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THE DODD-FRANK ACT FIVE YEARS 

LATER: ARE WE MORE PROSPEROUS? 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JULY 28, 2015 

Printed for the use of the Committee on Financial Services 

Serial No. 114–47 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

DAVID SCHWEIKERT, Arizona 

FRANK GUINTA, New Hampshire 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

July 28, 2015 ..................................................................................................... 1 

Appendix: 

July 28, 2015 ..................................................................................................... 53 

WITNESSES 

TUESDAY, JULY 28, 2015 

Gramm, Hon. Phil, Senior Partner, U.S. Policy Metrics; and former United 

States Senator ...................................................................................................... 6 

Miller, Hon. R. Bradley, Of Counsel, Grais & Ellsworth LLP; and former 

Member of Congress ............................................................................................ 7 

Wallison, Peter J., Arthur F. Burns Fellow in Financial Policy Studies, American Enterprise Institute ..................................................................................... 9 

APPENDIX 

Prepared statements: 

Gramm, Hon. Phil ............................................................................................ 54 

Miller, Hon. R. Bradley .................................................................................... 60 

Wallison, Peter J. ............................................................................................. 63 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Capuano, Hon. Michael: 

Written responses to questions for the record submitted to Peter J. 

Wallison ......................................................................................................... 80 

(1) 

THE DODD-FRANK ACT FIVE YEARS 

LATER: ARE WE MORE PROSPEROUS? 

Tuesday, July 28, 2015 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:06 a.m., in room 

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

Members present: Representatives Hensarling, Garrett, 

McHenry, Pearce, Posey, Fitzpatrick, Luetkemeyer, Huizenga, 

Duffy, Hurt, Stivers, Fincher, Stutzman, Mulvaney, Hultgren, 

Ross, Pittenger, Barr, Rothfus, Messer, Schweikert, Guinta, Tipton, 

Williams, Poliquin, Love, Hill, Emmer; Waters, Maloney, Sherman, 

Hinojosa, Clay, Lynch, Scott, Himes, Carney, Delaney, Sinema, 

Beatty, and Heck. 

Chairman HENSARLING. The Financial Services Committee will 

come to order. Without objection, the Chair is authorized to declare 

a recess of the committee at any time. 

Today’s hearing is entitled, ‘‘The Dodd-Frank Act Five Years 

Later: Are We More Prosperous?’’ This is the second of three hearings examining the impact of the Dodd-Frank Act. The first was 

entitled, ‘‘The Dodd-Frank Act Five Years Later: Are We More Stable?’’ and the third hearing will be entitled, ‘‘The Dodd-Frank Act 

Five Years Later: Are We More Free?’’ 

The Chair wishes to alert all Members that the Chair intends to 

close the hearing and adjourn at 1 p.m. 

The Chair now recognizes himself for 3 minutes to give an opening statement. 

Under the Obama economic strategy, of which Dodd-Frank is a 

central pillar, our economic—our anemic recovery, rather—has created 12.1 million fewer jobs than the average recovery since World 

War II. For more than a year now, the share of able-bodied Americans in the labor force has hovered at the lowest level in nearly 40 

years. Small business startups are at the lowest level of a generation. 

Had this recovery simply been as strong as average previous ones, middle-income families would have nearly $12,000 more in 

annual income, and 1.6 million more of our fellow Americans would 

have escaped poverty. This is simply unacceptable. 

But more than the numbers, my constituents’ angst tells me all 

I need to know. One wrote me not long ago, ‘‘There are part-time 

jobs around my area, but always jobs with no benefits and less 

2 

than 40 hours. My son is a disabled Iraqi Freedom combat veteran 

who has lost hope of finding a decent full-time job.’’ 

I suspect most Members of Congress unfortunately still receive 

letters just like these. The painful truth is that Dodd-Frank and 

the hyper-regulated Obama economy are failing low- and moderateincome Americans who simply want their fair shot at economic opportunity and financial security. 

As we know, a recent Federal Reserve report stated that within 

a few years, roughly one-third of all Black and Hispanic borrowers 

may find themselves disqualified from obtaining a mortgage to buy 

a home because of Dodd-Frank’s qualified mortgage rule, which is 

based solely on a rigid debt-to-income requirement. 

Because of Dodd-Frank, free checking at banks has been cut in 

half. Furthermore, according to the FDIC, more than 9 million 

households don’t have a checking or a savings account principally 

because account fees are too high or unpredictable, another consequence of Dodd-Frank. 

Dodd-Frank’s 2,300 pages launched a salvo of consequences that 

have crippled growth. It was advertised to target Wall Street, but 

instead it has hit Main Street. It has had pernicious effects on 

small businesses and community financial institutions, which are 

the lifeblood of the Main Street economy. 

Community banks and credit unions supply the bulk of small 

business and agricultural loans. The combined weight of DoddFrank’s 400 regulations is dragging them down. We are losing one 

community financial institution a day. 

But Dodd-Frank goes far beyond banks and credit unions. Its 

corporate governance provisions hit every public company in America including grocery chains, cable TV servers, and bowling alley 

chains. 

They didn’t cause the financial meltdown but still must comply 

with regulations imposing wage controls, salary ratios, and private 

compensation disclosures made for big Wall Street firms. Every 

dollar these businesses are forced to spend on hiring lawyers and 

accountants to help explain this gibberish is taken out of working 

people’s wages and capital expansion. 

No wonder the economy limps along at 2 percent GDP growth— 

far below its historic norm. And no wonder low- and moderate-income Americans lose sleep at night worrying about their stagnant 

wages, smaller bank accounts, and childrens’ future. 

Hardworking Americans deserve better than Dodd-Frank. 

The Chair now recognizes the ranking member for 5 minutes for 

an opening statement. 

Ms. WATERS. Thank you, Mr. Chairman. 

And welcome, witnesses. 

I would like to acknowledge two distinguished former Members 

of Congress who are with us today: Congressman Brad Miller, our 

long-time colleague on the Financial Services Committee; and 

former Banking Committee Chairman, Senator Phil Gramm. 

Today’s hearing is focused on whether or not we are more prosperous 5 years after Dodd-Frank, which was enacted after our Nation suffered the greatest destruction of wealth in 80 years. Just 

as the Sarbanes-Oxley Act was enacted in reaction to several corporate and accounting scandals—most notably Enron—so, too, was 

3 

Dodd-Frank enacted as a reaction to years of deregulation, lax enforcement, and zero accountability for the Nation’s financial institutions. 

Even the legendary champion of the free market, Alan Greenspan, has now acknowledged that he made a mistake and that the 

market did not and cannot police itself. The crisis left an indelible 

mark on our financial system, our housing market, and our way of 

life. 

We all know the numbers: 9 million Americans lost their jobs; 5 million homeowners lost their homes to foreclosure; and $16 trillion 

in household wealth was destroyed. 

We have come a long way since those dark days. A new staff report released by committee Democrats shows unequivocally that 

Dodd-Frank has made our financial system more transparent, more 

stable, and more accountable. 

The Consumer Financial Protection Bureau (CFPB) has returned 

$10.8 billion to 17 million defrauded consumers. Over-the-counter 

derivatives, once traded in the shadows, are now more transparent, 

and regulators are getting tougher on banks to ensure that their 

failure doesn’t endanger the wider economy. 

The stability created by Dodd-Frank has allowed us and our Nation to once again prosper. The housing market is improving, the 

economy has added nearly 13 million private sector jobs over 64 

consecutive months of job growth, and the unemployment rate has 

plunged down to 5.3 percent. Moreover, the average 401(k) balance 

reached a record high last year, and the S&P 500 has risen by 

more than 250 percent since February 2009. 

So we are more prosperous, but there is much more work to be 

done. 

The crisis exacerbated what was already an unacceptably large 

wealth gap between white and minority households. The current 

wealth gap between African-Americans and whites has reached its 

highest point since 1989. The current white-to-Hispanic wealth 

ratio has reached a level not seen since 2001. 

We need to make sure that it is not just Wall Street bankers who 

are becoming more prosperous, but also the millions of Americans 

who are worried about a roof over their head, worried about getting 

a job that pays a living wage, and worried about being able to afford the high cost of college. 

Let me be clear: Recent history demonstrates that deregulation 

of our largest financial institutions, coupled with systemic disinvestment from low-income, middle-class, and minority neighborhoods is no way to ensure that prosperity is widely shared. 

In fact, later today we will mark up 14 proposals which, in many 

cases, loosen the rules for large banks whose prosperity doesn’t 

need any more assistance from this committee. Instead, we should 

be focusing on the residents of public housing, the cities and towns 

still devastated from the foreclosure crisis, and the community 

banks and credit unions that need relief. 

Finally, Senator Gramm, you are the namesake of the so-called 

Gramm-Leach-Bliley Act, which you don’t mention in your testimony, but which turned our Nation’s biggest banks into megabanks 

and dramatically intensified the effects of the crisis. Opposing that 

measure is among the proudest votes I have taken as a Member 

4 

of Congress. And in the aftermath of the crisis, some of that law’s 

most fervent supporters very publicly reconsidered their support. 

So I am very interested in hearing you discuss, after watching 

the harm and heartache of the 2008 crisis, if your views have at 

all changed. 

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

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Monetary Policy and Trade Subcommittee. 

Mr. HUIZENGA. I am very pleased to have this conversation. As 

a former licensed REALTOR®, I have seen firsthand the effects of 

Dodd-Frank in a lot of areas where frankly, people kind of said, 

‘‘Wait a minute. How did this Wall Street collapse come about 

through our community banks, our insurance companies, our small 

local lenders, our local REALTORS® when we are dealing with 

some of the mortgages?’’ 

But I want to touch on a couple of things today. 

First and foremost, as I sort of dub them, the window-dressing 

provisions of Dodd-Frank, and things like pay ratio. The Wall 

Street Journal had an article today stating that the SEC looks like 

it is imminent in its execution of one of its duties that had been 

foisted—a priority foisted upon them by Dodd-Frank, which was to 

come out with rules regarding pay ratio. 

And as we look at this—I have a bill to try to address that—we 

wonder, who does it cover, how is it calculated, why is it even in 

there, does it tell us why the collapse happened, and is it going to 

keep us from—keep it from happening again? Nobody has been 

more critical of the shortsightedness of business when it comes to 

dealing with their stock price being more of a focus than their longterm health, but it seems to me and so many others that this absolutely does nothing to get us further down that path. 

Another one of those window-dressing provisions would be conflict minerals. I chair our Monetary Policy and Trade Subcommittee, where we deal with the conflict minerals. And I think 

the question is, is it working, and is it workable, especially as we 

look at things like gold that are affecting our manufacturers? And 

maybe more importantly, is it helping those whom it was intended 

to help? 

And we have had continued testimony that, no, it is not. It is not 

actually helping those folks in those conflict areas throughout the 

world. 

So I look forward to having those conversations today, talking 

about qualified mortgages and what is or isn’t happening there. 

And as we look into this, I think many of us are convinced that 

Dodd-Frank was more of an agenda waiting for a crisis than an actual solution to a problem. 

With that, Mr. Chairman, I yield back. 

Chairman HENSARLING. The gentleman yields back. 

I ask unanimous consent that the gentleman from Missouri be 

yielded 1 minute. Without objection, the gentleman is recognized 

for recognition. 

Mr. CLAY. Thank you, Chairman Hensarling, and Ranking Member Waters. 

5 

Today, I am in a different kind of role. I am playing tour guide 

today and I brought a group of St. Louisians here—young ladies between the ages of 14 and 15 years old who are part of the St. Louis 

Eagles Basketball Club, and are here this week for a tournament. 

I understand they did pretty well. 

But they come from the St. Louis region and I will be taking 

them on a tour. I wanted them to get some exposure to what we 

do on a day-to-day basis in this committee, and if the committee 

could welcome them, I would appreciate it. Thank you. 

[applause] 

Thank you, Mr. Chairman. I yield back. 

Chairman HENSARLING. The gentleman yields back. 

Today, we welcome the testimony of three distinguished panelists. 

I am especially happy to recognize and introduce the Honorable 

Phil Gramm, who is a senior partner at U.S. Policy Metrics. He 

served with distinction in the House for 3 terms, and in the United 

States Senate for 3 terms, where he authored such landmark laws 

as Gramm-Latta, Gramm-Rudman, and Gramm-Leach-Bliley. 

Previous to his public service career, he taught economics for 12 

years to Texas Aggies, including yours truly. He holds a Ph.D. in 

economics from the University of Georgia. 

Next, the Honorable Brad Miller, who is Of Counsel at Grais & 

Ellsworth, LLP. 

We welcome you back, sir. 

Brad Miller served in this committee room as a Member of the 

House for 10 years, including as a member of our committee. He 

is a former chairman of the House Science Committee’s Investigations and Oversight Subcommittee. 

Prior to his election to Congress, Congressman Miller practiced 

law for more than 20 years. He holds a J.D. from Columbia, a master’s degree from the London School of Economics, and a B.A. from 

the University of North Carolina at Chapel Hill. 

Last but not least, Peter Wallison is the Arthur Burns Fellow in 

Financial Policy Studies at the American Enterprise Institute 

(AEI). He is the author of many scholarly works, including his latest book, ‘‘Hidden in Plain Sight,’’ which I believe to be the definitive work on the cause of the 2008 financial crisis. 

Prior to joining AEI, Mr. Wallison practiced banking and corporate and financial law at Gibson, Dunn, and Crutcher. And from 

June 1981 to January 1985, he was General Counsel at the U.S. 

Treasury Department. 

He received his undergraduate degree from Harvard and his law 

degree from Harvard Law School. 

For you two former Members of Congress, just in case you are 

a little rusty on the lighting system: green means go; yellow means 

you have a minute to go; and red means the Chair would really 

prefer for you to stop. 

Mr. Wallison, we know that you have been a frequent witness before us. 

So at this time, Senator Gramm, welcome once again. You are 

recognized for 5 minutes to summarize your testimony. 

6 

STATEMENT OF THE HONORABLE PHIL GRAMM, SENIOR 

PARTNER, U.S. POLICY METRICS; AND FORMER UNITED 

STATES SENATOR 

Mr. GRAMM. Chairman Hensarling, Ranking Member Waters, it 

is quite an honor for me to be here today. 

I had the distinct pleasure of having a long and rich relationship 

with your chairman. Long ago and far away at Texas A&M I 

taught him money and banking. And as any old teacher would, I 

have taken great pride in what he has accomplished and the man 

he has become. 

Let me begin by answering the question about the economy. By 

any measure, we are experiencing the poorest recovery in the postwar history of America. If we had simply equaled the average of 

the 10 previous recoveries in the post-war period, 14.4 million more 

Americans would be working today, and the average income of 

every man, woman, and child in the country would be over $6,000 

higher. 

Five years after the enactment of Dodd-Frank, the cause and effects of the failed recovery can be seen throughout the banking system. Monetary easing by the Fed has, in fact, inflated bank reserves, but it has hardly had any impact on bank lending. Remarkably, today banks hold $29 of reserves for every $1 they 

are required by law to hold. I don’t know of a single instant in 

American history when we have remotely approached this situation. 

According to the FDIC, there are 1,341 fewer commercial banks 

today than there were when Dodd-Frank became law. Remarkably, 

only 2 new bank charters have been granted in the last 5 years. 

By comparison, even in the depths of the Great Depression, 19 

bank charters a year, on average, were issued. 

As regulatory burden has exploded under Dodd-Frank, community banks have hired 50 percent more compliance officers while 

total employment in the industry has grown by only 5 percent and, 

in fact, is still below the pre-crisis level. 

According to a study by the American Bankers Association that 

was issued last week, increasing regulatory burden has led almost 

half of all commercial banks in America to reduce their offering of 

financial products and services. 

In the Securities Exchange Act of 1934, and most subsequent 

banking law prior to Dodd-Frank, the powers granted to regulators 

by Congress were fairly limited, and were generally exercised by bipartisan commissions where major decisions were debated and 

voted on in the clear light of day. Precedents and formal rules were 

known by the people who were regulated, and regulators were generally responsive to Congress, which, after all, still controlled their 

appropriations. 

