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THE ANNUAL REPORT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JUNE 17, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–34 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

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 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

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 

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 

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 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

June 17, 2015 .................................................................................................... 1 

Appendix: 

June 17, 2015 .................................................................................................... 65 

WITNESSES 

WEDNESDAY, JUNE 17, 2015 

Lew, Hon. Jacob J., Secretary, U.S. Department of the Treasury ...................... 4 

APPENDIX 

Prepared statements: 

Lew, Hon. Jacob J. ........................................................................................... 66 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hensarling, Hon. Jeb: 

Written statement of the American Council of Life Insurers ....................... 73 

Lew, Hon. Jacob J.: 

Written responses to questions for the record submitted by Representatives Duffy, Garrett, Guinta, Hill, Hinojosa, Hurt, Lynch, Neugebauer, 

Ross, Rothfus, Stivers, Wagner, and Williams ........................................... 82 

(1) 

THE ANNUAL REPORT OF THE FINANCIAL 

STABILITY OVERSIGHT COUNCIL 

Wednesday, June 17, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:07 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Royce, Lucas, 

Garrett, Neugebauer, Pearce, Posey, Fitzpatrick, Westmoreland, 

Luetkemeyer, Huizenga, Duffy, Hurt, Stivers, Fincher, Stutzman, 

Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, Rothfus, 

Messer, Schweikert, Guinta, Tipton, Williams, Poliquin, Love, Hill, 

Emmer; Waters, Maloney, Velazquez, Meeks, Capuano, Lynch, 

Scott, Green, Cleaver, Moore, Ellison, Perlmutter, Himes, Carney, 

Sewell, Foster, Kildee, Murphy, Delaney, Beatty, Heck, and 

Vargas. 

Chairman HENSARLING. The Financial Services 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 testimony 

of the Chair of the Financial Stability Oversight Council (FSOC). 

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

When Democrats first passed the Dodd-Frank Act, they claimed 

that the Financial Stability Oversight Council (FSOC) was one of 

its crown jewels. FSOC, whose agency heads largely failed in the 

last crisis, would now be able to clearly identify risks to financial 

stability and take action before these emerging threats metastasized into another crisis. 

But a fatal flaw in this pipe dream was always the failure, perhaps the deliberate refusal, of Dodd-Frank’s supporters to recognize that among the greatest threats to financial stability are 

Washington policies themselves, including policies of the very agency heads who sit on the Council. FSOC simply refuses to look in 

the mirror. 

In its report, it conspicuously omits any references to specific 

government policies or agencies that are helping to cause the systemic risk it identifies: ‘‘Greater risk-taking across the financial 

system is encouraged by the historically low-yield environment,’’ 

the Council reports. Yet, the Council refuses to identify the obvious 

2 

source of this apparent risk, one of its own members, the Federal 

Reserve, and the Fed’s unprecedented loose monetary policy. 

The Council warns of reduced liquidity in the capital bond markets, yet never acknowledges that Dodd-Frank’s Volcker Rule and 

other regulations have drastically reduced liquidity. 

The Council lists ‘‘risk-taking of large, complex, interconnected financial institutions’’ as a threat. Yet, again, it fails to mention that 

Dodd-Frank amplifies the threat by empowering the Council to designate certain firms as too-big-to-fail, thus enshrining the concept 

into law. 

These designations will only make worse the profound threat ignored by the Council but recently identified by the Federal Reserve 

Bank of Richmond in their ‘‘Bailout Barometer,’’ that threat being 

that hardworking taxpayers, implicitly or explicitly, are now on the 

hook for a staggering 60 percent of the liabilities of the entire U.S. 

financial system. 

The Council turns a blind eye to other serious threats. Fannie 

Mae and Freddie Mac, at the epicenter of the last crisis, barely receive a mention. 

And it gets worse. Our unsustainable national debt, $18 trillion 

and counting, as all can see, perhaps one of the greatest existential 

threats that we face, with more debt incurred under this Administration than in our Nation’s first 200 years, is totally ignored. This 

is beyond negligent. It is beyond egregious. It is dangerous and, 

frankly, it is offensive. 

Another glaring omission from the report is any meaningful reference to economic growth or, rather, the lack of it. Along with 

Obamacare, Dodd-Frank is at the center of the Administration’s 

economic policies. As we approach Dodd-Frank’s fifth anniversary, 

we see the slowest, weakest recovery in the post-war era. 

We see an economic recovery that has created 12.1 million fewer 

jobs and has provided $6,175 less income for every citizen compared to the average post-war recovery. Again, compared to the average, we see an economic recovery that has left 1.6 million of our 

fellow citizens mired in poverty, and working middle-income families losing over $11,000 in annual income that rightfully should 

have been theirs. 

I find it stunning that in its report FSOC can find a link between 

weak economic growth in Greece and stability in the eurozone but 

apparently can find no link between economic growth and stability 

on this side of the Atlantic. 

Also nowhere to be found in the Council’s report is the threat 

posed to our stability, growth, and personal freedoms by the erosion of the rule of law under this Administration. We know that 

our President seemingly never tires of admonishing us that he has 

a pen and a phone ready to enact whatever policy he sees fit. Regrettably, he never seems to have handy a copy of the Constitution. 

As Americans become less governed by the rule of law and more 

governed by the whims of Washington, fear, doubt, uncertainty, 

and pessimism are sown. It is not lost on the American people that 

increasingly, Washington decides what credit cards can go in their 

wallets, what kind of home mortgages they can receive, and whether, if they like their bank account, they can keep it. 

3 

Truly, never before in my lifetime has more unchecked, unbridled 

discretionary power been given to the unaccountable and unelected. 

This includes the Financial Stability Oversight Council, which operates largely out of public view, yet its decisions have the potential to profoundly alter the lives and livelihoods of every American. 

FSOC typifies not only the shadow regulatory system but also the 

unfair Washington system that Americans have come to loathe— 

powerful government administrators, secretive government meeting, arbitrary rules, and unchecked power to punish or reward. 

Mr. Secretary, your Council and the rest of Washington need to 

awaken to the obvious truth, and that is, when it comes to systemic 

risk, Washington is a large part of the problem. 

I now recognize the ranking member for 5 minutes. 

Ms. WATERS. Thank you, Mr. Chairman. 

And welcome back, Secretary Lew. 

Today, we receive the annual report of the Financial Stability 

Oversight Council, as required by law. 

As we all know, this year marks the fifth anniversary of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is hard to believe it was just 5 years ago that we 

were coming to grips with the magnitude of the financial crisis, 

which caused the greatest loss of wealth in a generation. All told, 

the financial crisis cost our Nation more than $13 trillion in economic growth and $16 trillion in household wealth, not to mention 

the devastation of an unemployment rate topping 10 percent in 

many States. 

In the lead-up to the crisis, nobody in the private sector or in 

government was looking at the stability of our financial system as 

a whole. Nobody was looking at the big picture. And nobody had 

the responsibility to deal with emerging threats before they caused 

damage to our economy. 

That is why we created the Financial Stability Oversight Council 

as part of Dodd-Frank. FSOC filled that void, looking at every aspect of our financial system for possible weaknesses. And it serves 

as an advance warning system to identify and address systemic 

risk posed by large, complex companies, products, and activities before they threaten the economy. 

The Council has ensured for the first time that our financial regulators are working collaboratively to identify and respond to 

emerging threats to financial stability. And with their February announcement outlining enhanced engagement and opportunities for 

public input, they have doubled their efforts to engage with the industry and Congress in a transparent manner. 

In its 2015 annual report, the FSOC noted substantial progress 

to protect Americans from another crisis. And, indeed, we have 

taken important steps to prevent another economic disaster from 

happening, including making our large banks more resilient 

through stronger capital, leverage, and liquidity standards; covering oversight gaps in our financial system by designating complex, interconnected nonbanks for consolidated supervision; and reforming key markets like asset-backed securities and money market mutual funds. 

However, 5 years after Dodd-Frank became law, my Republican 

colleagues remain fighting the battles of the past. They continue to 

4 

believe that if only we rolled back all of the rules of the road, the 

financial system would magically unlock growth and the market 

would suddenly police itself. 

And they continue to ignore the lessons of the last crisis by doing 

all they can to undermine FSOC under the guise of oversight. By 

focusing merely on dismantling Dodd-Frank, my colleagues on the 

other side of the aisle impede Congress’ ability to focus on the new 

emerging threats to financial stability identified in FSOC’s 2015 

annual report. 

Like the Consumer Financial Protection Bureau (CFPB), destroying FSOC has become a leading component of the Republican deregulatory agenda. And while they waste countless hours working 

to undermine it, engines of job growth and American competitiveness like the Export-Import Bank face a possible shutdown in just 

5 legislative days. Rather than renew a proven job creator like the 

Ex-Im Bank, Republicans are spending their time bogging the 

FSOC down in countless document requests and inquiries—an obvious effort to undercut its ability to protect homeowners, consumers, and the American economy. 

So welcome, Secretary Lew, and thank you for your resilience in 

the face of efforts to stop the Council from its important work. I 

look forward to your insight on areas of systemic risk the Council 

has identified and hope to learn more about what FSOC is currently doing to monitor for such risk and promote financial stability. 

As we hear additional details from you, I will be interested to 

hear whether Republicans believe FSOC should take any action to 

address systemic risk or simply wait for another crisis. 

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

Chairman HENSARLING. The gentlelady yields back. 

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

Secretary of the Treasury. Secretary Lew has testified before our 

committee on previous occasions, so I feel he needs no further introduction. 

Welcome, Mr. Secretary. We are happy to have you back. 

Without objection, your written statement will be made a part of 

the record. 

Mr. Secretary, you are now recognized for 5 minutes to give an 

oral presentation of your testimony. 

STATEMENT OF THE HONORABLE JACOB J. LEW, SECRETARY, 

U.S. DEPARTMENT OF THE TREASURY 

Secretary LEW. Chairman Hensarling, Ranking Member Waters, 

and members of the committee, thank you for having me today and 

for this opportunity to testify on the Financial Stability Oversight 

Council’s 2015 annual report. 

I would like to begin by recognizing that we are a few short 

weeks away from the 5-year anniversary of the enactment of Wall 

Street reform and the creation of the Council. As we approach this 

milestone, it is clear that these reforms have made the financial 

system safer and more resilient while supporting long-term economic growth. 

Wall Street reform has put important consumer, investor, and 

taxpayer protections in place, supporting companies that play by 

5 

the rules and serve their customers, small businesses that need access to credit to grow and create jobs, and working men and women 

trying to save for their children’s education, a downpayment on a 

home, or their own retirement. Wall Street reform has worked. 

Five years ago, the Council was created to be a forum for the entire financial regulatory community to come together to look across 

the U.S. financial system to identify and respond to potential 

threats to financial stability. Today, the Council is doing exactly 

what Congress designed it to do, from asking the tough questions 

that will make our financial system safer to shining a light on 

emerging threats before they can evolve into the next financial crisis. 

Moreover, the Council’s member agencies work collaboratively to 

leverage the expertise that each regulatory agency brings to the 

table. And the Council has also established a track record of conducting its work in an open-minded and deliberative manner, incorporating constructive suggestions from stakeholders, including 

members of this committee, who have made the Council more effective. The Council asks hard questions and only makes judgments 

based on facts and detailed analysis. 

Before discussing this year’s report, I want to emphasize why 

each annual report is important. The annual report provides transparency about the Council’s work. Each report covers a range of 

issues based on extensive data-driven analysis, and it contains in 

one place the collective views of the financial regulatory community 

about current risks and emerging threats to financial stability, 

along with recommendations for specific actions to mitigate those 

risks. 

The findings and recommendations set down a marker for action, 

providing clarity regarding the Council’s priorities and a roadmap 

to the year ahead. This provides Congress and the public with a 

way to hold the Council accountable for making progress. 

The report highlights the Council’s recent work and demonstrates its continued commitment to openness and good governance. For example, this year’s report highlights a series of important Council initiatives over the past year, including enhancements 

to the Council’s transparency policy, stronger internal governance, 

supplemental guidance to our nonbank designations process, and 

ongoing engagement with the public regarding potential risks from 

asset management products and activities. 

Last month, at our 51st meeting, the Council released its fifth 

annual report. This year’s report focuses on 11 key areas, many of 

which have been discussed by the Council in prior annual reports 

as well as at its meetings over the past year. These include the potential incentives for greater risk-taking in a low-yield environment, the need for continued progress to reform benchmark rates 

such as LIBOR, and the continued reliance on short-term wholesale 

funding. For each of these areas, the report highlights where 

progress has been made and where more still needs to be done. 

Cybersecurity remains a key area of focus for the Council. The 

financial sector has been a leader of other industries adopting cybersecurity measures, but still we have seen cyber incidents affect 

the largest financial institutions and the community banks that 

form the bedrock of the financial system. 

6 

That is why this Administration and the Council are focusing on 

how to continue working with the private sector to strengthen best 

practices, information-sharing, and incident response. I commend 

the committee for focusing on the topic in recent hearings, and we 

look forward to working with Congress on this critical issue. 

This year’s report also identifies several new potential risks coming into focus which the Council and its member agencies will monitor over the coming year. For example, the Council will pay 

heightened attention to ongoing regulatory efforts to bolster the resiliency of central counterparties, or CCPs. The Council also highlighted the ongoing evolution of market structure across various 

asset classes and the need for constant monitoring to ensure that 

markets function efficiently. 

The Council recommends continued vigilance to the confluence of 

factors driving changes in market structure and the extent of their 

impact on market functioning and the provision of liquidity. 

Promoting financial stability and protecting the American public 

from the next financial crisis should be a common objective that we 

all support. Yet, opponents of reform continue to advocate rolling 

back these protections, including the ability of the Council and its 

member agencies to respond to future threats to financial stability. 

As the Council’s annual report demonstrates, threats to financial 

stability are real and will evolve with the marketplace. We simply 

cannot let our guard down. 

I want to thank the other members of the Council and all of the 

staff involved with the 2015 annual report for their hard work and 

commitment. 

As we approach the 5-year anniversary of Wall Street reform, we 

will continue to work with this committee to continue addressing 

these threats and promoting the strength and stability of the U.S. 

financial system. 

Thank you very much, and I look forward to answering any questions that you have. 

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

66 of the appendix.] 

Chairman HENSARLING. Thank you, Mr. Secretary. 

The Chair now yields himself 5 minutes for questions. 

Mr. Secretary, I alluded to it in my opening statement, but by 

chance are you familiar with the ‘‘Bailout Barometer’’ report of the 

Richmond Fed? Are you familiar with this report? 

Secretary LEW. I have seen it in the past. I am not sure which 

one you are holding. 

Chairman HENSARLING. I’m sorry? 

Secretary LEW. I have seen it in the past, but I am not familiar 

with what you are holding. 

Chairman HENSARLING. Okay. So you have reviewed the document. You are familiar with— 

Secretary LEW. I am familiar with the— 

Chairman HENSARLING. Okay. So you are familiar with the fact 

that it indicates that there has been a 61-percent increase in the 

explicit Federal guarantees in our financial system since the crisis. 

Is that correct? 

Secretary LEW. I understand that is the analysis which is in that 

piece of paper. I haven’t read the piece of paper. 

7 

Chairman HENSARLING. Okay. Do you have any reason to challenge that analysis? Has FSOC come up with a contrary analysis? 

Secretary LEW. Look, I think if you look at the experience we 

have had since the financial crisis, since financial reform, we have 

seen— 

Chairman HENSARLING. No, I am just asking, Mr. Secretary, has 

the Council— 

Secretary LEW. I haven’t looked at that piece of analysis, so— 

Chairman HENSARLING. Okay. That is— 

Secretary LEW. —I can give you my response to the idea, but 

that is what I was— 

Chairman HENSARLING. Okay. Well, let me quote from the report. There is $26 trillion, according to the Richmond Fed, in explicit and implicit Federal backstop today. One of the final conclusions of the report is that, ‘‘It is essential to restoring market discipline and achieving financial stability to shrink this Federal safety net.’’ 

Do you agree or disagree with their conclusion? 

Secretary LEW. I don’t want to comment on a report I haven’t 

read. I am happy to address the issue, Mr. Chairman— 

Chairman HENSARLING. How about their conclusion? Do you believe, independent of their report, that it is important to achieving 

financial stability to shrink the size of the government Federal 

safety net? 

Secretary LEW. Congressman, I— 

Chairman HENSARLING. In our financial markets, is it important 

or not important? 

Secretary LEW. I think if you look at the financial stability situation today versus before the Dodd-Frank Act and Wall Street reform, we have a much— 

Chairman HENSARLING. Mr. Secretary, I would be happy to let 

you have some context, but I would like for the question to be answered. It is a fairly simple— 

Secretary LEW. Congressman, I am happy to— 

Chairman HENSARLING. —question. Do you believe that for the 

sake of financial stability, the extent of the Federal safety net in 

our financial markets should be shrunk? 

Secretary LEW. I think if you look at an issue that we have 

talked about before, I very much believe that it would be a good 

thing to enact reform in the area of GSEs. There was progress on 

that on a bipartisan basis in the Senate last year. It is something 

that didn’t proceed to the Floor— 

Chairman HENSARLING. So can I take your answer as ‘‘yes?’’ 

Secretary LEW. Mr. Chairman, I am happy to look at that report. 

I am happy to offer my views on this issue, but— 

Chairman HENSARLING. You don’t have it to look at the report, 

Mr. Secretary. I am just asking you about a conclusion. 

Secretary LEW. Yes. I— 

Chairman HENSARLING. I don’t sense I am going to get an answer. Let me move on, Mr. Secretary. 

Secretary LEW. I would be delighted to answer the question if 

you give me the time. 

Chairman HENSARLING. I think you have had plenty of time to 

answer the question, Mr. Secretary— 

8 

Secretary LEW. Yes, I don’t think I have gotten— 

Chairman HENSARLING. —and you haven’t. 

Under Dodd-Frank, FSOC is comprised of agency heads as opposed to the agencies themselves, correct? We can both agree on 

that? 

Secretary LEW. Yes. 

Chairman HENSARLING. Okay. And we can also agree that of the 

10 voting members of FSOC, each was appointed by President 

Obama, correct? 

Secretary LEW. Yes, I believe that is correct. 

Chairman HENSARLING. Okay. I alluded to it again in my opening statement. I have read excerpts of this report. I have not read 

the entirety of the 150-page report. Have you read the entire report? 

Secretary LEW. I have. 

Chairman HENSARLING. Good. My staff read the entirety of the 

report; I have read many excerpts. So, in identifying emerging 

threats to financial stability, can you point to any page in the report where FSOC identifies a current Federal policy or rule as a 

contributing factor to an emerging threat? Because we can’t find it. 

Secretary LEW. Mr. Chairman, we identified the threats that we 

see as real. Many of those have a connection to Federal policy. And 

I am happy to answer specific— 

Chairman HENSARLING. Okay. But under Dodd-Frank, you also 

have the mandate to actually make recommendations. So how do 

you make a recommendation if you can’t cite a source? 

Secretary LEW. It is not my view that Federal regulation is a significant risk to financial stability. So I don’t agree with— 

Chairman HENSARLING. The last time you were here, Mr. Secretary, there was increasing evidence that we are suffering great 

illiquidity in our corporate bond market. You admitted that. This 

report cites it. We know that when mid-market companies hoard 

cash, they can’t promote jobs and economic growth. Many economists believe this will be the source of the next financial crisis. 

Somehow, the FINRA head can connect this bond illiquidity to 

the Volcker Rule. SEC Commissioner Dan Gallagher has said that 

the Volcker Rule has set the stage for a potentially dire liquidity 

crisis. There has been similar testimony from CFTC Commissioner 

Giancarlo. Even former Secretary of the Treasury Larry Summers 

has said, ‘‘There is a danger in their enthusiasm for keeping each 

individual institution safe that regulatory authorities will lose 

sight of keeping markets open and liquid, and I think that is a legitimate concern.’’ 

