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WHAT THE EURO CRISIS MEANS FOR TAXPAYERS

AND THE U.S. ECONOMY, PART II

HEARING

BEFORE THE

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES

AND BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TWELFTH CONGRESS

FIRST SESSION

DECEMBER 16, 2011

Serial No. 112–98

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.fdsys.gov

http://www.house.gov/reform
(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

DARRELL E. ISSA, California, Chairman

DAN BURTON, Indiana

JOHN L. MICA, Florida

TODD RUSSELL PLATTS, Pennsylvania

MICHAEL R. TURNER, Ohio

PATRICK T. MCHENRY, North Carolina

JIM JORDAN, Ohio

JASON CHAFFETZ, Utah

CONNIE MACK, Florida

TIM WALBERG, Michigan

JAMES LANKFORD, Oklahoma

JUSTIN AMASH, Michigan

ANN MARIE BUERKLE, New York

PAUL A. GOSAR, Arizona

RAU ́ L R. LABRADOR, Idaho

PATRICK MEEHAN, Pennsylvania

SCOTT DESJARLAIS, Tennessee

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

FRANK C. GUINTA, New Hampshire

BLAKE FARENTHOLD, Texas

MIKE KELLY, Pennsylvania

ELIJAH E. CUMMINGS, Maryland, Ranking

Minority Member

EDOLPHUS TOWNS, New York

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

DANNY K. DAVIS, Illinois

BRUCE L. BRALEY, Iowa

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

CHRISTOPHER S. MURPHY, Connecticut

JACKIE SPEIER, California

LAWRENCE J. BRADY, Staff Director

JOHN D. CUADERES, Deputy Staff Director

ROBERT BORDEN, General Counsel

LINDA A. GOOD, Chief Clerk

DAVID RAPALLO, Minority Staff Director

SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND BAILOUTS OF PUBLIC AND

PRIVATE PROGRAMS

PATRICK T. MCHENRY, North Carolina, Chairman

FRANK C. GUINTA, New Hampshire, Vice

Chairman

ANN MARIE BUERKLE, New York

JUSTIN AMASH, Michigan

PATRICK MEEHAN, Pennsylvania

JOE WALSH, Illinois

TREY GOWDY, South Carolina

DENNIS A. ROSS, Florida

MIKE QUIGLEY, Illinois, Ranking Minority

Member

CAROLYN B. MALONEY, New York

PETER WELCH, Vermont

JOHN A. YARMUTH, Kentucky

JACKIE SPEIER, California

JIM COOPER, Tennessee
(III)

C O N T E N T S

Page

Hearing held on December 16, 2011 ...................................................................... 1

Statement of:

Dudley, William C., president and CEO, Federal Reserve Bank of New

York; Steven B. Kamin, director, Division of International Finance,

Board of Governors of the Federal Reserve System; and Mark Sobel,

Deputy Assistant Secretary for International Monetary and Financial

Policy, U.S. Department of Treasury .......................................................... 10

Dudley, William C. .................................................................................... 10

Kamin, Steven B. ...................................................................................... 19

Sobel, Mark ................................................................................................ 27

Letters, statements, etc., submitted for the record by:

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 8

Dudley, William C., president and CEO, Federal Reserve Bank of New

York, prepared statement of ........................................................................ 13

Kamin, Steven B., director, Division of International Finance, Board of

Governors of the Federal Reserve System, prepared statement of ........... 21

McHenry, Hon. Patrick T., a Representative in Congress from the State

of North Carolina, prepared statement of ................................................... 4

Sobel, Mark, Deputy Assistant Secretary for International Monetary and

Financial Policy, U.S. Department of Treasury, prepared statement

of ..................................................................................................................... 29

(1)

WHAT THE EURO CRISIS MEANS FOR

TAXPAYERS AND THE U.S. ECONOMY, PART II

FRIDAY, DECEMBER 16, 2011

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON TARP, FINANCIAL SERVICES AND

BAILOUTS OF PUBLIC AND PRIVATE PROGRAMS, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 9:35 a.m., in room

2154, Rayburn House Office Building, Hon. Patrick T. McHenry

(chairman of the subcommittee) presiding.