These checks and balances weren’t perfect, but they produced a 

general consistency and predictability in Federal regulations. 

All of that changed under Dodd-Frank. 

The Consumer Financial Protection Bureau (CFPB) was structured with no bipartisan commission. It had automatic funding as 

an entitlement, which virtually eliminated any real ability for lawmakers to have any check on its actions. In the process, consistency 

and predictability were replaced by uncertainty and fear. 

7 

Since the Financial Stability Oversight Council (FSOC) meets in 

private and is made up exclusively of the sitting President’s appointed allies, bipartisanship and sunshine, the historic checks on 

regulatory abuse, have been lost. 

What constitutes a systemically important firm or what is a 

passing grade on a living will are not defined in law and, in fact, 

the regulators have almost total discretion in deciding what ‘‘systemically important’’ means and what is a passing grade on a living will. 

What does the stress test test? Not only does no one know, but 

regulators see the fact that no one knows as a virtue. 

You probably saw the statement that was made by the Vice 

Chair of the Fed that if you gave people a roadmap as to what was 

being tested, it would be easier to game the test. Does nobody realize that the fact that compliance is easier when you know what the 

law is, is why we have laws in the first place? 

To limit the abuse of rulers, the Romans long ago instituted the 

revolutionary practice of writing the law down so that people could 

go and read the law. Under Dodd-Frank today, the conditions of 

Roman law no longer exist in the United States of America. 

The rules are now whatever regulators say they are. This is not 

the rule of law; this is the rule of government. It is shackling economic growth. And what is even more important is that it is 

threatening our freedom. 

Thank you, Mr. Chairman. 

Oh, by the way, I still have a minute and 43 seconds. 

Chairman HENSARLING. No, you are a minute and 43 seconds 

over. 

Mr. GRAMM. Darn. I’m sorry. 

[laughter] 

Mr. GRAMM. All right. Well, it was a good effort. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Gramm can be found on page 54 

of the appendix.] 

Chairman HENSARLING. But as far as this chairman is concerned, 

you were on a roll. 

Congressman Miller, again, welcome back to your home. It is 

good to see you again. You are now recognized for your testimony. 

STATEMENT OF THE HONORABLE R. BRADLEY MILLER, OF 

COUNSEL, GRAIS & ELLSWORTH LLP; AND FORMER MEMBER OF CONGRESS 

Mr. MILLER. Thank you, Mr. Chairman. I never quite regarded 

this as my home. 

But as the chairman said, I did serve for an eventful decade as 

a member of this committee. I introduced legislation in 2004 to prohibit predatory subprime mortgage lending. 

According to the industry and their many allies on this committee, I probably meant well, but dreary rules like those I proposed were relics from a distant time when the financial industry 

did not perfectly understand and manage risk, and would deny lowincome and minority borrowers the dream of home ownership. 

8 

Subprime mortgages, they said, and many of you said, were the 

triumph of the innovation that comes from unfettered capitalism. 

I have not heard that argument since the financial crisis. 

But since then, I have heard another argument that I never 

heard before, that liberals bullied innocent banks into giving foolish mortgages to low-income and minority borrowers. It was government, they said, that caused the crisis. 

Scholars have repeatedly demolished that argument, but I did 

not believe it the first time I heard it because of what I know about 

the law of evidence. When a witness’ statement is self-serving, the 

witness made prior inconsistent statements, and the witness cannot or will not explain the inconsistency, you can decide not to believe a word the witness said. 

The Dodd-Frank Act is the response to the worst financial crisis 

and the worst economic downturn since the Great Depression. The 

Act includes a version of the home mortgage rules that I first introduced in 2004. The Act created the Consumer Financial Protection 

Bureau to protect against other abusive practices and to skeptically 

examine industry arguments that new lending practices that may 

appear predatory are really marvels of innovation. 

The Act requires banks to have more capital and gives regulators 

authority to require large financial institutions to show that they 

won’t bring the entire financial system down if they get in trouble—if they fail, and to make changes if they can’t. Trading in derivatives is more transparent than it was before, although that is 

a pitifully low standard. 

Dodd-Frank was a compromise and probably the most that was 

possible at the time, given the industry’s continued enormous clout 

in Washington, even while the industry stood in complete disrepute 

among the American people. We are better off and more prosperous 

than we would have been without it. 

But we have a financial system that still needs reform. The industry is too crooked, too large, and takes too much of the economy 

at the expense of people trying to make an honest living. Instead 

of a smooth flow of money from savers to people who can put 

money to productive use, far too much money coagulates on Wall 

Street. 

First, there has been no end to scandals: pervasive misrepresentation of the mortgages that backed mortgage-backed securities; 

manipulation of LIBOR and the other BORs; manipulation of electricity and other markets; rigging foreign exchange markets, and 

on and on. 

According to a recent survey, almost half of financial industry 

professionals said they thought their competitors were cheating, 

and 22 percent said they had personal firsthand knowledge of misconduct in the workplace. 

According to a 2012 poll, 68 percent of Americans disagreed with 

the statement, ‘‘In general, people on Wall Street are as honest and 

moral as other people.’’ 

William Dudley, the head of the New York Fed and a Goldman 

Sachs alum, said last year that the repeated scandals were not the 

work of a few bad apples but the product of the culture of Wall 

Street, and were a threat to financial stability. 

9 

And some, to quote the Republican frontrunner, I assume are 

good people. 

Second, the financial sector has more than doubled in size as a 

percentage of the economy since 1980. Largely because of the desperate mergers during the crisis, on top of the deregulation of the 

1990s, including Gramm-Leach-Bliley, the biggest banks are even 

bigger. 

Some on this committee have pointed to that consolidation as 

evidence that Dodd-Frank has made the system less stable, but 

have not supported any legislation to break up the biggest banks. 

I introduced legislation to break up the 6 biggest banks into at 

least 30 banks by capping the overall size. 

I do not recall any support for that proposal among critics of the 

banks. Instead, Congress repealed the provision of Dodd-Frank 

that required the riskiest swaps to be traded in a separately capitalized subsidiary to protect taxpayer-insured deposits and our 

economy’s payment system. 

Most of the debate on the size of the financial system have been 

about what would happen if things go wrong, like the London 

Whale trades. What happens when things go right is just as big a 

problem. When things go right, there is a harm that often goes undetected, like a patient with a parasite who does not understand 

why he is always tired. 

The Whale trades were in JPMorgan Chase’s synthetic credit 

portfolio. Synthetic credit is a bet whether a borrower defaults on 

a debt to someone else. The contribution to the economy of synthetic credit appears to be approximately the same as the nutritional value of plastic fruit. 

After the financial reforms enacted in the New Deal, the economy grew by 8 percent a year for the first 4 years of the Roosevelt 

Administration before the recession of 1937 and 1938. That will be 

hard to replicate. 

But the reforms ended frequent financial crises, and America had 

a steady growing economy that lasted for well more than a generation and created widely spread prosperity. The prosperity extended 

to many Americans who had been left out before. 

Yes, I want to avoid another financial crisis, but I also want an 

economy that grows and creates more prosperity for more Americans. To accomplish that, we still have work to do. 

[The prepared statement of Mr. Miller can be found on page 60 

of the appendix.] 

Chairman HENSARLING. Mr. Wallison, you are now recognized for 

a summary of your testimony. 

STATEMENT OF PETER J. WALLISON, ARTHUR F. BURNS FELLOW IN FINANCIAL POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE 

Mr. WALLISON. Thank you, Chairman Hensarling, Ranking Member Waters, and members of the committee. 

As Senator Gramm noted, the recovery of the U.S. economy since 

the financial crisis has been by far the slowest since the mid-1960s. 

The slide now on the screen shows how the recovery since 2009— 

that is the red line—lags the average of all recoveries since the 

mid-1960s. 

10 

We can find the reason for this slow growth in the excessive regulation that the Dodd-Frank Act imposed on the banking system 

beginning in 2010. One example is the requirement that banks 

with more than $50 billion in assets be treated as systemically important financial institutions (SIFIs). SIFIs not only receive stringent regulation by the Fed but are also required to file living wills 

and participate in stress testing. 

These add substantial costs, particularly by requiring these 

banks to hire more compliance officers and fewer lending officers. 

The result is less credit and more expensive credit for business 

firms that borrow from banks. 

The reason for requiring $50 billion banks to absorb these costs 

was the fear that if such a bank failed, it would cause another financial crisis. This seems highly implausible. 

The U.S. banking system has assets of $17 trillion. A $50 billion 

bank has 0.3 of 1 percent of all U.S. banking assets, which is a tiny 

amount. Indeed, a $200 billion bank has only 1.2 percent of all 

banking assets, and a $500 billion bank has only a little more than 

3 percent. 

It is absurd, I think, to believe that the failure of an institution 

or institutions of this size will cause instability in the U.S. financial system, which itself has $85 trillion in assets. 

In enacting Dodd-Frank, Congress sought to create stability 

through additional regulation, but they seriously overshot. The 

cost-benefit calculation was wrong. 

Very little benefit in the form of stability was gained by forcing 

more costly regulation on banks between $50 billion and $500 billion in size, but a lot of economic growth has been lost. 

The same is true for banks smaller than $50 billion and for community banks. They have also been hit with new and costly regulations under Dodd-Frank, and that has caused them to reduce their 

lending and to charge more for what they do lend. 

How did this additional regulation reduce economic growth? The 

reason is the cost of reduced bank credit fell disproportionately on 

small business. Smaller firms need bank credit. 

Larger firms have access to the capital markets. They are able 

to register their shares with the SEC and file regular financial reports. They can obtain the financing they need by issuing bonds, 

notes, and short-term credit instruments in the capital markets. 

In fact, about two-thirds of all credit—I have another slide 

there—for businesses in the United States comes through the capital markets. This slide shows that only about one-third comes 

through the banking system, and that percentage is declining relative to the capital markets. 

Because smaller firms can’t access the capital markets, they are 

dependent on bank credit. The result has been what we might call 

a bifurcated economy. Larger firms are growing at a pace consistent with past recoveries, but smaller firms are not growing 

much at all. 

The combination of the two has created this very slow recovery. 

In my prepared testimony, I reported on a recent Goldman Sachs 

study. This showed that firms with $50 billion or more in revenues 

have been growing at a compound rate of about 8 percent, well in 

11 

line with past recoveries, but firms with less than $50 billion in 

revenues were growing at about 2 percent a year. 

Also, all firms with more than 500 employees added an average 

of about 42,000 jobs a month between 2010 and 2012, while firms 

with fewer than 500 employees declined by about 700 employees a 

month during the same period. 

Since we know that it is small business and business startups 

that provide most of the growth in our economy and most of the 

new employment, the inability of smaller firms to get sufficient 

credit from banks has had a disproportionate effect on overall economic growth. 

To change this situation and restore economic growth, Congress 

should make sure that Dodd-Frank’s excessive regulatory burden 

applies only to the very largest banks. 

Thanks very much. I look forward to your questions. 

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

63 of the appendix.] 

Chairman HENSARLING. The Chair now recognizes himself for 5 

minutes. 

Senator Gramm, you are the coauthor of the budget that helped 

ignite the Reagan recovery, and I know that you have written on 

the subject of the Reagan recovery versus the Obama recovery. 

If we could go back to Mr. Wallison’s first slide, we know that 

during the recession of 1982 we had deeper unemployment, we had 

an even greater recession, as far as negative GDP was concerned. 

And yet, we know that the Reagan recovery came back quicker and 

stronger. 

What is the difference? What is the tale of the two recoveries? 

Mr. GRAMM. Mr. Chairman, first of all, the difficulties went beyond unemployment and the depth of the recovery because we had 

very tight monetary policy trying to break the inflation of the 

1970s, so interest rates peaked at 21.5 percent. Inflation was 13.5 

percent. Those were the headwinds faced by the Reagan recovery. 

Reagan’s basic approach was that the problem was government. 

That was his diagnosis. And his solution to the problem was to 

have less of it. 

He reduced government spending except to defense. We were at 

that point losing the Cold War, which changed. He cut taxes. There 

was strong bipartisan support for his budget and his tax cut. 

He reduced the regulatory burden. And, as they say in the history books, the rest was history. 

If the Obama recovery had matched the Reagan recovery during 

the same period of time—that is, over a 7-year period—we would 

have produced 19.9 million more jobs than the Obama recovery created, and per capita GDP would be $9,100 higher. That is $9,100 

a year for every man, woman, and child in America in the Reagan 

recovery, as compared to the Obama recovery. 

In the Obama recovery, not only did the poor, working, middleincome Americans, including women and minorities, lose in the recession, but they have lost in the recovery as well, something that 

has no precedent in the post-war period. The Reagan recovery, on 

the other hand, caused a decline in poverty and every one of those 

groups benefitted. 

12 

So, I guess the difference was I think Reagan had the prescription right that the problem in the 1970s was the government was 

too big, too powerful, too expensive, and exerted too much control 

over the economy. 

I think the problem in the Obama recovery has been that the diagnosis was false. Sure, there is greed on Wall Street and everywhere else. 

But what caused the financial crisis was the pressure on banks 

to make subprime loans through CRA, and the fact that there were 

HUD housing quotas on Freddie Mac and Fannie Mae requiring 

that they hold subprime loans starting out at 25 percent of their 

portfolio and going up to 57 cents of every dollar they held. When 

the bubble finally broke, what happened was described accurately 

in President Obama’s economic analysis in each of his budgets in 

2010, 2011, 2012, and 2013, and I quote: ‘‘In August of 2007 the 

United States subprime market became the focal point of a worldwide crisis. Subprime mortgages are provided to borrowers who do 

not meet the standard criteria for borrowing at the lowest prevailing interest rate because of low income, poor credit, lack of 

downpayment, and other reasons. In the spring of 2007 there was 

$1 trillion dollars of such outstanding mortgages and, because of 

falling home prices, many of these mortgages were on the brink of 

default.’’ 

Now if you were counting, and of course I was, he mentions 

mortgages six times, subprime twice, but he never mentions deregulation, Glass-Steagall, Gramm-Leach-Bliley, credit default 

swaps, or Wall Street greed. And this is not a campaign document. 

This is the budget of President Obama. 

So I think the diagnosis was wrong and it produced this massive 

increase in regulation, which choked the recovery. 

Chairman HENSARLING. The time of the Chair has expired. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Brad Miller, back in 2005, joining with former Congressman and now Federal Housing Financial Agency Director Mel 

Watt, and former Chairman Barney Frank, you attempted to end 

predatory mortgage lending by putting forth a bill modeled on 

North Carolina law that would have curtailed abuses in the 

subprime mortgage market. 

At the same time, Republicans opposed that bill with members 

like my chairman, Chairman Hensarling, noting, and I quote, 

‘‘With the advent of subprime lending, countless families now have 

their first opportunity to buy a home or perhaps be given a second 

chance.’’ 

How did Republicans feel about subprime lending back in the 

first half of the last decade when they were in control of the 

House? Did any Republicans help you to advance your bill? Were 

any Republicans worried about the growing abuses in the subprime 

mortgage market? 

Can you discuss the tremendous amounts of lobbying that took 

place in opposition to your bill at the time? Specifically, how and 

why did companies like Bear Stearns, shortly before the collapse, 

lobby in opposition to your bill? Help us understand what was 

going on. 

13 

Mr. MILLER. Yes. There was a great deal of lobbying against it. 

There were not many Republicans who favored it. I did have some 

discussions with Spencer Bachus that appeared to make progress 

for a while, which kind of fell apart. 

But the arguments that we have heard since then, we never 

heard at the time. And what we heard at the time was also not 

true. What we have heard since then is not true, but what we 

heard at the time was not true either. 

Subprime mortgage lending was never about home ownership. 

The subprime mortgage model was to lend to people who already 

owned their own homes—70 percent were refinances and had a lot 

of equity in their home—and the mortgages were designed to catch 

them in a cycle of borrowing and borrowing again with tricky little 

things buried in the legalese to strip their equity in their home. 

It also was not about helping people who otherwise could not 

have gotten a prime loan. Every study of subprime mortgages during that period shows that people who got subprime mortgages 

qualified for prime mortgages but got talked into subprime mortgages. 