So, in your last testimony, you found no evidence that the 

Volcker Rule contributed to the bond illiquidity. We have incredible 

evidence that it has contributed. Do you still stand by your previous testimony that there is no connection to bond illiquidity in 

the Volcker Rule? 

Secretary LEW. Mr. Chairman, I think that the question of market liquidity is a very complicated one, and trying to reduce it to 

one factor is never going to— 

Chairman HENSARLING. I said a contributing factor, Mr. Secretary. Is it a contributing factor? 

9 

Secretary LEW. If you would allow me to answer your question, 

this is a complicated issue. It is a very important issue. It is an 

issue that I spend a lot of time thinking about. It is not a 10-second 

answer. I will give you a— 

Chairman HENSARLING. Starting out with, is it a contributing 

factor? Or is it not a contributing factor? 

Secretary LEW. Yes. I think that it is not possible to say what 

is the single cause. I do not believe that Federal regulation is a significant factor— 

Chairman HENSARLING. I understand that, Mr. Secretary. 

My time has expired. I now— 

Secretary LEW. May I just ask to address this issue? Because I 

think it is actually a very important issue. 

Ms. WATERS. Mr. Chairman? I will yield time to the gentleman. 

Chairman HENSARLING. I would be happy to have the Secretary 

answer the question. 

Please. The Secretary is recognized. 

Secretary LEW. Mr. Chairman, I think if you look at the question 

of liquidity, there are a lot of people trying to reach a simple explanation to a complicated question. 

We are at a point in the business cycle where we are seeing naturally a lot of volatility as we move out of the deepest recession 

since the Great Depression. We are seeing an expectation of some 

movement in interest rates. That is a significant factor. 

We are seeing market structure changing rapidly. We are seeing 

the introduction of a high level of electronic trading, including 

high-frequency trading, that is changing the structure of markets. 

We have also seen a tremendous increase in the volume of 

issuance of bonds. That is having a big effect on market structure— 

Chairman HENSARLING. I understand all that, Mr. Secretary. 

Secretary LEW. I think anyone who tries to point to a single 

thing, like a rule, is not going to— 

Chairman HENSARLING. Mr. Secretary, I did not say it was a single thing. I asked you the question, was the Volcker Rule a contributing factor, and several minutes later you have still refused to answer the question. 

Secretary LEW. Well— 

Chairman HENSARLING. My only takeaway is that you don’t see 

it as a contributing factor, and so many other market— 

Secretary LEW. I think that part of the issue—there was a desire 

in financial reform for certain things that are high-risk, highly leveraged investments to be less liquid. I don’t that is necessarily a 

bad thing. 

That doesn’t mean it is a good thing for there to be a loss of market liquidity. I do not see a major impact— 

Chairman HENSARLING. Thank you. 

Secretary LEW. —in terms of broad liquidity, but we are constantly looking at this question of liquidity. And we are open to 

asking the question as to what the impact of Federal policy is. I 

just think it is a mistake to start there. 

Chairman HENSARLING. You could have fooled me, Mr. Secretary. 

I now recognize the ranking member for 5 minutes. 

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

10 

Mr. Secretary, I would like to offer you the courtesy of continuing 

your explanation, if you would like to have it. 

Secretary LEW. Thank you very much, Congresswoman Waters. 

I guess the thing I would add is that there has been a lot of focus 

on this issue since October 15th, and there has been a lot of telling 

of the story of what happened on October 15th that is just not 

based on the analysis or the facts. 

There was no breakdown in Treasury markets on October 15th. 

That is not something that is supported. There was no liquidity crisis. There was a moment, there was a blip, there were a lot of 

things going on, but we don’t see any evidence that regulation contributed to that event. 

There was a moment in time when there was a lot of off-risk sentiment because of events going on in the world. There was a huge 

amount of electronic trading going on. And there was a blip in the 

market that, obviously, is very much worthy of our attention. But 

people took from that, I think incorrectly, the notion that somehow 

that was an event that was caused by a rule. It wasn’t. 

And we are doing a lot of work on it and look forward to issuing 

an analysis very shortly. 

Ms. WATERS. Thank you, Mr. Secretary. 

One of the largest and most frequent criticisms my Republican 

colleagues have lodged against the Financial Stability Oversight 

Council is what they deem to be a lack of transparency with respect to nonbank systemically important financial institution, or 

SIFI, designations. 

And while I think many of their criticisms are merely attempts 

to hamstring the Council under the guise of oversight, I do appreciate that you and your staff have redoubled your efforts to engage 

with Congress and with nonbank institutions and to open up your 

deliberations for additional public scrutiny. 

Mr. Secretary, would you describe precisely what changes to both 

the annual and to the 5-year designation processes FSOC made in 

its February 2015 supplemental procedures announcement? And 

please also describe how FSOC balances the need for transparency 

against the need to protect sensitive market and supervisory information. 

Secretary LEW. Congresswoman, thank you. 

We made a number of changes that were designed to respond to 

concerns raised both by this committee, members of the committee, 

and by stakeholders, which give a great deal earlier notice and 

transparency to the process to parties that are under review. 

I want to just underscore that there was a lot of back and forth 

even before. So this is not as radical a change as it may sound like, 

but it is more formal. And I think it is something that has led to 

a good deal of, kind of, recognition that the system is more transparent, which is our goal. 

The review process, by necessity, involves reviewing highly confidential business documents that are commercially sensitive under 

law where we have to protect the documents and the information. 

We try our best, in the context of that constraint, which is a reasonable constraint, and it is a constraint shared by supervisors of 

these institutions as well, to be transparent with the public and the 

committee at the same time. 

11 

I think that the changes that we have made have helped, but 

FSOC is a young organization, and we always remain open to suggestions on how to improve the process. 

Ms. WATERS. Last month, the chairman of the full committee and 

five chairmen of each subcommittee sent a lengthy and onerous request for documents regarding the FSOC designation process, 

which contained at least 13 different subparts. It is my understanding that more than a week ago you responded to that document request with an offer for an in-camera review of 1,400 pages 

of confidential business and bank supervisory information. 

Since you responded, my staff has begun a review of those materials. To your knowledge, has the Majority availed themselves of 

that opportunity? 

And would you consider the production of such sensitive and voluminous documents to be consistent with the Council’s desire to 

be transparent with the Congress? 

Secretary LEW. Congresswoman, we did make that offer. We appreciate that your staff has begun reviewing it. Unless it has happened in the last day, I am not aware that the Majority has reviewed it, but it could have happened in the last 24 hours. 

That is the right way for us to make clear the commitment to 

transparency while protecting very sensitive confidential information. 

Ms. WATERS. Thank you very much. 

And, Members on this side of the aisle, would you please allow 

the Secretary to answer questions and give him the courtesy of not 

badgering him. This is complicated subject matter that we are dealing with, and he deserves the right to be able to respond in the 

time that it takes. 

I yield back the balance of my time. 

Chairman HENSARLING. The time of the gentlelady has expired. 

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

Garrett. 

Mr. GARRETT. I thank the Chair. 

So, Mr. Chairman, you said at the outset, ‘‘I would be delighted 

to answer your questions if you would just give me the time.’’ 

Mr. Secretary, we gave you the time to answer some questions 

that were submitted to you after the last hearing, which was back 

in March, and, lo and behold, it took your appearance here today 

before we got the answers to them. In other words, at 11:18 last 

night, we got the answers. 

That is March, April, May, and now halfway through June. So 

we do give you a lot of time. But it is just a pattern, I guess, of 

this Administration of ducking the questions and evading the answers. And it is certainly a pattern of yours of obfuscation in all 

these things and not giving a clear answer. You have such disdain 

for the American public that we have to bring you before this committee before you would simply answer the American public’s question? 

Mr. Chairman, you asked a question, is it a factor, the Volcker 

Rule, and the Secretary couldn’t answer it. 

And yet, Mr. Secretary, you were able to come up with a litany 

of other factors. You said it was a factor with regard to, the time 

that it was happening, high-frequency trading was a factor, volume 

12 

was a factor. So you ran off all those—correct?—that those were all 

factors. 

But then did you say that regulation and Volcker is not a factor? 

Is that the final answer? 

Secretary LEW. Congressman, what I said is complicated, and we 

are open— 

Mr. GARRETT. It is complicated. I understand. And you listed the 

other four factors. 

All we want is a simple question. You did say that in the blip, 

there was no evidence of regulation being a factor in that blip. Correct? 

Secretary LEW. That is certainly my understanding. 

Mr. GARRETT. Okay. So is it your understanding, further, going 

forward, that Volcker, therefore, is not a factor in any of this? 

Secretary LEW. Congressman, I think the Volcker Rule is a very 

important protection against— 

Mr. GARRETT. Is it a factor? 

Secretary LEW. —risk-taking. I can’t give you— 

Mr. GARRETT. You listed four other factors. Is this one of the factors? 

Secretary LEW. Congressman, I listed the factors that I know are 

very much real— 

Mr. GARRETT. Do you know whether this one is a factor? 

Secretary LEW. I am not able to say that I know the Volcker 

Rule— 

Mr. GARRETT. So you knew the other factors, and you don’t know 

this factor. That is— 

Secretary LEW. I— 

Mr. GARRETT. —the end of those questions. 

Secretary LEW. I am trying to demonstrate an open-mindedness 

that you are not giving me a chance to express. 

Mr. GARRETT. No. You are just— 

Secretary LEW. I haven’t ruled out— 

Mr. GARRETT. You were given the chance to answer the question, 

Mr. Secretary. 

Reclaiming my time, with regard to the FSOC and the FSB, I appreciate that the FSOC has announced that it has a process with 

regard to the listing of the potential risk associated in going forward in the designations. 

Is there such a process with FSB, as far as a due process system 

in place there, that we are trying to get to with FSOC? 

Secretary LEW. Congressman, the FSB is a very different process 

than— 

Mr. GARRETT. I understand that. 

Secretary LEW. —FSOC. There is no consequence to the designation in terms of— 

Mr. GARRETT. I understand that. 

Secretary LEW. So it doesn’t have the powers that FSOC— 

Mr. GARRETT. I understand that. 

Secretary LEW. Only FSOC has the power to impose— 

Mr. GARRETT. I understand that. 

Secretary LEW. —a regulatory burden on— 

Mr. GARRETT. So is there a process, nonetheless, of due process 

for the companies— 

13 

Secretary LEW. There is an open process where stakeholders 

share their views and, certainly, governmental entities share their 

views with the FSB, but it is a different kind of a process. So I 

don’t think the same kinds of due process issues apply when you 

are not designating a firm with the consequence— 

Mr. GARRETT. So it is not a due process, it is a different process, 

is what you are saying? 

Secretary LEW. I am saying you are comparing apples and oranges. FSB and FSOC are very different. So there is an appropriate set of due process concerns— 

Mr. GARRETT. Within that process right now, the FSOC is asserting its authority with regard to new roles with their disclosures to 

asset managers and the like, and I am sure you are familiar with 

that. 

Secretary LEW. Yes. 

Mr. GARRETT. And I know the FSOC had previously been looking 

at that issue. 

Until the SEC finalizes that, will you go to the FSB and suggest 

that they make no final determination with the asset managers? 

Secretary LEW. Congressman, I think there is a more basic issue, 

which is that we are— 

Mr. GARRETT. I am not asking about the basic issue. I am asking 

one question. 

Secretary LEW. I don’t think the FSB’s process and our process 

are at all identical. 

Mr. GARRETT. I understand that. 

Secretary LEW. We have our own responsibility— 

Mr. GARRETT. You just said that. So what I am asking you is, 

as a member of FSB, where you have told us repeatedly it is done 

on a consensus basis, I am asking, when you go back and try to 

get a consensus, will you say as your position is until your regulator, the SEC, which is working on this, you would ask FSB to 

stand down for now until this decision is made over here. 

Secretary LEW. What we are doing at the FSB is trying to make 

sure that it is a thorough, complete review. They— 

Mr. GARRETT. I gotcha. 

Secretary LEW. —are proceeding in a similar manner— 

Mr. GARRETT. I gotcha. I understand all that. You are being thorough, diplomatic, and all the rest. 

Simple question: Until the SEC finishes their process, will you 

use your capacity to say the FSB should stand down in this area? 

That is a simple yes-or-no question too. 

Secretary LEW. I don’t know the precise schedule at the FSB, so 

I— 

Mr. GARRETT. I didn’t think that you did. I am just asking you, 

would you— 

Secretary LEW. I don’t think that the FSB can time all of its actions around— 

Mr. GARRETT. I doubt that they can. But can you assert your authority in that regard to try to do so? 

Secretary LEW. Look, this consensus process, let’s understand 

what it is about. It is about trying to drive the world— 

14 

Mr. GARRETT. No, I am not asking about a consensus process. I 

am trying to ask you whether you will use your authority as the 

American Secretary— 

Secretary LEW. I don’t know. I would have to— 

Mr. GARRETT. —of the Treasury to represent the American companies on their behalf? 

Secretary LEW. I would have to look at where we were and where 

they were and make a judgment at the time. 

Mr. GARRETT. Yes. Well— 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Secretary, we have held a number of cybersecurity hearings 

this year both in this committee and in the Small Business Committee to examine the toll of cyber attacks on consumers and businesses. Many of the witnesses stated that a clear, uniform set of 

rules was needed to address this problem. 

Can you elaborate on FSOC’s proposal for a national plan to respond to cyber threats that you mentioned in your testimony? 

Secretary LEW. Thank you, Congresswoman. This is a hugely important issue in every sector of our economy and our country because, truly, there are exposures to cyber risk everywhere. 

The financial sector, I think, has been a leader in taking it seriously. And the largest firms are putting enormous resources into 

trying to put systems in place that are effective. 

One of the things that we have done as a government that I 

think is very important is our National Institute of Standards 

(NIST) has put out best practices. We have encouraged the private 

sector to use best practices. I have certainly encouraged other financial regulators to have the same view. 

I think that we are at kind of a moment where it is not just a 

question of what does a firm do itself, but you have to ask what 

are the policies a firm has with regards to who it will do business 

with. A lot of the exposures come not directly at the firm but when 

a third party connects to the firm. 

Ms. VELAZQUEZ. Right. 

Secretary LEW. So those firms do not just have to worry about 

what are they doing, but do they have good standards as to who 

they will do business with. And our goal ought to be to bring all 

of those parties to the highest standard. 

I think it is premature to talk about having a single national 

standard that is mandatory. We have put it out as a voluntary 

standard. I think many are going and using that standard. And I 

think it is something we have to continue to look at. 

Ms. VELAZQUEZ. The cost is an issue, especially for small businesses. Do you have any type of interagency working relationship 

on this matter like the Small Business Administration (SBA)? 

Secretary LEW. We do work across agencies in many areas. In 

particular, there are connections between, say, the utility sector 

and the financial sector, because if your power goes out, you are 

obviously going to face a risk. 

I am not familiar with what the SBA’s program on this is. In the 

financial area, one of the things that we have focused on is the 

15 

need for smaller financial institutions to be able to work together 

or through organizations so that they can pursue best practices together, because the burden for any individual firm would be too 

high. That is one of the reasons it is so important to have legislation in this area, to make the collaboration between firms easier 

and less risky for them. 

We have been very much supporting the enactment of cyber legislation, but even pending the enactment, we have put out Executive Orders to try and pave a way for firms to work together. 

Ms. VELAZQUEZ. Thank you. 

As you mentioned, lending standards have decreased as financial 

institutions try to find profitability in the current low-interest-rate 

environment. While the loosening of credit markets since the recession is beneficial for small businesses, too much risk-taking could 

again lead to problems. 

If interest rates were to rise, what impact will this have on the 

markets overall and specifically on access to capital for small businesses? 

Secretary LEW. Congresswoman, I think that there is at some 

point a tradeoff between access to credit and risk-taking. We have 

raised concerns over the last couple of years that in some cases 

there may by an overadjustment, where—if you look at the FICO 

scores for home mortgages, the averages have gotten very high. 

There are a lot of not very risky potential borrowers who are having access-to-credit issues. 

Some of that requires a clarification of some of the policies put 

in place. It is why some of the agencies have been addressing the 

issues like put-back risk. 

Now, why am I answering a question about small-business lending with housing issues? I think we all know, for a lot of small 

businesses, the pathway to credit, in part, is through their personal 

home equity, their home mortgages. 

Ms. VELAZQUEZ. Sure. 

Secretary LEW. So the two are related. 

We have done a lot through our programs to reach out, both 

through the SBA and through programs we at Treasury run, to 

make credit available to small businesses. We work with the community banks and local lenders to encourage that lending. I think 

it is an important question. 

I do think, as we come out of the—through the financial crisis 

into a period of calmer macroeconomic circumstances, that is an 

important time for more lending activity to be appropriate. 

The question isn’t, do financial institutions have no risk, but do 

they take reasonable risks, and are they not overly leveraged? 

Ms. VELAZQUEZ. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

And good morning, Mr. Lew. 

Secretary LEW. Good morning. 

Mr. LUETKEMEYER. I was kind of taken aback by your report. 

This morning in the Washington Times, there is a report that CBO 

16 

put out, I think yesterday. I don’t know if you have seen the article 

yet with regards to— 

Secretary LEW. I haven’t seen the article. I know the report. 

Mr. LUETKEMEYER. Okay. Thank you. 

And they make the comment here that—the headline is, ‘‘CBO 

Warns of Financial Death Spiral from Debt.’’ The first line says, 

‘‘Rising Federal debt threatens to choke off economic growth in a 

decade, beginning a death spiral that will sap revenue from government programs even as demand grows, forcing the government to 

borrow even more.’’ 

And one of the things—in your testimony here, your second paragraph, the first line says, ‘‘The Council was created to identify and 

respond to vulnerabilities in the U.S. financial system and provide 

a mechanism for agencies to talk to each other and take collective 

responsibility for addressing potential threats to financial stability.’’ 

And yet, in your report, I don’t see anything about debt. Am I 

missing something? 

Secretary LEW. Congressman, I think if you look at the risks to 

our economy from Federal spending and debt, we are in a much 

better position now than we were 61⁄2 years ago. We have reduced 

the deficit as a percentage of GDP and in dollars at a historically 

quick rate. And that very report makes clear that over the next 10 

years, we are in a pretty stable place. 

I think the thing in that report that people are concerned about 

is the long term. And, obviously, there are still— 

Mr. LUETKEMEYER. That is not what it says, Mr. Secretary. That 

is not what it says here. It says the long-term outlook for the Federal budget has worsened dramatically— 

Secretary LEW. No, I said over the next 10 years. That report 

goes out far longer than 10 years. And I think that the issue of— 

Mr. LUETKEMEYER. So we have just a little blip in the screen 

here— 

Secretary LEW. No. 

Mr. LUETKEMEYER. —and then we go back a little lower part of 

the curve, and then we go back up again? 

Secretary LEW. I think if you look at where we were in 2008– 

2009, we were careening towards a very treacherous place. We 

have stabilized it, and it is improving. We still have long-term challenges, and— 

Mr. LUETKEMEYER. Mr. Secretary, if you just quote the President 

and use his analogy of a car in a ditch, we are not out of the ditch 

yet, we are still trying to struggle to get out of there. We are bumping along here with an annual growth rate of what? Less than 2 

percent, 1 percent, something like that, of our GDP? 

And here CBO says—and the point I am trying to make is, CBO 

points out the debt is a problem for our economy, and yet your report does nothing, says nothing about it. And you are supposed to 

be an agency that points out these problems. 

My question is, why did you not point out that debt is a problem 

for our economy? 

Secretary LEW. Our report appropriately looks at the threats to 

financial stability, and— 

Mr. LUETKEMEYER. So you don’t consider it a threat? 