Present: Representatives McHenry, Guinta, Gowdy, Quigley,

Cummings, and Maloney.

Staff present: Molly Boyl, parliamentarian; Katelyn E. Christ, research analyst; Drew Colliatie, staff assistant; John Cuaderes, deputy staff director; Gwen D’Luzansky, assistant clerk; Adam P.

Fromm, director of Member services and committee operations;

Linda Good, chief clerk; Peter Hallor, senior counsel; Ryan M.

Hambleton, professional staff member; Christopher Hixon, deputy

chief counsel, oversight; Mark D. Marin, director of oversight;

Rafael Maryahin, counsel; Jaron Bourke, minority director of administration; Devon Hill, minority staff assistant; Jennifer Hoffman, minority press secretary; Lucinda Lessley, minority policy director; Jason Powell and Steven Rangel, minority senior counsels;

and Brian Quinn, minority counsel.

Mr. MCHENRY. The committee will come to order.

This is the Subcommittee on TARP, Financial Services and Bailouts of Public and Private Programs.

Our hearing today is, ‘‘What the Euro Crisis Means for Taxpayers and the U.S. Economy.’’ This is part 2 of a two-part hearing

about the ongoing crisis that Europe is facing and the American

people, the American citizens’, as taxpayers, exposure to that.

It is the tradition of this subcommittee to begin with the Oversight and Government Reform Committee’s mission statement.

We exist to secure two fundamental principles: First, Americans

have a right to know that the money Washington takes from them

is well spent. And, second, Americans deserve an efficient, effective

government that works for them. Our duty on the Oversight and

Government Reform Committee is to protect these rights.

Our solemn responsibility is to hold government accountable to

taxpayers, because taxpayers have a right to know what they get

from their government. We will work tirelessly, in partnership with

citizen watchdogs, to deliver the facts to the American people and

bring genuine reform to the Federal bureaucracy.
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This is the mission of the Oversight and Government Reform

Committee.

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

Over 3 years ago, Americans witnessed domestic and global markets deteriorating, resulting in millions of job losses and unprecedented measures by governments and central banks to prop up financial institutions. As the U.S. economy remains vulnerable in

the midst of a recovery, just across the Atlantic our friends in the

European Union fight to fend off a second wave of economic and

financial turmoil.

Today’s hearing examines the economic unrest facing Europe, actions undertaken by central banks and international organizations

in response, the options that remain at our disposal, and potential

consequences to the U.S. economy and taxpayers.

During the onset of the 2008–2009 financial crisis, asset-backed

securities, chiefly mortgage-backed securities, unexpectedly became

illiquid and fell sharply in value, resulting in a housing bust—now,

housing downturn, ended up with an asset crunch that ended up

in a larger housing bust. Financial firms were forced to write down

losses that depleted their capital base and reduced their access to

private liquidity. In response, the U.S. Treasury, Federal Reserve,

and U.S. Congress acted, well, in a way that the American people

are very familiar with. They know this story.

Today, Europe’s version of this story appears to be one of which

sovereign debt plays the role of asset-backed securities. Some say

history repeats itself; others say that it simply rhymes. This may

be the case of history repeating itself or simply it feeling and it

seeming like the last crisis or perhaps the European successor to

what happened between World War I and World War II.

Europe’s banks hold substantial amounts of European sovereign

debt that has dropped in value as the debt of periphery countries

has become unmanageable. Given the substantial amounts of sovereign debt on the books of European banks, their ability to borrow

has been brought into question. Perhaps these European sovereigns

are analogous to Freddie and Fannie preferred that many thrifts

and small banks across this country held as Tier 1 capital.

The European twist to the story is that nations home to the most

troubled banks do not have the financial capacity, perhaps, to bail

them out. Austerity measures and maxed-out balance sheets of periphery countries, known as PIGS, have left the EU and its central

banks scrambling to identify an intervention to end the panic and

restore normalcy to the markets.

As time runs out for the EU, work—works to strengthen its

framework in the European Central Bank, retains its dubious role

as lender of last resort, a recurring financial savior inserting itself

in the mix. The Federal Reserve and, to a lesser extent, the IMF

are also providing this same notion.