That is why the foreclosure crisis has been so much worse on the 

African-American community and on the Latino community. It has 

almost been an extinction event of the African-American and 

Latino middle classes because of the extent to which they were targeted by subprime mortgages. 

The typical terms would be a 2/28 or 3/27. There would be a teaser rate at the beginning, which was probably the only thing that 

the home owner understood when they walked out of the closing 

or settlement, as it is called in a lot of States. They walked out 

knowing what their monthly payment would be. Well, 2 years later 

or 3 years later it jumped by 40 percent. 

And then to get out of it—which they couldn’t begin to do because they couldn’t afford to pay a 40 percent increase in their 

mortgage—they had to pay a prepayment penalty, which was 3 

percent. 

And it all worked fine for the lenders and for all the mortgage 

establishments, including Wall Street, including Bear Stearns, including all the banks that brought that stuff and put them in mortgage-backed securities and sold them to guileless investors in the 

United States and all over the world. 

The explanation at the time was not true. The explanation since 

then is not true. 

Yes, this was caused by greed. This was caused by the lack of 

regulation. This was caused by the lack of agility of the Federal 

Government in responding to new practices. 

Congress did pass legislation designed to get at predatory mortgage lending in 1994, the Home Ownership and Equity Protection 

Act (HOEPA). And sure enough, the industry stopped those particular practices, but the requirement of that statute that the Federal Reserve issue new regulations to address new practices never 

happened. 

Yes, it was the result of greed. It was equity-stripping. As the 

bubble inflated, as when the bubble collapsed, home owners could 

not begin to pay their mortgages, could not sell their houses because they owed more than the houses were worth. And then it 

14 

started a continuous spiral that has still not been completely broken. 

Ms. WATERS. Mr. Miller, you described some of what was going 

on. The no-doc loans, the interest-only loans, all of these exotic 

products were part of the predatory lending scheme, isn’t that 

right? 

Mr. MILLER. Yes. They were all part of predatory lending. 

There were some non-prime loans that were not so unwholesome 

that really did seem to be designed to address differences in borrowers’ creditworthiness, but those got into a lot of trouble too 

when the entire—when home values collapsed. 

Ms. WATERS. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, chairman of our Monetary Policy and Trade Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

And I would love to continue the housing discussion but I need 

to hit on a couple of things. I want to talk a little bit about pay 

ratio and conflict minerals and what I would describe as these window-dressing provisions of Dodd-Frank. 

I want to start off with a quote from SEC Chair Mary Jo White, 

where she was talking about conflict minerals and about how the 

Commission’s mandatory disclosure powers seemed more directed 

at exerting societal pressure on companies to change behavior rather than to disclose financial information that primarily informs investment decisions. 

After she said she may, as a private citizen, wholeheartedly 

agree with some of these objectives, she added, ‘‘But as Chair of the 

SEC, I must question as a policy matter using the Federal securities laws and the SEC’s power of mandatory disclosure to accomplish these goals.’’ 

She is talking specifically about conflict minerals, which I want 

to touch on, but it seems to me that also applies to the pay ratio 

situation and the requirement that, as was mentioned earlier, The 

Wall Street Journal said was imminently coming out of the SEC. 

And Dr. Gramm was talking about those who have been left behind—minorities and women and so many others. And in that Wall 

Street Journal article, the AFL-CIO’s study is quoted: ‘‘In 1980, 42 

times was the ratio of, typically, the average worker to the CEO; 

it is now in 2014, 373 times.’’ 

Let’s assume that those numbers are right. Some of that has 

been what I have been very critical of, performance based on stock 

price versus a long-term view, oftentimes is it, or maybe the options have grown that ratio. 

I think we have agreed that there are maybe some things out of 

balance, but isn’t this more of a symptom rather than the root 

cause of this? And if it is not the root cause, why in the world are 

we having the SEC go through all the machinations of this? 

Mr. Wallison, I am going to give you first crack at this, specifically in these two areas. 

Mr. WALLISON. I think one of the problems that we face here is 

that enormous costs were placed on the financial system by the 

Dodd-Frank Act, and these two you mentioned, the pay ratio issue 

15 

and also conflict minerals, are examples of costs that are added to 

the financial system and added to the economy in general. 

And every time you add these additional costs, you reduce the 

amount of credit that is going to be available for businesses to— 

or you are requiring businesses to respond to costs which mean 

that they cannot then produce the kinds of goods and services that 

they are supposed to be producing. 

Mr. HUIZENGA. It strikes me that the question we really need to 

have is, ‘‘To what end and to what benefit? And who is this benefitting?’’ 

And it seems to me that we are just surely generating paperwork 

to generate paperwork. We know that the costs of this—the SEC 

itself has estimated that the pay ratio rule would impose 545,000 

annual hours of paperwork, and that this could add up to annual 

costs on the private sector of $710 million with an annual compliance time of 3.6 million hours. 

Dr. Gramm, would you care to comment on this? 

Mr. GRAMM. Look, it goes way beyond paperwork. What all this 

is about is demagoguery. It is the one form of bigotry that is still 

allowed in America, and that is bigotry against the successful. 

Why do people pay executives a lot of money? Why do CEOs 

make these huge salaries? Because they add value. 

If somebody takes over a company and it succeeds, they get rewarded. If it fails, they get fired. 

It is not the government’s business. As a shareholder, I own the 

company, not the government. It is my money, not the government’s money. 

So if I just want to give it away, then I ought to be free to do 

so. Now, maybe the government should assess a gift tax. I don’t 

want to suggest that to anybody. 

But the point is, people pay for performance. And there are some 

people who are able to add tremendous value. 

Joe Namath did as quarterback for the New York Jets. He is the 

most exploited football player in history even though he made the 

highest salary, because he added more value than he got. 

My friend Ed Whitacre at AT&T, if there has ever been an exploited worker—even though they made a big deal about him getting $75 million when he retired, the man added billions of dollars 

of value. He was exploited. It was an outrage. 

But nobody is raising hell about it. They are raising hell about 

the fact that he made a lot of money and other people would like 

to have the money. And even if they don’t want it, they don’t want 

him to have it. I don’t get it. 

Mr. HUIZENGA. Mr. Chairman, I think most of us have concluded 

that Dodd-Frank—or the SEC needs to deal with much more important issues than some of these window-dressing items. So with 

that, I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Maloney, ranking member of our Capital Markets Subcommittee. 

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

this hearing. 

And I welcome our distinguished panelists. It is good to see two 

former Members here. 

16 

Welcome back. 

Dodd-Frank was a landmark bill that overhauled the regulation 

of financial services in this country. But it was not written in a 

vacuum. 

It was a response to a devastating crisis which cost this economy $16 trillion in household wealth. Unemployment reached 10 percent, the highest level in 25 years, 9 million people lost their jobs, 

and 4 million Americans lost their homes. 

And while there were many factors that led to the financial crisis, it had its roots in predatory subprime mortgages. And these 

were loans that never should have been made and that ended up 

harming the consumers and the lenders and the overall economy. 

Because so many of these toxic mortgage loans were made, and 

so many of them were packaged into securities and sold to investors all around the world, the implosion of the subprime mortgage 

market had ripple effects throughout the global economy. 

Now, 5 years after Dodd-Frank was passed, those kinds of toxic 

predatory mortgage loans are prohibited, and it is hard for me to 

see or understand how this is anything other than a benefit for 

consumers, banks, and the overall economy. So I, for one, think 

that the fifth anniversary of Dodd-Frank is a reason for celebration. 

There was a chart up here earlier which showed what I call the 

deep red valley, where we were losing 750,000 jobs a month when 

President Obama took office. And Christina Romer, the former 

head of the Council of Economic Advisors for the President, testified before this body and others that the economic shocks from the 

economic downturn were at least 3 times worse than the Great Depression. 

This particular chart—I wish they would put it up there again— 

shows that when Dodd-Frank was put in place, the blue starts 

growing, which is jobs and a growing economy. 

So I would like to ask my former colleague, Brad Miller, who was 

very active in this subprime battle, and had his own legislation, 

and took leadership in all the debates, Congressman Miller, as you 

know, many of our colleagues on the other side of the aisle like to 

say that the sole cause of the 2008 crisis was the fact that far too 

much credit was extended to low-income people. And yet, they also 

opposed the CFPB’s rule that requires lenders to verify a borrower’s ability to repay a mortgage loan before they extend credit— 

the so-called qualified mortgage. 

Shouldn’t they support such a commonsense proposal? If this proposal had been in effect prior to the crisis, would so many toxic 

mortgage loans have been made? 

Mr. MILLER. Pointing out hypocrisy by politicians is too easy. It 

is almost not fair. 

But yes, if we had had sensible regulations in place to prevent 

subprime mortgage lending, and particularly the kind that we had 

which created an unsustainable mortgage that people could not get 

out of when property values declined, we would not have had the 

bubble, we would not have had the burst of the bubble, we would 

not have had so many—liquidity is frequently praised but liquidity 

just means the ability to borrow money freely. And when you borrow money freely to buy an asset that goes down in value, a lot 

17 

of liquidity proves to be a problem a little bit later on. And that 

is essentially the problem we had. 

It was the same problem. The bubble in the Great Depression, 

or that led to the Great Depression was the bubble in the stock 

market. 

Liquidity is a really good thing to have until it isn’t. 

Mrs. MALONEY. We also heard many testimonies from economists 

who said this was the first economic downturn in our history that 

could have been prevented because it was created by the mismanagement of the financial system. I, for one, believe markets 

run more on trust than on capital. And Dodd-Frank imposed regulation that put more trust back into our markets, which is one of 

many reasons why our economy is improving. 

My time has expired. Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

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

Garrett, chairman of our Capital Markets Subcommittee. 

Mr. GARRETT. I thank the chairman. 

I will start with Mr. Wallison. 

Would you agree with this premise or statement that it is intolerable when any class of people—minorities or the poor—are intentionally discriminated against, when they are unfairly targeted in 

the financial markets, in the housing markets, by illegal, unconscionable, unfair practices in that marketplace? Do you agree— 

Mr. WALLISON. Yes. Of course, I agree with that. 

Mr. GARRETT. And is it for that reason that this committee meets 

regularly to make sure that we do have adequate laws both on the 

Federal level and also on the State level to target those bad actors—and you agree that there are bad actors in this marketplace? 

Mr. WALLISON. Absolutely. 

Mr. GARRETT. And that is why we meet to target—have legislation to target those bad actors, and to address those unfair practices. Do you agree with that? 

Mr. WALLISON. Yes, I do. 

Mr. GARRETT. All right. 

Now, Mr. Miller, I am bad at quotes, but there is a quote by Winston Churchill that goes something like, ‘‘History is going to be 

kind to me because I intend to write it.’’ I don’t know what history 

you are writing, but you wrote today’s statement so it would be 

kind to past practices of the Obama Administration in this area. 

One of your comments was that scholars have said that there 

was no problem with forced regulation—or regulation forcing the 

banking industry to commit these or execute these subprime loans. 

That may be what scholars wrote from their ivory towers, as far 

as whether regulation was a cause of this or not, but I can tell you 

this committee had numerous hearings where we didn’t listen to 

scholars but we listened to the actual people in the field—the actual bankers—who told us repeatedly that regulation was a driving 

force behind their writing of subprime loans, that regulation told 

them how to do the underwriting, starting way back whether it 

was the Boston Fed describing what income and assets would be 

considered, to the actions of the Fannie Mae and Freddie Mac, all 

the way along the line, and the other regulators as well. 

18 

I think the actual people on the front line best describe what effect a regulation had on a marketplace. 

So we know that—well, I will close on this, Mr. Wallison—you 

admitted—or you say that there were some bad actors in the marketplace, but you also in your testimony, and also your report after 

the last crisis indicated that regulation was a factor, as well, if you 

would like to comment on that briefly? 

Mr. WALLISON. Yes, I would. If I have the time, I would like to 

say a number of things about this subject, but you are questioning 

it, so go ahead. 

Mr. GARRETT. Your report indicated that regulation played a 

role. That is history. Now we have to look to see what effect our 

current laws will have going forward, both on the minority and the 

poor populations, as well. 

So let me just ask this: The E.U. commissioner for financial services, Jonathan Hill, said that he would look at the combined effect 

of all the laws that have been passed to make sure we have the 

balance right between reducing risk and fostering growth, and 

where we haven’t got it right, we should have the self-confidence 

to make changes. 

Has anyone in this Administration, to the best of your knowledge—or Senator Gramm, you can comment on this, as well—said 

that this Administration is going to do a review of all the laws on 

the books to see that there will not be a negative impact upon the 

minority population or the poor population, to see the cumulative 

effect that it may be degrading their ability to get a loan and get 

a mortgage? 

Both gentleman may respond. 

Mr. GRAMM. Let me respond in the following way: There was one 

provision of Dodd-Frank related to mortgages that I thought was 

a very good provision, and it was what I would call the skin-in-thegame provision. It basically said if you make a mortgage, you have 

to hold a certain percentage of that mortgage, and you had to take 

the first loss, generally discussed at the 5 percent level. 

What happened to it? What happened to it is that this Administration would not enforce that law. 

Now, I thought it was a good law—that provision—because it basically said if you make a bad loan and it goes bad, even though 

it is securitized and some retirement fund has borrowed it—bought 

the security, you are going to take the first 5 percent of the loan. 

I don’t see any evidence that this Administration has taken the 

lessons of the subprime crisis seriously. They are pushing CRA 

again and requiring banks to make loans. They are lowering 

downpayments. 

It seems to me they are determined to go back to the same system that created the problem. And forgive me for—there were bad 

actors. There were predatory loans. But there were 100 predatory 

borrowers for every one predatory lender. 

The law required the loans to be made. It required people to 

make subprime loans. It required Freddie and Fannie to hold 

subprime loans. If these loans were so good, why did you have to 

make them make them? 

Chairman HENSARLING. The time of the gentleman has expired. 

19 

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

Mr. HINOJOSA. Thank you, Chairman Hensarling and Ranking 

Member Waters, for holding this important hearing. 

And thank you to my former and distinguished colleagues and 

the other panel member for your testimony and appearance here 

today. 

In the wake of the worst financial crisis since the Great Depression, the whole of our financial banking system teetered on the 

brink of collapse. To prevent such a calamity from happening 

again, we enacted the Dodd-Frank Act. 

This Act has strengthened oversight of Wall Street, given regulators the tools to end too-big-to-fail banks, and brought muchneeded transparency to markets by eliminating loopholes that allowed risky and unfair and abusive practices to go unnoticed and 

unregulated. 

Importantly, Dodd-Frank restored confidence in our markets and 

has brought our economy back from the depth of the deep recession. In the longest-running job creation streak in our history, we 

have added millions of jobs, lowered the unemployment rate, and 

added back $30 trillion to our Nation’s wealth. 

My first question goes to my good friend, Congressman Bradley 

Miller. It is undisputed that the widespread use of predatory and 

subprime mortgage products like adjustable rates, coupled with lax 

underwriting, caused a mortgage crisis when borrowers began defaulting in mass. However, many contenders like to ignore the fact 

that the mortgage crisis became a financial and economic crisis of 

epic proportion only because of a completely unregulated and 

opaque world of derivatives, such as credit default swaps. 

How did the Commodity Futures Modernization Act of 2000 create a situation which fueled that financial crisis of 2008, and what 

rationale was used to pass said law? 

Mr. MILLER. I wasn’t around when that was enacted; I was in 

the State legislation of North Carolina dealing with entirely different issues. But the Commodity Futures Modernization Act prohibited any regulation of derivatives either at the Federal or State 

level, and in the first 6, 7 years I was a member of this committee, 

there was never a hearing that talked about derivatives at all. 

According to the testimony in the recent trial about the AIG bailout, if AIG had not been bailed out, if they had not paid 100 cents 

on the dollar without getting anything for it on credit default 

swaps, which galled me at the time, and I said so, as a member 

of this committee, that Morgan Stanley would have gone down immediately, and Goldman Sachs would not have been long behind. 

It would have brought the entire financial system down. 