17 

Secretary LEW. I think that if you look at where we are today 

versus 6 years ago, the Federal deficit has been brought under control for the next decade. 

Mr. LUETKEMEYER. Yes, but part of— 

Secretary LEW. We are in a period where we need to get the 

economy growing; I totally agree with you. Our conversation should 

be about what can we do to grow the economy. 

And we know there are things we could do. We could have an 

infrastructure program in place. We could have immigration reform. There are lots of things we could do to grow our economy. 

I don’t think, right now, the debt 20, 30 years from now is the 

thing that is holding our economy back. 

Mr. LUETKEMEYER. I think you have missed the boat, quite 

frankly. CBO points it out. There is nothing in here. I think we are 

missing the boat. We have dropped the ball on this. 

Next question. One of the concerns I have, as the chairman of 

the Housing and Insurance Subcommittee is that we have a situation where we have designated some insurance companies as SIFIs. 

And one of the things is, that is fine if you feel there is that much 

risk there. We have asked before, quite frankly, to give us the criteria on which you based your analysis, and we have never gotten 

it. We had an Under Secretary who was here not too long ago who 

actually did a very good job of getting me the analysis on this. 

But I think part of your job, also, is to figure out how to de-risk 

things. You pointed out there is a problem. Okay, how do we get 

the problem solved? And I think that is also what is in your report. 

In your first line here, it talks about addressing potential risks to 

find ways to get back to financial stability. 

So how do we de-risk your—do we have criteria in place yet to 

de-risk a SIFI, an insurance SIFI? 

Secretary LEW. The analysis that led to firms being designated 

is laid out clearly in the record that is quite public. And I think 

each of the firms understands why they were designated. 

The question of how they—you are really asking how could they 

exit, because de-risking would mean they would no longer be. 

Mr. LUETKEMEYER. Right. 

Secretary LEW. We have made clear that we are going to review 

regularly, annually, the status of the firms. We have done that 

with the firms that have been designated. And— 

Mr. LUETKEMEYER. Okay. 

Secretary LEW. —if a firm changes its business model and has 

less risk, it would no longer be designated. 

Mr. LUETKEMEYER. I see my time is up. I will yield back. Thank 

you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Meeks. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Secretary, I want to go somewhere else, but I just have to 

say, I think, from what you were talking about, how we are better 

off than we were 6 years ago—and I wish my colleagues had talked 

about the person, and when they had the opportunity to stop the 

person who drove the car into the ditch in the first place, that 

caused us to have this debt and all this problem. So then when 

18 

someone else comes along and says, okay, I am going to help you 

get out of this ditch that I didn’t drive you in—but I am going to 

get you out of the ditch now. And you start pushing them to get 

them out of the ditch. Now, you might not be going 100 miles an 

hour yet. You are going maybe 50 miles an hour. But now you are 

no longer in that ditch. You are out the ditch, and you are moving 

in the right direction. 

But yet you want to blame the person who is getting you out of 

the ditch instead of the one who put you in the ditch in the first 

place. And that is where we are today. We were in a ditch in 2008, 

and now we are driving ourselves out of the ditch. That is where 

we are today. 

Let me go to where I really want to go to, Mr. Secretary, dealing 

with asset management. That is what I have been looking at, dealing with FSOC and the work-around, the asset management and 

that industry. And I know they don’t assume all of the risk as 

banks, that we look at them differently. 

But I did see in one of the reports, however—and I am concerned 

about herding. I think that was in an FSOC report, or OFR, et 

cetera. And we have a lot of investments there. Should we be concerned about this process of herding? 

Secretary LEW. Congressman, I think that, obviously, asset management has grown as a sector, and there are a lot of individual 

and institutional assets there. We have been looking carefully at 

this question for some time. The risks are not necessarily just firmspecific. That is one of the reasons that we are looking across the 

industry at activities to ask, are there activities that are particularly risky? 

We have not reached a conclusion. I am reluctant to give a view 

until we have reached a conclusion. Because, frankly, we have entered the process, as have regulators around the world, trying to 

understand and learn about a growing and somewhat new industry. We have identified that as a question. I can’t prejudge what 

the answer is. 

What I can tell you is that it is important that we complete the 

process and that it be driven by facts and by analysis. And if there 

is action that needs to be taken, the appropriate regulatory body 

should do so. 

I think the notion that you cut these questions off because you 

think you might not like the answer or because you think you 

know the answer is exactly what got us into trouble in 2007 and 

2008. We have to be willing to ask the questions and, even if the 

answers end up being hard, follow them to a logical analytic conclusion. I think that is what FSOC is doing, and I look forward to 

that process being completed. 

Mr. MEEKS. So let me ask—and I know on some municipal levels 

and State levels where we have multibillion-dollar pension plans 

that have tried to benefit from a greater diversification of asset 

management by using more emerging and diverse asset managers, 

which are generally smaller asset managers. And some are minorities and women who have selective investment strategies. However, 

I am finding that these small managers face real barriers that prevent them from gaining more market shares. 

19 

Has the Treasury or FSOC looked into how we can get more diversification of managers in this industry? 

Secretary LEW. I don’t know that FSOC has looked at it. As 

Treasury Secretary, I have looked at it. And I think that if you look 

at the performance of the smaller and minority-owned managers, 

there is not a huge difference. Some are successful, some are not. 

The same is true with the large managers. Some are successful, 

some are not. Some have good years, some have bad years. 

I think one of the problems is that there is a tendency to bulk 

things up because it easier to deal with a few rather than a lot of 

managers, and we need to push back on that. We need to make it 

clear that the door has to be open to new participants in this space. 

And we have tried through a number of things we have done to 

have that be the approach, both in terms of how we have managed 

some things within Treasury and through other intergovernmental 

efforts we have had. I think we are making progress, but there is 

more progress that needs to be made. 

Mr. MEEKS. Okay. Because as these asset managers get bigger 

and bigger, they play more and more of an important role in the 

sourcing of capital to businesses that create jobs in various communities. And so, that is one of the reasons why with banks we had 

to go to the Community Reinvestment Act in the 1970s. 

So don’t you think we should be looking into some policy that can 

ensure that we have more inclusion in the asset management industry so that we can also make sure that they are investing or 

reinvesting in some of our other communities? 

Secretary LEW. I think it is important for there to be broad participation and for the process to be open. I don’t know that I would 

think you should have, kind of, mandatory targets. But I would be 

happy to follow up with you. And it is a matter I have a great deal 

of interest in and would like— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Monetary Policy and Trade Subcommittee. 

Mr. HUIZENGA. Right over here, Secretary Lew. 

Secretary LEW. Everybody has moved around. I don’t know 

where to look. 

Mr. HUIZENGA. Sorry about that. 

So, unfortunately, I have 5 minutes, not 15 minutes, so I am 

going to try and quickly and respectfully move through a number 

of things. 

I, too, received the email at 11:18 last night and the answer to 

my questions on a few things from 3 months ago. 

Congratulations. You were actually very clear on one of my questions regarding financial services trade negotiations. I asked for 

you to explain why Treasury continues to oppose including financial regulatory matters in TTIP. This is the most clear answer that 

I think I am aware of and I think the committee has seen. You say 

TTIP is not, however, an appropriate or necessary vehicle for addressing financial regulatory cooperation. You claim that it is already happening at the Financial Stability Board, international 

standards-setting bodies, and a number of others. 

20 

I disagree with the answer. I think it should be included. But I 

appreciate your clarity. However, it does lead me to another question, which has to do with local storage data requirements that 

many in Europe are starting to push. 

And it is my understanding that the Administration has highlighted the free flow of information across the digital world as sort 

of a centerpiece of the negotiations for both TPP and TTIP, which 

is, again, a provision I fully support. I am confused as to what that 

difference without a distinction might be, as to why you are going 

to be doing that, since it is—it makes a tremendous amount of 

sense to have us negotiate with our partners in this if it is bad for 

American business. But, again, you exclude financial services. 

And I am curious, is it the Administration’s position that we are 

seeking to prohibit local storage requirements for everything except 

for financial services? 

Secretary LEW. No. We have been very firm on the issue of putting nontariff barriers in place where you have a local storage requirement for electronic data. 

I think the distinction is easy to make, and I have tried to be 

clear in this committee before. We view prudential regulation as 

something that ought not to be brought under trade negotiation or 

a trade process. And that is the difference. It is not prudential regulation to say that there shouldn’t be a nontariff barrier— 

Mr. HUIZENGA. So you are willing to have the financial services 

sector treated differently than any other sector of the U.S economy 

in the trade negotiation? 

Secretary LEW. In general, trade agreements do not bring prudential matters or— 

Mr. HUIZENGA. We have the Europeans— 

Secretary LEW. We said ‘‘no’’ to the Europeans on this. 

Mr. HUIZENGA. Yes, the Europeans would like to do it. And it 

seems very odd and, I think, a huge mistake. 

Secondly, I do want to quickly move on to the IMF and Greece. 

Would you agree or acknowledge that the decision to bend the 

rules, shall we say, if not ignore the rules regarding Greece on the 

exceptional access framework, which was done with Treasury’s concurrence, was a mistake? 

Secretary LEW. I think that the actions taken in 2010, 2012 to 

avoid an economic crisis in Greece were the right thing for the IMF 

and the right thing— 

Mr. HUIZENGA. So it was not a mistake? 

Secretary LEW. —for the United States. 

Mr. HUIZENGA. Okay. But just so I am clear, it wasn’t a mistake? 

Secretary LEW. At the time, Greece said— 

Mr. HUIZENGA. Okay. So now, looking back, do you think it was 

a mistake? 

Secretary LEW. No. And if I could just take— 

Mr. HUIZENGA. I will take ‘‘no’’ as your answer. That is fine. Because there is a discussion of putting those rules back in place at 

the IMF. That is something that the IMF board is interested in. 

And I am curious why the Administration, from my understanding, 

is opposed to that. Why? 

Secretary LEW. So, look, I think that there are occasions when 

it would be important for the IMF to have flexibility— 

21 

Mr. HUIZENGA. So the rest of the IMF board, excluding us, wants 

to put those rules back in place because they believe that what 

happened with Greece was a mistake . But you— 

Secretary LEW. I think that is not exactly where the conversation 

in the IMF is. There is a serious conversation— 

Mr. HUIZENGA. I have had a number of conversations with folks 

from the IMF and involved with the IMF, and I am not sure that 

is an accurate portrayal— 

Secretary LEW. Congressman, there is a range of issues, and I 

think it is important to distinguish them. There is the exceptional 

access issue itself, and there is a question of how to proceed into 

a new world of debt reprofiling. We have tried to— 

Mr. HUIZENGA. We also have the temporary new arrangements 

to borrow. And I know that the Administration has been trying to 

use that as a reason to not necessarily go into IMF quota reform. 

But it seems to me, if we are not going to address this exceptional 

access framework— 

Secretary LEW. Congressman, if I could just take—I know you 

are running out of time, but if I could take half a minute to respond— 

Mr. HUIZENGA. I am happy to take a private meeting later about 

this, but— 

Secretary LEW. I would be delighted to— 

Mr. HUIZENGA. —we can only get you up here twice a year, so— 

Secretary LEW. This is a hugely important issue. Obviously, 

quota reform is critical to the U.S. place in the world, and we are 

working very hard to get quota reform enacted. 

I think exceptional access has serious questions. I have never 

pushed back on the kinds of questions you are asking, and I am 

open to a serious conversation about it. I think, looking forward, 

finding a way for the IMF to avoid having to use tools like that is 

in all of our interests, and I would be happy to have a conversation. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Hello, Mr. Secretary. How are you doing? 

Secretary LEW. I am fine. 

Mr. CAPUANO. Are you familiar with Major League Baseball? 

Secretary LEW. I have heard of it. 

Mr. CAPUANO. Are you familiar with the team called the Boston 

Red Sox? 

Secretary LEW. I have. 

Mr. CAPUANO. So you purport to be an expert in baseball. Mr. 

Secretary, can you tell me what is wrong with the Red Sox right 

now? 

Secretary LEW. That is a long— 

Mr. CAPUANO. No. Then you refuse to answer that question. I 

need to know, is it the pitching? Is it the fielding? Is it the hitting? 

Come on, Mr. Secretary, answer the question. 

Secretary LEW. I am— 

Mr. CAPUANO. I can’t believe you refuse. 

22 

If you won’t answer that question, can you answer me why the 

Republican baseball team can’t seem to beat the Democrats? Come 

on, Mr. Secretary, answer the question. You have plenty of time. 

Oh, well, okay, if you refuse to answer the question, I guess I 

will have to move on to some other areas. Because I just wanted 

to show that I guess badgering is not the exclusive realm of some 

of my colleagues. We can badger, too. But it doesn’t produce much. 

So— 

Secretary LEW. As a Mets fan, I am showing great self-control, 

though. 

Mr. CAPUANO. Mr. Secretary, for everybody’s sake, in your next 

FSOC report, can you put a chapter in there on debt? You have a 

great story to tell. I think my colleagues actually raise a good 

point. Debt, in theory, could be a risk to the economy, and you have 

a good story to tell. It would satisfy everyone, including me. 

Secretary LEW. I understand. And, look, we could discuss it and 

say why we don’t think it is a risk. The report focuses on the things 

that we think are risks. 

Mr. CAPUANO. But I— 

Secretary LEW. It is a fair point. 

Mr. CAPUANO. Yes. Just, if you do it the next time, at least you 

take one of their arguing points away and you make some good 

points. 

Secretary LEW. Yes. 

Mr. CAPUANO. And I think it is a fair thing to discuss. 

With that, I am going to move on to a couple of things that are 

not directly related to FSOC but indirectly related to it. 

First of all, I would like to talk about Fannie and Freddie. Have 

Fannie and Freddie paid back every penny of the money that they 

borrowed from the American taxpayers? 

Secretary LEW. They have, I believe, just— 

Mr. CAPUANO. The answer is ‘‘yes.’’ 

Secretary LEW. I believe the answer is ‘‘yes,’’ but— 

Mr. CAPUANO. I know it is. I am asking a question I know the 

answer to. 

And, by the way, haven’t they also paid back billions upon billions of dollars above what they borrowed? 

Secretary LEW. Yes. I think I understand where you are going, 

Congressman. 

Mr. CAPUANO. I hope so. 

Secretary LEW. And I think what they have not done is they 

have not removed from the Federal Government, the Federal taxpayer, the risk that goes with those institutions having the backing 

of a Federal backstop. 

Mr. CAPUANO. I understand that. But the money that they are 

paying now above and beyond the money they borrowed, where 

does that money go? 

Secretary LEW. It goes to the Treasury. 

Chairman HENSARLING. It goes to the general Treasury. So, basically, homeowners who have a mortgage— 

Secretary LEW. And so does the risk—the support that goes behind the risk— 

Mr. CAPUANO. I supported all that. I am not—I totally agree with 

everything that was done up until they paid back their loans. 

23 

Secretary LEW. Yes. 

Mr. CAPUANO. My problem is they paid it back, they are stable, 

they are heading in the right direction, and it is time to get back 

to more business as usual. Because, like everybody else, I want to 

keep homeowners keeping their own money, to the best of our ability. Yes, there are interest rates, and, yes, there is some risk. But 

their dollar-for-dollar risk—right now they are simply contributing 

to the Federal Reserve—to the general Treasury account, and that 

doesn’t seem fair to me. 

It strikes me that if we are going to have a general Treasury account, either we should tell people we are charging you extra because you have a service or we are increasing your taxes—neither 

one of which, it seems to me, is fair. But, in this case, you are 

charging them through their mortgage for something that is unnecessary at this point in time. 

Secretary LEW. Yes. That is not the way I look at it. I see—the 

GSEs are still in conservatorship, which means the Federal taxpayer is directly standing behind them if they fail in the future. 

Mr. CAPUANO. They have done that from day one, and you 

weren’t— 

Secretary LEW. Well, no. From day one, there was an actual denial that there was a backstop. It is now clear there is a backstop. 

Mr. CAPUANO. Who denied that? 

Secretary LEW. It was in law. 

Mr. CAPUANO. I would respectfully and strongly disagree, and I 

think facts pointed out that I was right. 

Secretary LEW. No. I think that we have seen over the last several years the estimates of the potential risk of a problem in the 

GSEs is still quite large. So— 

Mr. CAPUANO. I understand. But if the money were going to a 

separate account to sit there and build up some kind of capital reserve, I think you would have a fair argument. 

Secretary LEW. But the liability is borne generally. 

Mr. CAPUANO. But the money going into the general Treasury 

doesn’t bear up, in my estimation. 

Secretary LEW. The liability is borne generally, yes. 

Mr. CAPUANO. Number one, they deserve their money back now 

that they are stable. Number two, homeowners deserve lower interest rates unless they are being told what the money is used for. 

And right now some of their money is being used to support something other than Fannie and Freddie. So I guess we will have to 

disagree on that. 

And I guess with the last few seconds, I wanted to follow up with 

something that I brought up with Mr. McRaith, who I think is also 

doing a great job. However, it strikes me that FIO and possibly 

FSOC is pursuing a backdoor way to take over regulation of U.S. 

insurance companies via international agreement. 

Now, that may be a little overstatement, and I am not a ‘‘black 

helicopter’’ guy, I kind of overstated it to make the point. But it 

certainly strikes me that some of the agreements we are about to 

make with some our international friends may be pushing a little 

too far. 

With that, I will have to yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

24 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, chairman of our Oversight and Investigations Subcommittee. 

Mr. DUFFY. Thank you, Mr. Chairman. 

Welcome, Mr. Lew. Obviously, you are the Treasury Secretary, 

not the coach of the Red Sox, and therefore we are not going to ask 

you questions about their failings. We would note that they are 

doing better than the Brewers, which says a lot about the Brewers. 

But if you were the coach, we would expect you to answer the 

questions that we have about baseball. And when we asked questions, we would hope that you wouldn’t give us answers about the 

history of baseball and how it came to be and you could talk about 

the history of Fenway. But you would actually answer the question 

of what is wrong with the Red Sox. 

You had a lot of questions today about the liquidity in the bond 

market. And I think the chairman brought out, is this related to 

Volcker or other rules and regulations that have caused banks and 

traditional market makers to leave the space. 

And I want to give you a chance to answer that question. Is this 

something that you are looking at? Do you think the rules and regulations that have come since the crisis have had any part in the 

lack of liquidity in the bond market? 

Secretary LEW. Congressman, I think that to answer the question fully would take quite a long time, because it is a very complicated issue. 

Mr. DUFFY. The Red Sox are complicated too. 

Secretary LEW. And I had tried to indicate that we are open to 

looking at any of the possible costs. 

Mr. DUFFY. This is not a ‘‘gotcha’’ game at all. You identify risk 

in the markets, right? That is your job. And you do come in, and 

you talked about cyber, and you talked about other things that are 

very complicated, that we can’t wrap our heads around, but you tell 

us where you see those risks. 

And so it is a very simple question, because a lot of the commentators will say: Listen, it is complicated. There are a lot of reasons why there is a lack of liquidity in the bond market. But they 

will unanimously point out that one of the causes could be the new 

regulatory regime and its impact. 

The commentators can talk about this, but you are not willing 

to answer that question today? 

Secretary LEW. In fairness, Congressman, I am offering a much 

more detailed answer than the commentators. Most of the commentators that I have heard, with some self-interest, have jumped 

to one explanation. 

Mr. DUFFY. You do this really well. So I ask you about liquidity 

in the bond market, and I mention commentators, then you will 

start to talk to me about commentators and the history of commentating and the articles that are written. 

Listen, are you unwilling to answer this question because the dogooders who are looking for risk are actually the ones who are potentially creating the risk in the market? And so, if you tell us, yes, 

this could be a cause of the lack of liquidity in the bond market, 

you have to look at yourself. You have to look at the regulatory regime that has taken place since the financial crisis, and you don’t 

want to admit that today. 