Last month, in an effort to aid European banks that have trouble

accessing dollars due to more scepticism about their health, six

central banks, led by the Federal Reserve, made it cheaper for

banks to borrow dollars to ease Europe’s sovereign debt crisis. In

the program’s first month, there have been over $50 billion in

transactions, prompting two immediate questions: Does the Fed action permit banks to get through the crisis without addressing
3

their most toxic assets? And has the Fed averted a liquidity crisis

or simply postponed an insolvency crisis?

Just yesterday, IMF Director Christine Lagarde said, ‘‘There is

no economy in the world, whether low-income countries, emerging

markets, middle-income countries, or super-advanced economies,

that will be immune to the crisis that we see not only unfolding

but escalating.’’ Director Lagarde’s remarks are troubling and remind us of the significance a financial meltdown has on the global

economy. If events in Europe threaten U.S. banks and its economy,

American policymakers must know the facts of the situation and be

ready to act.

Despite differences of opinion about the Fed and U.S. Treasury

actions, the reality is only a handful of individuals at each institution and department truly understand U.S. exposure to the

eurozone crisis. Today’s oversight hearing allows the Federal Reserve Bank of New York, the Board of Governs of the Federal Reserve System, and the U.S. Treasury—all of which operate as our

Nation’s foremost decisionmakers in the areas of economics and

monetary policy—to communicate to Congress and to the American

public about what is happening.

As daily headlines read of capital injections to the tune of billions

and trillions of euros and dollars, reenforcing the interconnectedness of the global economy, it is vital that Congress conduct oversight on rescue proposals and threats to our economy. A simple

question must be answered, a very simple question, such as: Are

the actions of the Federal Reserve consistent with its mandate?

And are the firms seeking liquidity simply illiquid or, perhaps, insolvent?

I am interested to hear from this panel and from each of you

about your views on this eurozone crisis, current potential rescue

efforts, and the consequences of the crisis on the United States—

not just to the United States, but to our government; not just to

our government, to our economy; not just to our economy, our citizens and taxpayers.

That is what this hearing is about. We don’t want to be caught

flatfooted on what is happening in the global economy. And that is

why policymakers on the Hill must know what potential actions

you can take, how you view this crisis, and the actions that you

have taken.

With that, I recognize the ranking member, the gentleman from

Illinois, Mr. Quigley.

[The prepared statement of Hon. Patrick T. McHenry follows:]
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Mr. QUIGLEY. Thank you, Mr. Chairman.

Yesterday, we heard from several nongovernmental witnesses

with a shared concern of the euro debt crisis. There was a general

agreement that a debt default in Europe would have a devastating

consequence for U.S. taxpayers. As Mr. Elliott testified, we are exposed to nearly $5 trillion in potential losses on loans and commitments to European governments, banks, and corporations.

At the same time, yesterday’s witnesses differed on the point of

whether Europe can resolve this crisis with its own resources.

Today, I look forward to hearing from our government witnesses,

who can speak to their roles in resolving this crisis. We should be

pushing Europe to act quickly and responsibly, but we cannot expose the U.S. taxpayer to potential losses.

Thank you. And I would like to yield the balance of my time to

the ranking member of the full committee, Mr. Cummings.

Mr. CUMMINGS. Well, thank you, gentlemen, for yielding.

Mr. Chairman, thank you for calling the hearings yesterday and

today on the financial crisis in Europe and its potential effects on

the United States.

At yesterday’s hearing, we heard that Europe faces two problems. One is a long-term budgetary problem that will require scaling back expenditures. The other is a much more imminent threat,

that a major European country might default on its debt. It appears that European officials are paying close attention to the longterm problem at the expense of aggravating the acute crisis.

Yesterday, Desmond Lachman, an economist and policy expert

with the American Enterprise Institute, testified as follows: ‘‘There

is very real risk that continuing to apply substantial fiscal tightening will lead to a very deep economic recession. A deep recession

would make it very difficult for countries to reduce their budget

deficits and would undermine their political willingness to remain

within the euro.’’

In 2008, when our own country faced the financial crisis, the

Federal Reserve took action to prevent an immediate financial

panic by acting as a lender of last resort. It did not insist that Congress first agree on how to slash the Federal deficit, cut the Federal work force, cut Medicare, and cut Social Security.

