S. HRG. 112–3 

AN OVERALL ASSESSMENT OF TARP AND 

FINANCIAL STABILITY 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 4, 2011 

Printed for the use of the Congressional Oversight Panel 

( 


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AN OVERALL ASSESSMENT OF TARP AND FINANCIAL STABILITY 


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65–276 2011

S. HRG. 112–3 

AN OVERALL ASSESSMENT OF TARP AND 

FINANCIAL STABILITY 

HEARING 

BEFORE THE

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 4, 2011 

Printed for the use of the Congressional Oversight Panel 

( 


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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

THE HONORABLE TED KAUFMAN, Chair 

KENNETH TROSKE

J. MARK MCWATTERS

RICHARD H. NEIMAN

DAMON SILVERS


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C O N T E N T S 

Page 

Opening Statement of Hon. Ted Kaufman, U.S. Senator from Delaware ... 1 

Statement of J. Mark McWatters, Attorney and Certified Public Accountant .................................................................................................................. 6 

Statement of Damon Silvers, Director of Policy and Special Counsel, 

AFL–CIO ....................................................................................................... 16 

Statement of Kenneth Troske, William B. Sturgill Professor of Economics, 

University of Kentucky ................................................................................. 20 

Statement of Richard Neiman, Superintendent of Banks, New York State 

Banking Department .................................................................................... 24 

Statement of Timothy Massad, Acting Assistant Secretary for Office of 

Financial Stability, U.S. Department of the Treasury .............................. 28 

Statement of Jason Cave, Deputy Director for Complex Financial Institutions Monitoring, Federal Deposit Insurance Corporation ........................ 60 

Statement of Patrick Lawler, Chief Economist and Head of the Office 

of Policy Analysis and Research, Federal Housing Finance Agency ........ 74 

Statement of William R. Nelson, Deputy Director, Division of Monetary 

Affairs, Federal Reserve System .................................................................. 89 

Statement of Joseph E. Stigliz, Nobel Laureate and University Professor, 

Columbia Business School, Graduate School of Arts and Sciences (Department of Economics) and the School of International and Public 

Affairs ............................................................................................................ 108 

Statement of Allan H. Meltzer, Allan H. Meltzer University Professor 

of Political Economy at Carnegie Mellon University ................................. 118 

Statement of Simon H. Johnson, Ronald A. Kurtz (1954) Professor of 

Entrepreneurship, MIT Sloan School of Management and Senior Fellow, Peterson Institute for International Economics ................................. 124 

Statement of Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow, University of Chicago Booth School of Business .................................................... 131 


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(1) 

AN OVERALL ASSESSMENT OF TARP AND 

FINANCIAL STABILITY 

FRIDAY, MARCH 4, 2011 

U.S. CONGRESS, CONGRESSIONAL OVERSIGHT PANEL, Washington, DC. 

The panel met, pursuant to notice, at 10:00 a.m., in room D–538, 

Dirksen Senate Office Building, Senator Ted Kaufman, chairman of 

the panel, presiding. 

Present: Senator Ted Kaufman (presiding), Richard H. Neiman, 

Damon Silvers, J. Mark McWatters, and Kenneth R. Troske. 

OPENING STATEMENT OF HON. TED KAUFMAN, U.S. SENATOR 

FROM DELAWARE 

The CHAIRMAN. Good morning. As you can tell, this is our last 

hearing and we took the ceremonial picture. 

Good morning, Mr. Secretary. We appreciate your willingness to 

join the final hearing of the Troubled Asset Relief Program. 

There’s no question our economy faces real challenges today, but 

let’s take a moment at the start of today’s hearing to imagine that 

those challenges could be far, far worse and were far, far worse. 

Let’s imagine that the S&P 500, which is risen by nearly 20 percent in the last year, had instead fallen by 30 percent in the last 

month. Let’s imagine that our economy, which has added over a 

million jobs in the last year, had instead lost that many jobs in just 

two months. Let’s imagine that America’s oldest and most highly 

regarded financial institutions were beginning to topple literally 

like dominos. 

I think it’s fair to describe this scenario as dire, even apocalyptic. 

And yet that is precisely the scenario that faced our economy in 

late 2008 around the time Congress passed the TARP into law. 

Today the panic of 2008 is a slowly fading memory and the TARP 

played a role in turning the page on that grim chapter in American 

history. It did not rescue our economy on its own, nor were all of 

its programs successful, not by a long shot. Even so, I believe that 

any hearing on the TARP should begin by recognize its greatest 

success, that in a moment of financial panic, panic, it helped to pull 

our markets back from the abyss. 

Despite this accomplishment the TARP remains deeply despised 

among the Americans public. Most of the anger is eminently understandable, as the program is viewed as having done far more for 

Wall Street than for every day Americans. It is only fair to note 

that some of the TARP’s unpopularity is due to misunderstandings 

about its track record. Disraeli said, ‘‘There’s three kinds of lies, 


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lies, damn lies and statistics’’ and polls are the third kind, statistics. But a recent Bloomberg poll I think hits the point in terms 

of anecdotal evidence, is exactly what I’ve found. It revealed that 

60 percent of the Americans believe that most of the TARP money 

provided to banks will be lost and we will not get that back. Only 

33 percent believe that most of the money will be recovered. 

Many of TARP’s greatest skeptics, I am sure, recall the frightening price tag first associated with the program, $700 billion, the 

amount the Treasury requested and Congress approved to bail out 

the financial system. What they may not know today is that the 

Congressional Budget Office estimates that the TARP will lose $25 

billion. Let me clear, $25 billion is a vast sum of money, yet it is 

far less than anyone expected the TARP to cost when it was created. 

Yet the news, unfortunately, is not all good. Most starkly, the 

TARP has fallen far short in its effort to help owner—homeowners 

stay in their homes. The President first announced the goal of 

leveraging the TARP to prevent 3 to 4 million foreclosures. Today 

the panel estimates it will prevent fewer than 800,000. It is no 

wonder then that many Americans view the TARP as a program 

designed and executed for the benefit of Wall Street CEOs rather 

than Main Street homeowners. 

Further, it would be grossly mistaken to account for the TARP 

solely by the number of taxpayer dollars lost. The program has a 

far greater and more noxious cost. Moral hazard. That lingering belief that America’s biggest banks are Too Big to Fail and the rules 

that apply to everyone else in America do not apply to them. This 

belief continues to distort our financial markets, advantaging the 

largest banks on Wall Street, while disadvantaging every other 

bank in the country. The cost of moral hazard is not easily quantifiable, but is real and it’s reprehensible. 

Today’s hearing will consist of three panels of distinguished witnesses. First we are joined by Acting Assistant Secretary Timothy 

Massad who currently manages all the TARP programs for the Department of the Treasury. Mr. Secretary, Mr. Massad, I particularly hope that you will share with us your lessons learned from 

more than two years at work on the TARP. 

If you were creating the TARP today what would you have done 

differently? That’s what we’re focusing on, what would we have 

done differently. What can our nation learn from this ugly experience and how can we prevent it from ever happening again? 

Our second panel includes witnesses from FDIC, the FHFA and 

the Federal Reserve. These offices played critical roles in responding to the financial crisis, often acting in coordination with addition 

to TARP programs. I hope these witnesses will help us place the 

TARP in its proper context among the full range of crisis response 

programs. 

Finally, we’ll be joined by four of this country’s leading economists who will bring decades of experience and exceptional credentials to the task of scrutinizing TARP and its effects. I look forward 

to hearing their expert views on the financial crisis and its enduring impact. 


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All of our witnesses’ testimony will provide material and support 

for the panels 30th and final Oversight Hearing Report which will 

be issued to Congress and the public later this month. 

Before we proceed I’d like to hear from my colleagues. Mr. 

McWatters. 


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STATEMENT OF J. MARK McWATTERS, ATTORNEY AND 

CERTIFIED PUBLIC ACCOUNTANT 

Mr. MCWATTERS. Thank you, Senator Kaufman. 

And welcome to our distinguished witnesses. 

Although the Congressional Budget Office has recently estimated 

that the subsidy cost of the TARP downward to only, only $25 billion, such metrics should not serve as the sole determinant of the 

success or failure of the program. We should remain mindful that 

the TARP’s overall contribution to the rescue of the U.S. economy 

was relatively modest, when considered along with the multi-hundred billion dollar bailout of Fannie Mae and Freddie Mac, the 

multi-hundred trillion dollar intervention of the Federal Reserve 

and FDIC as well as the incalculable efforts of private sector capital market participants. 

It is particularly difficult to label the TARP, or any other government sponsored program aimed at securing financial stability, an 

unqualified successful when the unemployment rate hovers around 

9 percent, the combined unemployment and under-employment 

rate equals 16 percent and millions of American families are struggling to escape foreclosure. It is of cold comfort to these families 

that the two big to fail financial institutions, aided by the TARP 

and other generous, below market rate, government sponsored programs are recording near record earnings. That is, to this day that 

TARP carries a substantial stigma with the residents of Main 

Street should come as little surprise. 

Professor Troske and I noted in our additional views of the Panel’s 2010 Oversight Report that the repayment by the TARP recipients of advances received under the program is a misleading measure of the effectiveness of the TARP and therefore should serve— 

should not serve as the standard by which the TARP is judged. 

The unlimited bailout of Fannie Mae and Freddie Mac, by Treasury, in the purchase of $1.25 trillion of GSE, guaranteed mortgage 

backed securities, in the secondary market by the Federal Reserve, 

under its quantitative—first quantitative easing program no doubt 

materially benefited the TARP recipients and other financial institutions. These institutions were not required, however, to share the 

costs incurred in the bailout of the GSEs. 

In effect, the bailout of Fannie Mae and Freddie Mac permitted 

the TARP recipients to monetize their GSE guaranteed MBS at 

prices above what they would have received without the GSE guarantees and use the proceeds to repay their obligations outstanding 

under the TARP, thereby, arguably shifting a greater portion of the 

TARP from the TARP recipients themselves to the taxpayers. Costs 

such as this should be thoughtfully considered when evaluating the 

TARP. 

After reflecting upon the analysis conducted by the panel, its individual members and panel staff over the past two years, it is all 

but clear that the success or failure of the TARP remains an open 

question in that neither a favorable adjustment to the CBO subsidy 

rate, nor the repayment of the TARP funds by some recipients tells 

the entire story. It is critical to note that although the TARP 

played a meaningful role in the rescue of the U.S. economy during 

the closing days of 2008, its enduring legacy may have been to all 


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but codify the implicit guarantee of the ‘‘Too Big to Fails’’ notwithstanding the profound moral hazard risks arising from such action. 

The TARP, in essence, reinforced the bubble/bailout cycle as the 

government’s preferred business model. Along these lines, the 

panel offered the following observations in its June, 2010 report on 

the AIG bailout. And I quote, ‘‘The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace. 

By providing a complete rescue that called for no shared sacrifice 

among AIG’s creditors, the Federal Reserve and Treasury fundamentally changed the relationship between the government and 

the country’s most sophisticated financial players. The AIG rescue 

demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the 

collapse of America’s largest financial institutions and to ensure repayment to the creditors doing business with them. So long as this 

remains the worst effects of AIG’s rescue on the marketplace will 

linger.’’ 

Likewise, in its January, 2011 report on the rescue of General 

Motors and Chrysler, the panel noted, and again I quote, ‘‘Treasury 

is now on course to recover the majority of its automotive investments within the—within the next few years. But the impact of the 

actions will reverberate for much longer. Treasury’s rescue suggested that any sufficiently large American corporation, even if not 

a bank, may be considered Too Big to Fail creating a risk that 

moral hazard will infect the economy far beyond the financial system. Further, the fact that the government helped absorb the consequences of GM’s and Chrysler’s failure, has put more competently managed institutions at a disadvantage. For these reasons, the effects of Treasury’s interventions will linger long after 

the taxpayers have sold their last shares of stock of the automotive 

industry.’’ 

In closing, it is important to consider the reasons underlying the 

distinct unpopularity of and the stigma associated with the TARP, 

that the TARP helped to rescue the United States economy from 

financial collapse in the closing days of 2008 should not have 

served as a basis for the public outrage and scorn that shadows the 

program to this day. From my perspective the public rejected the 

program because hundreds of often profligate and ill-managed financial and other institutions, and their shareholders and officers 

receive taxpayer funded bailouts as well as other subsidies from 

the Treasury, the Federal Reserve and the FDIC on remarkably favorable terms. Many senior officers of these institutions retained 

their lucrative employment and although they generally suffered 

meaningful dilution, the shareholders and those TARP recipients 

were not wiped out. 

The publicly—public intuitively recognized that such policies 

were an anathema in a market economy when entrepreneurs and 

passive investors alike, retained their business investment profits 

without question, but are accordingly expected to bear their full 

losses with transparency and accountability and without subsidy. 

Main Street quickly realized that the TARP was heavily tilted in 

favor of Wall Street, while Main Street was stuck with dramatic 

rates of unemployment, neighborhoods decimated by foreclosure, 


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banks that refused to lend and the general sense that the residents 

were left on their own. 

Thank you. And I look forward to our discussion. 

The CHAIRMAN. Mr. Silvers. 


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STATEMENT OF DAMON SILVERS, DIRECTOR OF POLICY AND 

SPECIAL COUNSEL, AFL–CIO 

Mr. SILVERS. Thank you, Mr. Chairman. 

Good morning. This is the last hearing of the Congressional 

Oversight Panel. I would like to begin by expressing my gratitude 

to Senate Majority Leader Harry Reid and to House Minority Leader Nancy Pelosi for giving me this opportunity to serve my country. 

I would also like to express my profound gratitude to our chair 

and his predecessor, my dear friend, Elizabeth Warren, for their 

leadership of our panel. 

And also our—my gratitude to our staff, in particular our staff 

director, Naomi Baum, for all they have done over the last two and 

a half years to make our panel a success. 

Finally, I would like to thank my fellow panel members, Richard 

Neiman, Mark McWatters and Ken Troske. We have worked together as a team in a manner that is tragically rare in our national 

politics today and I’m honored to have been a part of that. 

Now today we hear from Acting Assistant Secretary Timothy 

Massad, from representatives of the key independent agencies that 

work together with Treasury on restoring financial stability and 

from some of the world’s leading economists and experts on financial crises. While I’m grateful to all of our witnesses for joining us 

today, I want to note that we have, in many ways over the past 

two and a half years, benefited from the advice and assistance of 

Secretary Massad, of Professor Stiglitz and Professor Johnson. And 

it is fitting that they should be with us today. 

Before I conclude my opening remarks, I think it’s appropriate 

for me to be clear what my final conclusions are about the TARP 

program. One, I believe TARP, through the initial investments in 

the large banks and in securitization markets primarily, was a substantial contributor to halting a global financial panic. It is, frankly, irresponsible, to suggest our nation would have been better off 

had we taken no action. 

Two, I believe, and there is overwhelming evidence to support my 

position in our February, 2009 report, that at the time these initial 

TARP investments were made, the public did not receive anything 

like full value for our money. However, over time the management 

of these assets and the execution of further transactions, by the 

team at Treasury managing TARP, became systematically fairer to 

the taxpayer. And the team at Treasury, Secretary Massad, his 

predecessor, deserve a great deal of credit for that. 

Three, the Paulson Treasury Department was not truthful with 

the public when it said that the Capital Purchase Program funds 

were only going to healthy institutions. And the Geithner Treasury 

Department has compounded this lack of candor by refusing to 

admit, in testimony before this panel, that Citigroup and Bank of 

America were on the verge of collapse when they received additional TARP funds in November, 2008 and January, 2009, respectively. 

Four, the failure to replace bank management, to do a rigorous 

evaluation of the state of bank assets and to restructure bank balance sheets accordingly has left the United States with weak major 

banks and a damaged sense of trust between the American public 

and our nation’s elected leaders. 


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Five, although more than half a million families have been 

helped by tarps foreclosure prevention programs, foreclosure prevention has been subordinated to the needs of the banks. The truth 

is that continued mass foreclosures of homeowners are a powerful 

source of systemic risk and downward pressure on our economy 

and on jobs. 

In December, 2008 this panel held its first hearing in Clark 

County, Nevada. We did so to make the point that the American 

people would judge TARP based not on the wealth of bankers but 

on the health of our communities. In December of 2008 unemployment in Southern Nevada was 9.1 percent. Today it is 14.9 percent. 

In December, 2008, 6.58 percent of all home mortgages in Nevada 

were delinquent. Today 10.06 percent are. 

The most recent statement of the Federal Reserve’s Open Market 

Committee states that quote, ‘‘The economic recovery is continuing, 

though at a rate that has been insufficient to bring about a significant improvement in labor market conditions. Growth in household 

spending picked up late last year but remains constrained by high 

unemployment, modest income growth, lower housing wealth and 

tight credit.’’ That is precisely the scenario that the majority of this 

panel warned in our April, 2009 report, would be the likely consequence of failing to restructure the major banks. 

Although this panel is going out of business, the task of managing TARP’s remaining programs, of regulating the banks, of overseeing systemic risk goes on. The mass foreclosures tragically continue, but it is never to late to act to make change. 

Thank you. 

The CHAIRMAN. Dr. Troske. 


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STATEMENT OF KENNETH TROSKE, WILLIAM B. STURGILL 

PROFESSOR OF ECONOMICS, UNIVERSITY OF KENTUCKY 

Dr. TROSKE. Thank you, Senator Kaufman. 

I would like to start by thanking the witnesses for appearing before the panel today. I recognize that all of you are very busy people with a number of other responsibilities, so I appreciate you taking time to come here and help us with our oversight responsibilities. 

Given the focus of this, our last Oversight Panel Hearing, it 

seems appropriate to comment on the overall impact of TARP and 

the financial rescue efforts in general. I was recently asked by a 

reporter whether my assessment of TARP would be different if 

TARP had ended up costing $356 billion, as was originally estimated, instead of the current estimate of $25 billion, one of the 

more creative questions I’ve gotten from a reporter. I answered 

that any complete assessment of the success of TARP needed to 

take into account a number of factors, such as the role TARP 

played in preventing a financial collapse, the risk taxpayers were 

exposed to at the time TARP was enacted, the long run impact 

TARP had—has—will have on the market and TARP’s effect on the 

likelihood of future financial crises. 

So while the actual cost of TARP is an important component, it 

is only one factor affecting ones evaluation of the success or failure 

of TARP. So my answer to the reporter was, ‘‘Yes, I could still view 

TARP as a success even if the program had cost taxpayers $356 billion.’’ 

Throughout the financial crisis the government’s actions were 

circumscribed by the expectations of the market that in the event 

of a financial crisis the government would bail out firms whose 

bankruptcy threatened to increase systemic risk. These expectations, of course, were based on past government bailouts of large 

financial firms. In fact, as I have argued previously, these expectations affected the severity of the financial crisis, since the market 

responded to these expectations by encouraging firms to grow until 

they became Too Big to Fail, thereby increasing the number and 

size of systemically risky firms in the economy and in turn increasing the amount of money needed to stem the financial crisis. Also, 

once they’d attained Too Big to Fail status, the bailout guarantee 

provided these firms gave them the incentive to increase their risky 

behavior, thus increasing the likelihood of a financial crisis. 

Ultimately, in my mind, the success or failure of TARP in particular and the overall financial rescue in general will hinge on 

whether we are able to eliminate the problem that caused the crisis, Too Big to Fail firms. Unfortunately, at least so far, it does not 

appear that we have taken the necessary steps to end Too Big to 

Fail. 

In my opinion, the first step in fixing the problem of Too Big to 

Fail firms is defining exactly what we mean by ‘‘systemically important firms’’ or ‘‘systemically important risks.’’ That way the market has a clear understanding of which firms will receive support 

in the next financial crisis and which will not. 

Then the government needs to start charging market based fees 

to these firms for insurance provided to them, through substantially higher reserve requirements, which has been advocated by 


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Professor Meltzer among others, by requiring firms to hold additional alternative reserves against their systemically risky holdings, as has been proposed by Professor Zingales, by charging firms 

by the bailout insurance along the lines proposed by the president 

of the Federal Reserve Bank of Minneapolis, or through some alternative mechanism which forces these firms to pay the cost of the 

insurance that is currently being paid for by the American taxpayers. 

Only by ending the taxpayer funded survival guarantee for large 

firms, both domestic and foreign, will we return basic market discipline to Wall Street and ensure that large financial firms face the 

same competitive pressures faced by firms operating on Main 

Street. In turn, this will ensure that future financial crises will be 

much less severe and the fixes to these crises will not involve putting trillions of taxpayer dollars at risk. 

Since this is our last hearing, there are some people I would like 

to note and thank for their work with the panel. First I would like 

to thank the panel staff and especially our executive director, 

Naomi Baum, for their work. Looking over the totality of the panel’s reports, one realizes this work will become one of the definitive 

sources of information about the financial crisis and this is largely 

due to the hard work, patience and dedication of our staff. 

I would also like to thank my fellow panel member, Mark 

McWatters for help—for the help he has provided me in becoming 

familiar what the issues facing the panel. Mark was always available when I needed someone to bounce ideas off of, which helped 

me develop and formulate my ideas about TARP. 

I would like to thank Senator Kaufman for the leadership he has 

provided over the last several months. Senator Kaufman’s guidance 

was important in helping the panel continue to build on the bipartisan spirit of cooperation we first developed under the leadership 

of former chair, Elizabeth Warren. 

Finally, I would like to offer a special thanks to the longest serving panel members, Richard Neiman and Damon Silvers. Richard 

has been part of 30 reports issued by the panel, while Damon has 

participated in 27. As someone who is exhausted after having participated in a mere 10, I can honestly say I don’t know how they’ve 

done it reading over and offering comments on three drafts of each 

one of these reports. Based on my observations, both Richard and 

Damon have performed these tasks while recognizing the important responsibility they had to represent and protect the interests 

of the American taxpayers. So as one of these taxpayers, I would 

like to say thank you. 

And the—and I would also like, in conclusion, to thank the witnesses once again for joining us and helping us with our discussion 

today. 

The CHAIRMAN. Thank you. 

Superintendent Neiman. 


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STATEMENT OF RICHARD NEIMAN, SUPERINTENDENT OF 

BANKS, NEW YORK STATE BANKING DEPARTMENT 

Mr. NEIMAN. Thank you. 

When the financial crisis hit in the fall of 2008, we had a Republican President and a Democratic Congress. This panel was created 

by that Congress to help hold the administration accountable in 

implementing the TARP program. There was no shortage of ideological objections from the Left and the Right when TARP was 

passed and there are no fewer today. But the American public’s 

concern, it seems to me, has been far less ideological or partisan. 