25 

That is not badgering. I think that is a fair question. And to say 

that it is too complicated to answer, I don’t understand that, Mr. 

Lew. Give us a straight-up shot. What is it? Yes or no? 

Secretary LEW. I think that if you look at the many factors that 

are at work right now that are having an impact on liquidity, it 

is not my view that financial regulation is the principal thing that 

requires our attention. I have not said we shouldn’t look at it, and 

I think these other factors are very clear. 

Mr. DUFFY. I don’t know whether you were a tap dancer when 

you were young. I didn’t ask if it was the principal. This goes back 

to what the chairman was saying. You are playing with words. Is 

it a contributing factor, which goes back to the point the chairman 

made, is it a contributing factor, the rules and regulations? Are you 

looking at that? Is it a contributing factor? Not the main factor, not 

the only factor, but a contributing factor? Yes or no? 

Secretary LEW. If you look at liquidity, you have to look at different parts of the market. 

Mr. DUFFY. I know. I know. 

Secretary LEW. And if you are looking at Treasuries, it is different than if you are looking at high-risk bonds. 

Mr. DUFFY. I am going to ask you a yes-or-no question. Are you 

looking at FSOC, yes or no, at whether the rules and regulations 

are having some impact on the lack of liquidity in the bond market? 

Secretary LEW. We are looking at all of the factors that could 

contribute. 

Mr. DUFFY. So you are looking at that? 

Secretary LEW. We are looking at all of the factors that could 

contribute. 

Mr. DUFFY. So this is one? 

Secretary LEW. I am saying that as Secretary of the Treasury, it 

is something that many of the members of FSOC in their own 

agencies are looking at as well. 

Mr. DUFFY. Mr. Lew, this isn’t complicated stuff. We ask you 

simple questions and I think we are entitled to get straight answers from you. And I think if you think, listen, the rules and regulations that come have no impact, the commentators are wrong, 

banks and market makers have left the space, but that has no direct correlation with the lack of liquidity, tell us that. 

Secretary LEW. Congressman, I think that the financial reform 

has made our system safer and sounder than it was. We have a 

stronger economy because of it. Liquidity is still deep. 

Mr. DUFFY. Is it creating a risk too? 

Secretary LEW. And I think that when we look at the issues related to liquidity, we should look at all potential factors. I identified the things that I am aware of. 

Mr. DUFFY. One quick question: Do you support TPA like the 

President? 

Secretary LEW. I do, very strongly. 

Mr. DUFFY. Duly noted. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Maloney. 

26 

Mrs. MALONEY. Thank you so much, Mr. Chairman. 

And I am very pleased to welcome one of the favorite sons of the 

great City of New York. It is very good to see you. 

Secretary LEW. Thank you. 

Mrs. MALONEY. And I regret I had to chair another meeting and 

I just got here. But I want to follow up with something that was 

raised by Ranking Member Waters earlier. And while my good 

friends on the other side of the aisle have criticized FSOC for not 

being responsive to their document request, I would like to point 

out that FSOC did make 1,400 pages of confidential documents 

available to this committee. And my staff and I believe the staffs 

of many other Members on this side of the aisle have been over 

there to Treasury and reviewed these documents. 

And these were confidential documents laying out the detailed 

reasoning behind the FSOC’s decision to designate individual companies as systemically important, which was exactly what the Majority asked for. So I think supplying 1,400 documents for review 

is being responsive, and I just want to make that very clear. 

Now, I would like to ask you, Mr. Secretary, you said earlier that 

the issue of bond market liquidity is a legitimate one, but we 

should be very careful about assessing the causes of the lack of liquidity. And I agree with you. I don’t think we have any definitive 

answers yet, but I think it is an incredibly important issue. 

I think it is also important to focus on potential problems in the 

Treasury market rather than other markets, because the Treasury 

market is a $12 trillion market that determines the borrowing 

costs in so many other key markets as well. 

You mentioned the huge swing in the Treasury market on October 15th of last year and said there was no evidence of a breakdown in the market that day. And I agree with you. On October 

15th, trading was continuous and trading volume was heavy. So 

was it really a lack of liquidity driving the wild price swings or was 

it something else? 

Can you give us some more context for what the FSOC has found 

so far as it has looked into this issue? 

Secretary LEW. Thank you, Congresswoman. 

We have worked at Treasury, together with other agencies that 

look at the market carefully, and tried to follow the transactions 

that day to understand what actually happened. And there was a 

huge amount of volume, and there was this 15-minute period when 

there was a price spike. But there was not a breakdown in the 

market. It is something we have to ask what happened then and 

what do we learn from it going forward. 

There was a huge amount of electronic trading going on. Market 

structure has evolved, and one of the things with technology is you 

never go back. So we have to deal with the reality. And there are 

many positive things about electronic trading, so I don’t say that 

critical of the development of electronic trading. But that changes 

the structure of a market. 

We are looking at that. I can’t sit here today and say I have a 

clear answer. We are hoping over the course of the next few weeks 

to complete our analysis so that we can offer a more definitive 

view. 

27 

But what I was trying to say before is that there was a desire 

to jump to a conclusion that somehow financial reform caused October 15th. We see no link between financial reform and what happened on October 15th. Maybe others will find it. But it is why we 

have to be so careful when we ask these questions about liquidity 

to treat a very complicated issue the way it should be treated. 

I have not ruled out looking at any of the contributory possibilities from any policy area or market condition. But we also ought 

not to jump to a conclusion, which many did very quickly in a way 

that I can understand why they did, but it doesn’t mean it is right. 

And the Treasury market remains the deepest and most liquid 

in the world. There are other areas of the market where there are 

some questions about liquidity that are quite legitimate, where 

they are not electronically traded, so that is different, where the 

huge volume of corporate bond issuances raises some questions 

about would there be a good liquid market if there were a very 

stressed day. We are looking at all those questions. We take them 

very seriously. 

One of the things, you have to separate the different kinds of liquidity, because if it is a question of institutions keeping high-risk 

proprietary investments on their balance sheet or not, that is not 

something we should go back to. We have a system that is safer 

and sounder because we have moved away from that. 

Mrs. MALONEY. Thank you. I look forward to your report, and I 

hope you will personally brief Members of Congress. 

Secretary LEW. I would look forward to it. 

Mrs. MALONEY. I think it is critically important. 

And my time has expired. Thank you very much. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Fitzpatrick, chairman of our Task Force to Investigate Terrorism 

Financing. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for your time here. 

We have had a couple of hearings of the Task Force to Investigate Terrorism Financing. And I have a series of questions here, 

which I would like to sort of make part of the record rather than 

go through them today and ask that the Secretary give us a timely 

response. 

Secretary LEW. Sure. I would be happy to respond. 

Mr. FITZPATRICK. I will submit them to the Chair. 

I actually wanted to follow up on some questions and your quick 

responses from my friend, Mr. Capuano of Massachusetts, with respect to the national debt. 

It was being referred to as the national debt, which is not in the 

FSOC report, it is not even identified, that, number one, the national debt is a good story, it is a good story to tell about the national debt, and, number two, it is not a threat to our economy. 

And I think that you answered both in the affirmative. Do you 

agree with that? 

Secretary LEW. Again, it is a complicated question. I was OMB 

Director 3 years with a surplus. I believe in having a fiscal policy 

that lasts for the long, long term. I think if you look at what we 

28 

inherited, the stability that we now have is a world of improvement, and there is still work to do 30, 40 years from now. 

Mr. FITZPATRICK. But, Mr. Secretary, the question is the debt 

itself, which in 2008 President Obama referred to as a $10 trillion 

national debt is unpatriotic and immoral. Today, there is a debt 

clock, it is right above us at the hearing, $18 trillion, $159 billion— 

it is going up a million dollars a minute. 

Secretary LEW. It has come down. 

Mr. FITZPATRICK. Is it a good story? 

Secretary LEW. It is a good story. The deficit has come down as 

a percentage of GDP faster than at any other point. 

Mr. FITZPATRICK. That deficit started coming down, there was a 

new Administration, a new Speaker who took office in January of 

2011, and because of fiscal restraint, restraint of Federal spending 

and growth of the economy, the annual operating deficit is coming 

down. But it is not zero yet and the national debt continues to rise. 

Is that a good story? 

Secretary LEW. I don’t think it would be good for our economy 

if we were to have a balanced budget today. Right now, we have 

an economy which many of you have said isn’t growing fast 

enough. We need to continue to look at keeping the economy growing and keeping an eye on the long term. Having a stable fiscal 

posture for 10 years is huge progress. 

Mr. FITZPATRICK. Mr. Secretary, a couple of years ago the thenChairman of the Joint Chiefs of Staff described the national debt 

as the greatest threat to our national security. Is an $18 trillion 

debt a threat to our national economy? 

Secretary LEW. At the time, our deficit was in double digits. It 

is now coming below 3 percent of GDP. 

Mr. FITZPATRICK. I am not asking about the annual operating 

deficit. I am asking about the national debt. 

Secretary LEW. The debt as a percentage of GDP has stabilized 

for this period of time. We have made enormous progress. It was 

climbing and it is has stabilized. 

Mr. FITZPATRICK. Mr. Secretary, last month you referred to a proposed amendment to combat currency manipulation in the TransPacific Partnership as a poison pill. But also last month, the President said he was opening new efforts to combat currency manipulation abroad. 

Can you describe what efforts or what ideas the Administration 

might have, what the role of the Treasury would be, and whether 

you think they could be effective? 

Secretary LEW. Sure. The President and I personally take this 

extremely seriously. We put in enormous effort through our multilateral and bilateral engagements to use the tools we have. And we 

have had considerable success. We have helped push China into a 

different policy and Japan into a different policy. So I think we are 

using the tools, and we are using the tools well. 

In the trade legislation that is moving through Congress, there 

are additional tools. One is that there is a negotiating instruction 

that says in TPP currency issues are a high priority. And we are 

working with our TPP negotiating partners to arrive at agreements 

that will give us more visibility and more ability to use the consultVerDate Nov 24 2008 12:04 Sep 21, 2016 Jkt 096995 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\96995.TXT TERI
29 

ative process and the public disclosure to get them to do the right 

thing. 

Mr. FITZPATRICK. But can you identify the ideas the Administration was referring to last month? 

Secretary LEW. And then I was going to say there is an amendment that we support that Senator Hatch and Senator Bennet put 

in, in the Senate, which puts new tools in place, which requires 

that we do an evaluation based on objective criteria as to whether 

or not countries are violating what we would consider fair currency 

practices. If they are in violation, it puts us in a position where 

there are several new tools, including not being able to be in trade 

negotiations with countries that are violating. So I think we have 

important new tools in the trade law. 

Mr. FITZPATRICK. I want to get a question on Treasury’s budget. 

The President identifies the budget as a compilation of our Nation’s 

priorities. FinCEN and the Office of Terrorism and Financial Intelligence (OTFI) have been relatively flat-funded. Congress has met, 

probably even exceeded the President’s request, specifically on 

FinCEN. I want to say that the organizations within the Department of the Treasury do an outstanding job with the resources that 

they have. 

Secretary LEW. Thank you. 

Mr. FITZPATRICK. But we see terror growing, the challenges globally every single day, new organizations coming to light every single month. What can you tell us about— 

Secretary LEW. Congressman, I couldn’t be prouder of our offices 

that work on threats. 

Mr. FITZPATRICK. Do they have sufficient resources? 

Secretary LEW. They do have sufficient resources, and they 

punch way above their weight. But if we thought we needed more 

resources to do the job, we would ask for them. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. 

First of all, I think you are doing a great job, Mr. Secretary. And 

I know we had a disagreement last week on TPA, but never in my 

time knowing you have I ever heard you address Congress or the 

American people with disdain. That is something not in your makeup or character. 

Secretary LEW. Reverence would be more like it. 

Mr. LYNCH. That is right. And a desire to serve. So I appreciate 

that. You are a good man. We don’t always agree, but I honestly 

believe you have the best interests of the American people at heart, 

and the Administration is lucky to have you. 

I want to focus on a situation here. When a bank is convicted of 

a felony or a bank pleads guilty to a felony, we have laws in place. 

Congress has put forth some laws that say, when they are guilty 

of these crimes, we remove some privileges that they have. 

One of those privileges that they have is that of a well-known 

seasoned issuer (WKSI). And so we had a recent bout of guilty 

pleas by big banks, both in connection with LIBOR and also with 

the FX manipulation of dollar-euro exchange rates. 

30 

Normally those banks should be penalized by removing that 

WKSI designation, which allows them off-the-shelf registration and 

other privileges. But what has happened is that—I believe Labor 

Secretary Perez is the one who grants these waivers—I will give 

you a for-instance. In the latest round of SEC waivers, Barclays 

just received their third WKSI waiver since 2007. Citigroup has 

triggered a disqualification 5 times in the last 9 years, and every 

single time we give them a waiver. We don’t penalize them. So 

there is no difference in how they operate, because we give them 

a waiver after they plead guilty. 

UBS just received a seventh WKSI waiver since 2008. So they 

broke the law, criminal conviction, all pled guilty. JPMorgan Chase 

received its sixth WKSI waiver since 2008. And the Royal Bank of 

Scotland received its third WKSI waiver since 2013. 

And UBS, going back to UBS, their last WKSI waiver occurred 

while they were still under a nonprosecution agreement from 

LIBOR. So they immediately failed. 

So the penalties that Congress has put in place don’t happen because the SEC has given them waivers. And I am just wondering 

if giving these waivers continually and not punishing these banks 

is a moral hazard, is causing them to behave just as they always 

have been, because it seems that way to me. 

Secretary LEW. Congressman, let me start by saying I think we 

have made clear as an Administration that no individual and no 

firm is above the law, and we will prosecute and we will enforce 

regardless of who has broken the law. 

Secondly, the violations of law that are behind these actions are 

very serious. They get to the heart of the integrity of our system, 

things like tax fraud, things like terrorist financing facilitation. 

I think that if you look at the prosecutions, if you look at the settlements, the numbers have been very large, and there is no question but that firms are being held accountable. 

Mr. LYNCH. But the penalty falls on the shareholders. The penalty doesn’t go to any of the individuals who were involved here, 

and these banks continue to operate. Yes, you are right, there was 

$2.5 billion in fines, but they just keep on doing what they have 

been doing. And I have people in my district who are convicted of 

far smaller crimes, and they do serious time. 

Is there another set of penalties that we could put in there that 

you would actually agree to enforce? 

Secretary LEW. If I could answer your first question, then I will 

come back and answer that last question. 

I think if you look at the approach the prosecutors have taken, 

they have wanted to make sure they could hold accountable financial institutions and the individuals in them and not have unintended consequences that they can’t control. 

Mr. LYNCH. But these are intended consequences. That is my 

point. We intended them to be penalized, and they are not. 

Secretary LEW. And I would leave it to the regulators to decide 

the right way to respond. But prosecutors need to know that they 

are not going to create an unintended consequence. 

Mr. LYNCH. No, that is not the point here. 

Secretary LEW. I think on your last question, there are a lot of 

things we could look at in terms of what the practices within the 

31 

industry are and how you hold individuals accountable that are 

worthy of consideration. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Neugebauer, chairman of our Financial Institutions Subcommittee. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Secretary Lew, it is good to have you back. I want to refresh your 

memory a little bit. Back in March, you and I had a conversation 

a little bit about U.S. regional banks and whether or not they were 

a systemic risk. And you and I also discussed a little bit, the OFR 

report in February where they used, I think, five of the Basel 

standards to analyze a number of banks. And if you recall, that analysis showed that $50 billion banks 

were not a systemic risk. In fact, it went pretty far up the asset 

chain before it reached a point where they felt like those financial 

institutions were a systemic risk. Yet, Dodd-Frank says that the 

trigger is $50 billion. 

And so I guess my question to you is, as the Chairman of FSOC, 

is the framework of Basel in conflict with Dodd-Frank? 

Secretary LEW. I don’t think it is a question of in conflict. The 

question is, do banks of all size pose the same risk and require the 

same exact treatment? The answer is no. And we have been very 

careful in designing rules to try and distinguish different levels of 

treatment for different firms of different size. 

That doesn’t mean we have it perfect. There certainly is an openness to looking at issues there. But I have to say that the debate 

recently has taken on a kind of odd character. There has been discussion of exempting banks of $500 billion or less. 

Do you know how many banks there are that are between $500 

billion and the biggest banks? There are six banks, the largest financial institutions in the country and the world. So we have to 

be careful not to ask questions as if a $2 billion bank is it like a 

$50 billion bank, or a $50 billion is it like a $500 billion bank. 

I would be happy to have this conversation. We are open to ideas 

of how to tier the treatment appropriately. 

Mr. NEUGEBAUER. And I guess that kind of leads me into the 

other discussion that you and I had, and that was about Section 

115. I think one of the things is that when Dodd-Frank was passed, 

it was passed in a pretty hurried manner and not in a very transparent manner, but somebody just picked $50 billion. But then in 

Section 115 they said, you know what, you all can establish—it 

gives you the latitude to establish a different trigger or trigger 

mechanism if you choose to. 

And I think, if I go back and look at our conversation, you said 

that you all had not formally looked into it. You mentioned that 

you had informally looked into it. But there is, in fact, a process 

where there can be a formal process where Treasury could go 

through that process and recommend to FSOC to change that. And 

I am a little confused. 

Secretary LEW. There could be a formal process. But I think if 

you look, there are a number of regulators taking a look at this 

issue to see what they can do with their regulatory flexibility. And 

I think it is a question of when you raise it to the level of a formal 

review. 

32 

I will give you an example of the kind of issue that we have 

looked at, the frequency of the examination cycle. There is a reasonable case that the frequency should be different for a small institution and a very large institution. So there are ideas here that 

could be pursued. 

The fact that it is not a formal Section 115 review doesn’t mean 

that people aren’t asking these questions. If you look within the 

regulatory bodies, they are looking at them, and we are obviously 

looking across the landscape. 

Mr. NEUGEBAUER. Mr. Secretary, I think it is important to get 

their input, but the truth of the matter is that under Section 115, 

those other regulators do not have that authority. Section 115 authority resides in the Secretary of the Treasury, and last I checked, 

that is you. 

I think it is kind of a little confusing here, that we have one entity, OFR, using these Basel standards, saying this is what the world 

looks like from a systemic risk standpoint, and then we have DoddFrank. I think from a banking perspective, it is a little confusing 

as to what standards should be in place. And I think it is really 

kind of time for you to take on that leadership role and exercise 

Section 115 and bring some certainty to the marketplace. 

Secretary LEW. I would be happy to continue this conversation 

with you, Congressman. To be clear, OFR expresses independent 

views. It doesn’t express the views of the Treasury or of FSOC. I 

am expressing my own views. And they won’t always be identical. 

You wouldn’t want them to be identical with OFR, because OFR 

was put in place to be an independent institution expressing its 

own analytic view. 

Mr. NEUGEBAUER. I see my time has expired, Mr. Chairman. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Secretary Lew, it is good to have you here. You are doing a great 

job. 

Secretary LEW. Thank you. 

Mr. SCOTT. I want to keep the conversation for a moment on liquidity. It is a very serious issue. I am very concerned about it. A 

number of experts are registering great warnings about it. Liquidity, to me, is the key to protecting our financial system. It is also 

the key to being able to ascertain potential risks to our system. It 

sort of like provides us with a way to be able to not just look down 

the road for problems, but see them before they turn that corner. 

So I also realize, and I think you would agree, you too are concerned about liquidity, correct? 

Secretary LEW. I have said so, yes. 

Mr. SCOTT. Yes. And so the issue becomes, will this liquidity 

worsen as the economy worsens? And specifically, tell me what if 

there were another crisis? We don’t want another crisis. After they 

finished the Depression, they said they didn’t want another crisis. 