Although the actions taken in 2008 were not without controversy, the immediate financial crisis had to be averted. Longterm measures were left for the long term.

Unfortunately, perhaps dangerously, the European Central Bank

is balking at functioning as lender of last resort. My concern is that

this failure to act now could result in a deep recession in Europe

or an insolvency of a major European bank, which could put our

own economic recovery at risk.

Of course, our own recovery is not complete, by any measure. It

is true that, after unprecedented assistance from the American taxpayers, corporate profits have returned to their highest level in

years. Executives are making record salaries, and the richest

Americans are continuing to see their incomes and wealth grow exponentially. Main Street, however, is struggling mightily. The unemployment rate continues to hover at 9 percent. Mortgage

servicers continue to foreclose on millions of American families,
7

many of them in my district. And banks have yet to be accountable

for the abuses that caused this crisis.

For these reasons, I am glad that William Dudley, the president

of the Federal Reserve Bank of New York, is testifying today. Just

last month, he gave a speech at West Point in which he called on

Congress and the administration to continue near-term fiscal support to underpin economic activity and long-term fiscal consolidation to ensure debt sustainability.

He also explained that addressing the housing crisis is essential

to restoring the strength of our economy. Specifically, he called for

‘‘borrowers who are underwater on their loans but continue to

make their monthly payments to earn accelerated principal reduction over time.’’ He also called for more effective refinancing programs to ‘‘eliminate frictions and lower costs to refinancing for all

borrowers with prime conforming loans.’’ His message is directed to

us in this Congress, and we should pay close attention to it.

Examining the European financial crisis is a very important endeavor. It is a real threat to European countries and to the United

States. And I commend the chairman for holding these hearings.

It is my hope, however, that our committee will also focus on efforts to help Main Street USA and the millions of middle-class

American families and workers who were the true victims of the

financial crisis we face here at home.

And, with that, Mr. Chairman, I yield back.

[The prepared statement of Hon. Elijah E. Cummings follows:]
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Mr. MCHENRY. Members have 7 days to submit opening statements for the record.

And we will now recognize our panel of witnesses.

Mr. William C. Dudley is the president and CEO of the Federal

Reserve Bank of New York. Mr. Steven B. Kamin is the director

of the Division of International Finance at the Board of Governors

of the Federal Reserve System. Mr. Mark Sobel is the Deputy Assistant Secretary for International Monetary and Financial Policy

at the U.S. Department of Treasury.

It is the policy of this committee that all witnesses be sworn before they testify. So if you will please rise and raise your right

hands.

[Witnesses sworn.]

Mr. MCHENRY. You may be seated.

Let the record reflect that all witnesses answered in the affirmative.

And, with that, as you well know from congressional hearings,

we have a light system. Green means go; red means stop; yellow

means, well, just like a stoplight, hurry up.

So, with that, you will have 5 minutes to summarize your opening statements, and we will begin with you, Mr. Dudley.

STATEMENTS OF WILLIAM C. DUDLEY, PRESIDENT AND CEO,

FEDERAL RESERVE BANK OF NEW YORK; STEVEN B. KAMIN,

DIRECTOR, DIVISION OF INTERNATIONAL FINANCE, BOARD

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM; AND

MARK SOBEL, DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL MONETARY AND FINANCIAL POLICY, U.S. DEPARTMENT OF TREASURY

STATEMENT OF WILLIAM C. DUDLEY

Mr. DUDLEY. Thank you. Chairman McHenry, Ranking Member

Quigley, Congressman Cummings, and members of the subcommittee, it is an honor to testify before you today to discuss the

economic and fiscal challenges facing Europe and the potential implications for the United States.

Let me preface these remarks by stating that the views expressed in my written and oral testimony are solely my own and

do not represent the official views of the Federal Reserve Board or

any other part of the Federal Reserve System.

Although the U.S. economy is currently expanding at a moderate

pace, we face significant downside risks, mostly relating to the sovereign debt crisis in Europe. Because developments in Europe will

have an important bearing on the prospects for growth and jobs

here in the United States, the Federal Reserve is monitoring the

situation there very closely. This is also why we have taken special

steps, in cooperation with other central banks, to support the flow

of credit to households and businesses. I welcome the opportunity

to testify on these matters today.