Rather, they have retained the pragmatic focus asking the question, ‘‘Is the investment of our money serving the public well?’’ 

It would have been difficult for this panel to assist with answering that question if we ourselves got distracted from it. Congress 

wisely placed both Democrats and Republicans on this panel to 

force us to be as pragmatic as the people we were appointed to 

serve. And our efforts toward that goal, over two years as the nation gained a new Democratic President and then gained a new Republican House of Representatives, remain the same. 

Our five different perspectives and backgrounds could have led 

to more disagreement than agreement and ultimately a failure to 

shed light and create accountability regarding the most complex financial issues of the day. But one of the things that I will personally take away from this experience of the last two years is a renewed optimism that people can still work together for the public 

good during increasingly partisan times. 

Even in the beginning, when ideology was at its height, prior 

panel members, Chair Warren, Congressman Hensarling and Senator Sununu who all had something important but different to contribute, found ways to come together. Elizabeth Warren deserves 

great credit for her leadership in the early days of this panel. 

We have not been perfect however, and our oversight was always 

finite. So if someone asked me, ‘‘What is the single most important 

public service we were able to provide,’’ I believe the answer could 

really only be one, I believe we helped empower the American public to fulfill their critical role as the true watchdogs of government. 

That’s why we consistently called for more public data and more 

transparency. We demanded more information on TARP expenditures, HAMP mortgage modifications, non-HAMP mortgage modifications, bank health in lending and other TARP related areas. 

Our goal was to attain information on a systematic basis communicated as clearly as possible. 

With this, people can assess what is happening today and others 

in the future can, with the benefit of time, truly assess what happened back in the first global financial crisis of the 21st century. 

So our monthly reports and hearings come to a close this month, 

but the end of TARP oversight does not. I would humbly encourage 

our skillful fellow oversight body, SIGTARP and the GAO and the 

many reporters and bloggers who so often got the facts right, to 

continue to focus on ways to empower the public with clear information that provides opportunity to understand and have an impact. 

The fact is that free markets work, but the other fact is, they 

don’t work as well as we would always like. The reason for this apVerDate Mar 15 2010 21:00 Mar 30, 2011 Jkt 065276 PO 00000 Frm 00030 Fmt 6633 Sfmt 6602 E:\HR\OC\A276.XXX A276

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parent inconsistency is often the lack of broadly available information that allows market participants and consumers to create fully 

functioning markets. We need continued light shedding oversight 

and reforms to make free markets work, it’s simply good for the 

housing market, the financial market and the greater economy. 

I’d like to conclude by thanking today’s witnesses for their past 

and current support of our work and by thanking all our earlier 

witnesses. I feel particularly compelled to express great gratitude 

to my colleagues, Ken, Mark, Chairman Kaufman and Vice-Chair 

Silvers for solidifying a belief that people with different philosophies can still work together for greater good in Washington, D.C. 

Thank you. I look forward to our questions. 


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The CHAIRMAN. Thank you. I’m pleased to welcome Timothy 

Massad, the acting assistant secretary of the Office of Financial 

Stability and thank him for joining us. He was here at the beginning. It’s like bookends, it must be interesting to be at the beginning and the end. 

We ask that you keep your oral testimony to five minutes, that 

we will have adequate time for questions. Your complete written 

statement will be printed in the official record of the hearing. 

Please proceed with your testimony. 

STATEMENT OF TIMOTHY MASSAD, ACTING ASSISTANT SECRETARY FOR OFFICE OF FINANCIAL STABILITY, U.S. DEPARTMENT OF THE TREASURY 

Mr. MASSAD. Thank you, Mr. Chairman. 

Chairman Kaufman, Members McWatters, Neiman, Silvers and 

Troske, thank you for the opportunity to testify today about the 

continued progress of the Troubled Asset Relief Program. 

As this is your last hearing, I want to begin by thanking you and 

your staff for your hard work in overseeing TARP. Your reports 

have provided useful insights and your suggestions and questions 

have helped us refine and strengthen our programs. TARP is a success story today, and it was made possible by the tireless efforts 

of countless people, not only at Treasury, but also at COP and the 

other oversight bodies. 

And as you noted, there is some irony or symmetry to this moment. I appear before you today as the Acting Assistant Secretary 

for Financial Stability, but I began my work on TARP with you in 

December, 2008, when I volunteered as your special legal advisory, 

to help prepare the first of your nearly 30 reports. It has been an 

interesting journey for all of us and I’m—think we can fairly conclude that the journey, the program, was successful by any objective measure. 

First, TARP helped prevent a catastrophic collapse of our financial system and economy. In the fall of 2008 we were staring into 

the abyss, now we are on the road to recovery. TARP was not a 

solution to all of our economic problems, and there is still more 

work ahead. Unemployment remains unacceptably high and the 

housing market remains weak, but the worst of the storm has 

passed. 

Second, we accomplished all this using much less money than 

Congress originally provided and we are unwinding TARP faster 

than anyone thought possible. Congress authorized 700 billion, but 

we will spend no more than 475 billion and we have already recouped two-thirds of what we have spent. 

Third, the ultimate cost of TARP will be far less than anyone expected. The total cost was initially projected to be approximately 

341 billion. According to the latest estimates, both from Treasury 

and the Congressional Budget Office, the overall cost of TARP will 

be between 25 and 50 billion and most of that will represent the 

money we spend to help responsible American families keep their 

homes. 

Finally, our financial system is in far better shape today than before the crisis. It is stronger and on a path to recovery and Congress has adopted the most sweeping overhaul of our regulatory 


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structure in generations, which will give us tools we did not have 

in the fall of 2008. This work is not yet complete, but we have 

made great progress since this panel held its first hearing. 

TARP was a bipartisan success. The Bush Administration acted 

quickly and decisively to stop the panic and when this Administration took office we adopted a broad strategy to restore economic 

growth, free up credit and return private capital to the financial 

system. Today people no longer fear that our financial system is 

going to fail. Banks are much better capitalized and the weakest 

parts of our financial system no longer exist. The credit markets, 

on which small businesses and consumers depend, have reopened. 

Businesses are able to raise capital and mortgage rates are at historic lows. 

We have moved quickly to reduce the dependence of the financial 

system on emergency support. We have already recovered almost 

all of the funds invested in the banking system. And w this Administration provided funds to particular companies, we did so with 

tough conditions. Those companies are stronger today and have already—and we have already begun to recoup those investments. 

For example, the assistance we provided to AIG, one of the government’s most controversial actions, was necessary because the 

failure of AIG, at that time, in those circumstances, would have 

been catastrophic to our financial system and our economy. Now 

barely two years later the company has been restructured and the 

taxpayers are in a position, potentially, to recover every dollar invested, an outcome that many thought impossible back then. 

Similarly, we’ve provided assistance to General Motors and 

Chrysler on the condition that they fundamentally restructure 

their businesses. Our actions helped prevent the loss of as many 

as one million jobs and have helped restore the companies and the 

industry to profitability. And we have completed a highly successful initial public offering of GM and we are working to exit our investments in Chrysler and Ally as well. 

Finally, I want to address our efforts to help responsibility but 

struggling American homeowners. By reducing mortgage rates and 

providing sensible incentives to prevent avoidable foreclosures, our 

policies have helped hundreds of thousands of families stay in their 

homes and have helped to change the mortgage servicing industry 

generally. We have not helped as many homeowners as we originally estimated, and much work remains to be done. But we remain committed to do so, to helping as many eligible homeowners 

as possible in a manner that safeguards taxpayer resources and we 

hope the panel will continue to support these efforts. 

Mr. Chairman and panel members, TARP succeeded in what it 

was designed to do. It brought stability to the financial system and 

it laid the foundation for economic recovery. Our comprehensive 

strategy and decisive action made our economy far stronger today 

than it was two years ago. We are proud of our actions and we appreciate all the help you’ve provided along the way. 

Thank you again for the opportunity to testimony and I welcome 

your questions. 

[The prepared statement of Mr. Massad follows:] 


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The CHAIRMAN. Thank you, Mr. Secretary. There’s a lot of different reasons for this hearing and the last hearing and this report 

we’re going to come out. And we’re going to go back in history and 

what happened and the rest of it. What I’d like to focus today in 

my questions, as I said in my opening statement, is kind of what 

have we learned. What are the lessons learned? What—kind of— 

you know, we get in this kind of situation again, coming back, what 

did we learn? 

Now this is difficult to do because when TARP was originally set 

up, as I said in my opening statement, you—everybody at Treasury, everybody at the Fed was under incredible pressure. I mean 

the place was going down and going down fast. A lot of decisions 

were made. And I’m—this is not—I’m not here to be a Monday 

morning quarterback and go back and look at those decisions, although I’m sure other panel members will ask that and it will be 

in our report. 

But in term of lessons learned, going forward, if in fact you were 

summing up, we made some mistakes and things didn’t turn out 

the way we wanted to, in the area of moral hazard, which everyone, I think, has referred to, what do you think? What does Treasury believe could have been done, would have been done or you 

would do differently if, in fact, you were faced with this problem 

again, to mitigate the moral hazard? 

Mr. MASSAD. Mr. Chairman, that’s a very good question and 

something we’ve thought a lot about. I think the main lesson we 

learned is that we did not have the tools to deal with this crisis, 

at the time. And that is what, unfortunately, necessitated this program, which no one really wanted to have to do but we had to do 

it. We have now passed Dodd-Frank, the most comprehensive overhaul of our regulatory system, which I think gives us a variety of 

tools that should enable us to minimize and prevent these sorts of 

conditions again. 

Now, much work remains to implement that. But to me that is 

the principal lesson that we learned and that is the principal way 

we are trying to address the moral hazard issue, which many of 

you have, so rightly, noted. 

The CHAIRMAN. I mean just for the record, specifically what in 

Dodd-Frank do you think would reduce moral hazard? 

Mr. MASSAD. Well, I think the fact today that we have resolution 

authority, with respect to non-bank institutions, the fact that we 

have a manner for regulating systematic risk, the fact that we have 

the Office of Financial Research, Financial Stability Oversight 

Council, we have higher capital standards. All of those measures, 

I think, enable us to say that we now have the tools to try and prevent and minimize the effects of crises like this in the future. And 

therefore, render the sort of assistance we had to provide under 

TARP unnecessary. 

The CHAIRMAN. How about the method of the assistance? 

Mr. MASSAD. I’m sorry? 

The CHAIRMAN. How about the method of the assistance, how 

would that have changed with Dodd-Frank? How would you— 

would you have done it differently? 

Mr. MASSAD. Well, I think Dodd-Frank, for example, gives you 

the tools to dismember a non-bank financial firm. We didn’t have 


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that, that was one of the problems with the situation we confronted 

with AIG. So I think now we have that authority. 

The CHAIRMAN. And do you have any idea why most people believe, and you listen to economists talk about it of all parts and 

spectrum believe that we still have banks that are Too Big to Fail, 

that our major financial institutions that are Too Big to Fail? 

Mr. MASSAD. I think obviously the moral hazard issue is a very 

serious one and it’s one we have to continue to look at and address. 

I think though, the focus should be now on implementing DoddFrank. 

The CHAIRMAN. No, I got that. I’m just—and I understand that, 

but I’m just trying to figure out what you learned, that specifically 

you would do. And you’re saying essentially you have implemented—you have, in Dodd-Frank, all the things that Treasury 

would like to have had that could have helped them resolve this 

and eliminate—— 

Mr. MASSAD. I don’t know. 

The CHAIRMAN [continuing]. Eliminate moral hazard or mitigate 

moral hazard. 

Mr. MASSAD. Mr. Chairman, I guess I would say we have all the 

tools Congress decided to give us. 

The CHAIRMAN. Yeah. Well that’s—this is your chance to tell— 

to say—this is your chance to lay out everything that wasn’t included in that bill that you would have liked to have had, if in fact 

we were moving forward with this. 

Mr. MASSAD. Well, I don’t know that I want to re-litigate the battle over Dodd-Frank. I think the main thing is that we did achieve, 

in a very short time, a dramatic overhaul and I think our focus 

should be on implementing that. Now, we may, at a future date, 

look at was that enough, do we need to do more. I think those are 

very good questions and we’ll continue to address those. 

The CHAIRMAN. How about—you know, one of the—and again, I 

think most of the panelists mentioned this, there is a widespread 

perception, not perception, I think it’s personally a reality, that 

Main Street did a lot worse than Wall Street on this. Are there 

some things that TARP, that Treasury could have done in the beginning of this program to kind of—more better balance between 

what was going to Main Street, the benefits would accrue to Main 

Street as opposed to Wall Street? 

Mr. MASSAD. I guess I would say this, Mr. Chairman. I think the 

main benefit to Main Street of this program was that we did stop 

the panic. And again, when I say ‘‘this program’’ I should say in 

conjunction with all the other actions that were taken, because it 

wasn’t just TARP, but we did stop the panic and we did prevent 

a second Great Depression, which could have resulted, as many 

economists have estimated, of rates of unemployment of 16 percent, 

20 percent possibly even higher. It also allowed us to start to get 

credit flowing again. Those are the main benefits to Main Street. 

Now obviously particular programs also had direct benefits. 

Under the Capital Purchase Program we invested in 400 to 500 

very small banks, banks that small businesses and communities 

depend on. 

I agree with you that the perception was that this program provided support to Wall Street and many people didn’t think it did 


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much for them. I understand that. This is still a very tough economy and people that are unemployed or in danger of losing their 

homes feel that way. We understand that and that’s why I say 

there’s still a lot of work to be done. 

The CHAIRMAN. I’ll revisit this, but it’s not a tough economy on 

Wall Street. It’s a tough economy everywhere else, but it’s not a 

tough economy on Wall Street. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you, Senator. And welcome again, Mr. 

Massad. 

Following up on Dodd-Frank, if I may quote and I hope I’m not 

quoting out of context, which is always a risk here, Professor 

Stiglitz’s testimony. He says, ‘‘Resolution authority has made little 

difference because few believe that the government will ever use 

the authority at its disposal with these Too Big to Fail banks.’’ 

So we have Dodd-Frank, we have a blueprint to take down not 

only financial institutions, which we had the authority under FDIC 

to do before, but now AIG and others. Will there be the courage in 

a time of panic to actually do this, to actually take them down, as 

opposed to just simply writing a check with another bailout? 

Mr. MASSAD. Mr. McWatters, I would certainly hope so. And I believe now that these tools are very good ones. But obviously it remains to execute on this, it remains to promulgate the regulations 

necessary and to act. And it will require regulation that is nimble. 

It will require regulation that is responsive to changes in the industry as we go forward. But I think we’ve come a long way and 

I think we should give these tools a chance to work before we 

judge. 

Mr. MCWATTERS. And I know in one of the footnotes to my opening statement I make the observation that there was not the courage to take down some of the most insolvent financial institutions 

in early to mid 2009. I don’t mean the last quarter of 2008 when 

the markets were frozen, okay, that might unto itself have sent a 

different message. But once the markets had stabilized in the last 

quarter of 2008, begun to stabilize more in 2009 and certain institutions came back and said, ‘‘You know, oh by the way, we’re still 

insolvent, we’re still insolvent by the tune of many billions of dollars,’’ at that point there were rules on the books of the FDIC to 

take down these institutions and they were not. 

So it really makes me question that now you have new rules for 

new institutions, when it comes right down to it will this happen 

or will simply more checks be written and as more questions are 

written, more moral hazard will be created. Any thoughts on that? 

Mr. MASSAD. Certainly. You refer to events in 2009, the Obama 

Administration did not provide a single dollar to a large bank. 

Most of the money provided to the banks was provided under the 

Bush Administration, decisions with which I agree. I think they 

made the right decisions under the circumstances, though I was 

not involved in those. The Obama Administration provided $11 billion in additional funds to banks, most of that went to small banks. 

Where we provided assistance to additional firms, we did so with 

tough conditions. I think if you look at what we did with the auto 

industry, we imposed some very tough conditions that required 

them to restructure. Those companies—GM is now profitable, postVerDate Mar 15 2010 21:00 Mar 30, 2011 Jkt 065276 PO 00000 Frm 00049 Fmt 6633 Sfmt 6602 E:\HR\OC\A276.XXX A276

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ed the first full year profit since 2004. Chrysler has an operating 

profit. 

So I don’t think there was a lack of courage. I think we acted 

very forcefully and decisively. 

Mr. MCWATTERS. Yeah, but there were other actions going on 

underneath the surface, underneath TARP, which admittedly 

TARP was grabbing most of the headlines, that the FDIC was taking certain actions, the Federal Reserve was taking certain actions. 

Quantitative easing, one where the Federal Reserve purchased a 

trillion plus dollars of mortgage-backed securities, governmentbacked, mortgage-backed securities which would not have been 

purchased at a fair market value if Fannie and Freddie had been 

permitted to fail. So the bailout of Fannie and Freddie seems to me 

to have a direct correlation to the health of financial institutions 

and their ability to pay back the funds. So I mean there were a 

number of things going on here. 

Mr. MASSAD. Be happy to respond to that. You’ve raised a number of interesting points. First of all, I agree with you and with 

your opening comment that one must look at the cost of this, in 

terms of all the government programs, not simply TARP. But when 

you do that, the overall cost currently estimated is at about one 

percent of GDP, which is far less than the cost, for example, to resolve the S&L crisis. 

Secondly, you mentioned pricing of credit. In a crisis the government is acting because private capital isn’t flowing. So we are pricing that under what the market would otherwise charge, because 

the market isn’t stepping up. The trick is to still price it properly 

so that we don’t encourage excessive reliance on it, number one, 

and to impose conditions so that we don’t create a bigger moral 

hazard problem than is necessary. I agree that any government assistance comes with a moral hazard problem. But I think we did 

that and I think, again particularly when the Obama Administration launched the stress tests and provided the Capital Assistance 

Program, we said that is going to come with very tough conditions. 

No one took the money. 

Mr. MCWATTERS. My time is about up, but I’ll just leave it by 

saying that I think that there were some private market participants. Mr. Buffett and another—among others who, you know, cut 

better deals. So. 

The CHAIRMAN. Thank you. 

Mr. Silvers. 

Mr. SILVERS. Mr. Secretary, first before I ask you any questions 

I wanted to just expand a moment on my opening remarks in respect to your work and the work of your predecessor. 

I think it’s no secret that I have been critical of the economics 

of TARP transactions, but I want to, on the record, commend you 

and your predecessor for the work you’ve done since the spring of 

2009 in managing—in a.) in managing TARP’s—the TARP assets 

that you, so to speak, inherited and in the execution of the transactions that occurred since you and your predecessor came to work 

managing the TARP. I think particularly of the improvement in the 

economics from the public’s perspective of the warrant repurchases 

and the way in which both Citi and AIG’s investments have been 

managed, as purely as investment assets. So I want to make clear 


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that I think you all have done a fine job in that respect and the 

overall cost numbers that you’ve been citing are substantially driven by that achievement. 

Now I want to turn to I think the exchange you just had with 

my colleague, Mr. McWatters, because I think that it’s important 

in this final hearing to maybe shine a light on a couple of key moments in the history of the TARP. Do you agree that when the 

Obama Admin—I take your point and I’ve noted it for a long time, 

that under the Obama Administration there was not significant additional capital infused into large banks. Do you agree though, that 

there was a set of decisions made by the Obama Administration 

about what to do about the large banks and the government’s investments in TARP in the early months of the Obama Administration? 

Mr. MASSAD. There were decisions made by Treasury and by the 

regulators. But as you note, with respect to the Obama Administration and Treasury in particular, under TARP, we inherited those 

investments and our focus was on managing those investments and 

exiting them. The regulators really had the primary responsibility 

to look at the health of those institutions and—— 

Mr. SILVERS. Mr. Secretary, that’s not exactly what I was asking 

you. 

Mr. MASSAD. Okay. 

Mr. SILVERS. The Treasury Department released a plan in the 

early spring of 2009, which included the stress tests, the stress 

tests were the centerpiece of that plan. 

Mr. MASSAD. Yes. 

Mr. SILVERS. All right. The regulators executed that plan in substantial part, but it was an Administration and Treasury Department plan. 

Mr. MASSAD. Absolutely. 

Mr. SILVERS. Is that correct? 

Mr. MASSAD. Yes, that’s correct. 

Mr. SILVERS. Now, that plan appears to me to represent a key 

strategic decision moment, right, for the Administration. Can you 

explain a little bit about—can you amplify that a little bit if you 

agree that that’s true, about what those strategic decisions were 

that were made at that moment—— 

Mr. MASSAD. Certainly. 

Mr. SILVERS [continuing]. By the current president’s administration? 

Mr. MASSAD. Certainly. It’s a very good question. A central component of the financial stability plan was to recapitalize the financial system with private capital as efficiently as possible. And to do 

that we worked with the regulators to formulate the stress test for 

the largest 19 bank holding companies. And those tests were done 

with extraordinary and unprecedented transparency, because without those tests the market was not willing to reinvest in these institutions. 

I think the record of those stress tests and what followed is evidence of the success. Banks were able to raise a large amount of 

private capital following the results of those tests. So I think it was 

a very good strategy and executed successfully. 


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Mr. SILVERS. I would just observe that I think the nub of Mr. 

McWatters’ dispute with you and perhaps another my—of my evaluation of TARP has to do with that moment and that set of decisions, in respect to the question of restructuring banks and the 

like. I don’t want to spend what time we have arguing about that, 

but I want to make clear on the record that that, I think, is the 

key question. 

Can I just ask you, before my time has expired, what are your, 

going forward as this panel goes out of business, what are your 

greatest concerns? What worries you, both about TARP and about 

the issues TARP was designed to address, financial systemic stability? 

Mr. MASSAD. I’m very focused on our housing programs. We have 

not helped as many people as we would like. But I think the programs are very important and continuing to help tens of thousands, 

and I’m very concerned about efforts to eliminate those. I think 

without those programs many, many Americans who otherwise 

could be helped into an affordable mortgage will not have that opportunity to do so. 

Secondly, I’m very focused on managing and exiting our remaining investments as quickly as we can. I think it’s very important 

to get the government out of the business of owning stakes in private companies. I think we’ve got a very good record there, we’ve 

made a lot of progress, but we still have more work to do. And in 

particular, with respect to our smaller banks, their path to recovery 

has been a little harder and we need to continue to work with them 

on that. 

Mr. SILVERS. All right. Thank you. My time has expired. 

The CHAIRMAN. Dr. Troske. 

Dr. TROSKE. Thank you. I better turn on my mic. Thank you. 