But as surely as we have a free enterprise system, it is free to go 

up, sideways, down, whatever. 

So if we had another crisis, would the financial system, in your 

opinion, have the liquidity to be able to come to the assistance of 

33 

our financial system the way it did in 2008 when healthier institutions, it helped us a lot, they had the liquidity, they were able to 

buy up institutions at IndyMac, Washington Mutual, Countrywide, 

and Lehman Brothers, rather than the government having to wind 

them down? 

Secretary LEW. Congressman, I think when we talk about liquidity in the markets we are not talking about institutions that merge 

or don’t by other institutions or not. I think what we are talking 

about is, is there a market for buying and selling bonds in a quick 

way with stable prices? 

So obviously the capital and the depth of the balance sheet of institutions will affect, potentially, both questions. But I think they 

are severable. 

Let me make a couple of comments. One, I think that as we came 

out of the financial crisis, there is undoubtedly going to be some 

more volatility. When I started testifying as Treasury Secretary everyone was concerned there was no volatility in the market. Now 

there is a concern that there is volatility in the market. It shouldn’t 

be a surprise that as we see a return to a more normal economy, 

there is more volatility. 

I think that the institutions themselves are stronger than they 

were going into the crisis. They have more of a capacity to come 

through a period of economic stress in a healthy way, and that is 

a good thing. 

And I think in our FSOC report, we look at the risks that we see 

to the broad financial system, and we do include liquidity on the 

list, but it is not the single factor that we are looking at. And I 

think it is also going to separate the different parts of the market, 

because Treasuries are very different from high-risk bonds. 

Mr. SCOTT. Let me ask you this other question. I don’t have 

much time. But do you believe that there is any link between our 

anemic United States growth rate and the fact that our financial 

institutions have to hold so much capital in reserve rather than 

putting that capital back into the economic system to good use? 

Secretary LEW. Congressman, I think that there is a lot of money 

that is on the balance sheet of businesses they don’t even need to 

borrow to get access to. And yet, there is a more fundamental question, why are they not investing more? I think it has to do with 

a sense of confidence that they are looking for that the continued 

economic growth will be strong. 

Mr. SCOTT. But do you see a link? Is there a causal— 

Secretary LEW. Yes. I don’t think there is a lack of access right 

now to capital that is the problem. I focused earlier on things like 

housing and small business, because I think that is where the 

questions are real as to whether individuals or small businesses 

are having trouble accessing capital. Large firms right now are not 

having trouble accessing capital. 

Mr. SCOTT. Do you feel that these companies should have to hold 

as much capital in reserve as they are, and is that helping or damaging? 

Secretary LEW. I think that the fact that our banks now have the 

ability to see themselves through a difficult period makes our system safer and sounder. They did not have the capital, they had too 

34 

much leverage, and we saw in the financial crisis what the result 

was. We can’t go back there. 

Mr. SCOTT. All right. Thank you, sir. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner. 

Mrs. WAGNER. Thank you, Mr. Chairman. 

There seems to be so much interest in this issue of liquidity, so 

I just can’t help myself. And perhaps I will ask a question that will 

help put this to rest for all of us. 

In going back to your March 2015 testimony, Secretary Lew, on 

the issue of liquidity you said, and I quote: ‘‘So I think that this 

is something that requires a lot of analysis. We are doing it. And 

I would be happy to share with you a more complete analysis when 

we complete it.’’ 

Now, this was March of 2015. I didn’t get anything at 11:18 last 

night. What is the plan here? 

Secretary LEW. As I have indicated earlier, our hope is that in 

the next few weeks, that analysis of October 15th will be completed, and we look forward to sharing it with the committee. It 

has been a complicated analysis. It has required a number of agencies working with very different bodies of data, and I am very anxious to get it completed. 

Mrs. WAGNER. So within the next 3 weeks, we will receive— 

Secretary LEW. I can’t say 3 weeks; over the summer is the 

schedule we are working on. I have been pressing people very hard 

to finish it as soon as possible, and as soon as it is finished, we 

will share it. 

Mrs. WAGNER. And you believe that will come this summer then? 

Secretary LEW. That is the schedule we are working on, yes. 

Mrs. WAGNER. And that should answer all our questions about 

the importance of liquidity or lack thereof? 

Secretary LEW. No, I wouldn’t say that any single analysis will 

answer all the questions. It will help us understand October 15th 

much better. And in the FSOC report, we noted that there is a 

broad range of factors. 

I must say that I have taken a lot of questions today which want 

me to comment on regulation. In the FSOC report we added regulation to the list of things that we need to look at. So we are open 

to looking at all the causes. I identified the things that I am confident are things that we need to be looking at. 

Mrs. WAGNER. I have several more questions here. We look forward to your report this summer. 

To date, FSOC has designated four nonbank financial companies 

as systemically important financial institutions, or SIFI, essentially 

signaling to market participants that the government considers 

them too-big-to-fail. As a result, Richmond Fed President Jeffrey 

Lacker stated that shareholders and creditors of those firms can’t 

expect the government to shield them from losses during periods of 

distress, ultimately putting the taxpayer on the hook for a future 

potential bailout. 

For that reason, I am interested—and I think others on this committee also have mentioned this today—in how these companies 

can ultimately de-risk and shed their designation status from 

35 

FSOC and remove the implicit government support that such a 

designation carries with it, knowing that the primary goal for 

FSOC is to reduce risk in the financial system. I think that you 

also would share that sentiment. 

I know that Senator Mark Warner has told you before that there 

was never any intention of creating a ‘‘Hotel California,’’ I believe 

were his words, with the designation process where you were able 

to check out any time you like but never leave. 

Secretary Lew, in the absence of any practical guidance from 

FSOC on how to exit SIFI designation, is it really possible for designated firms to know what they are supposed to do to reduce systemic risk? 

Secretary LEW. Yes, Congresswoman. I think that the process is 

clear, that we review the designations annually. If the business of 

the designated company has changed and it no longer presents 

risk, they know what the risks are, we have identified the risks 

very clearly. And right now, it has been in the news that GE Capital has changed its business plans for reasons that have nothing, 

I believe, to do with the SIFI designation, but that will cause there 

to be a review, and we will have to see whether that changes their 

character. 

So we are open to, if firms change their structure, if they change 

their business— 

Mrs. WAGNER. They specifically, though, know how they can reduce risk, have you have given them guidance on this, how to 

change their business model, their structure? 

Secretary LEW. They know what it is about their business that 

created the designation in the first place. They know what the 

transmission mechanisms are. 

Mrs. WAGNER. Do they know from you specifically? 

Secretary LEW. There is a very long analysis that goes to the 

companies when they are designated that identifies for them the 

basis of determining the risk. If the basis, then, changes— 

Mrs. WAGNER. So you have a list—because I have limited time 

here—of specific information on what firms can do to remove this 

designation? 

Secretary LEW. It is not a question of take steps A, B, and C. It 

is a question of what are the risk factors, and if they no longer 

present those risk factors. 

Mrs. WAGNER. So you don’t have a list of how these— 

Secretary LEW. The risk factors are quite clear. 

Mrs. WAGNER. The risk factors are quite clear to whom? 

Secretary LEW. To the firms that are designated. They understand what it is. 

Mrs. WAGNER. Have you provided them with those risk factors? 

Secretary LEW. Yes. It is in the analysis that is available to the 

public. 

Mrs. WAGNER. I have run out of time, Mr. Chairman. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. Mr. Chairman, thank you for holding these hearings. I hope that we get the other members of FSOC to also testify. 

‘‘Chairman’’ is a lofty position, but if you were to interview the 

36 

chairman of this committee, I am not sure you would get the views 

that would reflect every member. And I am glad that Secretary 

Lew is here, but I look forward to hearing from the others. 

You have litigation on whether, I guess, it is MetLife, perhaps 

Prudential, is a SIFI. You have filed your reasons to dismiss their 

lawsuit under seal. You are the client. This is a document filed on 

your behalf. Could you just put it on your website, because it is of 

public policy interest, of course redacting any proprietary information about the individual company? Why would the reasons for arguing the dismissal of the lawsuit be under seal? 

Secretary LEW. Congressman, obviously it is a matter under litigation. I am not going to comment on the substance or the process 

of pending litigation. We have tried in all of the designations to be 

as transparent as we can be while protecting legitimate commercial 

information that we need to protect. 

Mr. SHERMAN. I would hope that you would make that document 

available for members of this committee since it is a public policy 

document as much as anything. 

Lehman Brothers didn’t go under because it had too many assets. It went under because it had too many liabilities, particularly 

contingent liabilities. And I am confused as to how there is discussion of mutual funds being listed as SIFIs. 

Now, obviously if the markets dropped by thousands of points, 

that is terrible for the economy. It is terrible for me, because I have 

my individual accounts. It would be just as terrible if that same 

money was in a mutual fund. 

Why would an unleveraged mutual fund be classified with a SIFI 

knowing that it has no liabilities? 

Secretary LEW. Congressman, in a review of asset managers we 

have made the judgment that the area that we need to spend considerable time on is looking at activities that asset managers engage in and whether or not there is risk associated with those activities. We haven’t completed the review yet, so I am not in a position to— 

Mr. SHERMAN. Are you looking at whether the asset management 

company would go bankrupt, whether the mutual fund would go 

bankrupt, or whether the economy would suffer not because the 

SIFI wasn’t able to pay its liabilities, but rather because a big company was doing this or that in the stock market? 

Secretary LEW. Ultimately, the questions of looking at financial 

stability involve looking at what the losses would be to creditors 

and associated businesses, not so much of an issue here, what the 

run risk would mean in terms of the potential spread to the economy and markets, whether or not it locks up access to one or another kind of essential services. 

We are looking not just at firms. We are looking at activities to 

see whether— 

Mr. SHERMAN. So an entity could be designated as SIFI not because their inability to pay their liabilities would cause a problem, 

but just because their activities cause a problem? 

Secretary LEW. No. The question is, are there activities within 

asset managers that if there were, under a stressed situation, a series of bad events. These things don’t happen in good situations. 

They usually happen when there are a lot of bad things going on. 

37 

Mr. SHERMAN. Okay. I want to go on. 

Secretary LEW. And we have to understand, are there activities 

in those asset management firms that present the kinds of risks we 

need to be concerned about. I don’t know the answer to it. We have 

asked this question— 

Mr. SHERMAN. I need to move on to another issue. 

Secretary LEW. We have asked the question knowing that the answer could be yes or no. So I don’t sit here today with a firm view. 

Mr. SHERMAN. We are of course faced with this trade deal. We 

are told that there are enforceable standards, but they are usually 

enforceable only if the Executive Branch of our government is willing to take action. With regard to China currency manipulation, we 

passed a law requiring the Executive Branch to do things. You explained to this committee last time I asked you about it that, well, 

the law is really bad policy and so will not be followed. 

If the Executive Branch won’t enforce U.S. laws because our 

trading partners would find that offensive, it is difficult to see how 

any provision of any trade agreement would be enforceable if that 

enforcement required the Executive— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Oklahoma, Mr. 

Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman. 

Mr. Secretary, it is good to see you again. In the working order 

with which we work through members on this side, we have 

worked through the subcommittee chairmen, we have worked 

through the underclassmen who didn’t have a chance to ask you 

questions the last time, that is appropriate, and now you are back 

to the old guys on the back row. 

I share some of the concerns of my colleagues on both sides of 

the aisle that there is a real problem with this liquidity issue on 

the Financial Services Committee. And I find it seems very hard 

to argue that this reduction of liquidity has nothing to do with the 

cumulative impact of new rules and regulations and the capital requirements. 

And while we of course continue to work to improve the safety 

and soundness in the system, it is just as important that we don’t 

lose sight of that big picture of course, that aggregate impact of all 

these factors, and be ever mindful of unintendedly creating risk 

and harming the ability of end users to drive this economy and create growth. 

I have a particular issue that I would like to focus on for this 

moment, though, and that is on the leverage ratio rule as it applies 

to the treatment of segregated margin. This is an issue that increases costs for end users and impacts their ability to hedge risks. 

And as you know, Congress required that margin received from 

customers for clear derivatives belongs to the customers and should 

remain segregated from the banks’ affiliated members’ accounts. 

However, under the leverage ratio rule, this client margin is 

treated as something the bank can leverage and treated punitively 

by requiring higher capital requirements for clearing. If end users 

don’t have the ability to hedge their risk, more risk is introduced 

into the system, customers pay more, and economic growth is 

harmed. And I think this is an example of the leverage ratio rule 

38 

and higher capital requirements when applied, I believe, inappropriately, in my opinion, where it actually harms liquidity and increases risk. 

As a prudential regulator, can you tell me, why does the rule 

treat customer margin as something the bank can hedge? 

Secretary LEW. Congressman, the leverage rules apply to all assets. It even applies to Treasuries and cash. So it is a very inclusive rule. And I think it is reasonable to ask questions as to whether or not there are unintended consequences. And certainly you distinguish it, say, from the Volcker Rule. The Volcker Rule exempted 

Treasuries. A lot of the questions I got earlier were trying to tie 

liquidity to the Volcker Rule. The Volcker Rule obviously doesn’t affect Treasury holdings. 

I would have to look at the specific issues related to the margins. 

Mr. LUCAS. But I hope you agree it would seem to have the effect, by requiring extra capital to cover these margin accounts that 

are segregated, it would have the net effect of increasing the costs 

to the end users. I hope you see where I am coming from on that. 

Secretary LEW. Yes. Look, as I say, I haven’t focused on the margin issue. I have focused on the Treasury and the cash issue. And 

I think if you go back to the purpose of the leverage rule, it is a 

very solid objective, which is to make sure institutions don’t get 

overextended. And I think that what the percentage is makes a big 

difference in terms of whether or not it is the binding constraint 

or not. 

Mr. LUCAS. Segregating the money makes very good sense, and 

I think we did the right thing there, but the net effect. 

Let me ask you this then. Regulators have been focused on removing risk from the banking system through the capital requirements and the additional regulations such as the Volcker Rule. 

Risk is going to exist somewhere within the system. If we remove 

it from the banking system, Mr. Secretary, where does it pop up 

next? If the banks can’t play this role of playing a market, somebody will. Will it be more of a danger to the overall economy than, 

for instance, the banks? 

Secretary LEW. I think it is an overstatement to say the banks 

aren’t playing that role. Banks are still doing their core business. 

And even under the Volcker Rule, they are not prohibited from 

market making and holding inventory for market making. 

You are asking a question that I am asking as well, with the evolution of the markets, are there questions of financial stability that 

we need to ask that are different? So you look at some of the newer 

players in the market, where the volume of trading is, I think it 

does raise questions, both about the kind of plumbing of the system, but also about implications on liquidity. 

Mr. LUCAS. Historically, the banks in making these markets, it 

would seem to me, historically have had a perspective of evening 

things out, consistency, stability being boring. But the entities who 

are winding up taking their place have historically made their 

money off of volatility. If we take it away from the people who like 

to take the wave out, yet give it to people who have made and 

make more the more intense the waves, it just doesn’t seem logical. 

39 

Secretary LEW. I think one can overstate the tradition of banks 

doing things that weren’t in their economic interest to maintain 

markets. But clearly having inventory has been real. 

I also think that if you look at what the definition of liquidity 

is, it may not be reasonable to think that there should be no price 

fluctuation even if there are dramatic things going on. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, ranking member of our Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman. 

Mr. Secretary, thank you for being here. 

We are moving toward the fifth anniversary of the passage of 

Dodd-Frank. Many of us were here during those turbulent and 

troublesome days, and we know that great care was taken in dealing with the creation of this Act. And we think that we made significant progress. And I think you, apparently, agree with us as 

well, that we have made tremendous progress. And regulators have 

moved toward implementation. Some of the rulemaking I agree 

with, some of it I, along with my colleagues, have challenged. But 

overall, we have made great progress. 

But when you think about Dodd-Frank as a whole, what do you 

think is the most significant thing left undone? What would you 

want to see right now completed so that we would have the full 

strength of Dodd-Frank at work preventing another collapse? 

Secretary LEW. That is a very good question. Obviously there are 

pieces that need to be completed, and that is not really what you 

are asking. You are asking, what is the kind of area that we 

haven’t addressed? 

Mr. CLEAVER. Yes. 

Secretary LEW. I would have to say GSE reform is the area we 

haven’t addressed. And it would be a good thing if we would. I am 

not sitting here today optimistic that is going to happen legislatively. But it is why we engaged so much in the Senate in the bipartisan discussion to try and work through an approach to GSE 

reform. 

Mr. CLEAVER. Mel Watt, who was a member of this committee— 

you mentioned the GSE reform and Mel Watt, of course, is now 

over at FHFA and doing a great job. Some of the work he is doing 

is going to help in some of the housing needs we have with money 

put into the Housing Trust Fund. But one of the things that you 

might be able to help me with is what do we do to enable private 

money to move back into the market? 

Secretary LEW. To back mortgages, you mean? 

Mr. CLEAVER. Yes. 

Secretary LEW. I think there have been some small steps taken, 

but there needs to be an active effort to look at what can we do 

to have a more active private securitization industry. The notion 

that most mortgages are backed by either FHA or a GSE that is 

backed by the Federal Government is not a great place for the industry and that part of the market to be, which is why I said GSE 

reform, which is a path towards an active private marketplace. 

The experiments that I think have been useful have been things 

like putting first-loss protection in place apart from the GSE. It has 

40 

been small. But we have seen that there are ideas there that you 

can insulate the public from the first risk and start to bring private 

money back into place. That can be through mortgage insurance. 

It can be through capital market products. I think more thought 

has to be put into that area to develop it further. 

Mr. CLEAVER. But you do believe that there is a need for a secondary market? 

Secretary LEW. I’m sorry? 

Mr. CLEAVER. You do believe that we do need a secondary— 

Secretary LEW. Yes. I think it would be good if there were more 

private, nongovernmentally backed. 

Mr. CLEAVER. So the GSEs would be a hybrid? 

Secretary LEW. Yes. Or they would have competitors. 

Mr. CLEAVER. I think in this committee there is some suggestion 

from time to time that the GSEs are not even needed. 

And one of the things that I am wondering about, when some 

prefer that it be completely private, is whether you believe the private market has an appetite to fully either take over or, what I 

would prefer, reenter the market. 

Secretary LEW. Look, I think right now the structure of our mortgage industry makes the continued operation of Fannie and 

Freddie necessary. The idea behind GSE reform was to be able to 

chart a path where there would be a different kind of marketplace 

in the future. So we live in the present, we live in a world with 

FHA and Fannie and Freddie, and we have to try to make that 

world better absent legislation. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, chairman of the House Foreign Affairs Committee. 

Mr. ROYCE. Thank you very much, Mr. Chairman. 

And for the record, Mr. Secretary, one of my colleagues earlier 

asked if the GSEs have repaid the money that they have borrowed 

from the American taxpayer. The simple answer that my colleague 

tried to elicit, I think, was that the payments they have made to 

the government now exceed the rescue funds they received. 

Mr. Secretary, I think you agree here this is not the real answer 

nor the real question. The real question is, have they repaid their 

debt to the American taxpayers? 

And for that answer, I think we can go to the Federal Reserve 

Bank of New York that was asked that question. And they put it 

this way. They said, ‘‘Should these figures be interpreted to mean 

that the Treasury, and therefore the taxpayers, have been ‘repaid’ 

by Fannie Mae and Freddie Mac, and that the two firms should 

now pay dividends to their regular shareholders again? The answer 

to that is no.’’ 

The New York Fed said that taxpayers are entitled to a substantial risk premium, government support has lowered funding costs 

and boosted profits, and the government has never collected the 

commitment fee that the government is owed from Fannie and 

Freddie. 