And then Morgan Stanley and Goldman owed a lot of people 

money, and if they couldn’t pay that a lot of people were going to 

be—a lot of financial participants—industry participants would 

have been out of business. 

Derivatives also create both a motive and a mechanism for a 

great deal of gamesmanship in the economy that is entirely useless, 

that really—I have yet to hear a remotely persuasive explanation 

of the benefit that they bring—that the physical markets for the 

referenced data assets are like this; the paper markets, the derivaVerDate Nov 24 2008 17:20 Oct 13, 2016 Jkt 097160 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\97160.TXT TERI
20 

tive markets are like this, and there is a huge amount of gamesmanship. 

There is now in the bankruptcy— 

Mr. HINOJOSA. Time is running out on me. 

Mr. MILLER. All right. 

Mr. HINOJOSA. I like what I hear from you. I agree with you. 

Tell me, how has the Dodd-Frank Act addressed these two issues 

of proper underwriting of the mortgages and the transparency and 

safety in the derivatives market? 

Mr. MILLER. On the underwriting of mortgages, there are now 

rules that require that mortgages be—that there is an ability to 

repay not just in the first 2 years, not just in the first little bit, 

but across the life of the mortgage. That will prohibit a lot of the 

worst practices of the last decade. And there are other provisions 

that are real reforms in the kind of practices we have. 

With respect to derivatives, there is now more of a requirement 

of transparency. They are traded mostly on exchanges. 

That means that you can—someone who wants to buy a derivative—God only knows why anybody would want to, but if you want 

to buy a derivative you can call up on your computer screen and 

see what the yields—what the spread is. And there is a great deal 

more transparency about it and real market forces. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, chairman of our Housing and Insurance Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Wallison, I am in the process of reading your latest book, 

and it is quite informative and I certainly enjoy it. It makes the 

long hours back to Missouri on a plane more bearable. 

But a quick question for you with regards to the GSE situation 

that you discuss and the history of it there. It looks to me like 

Dodd-Frank is steering the mortgage lending away from banks and 

private lenders back into the GSEs, which we have tried to get 

away from, but it looks like we are going the other direction. 

And so, I would like for you to comment on what effect you think 

Dodd-Frank has had with regards to that, and is that a good thing 

or a bad thing? 

Mr. WALLISON. First of all, there has been so much myth recited 

here. I would like to just go back and say one thing about the financial crisis so that we understand a little bit more about it. 

Now, predatory lending now doubt occurred, but the Financial 

Crisis Inquiry Commission was unable to find enough data to show 

that it was significant. What we learned from the financial crisis 

is that in 2008, more than half of all mortgages in the United 

States were subprime. And of those, 76 percent were on the books 

of government agencies—primarily Fannie Mae and Freddie Mac, 

FHA too. 

The point is that the government had required certain quotas 

to—of mortgages to be made to people below median income. Now, 

there was no reason why that was a bad idea except for the fact 

that if you make those quotas too high, then the GSEs had to reduce their underwriting standards, which they did. That is why 81 

21 

percent of all of the losses that Fannie suffered, they reported as 

coming from subprime and other low-quality mortgages. 

So in any event, the important point here is that we have to keep 

our underwriting standards high, and what we have done recently 

was to reduce those underwriting standards again, because it is always in the interest of the government to reduce underwriting 

standards. It increases home purchases and that improves the market. But in the end, we ultimately always have a crash. 

Mr. LUETKEMEYER. Thank you. 

Senator Gramm, you, in your testimony a while ago, talked about 

SIFIs and living wills. You made the comment that they are not 

defined in law, and I thought that was an interesting comment 

from the standpoint that we had Barney Frank in here a little over 

a year ago, and he was the author of Dodd-Frank, and the problem 

with SIFIs, in his own words, was an unintended consequence. He 

believed he wanted the biggest banks to be regulated, but it seems 

the regulators are allowing these regulations to flow downhill now 

to the mid-sized and regional banks, and even to the community 

banks, in a very negative way. 

And so I was wondering if you would comment—it seems like the 

regulators are creating law instead of enforcing existing law, and 

trying to make stuff up here, and your—and the effects that it is 

having on the banking system. 

Mr. GRAMM. Let me first say, you asked about Dodd-Frank, was 

it a good law. The biggest problem with Dodd-Frank is it didn’t 

write the law. The biggest problem with Dodd-Frank is the same 

problem with Obamacare. When the speaker said, ‘‘We need to pass 

it so we can find out what is in it,’’ she misspoke. She really should 

have said, ‘‘We should pass it so we can decide what is in it.’’ 

Dodd-Frank grants broad powers. It doesn’t define its terms. And 

so as a result, the regulators decide. 

Now, our system works that you write the law and then the regulators implement the law through a process, generally bipartisan, 

in sunshine, where there is debate, where people know what the 

rules are in general, and they basically implement them. What 

happened here was the law was never written in the first place. It 

granted huge powers to the regulators who make all of these decisions, and so you have become a bit player in the process. 

How many people thought that they were giving the regulators 

power to implement international regulatory standards that were 

written in Basel in the United States without Congress ever approving them? I don’t believe Democrats thought that. But they are 

doing it today because they do whatever they want to do. 

And in the case of the good provision of Dodd-Frank about the 

5 percent skin in the game, they just decided not to implement the 

law. 

The Constitution says that the President should faithfully execute the laws, but in this case and many other cases, this President 

does not execute the law. 

Mr. LUETKEMEYER. Thank you. And we now seem to have a regulatory system instead of a shadow banking system. I thank you, 

Senator. 

I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

22 

The Chair now declares a 5-minute recess. 

[recess] 

Chairman HENSARLING. The committee will come to order. 

The Chair now recognizes the gentlelady from Ohio, Mrs. Beatty, 

for 5 minutes. 

Mrs. BEATTY. Thank you, Chairman Hensarling, and Ranking 

Member Waters. 

And thank you, to our witnesses today. I was getting ready to 

say I am a freshman member, but now that I am a sophomore 

member of this committee, I certainly appreciate the varied history 

that we have had here, and especially from the two witnesses who 

have served here. 

We have talked a lot about history, and in some of the opening 

remarks from my ranking member, she gave us a history. So let 

me fast-forward to where we are today, hearing that history on 

housing, and certainly, we have heard many people talk about that 

crisis and what happened in the 2008 financial crisis. 

But as we talk about housing now, just this past week Bloomberg 

News reported that America’s housing market recovery is in full 

swing; there are sources across the Internet saying that housing 

ownership has dropped to a 48-year low. 

So my question to the three of you is, when we look at housing 

today, either in full swing or in the last 24 hours dropping, my concern is, what do we do as it relates to communities that are represented by minorities or those who are living in poverty? We know 

what happens to the communities that many of our constituents or 

that we live in, but what do you think we should be looking at to 

help the recovery of this lagging market for minorities? 

Mr. WALLISON. I think the data that you cited can be consistent, 

and that is there is a return of the market. There are many more 

sales going on right now, and the reason for that, unfortunately, 

is that the government is continuing to reduce underwriting standards. 

This is not good for minority buyers. It is not good for non-minority buyers. Because in the end, what happens when you are selling 

homes to people who cannot afford to carry those homes over an 

extended period is that we are going to have the same kind of 

crash we had in 2008. 

My solution for solving this problem is to get the government out 

of the housing market because it has an incentive to reduce underwriting standards, and as long as the government is in control of 

the market, that is what it will do. 

Mrs. BEATTY. Mr. Miller? 

Mr. MILLER. I have been critical of the efforts at addressing the 

housing market. Perhaps the Republicans on this committee don’t 

know that, but the RNC does. When I wrote an article in Salon in 

2012 that criticized the lack of real policy urgency about the collapse of home values and the foreclosure crisis, the RNC trumpeted 

excerpts from my article all over their website. State Republican 

parties trumpeted it also on their websites, as if Mitt Romney 

would have done anything different. 

This recovery was going to be hard. It was going to be hard for 

a number of reasons. 

23 

One is it was a balance sheet recovery. Americans—households 

and businesses, but especially households, were deeply in debt and 

had to get out of it and were going to consume less until they were 

in better shape. 

We had a bubble in the housing market, which led to a great 

deal of overbuilding, and so when we have had recessions in the 

past, usually housing—residential real estate, residential construction—dips, there is enough demand, and then that sort of gives 

extra juice to the recovery. That was not going to happen in this 

recovery. 

The natural demand for new housing during that period was 

probably about 1.4 million units. Instead we had a couple of years 

when we built 2 million. So that wasn’t going to happen. 

Protecting against the kind of predation we saw will help a lot. 

It will help preserve the wealth, because that is one of the ways 

that middle-class families have built wealth is by faithfully paying 

off a mortgage—getting a mortgage on a home, buying a home, 

paying off a mortgage over time, and not allowing the kind of predation that we saw in the last decade. 

Mrs. BEATTY. Okay. 

And I don’t have enough time, Senator Gramm, to ask you to 

comment. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Wisconsin, Mr. 

Duffy, chairman of our Oversight and Investigations Subcommittee. 

Mr. DUFFY. Thank you, Mr. Chairman. 

I am going to take a stab at Mrs. Beatty’s question. I think the 

way we help out lower-income and minority communities is by 

growing the economy, and making sure that they can access opportunity and access jobs. 

In my community, two of the biggest employers—one is regional 

and one is nationwide, and they started their businesses in the late 

1960s and early 1970s—have separately said, ‘‘If I wanted to start 

my business today, I couldn’t do it because of all the rules and all 

the regulation. I couldn’t get a bank to partner with me in our community to give me a loan to start the business that now employs 

tens of thousands of people with good-paying jobs.’’ 

And so, when we have a debate today, where is the next 

Menards? Where is the next Ashley Furniture? Where is the next 

Google, if you can’t start your business and employ people in Mrs. 

Beatty’s community and in my community? 

There was a graph that we had at the Joint Economic Committee—I used to serve on that committee—and it compared the 

historic declines, and then the historic recoveries. 

So if you had a slow-sloping decline, you would have a slow-sloping recovery. The decline would match the recovery. And if you had 

a steep recession, you would have a steep recovery. They would 

mirror each other. 

But if you look at this decline—which was very steep—and you 

look at this recovery, they don’t match the prior examples of recoveries. 

To the panel, have you noticed that this has been a lackluster 

recovery compared to others? Shouldn’t we have had, with a steep 

24 

decline, a steep economic recovery, but we haven’t experienced 

that? 

Dr. Gramm? 

Mr. GRAMM. We have had a bad recovery because we had a dramatic change in policy, and the policy was one of more taxes and 

more government control. You saw the graph that they had at—the 

chart they had at the Joint Economic Committee about new business starts. It is a perfect example. 

And let me say on the home ownership question, I think one of 

the things we could do that could help home ownership is to let 

banks make character loans again. Everything now is so rule-based 

that we don’t give the banker the ability to figure out who will pay 

this money back and who won’t. 

My mama didn’t graduate from high school. She was a widow. 

And she got a subprime loan, and no government guaranteed it. 

But by the time she died, any banker in Columbus, Georgia, would 

lend her money. Anybody. 

Why? Because she paid the money back. 

And I think we go too far now on these formulas. We don’t help 

people when we lend them money that they can’t pay back or they 

won’t pay back, but there are a lot of people who would work and 

struggle to make sure they paid the loan back, and I think getting 

back to some character lending would be a good idea and it would 

help deal with the problem that the Congresswoman from Ohio 

raised. 

Mr. DUFFY. We have now gone to check-the-box banking. 

Mr. GRAMM. We have not had a good recovery because we have 

implemented policies that have stifled the system which created 

the prosperity we have known. 

Mr. DUFFY. I would just note that—I am going to go to Mr. 

Wallison in a second—means we have 14.4 million less jobs and 

$6,000 less per family, Mr. Gramm. 

But Mr. Wallison, you— 

Mr. WALLISON. Yes. I would like to put up the chart that I had, 

my first chart. If you can find that again and put that up on the 

screen, because I think it tells us something very important. 

While we are waiting for it, it shows the recovery that we have 

had since 2010—actually, since 2009, and in comparison to all recoveries we have had since the mid-1960s. The important thing 

about it is that for the first three-quarters of the recovery from 

2009, it was in line with the usual recoveries, as you can see. When 

the Dodd-Frank Act was passed in 2010, you can see what happens 

to the red line, which is the line that shows the current recovery. 

So the market was recovering in the usual pattern after 2009, 

but once the Act was passed, everything stopped. And that is the 

point that I think you were trying to make and what I think is important for the committee to understand. 

Mr. DUFFY. That is a very good point, and I thank you. And I 

just want to point out that my friends across the aisle have been 

wearing pins in celebration of Dodd-Frank, and I would just note 

that is a celebration of a racist and sexist CFPB, a CFPB that is 

now setting rates in the auto industry. It is collecting data against 

the knowledge of consumers. 

25 

Lack of oversight for this—I am getting gaveled down so I am 

going to yield back, Mr. Chairman. 

Chairman HENSARLING. He was regrettably gaveled down. 

The Chair now recognizes the gentleman from Washington, Mr. 

Heck, for 5 minutes. 

Mr. HECK. That is quite an act to follow. 

Thank you, Mr. Chairman. 

I guess I want to begin by just registering my heresy here. I, 

frankly, as a relative newcomer here, have grown unbelievably 

tired of the finger-pointing. We seem to have points of view that 

suggest it is all the government’s fault—for incenting, cajoling, and 

strong-arming those poor, weak-kneed bankers into making loans 

they didn’t want to make. 

At the same time—here comes the heresy from my side of the 

aisle—we seem to be suggesting that every consumer was somehow 

duped into doing this and had no capacity whatsoever to make a 

well-informed decision for themselves. 

So it is all the government’s fault, or all the consumer’s fault, or 

all the banker’s fault. And I don’t know why it is so hard around 

here just to acknowledge that there is plenty of guilt to go around. 

The fact of the matter is there were consumers who were getting 

loans, who should have known better, did know better, but bet that 

the real estate increase in values would continue. The fact is that 

there were some bankers applying the can-you-fog-a-mirror rule to 

making loans. And the fact is that the government was compliant 

in some fashion with this big run-up and this big crash. 

I don’t know why that is so hard for us to acknowledge. And I 

don’t know what the proportion of that culpability is, but I am convinced that there is some to go around to everyone. 

Now, with that preface, I want to ask a question of all of you and 

ask Congressman Miller to begin. There are two people here who 

don’t like Dodd-Frank and one person who largely does, all right? 

I am not from Missouri, but show me. Can you cite another country in the world that during the midst of the Great Recession took 

actions, and adopted policies that better benefitted their economic 

growth curve than the United States did with the adoption of 

Dodd-Frank? If Dodd-Frank wasn’t perfect—and even you, Congressman Miller, suggest it wasn’t perfect—who did it better? What 

country did it better? 

Mr. MILLER. Actually, we did better. I have been critical of the 

policies that made the priority protecting banks from the consequences of their own conduct, of allowing them to privatize profits and socialize risk, of not taking them through receivership when 

they were, in fact, insolvent, which has been the standard playbook 

for dealing with a financial crisis. 

And none of the recessions since the Second World War began 

with a financial crisis. This is the only one. 

Around the world usually crises that, again, in the financial sector are a lot harder to get out of, and the standard playbook since 

the late 19th Century is take insolvent banks through insolvency 

and get them back operating with a new set of owners so they are 

not really being bailed out, and a clean set of books so they can 

actually do sensible things and not pretend to be solvent until— 

26 

Mr. HECK. So you don’t know of another country that had a better response which helped their economy? 

Mr. MILLER. Most of the developed world, certainly Europe, has 

done less well than we have. 

Mr. HECK. Senator Gramm, do you know of another country 

whose policy response— 

Mr. GRAMM. Yes, I know several. Poland was instituting a major 

move toward private property and a market-based system. Their 

economy was growing so strongly that they actually did not have 

a recession, and their growth has been strong since. 

If you compare growth prior to the recession to growth after the 

recession, I think you could make a case that both Germany and 

Britain did a better job than the United States. 

Mr. HECK. But their growth after the beginning than the recession was no better than ours. 

