should financial regulatory standards, prudential standards, be subject to a trade negotiation, the answer there, I believe, 

has to be ‘‘no.’’ We can’t be in a place where we are subjecting our 

financial regulatory standards to trade remedies. 

We have to regulate to make sure we have a sound financial system and drive through the G-20 and other bodies to have the international standards reflect our high standards. 

I think competition in the marketplace for financial service companies ought to be part of a discussion, and we ought to have open 

access subject to our national authorities. 

Mr. ROYCE. Here is a point. The Wall Street Journal article recently, in which Acting CFTC Chair Mark Wetjen takes issue with 

the process and policies with the CFTC cross-border guidance, here 

is his quote: ‘‘I don’t think that was the right decision. If you have 

equally comparable comprehensive regulations in Europe, as an example, then what’s the reason why we wouldn’t allow for substituted compliance in that situation?’’ 

There’s the question, and if you can have that dialogue in order 

to substantiate that. 

57 

And the second would be an article I am going to quote here, 

‘‘Transatlantic Swap Liquidity Split Persists,’’ which highlights two 

polls that show concrete evidence that ‘‘regulators have failed in 

their attempts to tackle a liquidity split by two swap market reforms in Europe and the United States.’’ 

Now, the Administration has pointed to the current regulatory 

dialogue, the financial management regulatory dialogue, as an appropriate forum. But what success has that produced? It hasn’t, in 

terms of regulatory cooperation and consistency. 

So I think you have an opportunity here. Many of the challenges 

we have seen today—uncertainty, market disruptions, which we 

talked about—could be avoided if we go down the road of this dialogue. 

Secretary LEW. Mr. Chairman, if I may just very briefly respond? 

I think that in the area of substitute and compliance we have 

made a good deal of progress, but the challenge is what is true 

comparability. And that is something that I believe is being worked 

through in the derivatives area with the CFTC and their counterparts both in Europe and in Asia. 

And if it is true substitute and compliance on a basis of comparable standards, that is one thing. I just don’t believe that a 

trade context is the appropriate place to resolve those matters. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr. 

Mr. BARR. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for your patience. It looks like I 

may be the very last questioner, so I appreciate your patience. 

Mr. Secretary, you have repeatedly said that an institution can 

appeal its SIFI designation if it disagrees with the FSOC determination that it poses systemic risk. 

But the first appeal is to FSOC itself, an appeal that seems useless, given that the institution is not appealing to an independent 

arbiter but instead to the same agency that is making the original 

designation. 

And then the second appeal would be to the courts, but that appeal would also seem fairly useless, given the fact that FSOC has 

not promulgated some objective standards to guide its terminations, and the court couldn’t effectively review those designations 

and would have to defer to FSOC’s original judgment. 

And, secondly, the institution wouldn’t challenge the regulators’ 

judgment anyway, for fear of retaliation in the supervisory process. 

Just last month, Former Assistant Treasury Secretary Michael 

Barr pointed out that institutions may refuse to appeal these designations precisely because they fear regulatory retaliation. 

So my question is this: Given the substantial flaws in the appeals process, both the original, initial administrative appeal and 

then the judicial appeal, does the designation process really give institutions a meaningful opportunity to challenge their designations? 

And, given these flaws, would you support an alternative process 

which would create an independent ombudsman or arbiter as an alternative to review the initial designation? 

58 

Secretary LEW. Congressman, I actually don’t agree with that assessment of the current process. I think that the engagement at the 

Stage 3 level is robust and it does affect the thinking at the staff 

level and the principal level. I think that when we had the one 

face-to face hearing, it was actually a very substantial exchange of 

questions that were responded to. 

And I think that as far as recourse to judicial resolution, it has 

not been the case that financial institutions or others are afraid to 

challenge judgments that they don’t agree with when the regulators make them. 

Mr. BARR. So you would not reform the current statutory process? 

Secretary LEW. I think the current process is actually working 

pretty well. 

Mr. BARR. Okay. 

In regard to Ex-Im reauthorization, you have said that every 

other developed country has an export credit agency, and we 

shouldn’t go it alone, we shouldn’t unilaterally disarm, regarding 

export support. 

But, given the fact that we have unilaterally burdened financial 

institutions with the Volcker Rule while the rest of the world does 

not have a similar regulatory regime, since we have unilaterally 

burdened our manufacturers with greenhouse gas standards not 

imposed by other countries, since we have unilaterally subjected 

our financial institutions with higher capital standards than the 

rest of the world, since we have unilaterally subjected the United 

States business community to the highest corporate tax rate in the 

world, what is the difference? 

Secretary LEW. Congressman, I would actually counter on two of 

those issues and on the third agree with you. 

I think, when it comes to Volcker, you have processes going on 

through other international processes, Liikanen and Vickers, where 

they are looking to put in similar kinds of systems. 

I think if you look at climate rules, the agreements made in Copenhagen were very important. We are complying, meeting our 

standards; other countries are doing the same. 

On the tax rate, I agree with you; we need to do business tax 

reform. We should not have a statutory business tax rate as high 

as we do, and I would look forward to a bipartisan effort to do that. 

Mr. BARR. I am glad you at least agree on that point. And I take 

it you take my point on the others, particularly with respect to the 

greenhouse gas rules, which other countries, developed countries, 

China, India, certainly are not adopting. 

Really quickly, final minute, I do want to ask you about the lost 

IRS emails. We knew that targeting of conservative groups by the 

IRS began in February-March 2010. Despite repeated inquiries 

from Congress in 2011, the IRS responses did not mention knowledge of the targeting. 

In fact, in February of 2012, Commissioner Shulman was aware 

of the inappropriate targeting, but in March of 2012, the Commissioner said, ‘‘I can give you assurances’’—this is to the Ways and 

Means Committee—that there was absolutely no targeting.’’ 