I want to come back to one—hopefully come back to some of Damon’s and Mark’s questions about stress tests, but I wanted to 

start by talking more about TARP mandate. 

As you know, in addition to the core goal of restoring stability 

and liquidity to the financial system, the legislation directed Treasury to consider such goals as maximize overall returns and minimize the impact of the national debt, protect American jobs, savings and retirement security, help families keep their homes, stabilize communities, and on and on. 

Do you think that TARP, the mission of TARP was too broad? 

And do you think that this broad mandate clearly, I think a number of people have indicated, in terms of stemming the financial 

crisis, many people would agree that it would be a success. We are 

going to hear from some economists later. It’s these other things 

that seem to be where the economy is still struggling. And by trying to throw all of that into a single piece of legislation, do you 

think that in some sense that doomed TARP to get the stigma that 

it has today? 

Mr. MASSAD. That’s a very good question, Mr. Troske. We interpreted the considerations that you’ve referred to as things that we 

should take into account in how we went about executing the authorities we were given. The authorities we were given were narrower than that. The authorities we were given were to purchase 

troubled assets from financial institutions. We weren’t given $700 


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billion and told—reduce the unemployment rate in any way you see 

fit. We were given a specific mandate to promote the stability and 

liquidity of the financial system. We were given the authority to do 

that through the purchase of troubled assets. And in doing so we 

were supposed to take those other considerations into account. 

I agree with you though, that because of the breadth of those, 

many people did feel it was up to TARP to resolve all of these economic problems, very important economic problems that we need to 

resolve. But I don’t think it was the job of TARP to do that alone. 

Dr. TROSKE. And I guess, I mean do you think Treasury has done 

a good job of communicating its actions regarding TARP to the public? You know, are there areas or programs within TARP where 

Treasury—you feel Treasury could have done a better job articulating its objectives, similar to what you just said to me? 

Mr. MASSAD. Sure. Again, a very good question. I think we certainly could have done a better job explaining what we were doing, 

explaining why we were doing it. I think there is a tendency, where 

you’re very focused on a crisis like this and taking action, to assume that people know a lot about what you’re doing or know more 

than they may know. You know, I recognize most people in this 

country don’t follow what goes on in Washington day by day the 

way many of us who live in Washington do. They’re focused on 

their families, their homes, their jobs, keeping their homes, keeping 

their jobs, getting their kids through school. And yeah, we certainly 

could have done a better job communicating what we were doing. 

Dr. TROSKE. I want to return to the questions about the stress 

test. So I don’t know whether you saw there was a column in 

Wednesday’s New York Times alleging that banks supplied the 

measures that were used in the latest round of stress test, ensuring that they would look good and rendering the tests rather meaningless. 

I think part of this comes from the fact that these latest rounds 

of stress tests, the results have been kept somewhat private and 

were not as public as the first time around. And I guess I want you 

to maybe address why, and obviously this is the Fed’s decision, not 

Treasury’s, but whether Treasury pushed the Fed to make them 

public, what are the benefits and costs from making these results 

public and do you have any idea why the Fed has tended to think 

that the benefits were less than the costs in making the results 

public. 

Mr. MASSAD. Well as you know, the current round of stress tests 

is being conducted by the Fed. It was designed by the Fed. I had 

no involvement in it and Treasury generally did not, to my knowledge. So I can’t really answer why the Fed structured it the way 

they have or their decisions about what they were going to publicize. Other than the fact that, I would note the following: Traditionally bank supervisory information and the testing that our regulators do, and they do it on an ongoing matter, is not made public. 

The exception was the stress tests of the spring of 2009. And we 

did that at that time, just given the gravity of the crisis. 

Dr. TROSKE. But as you noted, you attributed a lot of success to 

that. One would have thought we would want to follow up with 

that success. 


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Mr. MASSAD. Well, I think again, one has to do extraordinary actions in a crisis and I think in the crisis it was appropriate to conduct those stress tests with the transparency with which we did. 

But I think there are good reasons why we have a model in this 

country of bank regulation and supervision in which a lot of the detailed information is not made public, but certain conclusions and 

other information is made public. 

Dr. TROSKE. I’ll note that we—one of our later panelists is a 

Nobel Prize winning economists who won his Nobel Prize for his 

work on asymmetric information so I think it’s going to be interesting to hear his take on keeping information secret. 

Mr. MASSAD. I look forward to that. Unfortunately I cannot stay, 

but I look forward to reading the transcript later, of both the panels that follow. 

The CHAIRMAN. We will send you the transcript. 

Superintendent Neiman. 

Mr. NEIMAN. Thank you. 

Mr. Massad, thank you very much for your role. I was here when 

you volunteered your work on the COP panel, which was very helpful at the time. I also very much appreciate the fact that you continued in that role when asked to serve by the Treasury Department. I also want to acknowledge the work of your predecessor, 

Herb Allison for his efforts and his coordination with this committee. 

I want to follow up with your answer to Damon’s question about 

what worries you the most. The first point you mentioned was related to the housing programs and your concern that those could 

be eliminated. 

This is my area of interest because this week there were calls 

from lawmakers to eliminate Treasury’s foreclosures mitigation 

programs. Some have referred to the approximately $50 billion set 

aside to American homeowners, as a waste of money. But few mention that very little of the money has actually been spent, and that 

lack of spending frustrates those of us who believe that effective 

government investment into the housing market is essential for 

further financial stability and economic recovery. 

But with only $1 billion spent on the HAMP so far, as estimated 

by the CBO and nearly 600,000 mortgages permanently modified, 

it’s difficult to conclude that HAMP has been a waste of money. 

Even just as a back of the envelope estimate, that’s around $2,000 

per permanent mod and we know that there are certainly other 

more complicating factors, re-default rates and servicer incentives 

and the role that the GSEs have played. 

But, could you comment, from a cost benefit of analysis—— 

Mr. MASSAD. Sure. 

Mr. NEIMAN [continuing]. As to the value of those dollars spent 

on those 600,000 permanent mods? 

Mr. MASSAD. Sure. I think it’s been dollars very well spent. First 

of all, let me say that the money, as you know, is spent over time 

for once there is a permanent modification of a mortgage, the payments are made over time as long as the homeowner continues to 

make his or her payments. And you know, we estimate basically 

that over time a permanent modification will cost the government 

about $20,000. So we’ll see that number go up and as long as we 


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can continue to roll out the program we expect that, you know, 

more people will enter. We’re getting 25,000 to 30,000 additional 

permanent modifications a month. Keep in mind also that we have reallocated some of that $50 bil- lion, it’s actually $46 billion total, but we reallocated some of that 

to other programs, to the Hardest Hit Program, to the FHA Short 

Refinance Program and there are other subprograms within Making Home Affordable. So we’re looking at the total cost that we 

think will be spent, it will be below the $46 billion, but it will be 

significantly higher than where we are today, of course. 

Mr. NEIMAN. Could you talk to the benefits of those programs, 

both to the borrowers, I think—— 

Mr. MASSAD. Sure. 

Mr. NEIMAN [continuing]. Which are more obvious, but also to 

the underlying economy? 

Mr. MASSAD. Certainly. Certainly. You know, this is the worst 

housing crisis that we’ve seen since the Great Depression and what 

we’re trying to do through these programs is to help people modify 

their mortgage where it makes economic sense to do so. And by 

doing so you avert a lot of costs. A foreclosure, for any family that 

goes through it, is obviously a terrible economic loss, it’s also a 

great social and—or great psychological and emotional loss. It’s a 

loss to the community, the community suffers from it because 

neighboring house prices fall, particularly where you have a vacant 

home that can be then subject to vandalism, that hurts the community. 

So, you know, this situation is a drag on our economy as a whole. 

So the more that we can help people get into sustainable modifications, which is the focus of our program, it’s not simply kicking the 

can down the road, as some people have alleged, we’re helping people get into a sustainable situation, I think our country is much 

better off. 

Mr. NEIMAN. And before my time expires, could you comment on 

the impact of ending those programs would have on the economy? 

Mr. MASSAD. Certainly. I think it means that tens of thousands 

of people that could otherwise get help directly will not get that 

help. In fact more—— 

Mr. NEIMAN. And what of the impact on non-HAMP mods? Do 

you see a direct correlation—— 

Mr. MASSAD. Absolutely. 

Mr. NEIMAN [continuing]. If the HAMP program ended? 

Mr. MASSAD. I think—excuse me. Absolutely. I think one of the 

things that our program has done is it has set standards that have 

now been followed by the industry widely. There were no modifications getting done prior to the launch of this program. We’ve set 

standards, not only for how do you do a sustainable modification, 

what should be its terms, but also standards for borrower protection. Dual track, for example, the procedure where some of the 

servicers were talking to a homeowner about a modification at the 

same time that they were foreclosing. It’s very, very confusing to 

the homeowner and very frustrating. 

Mr. NEIMAN. And the elimination of that program could certainly 

jeopardize the standardization, the focus on those? 

Mr. MASSAD. Absolutely. Absolutely. 


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Mr. NEIMAN. Thank you. My time has expired. 

The CHAIRMAN. Thank you. 

Just to finish up on the moral hazard. I saw a quote, because as 

you—as everybody’s pointed out, it’s really a government problem. 

I saw a quote by Secretary Geithner and I just thought—right here 

in Financial Times, on January 14th, he said, ‘‘In the future we 

may have to do exceptional things again if we face a shock that 

large. You just don’t know the systemic, not until you know the nature of the shock.’’ 

Is this kind of backing away from the fact, no time, no way, no 

are we ever going to bail any bank out again? 

Mr. MASSAD. Chairman, it’s a very good question. The Secretary—I’ve talked to the Secretary about that statement—— 

The CHAIRMAN. Yeah. 

Mr. MASSAD. And he was referring to the use of the tools under 

Dodd-Frank. I think it’s clear that we don’t know what the next 

crisis will be. And as I said earlier, we believe that the tools that 

we now have under Dodd-Frank give us the ability to minimize the 

effects, but it requires, as I say, effective implementation and use 

of those tools. 

The CHAIRMAN. Is there any concern that—widespread belief 

that there still are banks Too Big to Fail. The market seems to indicate by the spreads that they give to the larger banks, that 

they’re Too Big to Fail, that people all over the world are trying 

to figure out. I know there’s a new study going to come out on resolution authority across borders, which has not been dealt with in 

Dodd-Frank and would be an incredible problem. Does any of that 

kind of concern you in terms of moving forward, with moral hazard? 

Mr. MASSAD. Certainly concerns me. I think the moral hazard 

issue is obviously a very, very significant one. And as you all have 

noted, it’s a very significant issue in light of what we had to do 

under TARP. But, again I think it’s up to us now to take the tools 

that Congress has given us and work to minimize that risk. 

The CHAIRMAN. One of the frustrations I think that people—I 

mean not just people, everyone has, it’s not just me, everyone, and 

that is the fact that, you know, we went in, we helped out the 

banks, we helped out the corporations and then the jobs just didn’t 

come, the investment didn’t come, the banks held on to the money, 

they’re still not investing the money, the corporations didn’t invest 

the money. Is there some way that TARP could have been structured to—I mean it sounds an awful lot like trickle down to a 

whole lot of people that didn’t trickle. 

Mr. MASSAD. Um hmm. 

The CHAIRMAN. And so is there any way that you think, looking 

back on it, that TARP could have been structured so that it would 

be a better chance that we’d actually get economic growth and jobs 

for small business and for regular people? 

Mr. MASSAD. I think that the key thing was that TARP alone 

wasn’t enough. 

The CHAIRMAN. No, I mean but again, we’re just focusing on 

TARP. 

Mr. MASSAD. Um hmm. 


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The CHAIRMAN. Could TARP have been structured, do you think, 

in some way so that we would have at least mitigated that if not 

eliminated it? 

Mr. MASSAD. Yeah. You know, I think policymakers, historians, 

probably this panel will explore that issue. I think it’s one we 

should explore. Sitting here today, you know, I’m very focused 

on—— 

The CHAIRMAN. Right, I got it. 

Mr. MASSAD [continuing]. Exiting the program and wrapping it 

up. 

The CHAIRMAN. One final thing. But one of the simple things was 

the panel I know right in the beginning said that there should be 

better support tracking of funds. And I know we’ve been concerned 

about the transparency of tracking where the funds went. Do you 

think, in retrospect, again the time, it was a tough time, 

everybody’s running around. But now looking back in the calm of 

two years, two and a half years later, do you think maybe it would 

have been a better—good idea to track the funds better? 

Mr. MASSAD. Well, you know, we implemented the recommendations of SIGTARP in this regard. It was done, you know, later after 

a lot of the money went out the door. 

You know, on the lending point though, I would simply note, as 

I think this panel noted in a very excellent report, that the lending 

issue is not simply a supply of capital issue, it’s also a demand 

issue, it’s also a regulatory issue. In other words, the level of lending in this country and how you get that back up. And you’re going 

to see that fall in a recession. 

So these are complex problems and while it may be that we could 

have done things differently under TARP, I think that, you know, 

the focus now should be to work with the tools we have and try 

to process—— 

The CHAIRMAN. No, I have that. What I’m trying to get at is kind 

of a history so that if we go, start over again, god forbid anything 

like it should ever happen again, we’re not starting without some 

of the best suggestions. So my question—and you can think about 

that, maybe you want to get back to me on that, kind of what are 

some of the things that we could have done to have mitigated that. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you, Senator. 

If I may, I will go back to the written testimony of Professor 

Stiglitz, first page, and I’ll read a quote and would like to hear 

your comments. Towards the bottom of the first paragraph Professor says, ‘‘The normal laws of capitalism where investors must 

bear responsibility for their decisions, were abrogated. A system 

that socializes losses and privatize gains is neither fair nor efficient. Admittedly, the big banks were given money—were given 

many enormous gifts,’’—and he uses the term gifts—‘‘of which 

TARP was only one. The United States government provided 

money to the biggest of the banks in their times of need, in generous amounts and on generous terms but have been forcing ordinary Americans to fend for themselves.’’ 

Would you care to comment on that? 

Mr. MASSAD. Certainly. Well, first of all, I agree that we need to 

have a financial system where firms can fail, regardless of how big 


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they are. The question is, when you were in the midst of the crisis 

that we faced, in the fall of 2008, what should we have done? And 

again I think the actions taken were appropriate in light of the situation that we confronted and the tools we had. But we obviously 

have to work toward a system where that never becomes necessary 

again and where firms do fail if they have taken excessive risks. 

Mr. MCWATTERS. Okay. Moving to the testimony of Professor 

Zingales. Page 3, I read from the last full paragraph of the page, 

‘‘TARP was the largest welfare program for corporations of its—and 

their investors ever created in the history of humankind. That 

some of the crumbs have been donated to auto worker unions does 

not make it any better, it makes it worse. It shows that this redistribution was no accident, it was premeditated pillage of defenseless taxpayers by powerful lobbyists.’’ 

Do you agree with that or do you not agree with that? 

Mr. MASSAD. I don’t agree with that. 

Mr. MCWATTERS. Okay. On what basis? 

Mr. MASSAD. Again, I think that we were confronted with an extraordinary situation in the fall of 2008 and we took actions that 

were necessary to prevent the collapse of our financial system 

which would have had terrible effects for everyone in this country. 

And I think the actions we took succeeded in doing that. 

Mr. MCWATTERS. You know, I don’t think—my time is up, but I 

don’t think either one of these gentlemen is saying that in October 

of 2008 the response by the United States Government was to do 

nothing. Okay? But it’s more of a nuance issue as to, okay, once 

the meltdown threat is over, just a few months later, which from 

our recollection, then we need to be able to turn on a dime and 

maybe apply the rules somewhat differently. 

But, my time is up and I’ll end there. 

The CHAIRMAN. Thank you. Mr. Silvers. 

Mr. SILVERS. Mr. Secretary, we’ve had a lot of conversations in 

this room and privately with the Treasury Department which kind 

of end with the issue of, well, with the problem of, ‘‘Well that would 

be a good idea to do but we don’t have the power to do it.’’ In that 

vein, as you look at the powers you have and don’t have to manage 

TARP going forward after this committee disbands, and with the 

notion that Congress is listening, what powers would you like to 

have that you don’t have? 

Mr. MASSAD. Well, I guess I’ve assumed we’re not amending the 

TARP at this juncture 

Mr. SILVERS I assume we’re not either. I’m trying to build a 

record. [Laughter.] 

Mr. MASSAD. You know, I think the work that remains to be 

done, particularly in the area of housing, is obviously critical. 

Mr. SILVERS. Yes. 

Mr. MASSAD. And as you know—— 

Mr. SILVERS. So let’s take housing. I mean I think we—I think 

a lot of us agree on that and agree with, I think, the—I think the 

sentiments you expressed a few minutes ago, which I hope that you 

and your colleagues keep repeating. 

So let’s take housing. You’ve got agreements, you’ve got a legal 

structure with the HAMP participants. If you could rewrite those 

agreements today, knowing what you know, what would you do? 


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Mr. MASSAD. Well, if we were to rewrite the agreements, again 

within the framework of the powers we have, we would have simply—— 

Mr. SILVERS. Assume someone gives you a magic wand, what 

would you do with it? [Laughter.] 

Mr. MASSAD. You know, it’s just difficult to answer the 

hypotheticals in terms of rerunning the history. In terms of going 

forward—— 

Mr. SILVERS. Going forward, yeah. 

Mr. MASSAD [continuing]. I think there, you know, I will leave 

it to the Congress. I don’t mean to dodge the question, but I think 

there’s a variety of things that have been considered. They range 

from the simple ones, which I know you’ve taken an interest in, 

that we concluded we couldn’t even use TARP funds, for example, 

to pay for legal aid and broad counseling in the housing program, 

because—— 

Mr. SILVERS. But would it be a good idea to do that? 

Mr. MASSAD. Yes. 

Mr. SILVERS [continuing]. I mean I’m not—I know that—— 

Mr. MASSAD. We supported the legislation to do that. And it 

didn’t go anywhere. 

Mr. SILVERS. So that’s one that’s item one. 

Mr. MASSAD. That’s a small one. That’s a small one. You know, 

I think there are a range of things, such as cram down or reform 

of the bankruptcy codes so that, you know, people could—that 

judges could write down mortgages. 

Mr. SILVERS. That would be item two then. 

Mr. MASSAD. That could be item two, but you know, I think we 

can certainly provide you potentially with others. I’m very focused, 

obviously, on just executing the authorities we have. 

Mr. SILVERS. Okay. I don’t know if I’m allowed to ask one more 

question? 

Several of the witnesses that we—in written testimony, have 

suggested that we ought to have sliding scale capital requirements 

for larger banks. That was in this panel’s regulatory reform report 

at the beginning of our work. It is within the powers granted to the 

bank regulators and the systemic risk regulator. What is your view 

of that proposition? 

Mr. MASSAD. I will leave that one to the regulators and the Financial Stability Oversight Council. I think it’s a very important 

question but I would note simply that, you know, we have raised 

the level of capital in the system significantly since where we were. 

Our banks are better capitalized, far better capitalized today. But 

as to the exact details of whether there should be a sliding scale 

and what that sliding scale should look like, I would defer to those 

who have that power. 

Mr. SILVERS. Mr. Secretary, if the Treasury Department has a 

view on that question, I know I sort of caught you by surprise on 

that—— 

Mr. MASSAD. Certainly. 

Mr. SILVERS [continuing]. If the Treasury Department has a view 

in its role in the systemic risk process—management process, I 

think we’d appreciate that in writing. 


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Secondly and finally, we’ve had—a number of us have had a back 

and forth with you about these fundamental strategic decisions 

that were made in early 2009. Our expert witnesses have a lot to 

say about that and a lot of it’s quite critical. I would offer you the 

opportunity, in writing, to respond if you and the Treasury Department would wish, to make your view on those questions known. 

Mr. MASSAD. Thank you. 

The CHAIRMAN. Thank you. 

Dr. Troske. 

Dr. TROSKE. Thank you. I want to refer back to the quote that 

Chairman Kaufman referred to and I know it’s always awkward to 

put someone in the position of criticizing their boss, but Secretary 

Geithner, Treasury Secretary Geithner did say, ‘‘You just don’t 

know what’s systemic and what’s not, until you know the nature 

of the shock.’’ 

The statement seems to be sort of in contrast to some of the calls 

by many economists, including some of our next panel and of 

course including myself in my opening statement, that the government needs to clearly define what they view as a systemically risky 

firm or systemic risk so that the market has a very clear understanding of what that means and what we view that—what we 

view is systemically risky. 

Could you sort of tell me why you don’t think, or perhaps maybe 

you do think, we can—why aren’t we defining what we mean by 

systemically risky? 

Mr. MASSAD. Well, I think there is a process going on to address 

that. I think what the Secretary was referring to is that it’s not 

simply a quantitative determination or a simple determination, it’s 

also going to be a determination that changes over time. But I 

think the Dodd-Frank legislation gives us the ability to do that. I 

think the initial work in that area has indicated that there will be 

a variety of criteria used that are both quantitative, qualitative, 

that involve looking at capital levels, leverage, interconnectedness 

and other factors. 

So I think the meaning of the Secretary’s statement was simply 

that it is a complex determination. 

Dr. TROSKE. I mean—and I guess I want to push a little bit on 

that. Do you view that at some point there’s going to be a clear 

statement to the markets, very transparent statement, ‘‘This I 

want we view as systemically risky,’’ so that someone from outside 

looking in would come to approximately the same conclusion about 

which firms are systemically risky as say a future Treasury secretary? 

Mr. MASSAD. That is a subject that the Financial Stability Oversight Council and its various members will look at and consider, 

and I’m sure they’ll have more to say about that in the future. 

Dr. TROSKE. Going back to the original TARP legislation, one in 

which was supposed to involve the purchasing of troubled assets, 

you know, toxic assets of the books of banks. That’s not the way 

it was implemented and, I guess in my opinion, rightfully so. But 

I guess that—those troubled assets, presumably, are still sitting on 

banks’ books. Do you have a sense of how big that—the problem 

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backed securities was, in addition to the other affects, a way of removing those troubled assets from banks’ books and shifting them 

to the Feds books? 

Mr. MASSAD. Well, I would say a couple of things. It’s a very good 

question. I think what we’ve seen is we have seen substantial 

write-offs by the industry, number one. Number two, I think we’ve 

seen asset quality generally improve. Number three, I think we’ve 

seen that the performance of the big banks at least has actually 

been better than what the stress tests predicted. The stress tests 

were designed to look at, you know, what was the riskiness of those 

assets in the bank situation. 