The situation in the euro area is very unsettled, with pressure

on sovereign debt markets and local banking systems. The euro

area has the capacity, including the fiscal capacity, to overcome its

challenges. However, the politics are very difficult.
11

Europe’s leadership has affirmed its commitment to the European Union and its single-currency monetary union on numerous

occasions, and leadership is working to achieve greater policy coordination in areas such as fiscal policies. Assuming that Europe

ultimately succeeds in managing this situation, a stronger union

will emerge that will be viewed as more robust and resilient.

If, in contrast, Europe were not to be fully successful in charting

an effective course, this could have a number of negative implications for the United States. In particular, there are three possibilities that I would like to highlight for the subcommittee today.

First, if the European situation were to deteriorate, then the

euro area would face even more serious fiscal and economic challenges. As a result, growth within the eurozone would weaken, and

this would lead to less demand for U.S. goods and services that are

exported to Europe from companies and workers here. It is important to recognize that the euro area is the world’s second-largest

economy after the United States and an important trading partner

for us.

Second, if the European situation were to deteriorate, this could

put pressure on the U.S. banking system. The good news is that

the U.S. banks are much more robust and resilient than they were

a few years ago. Also, the direct exposures of U.S. banks to the

countries in Europe that are facing the most intense fiscal challenges are actually quite modest.

The bad news is that the exposures of the U.S. banks climb quite

sharply when one also considers the exposures to the core European countries and to the overall European banking system. This

means that if the crisis were to broaden further and intensify, this

could put greater pressure on U.S. banks’ capital and liquidity buffers.

Third, if the European situation were to deteriorate further, financial markets would likely become more stressed. This could

tighten the availability of credit to U.S. households and businesses,

and this could damage the U.S. recovery and result in slower economic growth and slower job creation.

In terms of the actions the official sector in the United States

has taken or could take with regard to Europe, I want to emphasize that any and all such actions pursued by the Federal Reserve

are motivated by the mandates that Congress has given the Federal Reserve to promote price stability and maximum sustainable

employment here in the United States.

When the Federal Reserve was created by Congress in 1913, it

was given the responsibility to provide liquidity to the financial

system in times of stress in order to shield the economy, to the extent possible, from the severe effects of financial instability on economic activity and jobs. While the economy and the markets have

evolved substantially in the century since then, this basic principle

continues to guide our efforts today.

In today’s globally integrated economy, banks headquartered outside the United States play an important role in providing credit

and other financial services in the United States, providing a total

of about $900 billion in overall financing within the United States.

For these banks to provide U.S. dollar loans, they have to maintain

access to U.S. dollar funding. At a time when it is already hardest
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for American families and firms to get the credit they had need, we

have a strong interest in making sure that these banks can continue to be active in the U.S. dollar markets.

One way we can help to support the availability of dollar funding

is by engaging in currency swaps with other central banks. This

has been used as a policy tool dating back to 1962. Recently, the

FOMC decided to use this tool, cooperating with five other central

banks. This action is designed to support financial stability, avoid

an unnecessary tightening in financial conditions, and support economic activity and jobs in the United States.

In particular, by reducing the cost of dollar funding by the swap

lines last month, we reduced the pressure on banks in Europe to

abruptly liquidate their U.S. dollar assets. Thus, this step will help

to insulate U.S. markets from the pressures in Europe and support

the availability of credit to U.S. households and businesses.

In sum, I am hopeful that Europe can effectively address its current challenges. The Federal Reserve is actively and carefully assessing the situation and the potential impact on the economy. We

will continue to monitor the situation closely.

Thank you for your invitation to testify today, and I look forward

to your questions.

[The prepared statement of Mr. Dudley follows:]
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Mr. MCHENRY. Mr. Kamin.

STATEMENT OF STEVEN B. KAMIN

Mr. KAMIN. Thank you, Chairman McHenry, Ranking Member

Quigley, Congressman Cummings, and members of the subcommittee, for inviting me to talk today about the economic situation in Europe and recent actions taken by the Federal Reserve in

response to the situation.

The fiscal and financial strains in Europe are spilling over to the

United States by restraining our exports, depressing confidence,

and adding to pressures on U.S. financial markets. Of note, foreign

financial institutions, especially those in Europe, are finding it

more difficult to borrow dollars.