There was further stonewalling. The Administration said this 

was a rogue office in Cincinnati. As it turns out, we know that was 

59 

not the case. There was also the story that this was targeting of 

both progressive and conservative groups. TIGTA George confirmed 

that the progressive groups were not targeted. 

And then we find out about these lost emails, and there was 

stonewalling, when Commissioner Koskinen knew about the harddrive program in February and when Treasury knew about the 

hard-drive program in April of early year. We didn’t find out until 

11 days ago that there were these lost emails. 

So when the President says there was not a smidgeon of corruption and when we find out that the hard drive crashed 10 days 

after Chairman Camp first sent a letter inquiring into this matter 

back in 2011, do you agree with this assessment that there is, 

maybe not corruption—I am sure you don’t agree with that—but 

that the stonewalling is inappropriate? 

Chairman HENSARLING. The time of the gentleman has expired. 

If the Secretary wishes to give a brief answer. 

Secretary LEW. If I can just responsd briefly. 

Congressman, I don’t believe there is any evidence of any political interference to date. And I don’t think any of the issues that 

have come up undermine that view. 

I think if you look at the reaction that we had when the TIGTA 

report came in, the first step we took was to replace the top leadership. Danny Werfel came in. All the leadership between him and 

the program was changed at a Senior Executive Service level. Procedures were put in place so that it was a very different process 

going forward. 

I think the fact that a hard drive broke is only evidence that a 

hard drive broke. 

Chairman HENSARLING. The time of the gentleman, again, has 

expired. 

I would like to thank the Secretary for his testimony today. 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to this witness 

and to place his responses in the record. Also, without objection, 

Members will have 5 legislative days to submit extraneous materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:10 p.m., the hearing was adjourned.] 

(61) 

A P P E N D I X 

June 24, 2014 

62 


91150.001
63 


91150.002
64 


91150.003
65 


91150.004
66 


91150.005
67 


91150.006
68 


91150.007
69 


91150.008
70 


91150.009
71 


91150.010
72 


91150.011
73 


91150.012
74 


91150.013
75 


91150.014
76 


91150.015
77 


91150.016
78 


91150.017
79 


91150.018
80 


91150.019
81 


91150.020
82 


91150.021
83 


91150.022
84 


91150.023
85 


91150.024
86 


91150.025
87 


91150.026
88 


91150.027
89 


91150.028
90 


91150.029
91 


91150.030
92 


91150.031
93 


91150.032
94 


91150.033
95 


91150.034
96 


91150.035
97 


91150.036
98 


91150.037
99 


91150.038
100 


91150.039
101 


91150.040
102 


91150.041
103 


91150.042
104 


91150.043
105 


91150.044
106 


91150.045
107 


91150.046
108 


91150.047
109 


91150.048
110 


91150.049
111 


91150.050
112 


91150.051
113 


91150.052
114 


91150.053
115 


91150.054
116 


91150.055
117 


91150.056
118 


91150.057
119 


91150.058
120 


91150.059
121 


91150.060
122 


91150.061
123 


91150.062
124 


91150.063
125 


91150.064
126 


91150.065
127 


91150.066
128 


91150.067
129 


91150.068
130 


91150.069
131 


91150.070
132 


91150.071
133 


91150.072
134 


91150.073
135 


91150.074
136 


91150.075
137 


91150.076
138 


91150.077
139 


91150.078
140 


91150.079
141 


91150.080
142 


91150.081
143 


91150.082
144 


91150.083
145 


91150.084
146 


91150.085
147 


91150.086
148 


91150.087
149 


91150.088
150 


91150.089
151 


91150.090
152 


91150.091
153 


91150.092
154 


91150.093
155 


91150.094
156 


91150.095
157 


91150.096
158 


91150.097
159 


91150.098
160 


91150.099
161 


91150.100
162 


91150.101
163 


91150.102
164 


91150.103
165 


91150.104
166 


91150.105
167 


91150.106
168 


91150.107
169 


91150.108
170 


91150.109
171 


91150.110
172 


91150.111
173 


91150.112
174 


91150.113
175 


91150.114
176 


91150.115
177 


91150.116
178 


91150.117
179 


91150.118
180 


91150.119
181 


91150.120
182 


91150.121
183 


91150.122
184 


91150.123
185 


91150.124
186 


91150.125
187 


91150.126
188 


91150.127
189 


91150.128
190 


91150.129
191 


91150.130
192 


91150.131
193 


91150.132
194 


91150.133
195 


91150.134
196 


91150.135
197 


91150.136
198 


91150.137
199 


91150.138
200 


91150.139
201 


91150.140
202 


91150.141
203 


91150.142
204 


91150.143
205 


91150.144
206 


91150.145
207 


91150.146
208 


91150.147
209 


91150.148
210 


91150.149
211 


91150.150
212 


91150.151
213 


91150.152
214 


91150.153
215 


91150.154
216 


91150.155
217 


91150.156
218 


91150.157
219 


91150.158
220 


91150.159
221 


91150.160
222 


91150.161
223 


91150.162
224 


91150.163
225 


91150.164
226 


91150.165
227 


91150.166
228 


91150.167
229 


91150.168
230 


91150.169
231 


91150.170
232 


91150.171
233 


91150.172
234 


91150.173
235 


91150.174
236 


91150.175
237 


91150.176
238 


91150.177
239 


91150.178
240 


91150.179
241 


91150.180
242 


91150.181
243 


91150.182
244 


91150.183
245 


91150.184
246 


91150.185
247 


91150.186
248 


91150.187
249 


91150.188
250 


91150.189
251 


91150.190
252 


91150.191
253 


91150.192
254 


91150.193
255 


91150.194
256 


91150.195
257 


91150.196