Is there more work to do? I would defer to the regulators on that, 

about the principal responsibility for overseeing those banks. We’re 

obviously still on the road to recovery. 

Dr. TROSKE. Thank you. 

The CHAIRMAN. Superintendent Neiman. 

Mr. NEIMAN Thank you. I’d like to come back again to the foreclosure issues. And as I mentioned in my opening, I believe the 

best thing this panel can do is to establish a precedent and a process to get good information to the public. And that’s why some of 

our, I think greatest frustrations around the HAMP program have 

been with respect to the release and obtaining of information. 

The first being really around non-HAMP modifications. I think in 

the defense of the HAMP program, you rightfully point to the fact 

that not only did you create a system for modifications, but also 

that it encouraged non-HAMP modifications outside of the HAMP 

program, and I think they probably exceed three to one the number 

of HAMP. 

But despite our continued calls for information—and it’s been 

supported by the Secretary himself—when Secretary Geithner was 

here last December he acknowledged how important that kind of 

information was. He pledged to us, ‘‘We are looking for ways we 

can get better information out there to assess these programs.’’ 

What progress has been made since December in obtaining and 

publicly releasing this data, regarding proprietary bonds? 

Mr. MASSAD Thank you, Mr. NEIMAN. That’s a very good question and I know it’s been an issue that you’ve been very focused 

on. And I agree with you, we need more data on those non-HAMP 

modifications. 

As you know, those are outside of our program and therefore outside of the system, the reporting system that we set up. There was 

no reporting on any modifications in this country, prior to HAMP. 

And we set up—— 

Mr. NEIMAN. Have servicers been asked to voluntarily submit 

that? 

Mr. MASSAD. We have suggested that to several of the servicers. 

I know you’ve raised it with HOPE NOW in your conversations 

with them and when they appeared before this panel. And I know 

the regulators are also looking at that issue. 

Mr. NEIMAN. So again, I think we would encourage you certainly 

to put a process in place. This is something that certainly, if not 

voluntarily submitted, should be a high priority to find a way to 

require that information to be submitted and publicly released. 


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The other area has been around the web portal. And we’ve been 

talking about this web portal to allow not only housing counselors 

and borrowers to submit data directly through a web based system 

to their servicers, but even more importantly, to allow them to assess the status of their modification. 

Mr. MASSAD. Um hmm. 

Mr. NEIMAN. We continue to read and hear about the slow implementation and even the slow pick up on usage. Can you give us an 

update as to how frequently and the volume of usage on that system? 

Mr. MASSAD. Let me get back to you on that. I don’t have those 

figures at my fingertips or the status of that. I know it has taken 

a lot of work to get to where we want to be. There are issues of, 

you know, making sure that it not only works, but that it protects 

privacy. But I’d be happy to get back to you on that. 

Mr. NEIMAN. Okay. And the last, if you bear with me, is something I’ve asked at our last hearing. I’ve asked Ms. Caldwell and 

I’ve asked the Secretary himself regarding the need for a national 

foreclosure database. And I’ve been given polite noncommittal responses each time. So I wouldn’t want you to feel that you were 

left out today. [Laughter.] 

So, well what is it? What do you think would be the reluctance 

for starting a program that would provide mortgage performance 

data across the board, across state, across national, across all lines, 

for banks and nonbanks? 

Mr. MASSAD. Again, a very good question, Mr. Neiman. I think 

we’re at a point in time where we’re going to see very dramatic 

change, overall, in the mortgage servicing industry which will lead 

to things like national servicing standards and presumably a national database on a number of these issues. It’s been clear 

throughout this crisis that we didn’t have data, we didn’t have 

standards and that’s been a large part of the problem. 

So I think there is a lot of work going on on a number of fronts 

to look at those. I can’t give you a specific prediction as to where 

we’ll be when, but I think we will see some significant change 

there. 

Mr. NEIMAN Thank you. I look forward to your follow-up response on the web portal. Thank you. 

The CHAIRMAN. Thank you, Acting Assistant Secretary Massad. 

Thank you for being here today, but thank you so much for your 

public service. 

Mr. MASSAD. Thank you for having me. 

The CHAIRMAN. It’s a real—it really is—appreciate it. 

One thing, one question I have is you said that you’ve raised 

bank capital requirements significantly. I don’t want to ask that 

question now, if you could just submit in writing kind of what you 

did to raise bank capital requirements significantly. 

Mr. MASSAD. Yeah. Certainly. It wasn’t us, but just generally 

what I meant was that bank capital levels have increased. 

The CHAIRMAN. Okay. I’d just like some details on that. 

Thank you very, very much. 

And the next panel come forward, please. 

Welcome. I am generally pleased to welcome our second panel. 

We’re joined by Jason Cave, deputy director of the Office of ComVerDate Mar 15 2010 21:00 Mar 30, 2011 Jkt 065276 PO 00000 Frm 00062 Fmt 6633 Sfmt 6602 E:\HR\OC\A276.XXX A276

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plex Financial Institutions Monitoring at the FDIC; Patrick 

Lawler, chief economist and associate director for Policy Analysis 

and Research at FHFA; and William R. Nelson, deputy director, Division of Monetary Affairs, Federal Reserve. 

Thank you all for joining us. Please keep your oral testimony to 

five minutes so that we will have ample time for questions. Your 

complete written statement will be printed in the official record of 

the hearing. 

We’ll begin with Mr. Cave. 


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STATEMENT OF JASON CAVE, DEPUTY DIRECTOR FOR COMPLEX FINANCIAL INSTITUTIONS MONITORING, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. CAVE. Chairman Kaufman and members of the panel, I appreciate the opportunity to testify on behalf of the FDIC concerning 

the Temporary Liquidity Guarantee Program or TLGP. 

A significant contributor to the financial crisis was a disruption 

in credit markets, which significantly impaired the ability of even 

credit-worthy companies to refinance their commercial paper and 

long term debt. 

The FDIC’s TLGP was one of several extraordinary measures 

taken by the U.S. Government, in the fall of 2008, to address the 

crisis in the financial markets and bolster public confidence. The 

FDIC TLGP helped to unlock the credit markets, calm market 

fears and encourage lending during these unprecedented disruptions. 

The TLGP provided a guarantee, for a limited period of time, for 

certain new senior unsecured debt issued by financial institutions. 

We designed this program to be as inclusive as necessary to ensure 

that credit—particularly between banks—began to flow again. This 

calmed what was becoming ‘‘the perfect storm,’’ whereby creditors 

refused to roll their debt beyond weeks or even overnight and demanded more collateral at the exact time that banks needed these 

funds to continue to finance their operations. 

Additionally, the TLGP fully guaranteed certain non-interest 

bearing transaction deposit accounts. This provided stability to insured banks, particularly smaller ones, enabling their commercial 

customers to continue to do business without disruption. The creation of this aspect of the program was necessary because we were 

seeing that smaller, healthy banks were losing these accounts to 

their much larger competitors because of uncertainties in the financial system. 

At its peak, the FDIC guaranteed almost $350 billion of debt outstanding. As of December 31, 2010 the total amount of remaining 

FDIC guaranteed debt was $267 billion. Of that amount, $100 billion, or 37 percent will mature in 2011, and the remaining $167 billion will mature in 2012. 

The TLGP has worked as it was intended to. Credit markets 

have returned to some level of normalcy, and private investors 

have resumed their roles as credit providers at market terms. Financial institutions are in the process of repairing their balance 

sheets, increasing cash positions and reducing their alliance upon 

short term debt. 

The FDIC as deposit insurer and as guarantor of TLGP supports 

these needed improvements. Given that $267 billion in TLGP remains outstanding, it is important that financial institutions continue to replace government guaranteed debt with private funds. 

The FDIC is closely monitoring the funding plans that institutions 

have developed to ensure that TLGP can be fully repaid through 

the private credit markets. The next two years will be important, 

given the significant amount of debt that is coming due. 

The financial system benefited from a prompt, coordinated response across regulatory agencies. The FDIC believes it is just as 


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important to have that same level of coordination in evaluating the 

health of these large financial institutions coming out of the crisis. 

Currently we are working with the Federal Reserve to review the 

dividend plans at the large banking organizations. We believe that 

a comprehensive review of dividend and capital repayment plans 

across large firms is critical since these payments were a large 

drain on cash reserves prior to the crisis, leaving financial institutions more vulnerable to the disruptions that followed. 

This is why the dividend plan review and TLGP repayment plans 

are intertwined. The regulators should not approve dividend and 

capital repurchases which involve significant cash outlays by financial firms until we are all fully confident that these firms will have 

the financial resources, under both normal and stressed conditions, 

to repay debt guaranteed by the FDIC. 

In conclusion, while the measures taken by the FDIC and other 

governmental agencies to address the financial crisis were unprecedented in nature, these measures were successful at stabilizing the 

credit markets and creating an environment that allowed for economic recovery. Now we are actively working to ensure that the 

program winds down in an orderly fashion by the end of 2012. 

Thank you. I will be pleased to answer any questions from members of the panel. 

[The prepared statement of Mr. Cave follows:] 


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The CHAIRMAN. Thank you. 

Mr. Lawler. 

STATEMENT OF PATRICK LAWLER, CHIEF ECONOMIST AND 

HEAD OF THE OFFICE OF POLICY ANALYSIS AND RESEARCH, 

FEDERAL HOUSING FINANCE AGENCY 

Mr. LAWLER. Thank you. Chairman Kaufman, members of the 

panel, thank you for the invitation to present FHFA’s perspective 

on the impact of TARP on the economy and the financial sector. 

I’m going to be referring to some charts in the back of my testimony, if you’ve got that handy. 

TARP was created when financial markets were in the midst of 

a crisis. Collectively, TARP programs made important contributions 

to reestablishing financial stability by increasing confidence and 

adding liquidity to financial markets. The oversight board, on 

which FHFA’s director sits, concluded that without TARP the severity of the crisis and its impact on the economy would have been 

materially greater. 

Given the origins of the crisis and housing financial markets, the 

conservatorships of Fannie Mae and Freddie Mac were designed 

from the start to maintain access to funds for sound, new mortgages. To assist borrowers who were struggling to make payments 

on poorly structured and unaffordable loans, FHFA worked with 

the Treasury, HUD and others to develop a series of programs, including the Home Affordable Modification Program, which used 

TARP funds for non-GSE loans to enhance incentives for borrowers 

and servicers. 

In all cases, FHFA has been guided by its responsibilities as conservator of each enterprise to limit activities to those that make 

business sense, are safe and sound and are consistent with the enterprises’ charters and the goals of conservatorship. These programs have benefited the enterprises by mitigating risks and reducing both direct losses on loans where foreclosure is avoided, and 

indirect losses on properties where housing markets are stabilized, 

which reduces defaults on other loans. 

As shown in Figure 1, with these and other programs, including 

notably the Federal Reserves large program for purchasing mortgage securities, the cost of mortgage borrowing declined, both absolutely and relative to yields on reference Treasury securities. 

In Figure 2, cheaper financing and foreclosure prevention programs helped stabilize house prices, as measured by FHFA, almost 

immediately and by other measures within a few months. 

In Figure 3, serious delinquencies continued to rise sharply in 

2009 as the recession worsened, but they have since eased somewhat. Inventories of houses currently or potentially for sale are 

very high in portions of the country, so significant risks remain, despite recent price stability and lower delinquency rates. 

The enterprises have significant responsibilities with respect to 

TARP through their implementation of Making Home Affordable 

programs for mortgages on their own books as well as through 

their roles as Treasury’s financial agents. 

Turning to Figure 4, in 2010 the enterprises completed nearly a 

million foreclosure prevention workouts. More than double 2009 

total and nearly two and a half times the number of foreclosure 


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sales in 2010. Most workouts are home retention actions intended 

to keep borrowers in their homes. 

While HAMP has not produced the volume of loan modifications 

the Treasury Department initially hoped for, we believe it has been 

instrumental in standardizing and streamlining the industry’s 

modification process. And in that way it has contributed greatly to 

the sharp rise in non-HAMP modifications that has taken place 

over the past two years. 

The quality of the modifications also appears to have improved, 

as indicated in Figure 5. Although it is still too soon to judge how 

successful recent modifications will ultimately prove to be, re-defaults of loans modified by the enterprises have been much lower 

since the implementation of HAMP than previously. 

In addition to foreclosure prevention programs, the enterprises 

used the Home Affordable Refinance Program, HARP, to help 

homeowners whose property values has fallen to take advantage of 

historically low interest rates by refinancing their mortgages which 

can help them avoid future default. In Figure 6, the volume of 

HARP refinances has also been much less than Treasury—the 

Treasury Department anticipated, but refinances outside HARP, 

many with a similar streamlined structure, have been ten times as 

large with Fannie Mae and Freddie Mac mortgages. 

FHFA has worked closely with the Treasury Department on critical issues brought on by the housing crisis and general financial 

and economic disruptions over the past few years. The interactions 

have been frequent and professional, respectful of our differing 

roles and legal responsibilities but collaborative toward our common goal to bring stability and liquidity to housing markets and 

seek foreclosure alternatives whenever feasible. 

Thank you. I’ll be happy to answer questions. 

[The prepared statement of Mr. Lawler follows:] 


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The CHAIRMAN. Thank you. 

Mr. Nelson. 

STATEMENT OF WILLIAM R. NELSON, DEPUTY DIRECTOR, DIVISION OF MONETARY AFFAIRS, FEDERAL RESERVE SYSTEM 

Mr. NELSON. Chairman Kaufman and members of the Congressional Oversight Council. Thank you for the opportunity to testify 

about the Term Asset Backed Securities Loan Facility, TALF, 

which was established by the Federal Reserve and Treasury Department during the financial crisis to increase the availability of 

credit to households small businesses. Treasury provided credit 

protection for the TALF under the Troubled Asset Relief Program, 

TARP. 

When the financial crisis intensified in the fall of 2008 investor 

demand for highly rated asset-backed securities, or ABS, evaporated. Spreads on ABS widened dramatically and issuance of new 

ABS dwindled to near zero. In response, lenders that relied on 

securitization for funding pulled back on the credit they provided 

to households and businesses contributing to the severe contraction 

in the economy that followed. 

Among the many actions taken by the Federal Reserve and the 

Treasury in response to these events, was the creation of the 

TALF, which was designed to encourage renewed issuance of ABS. 

Under the TALF the Federal Reserve Bank of New York provided 

loans to investors for the purchase of certain ABS backed by consumer and business loans. TALF loans had maturities ranging 

from three to five years. The interest rate spreads on TALF loans 

were set below spreads on highly rated ABS prevailing during the 

financial crisis, but well above spreads in more normal market conditions, providing investors an incentive to repay the loans as financial conditions normalized. 

To protect the Federal Reserve and the Treasury, several layers 

of risk controls were built into the TALF program and are detailed 

in my prepared remarks. 

The TALF contributed importantly to a revival of ABS markets 

and a renewed flow of credit to households and businesses. 

Issuance of non-mortgage ABS jumped to $35 billion over the first 

three months of TALF lending in 2009 after having slowed to less 

than $1 billion per month in 2008. 

During its initial months of operation the TALF financed about 

half of the issuance in the ABS market. Over the life of the program the TALF supported nearly 3 million auto loans, more than 

1 million student loans, nearly 900,000 loans to small businesses, 

150,000 other business loans and millions of credit card loans. 

When the program closed in June, 2010, $43 billion was outstanding. As a result, in July, 2010 the Federal Reserve Board and 

the Treasury agreed that it was appropriate for the Treasury to reduce the credit protection provided by the TALF under the TARP, 

from $20 billion, ten percent of the authorized size of the program, 

to $4.3 billion, ten percent of the loans outstanding when the program closed. 

As I noted, the TALF loan interest rates were set at spreads chosen to be well above those that prevailed in more normal financial 

conditions, yet below those at the height of the crisis. The TALF 


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has earned nearly $600 million of net interest income to date. If 

there were to be any losses on TALF loans, the losses would first 

be absorbed by the accumulated net interest income. The TARP 

funds would absorb any losses that exceeded the accumulated net 

interest income, up to the commitment provided by the Treasury. 

The experience to date suggests that the multiple risk controls 

built into the TALF program have been effective and losses appear 

unlikely. Because market conditions have improved, TALF loans 

now appear expensive, as intended, and more than two-thirds of 

the loans have been repaid early. All the remaining TALF loans 

are current regarding payments of interest and principal. All of the 

collateral backing the outstanding loans have retained their AAA 

ratings and the market value of the collateral backing each of the 

loans has remained well above the loan amount. 

As a result, we see it as highly likely that the accumulated interest will be sufficient to cover any loan losses that may occur without drawing on the dedicated TARP funds. 

In conclusion, we believe that the TALF program represents a 

highly successful use of TARP funds. The TALF program helped restart the ABS markets at a critical time, thereby subording the 

provision of credit to millions of American households and businesses. Moreover, its careful design has protected the taxpayer and 

in the end the program almost certainly will remit a net profit to 

the Treasury. 

Thank you for the opportunity to discuss the TALF program 

today. I would be pleased to take any questions that you have. 

[The prepared statement of Mr. Nelson follows:] 


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The CHAIRMAN. Thank you very much. 

And we’ll start—we’ll have one round of questions. 

Mr. Cave, can you talk a little bit about the plans of the—that 

you mentioned in your testimony about plans for large banking organizations to increase dividends and how you think that works 

and why you think that works and what has to be done before that 

should go forward? 

Mr. CAVE. Yes, thank you. I’d be happy to answer that question. 

The Federal Reserve is the lead agency with responsibility for 

administering the stress tests and the review of the dividend plans. 

We are involved as well. We think that this is a positive program. 

Before the crisis you had institutions that paid out significant 

amounts of cash in dividends and in capital repurchases, leaving 

them more vulnerable when the crisis did hit. So the process that’s 

being used—before institutions can begin to increase dividends and 

capital repayments—is a programmatic approach that we view as 

an improvement over the past. And we are very much involved in 

that as well. 

The CHAIRMAN. Do you have any thoughts about the timing of 

this at this particular time? 

Mr. CAVE. The staffs are working presently on this. It’s a priority. There is interest in having responses to institutions for the 

first quarter of 2011, so this is a very important time where a lot 

of work is going into this as well. 

The CHAIRMAN. Mr. Nelson, do you have any comments on that, 

the dividends plans of large banks? 

Mr. NELSON. No, I do not. 

The CHAIRMAN. Okay. Mr. Lawler, what’s your view about 

Fannie Mae and Freddie Mac having conflicts as their roles as investors in residential mortgages and their roles as Treasury agents 

with respect to HAMP? 

Mr. LAWLER. I don’t think it creates important conflicts. They are 

investors. They do have an interest in trying to reduce foreclosures 

to the maximum extent possible. I think it’s very consistent with 

the Treasury Department’s goals with these programs. They’re 

working together to try and create programs that will work to keep 

people in homes and reduce costs to taxpayers. 

The CHAIRMAN. But the—one of the problems is, is there are conflicts involved throughout the whole process, with the servicers. Do 

you agree? And as Fannie Mae and Freddie Mac, you don’t see 

they—where they have any conflict? 

Mr. LAWLER. With servicers? 

The CHAIRMAN. Yeah. 

Mr. LAWLER. Servicers have some conflicts in some parts of the 

process. For example, if they hold a second lien—— 

The CHAIRMAN. Right. 

Mr. LAWLER [continuing]. On a property where they’re also servicing the first lien, that’s a conflict and that’s certainly an issue. 

The CHAIRMAN. Fine. Mr. Nelson, did TALF work, in your opinion? 

Mr. NELSON. Yes, sir, it was very effective. For example, in research that was just released on the Federal Reserve’s website yesterday, my colleagues and I at the Federal Reserve have found that 

the TALF had a very consequential affect on lowering ABS spreads, 


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both for consumer ABS and in commercial mortgage-backed securities. 

In other research, my colleagues have found a link between the 

issuance of TALF ABS and lower loan rates extended by the lenders that funded themselves with TALF ABS. 

And finally, I’d add that we talked to issuers when the program 

was in operation and in subsequent surveys and asked them what 

the effects of the program were for them and they indicated that 

the program helped them to lower rates and that without the program they would have lent less and there conceivably been a much 

more severe contraction of credit. 

The CHAIRMAN. Great. Follow on Dr. Troske’s question, Mr. 

Cave. Are you concerned about how we get troubled assets off the 

balance sheets of banks? 

Mr. CAVE. I think that what we are seeing are some improvements in troubled asset levels compared to what we saw during the 

crisis. Our latest review, the Quarterly Banking Profile that we released last week, showed that we’re seeing some improvements in 

delinquencies and net charge-offs from the crisis levels. But again, 

levels are elevated compared to historical averages and there still 

remains work to be done to continue the process of balance sheet 

repair. 

The CHAIRMAN. Thank you very much. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you. Following up on that. Do these 

troubled assets, which are estimated at around a trillion dollars, as 

presently constituted, do they pose a systemic risk to the economy? 

Mr. Cave? 

Mr. CAVE. Compared to where we were with troubled assets during the crisis, we are at a point where levels have receded. It is 

still very much something the FDIC monitors closely. Also, we look 

to ensure that institutions have proper reserves and capital and liquidity to be able to deal with their problem assets. Something 

that, again, we look at very closely. 

Mr. MCWATTERS. Okay. And I’m putting words in your mouth 

and saying that sounds like a no to me. I mean it sounds like a 

no answer. It’s not that these troubled assets, a trillion dollars on 

the books, do not pose a systemic risk today. Is that a fair statement or? 

Mr. CAVE. I would need to get additional information to you on 

that. 

Mr. MCWATTERS. Okay. Fair enough. 

Mr. Lawler or Mr. Nelson, do you have any thoughts on that? 

Mr. NELSON. No, sir. 

Mr. MCWATTERS. Okay. 

Mr. LAWLER. At Fannie Mae and Freddie Mac and the home loan 

banks there are troubled assets, but because Fannie Mae and 

Freddie Mac are currently under conservatorship and backed by 

the Treasury, they’re not currently creating a systemic risk. 

Mr. MCWATTERS. But if the bailout of Fannie Mae and Freddie 

Mac somehow went away, then the answer could be different? 

Mr. LAWLER. Yeah, that’s a hypothetical, so. 

Mr. MCWATTERS. Okay. Okay. 


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How about the robo-signing problems and the breech of representations that we read about a lot a couple months ago? Did those 

create a systemic risk in the opinion—— 

Mr. LAWLER. If the foreclosure process were to stop functioning 

entirely that would create some significant problems. Most of the— 

my understanding of those issues were that the processes were not 

followed correctly, but if they can be created, so that they do work 

properly, then that’s not a systemic risk. If we simply were unable 

to foreclose on properties then that could create more serious problems. 