These institutions make loans to U.S. households and firms, as

well as to borrowers in other countries who use those loans to purchase U.S. goods and services. Thus, difficulties borrowing dollars

by European institutions may make it harder for U.S. households

and firms to get loans and for U.S. businesses to sell their products

abroad. Moreover, these disruptions could spill over into U.S.

money markets, raising the cost of funding for U.S. financial institutions.

To address these potential risks to the United States, on November 30th the Federal Reserve announced, jointly with the European

Central Bank and the central banks of Canada, Japan, Switzerland, and the United Kingdom, that it would revise, extend, and

expand its swap lines with these institutions. The measures were

motivated by the need to ease strains in global financial markets

which, if left unchecked, could impair the supply of credits to

households and businesses in the United States and impede our

economic recovery.

Three steps were described in the announcement. First, we reduce the pricing of the dollar swap lines from a spread of 100 basis

points over the overnight index swap rate to 50 basis points over

that rate. The lower cost enables foreign central banks to reduce

the cost of the dollar loans they provide to financial institutions in

their jurisdictions. This, in turn, should help alleviate strains in

international financial markets and put foreign institutions in a

better position to maintain their supply of credit, including to U.S.

households and businesses.

Second, we extended the closing date for these lines from August

1, 2012, to February 1, 2013, demonstrating that central banks

were prepared to work together for a sustained period, if needed,

to support global liquidity conditions.

Third, we agreed to establish swap lines in the currencies of the

other participating central banks. These lines would allow the Federal Reserve to draw foreign currencies and provide them to U.S.

financial institutions on a secured basis. U.S. financial institutions

are not experiencing any foreign currency liquidity pressures at

present, but we judged it prudent to make such arrangements

should the need arise in the future.

I would like to emphasize that information on the swap lines is

fully disclosed on the Web sites of the Federal Reserve Board and

the Federal Reserve Bank of New York.
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I also want to underscore that the swap transactions are safe

and secure. First, the swap transactions present no exchange rate

or interest rate risk because the terms of each drawing and repayment are set at the time the draw is initiated. Second, each drawing on the swap line must be approved by the Fed, allowing us to

closely monitor use of this facility. Third, the foreign currency held

by the Fed during the term of the swap provides an important safeguard.

Fourth, our counterparties are the foreign central banks, not the

private institutions to which the central banks lend. The Fed’s history of close interaction with these central banks provides a track

record justifying a high degree of trust and cooperation. Finally,

the short tenor of the swaps means that positions could be wound

down relatively quickly were it judged appropriate to do so.

Notably, the Fed has not lost a penny on these swap lines since

they were established in 2007. In fact, fees on these swaps have

added roughly $6 billion to overall earnings on Fed operations.

To conclude, the changes we have made to our swap line arrangements should help maintain the flow of credit to U.S. households and businesses while protecting the U.S. taxpayer. Ultimately, however, the easing of financial strains here and abroad

will require concerted action by the European authorities. We are

closely monitoring the events in Europe and the spillovers to the

U.S. economy and financial system.

Thank you again for inviting me to appear before you today. I

would be happy to answer any questions you may have.

[The prepared statement of Mr. Kamin follows:]
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Mr. MCHENRY. Thank you, Mr. Kamin.

Mr. Sobel.

STATEMENT OF MARK SOBEL

Mr. SOBEL. Chairman McHenry, Ranking Member Quigley, Congressman Cummings, thank you for this opportunity to discuss interests in European economic reform.

Over the past year, stresses in Europe have spread to some of

Europe’s largest economies. The crisis now facing Europe is deeper

and more entrenched. Euro area growth is projected by most analysts to be negative this quarter and into early 2012. The OECD,

which earlier this year projected eurozone growth in 2012 of 2 percent, just revised this estimate to 0.2 percent.

In the United States, the pace of recovery has strengthened, but

given strong global linkages, Europe’s problems are a serious risk

for us. The EU buys nearly 20 percent of U.S. goods exports. When

European growth slows, U.S. jobs and exports decline. When European financial markets tighten, U.S. banks may be less willing to

lend, hurting American businesses that rely on bank credit to grow.