Mr. GRAMM. But their growth before was a lot worse. So if you 

are going to look at the impact of the financial crisis, I think you 

have to look at what they were doing before and what they did 

after. The hallmark of our disappointing recovery has been that it 

was so different than our previous recoveries, and I do think that 

policies which were implemented had a lot to do with it. 

Now, look, there are two sides of every story. As Jefferson said, 

good men with the same facts are prone to disagree. 

But my basic view in looking at this is that we instituted a 

bunch of policies which affected investor confidence, and we did not 

get the good recovery that we should have. First of all, the recession came on very slowly—I’m sorry. 

Mr. HECK. I have the same trouble with my mentor too, Mr. 

Chairman. I understand. 

I would just conclude by saying if we want to go where there is 

no government regulation, that country exists. It is Somalia, and 

I am not trading places with them for anything. 

Chairman HENSARLING. The time of the gentleman has expired. 

Mr. GRAMM. I shouldn’t have cut him off all those years in the 

classroom. 

Chairman HENSARLING. The time of the gentleman has expired. 

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

Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

Just a little bit of housekeeping here. We heard the statement 

earlier in an answer to a question that derivatives are entirely useless and Mr. Miller could see no reason to have them. 

Senator Gramm, do you see positive reasons for any derivatives? 

Mr. GRAMM. Yes, I see lots of positive reasons for derivatives. I 

think it is a way that people can hedge, for example, if you are an 

airline and have to buy jet fuel, it is a way of protecting yourself. 

If you are in the insurance business, you can partially protect yourself by buying derivatives which have value based on what happens 

with the weather. 

It is a vehicle whereby you can get risk in the hands of people 

who are capable of bearing it and they get a profit for bearing it. 

So I think there is a reason for it. 

And if I could, let me just straighten something out. A lot of people point to the Commodity Futures Modernization Act as being 

27 

some terrible law that deregulated derivatives. Nothing could be 

further from the truth. 

You had a Commodity Futures Trading Commission (CFTC) 

Chair who got it in her head that derivatives were futures, and by 

raising the question, since it is illegal to trade futures off an exchange, she created legal uncertainty in all of these markets. President Clinton and every financial regulator in the government 

begged the Congress to pass a law making it clear that derivatives 

were not futures. 

Derivatives were never regulated, so this idea that somehow we 

deregulated derivatives in the Commodity Futures Modernization 

Act is just totally wrong. 

Mr. PEARCE. Thank you. 

Mr. GRAMM. And it got 300 votes in the House and only 60 people voted against it. 

So the point is that we never regulated derivatives before. We 

now regulate them. It will be interesting to see what the net result 

will be. My guess is it will not be good. 

Mr. PEARCE. Okay. 

Mr. Wallison, you had mentioned that one of the great problems 

was the—and the move toward 2008 was the relaxing of the underwriting standards, and you said that we are doing it again. Can 

you flesh that out just a bit? I have another question, so if you 

could—so we are doing exactly the same thing that put us in position— 

Mr. WALLISON. Two things, Congressman, that I would mention, 

and that is a few months ago the regulator of Fannie Mae and 

Freddie Mac, which is the Federal Housing Finance Agency, told 

them that they weren’t taking enough risk on mortgages, so he 

wanted them to reduce their downpayment standards from 5 percent, which is already too low, to 3 percent. That substantially increases the risk. 

The second thing is that the President himself said he was going 

to reduce FHA’s mortgage insurance premium by half a point, 

about 50 basis points. What that does is put more of the taxpayers 

at risk and allows much riskier mortgages to enter our financial 

system. 

So in both cases, the government has been going back to exactly 

the same policies that preceded the financial crisis. 

Mr. PEARCE. Okay. Now, the basic narrative that we get from our 

friends on the other side of the aisle is that the system was teetering on collapse and that we have strengthened the oversight. 

And yet, the people who reduced the underwriting standards, 

Fannie and Freddie, it is my understanding that they are not 

touched at all by Dodd-Frank. Is that more or less correct, Mr. 

Wallison? 

Mr. WALLISON. That is exactly right. 

Mr. PEARCE. So this narrative that comes from our friends on the 

other side is probably completely bypassing the lynchpin of the entire problem, and yet we never hear that. 

Lastly, the effect on the community banks. Community banks, in 

my opinion, were not greatly responsible for any of the problems— 

the subprime, the predatory practices—and yet they get the bulk 

28 

of the regulation under Dodd-Frank. Again, Mr. Wallison, I would 

like your comment on that. 

Mr. WALLISON. Exactly. They are suffering much greater regulation than they need, and as a result of that additional regulation, 

they are not making the loans that local communities need and 

small businesses need. 

Mr. PEARCE. Okay. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Sherman. 

Mr. SHERMAN. Thank you. Mr. Chairman, the topic of this hearing is, are we more prosperous. I would point out that Dodd-Frank 

is just one of many things that have happened in the last few 

years. 

The harm to our prosperity done by our current trade policy 

swamps any benefit that Dodd-Frank was intended to provide. And 

I don’t think we will be as prosperous as we should be until we 

eliminate a trade policy which has given us the largest trade deficit 

in history. 

Dodd-Frank gave an awful lot of power to the regulators, which 

they are not using. First, we had the Franken-Sherman amendment which dealt with credit rating agencies. 

It continues to be the fact that if you are issuing a major debt 

instrument, you can decide which credit rating agency rates you, 

you can pay them a million bucks, and they have every reason to 

give you a good rating because you will be back to them with another issue or someone else will be back to them with a similar 

issue the next week. 

So as long as credit rating agencies are rating dead issuances, we 

will have the same result that we would have in the American 

League if the home team got to select and pay the umpire. 

We also were trying to pass a law that said we shouldn’t have 

too-big-to-fail. We still have too-big-to-fail. The reason for that is 

the regulators under Dodd-Frank were given the authority but 

were not required to break up those that are too-big-to-fail. So the 

only way you don’t have too-big-to-fail is if you are too-big-to-fail, 

you are too-big-to-exist. 

But I only have one House cosponsor on that bill. Maybe we will 

pick up some more if any of my colleagues are listening to this. 

And of course, Bernie Sanders is, I believe, the only person on that 

bill in the Senate. 

So to ask us whether we are more prosperous when we still have 

the debt instruments rated by a credit rating agency selected and 

paid by the issuer, while we still have too-big-to-fail and, in fact, 

they are bigger, the one thing that saves us from a meltdown this 

year is that we remember 2008, and nobody plays with matches for 

the first few years after they burn down their house. 

So I think investors are going to be careful for a while. Maybe 

for another year or 2 years. And after that, if we give AAA to AltA, we will have this kind of meltdown. 

Finally, on the CFPB, we on the Democratic side passed a bill 

which creates a single regulator. We may rue the day. I do not 

know who is going to win the next Presidential election, and we 

have a panel here who could advise us but they don’t know either. 

29 

If a Democrat wins, Mr. Cordray may continue to be there. I 

know some Republican candidates who would appoint somebody to 

that position whose first act would be to repeal everything Mr. 

Cordray has done. 

And if we have a panel of three or five, we—some of us are very 

sure that we will not lose the Presidential election, and Donald 

Trump is doing everything possible to help us. 

But we could still lose the next Presidential election, so I think 

the CFPB got a good start because we guaranteed a Democrat 

would be in complete control. And now, having enjoyed that for a 

while and until we know who is winning the next election, it might 

be good to get a board in there that will reduce the swings to the 

left and the swings to the right that you would expect if there was 

just one person from one party appointed by one President. 

Mr. Miller, do you have any comments for us? 

Mr. MILLER. I commented on that at the last hearing. That is one 

of the potential downsides of having a single commissioner is that 

presumably that will change—a more dramatic change. But if you 

have a five-member commission, that can change pretty quickly 

too. The SEC and the CFTC are pretty much three-to-two all the 

time. You swap out one commissioner and you have it three-to-two 

the other way. 

Mr. SHERMAN. Yes. But I have never seen the SEC change where 

they repeal all their existing regulations, or a big chunk of them, 

when a new Administration takes office. I hope I don’t see that because we will win the Presidency. 

And I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Virginia, Mr. 

Hurt. 

Mr. HURT. Thank you, Mr. Chairman. 

Mr. Chairman, I want to thank you for continuing to focus on 

this important issue 5 years post-Dodd-Frank. 

I want to thank each of the witnesses for appearing and participating in today’s hearing. 

I represent Virginia’s 5th District. It is a very rural district, 

mostly agricultural in nature. There is a lot of history—Jefferson’s 

home and Madison’s home are in the 5th District. 

Main Street Virginia 5th District is a long way from Wall Street, 

and I think about this in the context of the big picture, which is 

that since the founding of our country, I think that all Americans, 

whether you live in the big city or you live in the rural areas, have 

benefitted from this marriage between free market principles, a robust free market, and a democratic republic as a political system. 

And I think we have all benefitted from that across the country, 

and it has built the greatest economy—I think that we would all 

agree—the world has ever seen. 

My question is really for all three of you. I would like to start 

with Mr. Miller, and then go to Mr. Wallison, and then finish up 

with Mr. Gramm. 

But 5 years after Dodd-Frank we see the Federal Reserve Bank 

of Richmond reports now that 60 percent of all liabilities in our financial markets are either explicitly or implicitly backed by the 

30 

U.S. Government, backed by the U.S. taxpayer. And I guess my 

question for you all is, is that a good thing? 

What is the current effect of that? What is the current effect of 

that in today’s economy? And more important, what does it portend 

for the future of the American economy? And if you have time, how 

do we fix it? 

That is a whole lot for just a couple of minutes, but maybe we 

could start with you, Mr. Miller. 

Mr. MILLER. I have not seen that statistic or that study. I would 

certainly be interested in analyzing it. It is kind of hard for me to 

imagine that is the case, but I have heard a lot of statistics thrown 

around in the time that I was in Congress and since that, upon 

closer examination, there were asterisks that explained them. 

Obviously, I don’t think that 60 percent of assets should be guaranteed by the government. I said just a moment ago that I think 

the great mistake in responding to the financial crisis was not to 

take the financial institutions that were insolvent through an orderly receivership, come out of that—continue to maintain this— 

the economy’s payment system, prevent disruption, which is possible to do, offload their suspicious—their suspect assets into something like the Resolution Trust Corporation, deal with those in a 

sensible way, which often would mean reducing the principal to try 

to make them payable rather than forcing people into foreclosure. 

No. I think that the sensible thing during the financial crisis 

would have been, again, what has been the standard playbook of 

dealing with financial crises around the world—and they happen 

with surprising frequency—is to take banks through receivership. 

Mr. HURT. Thank you, Mr. Miller. 

Mr. Wallison? 

Mr. WALLISON. Yes. Government does guarantee much of our financial market today, and I suppose the worst example of all is the 

Government-Sponsored Enterprises, which are not only regulated 

now by the government but also backed by the government. The result of that is that they can take much more risk. 

And this is true of any institution that is backed by the government. It can take much more risk because people assume that they 

will not suffer any losses if they make loans to such an institution. 

And as long as that is happening, as long as we have institutions 

like that, we are going to have much more risk and much more failure in the economy. 

Mr. HURT. Excellent. Thank you. 

Mr. Gramm? 

Mr. GRAMM. First of all, I don’t doubt your number is right. The 

Federal Government backs loans to preempt the capital market. 

And I object to it not just because it puts the taxpayer at risk, but 

because it changes the order of the credit line and puts people at 

the front of the line who have low-priority uses for capital and 

pushes further down in the line people who have high-valued uses 

that would create jobs and growth and opportunity. 

And if you look at the preemptions that are occurring with these 

Federal guarantees, they are in areas where the rate of return is 

low. Not to pick on wind power, but it is such a beautiful example. 

With the Federal guarantees and the subsidies, you can make 

31 

money generating electricity with wind by giving the power away 

practically for free. 

Now, clearly that kind of incentive creates waste, inefficiency, 

and misallocation of capital, and you see it all through the capital 

market. So we go around the world advising all these underdeveloped countries, ‘‘Let the market system allocate capital,’’ and 

yet we are not doing it. 

Mr. HURT. Right. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

Mr. Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. 

And I thank each of you for being with us today. 

In 1983, I started a business. I had an idea, and went to a banker in Dallas, Texas, at Mercantile Bank, and asked if he would loan 

me $150,000. And for some reason, he loaned me the money. He 

thought I had a good idea, and I think he thought I would pay it 

back. 

It turned out to be a good idea. We had about 300 employees. It 

was a very successful company. 

He got paid back ahead of schedule. The people we hired were 

a broad spectrum of America who came and enjoyed that business. 

I later sold it to my partner. 

In later years, I started another company, a real estate investment business that I no longer own, and those raw land properties, 

undeveloped properties, are now being purchased by developers, 

and those developers have to go to private equity to find money because they can’t go to the market. They can’t go to the commercial 

lenders. They don’t have access to that capital again. 

What do you see, Senator Gramm, as the long-term implications? 

America became the great economic power we are today not because of the great government but because of real opportunity that 

people had to take an idea and build on that idea. 

And that access to capital, as I had in 1983, isn’t there today. 

I was on a bank board. We knew who to loan money to. We knew 

who was creditworthy, as you said, by character alone. And yet, 

you can’t borrow money on that basis anymore. 

If we are a country which was built because of those entrepreneurs, what is going to happen to the future of this country? 

Mr. GRAMM. Basically, growth is not some kind of formula where 

you get a multiplier based on the government spending money. 

Growth comes from somebody who has a new idea, a new vision, 

a better product, a better way of doing things, and then they go to 

the capital market and the capital market is where these ideas, 

these dreams, get translated into reality. 

I always said when I went to the old New York Stock Exchange 

that I thought I was standing on holy ground. When you look at 

what that institution and the capital market have done for mankind, you look at what it has done in the last 20 years in terms 

of people who were living on less than $1 a day, and when capitalism and markets started to grow, people started to prosper. 

If we think we can remain the greatest country in the history of 

the world by giving up the system that made us the greatest country in the history of the world, I think we are fundamentally 

32 

wrong. And I think one of the reasons this recovery has failed so 

miserably is because of the expansion and the preemption of capital 

in these areas where we are subsidizing people to do things that 

would never be done on an economic basis. This increasing capital 

cost falls squarely on small business and the entrepreneur, and finally, we have a regulatory system that is now stifling the very 

functioning of the capital market—where you had a banker who 

had a good sense of what a good idea was, a good sense of people’s 

character, and his job was to make good loans. 

I never have understood how you make money by making loans 

that people don’t pay back. I have never been able to do it. I have 

never worked at any place that could do it. 

So I think we are in danger of getting away from the thing that 

made us great. 

Finally, let me say that Britain is no longer a great country in 

terms of its ability to produce goods and services. I think it is below 

Belgium in the export of goods and services. But Britain is still a 

great country because it has a great banking system. 

We let New York and Chicago, the hubs of our financial system, 

deteriorate at our own peril. We need to dominate the world in 

banking and finance. It is something we do well. It is a source of 

power. It ultimately is a source of military power. And I think we 

ought to be very concerned about it. 

And this idea that all these people on Wall Street are a bunch 

of crooks—I worked for a big investment bank for 9 years, and I 

think I have about as good a sense for when people are proposing 

something as anybody else. I never heard anybody propose to do 

anything illegal. I never saw anybody set out to violate the law. 

Now— 

Chairman HENSARLING. The time of the gentleman— 

Mr. GRAMM. Maybe they did and I didn’t see it, but— 

Mr. PITTENGER. Thank you, Mr. Chairman. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Kentucky, Mr. 

Barr, for 5 minutes. 

Mr. BARR. Thank you, Mr. Chairman. 

And thank you, to our witnesses here today. 

I wanted to talk to you all a little bit about what I think everybody acknowledges was the core cause of the financial crisis: mortgages. You talked about that today. 

Dodd-Frank has a number of titles that deal with issues extraneous to the core cause of the financial crisis, so let’s get at what 

I think there is general consensus about the subprime mortgage 

crisis, which precipitated the economic collapse in 2008. Obviously, 

two of our panelists here make the case that government policy 

produced the subprime meltdown. One of the panelists here disagrees and says it was greed that caused subprime. 

Can you elaborate a little bit on your differing positions on that? 