So the false scenario that is perpetuated is that taxpayers have 

been repaid, it is time to end conservatorship and return the GSEs 

to control of the shareholders. From your comment earlier, I assume you disagree with this narrative and agree with the concluVerDate Nov 24 2008 12:04 Sep 21, 2016 Jkt 096995 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\96995.TXT TERI
41 

sion of the New York Fed that failing to work to wind down the 

GSEs and give space for private capital to come in would be a colossal missed opportunity to put the U.S. residential mortgage finance market on a more stable long-term footing? 

Secretary LEW. Congressman, I totally agree, and I was trying to 

indicate in my response earlier that the risk is being borne by taxpayers on an ongoing basis and the conservatorship is not over. 

I would only add one additional thing to what I said earlier, 

which is that the damage done to our economy by the housing crisis was far more than the simple amount of money that was put 

into the GSEs. And I think Americans are still healing from the 

pain of that financial crisis. 

So I think that the right thing is to do GSE reform and to get 

on to a new restructured system, but it is not the right time to be 

talking about ending the conservatorship or paying dividends. 

Mr. ROYCE. And I think we can move forward together on that 

GSE reform concept. I have publicly endorsed reforms that would 

increase private sector participation in the secondary housing market, that would decrease taxpayer exposure to future losses, and 

that would limit disruption to the housing market. 

But I think, if you look at the particulars, more risk sharing is 

something that can be done to create a lot of space here. A common 

securitization platform is something that works for the GSEs and 

then brings in private capital to use that platform. A common residential mortgage-backed security would be a good start for Congress, I think, to pass this year. If I could have your thoughts on 

that? 

Secretary LEW. Look, I think the items that you just mentioned 

are the kinds of things we have been talking about and thinking 

about. Obviously, there is a common security platform being built. 

It is something that could be expanded beyond the GSEs and be 

available more broadly. I think the more we are able to lay a foundation that a private securitization market can be built on, the better off we would be. 

Mr. ROYCE. If I have a minute here, I am going to quickly push— 

Last week, the Treasury Department announced its deliverables for 

the upcoming Strategic and Economic Dialogue with China. One of 

the issues a few years back was that ownership caps were raised 

there from 33 to 49 percent. But this is largely symbolic because 

it doesn’t really provide further benefit to firms operating in China. 

When Chinese institutions invest in the United States, they face no 

ownership cap or activity restrictions. And this is just one of many 

impediments that our financial services firms face when operating 

there. 

I did want to raise that issue with you. And also, I raised with 

you earlier that on this technology restriction, we have China 

agreeing to delay implementing a certain restriction on its draft 

antiterror laws that would require foreign companies to hand over 

their encryption keys. Clearly, our banks and our financial services 

firms, technology firms, cannot operate under those conditions in 

China. 

Recently, we were in Shanghai, and they were pushing that. It 

is still on the third reading. The peoples’ Congress has adjourned 

42 

until next year, but that still hangs out there. And so, we need to 

have greater pushback. 

Secretary LEW. Congressman, I agree with you totally. I have 

pushed back with China’s most senior leaders on this issue and 

have made it clear to them that it is a very significant issue here 

and it is something that in the context of both the S&ED and the 

leaders meeting we need to see movement on. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, ranking member of our Monetary Policy and Trade Subcommittee. 

Ms. MOORE. Thank you so much for joining us today, Secretary 

Lew. 

I can’t resist asking some questions about liquidity as well, since 

that has come up several times, but I want to take a different approach, as opposed to the required capital standards. In your testimony you mentioned that it has been a year now since we have 

floated the NAV for institutional investors, and at least your executive summary was not very descriptive of how that has been working. 

I am wondering if we have seen less use or about the same of 

assets which are typically a little bit more liquid than other investments in the money market mutual fund space? 

Secretary LEW. Congresswoman, first, I don’t believe the rules 

are effective yet. They were put in financial form with a future effective date. 

I think we have seen a continued reduction in the reliance on 

short-term wholesale funding, which is a good thing, but we still 

have very large amounts of investment in money market funds. 

And we saw in the financial crisis that there was run risk there, 

and the reason that the rules were put in place by the SEC was 

to create a safer path forward. 

I certainly will keep an eye on that as it is implemented to make 

sure it works as designed. But we have made clear that we have 

to keep attentive to whether or not they are sufficient or whether 

there is a need for additional policy. 

Ms. MOORE. But it would not be a good thing if we were to close 

down or essentially shut down the money market mutual fund— 

Secretary LEW. No. 

Ms. MOORE. —or stagnate it in some way, prevent those institutional investors from having that liquidity. That would be something you would be watching out for? 

Secretary LEW. Right. The problem is the connection between the 

money market funds and the rest of the financial system. What we 

saw during the financial crisis was that the risk of money market 

investors, institutional investors, leaving, selling their position, was 

creating the risk that the overnight funding that the largest financial institutions relied on would evaporate. And that could have 

caused the entire implosion of major financial institutions. 

We are in a much better place because there is less reliance on 

wholesale funding, and we now have rules in place to try and make 

it safer. 

Ms. MOORE. Thank you, Mr. Secretary. 

43 

You mentioned also that the threat of migration of servicing from 

banks from nonbanks, such as the recently announced algorithmic 

lending that Goldman Sachs, for example, wants to do, really demonstrates there is a change in market structure, that there is more 

risk-taking incentive. 

I am wondering, in that context, how nonbank SIFIs—do you 

think it is more important to focus on a few industries, fewer institutions? Or what do you see? Do you see an expanded role for the 

FSOC given the change in the market structure? 

Secretary LEW. Look, I think that we have tried to be very careful and analytic in the approach and not to overreach and go into 

spaces that we don’t need to be in or belong in. The institutions 

that have been identified are market utilities that have crosscutting exposures, and the largest kinds of firms that are nonbank 

firms, where the determination was made that the risk is there. 

So it is not that we are looking to regulate more firms for the 

sake of regulating more firms. We are going to continue to go 

through the criteria, and we are obviously getting to smaller firms 

as we get down the list. 

Ms. MOORE. Thank you, Secretary Lew. 

I was stunned at some of your comments to Mr. Cleaver about 

GSE reform, and also your declaration in your testimony that negative equity has declined. That hasn’t been my experience at all. 

And I think homeowners are in a lurch after this recession, a lot 

of housing in my district is deteriorating because you can’t lend for 

needed improvements in the home, I mean, basic things like roofs, 

plumbing, and so on. I think we need some sort of product. 

I only have 10 seconds. I guess I just want to get your insight 

about help for the homeowner in this environment. 

Secretary LEW. I would be happy to follow up. I don’t have the 

time now. But I have tried in a few instances to express the concern that creditworthy borrowers should have access to the market, 

and there are a number of things that we are looking at in that 

regard. 

Chairman HENSARLING.The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Florida, Mr. 

Posey. 

Mr. POSEY. Thank you, Mr. Chairman. 

Mr. Secretary, in October of 2013, the online publication 

RepealFATCA.com submitted a Freedom of Information Act (FOIA) 

request for documents concerning the intergovernmental agreements with the United Kingdom, Switzerland, and Canada. The 

Department promptly acknowledged the request, and on October 

24, 2013, stated that, ‘‘Expedited treatment has been approved.’’ It 

is a letter from your agency. However, since then there has been 

no response from the Department despite repeated follow-up inquiries from the requester. 

On January 27th of this year, 15 months after the initial request, 

I sent you a letter asking for prompt action on the request and to 

keep me informed on the response that would be forthcoming. Despite additional inquiries, the only answer I have received so far 

is, ‘‘We are working on it.’’ 

It has now been 20 months, almost 2 years since their simple initial request under the Freedom of Information Act, and 5 months 

44 

since my letter inquiring about the status of that request. Is this 

the Treasury standard for expedited treatment? 

Secretary LEW. Congressman, in general our performance on 

FOIA is better than that. I am not familiar with this specific matter. I am happy to look into it. 

Mr. POSEY. It is just hard to believe that there is some reason 

that the Department is stonewalling that one. 

Secretary LEW. I will have to look into the matter and get back 

to you. 

Mr. POSEY. On another matter, I would like to bring to your attention that the Fiscal Year 2012 Financial Services appropriations 

bill included report language directing the Secretary of the Treasury to submit a report to Congress regarding the potential risks to 

the U.S. financial markets and economy posed by financial terrorism and economic warfare. 

I subsequently met with Treasury Assistant Secretary Fitzpayne 

in August of 2012 and was told that the Treasury would work on 

that. The report language also included in Fiscal Year 2013 and 

2014 appropriations bills. 

In July of 2013, my staff sent nearly a half-dozen emails to the 

appropriate Treasury staffer for a status update, but those emails 

went unanswered. Finally, in the Fiscal Year 2015 CR/Omnibus 

bill that became public law, the actual bill language was included 

to the same effect. 

‘‘The Secretary of the Treasury, in consultation with the appropriate agencies, departments, bureaus, and commissions that have 

expertise in terrorism and complex financial institutions, shall provide a report to the Committees on Appropriations of the House of 

Representatives and the Senate, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate not later than 90 

days after the date of enactment of this act on economic warfare 

and financial terrorism.’’ 

Obviously, Congress felt the issue was important enough that it 

has included language in an appropriations bill dating back as far 

as Fiscal Year 2012. However, it is apparent the Department isn’t 

giving this matter the same attention. I was hoping you could provide us with some information about your progress on the report. 

As the Secretary provided his report to the relevant committees 

in Congress, given the Department has had knowledge of this issue 

for over 3 years, I would have thought the Department would have 

prepared to meet that 90-day threshold set by Congress. And so ultimately the question is, when can we expect the report? 

Secretary LEW. Congressman, I will have to check on the report. 

But in the area of economic warfare and terrorism, there is no 

agency in any government in the world that does a more effective 

job than Treasury, and I am happy to defend the record that we 

have here. We really are the global leaders in making progress in 

this area. And I think it is an area of great bipartisan consensus 

and we looking forward to working together. 

Mr. POSEY. Just doing the report as the law requires would be 

a great way to kind of boast or toast what you are doing. 

45 

Secretary LEW. I will check on the report. I am quite familiar 

with what we are doing. It takes a great deal of my attention and 

the world’s attention. The report I will have to check on. 

Mr. POSEY. So, will you have someone get moving in the next 

week on these two issues about the FOIA request so we don’t have 

to wait another 2 years for that one? 

Secretary LEW. We will get back to you. 

Mr. POSEY. And let me know the status of this report within the 

next week, would that be asking too much? 

Secretary LEW. We will get back to you. 

Mr. POSEY. I heard you say ‘‘yes’’ a little while ago to somebody 

on the other side. I was just hoping we could maybe get the word 

‘‘yes’’ twice in one meeting in the 3 hours. But can we expect that 

maybe in a week? 

Secretary LEW. I don’t know what the status of the issues are. 

We will get back to you promptly. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

ranking member of our Oversight and Investigations Subcommittee. 

Mr. GREEN. Thank you, Mr. Chairman. And I thank the ranking 

member. Of course, I also thank the witness for appearing today. 

Mr. Secretary, in your annual report you cite some concerns 

about cybersecurity. Ironically, yesterday the Subcommittee on 

Oversight and Investigations held a hearing on cybersecurity 

styled, ‘‘A Global Perspective on Cyber Threats.’’ One of the things 

that I took away from this hearing is that there appears to be clear 

and convincing evidence that cyber threats and attacks pose a clear 

and present danger to our financial system. 

And I am pleased to see that you have addressed this, and you 

need additional assistance pursuant to what I am reading. You indicate that you would like for Congress to provide the financial regulators with the authority to oversee third-party vendors. And I believe I have some sense of why, but I think that the record should 

reflect your thoughts on why this is so important. 

Secretary LEW. Congressman, this issue of cybersecurity is obviously a relatively new issue, but it has gone right to the top of the 

worry list and priority list that we have, and as I talk to CEOs, 

it is the top issue that many of them have. The challenges are 

many. It is hard to protect a system, it is hard to have individuals 

in the system operate in a way that makes it as safe as possible. 

I think the financial sector is actually at the lead and we have 

a lot of work to do in the financial sector. There are many other 

areas where the exposure is even greater and some of them overlap. I mentioned earlier the connection between utilities and financial up here. Power and phones are not there, it is very hard to run 

a modern financial institution. 

I think that it is very much in the mind of both the regulators 

and the industry, and the more tools we have to work together, the 

more tools there are for them to work collaboratively and to share 

information and best practices, the more likely we are to be successful. A threat that shows up in one place, if you know about it, 

you can then look for it as opposed to being blindsided by it. 

46 

And we are making progress. There is much better sharing of information than there was. But I wouldn’t suggest that we are ultimately where we need to go. And I think the passage of legislation 

to enable the greater sharing of information would be very helpful. 

Mr. GREEN. I want to concur with you. The witnesses who appeared yesterday all indicated, I believe, that you are at the top of 

the game as it were, that you are doing better than most. 

Secretary LEW. I don’t take much comfort in that, though. 

Mr. GREEN. They didn’t say that we have absolute security and 

I understand this. My concerns have to do with the need for authority. What would you have us do immediately to give you this 

authority? I know that it is in broad terms here. Are there some 

specifics that you can call to our attention? 

Secretary LEW. The cybersecurity legislation that is pending 

would take down some of the barriers for sharing of information 

and collaboration in the private sector. I think getting that in place 

would be quite helpful. 

We are doing things now on a voluntary basis where there are 

risks that firms have to balance which would be very much eased 

if the legislation were to pass. We have Executive Orders that go 

as far as Executive Orders can. 

I would be happy to follow up with you on more specific issues 

in the financial space that could be helpful. 

Mr. GREEN. Thank you. 

And finally this: You have indicated that you believe that you 

should be allowed to coordinate a national plan, as it were, to deal 

with these responses to cyber threats, and you would like to coordinate this with law enforcement, Homeland Security, as well as regulators. How far along are we with this concept of your having this 

opportunity to coordinate a national plan? 

Secretary LEW. Obviously, within the Federal Government, we 

collaborate quite a lot, and DHS plays the lead on cybersecurity. 

But I will tell you, in the financial space we have a regular meeting 

amongst the agencies that work most closely together and we are 

looking at what we can do to be more prepared. And obviously, that 

gives us the ability to reach out more effectively and develop a 

plan. 

Mr. GREEN. Thank you for your service. 

And I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney. 

Mr. MULVANEY. I thank the chairman. 

Mr. Lew, in October 2013, you went to the Senate Finance Committee and had a hearing concerning prioritization of payments. 

And you told them at the time that, and I am quoting: ‘‘The systems are automated to pay because for 224 years the policy of Congress and every President has been to pay our bills.’’ You went on 

to say it wouldn’t be easy to pay some things and not others, they 

weren’t designed that way, et cetera. 

And then in May of 2014, you gave this chairman a letter saying 

something slightly different. You said, ‘‘If the debt limit were not 

raised and assuming Treasury had sufficient cash on hand, the 

New York Fed systems would be technologically capable of conVerDate Nov 24 2008 12:04 Sep 21, 2016 Jkt 096995 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 K:\DOCS\96995.TXT TERI
47 

tinuing to make principal and interest payments while the Treasury was not making other kinds of payments.’’ 

I will ask you, Mr. Lew, when did you come to learn the New 

York Fed was technologically capable of making the payments you 

set forth in your letter to the chairman of May 2014? 

Secretary LEW. Congressman, I don’t remember the exact date, 

but I can tell you the statement I made at the Senate in October 

2013 and the statement to this committee are entirely consistent. 

What I said in October 2013 is that we make tens of millions of 

payments and we don’t have the capacity to pick and choose 

amongst all of them. 

I didn’t address specifically the question of, is there the technical 

capacity to pay principal and interest. I did indicate to this committee that we do have the technical capacity, but it would be a 

terrible thing to do because if you chose to pay principal and interest, you would be defaulting on something else. You would be defaulting on a Medicare payment or on a veteran’s payment or on 

something else. 

The only solution is to raise the debt limit and to not put any 

President in the position where they have to make the decision, do 

they pay one thing but not another? 

Mr. MULVANEY. Mr. Lew, that was a really good answer the first 

three times I have asked it. I asked you that same question, sir, 

in May of 2014, and you told me you would have to check. When 

you came back before us in March of 2015, you told me you had 

checked but you had forgotten it and you didn’t remember it on 

that day, but you would look into it again. I sent you a set of written questions and asked you the exact same question. I got two 

pages with no answer in them. 

So I am not going to ask you any more questions, Mr. Lew. I feel 

like I have given you enough chances to answer that question. My 

question was very straightforward, when did you know? It is an answer you should know. And if you don’t know it, you are right, you 

should go back and be able to look it up. In fact, you told me one 

time you did go back and look it up and you knew it at one point 

but you had forgotten it before you got here. 

Mr. Lynch asked you a question, sir, earlier today about whether 

or not you felt like your answers to this committee were disdainful, 

and you said that, no, you thought that they were reverent. And 

I kept waiting for the laughter after that, Mr. Lew. 

I have asked you some really serious questions. We have asked 

you some really serious questions. By the way, the other questions 

I asked you, not the first time, go deeper. This not an empty question, Mr. Lew, this is not a question that was designed to just 

‘‘gotcha,’’ to try and make you look bad so we would get on television. That is not the point. We are interested in answering the 

questions because of the market turmoil that always raises its head 

as we come up against the debt ceiling. 

So in addition to the question I asked you about when you knew, 

I also asked you, ‘‘In the event we reach the debt limit and exhaust 

extraordinary measures and Congress does not raise the debt limit, 

can the Treasury Department continue to make principal and interest payments on the debt, yes or no?’’ You didn’t answer that. 

You have had, by the way, 6 months to answer these questions. 

48 

I also went on and asked you, ‘‘Will you commit that in the event 

we reach the debt limit and exhaust extraordinary measures and 

Congress does not raise the debt limit, the Treasury will continue 

to make principal and interest payments on the debt?’’ You didn’t 

answer that either. 

What are we to infer from your refusal to answer now for a yearand-a-half these types of questions, that the answers—no, you had 

your chance. I did what very few people here did today; I let you 

go until you stopped. In fact, I was going to even go until I had 

a minute-and-a-half left. You had your chance. It is my turn. 

We are interested in asking these questions because we are concerned about what happens in the markets. We would hope that 

the Secretary of the Treasury of the United States would be just 

as concerned. Your name is on the money, Mr. Lew. We have given 

you the chance to calm the markets. You have refused to do so. We 

have given you the chance to give this committee information. You 

have refused to do so. 

One implication is that you don’t want us to know the information we ask for because it is harmful to you or the Administration. 

And the other implication that we are completely within our rights 

to make is that the answers regarding payments are not being 

given to us because you want the chaos, because you think it is 

preferable to you and your Administration, this Administration, to 

have the chaos, that it will help you achieve politically what you 

want to achieve. 

So I am done asking, Mr. Lew. All I will say is that when the 

chaos comes, it will not be on the shoulders of the people on this 

committee on either side of the aisle, it will be on you, because you 

have had the chance to calm the markets and refused to do so. 

Secretary LEW. Mr. Chairman— 

Mr. MULVANEY. No, sir. Not on my time. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. I would like to thank the Chair and the ranking 

member for the time. 

And I would actually like to thank you, Mr. Secretary, for answering some of the written questions that I gave you. I know it 

is not easy to do that, you are busy doing a lot of things, but you 

did give us some answers, and they were answers that we can use. 

So I extend my thanks and appreciation for that. 

As you know, Mr. Secretary, you are probably going to get a 

question from me about Somalia. I know you are shocked. And 

what I would like to just ask you is if you have any information 

on the bill that we passed last year into law. 

There was a bill that we passed last year that was called the 

Money Remittances Improvement Act and the goal of the bill was 

to improve oversight of State-licensed nondepository financial institutions. Now that the law is in place, all well-supervised entities 

like the money services business should have their license status 

recognized and respected. 