When European stocks decline, U.S. equity markets often do as

well, hitting the savings, the 401(k) programs, and wealth of Americans. In States such as New York, North Carolina, and Illinois,

over 150,000 jobs, and over 250,000 in Illinois, are export-related.

Europe has an enormous self-interest in tackling its problems. As

President Obama and Secretary Geithner have stated, Europe

clearly has the capacity and resources to address its crisis. Europe

is making progress in putting in place reforms to create the conditions for future growth and build a stronger architecture for fiscal

union. The recent European Council agreement represents an important step forward, but more work remains to be done.

Supporting Europe is a matter of vital national interest for the

wellbeing of the American economy. Therefore, we are heavily engaged with Europe. Bilaterally, the President is actively engaged.

There are extensive contacts with European leaders. Secretary

Geithner has traveled to the Europe three times in the last 3

months. Multilaterally, we are working through the G–20. Last

month in Cannes, France, G–20 leaders focused heavily on the European crisis. Mexico is going to chair the G–20 in 2012, and promoting a more effective European crisis response is a top priority

of the Mexican chair.

The IMF is a central institution of the international monetary

system. It has well served the world and the United States. It

helped the United Kingdom and Italy overcome crises in the 1970’s,

resolved the Latin American debt crisis of the 1980’s, supported

Central and Eastern European transition in the early 1990’s, and

later that decade and earlier in the last decade responded to Asian

and emerging-market crises. It has been a hallmark of my career

to see the strong bipartisan support in both the executive and legislative branches for the Fund’s role in the global economy.

Countries, first and foremost, bear the burden of adjustment, but

the IMF can play a role in promoting more orderly adjustment by

offering financing to support economic reforms, thus providing

breathing space to countries in overcoming their problems with less

disruption. When growth plummets in one country, especially a
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large country, it spills over on to others. In these circumstances,

IMF support helps mitigate the impact on the system as a whole.

The global financial crisis in 2009 offers a good example. The actions taken by national authorities, coupled with the London summit announcement of significant new IMF support, helped stem a

massive destabilizing capital outflow from emerging markets. This

action was critical in promoting recovery.

The IMF is a good investment for the United States. It helps promote global stability. When the Fund lends, it does so subject to

conditions to help assure it is repaid. Its repayment record is outstanding. When the IMF draws on U.S. resources, we are exposed

to the Fund’s balance sheet, and that balance sheet is solid. The

Fund is regarded as the world’s preferred creditor, meaning that

all IMF members agree it gets repaid first.

The challenge Europe faces is within the capacity of stronger European members to manage. As European countries strengthen economic reforms and fiscal governance, Europe must also continue

mobilizing the requisite resources to put in place a strong and credible firewall commensurate with the scale of the challenge. It must

do so quickly, with force and determination. The IMF cannot substitute for a strong and credible European firewall in response.

The IMF now has a substantial arsenal of financial resources, almost $400 billion. The administration has been clear with our

international partners that we have no intention of seeking additional funding for the IMF.

Thank you for inviting me again today. I look forward to answering any questions.

[The prepared statement of Mr. Sobel follows:]
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Mr. MCHENRY. Thank you, Mr. Sobel. And thank you for representing the administration.

I recognize myself for 5 minutes.

Let’s begin at sort of a broad question here for the whole panel.

Now, the reason why we are having this discussion is because, in

the last crisis, policymakers on the Hill were largely caught flatfooted on the actions of the Federal Reserve and the extraordinary

actions of the request from Treasury for the creation of TARP. The

American people were surprised by it, too.

Looking at this crisis with Europe, I think it is important that

we have oversight hearings on the Hill to understand the range of

options that you have, both with our central bank and the central

bank’s, really, main market bank being represented here today, or

main market participant, to understand the range of options.

So let’s begin with this question. Do you believe that European

countries are suffering from a liquidity problem, or is it a solvency

problem? And why do you believe that?

Mr. Dudley.

Mr. DUDLEY. Thank you, Chairman McHenry.

I think that if you look at Europe as a whole, Europe has the

fiscal capacity to solve their problems. The issue is really a political

one rather than an economic one. It is a huge political coordination

problem of getting 17 countries that share the euro and 27 countries that are part of the European Union to have a meeting of

minds to move toward greater fiscal integration.