And let’s start with Mr. Gramm. 

Mr. GRAMM. Look, we set out in a law that in order to open a 

teller machine, much less acquire another bank or merge with another bank, you had to meet a test called CRA. And that basically 

boiled down to, as Alan Greenspan said in testimony before this 

33 

committee, ‘‘If you want to know the source of subprime lending, 

you need to go back and look at CRA.’’ That is a direct quote. 

And as bank mergers occurred, as bank growth occurred, the 

pressure to make CRA loans got bigger and bigger and bigger. We 

set out in law that Freddie and Fannie had to hold 25 percent of 

their whole portfolio in subprime loans, and then we increased it 

until when the wheels came off it was 57 cents out of every dollar. 

We know now from the records of Freddie and Fannie that they 

knew they were taking huge risk in making these loans and guaranteeing these loans and holding this paper. We know that they 

told their superiors that they were taking big risks. And we know 

they struggled to meet their goals. 

And what was the net result? As Peter has told the world in the 

most convincing terms, the net result was a huge volume of loans 

that had been made to people who either couldn’t or wouldn’t pay 

them back. 

Mr. BARR. And just to follow up on your observation that the 

skin-in-the-game concept is actually a potential remedy to this—in 

other words, portfolio loans, risk retention—at least partial risk retention from mortgage originators. Contrast a policy like that to 

what the Administration is doing now to continue to incent taxpayers to bear that risk, and what is the difference between the 

originate-to-distribute model, where there is not an alignment of 

incentives between the mortgage originator and the borrower, 

where they sell to the government, versus a system in which mortgage originators retain the risk and the risk is on shareholders as 

opposed to taxpayers. Which is the better system? 

Mr. GRAMM. Look, if mortgage lenders have to retain risk, they 

are not going to make a lot of the loans that were made. It 

wouldn’t have happened. 

Secondly, we are going back to exactly the same system that existed before. We are lowering downpayments; we are pushing CRA 

again; I don’t doubt that we are going to move back to some kind 

of quota at Freddie and Fannie. 

And look, I understand wanting loans to be made, wanting 

houses to be built, but if there is anything we know, it is that if 

you foresaw housing you are going to end up lowering home ownership, not raising it. That is what the financial crisis proves. 

Mr. BARR. So to conclude, Senator—my time is expiring—what is 

the cause of subprime lending? Is it portfolio loans, where there is 

risk retention, or is it government policy that encourages originateto-distribute, where the taxpayer is on the hook? 

Mr. GRAMM. Look, some subprime lending would occur because 

people figure out that somebody would be a good risk. I am not 

against subprime lending, but I don’t think the Federal Government ought to guarantee it. I think we ought to take a hard look 

at securitizing subprime loans with very low downpayments because of the inherent risk that it injects into the system. 

Chairman HENSARLING. The time of the— 

Mr. GRAMM. Why did we get where we were? There is no plausible explanation for it other than government mandates that mandated a bunch of loans that couldn’t or wouldn’t be paid— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from— 

34 

Mr. GRAMM. I’m sorry. I took the whole time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Connecticut, Mr. Himes. 

Mr. HIMES. Thank you, Mr. Chairman. 

And thank you all for being here. It is terrific to have the opportunity to chat with some people who have been so important to the 

last 15 years on this issue. 

Reflecting on the title of the hearing, ‘‘Are We More Prosperous?’’ 

at some level that is a no-brainer. There is simply no question or 

no point of fact to suggest that we are not dramatically more prosperous as a country, in the aggregate, than we were 5 years ago— 

certainly than we were 7 years ago. 

And by the way, this is not what we were promised. I was there 

when we started writing Dodd-Frank, and just as we started writing Dodd-Frank we were promised that, like the Affordable Care 

Act, this would be job-killing legislation. Frankly, everything we 

did was going to be job-killing. 

Twelve million new jobs later and a fairly reasonable recovery, 

of course, we don’t hear job-killing much. Now we hear the criticism that the recovery is not what it might have been, and Mr. 

Wallison and Senator Gramm are making that case fairly strongly 

here. It is not what it might have been. 

They are arguing a hypothetical. They are arguing a counterfactual, which is always challenging to do, and not the strongest platform on which to criticize some work that was done. 

We were also promised, of course, that credit markets would 

seize up and stop the critical function of providing credit to American households and businesses. 

I did a little work. I am not going to go through it, but what you 

see up on the screen there is commercial and industrial loans up 

fairly dramatically in the last 5 year; venture capital investment 

up really quite dramatically in the last 5 years; total consumer 

credit up—actually concerningly up in the last 5 years; and, of 

course, the stock market there in the lower left is not exactly availability of credit but it is certainly a proxy for the confidence that 

our—that people have in our capital markets. 

So we are left with the idea—and this is where I have some 

questions—that the recovery is not what it might have been. 

Mr. Wallison, you say, ‘‘I believe all the new regulation added by 

Dodd-Frank is the primary reason for the slow growth that this 

country has experienced.’’ And you open your testimony with a 

chart which shows that this recovery has been less strong than the 

average of the other 10 recoveries. 

With all due respect, the economic analysis there—there was absolutely nothing even near average with the meltdown that we suffered in 2008, 2009. Fourth quarter 2008 GDP growth was at negative 8 percent annualized. We had not seen the kind of asset destruction that we saw. 

Is there any reason, Mr. Wallison or Senator Gramm, why we 

should expect that the recovery from what we have come to call the 

Great Recession, acknowledging that it is probably the second-biggest economic dislocation we have seen in 100 years—is there any 

reason to believe that just basic analysis would suggest that maybe 

35 

it would be very much at the low end of the kinds of the recovery? 

Is there anything average about what happened in 2008 and 2009? 

Mr. WALLISON. Yes. Actually, in my prepared statement you will 

see a study that was done of the 27 recoveries that we have had 

since the late 1800s done by 2 scholars, and what they showed was 

that in almost every case, the recovery is as fast as the decline that 

preceded it. 

In three cases, that was not true. One was in the Great Depression. The second was in 1989 to 1991. And the third is this current 

recovery we have today. 

The reason that I think you might assign to this is that when 

the government gets involved in trying to improve the economy in 

some way, creates more regulation, as they did during the Great 

Depression, as we did in 1989 to 1991, and as we have just done, 

we interfere with the natural return of the economy which usually 

occurs after a severe recession. So yes, there is a lot of history that 

is behind exactly what Senator Gramm and I have said. 

Mr. HIMES. I have to respectfully disagree, and I think you yourself point out that actually in the Great Depression, which of 

course led to regulation which tamped down the cycle of boom and 

bust that we had seen prior to the 1930s—it was the 1933 and 

1934 Acts and associated regulation that fairly dramatically 

changed the volatility in the business cycles in our economy—that 

I think also stands as counterpoint to this idea that it is government interference that causes this stuff. 

But I am really taken by your statement: All the new regulation 

in Dodd-Frank is the primary reason for the slow growth this country has experienced. 

I have asked the Fed that every time they have been there. They 

have pretty good economists. I have certainly read the economic literature. 

Do you really believe—because no one else does, that I am aware 

of anyway—that Dodd-Frank is the primary reason, and it is not 

reduced aggregate demand, it is not uncertainty in Europe, it is not 

continued dislocation in the housing market? Dodd-Frank is the 

primary reason? 

Mr. WALLISON. Here we have a Q.E. by the Fed, we have the 

ACA, the Affordable Care Act— 

Mr. HIMES. Which is different than Dodd-Frank, right? 

Mr. WALLISON. I am just talking about the three things in the 

last 5 years that are really significant activities by the government. 

Q.E. by the Fed hasn’t substantially improved growth; Obamacare, 

the ACA, hasn’t substantially improved growth. But if anything, 

both of those should have been stimulative. 

The third is Dodd-Frank. And in that case, of course, we see 

what we have seen, which is very slow growth—historically slow 

growth. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren. 

Mr. HULTGREN. Thank you all so much for being here, especially 

Senator Gramm. 

It is good to see you. As a 1996 Gramm-for-President delegate 

from Illinois, I appreciate your work and— 

36 

Mr. GRAMM. You were in a distinct group. 

Mr. HULTGREN. And I’m very proud of that. 

Five years after the passage of the Dodd-Frank Act, a cornerstone of President Obama’s liberal economic agenda, this overreaching law has unquestionably made Americans worse off. We 

are now less financially independent and we are now increasingly 

subject to the demands of bureaucrats in Washington. 

Dodd-Frank has nearly 400 rulemaking requirements. Only 235 

of these rulemakings have been finalized. 

At the same time, we are seeing community banks, the drivers 

of economic growth, continue to struggle under this crushing regulatory onslaught. We have 500 fewer community banks since the 

passage of Dodd-Frank. And with no end to regulations in sight I 

am fearful we will continue to see the big banks get bigger and the 

community banks be fewer. 

At the same time, American workers are facing stagnant wages 

and reduced economic opportunities because of the failed economic 

policies and regulatory overreach of this Administration. No one 

should be celebrating an economy where growth is so weak, feeble, 

and slow that more than 17 million Americans are still unemployed 

or underemployed 6 years after the recession ended. 

The Dodd-Frank Act has done nothing to create jobs in my home 

State of Illinois, where the unemployment rate stands at 5.9 percent. 

Senator Gramm, I think everybody agrees that our Nation’s community banks were not the cause of the financial crisis. However, 

I noticed in your testimony that community banks have hired 50 

percent more compliance officers, while overall industry employment has expanded by only 5 percent, and I quote you there. 

Are compliance costs such as these one of the reasons why we 

are continuing to see fewer and fewer community banks? And for 

the industry as a whole, what does this mean for financial services, 

innovation, and the ability of companies to focus on the evolving 

needs of their customers? 

Mr. GRAMM. I don’t think you can dispute the fact that a growing 

regulatory burden has induced banks to terminate their activity in 

various kinds of businesses. Consumer credit, commercial credit, 

and housing credit have fled the banking system. 

New innovations still occur in finance but they occur outside the 

banking system. And so we have a huge banking system with all 

of its capital and with all of its talent that is basically being 

thwarted and is not being put to work, putting America’s money to 

work, and putting America to work. 

I think that is part of it, but I think it goes beyond that. I think 

that Dodd-Frank, by creating all of this regulatory power, has created uncertainty and fear in the business community which has induced people not to take risks that would have been productively 

undertaken in the absence of the situation. 

It is not just that Dodd-Frank did bad things. Not everything in 

Dodd-Frank was bad. 

But the problem is it gave so much discretionary power to regulators that now we are ruled by regulation. It is not you writing 

the law and them implementing it. For all practical purposes, they 

are the law. 

37 

And this is not the system that created the American miracle. 

And it is a dangerous system. I know it is your next hearing, but 

it is dangerous for freedom and democracy. 

And I would just like to say to our Democrat colleagues, someday 

Republicans are going to win an election for President, I hope soon. 

And all of these things that were done by regulation can be undone. There is nothing permanent about this. 

This Consumer Product Safety Commission has so much power 

that the new Director could in essence eliminate it by his own 

power and order. So it is just a bad way to make law. 

We need to define what laws mean. We need to control regulators within the constraint of what you say. 

And I think that is where Dodd-Frank got way off track. Part of 

it was community banks, for example, they weren’t part of the 

problem, but the desire had always been there to have the government play a greater role, and so community banks that had nothing to do with the problem, hedge funds that had nothing to do 

with the problem, insurance companies that were in traditional 

lines of insurance that had nothing to do with the problem, money 

managers that were simply caught in a bankruptcy were not the 

cause of the problem, and yet they have all been brought under the 

grasp of the government. And in doing so, you have created tremendous inefficiency in the marketplace, in my opinion. 

Chairman HENSARLING. The time of the gentleman has expired. 

Mr. HULTGREN. I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Florida, Mr. Ross. 

Mr. ROSS. Thank you, Mr. Chairman. 

Yesterday, I endured something that I think many consumers in 

this country have endured as a result of Dodd-Frank, and that was 

going through a closing after I refinanced my house. I had done 

this years ago, had gone from a 15-year to a 30-year mortgage in 

an effort to fund my children’s education—a cash loan, if you will. 

And I did. The oldest has graduated; the youngest is just about 

done. 

So I decided to take advantage of the rates, as low as they have 

been. And before the Truth in Lending changes come about now in 

October, I wanted to get this done. 

It was a grueling 2-month process. I met with my community 

banker, and the community bank has been in existence in my community since 1920. It has endured a lot. 

But I was told that this has been probably one of the least expansive—in fact, they have shrunk their mortgage business significantly. One community bank will only write their own paper, and 

they will do so only on their terms, which is usually a balloon note 

that may be adjustable but it is outside Freddie and Fannie. 

And for 2 months, we went through a process of disclosure, and 

disclosure, and ultimately did close. But it was an experience that 

I can’t imagine that the general public can not only not endure but 

may not qualify. 

And my banker told me, ‘‘The qualified mortgage rule is killing 

us. What did we do wrong to cause the proscriptive regulatory burden that we have on community banks?’’ 

38 

And so, Senator Gramm, I would just ask you, what did the community banks do wrong that led to this restrictive policy on them 

that I think has been an unintended consequence, to the detriment 

of the consumers out there who desperately need their capital not 

only for their businesses but for their children’s educations and for 

their own livelihoods? 

Mr. GRAMM. I think we all know that in any society, people have 

a political agenda. 

Mr. ROSS. Right. 

Mr. GRAMM. And since the turn of the century, the progressive 

political agenda has been to have government basically control the 

commanding heights of the economy. And when the financial crisis 

occurred and the people who had had this agenda for 100 years 

were in control of the government— 

Mr. ROSS. They imposed it. 

Mr. GRAMM. —they decided this was a crisis that shouldn’t be 

wasted, and even if community banks had nothing to do with it, 

they could be improved by having government as a partner. 

And so now, if you are unlucky enough to be designated one of 

the systemically important banks you have government bureaucrats embedded in your executive offices to report and advise. And 

it reminds me of the old Soviet system where you had political officers in every military unit and in every factory. 

Mr. ROSS. Which we do. We now have more compliance officers 

than we have ever had. 

Mr. GRAMM. So I don’t know. Some people this doesn’t bother, 

but it bothers me. 

Mr. ROSS. And it bothers me, too. Let’s take, for example, the 

payday lending industry. The CFPB has just come back down with 

some extensive regulations that are going to essentially put the 

payday lending business out of business. Now, banks don’t want 

this. But we are not going to eliminate the demand for payday 

lending. 

And in fact, what would be the consequences? Would they not 

have to go to Lenny the loan shark? There is still going to be a demand. Just because government thinks they can control the supply 

of capital doesn’t mean they are going to be able to control the demand. Is that correct? 

Mr. GRAMM. What has happened, of course, is that the regulatory 

burden and the uncertainty have basically caused bankers and 

other people in the financial sector and other parts of the economy 

that are affected to basically become very cautious. 

Mr. ROSS. Yes. 

Mr. GRAMM. And as a result of being very cautious, they don’t 

want to make a mistake. 

Mr. ROSS. And they are being very— 

Mr. GRAMM. And to do something, you have to take action. And 

I think that is a big factor in this failed recovery. 

Mr. ROSS. I agree. 

Mr. GRAMM. And it is going to be difficult to fix. But I think a 

good starting point is to go back and look and see, what did we 

learn from the financial crisis, and try to fix the things that we 

learned were a problem and know after the fact, and the things 

that weren’t part of it, let them operate. 

39 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

I would like to talk a little bit about the concentration we see 

going on in the financial services industry. 

Mr. Wallison, Senator Gramm testified that according to the 

FDIC, 1,341 banks have disappeared since 2010, and only 2 new 

banks have been chartered in the last 5 years. There seems to be 

no doubt that assets in the financial sector are becoming more concentrated in the Dodd-Frank era. 

I am seeing it in Western Pennsylvania as institutions merge, 

and I also recall a conversation I had with a community bank 

where they had to have an individual, or a group of individuals, 

spend a cumulative 2,000 hours going through some CFPB regulations. Mind you, it wasn’t this community bank that was responsible for the financial crisis. 

The big banks are getting bigger and the small banks are becoming fewer. What does this mean for families and small businesses 

on Main Streets across America? 