And I just want to know what you know. And if you don’t know 

anything, I understand, because I didn’t tell you I was going to ask 

you that. But if you do know, I would be happy to get a report. 

49 

Secretary LEW. Congressman, thank you. As we have discussed 

many times, this issue of remittances is a very important one, and 

we are very concerned about the problems that families are having 

in making payments. 

We are working on the implementation of the legislation. And I 

am happy to get back to you with a more detailed response on the 

status of the implementation. 

But we are more broadly working on this issue of how to deal 

with remittances in Somalia. 

Mr. ELLISON. Right. 

Secretary LEW. As I think you know, we are very involved with 

the World Bank to develop solutions to the problem, and that really 

means building up some capacity in the Somali financial system. 

Mr. ELLISON. I agree. 

Secretary LEW. Because right now there is not a real financial 

system to engage with. We have had meetings at a very senior 

level in Somalia, at the political level, at the central bank level. 

And I know that our Under Secretary will be traveling to your district to have some meetings on this issue. 

Mr. ELLISON. I appreciate that. And I just want to say again that 

I am foursquare with the Administration’s effort to stop terrorist 

financing. I am on a task force to help achieve that. 

But on the other hand, we can get so successful at that effort 

that we close off all the money, and that, I think, would be unfortunate because it would actually serve the interests of Al Shabaab 

and terrorists over there to see the collapsing of the Somali economy which depends upon remittances to the degree about 40 percent. 

So I would like to talk with you more about the implementation 

of that program. I know that you all are doing some technical assistance to Somalia. I talk with political leaders there and try to 

give them my best perspective on how they can improve their system. 

Could you talk a little bit about the work that you all are doing 

in the technical assistance area and what sort of message that you 

would like them to receive in order to develop that solid banking 

system that I think they are going to need? 

Secretary LEW. Right. There is not an easy answer to that question. It is hard to exaggerate how little they are starting with in 

terms of building a functioning financial system. And the tragedy 

is that there are legitimate transactions, like family remittances, 

that should be able to go forward, but it is very hard to know that 

the money isn’t going to go into hands that will do real harm. 

And trying to figure out how to build that system is why we are 

working with the World Bank. We can’t go into Somalia the way 

we go into some countries, because of the security conditions. So we 

have people come out of Somalia into other countries for training. 

It is not the most efficient way to do it. Our OTA people are great 

when they can go in and work with people side by side. We just 

can’t do that in Somalia. But we are trying to do it offsite to help 

them build the skills. 

It is a process. It is not something you can just kind of hand over 

and have a functioning system. They are trying, we are going to 

50 

work with them, and we have to be creative in finding the ways 

to start that building process. 

Mr. ELLISON. I just want to urge you on behalf of the people who 

live in the Fifth Congressional District of Minnesota and many 

other parts of this country. 

We actually, me and Mr. Emmer, are going to start a Somali caucus because we have constituents who live in both districts and 

definitely want to see that country get stable and strong and not 

be a haven or an attractive nuisance for bad people. So we try do 

our good part, and we hope you will continue to push with that 

technical assistance. 

Secretary LEW. We will do so and we will continue to work with 

you and try to find a solution to this. 

Mr. ELLISON. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlemen from Tennessee, Mr. 

Fincher. 

Mr. FINCHER. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for being here today. 

I am going to go back to an issue you and I talked about a few 

months ago, liquidity. I know it has been a pretty hot subject 

today. In recent comments from Larry Summers, former Treasury 

Secretary under President Clinton, who later served as adviser in 

the White House during the creation of Dodd-Frank, he warned, 

‘‘Regulatory authorities have made a mistake when they looked at 

each institution and they said, ‘You will be safer if you withdraw 

from the markets a bit,’ and then forgot that if all institutions 

withdraw from the markets a bit, the markets will be less liquid, 

the markets themselves will be less safe, and that will in the end 

hurt all of the institutions. I think there is a real issue there. 

Frankly, a lot of the effort that is going into macro prudential 

should be into making sure we have liquidity.’’ 

What is your reaction to his comments about the role of the regulations, not just Dodd-Frank, but layered capital and liquidity mandates are having on fixed-income markets? 

Secretary LEW. Congressman, as I have said in response to several questions today, I think this liquidity issue requires our very 

serious attention. I think there are a number of factors that have 

been at work. It ranges from the point we are at in the economic 

cycle and the volatility that is natural at that point, to the emergence of new market mechanisms that are different and present 

different risks, to the volume of corporate bond issuance. 

I have also said that we have our eye on whether or not there 

are regulatory issues, it is in the FSOC report, that it is one of the 

things we need to look at. So I am not approaching this from the 

point of view that we know exactly what it is. Frankly, I don’t 

think anyone knows exactly what the answer is. 

Mr. FINCHER. But you think it could be a possibility that it could 

be overregulation? 

Secretary LEW. But I think the factors that I described I know 

are at work. I think that the question of regulation is much more 

speculative. And I think people have jumped prematurely to a conclusion about regulation which I think would take our eye off of 

where the real risks lie. 

51 

Mr. FINCHER. Would you say that we need more regulation? 

Secretary LEW. Look, I think that we have come a long way since 

the financial crisis. Our system is safer and sounder. We have the 

ability for our institutions to withstand a bump in the road that 

they didn’t have before. That doesn’t mean that we should ever 

stop. We have to keep looking forward. 

Mr. FINCHER. So you think more is needed? 

Secretary LEW. I didn’t say more or less. You can’t take 50 years 

between looking at these questions, that didn’t turn out so well. We 

need to keep our eye on the future, and we have to be open to the 

possibility that there are multiple different factors that are at the 

core of an issue. 

And on something like liquidity, it is of fundamental importance 

that we have a deep and liquid market here. You still have to separate out Treasury markets from corporate markets to high-risk 

markets. They are not all the same. Liquidity issues aren’t all the 

same. 

Mr. FINCHER. Let me follow up. Secretary Summers’ comments 

have been echoed by everyone from the Bank for International Settlements, Mr. Ketchum at FINRA, SEC Chair White, CFTC Commissioners Bowen and Giancarlo, and many overseas regulators, 

such as Mark Carney at the Bank of England. We talked about you 

issuing a data-driven analysis, and I think you have said there is 

going to be a White Paper coming out. 

Secretary LEW. Hopefully. Our goal is to get it this summer and 

we will share it as soon as it is completed. 

Mr. FINCHER. Okay. It seems like every time we have a hearing, 

we talk about the problems that we face and more regulation. I 

know I am just going to differ with you, and I know you haven’t 

said. 

Secretary LEW. I didn’t say anything— 

Mr. FINCHER. I know. But it sounds like that you are inclined to 

be for more regulation. 

Secretary LEW. We have to be open to less also. I didn’t say 

more. 

Mr. FINCHER. There are you go, and that is good. 

Secretary LEW. We have to be open to more or less. 

Mr. FINCHER. What seems to be happening is the more liquid 

that is tied up in the markets, it is not the bigger institutions that 

pay the price here, it is the small guys. It is the guys back in 

States like Tennessee and Arkansas, Mr. Hill, that end up paying, 

the folks at the bottom. And we need to make sure that when 

something does happen, there is enough liquidity available to take 

care of these issues. 

So thank you, Mr. Lew. 

And with that, I yield back, Mr. Chairman, which is rare, the 

balance of my time. 

Chairman HENSARLING. The gentleman yields back. 

The Chair recognizes the gentleman from Colorado, Mr. Perlmutter. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

And thank you, Mr. Secretary, for staying cool under the withering cross-examination of my Republican colleagues. 

52 

So I just really have a different view than the chairman and 

than Mr. Duffy, as to what is going on in the economy. We might 

as well start with all the records being set by Dow Jones, it is up 

from 6,500 at the end of George Bush to 18,000. The S&P from 

about 700 to 2,100. The NASDAQ is 3 times what it was. Foreclosures are down very low. There has been a tremendous improvement across pretty much all sectors, from manufacturing, to hotels, 

to whatever. 

So when they are talking about calming the markets and you are 

causing them to roil, I want to thank you for rebuilding the markets from the recession that we were in at the end of George Bush. 

I don’t know if you have your report in front of you, but there are 

some very important graphs that I would like you to take a look 

at, if you have your report in front of you. 

So let’s take a look, just at easy ones, starting with 4.1.4. Under 

the Obama Administration, we see oil imports drop and oil production increased like we haven’t seen in decades. Do you see that 

one? 

Secretary LEW. I do. 

Mr. PERLMUTTER. How about 4.1.6, civilian unemployment rate 

dropping like a rock—this is on page 20 of the report—after the 

2007–2008 recession. Do you see that? All right. 

But now let’s talk about FSOC. So if you would turn forward in 

your report to pages 62 and 63. I want to look at graphs 5.3.16 and 

5.3.19. Do you see those? 

Secretary LEW. Yes. 

Mr. PERLMUTTER. So can you tell us what graph 5.3.16 is? 

Secretary LEW. I have read the words. I am looking at some of 

these graphs for the first time. 

Mr. PERLMUTTER. All right. So let me tell you what it is and then 

you can expand on it if you like. 

As the recession took place starting in 2008, 2007–2008, we saw 

loan loss reserves fall so that banks couldn’t withstand one more 

loss. But since FSOC was created in 2010, what do you see in 

terms of the loan loss reserves? They have almost tripled. 

Secretary LEW. Yes. And we are seeing performing loans doing 

better and we are seeing the foreclosure issue settle down. 

Mr. PERLMUTTER. Okay. Now let’s look at the one that is really 

quite telling, and that is 5.3.19, FDIC-insured failed institutions. 

Do you see that? 

Secretary LEW. Yes. 

Mr. PERLMUTTER. And my friend the chairman was talking about 

this recovery and why isn’t it bigger, other than the fact we have 

13 million new jobs. We see pensions at an all-time high. But 

under Republican Administrations, and I think between 1980 and 

1990 we had the Reagan Administration and the first George Bush 

Administration, look at the number of failed institutions. Do you 

see that? 

Secretary LEW. I do. 

Mr. PERLMUTTER. Okay. Then it falls off to virtually zero under 

the Clinton Administration. There were almost no bank failures. 

Do you see that? 

Secretary LEW. Yes, sir. 

53 

Mr. PERLMUTTER. Then under the second George Bush we see a 

tremendous spike in failed institutions. Do you see that? So now, 

it has fallen off precipitously. 

We are here to talk about the FSOC and about Dodd-Frank and 

putting some structure back into the market so that we don’t have 

a failed banking system. Would you like to comment on that? 

Secretary LEW. Congressman, I think that you have talked about 

the improvement in the economy in a very compelling way. Obviously, the graphs illustrate it, but so does the number of people 

working every day. 

I think that there is no doubt but that the steps we have taken 

through Wall Street reform and FSOC have made our system safer. 

We also have an economic recovery underway, which is why everything is also getting better. 

What I don’t think we can do is kind of rest comfortably that 

there is no problem out there to worry about, because what will 

happen is we will get to the down point of a business cycle, there 

will be stress on the system, and we owe it to the American people 

to make sure we are in a position when times get tough that we 

don’t go back to the 2007–2008 kind of situation. That is exactly 

what we are doing in FSOC. 

Mr. PERLMUTTER. I completely agree with you, and that is why 

you need the loan loss reserves, so that you can withstand a downturn. That is why we take into consideration these precautions. 

Secretary LEW. It is why you need capital. 

Mr. PERLMUTTER. If I were my Republican friends, I would be 

grasping at this liquidity straw too, given the overall recovery of 

the economy. But I want to thank you and I want to thank the 

President for putting this economy back on track. 

And I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Thank you, Mr. Chairman. 

Mr. Secretary, it is a pleasure to have you here again. 

I want to talk about the ultimate goal of FSOC. FSOC’s goal is 

to reduce risk in the market, is it not? 

Secretary LEW. Yes, it is to reduce. It is to make sure that we 

have financial stability always on our minds and we reduce the 

risk of a financial crisis. 

Mr. ROSS. And financial stability could be accomplished with the 

elimination of risk too, which I don’t think that is the ultimate 

goal, because without risk you have no return of course. 

Secretary LEW. No, no. It is why I focused on stability. 

Mr. ROSS. Thank you. And let’s talk about stability, because in 

gaining stability we need to make sure that our institutions have 

a proper road map. And right now we have a designation of a SIFI 

that leads to an institution now trying to find out how they get out. 

And I give you credit for what happened in February with some of 

the transparency rules that you promulgated and an opportunity 

every 5 years to try to get a decertification, if you will, of being a 

SIFI. 

My concern is, why don’t we have in place a road map, a precautionary measure to prevent them from ever being designated as 

a SIFI? 

54 

Secretary LEW. The process is not one where we assume that everyone could be a SIFI. It is to go through the firms that present 

themselves because of their size, complexity, and structure. 

Mr. ROSS. True. True. But are we not focusing on more of a 

treatment for the cure instead of giving the prevention of the problem. 

Secretary LEW. I think the reality is that no two firms present 

themselves in an identical place. And the way we go through the 

analysis looks at each firm and the risk that it presents through 

a— 

Mr. ROSS. And it should be done— 

Secretary LEW. —consistent set of questions. 

Mr. ROSS. It should be done that way. But, again, in a proactive 

way, if these firms being looked at were given some guidance to 

prevent them from ever going over the cliff, we wouldn’t have to 

have— 

Secretary LEW. Right. 

Mr. ROSS. —the designation. 

Let me move into something really quickly here on asset managers, because I think asset managers are pretty important, and I 

have some concerns about them being declared SIFIs. 

For example, in Dodd-Frank, it says that some of the criteria to 

include are leverage, the extent and nature of the off-balance-sheet 

exposure of the companies, the amount and types of liabilities of 

the company, including the degree of reliance on short-term funding. 

Let’s talk about leverage. What is a leverage ratio that you 

would consider to be worrisome? 30 to 1? 

Secretary LEW. Yes, I don’t want to give you a single number. 

Obviously, the larger it is, the— 

Mr. ROSS. So smaller would be better. 

Secretary LEW. Yes. 

Mr. ROSS. And knowing that, 5 to 1 may even be a little bit of 

a concern. 

Secretary LEW. And it depends on what the investments are in. 

Mr. ROSS. Correct. 

Secretary LEW. It is a combination of leverage and risk. 

Mr. ROSS. When asset managers will not—they won’t have a 

greater than 11⁄2-to-1 risk—in fact, I think Vanguard has 1.04-to1 risk, which is about almost minuscule—it would seem to me that 

should be a consideration that would prevent them from even being 

considered a SIFI. Would you agree? 

Secretary LEW. It is certainly a factor that you would have to 

consider. And we have made our focus for this last period of time 

looking at the activities that contain the most risk, because we 

don’t— 

Mr. ROSS. But they don’t really contain risk. Asset managers 

don’t contain risk. They are basically—they don’t even have any 

collateral as such to have risk. 

Secretary LEW. First, asset managers have different business 

models. Some of them are leveraged; some of them are not leveraged. 

Mr. ROSS. But the leverage is very minuscule. 

55 

Let me just go into this, if I can. Once you are a SIFI, then you 

become jointly and severally liable for all SIFIs, do you not? If one 

fails, then everybody that is a SIFI bears the brunt of that? 

Secretary LEW. I am not sure what you mean by joint and several. It— 

Mr. ROSS. The SIFIs themselves will bail out the SIFIs. 

Secretary LEW. I am just—I am not sure what you are referring 

to. 

Mr. ROSS. Okay. 

Let me move on, then, to what the impact is if an asset manager 

were to be deemed a SIFI. You, of course, realize the cost of compliance, but, most importantly, asset managers deal in mutual funds, 

they deal in 401(k)s, they deal in investments that deal with people’s retirements and pensions. 

And there is a study out there by the American Action Forum 

that indicated that the capital requirements necessary if an asset 

manager was deemed a SIFI could raise the cost as much as 25 

percent, that over the life of that program for the retiree could be 

over $100,000. 

Will that not be taken into consideration when trying to determine whether or not they are a SIFI? 

Secretary LEW. Obviously, those same retirees have an interest 

in making sure that they have access to their savings when they 

need them and that they— 

Mr. ROSS. But it is having a significant impact— 

Secretary LEW. Yes. So— 

Mr. ROSS. —on the mom-and-pop— 

Secretary LEW. —I don’t start out with the presumption that 

firms should be or shouldn’t be designated. I think we have to complete the analysis and come to a conclusion of what risk factors we 

are looking at and if those risk factors warrant any kind of action. 

So— 

Mr. ROSS. I agree with you. I just think it would be a good preventive measure to do it in conjunction with the institution so that 

they can prevent that risk from ever being taken— 

Secretary LEW. Yes. 

Mr. ROSS. —and ultimately continue in a very stable financial 

environment. 

Secretary LEW. My sense is that the asset management industry 

is very much offering its views as we go through this process. 

Mr. ROSS. Very strongly. Yes, sir. 

I see my time is up. I will yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Maryland, Mr. Delaney. 

Mr. DELANEY. Thank you, Mr. Chairman. 

And thank you, Mr. Secretary, for being here. 

I want to associate myself with the comments that Congressman 

Ross just made, because I have a similar view on asset managers, 

but I don’t want to take up my time to talk about that. 

When I walked in, I thought I heard my colleague asking you 

about the prioritization of our debts, but I might not have heard 

that. And I know you weren’t able to answer it, so I do want to 

make a comment on that. 

56 

It seems to me that is a really misguided idea, because the best 

credits in the world, which, obviously, we should view the United 

States as certainly one of them, never prioritize their debts. Right? 

Berkshire Hathaway, ExxonMobil, all these terrific credits, all 

their debts are treated the same, and they have great flexibility as 

a result, whereas weak credits are forced by the market to 

prioritize their debt so that people know exactly what they have 

and when they get it paid. 

So it strikes me it would be a really misguided idea to force the 

United States Government into a position where it was somehow 

signaling to the world that we are weak credit. I don’t know if you 

agree with that. Very quickly, if you don’t mind. 

Secretary LEW. I couldn’t agree more. 

I think that the reality is the technical question of could you pay 

principle and interest misses the point, which is that, if you pick 

and choose what you pay, you are going to default on something. 

Mr. DELANEY. Right. And you are going to present very differently than the way we want the United States— 

Secretary LEW. Even if you reach the conclusion that you had to 

do that because it would be disastrous not to, it is a terrible place 

to be because you are still in default. 

Mr. DELANEY. Right. 

Secretary LEW. So the only thing that solves the issue is to raise 

the debt limit. 

Mr. DELANEY. So the second question is about the liquidity crisis, 

and I know you have talked about this a lot. 

And it is interesting, when you think about the role of banks, 

which have been very important to our economy for a long period 

of time, which is why the government has supported them, which 

is why we also try to regulate them in ways that make sense, right 

now banks are not all that important when markets are good. 

There are a lot of other alternatives for liquidity. But they are really, really important when markets are bad because there is no incentive for market-based participants to really participate in markets when they are bad, other then if they are kind of vulture investors and trying to get really good deals. 

And I do worry that what has happened with liquidity has put 

these banks in a position that, if there were some kind of a crisis, 

they wouldn’t be able to respond as well. And I know there are a 

lot of reasons why this liquidity data is emerging, but it seems to 

me—and this is coming from someone who is supportive of the regulatory response that we have had, supportive of Dodd-Frank. I 

think all the things we did we obviously had to do. 

But it seems to me the notion of having very high minimum liquidity standards for banks, coupled with not looking at riskweighted assets from a capital test and having this kind of overlay 

where you still risk-weight assets but you need a minimum amount 

of capital, which inevitably puts a lot of capital against really lowrisk-weight assets like Treasuries, it seems to me those create very 

big incentives for banks not to be liquidity providers in a crisis. 