Mr. MCWATTERS. Well, what about a systemic risk that could develop when financial institutions, the servicers, the originators, the 

securitizers are sued, particularly the financial institutions are 

sued and wearing any of those hats, perhaps multiple hats of the— 

being the securitizer and the originator? I mean there are claims 

now before the courts that investors were materially misled and 

they’re asking for a significant amount of damages. I understand 

lawsuits, they happen all the time, but is the cumulative effect of 

these lawsuits, do they present a systemic risk to these financial 

institutions? 

Mr. LAWLER. Again, not to Fannie Mae and Freddie Mac, because 

they’re not—— 

Mr. MCWATTERS. Okay. 

Mr. LAWLER [continuing]. The ones being sued. 

Mr. MCWATTERS. Mr. Cave, what do you think? 

Mr. CAVE. I think that in our view this is very much a question 

for the Financial Stability Oversight Council. As you have noted, 

this situation involves various financial market participants as well 

as regulators and we believe that this is something that should be 

a question for the FSOC. 

Mr. MCWATTERS. Mr. Nelson, the Fed, what’s the Fed’s view of 

this? 

Mr. NELSON. I’m sorry, sir, this is not an area of my expertise. 

Mr. MCWATTERS. Okay. Okay. Fair enough. 

So it sounds like no one is saying, well, with the exception of Mr. 

Lawler, because his client is—has an unlimited check from Treasury, that the answer is simply uncertain. 

Let me ask one final question in the few seconds I have. If you 

had to do this all over again and you were back in 2008 and you 

were gearing up, would you do anything differently? Would you 

have different programs? Would you have the programs that you 

have now but would you tweak them some way? 

Mr. Cave. 

Mr. CAVE. Thank you for the question. From our perspective, the 

TLGP program, so far, has been a success and has done what it 

was intended to do, unlock the credit markets and allow institutions to extend their liabilities. We think that’s very important. 

What was happening prior to the crisis was that institutions’ balance sheet liabilities were getting shorter and funding was getting 

more complicated. So again, we think that the TLGP was successful in addressing that issue. There is still more time to go. We still 

have exposure and we are monitoring that very closely. So I think 

that is working as expected. 


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The Dodd-Frank Act has provided us with greater authorities to 

do things that we could not do prior to the crisis. And we view, 

very much, the proper implementation of the Dodd-Frank Act as a 

key thing to do as we move forward. 

Mr. MCWATTERS. Okay. Thank you, Mr. Cave. 

Mr. Lawler, Mr. Nelson, any thoughts? 

Mr. LAWLER. Putting Fannie Mae and Freddie Mac into conservatorship was the right thing to do and that helped provide 

funding, continued funding for housing markets. We did not, at 

that time, appreciate, when we put them into—first put them into 

conservatorship, how serious the recession would be and how bad 

unemployment would be and what the implications would be for 

the housing market from that point forward. 

We did move with the Bush Administration to start the streamline mortgage modification program, but as we did that and as we 

moved into HAMP we learned a lot of lessons about how to institute such a program. We’d never done anything remotely like this 

before, trying to get all large servicers in the country working on 

a single program, doing things the same ways with systems that 

were entirely different. So we learned a lot as we implemented that 

and as we shifted from SMP to HAMP that had we gone through 

the experience before we would have been able to do faster. 

Mr. MCWATTERS. Okay. Thank you. My time is up. Sorry. 

The CHAIRMAN. Mr. Silvers. 

Mr. SILVERS. So this hearing and the wind up of our work is really focused, I think on two really major issues that I want to address with you all. One—and the relevance of your testimony to 

these two issues. One is the question of the stability, the health of 

the banking system and the other is the question of the housing 

market and the continuing foreclosure crisis. 

Let me start with the housing market. Mr. Lawler, let me make 

sure I have—I understand the GSE’s position here correctly in 

terms of their exposure to the housing market and the foreclosure 

crisis. The GSEs have obligations to their—to the holders of GSE 

issued securities. And the GSEs bought some stuff during the run 

up to the financial collapse. It turns out probably to have been a 

mistake. 

Am I right in understanding that, and as a general matter, the 

more foreclosures there are, the more housing prices fall, the more 

the value—the more GSEs have difficulty meeting their obligations 

to their security holders and the lower the value of those assets 

they purchased fall, is that basically right? 

Mr. LAWLER. Right. If they can prevent unnecessary foreclosures 

then that will help the market and makes their securities more valuable. 

Mr. SILVERS. So if housing prices fall secularly across our economy, the losses the GSEs will suffer and that—the money that will 

be paid out per the guarantee Mr. McWatters was talking at, will 

increase, right? 

Mr. LAWLER. Right. 

Mr. SILVERS. So from the perspective of the interests of the GSEs 

as at least nominally independent firms, the fiduciary duties of the 

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son to try to do everything you can to keep housing prices from falling further. Is that right? 

Mr. LAWLER. Right. 

Mr. SILVERS. Okay. Now, the GSEs are today the, as far as I understand it, the really the only providers of a secondary market of 

any consequence, for mortgages in the United States. Is that true? 

Mr. LAWLER. Conventional mortgages. Ginnie Mae handles—— 

Mr. SILVERS. Yes, there’s Ginnie Mae and FHA, but there’s not 

a private label mortgage market of any consequence today? 

Mr. LAWLER. That’s right. 

Mr. SILVERS. Right? So you—so the GSEs really are—the GSEs 

have, shall we say, a fair amount of market power right now? 

Mr. LAWLER. Okay. 

Mr. SILVERS. Right? Would you agree that’s true? 

Mr. LAWLER. Yes. 

Mr. SILVERS. All right. Does it make—isn’t it—is it consistent 

with the GSEs business purposes, right and the duties owed to the 

GSEs by the governance of the GSEs, is it consistent with that to 

use that market power to ensure that the housing market doesn’t 

fall further, all right, to—and to thus minimize the losses the GSEs 

are going to incur in the future? Does that make sense? 

Mr. LAWLER. Well it does, except that the prices they charge directly affect what their earnings or losses are as well, so there’s a 

balance that—— 

Mr. SILVERS. Right. No, I’m saying in totality the GSEs should 

be managing their business to minimize the losses they’re going to 

incur. And this has everything to do with the broad movements of 

housing prices and stability in the housing market. Am I right? 

Mr. LAWLER. That’s right. 

Mr. SILVERS. Okay. So would you agree then that to the—that 

because foreclosures, as a general matter, all right, some foreclosures are unavoidable, but that foreclosures as a general matter 

contribute to falling housing prices and greater losses to the GSEs, 

as a pure business matter the GSEs ought to use every instrument 

and every power in their disposal to ensure that no unnecessary 

foreclosure occurs? 

Mr. LAWLER. And ‘‘unnecessary’’ is an important word there. 

Mr. SILVERS. But you agree with that, as a business matter? 

Mr. LAWLER. Their program—— 

Mr. SILVERS. I said as a business matter—— 

Mr. LAWLER. Right. 

Mr. SILVERS [continuing]. Not as a public policy matter, not as 

a matter of social do-gooderism, but as a pure business matter for 

the GSEs, you agree that that’s true? 

Mr. LAWLER. That’s what their programs are designed to do. 

Mr. SILVERS. Okay. Excellent. Thank you. 

Mr. Cave, your testimony, which I found very interesting expresses some concerns about dividends. And not surprisingly, the 

FDIC appears concerned that the—loans which the FDIC has guaranteed be paid first before any dividends get issued. I am concerned further beyond that about the quality of earnings at the 

large banks that are proposing paying dividends. Do you have— 

does the FDIC share my concern? 


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Mr. CAVE. Thank you. Based on our recent Quarterly Banking 

Profile report, the earnings and the state of the industry have improved. We saw 2010 as a turnaround year with stronger earnings. 

But, a portion of that was due to reductions in loan loss provisions, 

which had a benefit for earnings. Revenues did not see as much improvement. That’s an area we are looking at very closely to ensure 

that those reductions in provisions are appropriate given the current risk of the assets. I think that’s an area that—— 

Mr. SILVERS. Right. 

Mr. CAVE [continuing]. Further work is needed. But we are looking at that very closely. 

Mr. SILVERS. Now my time is expired, but if I can ask the Chairman’s indulgence. I just want to clarify that for the non-bank regulators who might be listening. What we’re talking about here, and 

you tell me if I’m wrong, all right, is that a fair amount of the 

earnings of the large banks does not reflect actual cash that has 

gone into those banks. It reflects changes in assumptions about future losses. The dividends that would be paid would involve actual 

money, not assumptions or promises or other things, but actual 

money so that on the one hand you have no money coming in for 

that part of those earnings and on the other hand dividends would 

involve real money coming out. Is that, in a sort of simple-minded 

way, is that what we were just discussing? 

Mr. CAVE. I think that would be a fair representation. Dividends 

would be cash coming out and there are various attributes of the 

earnings stream that have various levels of quality. 

Mr. SILVERS. All right. I’m concerned about that. Thank you. 

The CHAIRMAN. Dr. Troske. 

Dr. TROSKE. Thank you. So I’ll start with you, Mr. Nelson. In a 

recent paper Professor Zingales and a co-author estimated that the 

CPP program, along with the FDIC’s Temporary Liquidity Guarantee Program increased the value of banks participating in these 

two programs by approximately $130 billion, of which 40 billion 

represented a direct taxpayer subsidy to banks, it seems clear that 

many of the programs implemented by the Federal Reserve’s including its purchase of mortgage-backed securities and the Primary 

Dealer Credit Facility also provided significant financial assistance 

to banks. Do you think the assistance from these other programs 

and other agencies enabled large banks to repay their TARP funds 

more quickly? 

I know that these efforts were coordinated between Treasury and 

the Fed and the FDIC. Was there some discussion about this and 

if so, do you think that these other programs allowed some of the 

shifts—some of the costs of TARP to be shifted to these other what 

I would call less scrutinized programs? Do you have any thoughts 

on that? 

Mr. NELSON. The Federal Reserve’s response to the financial crisis could be divided up into two broad categories. One would be 

their provision of liquidity through the discount window, a traditional lender of last resort response, their liquidity facilities of 

which TALF was one. Those facilities were intended to increase the 

liquidity of financial markets and ultimately allow for greater credit to flow to consumers and businesses as I discussed. 


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The purchases of agency mortgage-backed securities, something 

you mentioned before all of the Federal Reserve’s purchases of securities were government guaranteed securities. Those were designed to act very much like traditional monetary policy, by lowering interest rates, encouraging spending, bringing down unemployment and achieving the macroeconomic objectives that the Congress gave to the FOMC. 

I don’t know anything about any additional objectives along the 

lines of what you just described. 

Dr. TROSKE. But I mean it certainly is the case that they entered 

into a market in which the mortgage-backed security market was 

close to not functioning and they dumped $1.2 trillion into that 

market. And I’m not arguing with—that that was not part of an 

active monetary policy and that that was not the right policy to 

adopt. But clearly that had to have some affect on the mortgages 

that were, you know, the liquidity that banks had with these mortgages and allowed them to move them off their balance sheets. Is 

that correct? 

Mr. NELSON. Well, Dr. Troske, I’d respectfully disagree. The government guaranteed mortgage-backed securities market functioned 

very well throughout the financial crisis. And the liquidity of those 

assets was very well maintained. They were government guaranteed assets. And during the financial crisis there was quite a bit 

of demand for the safety and security of government guaranteed 

assets. 

So it is true that by the nature of the actions, lowering interest 

rates raises the prices of securities, that’s how it works. So, by lowering interest rates anyone who was holding those securities would 

have had an asset that went up in value, but that was not the objective of the programs. 

Dr. TROSKE. Mr. Cave, I guess I’d direct the same question to 

you. Do you think that the FDIC’s actions sort of benefited large 

banks and in some sense allowed them or enabled them to be more 

quickly pay back their TARP funds? I mean and I’m not arguing 

that that was the main purpose but was that one of the consequences of this action? 

Mr. CAVE. I don’t believe that that was a consequence. The TLGP 

was very much a programmatic—systematic—approach that provided help to the markets, not just for large institutions. 

There were two parts to the program. It’s important to know 

with the TLGP debt guarantee program that the main purpose 

there was to address the situation where money was coming due 

very quickly and debt was getting shorter. The TLGP allowed institutions to refinance as institutions were becoming less liquid. So it 

was very important. 

There was also the Transaction Account Guarantee program that 

benefited large banks, but also very much benefited small banks as 

well, because we were seeing issues there with these accounts. 

That provided some stability, not just to large institutions, but 

small institutions as well. We were taking a combined approach. 

These were broad programs with broad participation that provided 

the improvements to the situations that we were seeing at that 

time. 


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Dr. TROSKE. Okay. And Mr. Nelson, let me ask you one more 

question. I guess throughout this crisis it seems as if, and perhaps 

rightfully so, there was a blurring in distinction of the Fed is traditionally the agency that conducts monetary policy, Treasury is traditionally the—one of the agencies that conducts fiscal policy. Many 

of the programs of the Fed looked a lot like fiscal policy, lending 

money to AIG, Primary Dealer Credit Facilities that I mentioned 

before. Financial stability program of the Treasury looked a lot like 

monetary policy, an effort to remove liquidity from the market to 

tamp down inflationary expectation. 

Does that concern you about this blurring of the distinction between who does monetary policy and who does fiscal policy? Perhaps it was necessary and I guess—do we think that at some point 

we can put the genie back in the bottle and get back to more traditional roles? 

Mr. NELSON. Dr. Troske, I agree. This is a very good question 

and it’s very important that the independence of the Federal Reserve and the separation of monetary policy from fiscal policy be 

maintained. Being a lender of last resort is a very traditional role 

of a central bank and of the Federal Reserve. It’s part of the reason 

why the Federal Reserve was created. 

You mentioned the Primary Dealer Credit Facility, that was a facility that was created using our emergency authority. But it 

looked like a traditional discount window facility rather than lending to depository institutions, in the case of the Primary Dealer 

Credit Facility, we lent to primary dealers who are generally large 

investment banks, for very short terms with very good collateral. 

And all of the Federal Reserve’s interventions were against very 

good collateral. And all of the Federal Reserve’s credit facility 

loans, apart from the TALF loans, which I’ve discussed, have all 

been repaid with no cost to taxpayers. So, I would argue that the 

Federal Reserve’s actions during the crisis have been consistent 

with the traditional role of a central bank, as a lender of last resort, as a liquidity provider. 

In the case of the TARP and the TALF, which we’re discussing 

today, that was a very important role of the TARP in allowing the 

Federal Reserve to participate in the TALF with the Treasury and 

yet maintain its position as a liquidity provider by having the credit protection provided by that program. 

Dr. TROSKE. Thank you. 

The CHAIRMAN. Superintendent Neiman. 

Mr. NEIMAN. Thank you. 

I’d like to shift to another area, probably one that you’re not expecting, and that’s the critical lesson that we learned from the financial crisis on the inextricable link between safety and soundness and consumer protection and the fact that loans that are 

made to individuals—either on onerous terms or loans that cannot 

be paid back—have a clear impact on financial stability. 

One of the most prominent steps to fix this problem, in DoddFrank, was the establishment of the Consumer Financial Protection Bureau. But regulators, particularly some of the witnesses 

here today, clearly are not off the hook when it comes to consumer 

protection. Certainly regular institutions below the $10 billion level 


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continue to be reviewed for compliance by their existing federal 

regulators. 

But what I’m interested in, and maybe we could start with Mr. 

Cave as deputy director of the Complex Institution Unit at the 

FDIC, is how do you incorporate consumer protection into your risk 

assessment at these large institutions, particularly those over 10 

billion, where you no longer have responsibility for direct consumer 

compliance examination that will be shifted to the CFPD? 

Mr. CAVE. I’d be happy to answer that question. First off, at the 

FDIC we view safety and soundness and consumer protection as 

going hand-in-hand. We have made some changes in our structure 

at the FDIC recently, creating a new Division of Consumer Protection to continue to give that very much the focus that’s necessary. 

That group will work very closely with our supervision group. 

But, it’s a very important issue. I think that the recent foreclosure situation highlights the fact that what can happen on the 

consumer issues can have an impact for the large institutions. And 

it goes to show the importance of having the structures and controls in place to deal with those issues. Regulators very much look 

at those structures and controls to ensure that those are in place 

because consumer issues could create risks to these institutions. 

Mr. NEIMAN. So how will the actual supervision process change 

going forward? So I assume there will be a formal process for sharing exam information with the CFPB when they take on that responsibility. But the risk—you’re still responsible for assessing risk 

within those institutions, assessment management. So how will you 

be able to assess management, assign ratings without having a 

clear understanding of the processes and controls around risk? Will 

it be beyond simply relying on the information from the CFPB? 

Mr. CAVE. For the large institutions, our role will continue to be 

in a back up capacity. So we’re used to being in that role, of having 

to work with other regulators to ensure that we have the information we need to assist. From that standpoint, for the large institutions, we have some experience there. We’ve made some improvements to where things weren’t as enhanced, I think we would continue to work along those lines. 

Mr. NEIMAN. Thank you. I don’t want to exclude other witnesses. 

And you know, when blame is assessed there’s often fingers being 

pointed across the board with respect to institutions and credit rating agencies, and regulators are certainly not left out of that list. 

One of the issues that comes up frequently is the ability of regulators and examination personnel to stay current and have the expertise to understand the complexity of transactions at some of the 

largest most sophisticated financial institutions in the world. 

I’d like to get your sense of if this is an issue. How do you change 

or are you changing, either the incentives or the hiring? What are 

the issues around of being able to stay ahead and on top of these 

complex transactions at some of the most sophisticated institutions 

in the world? 

Mr. LAWLER. We are indeed trying to develop a new program of 

examiner training, internally, to address just those kind of problems. 

Mr. NEIMAN. Mr. Cave. 


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Mr. CAVE. At FDIC we recently created the Office of Complex Financial Institutions. I’m the Deputy Director of the monitoring section. There’s a few things going on there that are important to 

note. We’ll have a group that is responsible for having onsite presence in the largest institutions. So we will have teams that will 

look at specific institutions and look at all of the risks associated 

with those. In addition, we’ll be creating a systemic risk branch 

that will look at institutions horizontally—across institutions—to 

see where there might be outliers, where there might be areas of 

risk, and where there might be certain portfolios that require our 

onsite teams to devote more attention. 

So by covering the waterfront, both looking vertically at the institution and horizontally, we believe that we’ll get a better picture 

of what’s going on. And that will feed very much into our resolutions group that will also be part of the Office of Complex Financial 

Institutions and be responsible for the resolution plans. This will 

provide information to say, ‘‘We’re seeing some things here that 

concern us, I think we need to look further into the resolution 

plans, see how the institutions are dealing with it.’’ So, we have 

that hand-in-hand. 

The other area we have is an international section. Because, as 

it was noted in the earlier panel, having the coordination for these 

large institutions beyond the U.S. borders is essential to ensure 

that we will have plans that actually mean something when they’re 

needed. So we will have a group that will be dedicated to working 

with the international regulators to make sure we’re talking the 

same language. 

Mr. NEIMAN. Thank you. So there is no doubt, the fact that I am 

a current regulator, I am totally confident that regulators have the 

ability, that the types of people they are attracting have the ability 

and experience to stay current in order to provide that kind of oversight role. This is something that we should never lose sight of and 

though it will continue to be a challenge, it will certainly be a top 

priority. 

So thank you all. 

Mr. LAWLER. And I should have added, as Jason and also the Fed 

and the FDIC and all of the regulators that are part of FSOC have 

developing units to address systemic risk issues that go across institutions. 

Mr. NEIMAN. Thank you. 

The CHAIRMAN. And thank you very much. Thank you for being 

witnesses. Thank you for your public service. 

I think as Superintendent Neiman said, it goes without saying 

that one of the features of our democracy is that we have regulators that have to work. And it only works because we have good 

people in regulatory agencies. And the sacrifices made by people in 

the regulatory agencies and people in public service and especially 

people in the federal service is something I’ve always been amazed 

at. 

So I just want to thank you again. And we’ll bring up the next 

panel. 

I am very pleased now to welcome our third panel of distinguished economists. Joseph Stiglitz, a Nobel Laureate, University 

Professor at Columbia University; Allan Metzger—Meltzer, the 


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Allan H. Meltzer University Professor of Political Economy at Carnegie Mellon; Simon Johnson, the Ronald A. Kurtz Professor of Entrepreneurship at MIT Sloan School of Management and a senior 

fellow at the Peterson Institute for International Economics and 

Luigi Zingales, the Robert C. McCormack Professor of Entrepreneurship and Finance and the David G. Booth Faculty Fellow at 

the University of Chicago Booth School of Business. Thank you 

very much for coming. I want to thank you all. 

Please keep your oral testimony to five minutes so we can have 

ample time for questions. Your complete written statement will be 

printed in the record. 

We’ll begin with Mr. Stiglitz. 

STATEMENT OF JOSEPH E. STIGLIZ, NOBEL LAUREATE AND 

UNIVERSITY PROFESSOR, COLUMBIA BUSINESS SCHOOL, 

GRADUATE SCHOOL OF ARTS AND SCIENCES (DEPARTMENT 

OF ECONOMICS) AND THE SCHOOL OF INTERNATIONAL AND 

PUBLIC AFFAIRS 

Dr. STIGLITZ. Well thank you very much for this opportunity to 

share with you my views about the success and failures of TARP. 

TARP and the recovery of troubled assets were not ends in themselves, but means to an end, namely the recovery of the economy. 

TARP was justified to the American people as necessary to maintain the flow of credit. It was hoped that it would provide—play a 

pivotal role in dealing with the flood of mortgage foreclosures and 

the collapse of the real estate market that led to the financial crisis. 

In these ultimate objectives TARP has been a dismal failure. 

Four years after the bursting of the real estate bubble and three 

years after the onset of recession, unemployment remains unacceptably high, foreclosures continue almost unabated and our economy is running far below its potential, a waste of resources in the 

trillions of dollars. Lending, especially to small- and medium-size 

enterprises, is still constrained. While the big banks were saved, 

large numbers of the smaller community and regional banks that 

are responsibility for much of the lending to SMEs are in trouble. 

The mortgage market is still on life support. 

But TARP has not just failed in its explicit objectives, I believe 

the way the program was managed has, in fact, contributed to the 

economy’s problems. The normal laws of capitalism where investors 

must bear responsibility for their decisions were abrogated. A system that socializes losses and privatizes gains is neither fair nor 

efficient. TARP has led to a banking system that is even less competitive, where the problem of Too Big to Fail institutions is even 

worse. 