Mr. WALLISON. This is a very serious problem because these 

small businesses depend entirely on banks in order to find financing. And as we know, it is small businesses that provide most of 

the growth and most of the employment in our economy. 

These small businesses cannot go to the capital markets, as larger businesses can, so they—their dependence on banks means that 

if we put more burdens on the banks and as a result of those burdens—these are small banks I am talking about—as a result of 

those burdens they cannot make as many loans as they could before, that means there will be less growth in our economy. It is as 

simple as that. 

Mr. ROTHFUS. So you think there is a direct correlation between 

the regulatory burdens on our community banks and the ability of 

small businesses to receive capital and credit from community financial institutions? 

Mr. WALLISON. Yes. That is the entire burden of my prepared 

testimony today. There is a relationship there. 

Mr. ROTHFUS. I also wonder about the concentration of liabilities 

and what that means for systemic risk. Does industry consolidation 

as a result of what I call trickle-down government’s higher relative 

regulatory burden on smaller institutions make the system more or 

less risky? 

Mr. WALLISON. Yes. First, let me step back and say I have grave 

doubts about systemic risk coming from any single institution. The 

very, very largest banks—the $1 trillion banks—perhaps. But any 

bank smaller than that, the failure of such a bank would not, I 

think, cause systemic risk. 

But is perfectly true that as these institutions get larger and 

larger, the losses that they would cause—not necessarily systemic, 

but the losses they would cause would be much more substantial 

if they were to fail. And so we are always better off—as any system 

is, including our own gene pool—if we have much more diversity 

in the gene pool. 

40 

Mr. ROTHFUS. And if we keep going down this road over the next 

10, 20, 30 years, could we get to a point where we have far fewer 

banks in the country, far fewer community banks, and what does 

that mean for Main Street? 

Mr. WALLISON. It is going to be disastrous if we have far fewer 

because it will be very hard for local businesses to get credit. And— 

Mr. ROTHFUS. I just want to— 

Mr. WALLISON. —under those circumstances, we would have 

much slower growth, as we have. 

Mr. ROTHFUS. Senator Gramm, during consideration of the DoddFrank Act, there was a lot of talk about moving toward government-mandated plain vanilla credit products. Congress expressly 

rejected this approach in the final version of the bill, yet I am concerned that actions by regulators, particularly the CFPB, are instituting a plain vanilla approach in contravention of congressional 

intent. 

What regulations do you think are moving us toward homogenized, plain vanilla credit allocation? 

Mr. GRAMM. I am against credit allocation of any kind. I think 

it is very harmful to the economic system. 

And at its root, many of the reforms of Dodd-Frank are about 

credit allocation, about getting government involved in determining 

who gets loans and who doesn’t, who gets access to capital and who 

doesn’t. And I think that is a very dangerous thing for government 

to be doing because it promotes inefficiency and it lowers the 

growth capacity in the economy. 

Mr. ROTHFUS. If I could just quickly go to Mr. Miller, were you 

on this committee in 2003? 

Mr. MILLER. I was. 

Mr. ROTHFUS. Do you have any recollection of Barney Frank suggesting that the Federal Government was doing too little rather 

than too much in pushing Fannie and Freddie to meet affordable 

housing goals? 

Mr. MILLER. He may have said the same thing that Mr. Wallison 

said. There was a great deal of criticism of Fannie and Freddie 

during that period that they were— 

Mr. ROTHFUS. Do you remember Barney Frank, during the fall 

of 2003, saying he wanted to roll the dice? 

Mr. MILLER. I do not recall that he said that. I do remember Mr. 

Wallison’s column in American Banker that said the same thing. 

Mr. ROTHFUS. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Arizona, Mr. 

Schweikert. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

And, gentleman, I want to see if I can distill down part of this 

conversation. If we look back to late 2007–2008, ultimately do we 

all agree that as home prices moved against the markets, the 

securitized products had impairments, MBS began to turn negative 

in its value, and that created the cascade? 

When we look at something like Dodd-Frank, was it floor plan, 

was it credit card securitization, automobile securitization? We 

have a bill that regulated huge portions of our financial sector, but 

41 

we constantly circle back here saying, ‘‘Okay, it was this portion of 

our mortgage market.’’ 

Have we done something, allowed something that is absolutely 

irrational on saying, ‘‘Here is the problem. Here is what we wanted 

to deal with. Here is what we wanted to improve. Oh, by the way, 

there is a grab-bag of desires that have been around this place for 

decades. There is a crisis. Let’s load them in. Let’s burden the financial markets up and down.’’ 

Was there a dramatically more elegant, simple solution to actually what went wrong? This is half statement and half question. 

And the second side is you just said diversity in markets. Are we 

actually seeing a creativity, a diversity because of Dodd-Frank 

being forced to, we will say, alternative sectors. When I am reading 

article after article that Silicon Valley is now much of the future 

of financial markets, whether it be peer-to-peer type lending platforms, is that where the velocity of markets are going to come 

from? 

Mr. Wallison, is diversity away from the traditional banking sector now? 

Mr. WALLISON. That could actually be happening because I happen to think that banks intermediation is much more expensive 

than agency intermediation that is in the securities markets, and 

maybe more expensive than the intermediation that is occurring in 

the V-to-B kind of market. So, it is entirely possible that is true. 

The cure for that is to, of course, allow banking organizations— 

not the banks themselves, which are insured; much of that is bank 

holding companies—to get into much more financial activities rather than freezing them, as current law does. 

Mr. SCHWEIKERT. That would be a situation of my community 

bank could act as an aggregator, collect investors and put them out 

on a loan product, therefore there is no cascade threat to the rest 

of the banking system. If something goes wrong, it is those investors, not even that institution. 

Mr. WALLISON. Yes. 

Mr. SCHWEIKERT. Is that an easy way to phrase it? 

Mr. WALLISON. That would be a good way to phrase it, yes. 

Mr. SCHWEIKERT. Senator, if I were to look at a solution—let’s 

live in a pretend world where Dodd-Frank did not exist. I am fixated on the concept that information would have been a much 

grander regulator of good practices. 

In a previous life, I bought billions and billions and billions of 

dollars of agencies, some MBS, and my risk officer was someone 

who picked up the phone, called over to Moody’s and said, ‘‘What 

was the rating on this?’’ instead of having flow of information from 

that securitization saying, ‘‘Hey, here is our impairment; here is 

our geographic distribution; here is’’—is information ultimately a 

much more efficient solution to ever avoid such a event again? 

Mr. GRAMM. I think the answer is ‘‘yes.’’ I think the government 

helped promote the idea that a rating agency rating was all you 

needed; it protected you. 

I don’t think it should. I think a lender ought to be liable for 

their decisions no matter what a rating agency does. 

42 

Much of subprime credit and almost all subprime securitized 

paper was AAA rated. I don’t think bankers should have been let 

off the hook for that. 

I don’t like the idea of banks settling and taking stockholder 

money. If somebody violated the law, convict them. Take them to 

court. Send them to jail. 

I don’t like the idea of taking out of somebody’s pension fund because somebody did something wrong. I have never understood 

that. 

Mr. SCHWEIKERT. In the last few seconds, because I know you are 

sort of a price theory allocation economist—Dodd-Frank, is it creating a massive distortion of where capital gets allocated and intense inefficiencies? 

Mr. GRAMM. The net result was it did, and it was agenda-laden 

because it was not bipartisan. The advantage of bipartisan legislating is that both sides are forced to throw out their agenda. 

Chairman HENSARLING. Tht time of the gentleman has expired. 

The Chair now recognizes the gentleman from Colorado, Mr. Tipton. 

Mr. TIPTON. Thank you, Mr. Chairman. 

And I thank the panel for taking the time to be here. 

This is an interesting conversation. I am just a small business 

guy, and I like to be able to look at actual outcomes. 

Right now, we have a real unemployment rate—our colleagues 

have been putting up charts about the recovery of the American 

economy—real unemployment rate now of 10.6 percent. We are seeing $2 trillion in regulatory costs. We are seeing the lowest labor 

participation rate in 4 decades. And coming out of the rural part 

of America, we are seeing real challenges economically because it 

is access to capital issues. 

And, Mr. Wallison, you were speaking to some of the challenges 

we are seeing with our community banks, and as we are seeing 

that pool of banks, that access to capital, shrink up, labeled that 

as ‘‘disastrous.’’ 

Would it be a good idea—and because I haven’t heard anyone say 

no regulations, and I don’t think that is coming from our side of 

the aisle; just sensible regulations—would it be a good idea really 

to be looking at cost-benefit analysis when we are looking at rules 

and regulations moving forward? 

Mr. WALLISON. Sure. And there is a difference between the largest banks and the smallest banks in that, because the largest 

banks can handle a large amount of regulation because they have 

the staffs to do it; the smallest banks cannot. So if you are going 

to make regulations, you ought to taper them to the ability of the 

institution to handle the regulations. 

Mr. TIPTON. When we are talking about having that tailored to 

actually the institutions, we just introduced out of our office the 

TAILOR Act for small community banks, and for credit unions, as 

well, to be able to have regulations that actually meet the risk 

portfolio, the size of the bank, to be able to have a sensible policy, 

to be able to create opportunity for the banks to be able to prosper, 

and still to make sure that they are secure. Does that sound like 

a good step in the right direction? 

43 

Mr. WALLISON. I think that is an excellent idea. I have some 

questions about whether the FDIC or the Comptroller of the Currency is going to be able to implement it, but we ought to get them 

to try to implement it. 

These are agencies, especially the FDIC, which have never been 

able to come up with a truly risk-based insurance system, even 

though Congress has asked for it. You are asking them to make 

even more kinds of distinctions. Maybe if you push them, they will 

do it, but it is a great idea. 

Mr. TIPTON. I appreciate that. 

I would just like you to comment, maybe, as well—we continue 

to see and we have heard the comments that only 60 percent of 

Dodd-Frank has currently been implemented, and 40 percent is yet 

to come. 

I think the chairman has probably adequately labeled this as a 

kind of mission creep, or stealth regulatory actions that are moving 

forward. Not knowing, as Senator Gramm had spoken to as well— 

creating that uncertainty in the marketplace, are we really actually 

helping to cripple the American economy in this recovery that is 

impacting our ability to be able to prosper? 

Mr. WALLISON. Sure. There are two things that are operating 

here. 

One is uncertainty. And at the very beginning when Dodd-Frank 

came down, uncertainty was the principal problem. But as the regulations started to come out, there were actual real costs that were 

imposed on institutions, keeping them from making financing 

available to the real economy, to the business economy, and reducing growth. It’s as simple as that. 

Mr. TIPTON. And is there a problem—and, Senator Gramm, you 

may want to speak to this as well—having unaccountability? The 

Federal Government wants to be able to have all financial institutions have accountability. I think that we have the empathy, certainly, with that. 

But now we have a lot of institutions that are being established 

which are accountable to whom? 

Mr. GRAMM. They are not accountable to anybody. In fact, the intention of the Consumer Financial Protection Bureau was to put it 

in the Fed so it had enshrined funding, and to deny the Fed any 

oversight ability over it whatsoever. They are the most isolated and 

protected government agency that I am aware of that has ever 

been created. If there has ever been a law that violated the separation of powers, that is it. 

But that is not all of it. That is true in all of these other areas 

where regulators have in essence become little kings. They decide 

what the law says, and when it says it, and it creates tremendous 

uncertainty. 

And when people are uncertain, they don’t act. That is basically 

what is happening here. 

And your point about the recovery or argument about the recovery—when is the last time you heard a candidate campaigning on 

‘‘Happy days are here again?’’ Ronald Reagan did in 1984, ‘‘Morning in America.’’ I don’t hear anybody doing it today. 

Chairman HENSARLING. The time of the gentleman has expired. 

44 

The Chair now recognizes the gentleman from Texas, Mr. Williams. 

Mr. WILLIAMS. Thank you, Chairman Hensarling. 

And thanks to all the witnesses today, and to my good friend and 

our good friend from Texas, Senator Gramm. Thank you for being 

here. 

I am a small business owner. I have been a small business owner 

for 44 years—a car dealer. And I can tell you, Main Street America 

is hurting. 

I go back to $1 gasoline, I go back to 20 percent interest, I go 

back to 1988, go back to 9/11, and I have never seen the inability 

to get a quick recovery like I have with the inability to come back 

from this Obama economy. Small business is hurting. 

And when you look at that, 400 new regulations, billions of dollars in crushing compliance costs, massive consolidation for smaller 

community financial institutions, and I could go on and on about 

the real effects of the disastrous laws we have talked about today. 

In addition, we have an economy that, as we have talked about 

also, has created 12 million fewer jobs in the last 61⁄2 years, the 

lowest labor participation rate in nearly 4 decades, and a national 

debt that stands over $18 trillion. Main Street America, again, I repeat, is not back. 

Senator Gramm also mentioned the lack of new banks being created in the wake of the financial crisis. It has been long documented that in my home State of Texas, banks large and small are 

struggling just as much as anywhere in the country and we have 

the best economy in the country. 

So my first question would be to you, Senator. You note in your 

testimony that Dodd-Frank was enacted 5 years ago. Only two new 

banks have been chartered in the United States. Later in your testimony you state that Dodd-Frank has undermined a vital condition required to put money in America back to work: legal and regulatory certainty. 

Would I be correct in assuming that you would view these two 

phenomena—the almost total absence of new bank charters since 

Dodd-Frank became law, and the climate of legal and regulatory 

uncertainty created by Dodd-Frank—as closely related? 

Mr. GRAMM. I don’t think there is any doubt about the fact that 

we have a financial system now that is very much bogged down 

with uncertainty and overregulation. It is not uncommon for a 

small bank in a small town that is not part of any chain, that 

makes virtually no bad loans, that had nothing to do with the 

subprime crisis—it is not unusual for them to be audited five different times in a year. 

So you figure they spend 2 weeks getting ready for the audit, and 

then they spend 2 weeks responding to the audit. And so all of a 

sudden you have 10 weeks—did I multiply that correctly? No. You 

have 20 weeks that are taken away from the job that they are supposed to do. 

And they have a CRA audit, they have all of these audits, and 

it seems to me that first of all, they ought to be audited by one 

audit and it ought to go for everything. We are making life hard 

for these people and they are making life hard for America by not 

45 

making the loans we need to grow the economy. And it is just that 

simple. This is not a complicated problem. 

Mr. WILLIAMS. And in the end, small business hurts. And I don’t 

know how you would start a business today, with Dodd-Frank, with 

CFPB, with taxes. I don’t know how you would get a loan. I don’t 

know how a young person would get a loan to start a business. 

So what about those considering chartering a new bank and the 

considerable efforts necessary to raise capital? To do so, isn’t the 

regulatory apparatus constructed by Dodd-Frank a huge impediment? 

Mr. GRAMM. I probably should not say this because I can’t verify 

that it is true, but somebody sent me a memo this morning that 

the second bank which has been chartered under Dodd-Frank has 

opened this week. I think the name of it is the Bird in the Hand 

Bank. It is worth two in the bush. 

And supposedly they have 10 employees, and they show up to 

open their business and they have 10 government bureaucrats who 

show up to tell them how to do their business. 

Now look—it makes for a nice joke, but the plain truth is when 

a bank charter has no value, it tells you something is going on. We 

have vast parts of the American community, many minority communities, that are grossly underserved financially, that are underbanked, that don’t have bank accounts. And we need more banks 

to open, but banks are not going—people are not going to invest 

capital if they can’t earn profits and if they don’t have certainty. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Maine, Mr. 

Poliquin. 

Mr. POLIQUIN. Thank you, Mr. Chairman. I appreciate it very 

much. 

And thank you, gentlemen, for being here. I appreciate it. 

Now, all of us who have run or owned small businesses or family 

budgets know that we can’t spend more money than we take in for 

long periods of time and borrow to make up the difference and survive. As a business owner myself, and as a former State treasurer 

up in Maine, I have also learned that high levels of public debt can 

be very damaging to an economy and job creation for a couple of 

reasons that we all know: It discourages business investment when 

the government can’t get its fiscal house in order; and also the debt 

service payments—the interest payments on that rising debt 

chokes off the government’s ability to fund roads and bridge repair, 

educate our kids, protect our environment, or defend our country. 