Do you agree with that assessment? 

Secretary LEW. I think that the liquidity rules, the theory behind 

them was you look at the overall exposure of the firm, and they 

didn’t make distinctions between different kinds of assets. 

57 

I obviously think that Treasuries and cash have a degree of safety that is different— 

Mr. DELANEY. Right. 

Secretary LEW. —than almost any other asset in the world. But 

that is a different approach than saying everything is treated the 

same. 

Mr. DELANEY. Right. 

Would you support changes to the regulatory framework that actually eliminated disincentives for institutions to hold Treasuries 

and cash so that they are actually in a position to do their job in 

a crisis? 

Secretary LEW. I don’t think we have any evidence that they are 

not in a position to do their job. The Treasury markets remain deep 

and liquid. And as I have said a couple of times today, I don’t think 

that what people looked at on October 15th, in terms of the movement on Treasuries, had to do with a lack of—it wasn’t the effect 

of any kind of regulatory environment. 

Mr. DELANEY. But the people running these institutions seem to 

think they have a disincentive to hold liquidity in cash. 

Secretary LEW. Yes. 

Mr. DELANEY. So sometimes perception becomes reality. 

Secretary LEW. I will give you an example. I have heard a lot of 

them say as if it affects the Treasury market, that Volcker is the 

reason, but Volcker— 

Mr. DELANEY. That has nothing to do with it. 

Secretary LEW. —Volcker doesn’t cover Treasuries. 

Mr. DELANEY. I agree. I am talking about Treasuries. 

Secretary LEW. Yes. So, in Treasuries, I think you asked the 

right question, is it something in the leverage rules, because the 

other rules didn’t— 

Mr. DELANEY. Because it used to be, no matter how many Treasuries you had, you didn’t have to have, really, capital against them. 

Secretary LEW. Right. 

Mr. DELANEY. Now you kind of do. So, in my mind, if I was running an institution, that would make me have less of them. 

Secretary LEW. Right. I think that it is very important for us to 

maintain the deep and liquid Treasury markets. It is something 

that is part of what makes our dollar the world’s reserve currency. 

It is part of our economic backbone. I don’t see a weakness in the 

Treasury market right now, but I can assure you that— 

Mr. DELANEY. You are looking at it. 

Secretary LEW. —a day doesn’t go by when I don’t ask questions 

about it. 

Mr. DELANEY. Right. Sure. 

Last question, Ex-Im Bank. I have talked about ideas where institutions like Ex-Im are required to sell off some of their portfolio 

on a regular basis so there is better transparency as to how their 

assets are priced. Do you support approaches like that? 

Secretary LEW. I am not familiar with that proposal. I would be 

happy to look it. 

I think the Ex-Im Bank does enormously important work in leveling the playing field for U.S. exporters. It throws off a— 

58 

Mr. DELANEY. Right. And I agree with that position. I just think 

additional transparency around how they price their assets is useful— 

Secretary LEW. I just haven’t looked at that. I would be happy 

to look at it. 

Mr. DELANEY. Yes. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair wishes to alert Members that in order to accommodate 

the Secretary’s schedule, we anticipate clearing three more Members in the queue. Presently, that would be Mr. Stivers, Mr. 

Pittenger, and Mr. Barr, depending on whether or not somebody 

else walks in on the Democratic side. 

The gentleman from Ohio, Mr. Stivers, is now recognized. 

Mr. STIVERS. Thank you, Mr. Chairman. 

Right here, Mr. Secretary. How are you? 

Secretary LEW. I am well. How are you? 

Mr. STIVERS. Good. 

So you have already answered questions from Mr. Duffy and Mr. 

Ross and Mr. Fincher about liquidity. I want to ask a couple of 

things about that. 

You have said you don’t think there is a problem, and, to you, 

the world is rainbows and unicorns and everything is good with liquidity. 

Secretary LEW. I don’t think that is what I said. 

Mr. STIVERS. You said there wasn’t a problem with liquidity, 

didn’t you? 

Secretary LEW. No. I said I think the Treasury market—we 

haven’t seen problems in the Treasury market. I think there are 

issues about liquidity that require a lot of attention, and I went 

through at some length the kinds of issues that I think we need 

to pay attention to. 

Mr. STIVERS. Great. Okay. Well, then, let’s talk a little bit about 

that. 

So you do believe that we need to give it a little attention. In 

your role of Chair of the FSOC, have you directed the Office of Financial Research (OFR) to study this problem and how the policies 

that are completed and proposed might come together to cause a 

problem? Or have you asked them anything at all? 

Because some of us would love to see them do a study. I wrote 

them a letter asking them to do a study. And I am just curious if 

you have asked them to do a study on it, on liquidity and— 

Secretary LEW. They are doing work in this area. And they have 

obviously issued some analysis, and I know they have other work 

that is ongoing. 

And I think it is not just an OFR question. It is a question that 

we have to ask in domestic finance in Treasury, securities and 

banking regulators have to ask. So I think that there is a serious 

conversation in this area. 

What I have tried to make clear is that it would be a mistake 

to jump to conclusions about what the relationship between the 

safer, sounder world after financial reform and liquidity is. We 

have to be open to it but not assume that is the whole explanation. 

Mr. STIVERS. I don’t disagree with you, which is why I ask you 

if you would ask the OFR to do a study. 

59 

And so you just indicated there is some work going on. When can 

we expect to see a study from OFR around— 

Secretary LEW. I would have to get back to you on the 

workstream. 

Mr. STIVERS. Please do. Because that is their job. Their job is— 

it is called the Office of Financial Research. So it seems to me that 

they are the most logical place to look at it. 

Secretary LEW. They have been doing a lot of analysis on October 

15th, for example, to understand what happened on that day. And 

they are very much in the space of helping to make it possible to 

look between the data that different regulators have and do the 

analysis. 

Mr. STIVERS. Which is their job. And I am just asking you— 

Secretary LEW. Yes. 

Mr. STIVERS. —to have them do their job and make that available to us. Because, as policymakers, we would love to see that, 

and it may impact some of the policies we decide to make. And as 

somebody who enforces those policies that are made by Congress, 

obviously you have some ability to change the way you do your job 

too. 

But we would love to see that information. And the sooner we 

can see it, the sooner we can make an informed decision, as opposed to either one of us, maybe me assuming that it is a problem 

and you assuming it is not. Let’s look at— 

Secretary LEW. I couldn’t agree more that we have to understand 

things before we act. 

Mr. STIVERS. So please ask them do a study that is detailed with 

regard to this. Because I think, when you see what is going on between the Volcker Rule and what is going on with the Department 

of Labor and what is going on in the private sector separately from 

regulation, where a lot of people are simplifying their business 

model, getting out of some risky businesses, those three come together in a way that could really cause a liquidity crisis in the future. And I just want to make sure we look toward it and try to 

anticipate it and head it off. So, please, I would urge you to do 

that. 

The other question I have, really quickly, is with regard to designating systemically important institutions. Has anybody talked to 

you about that? Because I didn’t hear whether anybody had talked 

much to you about that. 

Secretary LEW. There were quite a number of questions earlier. 

Mr. STIVERS. So— 

Secretary LEW. I am not sure what question— 

Mr. STIVERS. Okay. Well, do you think the $50 billion—let’s talk 

about banks for a second. The $50 billion level—many folks, including folks at the Federal Reserve, have said that is an inadequate 

and artificial number. How do you feel with that number in the 

law? 

Secretary LEW. I think that it is important that we use the flexibility we have to treat institutions of different size differently. And 

we have tried to do that, and we need to continue to ask, is it being 

done as well as we can do it. 

I think it is a mistake, though, to think that a $2 billion institu- tion is the same as a $50 billion institution or a $100 billion or a 

60 

$500 billion institution. So I think some of the suggestions that I 

have heard about drawing the line, say, at $500 billion are very 

bad policy. That would take the next six largest institutions out of 

the heightened supervision. 

Mr. STIVERS. Let me suggest an alternative approach. Have you 

looked at nonbank assets, the assets that are not under the covered 

institution—I would ask you to look at that, because that is where 

the systemic risk is created. 

I know my time is gone, but please look at that. I will follow up 

in writing. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Secretary Lew, there has been some discussion 

today, a considerable amount, regarding the debt. From what I understood, you seemed to be somewhat dismissive of this concern 

and of the threat. Do you see it as a threat? 

Secretary LEW. I— 

Mr. PITTENGER. Do you see it as an economic— 

Secretary LEW. I have spent most of my professional life trying 

to control our spending and have revenue to cover our expenses, so 

I don’t dismiss it at all. 

Mr. PITTENGER. Okay. But do you see it— 

Secretary LEW. I think we have made enormous progress— 

Mr. PITTENGER. Do you see it as a level of concern as much as 

Iran— 

Secretary LEW. I don’t think— 

Mr. PITTENGER. —in terms of national security and economic security? 

Secretary LEW. I think— 

Mr. PITTENGER. How would you place it? 

Secretary LEW. —if we had stayed on the course we were on in 

2008— 

Mr. PITTENGER. No. 

Secretary LEW. —I would say that— 

Mr. PITTENGER. Sir— 

Secretary LEW. —we have made progress since then. I don’t— 

Mr. PITTENGER. —with all due respect, let me ask you—this is 

the question I am asking. How do you view the threat? Do you view 

it as important as the concern we have with Iran and the security 

threat there? 

Secretary LEW. I— 

Mr. PITTENGER. The economic threat that we have with the 

debt— 

Secretary LEW. Look, I— 

Mr. PITTENGER. —do you sense that? Is that as compelling to 

you? 

Secretary LEW. I think they are, obviously, very different kinds 

of— 

Mr. PITTENGER. They are. 

Secretary LEW. —threats. We have made a lot more progress on 

our fiscal position than we have in terms of moving Iran. 

Mr. PITTENGER. I understand that. 

61 

You heard the statement from Admiral Mullen earlier, and you 

hear it from Peter Orszag still today, the former budget writer for 

Mr. Obama, still talking about the trajectory of spending and the 

concerns over the debt. 

I was with Erskine Bowles over the weekend. I have known Erskine for 25 years. He made a statement publicly this last fall regarding the spending levels and the debt and where that is headed. 

There are a lot of people who give a clear focus on the debt and 

see it as a major priority and a concern. And what I am asking you, 

do you see the same level of concern—when you put your head on 

a pillow at night, does that keep you awake as much as Al Qaeda? 

Secretary LEW. Congressman, we have made enormous 

progress— 

Mr. PITTENGER. No, no, no. That is not the question, with all due 

respect. 

Secretary LEW. But it is the reason why my answer is what my 

answer is. If you had asked me this question in 2009, I would have 

given you a different answer than I am giving you now because— 

Mr. PITTENGER. I am asking you today. 

Secretary LEW. —we are not in the same place. 

Mr. PITTENGER. Is it a vital concern to you today? 

Secretary LEW. I don’t think it is the most pressing concern 

today, because we have controlled the rate of growth— 

Mr. PITTENGER. So $18 trillion, that is not a concern to you? 

Secretary LEW. As a percentage of GDP, we have stabilized the 

deficit and the growth of the debt. 

Mr. PITTENGER. And the trajectory of spending is going up— 

Secretary LEW. I think— 

Mr. PITTENGER. —not leveling off. 

Secretary LEW. —for the next 10 years, we have a stable debt 

and deficit situation. 

Mr. PITTENGER. Here is Erskine Bowles— 

Secretary LEW. It does not mean— 

Mr. PITTENGER. Excuse me. Here is Erskine Bowles, October 

2014: ‘‘The deficit is projected to return to an upward path over the 

rest of the decade and beyond.’’ 

Sir, a lot of smart people disagree with you. A lot of smart people 

are concerned about the trajectory of spending and the imploding 

debt and the fiscal crisis that is going to put us in. And what I am 

asking you is, do you not share that concern? 

Secretary LEW. Congressman, I am telling you I do have a concern about our fiscal policy. We have to maintain a responsible fiscal policy. We also have to maintain growth, and we have to— 

Mr. PITTENGER. Do you think it is enough to talk about, to bring 

it to the American people? 

Secretary LEW. We have done more than talk, Congressman. We 

have reduced the debt— 

Mr. PITTENGER. Sir, in all due respect, the man that you work 

for, that you report to, has he ever brought it up in an inauguration? Has he ever brought it up at the State of the Union address? 

He came here to the Capitol this week to talk about TPA. Has he 

ever come to talk to the Members of Congress about the debt and 

the— 

Secretary LEW. Congressman, when he took office— 

62 

Mr. PITTENGER. The man that you advise, do you advise him to 

address this debt concern? 

Secretary LEW. Congressman, we have reduced the deficit as a 

percentage of GDP from 10 percent— 

Mr. PITTENGER. That is— 

Secretary LEW. —to under 3 percent. 

Mr. PITTENGER. I am talking about the future. 

Secretary LEW. That speaks to what we are doing and what we 

have done. 

Mr. PITTENGER. There are a lot of smart people who proceeded 

you in your job who have serious concerns about it. 

Let me go on to another issue, and that deals with FATF. There 

are 34 countries, as you know, committed to the 40 recommendations of FATF in going after terrorism, terrorism financing. What 

capabilities do we have of going after those countries that are not 

in compliance? 

We have Turkey, we have Qatar. Clearly, they are complicit with 

terrorism financing. What role can you play as enforcer, in that 

FATF is not an enforcer? They merely have the standards. And yet, 

clearly, we see the infractions by those who, in some measure, like 

Turkey, is a member of NATO. 

Secretary LEW. FATF has been a very important process to bring 

the world community together behind high standards to control bad 

practices and bad activity. 

We are very much engaged on a bilateral basis with any country 

that we see doing things or not doing things that they need to do 

to control— 

Mr. PITTENGER. Have you called out Turkey on the matter? 

Secretary LEW. I have talked with our counterparts in Turkey 

about what they need do in their banking system, and— 

Mr. PITTENGER. Have you called out Qatar? 

Secretary LEW. I have talked to people in most of the world 

about this issue. And when we talk, they actually respond and they 

move. 

So it is not an easy process where you can just kind of turn a 

switch and have everybody doing everything they need to do, but 

we are engaged very deeply at a very high level around the world. 

Mr. PITTENGER. Thank you for your service. 

I yield back. 

Chairman HENSARLING. The gentleman yields back. 

Our last questioner will be the gentleman from Kentucky, Mr. 

Barr. He is now recognized. 

Mr. BARR. Thank you, Mr. Chairman. 

Mr. Secretary, thank you for your patience and for staying with 

us here. 

Since we have talked a lot today about market liquidity, let me 

bookend our discussion here today with that subject. 

The Center for Financial Stability has found that market liquidity has declined 46 percent since its peak in March of 2008. And 

a recent article in the Wall Street Journal provides this analysis: 

‘‘Talk to almost any banker, investor, or hedge fund manager 

today, and one topic is likely to dominate the conversation. It is the 

lack of liquidity in the markets and what this might mean for the 

world economy and their businesses. Market veterans say that they 

63 

have never experienced conditions like it. Banks have become so reluctant to make markets that it has become hard to execute large 

trades, even in the vast foreign exchange and government bond 

markets, without moving prices.’’ 

So I want to address my question to your skepticism that regulation has played a part in this liquidity issue. 

Have you heard from bankers, many of your former colleagues on 

Wall Street, and bankers that I have heard from as well, that they 

are less likely today to engage in market-making activities as a result of Volcker and other regulatory pressures? 

Secretary LEW. Look, I have heard people say things, some of 

which are supported by facts and some of which are not. So— 

Mr. BARR. But, clearly, as Secretary of the Treasury, you have— 

Secretary LEW. I talk to people all the time. 

Mr. BARR. Yes, and they have given you that feedback. But what 

is it that leads you to doubt their sincerity, or do you not— 

Secretary LEW. I am not doubting anyone’s sincerity. I think people see the world the way they see it. Sometimes it is right, and 

sometimes it is wrong. 

I think that—you just cited at the end of the piece that you read 

that people are saying they are having trouble moving blocks of 

bonds in any size they want without any movement in price. I 

think that has something to do with market structure. You have 

different players in the market now. It may mean that to maintain 

liquidity you have to do multiple transactions. 

Mr. BARR. I understand, but— 

Secretary LEW. That is different from not being able to transact. 

Mr. BARR. Yes. I understand. But would you acknowledge that 

when banks become reluctant to engage in market-making that impacts liquidity? 

Secretary LEW. I think there are different kinds of market-making going on. There is a lot of market-making going on, and you 

can’t roll back the clock. The fact that you have the emergence of, 

say, electronic trading and high-frequency trading, there is a lot of 

activity taking place in that space that isn’t the traditional brokerdealer model. 

Mr. BARR. Let me take one example, and that is the collateralized loan obligation marketplace: $350 billion of senior secured commercial and industrial loans that provide financing for 

very dynamic job-producing companies, many of which are actually 

in my own district. 

Would you acknowledge that the Volcker Rule has forced banks 

to take pretty significant losses in AAA and AA CLO paper? 

Secretary LEW. Obviously, the Volcker Rule is still taking effect. 

It hasn’t— 

Mr. BARR. There are already banks being forced to divest AAA 

and AA CLO paper. 

Secretary LEW. Banks are going to have to not have proprietary 

investments that they had in the past. 

Mr. BARR. Right, but let me ask you— 

Secretary LEW. That means that they are going to have to sell 

some assets. 

Mr. BARR. Sir, do you know how many AAA or AA tranches of 

CLO notes defaulted over the last 20 years? The answer is zero. 

64 

The Volcker Rule is forcing banks to divest in very safe investments. And you have to acknowledge that has a destabilizing impact on the financial stability of these institutions. 

Secretary LEW. But I think you also have to acknowledge that 

the exposure to risk on proprietary investments was a significant— 

Mr. BARR. What risk is there with AAA or AA CLO notes that 

have never defaulted over 20 years and performed well during the 

financial crisis? 

Secretary LEW. The objective of the Volcker Rule was to reduce 

the level of risk exposure of firms by getting them out of proprietary investments. I think that we will be better off when that is 

implemented. And I think the markets will adapt— 

Mr. BARR. You don’t dispute the fact that Volcker forces banks, 

which haven’t defaulted in 20 years, to divest of AAA paper? 

Secretary LEW. With the exception of Treasuries, it is a pretty 

tight rule in terms of— 

Mr. BARR. Let me conclude just really quickly with one other 

point, and that is community banks. 

Community banks in my district, the bankers tell me that DoddFrank and the avalanche of compliance costs and red tape has really impacted their bottom line. And the numbers bear this out. The 

number of community banks $10 billion or below has shrunk from 

7,700 in the second quarter of 2010 to only 6,300. 

Meanwhile, there is consolidation in the industry. So the big 

banks, the SIFI banks, are larger. And too-big-to-fail is a bigger 

problem now because we don’t have diversity and we don’t have as 

much competition in the system. 

Can you respond to that financial stability issue? 

Secretary LEW. Look, I think the consolidation was going on before Wall Street reform was enacted, and I am not sure that consolidation is leading to the SIFIs taking over. It is mostly smaller 

banks combining. And it is an issue that—we have a real shared 

interest in making sure communities have access to community 

banks— 

Mr. BARR. And I would encourage FSOC to look at consolidation, 

industry consolidation, as a problem, because it is exacerbating toobig-to-fail. 

Thank you. I yield back. 

Chairman HENSARLING. Although there are other Members in 

the queue, they will not be recognized today. 

I would like to thank Secretary Lew for his testimony. 

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. 

Mr. Secretary, we would ask that your office respond as promptly 

as you are able. And I mean this most respectfully and sincerely: 

We would ask that Treasury cease the response dump at midnight 

before your appearances. That is a sincere request to you, sir. 

With that, this hearing stands adjourned. 

[Whereupon, at 1:13 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

June 17, 2015 

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