There were six critical failings of TARP. First, it did not demand 

anything in return for the provision of funds. It neither restrained 

the unconscionable bonuses or payouts and dividends, it put no demands that they lend the money that they were given to them, it 

didn’t even restrain their predatory, speculative practices. Secondly, in giving money to the banks it should have demanded appropriate compensation for the risk borne. It is not good enough to 

say that we were repaid or we will be repaid or we will be almost 

repaid. 


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If we had demanded arm’s length terms, terms such as those 

that Warren Buffett got when he provided funds to Goldman Sachs, 

our national debt would be lower and our capacity to deal with the 

problems we had would be stronger. The fairness of the terms is 

to be judged ex ante, not ex post, taking into account the risks at 

the time. 

Thirdly, there was a lack of transparency. Fourthly, there was a 

lack of concern for what kind of financial sector should emerge 

after the crisis. There was no vision of what a financial sector 

should do. And not surprisingly, what has emerged has not been 

serving the economy well. 

Fifthly, from the very beginning TARP was based on a false 

premise, that the real estate markets were temporarily depressed. 

The reality was that there had been an enormous bubble for which 

the financial sector was largely responsible. It was inevitable that 

the breaking of that bubble, especially given the kinds of mortgages 

that had been issued, would have enormous consequences that had 

to be dealt with. Many of the false starts, both in asset recovery 

and homeowner programs, have been a result of building on that 

false premise. 

Particularly flawed was the PPIP, a joint public/private program 

designed to have the government bear a disproportionate share of 

the losses, the private sector, while putting up minimal money, 

would receive a disproportionate share of the gains. It was sold as 

helping the market re-price but the prices that were—that would 

emerge would be prices of options, not of underlying assets. The 

standard wisdom in such a situation is summarized in a single 

word, ‘‘restructure.’’ But TARP, combined with accounting rules 

changes, made things worse. 

The sixth critical failure of TARP was that some of the money 

went to restructuring securitization under the TALF program, 

without an understanding of the deeper reasons for the failure of 

mortgage securitization. These attempts to revive the market have 

failed, and to me this is not a surprise. 

There were alternative approaches, evident at the time of the crisis and even more so as time went on, that I describe more fully 

in my written testimony. These approaches, had they been taken, 

would have led not only to a strong economy today but would have 

led to our government being in a stronger fiscal position. 

We might say, ‘‘Oh, this is water over the dam,’’ but it’s not. We 

have not repaired our banking system and indeed, with the enhanced moral hazard and concentration in the financial sector, the 

economy remains very much at risk, in spite of Dodd-Frank. Our 

economy is not back to health and will not be until and unless 

lending can be restored, especially to small- and medium-size enterprises. This means that we need a more competitive financial 

sector and one more focused on its core mission of lending. 

A wide—there is a wide array of important activities performed 

by the financial sector, but not all of them should be undertaken 

by government-insured banks. Banks won’t focus on lending if they 

can continue to make more money by publicly underwritten speculation and trading or by exploiting market power in the credit and 

debit card markets. Moreover, Too Big to Fail institutions, whether 

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vestment banks, pose an ongoing risk to our economy and the 

soundness of government finances. 

I want to conclude with two more general comments. First, we 

should not forget the process by which TARP and this oversight 

panel were created. That political process does not represent one 

of the country’s finest moments. At first a short three-page bill was 

presented giving enormous discretion to the Secretary of Treasury 

and without congressional oversight and judicial review. Given the 

lack of transparency and potential abuses to which I have already 

referred, which occurred even with full knowledge that there was 

to be oversight, one could only imagine what might have occurred 

had the original bill been passed. 

Fortunately, Congress decided that such a delegation of responsibility was incompatible with democratic processes. On the other 

hand, the political deals required to get TARP passed, with an estimated $150 billion in largely unjustified and unjustifiable tax 

breaks, do not speak well for our democracy. When we think of the 

cost of TARP, surely the price tag associated with those tax breaks 

should be included in the tally. 

Nor should we underestimate the damage of the correct perception that those who were responsible for creating the crisis were 

the recipients of the Government’s munificence. And the lack of 

transparency that permeated this and other government rescue efforts has only reinforced public perceptions that something untoward has occurred. 

For these and the other failings of TARP, our economy and our 

society have paid and will continue to pay a very high price. 

[The prepared statement of Dr. Stiglitz follows:] 


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The CHAIRMAN. Thank you. 

Mr. Meltzer. 

STATEMENT OF ALLAN H. MELTZER, ALLAN H. MELTZER UNIVERSITY PROFESSOR OF POLITICAL ECONOMY AT CARNEGIE MELLON UNIVERSITY 

Dr. MELTZER. Mr. Chairman, members, gentlemen. 

The invitation to this hearing, like most discussions of the TARP 

program asked whether TARP succeeded in preventing major financial failures. My answer is yes, TARP avoided a potential financial disaster. 

My concern is with a question. Congress should not start with a 

crisis that followed Lehman Brother’s failure, instead it must ask 

and demand answers to some other questions. Why was it necessary to issue about a trillion dollars of public money to prevent 

financial collapse? What, if anything, has been done to reduce to 

insignificance the prospect that another TARP will follow at some 

unknown time in the future? 

Like many other bad decisions, the use of public funds to prevent 

failures began small. In the 1970’s the Federal Reserve began the 

policy that became Too Big to Fail, by preventing the failure of 

First Pennsylvania Bank. That was followed by other bailouts. 

Soon bankers and financial firms recognized that becoming large 

was a way to reduce risk. Some recognized that they could take 

more risk. This is known as moral hazard. 

The process works like this. I’ve been present for some of these. 

Bankers and Treasury or Federal Reserve staff warn the principal 

policymaker that the failure invites a domestic or world financial 

crisis. Sometimes they say, ‘‘Mr. Secretary, your name will be on 

that crisis in the history books.’’ I’ve never found any way of overcoming that warning when the crisis occurs or seems imminent. 

It doesn’t help to point out that on the few occasions when there 

was no bailout, financial failures occurred but no crisis followed. 

One example is the failure of Penn Central Railroad in June, 1970. 

Penn Central Railroad was a major issuer of commercial paper. 

The commercial paper market closed to most issuers. Federal Reserve Chairman Arthur Burns was anxious to protect the commercial paper market by bailing out Penn Central. Budget Director 

George Schultz opposed. President Nixon made the mistake of appointing an outside counsel from his old Nixon law firm. Congressional leaders, led by Congressman Wright Patman, viewed that as 

an effort to assist the Republican Party. That ended the bailout. 

The taxpayers were lucky that time, there was no crisis. The 

commercial paper market declined but borrowers got the accommodation at banks. No crisis occurred. After a few months the commercial paper revived—market revived. 

Drexel Burnham Lambert, the major issuer of non-investment 

grade debt at the time, went bankrupt. No bailout and no crisis. 

Other financial firms took over the business that Drexel had done 

and Drexel went into bankruptcy. 

The main reason that policymakers resort to Too Big to Fail in 

ever larger amounts is regulatory failure. Regulators do not require 

financial firms to hold enough capital. In the 1920’s large banks 

had capital—held capital equal to 15 to 20 percent of their assets. 


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Many small banks, but no large banks, failed. Even in the early 

years of the Great Depression, very few large banks failed. Stockholders, not the general public, bore those losses. That is as it 

should be, in my opinion. 

After the recent crisis Congress passed the Dodd-Frank bill. 

Dodd-Frank did nothing to increase capital requirements. The 

international regulators at Basel did better, but did not increase 

capital enough. Further, Dodd-Frank put the Secretary of the 

Treasury at the head of the committee to decide on Too Big to Fail. 

That decision embeds two errors in the law. First, the time to prevent bailouts is not when the crisis occurs, it has to be established 

policy, not a judgment made when failure threatens the international financial market. We profess to believe in the rule of law, 

we need a law that embeds a rule and a policy that applies it. 

Second, the Secretary of the Treasury is very often the principal 

person who favors Too Big to Fail. Nothing in Dodd-Frank changes 

these incentives, it continues bailouts, it even provides money for 

them. 

I will repeat the proposal I’ve made in several previous hearings, 

that some minimum size to protect community banks, Congress 

should require banks to increase capital relative to their assets as 

asset size increases. Instead of subsidizing large banks we should 

make them pay for the cost that they impose. If a bank increases 

assets by ten percent, capital must increase by more than ten percent. 

The proposal has three major benefits. First, stockholders and 

managers bear the losses, not the taxpayers and the public. Second, the rule encourages prudence and eliminates the imprudent 

by replacing owners of failed banks. Third, Congress can eliminate 

many of the regulations included in Dodd-Frank. Regulation will 

not strengthen financial institutions, more capital will. 

In the most recent crisis Bear Stearns was the first big failure. 

Instead of letting it fail the Federal Reserve took some of the worst 

assets on to its balance sheet, shifting many losses to the public. 

The market read the decision as a sign that Too Big to Fail remained the policy. They got a big shock when without much warning, in the midst of a recession, Lehman Brothers was allowed to 

fail. This sudden policy change without warning in the midst of a 

recession created massive uncertainty. I believe Secretary Paulson 

and Chairman Bernanke were wrong to change policy without 

warning, but I praise the prompt response called TARP that provided liquidity to all parts of the market after making a huge error. 

TARP avoided compounding the error. 

Notice, however, what has happened. Chairman Bernanke told 

us that the top funds were short term, they would run off in due 

course, thereby shrinking the Federal Reserve balance sheet. But 

instead of shrinking the Fed, at the pressure from the Treasury, 

bought mortgages more than offsetting the original TARP funds. 

Again, Chairman Bernanke told us that the mortgages would 

start—would be repaid so the balance sheet would shrink. Again, 

that didn’t happen. QE–2 purchased more than—purchases more 

than offset the reduction in mortgages. 


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I don’t believe that the Federal Reserve has a credible strategy 

to reduce its balance sheet. We face the prospect, in future years, 

of high inflation. 

Three last remarks. First, how can Congress continue to justify 

a system that makes the public pay for bankers’ mistakes? Second, 

remember that capitalism without failure is like religion without 

sin, it doesn’t work. Third, Congress should demand a detailed 

statement of how the Federal Reserve plans to shrink its balance 

sheet, including an estimate of how high market interest rates will 

have to rise. 

[The prepared statement of Dr. Meltzer follows:] 


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The CHAIRMAN. Thank you. 

Mr. Johnson. 

STATEMENT OF SIMON H. JOHNSON, RONALD A. KURTZ (1954) 

PROFESSOR OF ENTREPRENEURSHIP, MIT SLOAN SCHOOL 

OF MANAGEMENT AND SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Dr. JOHNSON. Thank you, Senator Kaufman. 

I completely agree with and would like to endorse the views of 

both Professor Stiglitz and Professor Meltzer. And let me frame my 

agreement in the form of the following question. Does anyone here 

think that Goldman Sachs could fail? If Goldman Sachs hits a rock, 

a hypothetical rock, I’m not saying they have and I’m not saying 

they will, but if they were to hit a rock, does anybody here believe 

that it would be allowed to collapse, fail, go bankrupt, 

unencumbered by any kind of bailout now or in the near future? 

I’ve asked this question around the country and across the world 

for the past two years, I’ve yet to find anyone who realistic thinks 

it could fail. I found some people who wish it could fail, but that’s 

a different question. 

Goldman Sachs is too big. Goldman Sachs has a balance sheet 

around $900 billion in the latest data. It was a $1.1 trillion bank 

when it came close to failing in September 2008 and it was rescued 

by being allowed to convert into a bank holding company. It is too 

highly leveraged. Those debts are held in a complex manner 

around the world, including through its derivative positions. And 

it is too inherently cross border. We—I would remind you, and I 

would ask you to reinforce with everyone you meet, we do not have 

a cross border resolution authority. Whatever you think of DoddFrank, and I share many of the reservations already expressed, 

there is, there can be no cross border resolution authority in U.S. 

legislation. You need a cross border agreement. 

Among other things, I’m the former chief economist of the International Monetary Fund, I know well the technical people, the G20, 

the G10, various bodies responsible in the alphabet soup of international regulation and macro-prudential supervision, I know these 

people, I talk to them, there will not be a cross border resolution 

in our lifetimes. No mechanism, no authority. You cannot handle, 

in an orderly fashion, the failure of a bank like Goldman Sachs or 

JP Morgan Chase or Citigroup which operate in 50, 100, 120 countries. You can let them collapse but then you face another Lehman, 

or you can bail them out with some form of conservatorship where 

you protect the credit, and that’s the key point, and then you have 

all of the complications Professor Stiglitz and Professor Meltzer put 

forward. 

Or it gets worse. You enter another phase of what the Bank of 

England now calls a ‘‘doom loop’’ where repeated boom, bust, bailout cycles lead you not just to some unfortunate situation where 

there’s always a transfer from the public to the bankers, it leads 

you to fiscal ruin. And if you don’t believe me look carefully at the 

experience of Ireland, where three big banks became two times the 

size of the Irish economy and they blew themselves up at enormous 

cost. That is where this leads. It leads to fiscal ruin. 


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What we should have done along with TARP or in addition to it, 

quickly on its heels, is implement a form of size cap, a form of leverage cap relative to GDP, just as was proposed in the BrownKaufman Amendment to Dodd-Frank, which unfortunately failed 

on the floor of the Senate, I believe 33 to 61. 

We should also have implemented a cross border resolution 

framework, although as I said, that will always prove elusive. 

Given that those measures have failed and that water is now under 

the bridge, we should do exactly what Professor Meltzer and Professor Stiglitz have suggested. We should have much higher capital 

in these banks. 

It is astonishing, but unfortunately true, that Basel III supplemented with all the supplementary cushions and all of the implementation that we will see for systemically important financial institutions, the so-called SIFIs, will I believe leave us with a Tier 

I capital requirement below that which Lehman Brothers had the 

day before it failed. Lehman Brothers had 11.6 percent Tier 1 capital. We will end up between 10 and 11 percent. 

How can this make any sense? The Swiss national bank is requiring 19 percent capital requirements, although I would suggest 

they go with pure equity for all 19 percent. The Bank of England 

is actively pursuing and trying to implement capital requirements 

closer to 20 percent. 

Raising capital requirements in this form is not socially costly. 

I know that the bankers claim vehemently to the contrary, but they 

are wrong. And if you don’t believe me you should consult the research of Anat Admati and her colleagues at Stanford and other 

leading universities. These are the top people in finance who are 

not captured by the financial industry and they say we need more 

capital, it’s not costly and we need a version, I would suggest, of 

exactly what Professor Meltzer just laid out for you most 

articulately. We are not going to do it. 

In conclusion, let me quote Larry Summers. His 2000 Ely Lecture to the American Economic Association where he reviewed the 

experience of financial crisis around the world to that point, particularly in the 1990s when he was at the U.S. Treasury. And Mr. 

Summers said, ‘‘It is certain that a healthy financial system cannot 

be built on the expectation of bailouts.’’ 

[The prepared statement of Dr. Johnson follows:] 


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The CHAIRMAN. Mr. Zingales. 

STATEMENT OF LUIGI ZINGALES, ROBERT C. MCCORMACK 

PROFESSOR OF ENTREPRENEURSHIP AND FINANCE AND 

THE DAVID G. BOOTH FACULTY FELLOW, UNIVERSITY OF 

CHICAGO BOOTH SCHOOL OF BUSINESS 

Dr. ZINGALES. Thank you, Chairman Kaufman and members of 

the Congressional Oversight Panel. Thank you for inviting me. 

In providing—TARP and the financial sector economy it’s important to establish what is a counter factor, what will happen in the 

absence of TARP. Chairman Bernanke and then Treasury Secretary Paulson repeatedly presented their choice as an alternative 

between TARP and the collapse of the entire financial system. If 

the alternative was indeed the abyss, TARP is clearly an unqualified success. We have escaped the abyss. 

Even if the alternative was between TARP and some chance of 

falling into the abyss, we have to conclude that TARP was a success. The cost of TARP, however big, is small with comparison to 

the possibility of a second Great Depression. 

Pietro Veronesi and I estimated the bankruptcy of the ten largest 

banks would have wiped out 22 percent of their value for a total 

of 2.4 trillion, a number that doesn’t consider the cost imposed on 

the rest of the U.S. economy which could be a multiple of that. The 

financial system was at risk and some intervention was needed. 

Yet, it is both false and misleading to say there were no other alternatives. False because there were feasible and in fact superior 

alternatives. Misleading because it made TARP appear inevitable 

forcing people not to question its cost. 

By stating clearly why an intervention was needed, ie. where the 

market failed, it would have been possible to design plans more effective and less expensive. This is not just hindsight. On September 

19, 2008 I wrote a proposal to address the instability of the financial system through an emergency reform of the bankruptcy code 

that could have transformed the long term debt of shaking financial institutions into equity. The feasibility of this idea is proven 

by the fact that the Credit Suisse has not advanced a similar proposal to deal with future bailouts. The same is true for alternative 

plan to deal with home foreclosure and with the bankruptcy of GM 

and Chrysler. 

I didn’t write a plan for AIG because I never understood what 

the real goal of bailing out AIG was, to save European banks, Goldman Sachs or the policyholder. We have to rely on Wall Street for 

claims that the failure would have completely roiled markets. 

If we agree that other feasible alternatives did exist, then we 

have to consider the cost and benefits of TARP, vis a vis these alternatives. Veronesi and I estimated that the capital purchase program increased the value of banks’ debt by 120 billion at a cost of 

32 billion for the taxpayers. Though in spite of the enormous value 

created by the government intervention, taxpayers ended up with 

a large loss. In the auto companies’ case, creditor were now the 

winner, the autoworkers union was with a gain of 16 billion. There 

is, however, a consistent lower, the taxpayers who lost 59 billion 

in the rescue. 


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TARP was the largest welfare program for corporations and their 

investors ever created in the history of humankind. That some of 

the crumbs have been donated to the autoworkers unions doesn’t 

make it any better. It makes it worse. It shows that that redistribution was no accident, it was a premeditated pillage of defenseless taxpayers by powerful lobbyists. TARP is not just a triumph 

of Wall Street over Main Street, it is the triumph of K Street over 

the rest of America. 

Yet, the worst long term effect of TARP is not the burden imposed on taxpayers but the distortion to incentives it generated. 

First, its excessively lenient terms of the bailout ensure that the 

legitimate assistance recapitalized in smaller banks and at market 

terms became more difficult. 

Second, the way subsidies were distributed under TARP show 

that the enormous return to lobby. A member of the Bush Treasury 

admitted that during the summer of 2008 any phone call from the 

212 area code had one message, ‘‘Have the government buy the 

toxic assets.’’ Eventually this constant request became government 

policy. 

Third, the way the bailout was conducted destroyed the faith 

that the Americans have in the financial system and in the government. In a survey they conducted in 2008, 80 percent of the American people stated that the government intervention made them 

less confident to invest in the financial market. 

Last but not least, it entrenched the view the large financial institutions cannot fail and their creditors cannot lose. This expectation leads investors, such as a CFO I know, to invest their money 

in the banks most politically collected, not in the most financially 

sound. 

This is the end of the credit analysis and the beginning of political analysis. 

[The prepared statement of Dr. Zingales follows:] 


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The CHAIRMAN. Thank you. 

Now we’ll begin the questions. And the first question I have is 

moral hazard. The panel, one of the things that has been incredible 

about the way this panel’s functioned since I’ve been here is, and 

not because of me, because of the other panelists, is how bipartisan, non-partisan things have been. And I think moral hazard 

has been raised in every one of our discussions, just about everything that TARP’s done and our concerns about that. 

Could each one kind of—this is kind of the history of TARP. Can 

each one kind of talk about how you think TARP impacted on 

moral hazard? 

Mr. Stiglitz. 

Dr. STIGLITZ. You know, I think the point has been made by all 

four of us, and we didn’t coordinate our testimony. 

The CHAIRMAN. Right. 

Dr. STIGLITZ. And I think this is reflecting where the broad span 

of the economics profession is from a whole spectrum. We don’t 

agree about a lot of things, but one of the things we do agree is, 

incentives matter. And that if you know that you’re going to get 

bailed out no matter what your losses are, then you have an incentive to take on more risk. The market gets distorted because the 

Too Big to Fail banks get capital at a lower cost. So that money 

doesn’t flow on the basis of efficiency, but on the basis of this connectedness, is the way Professor Zingales put it. 

So it’s manifested in absolutely every way. It also gets manifested at a higher level, it’s not quite moral hazard in the usual 

way, but the banks have gotten much higher returns out of their 

political investments than any other form of investment. And you 

might say, from the point of view of a firm obligated to maximize 

your returns to your shareholders, ‘‘Where is the best place to put 

your money? It’s on K Street.’’ 

The CHAIRMAN. Mr. Meltzer. 

Dr. MELTZER. I agree completely with Joe. [Laughter.] 

He’s absolutely right. There has to be incentive. Those incentives 

will never come if you say to the Secretary of the Treasury, ‘‘Look, 

there’s this crisis and we have to do something about it now. We 

have to do something about it before. We have to have capital in 

the banks. We have to give an incentive to the bankers to be prudent in the risks that they take.’’ No set of regulations is going to 

do that. 

You know, I’ve given this talk to lots of places, including the 

Council on Foreign Relations, where I said regulations are made by 

bureaucrats and regulators and is circumvented by lawyers and 

markets. First question was a man got up and said, a large Wall 

Street audience, first question came from a man who said, ‘‘I’m a 

Wall Street lawyer, who do you think shows them how to circumvent them?’’ [Laughter.] 

We need to have capital so that the incentives are on the banker 

and stockholders to avoid TARP. We started small with First Pennsylvania. Before the 1970’s we didn’t bailout large banks. It’s only 

something that has been growing and growing and growing. And 

it’s time for Congress to put an end to it. 

The CHAIRMAN. Mr. Johnson. 


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Dr. JOHNSON. Gene Farmer, the father of the efficient markets 

view of finance, said on CNBC recently, ‘‘Too Big to Fail is not a 

market, it’s a government subsidy scheme.’’ And it’s an abomination and it should end. The new GSEs, the government sponsored 

enterprises of today are—include, most prominently, the largest six 

bank holding companies in the country: Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan 

Stanley. These firms can borrow more cheaply because they are 

backed by the government. 

The estimates—responsible, realistic estimates are they have a 

funding advantage about 50 basis points, .5 of a percentage point. 

They can get bigger, they want to get bigger, they want to become 

more global. These are all exactly the things we can’t deal with 

when they fail. It’s all the things that make it harder for any secretary of the Treasury to refuse them a bailout. 