Now, here in Washington—I am a freshman; I have been here for 

7 months—I have learned that the folks here have been doing this 

for a very, very long period of time, and it has accelerated over the 

past 61⁄2 years. So now, we have this $18 trillion national debt. 

The interest payments—1 year on that debt is about $230 billion. 

That is almost twice what we spend in a year on veterans’ benefits. 

And the CBO projects that in 10 years the interest on that debt 

will be $26 billion or thereabouts. We will exceed what we spend 

to defend our country. 

We have folks who come before us, like Treasury Secretary Lew, 

say, ‘‘Well, that is no big deal because it only represents 3 percent 

of GDP.’’ Now, on the second day I was here, the House of RepVerDate Nov 24 2008 17:20 Oct 13, 2016 Jkt 097160 PO 00000 Frm 00049 Fmt 6633 Sfmt 6633 K:\DOCS\97160.TXT TERI
46 

resentatives passed H.R. 1, which requires the Federal Government 

to balance its books by way of a constitutional amendment requiring such. 

So I would like to ask you, Dr. Gramm, what do you think of 

H.R. 1, about requiring a discipline here in Washington to balance 

our books and to start paying off our debt, and what advice would 

you give to the Senate? 

Mr. GRAMM. First of all, let me say that what I worry about in 

the debt—of course, the debt held by the public has doubled in the 

last 7 years—is that we are paying $230 billion a year to service 

that debt when interest rates are practically zero. Some day in 

God’s good time, we are going to have ordinary interest rates. 

And when you go back and look at what ordinary interest rates 

have been in the post-war period, they have been about 5 percent 

on a 5-year Treasury note. If we were paying that interest cost 

today, the cost of servicing the debt would skyrocket and we would 

be spending as much money servicing the debt as we spend on Social Security. 

So the problem with debt is that it is forever if you don’t pay it 

off. 

Mr. POLIQUIN. I assume, therefore— 

Mr. GRAMM. So I think it is a very real problem and I think that 

we are going to end up in the not-too-distant future paying the 

price of this debt, and it is going to crowd out spending, and it is 

going to deny people services, and people are going to be unhappy 

about it. 

Mr. POLIQUIN. Do you believe, therefore, Dr. Gramm, that it is 

a good idea for Washington to have an institutional discipline 

coded in our Constitution to balance the books every year? 

Mr. GRAMM. If I could make one change in American government, I would want to require a balanced budget— 

Mr. POLIQUIN. Thank you— 

Mr. GRAMM. —the reason being then you have to choose. We 

could have—look, the two parties—people have different values and 

they put a different weight on different things, but if we really had 

to choose and we didn’t have a choice except to pay our way, we 

would have a lot of bipartisanship because we would end up compromising and we would have democracy at its best. Now we don’t 

have to choose. 

Mr. POLIQUIN. Thank you, sir. 

Mr. Miller, do you think that a balanced budget amendment to 

our Constitution is a good idea? 

Mr. MILLER. I think Congress should do its job. The chairman, 

in his introduction of me, mentioned that I was the chairman of the 

Oversight Subcommittee for the Science Committee. We had a 

great many hearings designed to get at— 

Mr. POLIQUIN. Do you think— 

Mr. MILLER. Excuse me—designed to get at programs that were 

badly run and were spending too much money, and reducing 2 percent across-the-board is lazy, slovenly work on the part of Congress. 

Mr. POLIQUIN. Do you think Washington, sir— 

Mr. MILLER. Figure out— 

Mr. POLIQUIN. Sir, do you— 

47 

Mr. MILLER. —what the government is spending money on. I 

know that is hard work, but it is really your job. 

Mr. POLIQUIN. I am assuming, sir, that you do not think an institutional discipline to balance the budget in our Constitution is a 

good idea. Is that correct, sir? 

Mr. MILLER. Why don’t you do your job? Why don’t you figure out 

what the government does—spends— 

Chairman HENSARLING. The time of the gentleman has expired. 

Mr. POLIQUIN. Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from Utah, Mrs. Love. 

Mrs. LOVE. Thank you very much. 

I just want you to know first of all, Senator Gramm, I have listened to your testimony and I have had to smile because I think 

that you have articulated so well the problems that we have had 

with Dodd-Frank. 

I don’t think anyone in this body is saying that we didn’t have 

to address a financial crisis, but sometimes too much medicine is 

really bad also, and can actually hurt. 

The one portion that I want to point out to you that I really appreciate was when you talked about people of value and rewarding 

people of value. And I want you to know, these are the people who 

took all the risks; these are the people who have been able to come 

in and been able to fix companies and do several things. 

And although we know that there are always some bad players, 

I believe we need to do everything we can to make sure we give 

people as many opportunities as possible. 

My parents—my father came here with very little money, just 

$10 in his pocket. And I want you to know that those are the people who actually gave him a chance. 

Those people gave him three jobs, sometimes all at once, to make 

sure that they made ends meet, to the point where my dad was actually able to be a manager without having the education that he 

needed. He gathered the experience that he needed to become a 

manager and put three kids through school. And that is the American Dream. 

So I thank you very much for bringing that up. 

I would like to actually focus on the Volcker Rule and its impact. 

In your testimony you said that despite years of delay and hundreds of pages of new rules, no one knows what the Volcker Rule 

actually requires. 

Mr. GRAMM. Not even Mr. Volcker. 

Mrs. LOVE. As a matter of fact, as articulated by Paul Volcker 

himself, it was to stop large banks with large trading and derivative operations from gambling with taxpayer-backed deposits. 

Given the enormous regulatory burdens being carried by small 

community banks, and the much-discussed impacts on credit availability, shouldn’t banks with less than $10 billion in total assets, 

in your opinion, be explicitly exempt from the Volcker Rule? 

Mr. GRAMM. Let me tell you what happened as observed it: Paul 

Volcker was the Chairman of the President’s Economic Recovery 

Advisory Committee. They had never had a meeting. 

Months, years were going by. Mr. Volcker was becoming unhappy. He started telling people he was unhappy. 

48 

And then he had this idea about proprietary trading and banks. 

Nobody was for it. The Democrats in Congress weren’t for it. 

But suddenly it became the be-all proposal even though nobody 

knew what it meant. And so now we have a proposal such that, despite years of study, and thousands of pages of regulations, nobody 

knows what it means. 

And so what is happening is as we are really starting to implement it, at some point somebody is going to figure out what they 

think it means and then banks are going to have to comply with 

it. And I think it is going to have a very negative effect in terms 

of the ability of people to manage their capital. 

And every time you limit a bank’s ability to be efficient in using 

its capital, you are hurting the bank and you are hurting the 

bank’s customers. And that is what I think is going to happen. 

Mrs. LOVE. Okay. Do you have—I’m sorry— 

Mr. GRAMM. I am not sure I have answered your question. 

Mrs. LOVE. It is just that I am thinking about the Volcker Rule 

and the $10 billion in total assets, and also the implement that 

they have on the ILCs, the issues that the—that they have to deal 

with with the affiliates of the ILC. 

I am looking at this Volcker Rule and I am looking at the unintended consequences and wondering what needs to be done so that 

we can provide some regulatory relief to the small banking agencies and also to the small bankers—sorry—and also to our ILCs, 

who are—pretty much can’t do business with other companies because of the affiliates language in there. 

Mr. GRAMM. Let me just quickly respond. I think a nice proposal 

would be to have the regulators write what they think is required 

by it, have it submitted to Congress, and if Congress didn’t approve 

it, then that part of the law would be repealed. 

Mrs. LOVE. Great idea. 

I want to finish with this note: We are not talking about banks 

here, really. We are not even really talking about big banks—large 

banks, ILC. 

We are talking about the American people and their ability to be 

able to get some credit so that they can achieve their dreams, and 

what we are doing to actually help that or stop that. And let’s 

make sure that we are on the side of the American people. 

Thank you. 

Chairman HENSARLING. The time of the gentlelady has expired. 

The Chair wishes to advise Members that the Chair intends to 

recognize two more Members and then we will adjourn. Currently, 

that will be Mr. Hill and Mr. Emmer. 

The gentleman from Arkansas, Mr. Hill, is now recognized. 

Mr. HILL. Thank you, Mr. Chairman. 

It is certainly good to see you, Senator Gramm. 

And my old friend, Peter Wallison, glad to have you back. 

And, Congressman Miller, thank you for coming back to the committee. 

I want to tell you that for certainly the past 17 years as an entrepreneur, prior to coming to Congress in January, I was one of those 

banks that Senator Gramm was referring to when he described the 

multi-examination cycle. And in the State securities department, 

the State insurance department, the Federal Reserve Bank of St. 

49 

Louis, the State banking department of Arkansas, the FDIC, the 

FINRA, the SEC Fort Worth, and I am not sure if I have left anybody out, I never had one of those agencies ever shirk their consumer protection obligation under Federal or State law, ever. 

And from that point of view, I think one of the main titles of 

Dodd-Frank is the single most redundant—you say independent 

and unaccountable—agency ever created, and that is the CFPB. 

And I stand in awe that Congress would do that to itself. And I 

didn’t—I left out the State’s attorney general and the FTC in that 

process. 

Peter Wallison, on the subject you laid out for the committee that 

in 2008, 50 percent of the mortgage market at that time at the 

peak was subprime, and that 78 percent of those were guaranteed 

by FHA or Fannie and Freddie, and yet Dodd-Frank completely ignores reforms in the mortgage market. 

My experience as a banker during that crisis was that people 

were trying to sell us secondary-market instruments, privately 

issued, purely for CRA credit, and the spread on those securities 

were no greater than mortgages that we originated in our own 

portfolio. 

So we had no risk spread premium for them allegedly being a 

subprime credit or CRA-type credit. I found that sort of amazing, 

as a banker at the time, and one reason why we just—there was 

no spread, there was no benefit to it. We didn’t need the CRA credit, so we passed on it. 

But it struck me that they wouldn’t have existed if Fannie and 

Freddie had not reduced their own underwriting standards. And 20 

years ago they were the gold standard of underwriting standards. 

They were the clearinghouse. Could you reflect more on that deterioration in the Federal Government’s leadership in declining underwriting standards? 

Mr. WALLISON. Yes. Up until 1992, Fannie and Freddie would 

only accept prime mortgages. In fact, they were known for that. 

And a prime mortgage had a good credit rating for the borrower; 

it had a downpayment of 10 to 20 percent; it had a debt-to-income 

ratio of no more than 38 percent. That was the prime mortgage and 

that kept mortgage defaults in the United States somewhere below 

1 percent on a regular basis. 

But in 1992, the affordable housing goals were imposed on 

Fannie Mae and Freddie Mac and then raised over time from 30 

percent to 56 percent. And during that period they had to reduce 

their underwriting standards in order to meet those goals. 

So by 1995, Congressman, they were accepting mortgages with 3 

percent downpayment. And by 2000, they were accepting mortgages with no downpayment at all. 

That was all to meet the government quota. 

Mr. HILL. You know what— 

Mr. WALLISON. That is why we had so many mortgages in our 

financial system that were poor quality in 2008. 

Mr. HILL. What frustrates me from a public policy point of view 

is that Congress was so eager in the Clinton and early Bush Administrations to boost home ownership rates at this huge cost to 

society and to the economy, and skewing capital markets. And yet, 

that increase was so modest it was almost microscopic. I think 

50 

today the news came out that it has fallen back to 63.3 percent or 

something like that, I think it was announced this morning. 

But it never really—all that effort didn’t produce the lasting economic benefits of sort of the pot of gold at the end of the rainbow. 

What do you think, looking on—studying—and Senator Gramm as 

well—what do you think sustainable home ownership rates are in 

our economy? 

Mr. WALLISON. Let me just add something before Senator 

Gramm just briefly, and that is home ownership rates were 64 percent for 30 years between 1965 and 1995, so it looks like that is 

the natural rate of home ownership in this country. 

Mr. HILL. Yes. Okay. 

Senator Gramm? 

Mr. GRAMM. Yes. Look, I think the way to promote home ownership is to promote jobs. If people have jobs, if they have a solid future, if they are confident in their future, they will be able to buy 

a home and they will be able to pay for it. 

We are trying to create home ownership without people having 

to do the things you do that make it possible for you to own a 

home. So I think a jobs program is the best housing program, the 

best education program, the best nutrition program. 

Mr. HILL. Thank you, Senator. 

I yield back. 

Mr. GRAMM. We need to get back to that. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Emmer. 

Mr. EMMER. Thank you, Mr. Chairman. 

And thanks to the panel, for a couple of extra minutes. 

Mr. Wallison, I wanted to ask you a question, because many of 

our colleagues believe that deregulation played a large role in the 

economic collapse in 2008. I find the argument somewhat disingenuous since apparently the number of banking regulations in Title 

12 of the Code of Federal Regulations actually increased by approximately 20 percent between 1997 and 2008. 

In fact, in the 2 decades preceding the financial crisis of 2008, 

Congress gave Federal regulators broad new powers over banks, 

mortgage lenders, and other financial services firms through the 

Federal Deposit Insurance Corporation Improvement Act of 1991, 

the Home Ownership and Equity Protection Act of 1994, the 2001 

Bank Secrecy Act amendments made by the USA PATRIOT Act, 

the Sarbanes-Oxley Act of 2002, and the Fair and Accurate Credit 

Transactions Act of 2003. 

The question with that is, did deregulation of the financial industry play a large role in the economic collapse of 2008? 

Mr. WALLISON. First of all, it didn’t occur, so it couldn’t have had 

any role in 2008. There was no deregulation before 2008. In fact, 

there was none throughout our economy except in finance. 

In the financial area, there was no deregulation from the New 

Deal up until 2008. Every other area of the economy did very well 

with deregulation. We had a lot of growth, a lot of improvement in 

products and innovation, reduction in cost, and so forth, all because 

of deregulation. 

51 

But not in finance, which has been controlled by the government 

very carefully, and I am here—speaking here almost entirely of the 

banking system, which has been increasingly regulated all this 

time. And the Acts you refer to, FDICIA and FIRREA, were perfect 

examples of that. 

Now, when people try to blame the financial crisis on deregulation, they point to Senator Gramm’s Act, Gramm-Leach-Bliley, in 

the elimination of one part of the Glass-Steagall Act. That had no 

effect whatsoever on the financial crisis, which, as we know, was 

the result of mortgage meltdown, the housing system in this country coming apart because of a reduction in underwriting standards, 

which was induced, as I have said, by government activity. 

So there was no deregulation and there is no reason to blame deregulation for the financial crisis. 

Mr. EMMER. Senator Gramm, you were waving at me? 

Mr. GRAMM. Let me just say, people assume that because I am 

the ‘‘Gramm’’ of Gramm-Leach-Bliley that somehow this is me. 

This is what I thought in 1999. Ninety members of the Senate 

voted for it. It was supported by President Clinton and every financial regulator in America, and it was the best judgment I had at 

that point. But if I thought that it was a mistake, I would say so. 

I don’t see any evidence that it was a mistake. If allowing banks 

and security companies to—insurance companies to affiliate 

through a financial services holding company where bank capital 

couldn’t be put into those other areas—if that were a problem in 

causing the financial crisis the financial crisis would have start 

in—started in Europe where they never separated the things to 

begin with. 

Mr. EMMER. Senator? 

Mr. GRAMM. And I would add to your list one other thing. 

Mr. EMMER. What is that? 

Mr. GRAMM. When the Congressional Research Service did its 

outline of Gramm-Leach-Bliley it never used the word ‘‘deregulation’’ or ‘‘deregulates.’’ The truth was it allowed the affiliation but 

it kept the same regulators regulating the same thing. 

There isn’t any evidence to substantiate the claim that there was 

this massive deregulation between 1980 and the financial crisis. It 

just won’t hold water. 

Mr. EMMER. Thank you. 

I see that my time is quickly expiring so, Mr. Chairman, I will 

yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

There are no other Members in the queue. 

I would like to thank our witnesses for their testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:09 p.m., the hearing was adjourned.] 

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