Gene Farmer suggests, and I actually agree with him, we should 

be looking at capital requirements closer to 40 or 50 percent. This 

isn’t—this is just the percent of their assets financed with equity. 

I know it’s anathema to the modern bankers, because they’re excessively focused on return on equity. 

And also they’re not doing the analysis right. They’re not following the principles of basic finance. 

And again, I refer you to the website of the analysis of Anat 

Admati and her colleagues who have written extensively about this 

for a broad audience and explained it to the newspapers repeatedly 

in op eds and letters. The technical people get this, the bankers 

refuse because they want to be paid on a risk—on a return on equity basis that’s not risk adjusted. That way they can get a lot of 

cash out in the boom and they walk away a long time before society 

bears these horrible ultimate costs. 

The CHAIRMAN. Mr. Johnson, let me just follow up on that and 

then I’ll get to Mr. Zingales. 

The plan of major banks to increase their dividends. How does 

that fit into capital requirements and stockholders’ equity? 

Dr. JOHNSON. Senator Kaufman, it makes no sense at all. The 

Federal Reserve and the other responsible authorities have not yet 

determined—you know, so even within their own framework it 

makes no sense. They’ve not yet determined what a systemically 

important financial institution should hold. There are exactly the 

issues you were discussing with the previous panel, in terms of additional losses coming through from major lawsuits, various kinds 

of put-backs and so on. We don’t know how much capital they’re 

going to need to weather the next stage of the global cycle. And the 

Federal Reserve has not yet determined that. So why you would 

allow them to pay out any of this capital as dividends? This is just 

reducing their equity, it is allowing them to have more leverage in 

their business. 

The bankers, again, want it because they get paid on a return 

on equity basis. But this is just letting them leverage up. And 

there’s a put option. We write the put option, we bear the cost of 

that. You’re increasing the put option, which is not scored in anyone’s budget, by allowing them to pay these dividends. It’s unconscionable, it’s irresponsible and the Federal Reserve should back off 


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from allowing this increase in dividends, which is apparently where 

they’re currently headed. 

The CHAIRMAN. Thank you. And I’ll take this time off my next 

thing, Mr. Zingales, so we can have everyone comment. 

Dr. ZINGALES. Thank you. 

In terms of—I agree with most of—what everybody else has said. 

Let me point out one aspect of moral hazard that people generally 

don’t think of, because they always think about sort of shareholders doing crazy stuff. 

But moral hazard arises also on the size of investors. What I was 

mentioning in my testimony is during the crisis I was talking with 

a CFO who had to park his liquidity, it was in Europe. And he had 

like very large liquidity in this company and was worried and he 

said, ‘‘I need to invest in a safe place. Where is a safe place, and 

not the banks with more capital, other banks who are more politically connected.’’ 

And so this creates the incentives for lenders to actually lend 

more to the banks that are politically connected, independently of 

their safety. And bankers who find this—that extremely cheap, find 

it irresistible to take back. And sometimes they take back because 

they really sort of want to speculate, sometimes it’s because they 

just don’t see the end in sight. I think that in the case of Lehman, 

probably at the end, Dick Fuld was a fool, was not excited playing 

on some strategic risk taking, was simply not seeing that—the mistakes he was doing. But the credit market was not there to stop 

him because the credit market felt ensured by the Too Big to Fail 

policy. 

Let me add another couple things that are slightly different to 

my colleagues here. Number one, I would like, like Professor 

Meltzer, stop the Too Big to Fail by legislation. I don’t think this 

is feasible. I think that it’s like trying to stop a parent from saving 

a child when the child is in danger. I think that we should not bailout our children, it’s not educationally good, but when their life is 

in danger we can’t resist. And even if we promise before not to do 

it, eventually we’re going to do it. 

So the very way to address sort of this problem is not by legislating out an intervention, it is by adding a system of intervention 

in place. Because the real problem of the regulator is they intervene too late. It’s not that they don’t have the instruments. 

Let’s take a case where they did have the instrument, like in 

savings and loans or in the case of Washington Mutual, the regulator had the—all the instruments to intervene. You know when 

they intervene? When the credit default swap price was 3,305. It 

means 33 percent spread over the risk free rate. 

And in spite of this, if you Googled Washington Mutual and 

shareholders, you find that there are some shareholders sued because the shareholders are complaining that the regulators are— 

intervene too early. I always say, if you are a turkey Thanksgiving 

always comes too early. And if you are sort of a shareholder of a 

bank that is really out of the money, the regulator always intervenes too early and you exert an enormous political pressure for 

them to intervene. 

So we need to have the market-based signal to force the regulator to intervene early on and give a choice, either you recapitalize 


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or you are liquidated. And in a sense, what the gentleman earlier 

was saying, from the Treasury, the stress test was exactly that, 

was an out and out choice. Either you sort of recapitalize or we 

take you over. And all of a sudden all the problems in raising capital disappeared. 

The CHAIRMAN. Thank you very much. I just lost my second 

round. 

Mr. McWatters. 

Mr. MCWATTERS. Thank you. That’s a hard act to follow. 

When I read your testimony last evening, it was well after midnight, I’d just flow in and I was thumbing through the pages and 

I thought, ‘‘Okay, there’s four minds here thinking pretty much the 

same way.’’ And I happen to agree with most everything I was 

reading, which was delightful. 

It raises a question though. If we go back to September of 2008, 

okay, September, 2008 if President Bush and Secretary Paulson 

had called you and said, ‘‘We’re in a jam, we’re in a really bad jam 

here. What should we do,’’ what would you have said? 

Mr. Stiglitz. 

Dr. STIGLITZ. Well, I think it is clear that there had to be some 

government action. I think it’s also clear that we’ve all said the 

real mistake was letting things get to that position and also the 

case that given what we know now, the Fed knew that there was 

a lot of turmoil in the financial markets well before. Everybody 

knew; the Financial Inquiry Commission pointed this out, that 

after Bear Stearns it was known that Lehman Brothers was very 

likely—this argument that they didn’t have authority is a little bit 

nonsense, because if they really believed that, they should have 

gone and asked for the authority. So they needed to do something. 

The real problem that I had, and I tried to emphasize in my remarks, was the way they gave money to the banks was wrong. 

Now, interesting, when TARP was passed, they said they were 

going to buy the troubled assets. Everybody pointed out that that 

was a flawed approach and to their credit Paulson changed the 

strategy after several weeks. And it would have been an even 

worse disaster had he not changed that strategy. But the way the 

money was put in, as I said before, without conditions, without 

thinking about the structure of where you wanted to go, and most 

importantly without thinking about the mortgage market which 

was the source of the—the underlying source of the problem. It 

seemed to me that they went in without any vision, without any 

understanding of how to get re-lending started, what to do with the 

mortgage market. And they’d had plenty of time to think about 

that. So it’s not the intervention, it’s how the intervention was 

done. 

Mr. MCWATTERS. Okay. Mr. Meltzer. 

Dr. MELTZER. I’m in a good position to answer your question, Mr. 

McWatters, because I appeared on the Lehrer Program when the 

program was first announced and I said, ‘‘I’m against it. He hasn’t 

explained how it’s going to work, he hasn’t explained why it should 

work, he doesn’t have a coherent plan. We need a coherent plan.’’ 

I’ve got—I’ve been on TV, such programs, many times. I received 

an overwhelming response from the public. Nobody that I knew, it 

went 149 to 1 on my side. 


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I got a call from the Treasury, they said, not in so many words, 

but the message was clear, the message was, ‘‘Okay, wise guy, 

what would you do?’’ So I went to the Treasury and I told them 

what I would do. I said, ‘‘Call the banks in, raise capital in the 

market. If you can raise—if you need $20 billion, raise $10 billion 

in the marketplace and we’ll give you $10 billion at subsidized 

rates. If they can’t do that they’re done.’’ The Treasury eventually 

did something like that, close to that but at the time they didn’t 

want to hear it. 

Capital, that’s spelled in capital letters, is what protects the public and incentivizes the management and the stockholders. 

Mr. MCWATTERS. Okay. Thank you. 

Mr. Johnson. 

Dr. JOHNSON. If you give me the choice between global calamity 

and unsavory bailout, I’m going to suggest unsavory bailout, along 

the lines of Mr. Meltzer recommending the capital injection, that 

is best practice if you find yourself with that choice. 

But I think all of the suggestions we’re making are with regard 

to how do you learn the lesson and reduce the chance of a global 

calamity scenario going forward. And I completely agree, that given 

the options now on the table, capital is the answer. We need a lot 

more capital and it needs to be pure capital, real capital, not funky 

capital, not hybrid capital, not contingent capital. It needs to be 

real equity capital in our financial system. 

This is not costly, from a social point of view. The bankers don’t 

want it. They hate it. They’re fighting against it. All the arguments 

they brought forward against it are pure lobbying. They have no 

research on their side. They have no analysis on their side. It is 

complete public relations exercise. We need a lot more capital in 

the financial system here. And we need to persuade anybody who 

wants to do banking business or financial sector related business 

in the United States from another country needs to have, whatever 

they do in the United States be just as well capitalized as our financial institutions. And hopefully that will be a lot more capital 

than we have today. 

Dr. ZINGALES. Also in my case the question is not so hypothetical. I am a member of the Committee on Capital Market Regulation and while I didn’t speak directly to Treasury, I did speak 

with the chairman of our committee who spoke with Paulson. And 

I had a very clear proposal that I articulated in two pieces that I 

reference in my testimony. 

One with a very subtle title, ‘‘Why Paulson is Wrong’’ and the 

second, ‘‘Plan B’’ where I would say it’s very simple, you basically 

require a bank to do a debt for equity swap. There is enough long 

term debt that can absorb those losses. And if you think that this 

requirement is coercive, you give the option to shareholders to buy 

back their shares through a scheme that is known in the literature 

as a batch scheme, which is very fair. 

So it would not have been coercive at all, it would have been immediate. And even—the only objection that people could raise to 

the Meltzer idea, which is a very good idea, is the market is not 

ready to provide that capital. In that particular case there wasn’t 

even that objection. So the plan was feasible. 


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And, as I said in my testimony, now the Credit Suisse is proposing it as the law of the land in Switzerland. Why? Because 

banks in Switzerland know that they are too big to be saved. And 

so they are concerned about what is going to happen in the future. 

In the United States they’re not concerned about that so they lobby 

in a different direction. 

Mr. MCWATTERS. Okay. Thank you. 

I’ll ask one more question. This will be my second round. If you 

fast forward to today and look at the other end of the bookend, 

March 4, 2011, you’ve all described problems we have now. The 

chair has described moral hazard and the like, we’ve all written 

and talked about moral hazard. What do you do today? I can anticipate your answers as I think you’ve given them, but just to make 

it very clear on the record, what would your recommendation be on 

March 4, 2011? 

Dr. STIGLITZ. Okay, very briefly. You know, first I want to emphasize the two things that we’ve already said. One, that you need 

more capital and that you need—the magnitude of more—increasing capital has to be commensurate with the size of the banks, the 

risk of the Too Big to Fail distortion has to be eliminated. 

But secondly, if you have a problem, I think Professor Zingales 

is right, you ought to play by the ordinary rules of capitalism which 

says when you go into bankruptcy you convert debt to equity. I 

mean it’s really just a version of the standard rules of capitalism. 

And you look at the numbers, say back in Citibank, they had 

enough long-term capital that it was more than enough to manage 

them, it was actually more than we actually put in. So the answer, 

you know, that we need to have the resolution authority, ought to 

be nothing more than basically the rules of capitalism. 

But I do feel that because there are what we call agency problems, that the owners of the bank—the managers of the banks do 

not necessarily act in the interest of the owners. This is, you know, 

we have a kind of managerial capitalism, that you have to go beyond that to have regulations and restrictions on risk-taking. And 

in particular, for instance, that it should not be allowed for government-insured institutions or very large institutions to be writing 

these kinds of risky derivatives and under other very high risk activities. 

So I think we do need additional regulations and more transparency that would circumscribe excessive risk taking by either 

government insured institutions or large institutions, because 

they’re implicitly government-insured, because I don’t think the 

capital is enough, is a full solution. 

Mr. MCWATTERS. Thank you. 

Dr. MELTZER. At the risk of sounding as though Simon Johnson 

and I collaborated, I would say, I’ll change the word capital to equity and picking up what he had said. And what would I would do? 

I would raise the requirement to say that for every—that after a 

minimum size, to protect community banks, you start to phase in 

capital requirements which start at 10, 10 percent and increase as 

the size of the bank increases so that it’s 11, 12, 13 going up toward 20. So that the largest banks will be paying what they were 

paying in the 1920’s. 


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And I would phase that in beginning now, because the big banks 

are reporting substantial profits. And I would give them three 

years to get to the required capital. 

And as far as other regulation is concerned, I’m a believer that 

regulation only works when it incentivizes the regulated. That is, 

if you compare drug regulation where you say, ‘‘Well, we’ll give you 

a monopoly and you produce this drug,’’ then you have someone 

who wants to protect his right. We have to go the same thing. Capital is one way to do it. There are other ways to incentivize the 

bankers. If we just give them prohibitions what we’ll get, you can 

see it happening, you can see the number of lobbyists, bankers that 

are in Washington every day trying to write the rules that were 

passed in Dodd-Frank. That isn’t the way we’re going to restrict future risks. 

Mr. MCWATTERS. Okay. Thank you. 

Dr. JOHNSON. Don’t allow them to pay dividends today. Nobody 

knows—we’re all agreeing you need more capital. Nobody knows 

how much capital is necessary. The—even the bankers will concede 

that the easiest way to increase equity in the business is to retain 

earnings. They have profits now. That money stays in the bank, it 

belongs to the shareholders. 

Paying out equity under these circumstances makes no sense in 

economic terms. It’s irresponsible. It encourages risk taking of 

these banks, high leverage bets and it’s completely contrary to the 

state of policy, both in the broad of the administration, Mr. 

Geithner says, ‘‘We need capital, capital, capital,’’ that’s what he 

says all the time. But they’re not pushing for enough capital. 

And it’s completely against the process. The federal Reserve process stress test and the determination of how Basel III will apply 

to systemically important financial institutions is not done, so why 

would you let them pay capital under these circumstances? It 

makes no sense and they shouldn’t do it. 

Mr. MCWATTERS. Okay. Thank you. 

Dr. ZINGALES. I agree with most of what has been said, with one 

qualification. I think the definition of capital, especially if it is done 

in accounting terms, is not particularly useful because Washington 

Mutual did not violate any capital requirement before it failed. As 

was reminded earlier, Lehman at 11 percent of capital just the day 

before it went bust. So I don’t think that this accounting based 

measure of capital are particularly useful. 

What we need to do is a market base. And Oliver Hart and I 

have a proposal based on credit default swap, you can have other 

proposals based on other indicators. 

But I think the notion is we don’t want to treat everybody the 

same, because there are virtuous banks, there are sort of people 

who behaved properly. Why should they be subject to the same 

rules? I think that the rule should be if your CDS is above a certain level you cannot pay dividends and you cannot pay cash 

bonus. You have to transform all the bonus you want into equity 

and that will likely play a bigger role in recapitalizing banks than 

even stopping dividends. 

Mr. MCWATTERS. Thank you gentlemen. 

The CHAIRMAN. Mr. Silvers. 


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Mr. SILVERS. Well, if I’ve learned one thing from this panel, it’s 

not to ask all of you the same question. [Laughter.] 

Actually I have several questions I would like to get answered, 

and so although I enjoyed listening to you I’m going to be specific 

in whom I’m asking. 

First, when Secretary Massad spoke one of the things that I took 

away from his testimony was the argument that while we have a 

lot of problems in our economy, those problems aren’t really related 

to TARP. Unemployment, foreclosures, so forth, that they didn’t 

really—perhaps even in credit provision are not really the fault of 

TARP or shouldn’t be—TARP shouldn’t be held responsible for it. 

Professor Stiglitz, I think I take your testimony to be of the view 

that you don’t agree with that. Can you explain what it is, in relation to those macroeconomic matters, that are related to TARP? 

Dr. STIGLITZ. Well, they’re related in the short run and in the 

long run. In the short run what I was trying to argue is that if 

you—they had given money to the banks in ways—in other ways, 

they could have induced more lending and induced more restructuring. So for instance, by the time we bailed out Citibank and 

Bank America, we were very large shareholders. We could have 

been even larger shareholders if we got shares—— 

Mr. SILVERS. If we got the value for the money, so to speak? 

Dr. STIGLITZ. Yeah, if we had gotten voice relative to the money 

we put in. If we used that shareholder voice to say, you can’t go 

make your profits out of speculation, you can’t go paying these bonuses, this goes back to the point paying out bonuses and dividends 

is decapitalizing the banks and what was needed was recapitalization. And we allowed the decapitalization of the banks through the 

payouts of bonuses and dividends. We didn’t put any pressure, any 

constraints on the behavior of the banks, so there were—including 

the restructuring of the mortgages. 

So given the amount of money that, you know you’re putting in— 

if you’re putting in hundreds of billions of dollars you should have 

some voice in what happens. And the result of that is that we 

didn’t get what we wanted, which was a restarting of the economy. 

The long run are the more—are the even worse problems, because we have a more concentrated banking system, that means interest rates will be higher, spreads will be higher. And the result 

of that is not only are there the long risks that we’ve been talking 

about but in the short run the—because the market is less competitive the flow of money will, in the long run, not be what it should 

be. 

Mr. SILVERS. Okay. Professor Johnson, Treasury seems convinced 

that the banks are healthy, sound or something like that. I wonder 

if you would comment on two things. One is, is that right? And 

two, how can anyone know that’s right and given the state—we’ve 

talked a lot about the capital side of the balance sheet, the liability 

side, given the state of what we know or don’t know about the 

asset side of the balance sheet. 

Dr. JOHNSON. Yes, that’s exactly right. There’s a great deal of uncertainty around asset values. And of course, the correct way to assess the state of any banks is to do the stress test. Now there needs 

to be tough stress tests, the downside scenario needs to be much 

more rigorous or negative, pessimistic than the one they used in 


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2009. And I fear that the stress tests that they’re doing now, although they haven’t disclosed anything really about them, I fear 

that those tests are even more gentle. 

So my answer is, we don’t know. There’s a lot of bad things that 

can happen. We’re certainly not out of the recession, as my colleagues have mentioned, in many dimensions, and you have emphasized. So the sensible, prudent thing to do is to require that the 

banks retain the earnings and build up bigger equity buffers 

against potential future losses. 

And that’s irrespective of whether or not you accept my view; 

Gene Farmer’s view; Professor Meltzer’s view and Admati’s view 

that going forward we should have 20, 30, 40, Adair Turner’s view 

from the UK, the FSA there, Financial Supervisors; Mervyn King’s 

view, the head of the Bank of England; Philipp Hildebrand’s view, 

the head of the Swiss National Bank, even if you don’t agree with 

the views of those people, just today, and if you’re just in learning 

Basel III the only thing that makes sense is to have them retain 

the earnings right now and not pay out dividends, given what we 

know and the many things we don’t know, many things we fear 

about the economy going forward. 

Mr. SILVERS. Professor Meltzer, your suggestion that we have 

size adjusted capital requirements is, as I noted in the prior panel, 

it was one of the recommendations of this panel, in our regulatory 

reform report to Congress. 

Dr. MELTZER. Good for you. [Laughter.] 

Mr. SILVERS. Thank you. 

It seems to me, just the most sort of obvious idea and I’m heartened to see some one of your experience having recommended it. 

Dr. MELTZER. Senator Vitter introduced a bill to do it. 

Mr. SILVERS. Now I’ve also been involved in the arguments on 

The Hill that essentially prevented it from being mandated in 

Dodd-Frank and I find that in general it is treated as though you 

were suggesting the creation of a perpetual motion machine or 

something of that nature in our politic processes. Can you explain 

to me why something so sort of straightforward can’t seem to be 

taken seriously? 

Dr. MELTZER. Yes. The bankers don’t want it and they come 

down with their lobbyists in hordes to tell them—tell the congressmen, you know, ‘‘That’s just disaster. You’re facing disaster. There 

won’t be loans for the public. There won’t be capital to build industry,’’ all that stuff. 

Mr. SILVERS. Can I just ask and then I’m going to stop. 

Dr. MELTZER. We got through the 1920’s with capital requirements. 

Mr. SILVERS. But since we’re talking about size-weighted capital 

requirements, would that not just mean that it would be a powerful 

incentive for institutions to be smaller and then they would lend 

more when they were smaller? I mean would not rational actors 

move to basically step away from the Too Big to Fail structures 

and the amount of credit provision would not be affected. 

Dr. MELTZER. We would remove the incentive which pushes them 

to be bigger and bigger all the time. And that would be good. I 

don’t think they would be small, but I do think they were be smaller. 


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Mr. SILVERS. Smaller, right. 

Dr. MELTZER. There isn’t any evidence that I know that says that 

there are economies of scale at that size which makes them want 

to be bigger. 

Mr. SILVERS. Yeah. 

Dr. MELTZER. And I would like to add one other thing. In 1991 

I believe Congress passed FDICIA. Are you familiar with FDICIA? 

Yes. Did they use it at all? No, they didn’t use it at all. What did 

it call for? It called for early intervention. Just completely ignored. 

And they gave reasons. They said it didn’t apply to holding companies, such things as that. You know, given all the things that they 

were doing they could have made FDICIA work and closed them 

down early or make them raise more capital. They didn’t do that. 

So we have to legislate it. 

Mr. SILVERS. Thank you. I’m allowed to keep going, I’m told. 

Various people want to speak. Mr. Johnson? 

Dr. JOHNSON. My understanding of the literature, just to reinforce Professor Meltzer’s point, is there’s no economies—no evidence for economies of scale or scope in banking over about $50 billion in total assets. You might see $100 billion dollars if you wanted to be generous. All the benefits above that are private benefits, 

not social benefits. 

Mr. SILVERS. I guess one—— 

Dr. STIGLITZ. Can I just make one more point—— 

Mr. SILVERS. Yeah, sure. 

Dr. STIGLITZ [continuing]. Just to emphasize the theoretical point 

here, that the requirements of leverage, there’s a basic idea in economics called the Modigliani-Miller Theorem—— 

Mr. SILVERS. Yes. 

Dr. STIGLITZ [continuing]. That says that leverage doesn’t buy 

you anything except higher probabilities of default. And that—and 

so that the argument that they’re making that it would interfere 

with the efficiency of the economy has no support in the economics 

profession. 

Mr. SILVERS. But there is one more argument I’d like to dispose 

of, because there is this—there is the notion that—I mean you all 

suggested various levels of capital be required. But setting the 

question of how much capital should be required at any given size, 

just the notion of a sliding—the notion of a sliding scale, right, does 

not—is there any basis for the argument that a sliding scale would 

bring on a credit crunch? 

Dr. MELTZER. No. 

Dr. STIGLITZ. No. 

Dr. ZINGALES. Can I dissent on this? I think that—— 

Mr. SILVERS. I’ve found a point of agreement. I feel proud. 

[Laughter.] 

Dr. ZINGALES. I have to say I have great respect for Professor 

Stiglitz. I think that since Modigliani and Miller we have a large 

literature in corporate finance saying that actually it’s sort of—the 

level of that is not irrelevant. And actually he contributed in part 

to that literature. So I’m surprised to say—to see now that he says 

that it’s completely irrelevant. I don’t think it’s irrelevant, I think 

that there are some costs of having too much or too little debt depending on the situation. And I think that in the current situation, 


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if you were to dabble in the capital requirement to banks tomorrow, you will have a credit crunch. I think that it will definitely 

be a consequence. 

Why? Because the managers don’t want to raise more equity, regardless of whether this is in the interest or not of the shareholders, but they don’t want to raise more equity. And so the alternative of raising more equity is to lend less. So I think there will 

be consequences and I think that the argument they’re going to use 

to say why the sliding scale is bad is that it’s going to unfairly affect the large banks. I completely disagree with this argument. I 

think that now we unfairly favor large banks so the sliding scale 

will only bring sort of a level playing field, but that’s how to argument they would make. 

Mr. SILVERS. Right. Your point about the credit crunch is kind 

of an institutionalist argument. 

Dr. MELTZER. But, the main change would be—— 

Dr. ZINGALES. Why institutional? I’m sorry. 

Dr. MELTZER [continuing]. You get more collective form of lending. That is if a bank—one argument that’s made is that the corporations are so big that they need to have—— 

Mr. SILVERS. Big banks, right. 

Dr. MELTZER [continuing]. Big banks. But they can syndicate the 

loans, they’ve done that for hundreds of years. They can syndicate 

the loans and service the banks—the customers. 

Dr. JOHNSON. Sorry, I see a straw man slipping into the conversation. And no one is proposing that you immediately double 

capital requirements and tell them to hit that number tomorrow. 

Yes, the one way you could achieve that is by dumping assets or 

reducing loans as Luigi said. But, if you can look, for example, at 

the plans brought forward by or proposed by Jeremy Stein and 

David Scharfstein, for example, who are both very experienced, 

both worked in the Treasury under this administration, and now 

have proposals out there for ways in which you can time the shift 

in capital requirements to phase in these kinds of either a higher 

level overall or a step level as Professor Meltzer’s suggesting. This, 

if implemented properly, would not be contractionary. 

Dr. STIGLITZ. Let me just go back to—— 

Mr. SILVERS. I don’t think—my chair has told me that this must 

come to an end. [Laughter.] 

The CHAIRMAN. Dr. Troske. 

Dr. TROSKE. Thank you. This has been a fascinating conversation 

and I’m certainly not going to try to compete with you on your 

field, so I’m going to pull you over to mine as a mere labor economist and start talking about executive compensation, which is—has 

received a certain amount of attention. 

But my own view of this issue and combined with the current crisis sort of has evolved over time and to one in which it seems to 

me that when you have a Too Big to Fail financial institution it’s 

the case that shareholders very much value risk and are going to 

move towards more leverage. And they’re actually going to compensate executives in a way that would have them shift the risk 

profile of the investments that they make out to a more risky environment. So you don’t need to take a very strong stand, in terms 

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timally or not, but in the presence of Too Big to Fail, both shareholders and executives are willing to move towards more risky 

forms of investment and are going to be compensated in that fashion. 

I guess I’d like your thoughts on my hypothesis. And I’ll start 

with you, Professor Stiglitz. 

Dr. STIGLITZ. Well, let me just say, the important point that 

you’re emphasizing is that the decisions made by the banks are 

made by managers, not by the shareholders, and that there can 

often be misalignment of interest between the two. And that’s why 

I remarked before, I think that there need to be regulations affecting shareholder compensation, regulations in general, including 

regulations affecting shareholder incentives. Because those incentive structures can lead them to want to undertake excessive risk 

and there may be limited ability of shareholders to constrain the 

ability of managers in that way. 

So—and there’s a second problem in managerial compensation 

that you didn’t mention that I think is important to realize. That 

when you get shareholder stock option kind of compensation, it provides an incentive for you to distort the information that you’re 

providing. So it encourages nontransparent accounting and there’s 

always going to be a lot of discretion. A lot of the issues that— 

we’ve ignored the mistakes that have been associated with the ability to not—to keep on bad mortgages at full value and that whole 

distortion in the assessing of the asset structure. But the point is 

that if you have compensation that is related to the seeming performance of the share market, you—sharers, you have an incentive 

to distort the information provided by the market and to the regulators. 

Dr. TROSKE. Does anybody have anything different to add? 

Dr. JOHNSON. Yes. 

Dr. TROSKE. Okay. 

Dr. JOHNSON. If I may. I agree with you that theoretically if the 

Too Big to Fail guarantee holds, then the interest of the investor 

and interest of management, in this regard, are—can be aligned. 

So the investors want the management to leverage up, they want 

them to take a lot of risk. However, as a practical matter, I think 

the kinds of concerns Professor Stiglitz was mentioning come into 

play. 

And I would refer you to a paper by Sanjai Bhagat and Brian 

Bolton who went carefully through the compensation received by 

the top 14—by executives of the top 14 financial institutions in the 

United States between 2000 and 2008. They found that those executives took out, in cash bonus and through stock sales, $2.6 billion in cash. In fact the top five executives took out around $2 billion in cash. And the shareholders, at the same time, if you were 

a buy and hold shareholder over that period, you did pretty badly. 

So that suggests that as a practical matter, maybe it’s because 

of misrepresentation, actually I think that’s quite a plausible explanation, or maybe it’s for some other reason, the shareholders do not 

do well when the managers leverage up, take a great deal of risk 

and get paid on a more or less immediate return basis, which is 

linked to your return on equity basis, not properly risk adjusted. 

Dr. TROSKE. Yeah. Thanks. Can I—— 


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Dr. MELTZER. Dr. Troske, I worried about this program a lot as 

a practical thing because I was a chairman of an audit and compensation committee for a Fortune 500 company. And so I faced the 

problem of how do you reward the chief executive and subsidiary 

executives. I don’t think there’s an easy answer to this problem. 

Dodd-Frank came up with a proposal which says that you have a 

nonbinding vote of the shareholders. So far I believe the evidence 

is the shareholders don’t care much. That should be evidence that, 

leave it alone. 

Dr. TROSKE. Professor Zingales—— 

Dr. MELTZER. Except in the case where you’re failing. 

Dr. TROSKE [continuing]. I’d like to ask you a little, somewhat 

different question more related to your recent paper, ‘‘Paulson’s 

Gift,’’ and I like your title. I wish I were that creative, or editors 

let me be that creative in my titles. 

You estimate that TARP preferred equity infusions and the FDIC 

debt guarantee cost taxpayers between 21 and 44 billion. You talk 

about an alternative plan. The government could have charged 

more for both the equity infusion and the debt guarantee, as Warren Buffett did when he invested in Goldman Sachs three weeks 

before the Paulson plan. Could you kind of—could you elaborate on 

the difference between private party transactions undertaken at 

the time of TARP on the one hand and the actual TARP transactions as well as the FDIC’s extension of deposit insurance? 

Dr. ZINGALES. Yes. I think that there are two aspects. First of 

all, the capital infusion that was done was done, not in market 

terms by any stretch of the imagination, was definitely worse than 

the one that Warren Buffett got in terms of return. And the same 

is true for the debt guarantee. Now, what is interesting is we observe when this debt guarantee was the standard that the overall 

cost of insuring these institutions dropped. 

So—but even if we take the value of this cost after the announcement, so let’s think about there is a systemic effect and there is an 

individual effect, even if we sort of take anyway the systemic effect, 

the cost of insuring this institution was too cheap and that was not 

really varying according to the type of institution. So for JP Morgan this was not very convenient, for Citigroup or Goldman was 

tremendously convenient. 

So what the accurate number you reported doesn’t give a good 

sort of picture of is sort of the cross section. There was an important redistribution also within banks. JP Morgan was heavily penalized by the plan, probably because the market expected them to 

buy on the cheap the assets the other people were selling. And 

Citigroup was—Citigroup, Morgan Stanley and Goldman were tremendously helped by the plan. 

So there is sort of also this cross sectional aspect which I think 

is important because it distorts the market incentives. By treating 

everybody the same the good managers are not rewarded and the 

bad managers are not penalized. 

Dr. TROSKE. So let me ask one final question. As a profession 

we’re often characterized as unable to reach consensus on any 

issue. And I would argue that the five independent PhD economists 

in the room, and I’m going to be arrogant enough to put myself in 

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fects that these distorted incentives had throughout this problem 

and continue to have today. This is a point I’ve made repeatedly 

since being on this panel. 

I can understand why folks ignore me, but I struggle to understand why they ignore you. And I guess I’m kind of curious on your 

thoughts, what are we doing wrong as a profession because I do 

think these issues are something that economists do agree about. 

And so I guess I’d like your thoughts on, you know, on—because 

I’m kind of tired of shouting into the wind. I don’t know about you. 

[Laughter.] 

Professor Stiglitz, I’ll let you lead off. 

Dr. STIGLITZ. Okay. Well, I think the—what is interesting about 

this particular case is that there is a broad spectrum of support 

from the Left and the Right in the economics profession. But this 

goes back to the particular groups who are big beneficiaries of this 

particular system. And they have a lot of money to invest in both 

trying to shape public opinion and to get what they want. 

So I don’t find it that mysterious in a way, that there is a lot 

of money at stake. I mean he’s talked about some of it, but a lot 

of money and that the money on the other side of trying to create 

a more efficient, fairer system, the point that a number of people 

have always made, Becker, for instance, that those are lots of people. And you have concentrated beneficiaries and the alternatives 

are much more diffuse. It’s very hard to get a fair battle when you 

have that—this much money at stake. 

Dr. TROSKE. Professor Meltzer, you’ve been doing this for a long 

time. What are your thoughts? 

Dr. MELTZER. Well, I’m a strong believer in what is now called 

‘‘political economy,’’ that is making policy; the first four letters of 

policy and politics are the same and the money is very important. 

So you know, we’re fighting a battle that I—well, I agree with my 

old friend, the late Milton Friedman who said, ‘‘Our job as economists is to come up with proposals and when the crisis comes it 

will be better than the proposals that will occur at that time.’’ And 

he and we have had a record of getting things done that way in 

crises. 

In the ordinary course of events you’re fighting a tough political 

battle in which, as Joe just said, there’s much at stake and there’s 

a lot of money that goes into campaigns coming from Wall Street 

and that makes, you know, a big, big hurdle to get over. So when 

Senator Vitter introduced my bill to scale up the thing, you know, 

there just wasn’t a lot of support in the Senate Banking Committee 

for it. 

Dr. JOHNSON. It’s a fascinating question that the bankers, when 

confronted by these proposals in the United States say, ‘‘We’re 

going to move to the UK,’’ and when confronted by these proposals 

in the UK they say, ‘‘Well, we’re going to move to New York.’’ You 

don’t have to get the G20 together on this, you need to have the 

world’s leading financials and New York and London would span 

most of it. And the Swiss are already pointing in exactly the same 

direction. 

And there are people within the Federal Reserve system, for example, Thomas Hoenig, within the other regulatory agencies, including Sheila Bair, who I think totally get this. I’m not saying 


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that we convinced them, I think that they figured this out by themselves. 

There are other people, such as Treasury and important elements within the New York Fed and within the Board of Governors 

of the Fed who are absolutely adamantly opposed to applying the 

logic that we’ve been discussing here today. They say—well, I don’t 

know what they say. They don’t come out and discuss it enough 

and clearly enough and I think, you know, ultimately a lot of the 

reasons they put forward make no sense at all. 

And I think it was Mark Hanna, the legendary Republican Senator at the turn of the—beginning of the 20th century, the organizer of the Republican Party in the Senate around the country 

who said, ‘‘There are two things that matter in American politics. 

The first is money and I don’t remember what the second one is.’’ 

Dr. TROSKE. Mr. Zingales. 

Dr. ZINGALES. I think there are a couple of reasons. First of all, 

I think we know, as Stiglitz reminded, that there is a capture by 

the sort of people who are well organized and have a lot of money 

at stake. I actually believe in democracy enough that I think that 

on some topics this sort of strength can be overcome, but it requires that the topic is sufficiently interesting and sufficiently sort 

of easy to explain in the media that it generates sort of a public 

outrage. 

So I think that in terms of environmental issues, people are 

much more sensitive because you can explain that more easily to 

the ordinary human being. I think that excessive compensation 

really attracts the interest of voters. When it comes to how to properly regulate capital requirements, I think that would put asleep 

like 99.9 percent of the people. And so it’s very hard to be successful in explaining or pushing on—with the political agenda, against 

the entrenched interest. 

But I have to say that there is also a responsibility of the economic profession in that. I think that you preach to the choir and 

it says, here this is not a selected sample, I think there are people 

that have been actively engaged in public speaking and I don’t 

think that you can say the thing about most economists. I think 

that most economists don’t write in newspapers, don’t sort of actively sort of take their positions, they’re not public figures. It’s not 

what you are awarded for academically. The type of policy advice 

you give is not sort of very strong in your vitae and I think that 

they don’t care. 

Dr. TROSKE. Thank you. 

The CHAIRMAN. Thank you. 

Superintendent Neiman. 

Mr. NEIMAN. Thank you. 

The CHAIRMAN. We saved the best for last. 

Mr. NEIMAN. Oh, okay. Thank you. 

You know, in addition to the global calls and efforts to increase 

bank capital, we also know that liquidity is a driver to a firm’s failure. Lehman is a good example with reference to the capital position at the time, the impact of short sellers, and of the fact that 

short term funding can dry up at any point in time. 

I’d be interested in your views on the relationship between capital and liquidity. And also your views on the proposals out there, 


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particularly Basel III; the proposals with respect to increases in liquidity practices and requirements. 

Dr. ZINGALES. Can I start? 

Mr. NEIMAN. Sure. 

Dr. ZINGALES. I think that the risk that short term debt presents 

is very large because short term debt can run very quickly. If I 

lend somebody overnight, I don’t want to take any risk that the 

counterparty will fail overnight. Whatever high interest rate you 

offer over a day is not large enough to compensate for the risk. And 

that’s the reason why when the market sentiment shifts and when 

there is a fear that the counterparty is insolvent or—then the short 

term lenders stops lending. 

So that’s the reason why I think it’s important to have a cushion 

of long term debt. And so the Basel requirement for having a significant amount of long term debt I think is important. And paradoxically I think that part of what made the crisis worse are two 

pieces of—two facts. One is the Fed policy that kept sort of interest 

rates, especially short term on the curve, very low favored people— 

favored the short term borrowing by part of financial institutions, 

made it very convenient. And of course they don’t internalize this 

externality of sort of the systemic aspect. 

The second paradoxically is sort of the bankruptcy reform done 

in 2005. By making sort of—by exempting derivative and repurchase agreements from bankruptcy, they made them much cheaper 

than everything else, basically inducing institutions to take more 

of it and then making them more fragile. So, I’m definitely in favor 

for some sort of requirement in terms of compositional liabilities. 

Mr. NEIMAN. Any other? 

Dr. STIGLITZ. The—I think the issue that you raise focuses particularly on the question of the shadow banking system and that 

this is a really very serious problem that a lot of the discussion will 

be focusing on in the banking system. But you know, the point 

where Lehman Brothers really showed up was the collapse of reserve—the reserve fund. And people thought that they could use 

the shadow banking system as a substitute for the banking system. 

I think what we now know we have to regulate both the shadow 

and the regular banking system. We have to see them as an integrated whole and that we shouldn’t view the shadow banking system as a way of circumventing the banking system. So I think that 

is one of the important aspects. 

I do want to agree with Professor Zingales that the incentive 

structures that are often built very subtly into the whole structure, 

like the bankruptcy provision, is really an example of something 

that’s a major distortion that got very little attention at the time 

that it was adopted, but is obviously—it is an example of the kind 

of concern. 

Another example is when you have incentives where some of the 

things are—some of the CDSs are done in a transparent market 

and some are done over the counter. That is an incentive to move 

things into the dark areas and to engage in things where nobody— 

it’s difficult to regulate. 

So, we are now, in the way we’re going forward right now are 

creating new opportunities and new incentives to move things 

away from where we can see what’s going on and to where we can’t 


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and where these kinds of liquidity issues become all the more important. 

Mr. NEIMAN. I’m glad you raised the issue of shadow banking because I did want to ask about the regulatory reform efforts about 

riskier activities, proprietary trading, swap activities and different 

proposals. For example, the Volcker Rule requires moving those activities, the proprietary trading, hedge fund activities out of the 

holding company all together as opposed to certain swap activities 

being moved out of the bank into the holding company. 

I’d be interested in your views as are you shifting those activities 

into a less regulated area or would you prefer to see them within 

the bank holding company structure with a higher level of oversight and capital requirement? 

Dr. STIGLITZ. Well, my view, there are two separate issues. I 

think we have to deal with very strongly with the Too Big to Fail 

banks and financial institutions, whether they’re banks or nonbanks and with the Too Correlated. We haven’t talked about the 

Too Correlated to Fail, because that’s another set of problems that 

represent systemic risk. But—so that’s one set of issues. And when 

you have them still connected in a holding company you haven’t 

really solved the Too Big to Fail. 

But the other issue is, wherever they are there needs to be transparency. And the movements to allowing large segments of transactions to be in a nontransparent venue seems to me a real invitation to problems. 

Mr. NEIMAN. Any other? 

Dr. MELTZER. Yes. I’d like to say that on the money market 

funds, the biggest part of the off banking system, how did that crisis come about? Well, they got a rule, they had to mark their markets—their assets to market until they got to the point where they 

no longer could do that and pay a dollar or pay their face value. 

So they got the SEC to change the rule so they didn’t have to mark 

their market—their assets to market. And when there was a run, 

after Lehman, that caused them. If they had been forced to mark 

their market—their assets to market that would have been the normal course of events. That was just a bad ruling. 

We ought to reverse that ruling and say that when your liabilities are only worth 95 cents, they’re worth 95 cents. 

Mr. NEIMAN. Thank you, Mr. Meltzer. 

Dr. MELTZER. That was a mistake. I agree with a comment that 

you made quickly and I think it is a major problem that you have 

to think about. If we regulate too much, and we may well be doing 

that, we’re just going to shift—somebody has to bear the risks of 

the forward movement of the American economy. If we shift those 

risks out of the banks, the most regulated part of the system, and 

into other agencies, perhaps some not yet born, that’s not going to 

be in the public interest or in the long run interest of the country. 

So we have to be concerned with what we do to keep the risks 

where we can at least see them. 

Mr. NEIMAN. Well the most descriptive is to avoid playing 

‘‘whack-a-mole’’ I live near an amusement park and—— 

Dr. MELTZER. Right. So that’s another reason why capital requirements are much more desirable than regulation. 

Mr. NEIMAN. Appreciate that. 


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Mr. Johnson. 

Dr. JOHNSON. I agree completely. The—many of these shadow 

structures were constructed as a way to get around capital requirements, to so called economize on capital which means to take more 

highly leveraged bets and to take on more risk. And while I recognize your points about liquidity, and I agree that we have constructed incentives for too much short term funding of longer term 

assets and assets that should be actually funded with equity, because of the nature of the risks there, I would emphasize we need 

high capital requirements across the board. 

We can’t rely on the market to do this by itself, because as we’ve 

discussed it’s an incentive for the management, for sure, and in 

many cases management and shareholders to get big enough so 

they can fail. 

And I would end by quoting somebody I know in the hedge fund 

sector, in a very large hedge fund, household name. He said to me, 

‘‘Simon, let’s face it, on the Too Big to Fail debate you lost. And 

now our question is, or what we’re working on in the hedge fund 

is, how do we become Too Big to Fail.’’ 

Dr. ZINGALES. Can I sort of endorse strongly what Professor 

Meltzer said? I think that the single most evil rule that is still in 

place is exactly that one of the SEC that provides an appearance 

of safety on money market funds and help them market themself 

as complete substantive deposits when they are not. And it’s ironic 

that we had 2,000 pages of legislation and we could have changed 

that rule sort of very easily, I don’t think it’s subject to congressional approval, it’s just a rule of the SEC, but nobody wants to do 

it and nobody even is discussing doing it. 

Mr. NEIMAN. All right. Thank you. 

The CHAIRMAN. Well, I’ve been around this place for almost 40 

years, I’ve never seen a panel and a group of witnesses more in 

agreement in my entire life. [Laughter.] 

So I—and let me tell you something, I know you know about the 

disparity in the political ideas of the witness, let me tell you, 

there’s some pretty different views about just about everything up 

here on the panel, but I think there’s one thing that we’re all in 

agreement on and I think that Dr. Troske raised a good point, that 

I have felt the—I have the scars from, and that is the difficulty, 

of not just economists of trying to get some of these ideas that have 

been raised here that seem to be pretty simple, pretty straightforward and pretty widely held by people that have spent time 

thinking about it, to get it into legislation and get it into the Securities Exchange Commission and get it into CFTC. 

So anyway, I really, really want to thank you all for taking time 

out of your day to come down here and do this. We really do appreciate it. 

The record for the hearing will be kept open for one week so the 

panel may submit questions to the record of witnesses. 

I want to finally say, just thank some folks. And I want to thank 

my fellow panelists. I mean you know, I came into this late and 

the welcomeness, the ability, the—I’ve never seen a group that is 

so easy to get along with and are so interested in trying to come 

to a common ground, even though there are very basic differences 

on the issues. So I really want to help my fellow panelists. 


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157 

The other thing, having been a staff person, when you show up 

at this point with a staff that’s in existence, you show up and 

you’re a little scared because you know what you want in a staff 

and the rest of it. And I want to tell you, this has been a—absolutely—this COP staff is absolutely incredible and Naomi Baum 

does an incredible job to monitor the—Elizabeth and the whole 

group has just done an incredible job and I think the record shows 

that. 

So I want to thank everybody from here. And with that we will 

close the hearing. 

[Whereupon, at 1:44 p.m., the hearing was adjourned.] 


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