We are seeing movement in that direction, but it is not happening, maybe, as fast as some of us might like. But I do not see

Europe as having, you know, a fiscal insolvency problem as you

look across Europe broadly. Their situation fiscally is, you know,

very comparable to ours or other countries.

Mr. KAMIN. So, if I could add on to those remarks, with which

I fully agree, essentially, on top of a number of different challenges

that Europe faces, it faces a critical problem of confidence—confidence by global investors in the long-term sustainability of fiscal

finances in some European countries, although, as President Dudley has mentioned, if you look at Europe as a whole, its fiscal numbers in terms of debt do not seem out of line; confidence in the

near-term liquidity situation of European countries. Investors want

the confidence they know that countries will be able, and, you

know, before the long term is reached, to secure their necessary

funding. And then, finally, confidence in the stability of the banking system.

So it is incumbent upon European authorities to address all of

these issues, and, indeed, they have taken a number of steps on all

three fronts. In the summit announcement that was released last

Friday, they, you know, suggested measures to bolster long-term

fiscal discipline. They also released additional measures to address

the viability of the financial backstop, you know, for euro area

countries. And, finally, somewhat previous to that, they announced

higher capital requirements for banks.

So they are taking measures, but a lot more follow through is

needed on them. Details need to be fleshed out. But, again, the Europeans have a deep commitment to address the issue, and they

should have the resources to be able to do so.
34

Mr. MCHENRY. Thank you.

Mr. Sobel.

Mr. SOBEL. I very much agree with Bill Dudley and Steve

Kamin. I would underscore fully the point that Europe has the capacity and the resources to address this challenge.

Mr. MCHENRY. Okay. Thank you.

So it is a liquidity, in essence, it is a liquidity challenge the countries face. I think that is what you are generally saying.

So let me follow up with this. What about European banks? Do

they face a liquidity challenge or a solvency challenge?

Mr. Dudley.

Mr. DUDLEY. I think it is hard to generalize across, you know,

all the different banks in Europe. I think there are some banks

that are in greater degrees of difficulty than others.

The good news I think is that the European authorities are doing

the same kind of stress test that we ran here in the United States,

and they are identifying the capital needs that their banks have

and are basically demanding that their banks raise their capital ratios over the next 6 months or so. So I think that is a very important step to restore confidence in the European banking system.

Now, that is not sufficient. They also have to have confidence in

the fiscal sustainability of each country’s debt burdens, because the

banks hold a lot of sovereign debt.

So you really have to solve two problems. You have to basically

make sure the banks have enough capital to, sort of, handle normal

stress environments, but you also have to get each country on a

sustainable fiscal path so that people are comfortable that the sovereign debt they hold is going to be money good in the end.

Mr. KAMIN. Just to add briefly to those remarks, all of which,

again, I agree with, in general whenever you have a liquidity problem, either for sovereign governments or for banks, it is because at

least some subset of investors have doubts about the solvency as

well, even if perhaps a broader class of investors is more confident.

So that is why it is critical in this situation where liquidity is at

issue to bolster confidence and sustainability and long-term solvency. And that is why it is critical that the Europeans move ahead

on various fronts, both fiscal discipline, financial backstop, and

both increasing the transparency of bank situations as well as ensuring that they have sufficient capital.

Mr. SOBEL. Very briefly, I agree with all that was said, and I

guess the only other point I would like to stress is that I think it

is very important for European banks to have strong and adequate

capital——

Mr. MCHENRY. If you would speak into the microphone. Thank

you.

Mr. SOBEL. Sorry. That is important that European banks have

strong and adequate capital positions and access to funding.

Mr. MCHENRY. Interesting. Artful answers, I am sure.

But, Mr. Kamin, thank you. I think you answered this question

because you at least touched on the fact that are doubts about the

solvency of many financial institutions.

Mr. Dudley, would you like to follow up?

Mr. DUDLEY. Yeah, I mean, if I could just add to what Mr.

Kamin said, one of the issues is, if investors have even the slight-
35

est doubt about the solvency of an institution, even, you know, 1

or 2 percent probability that the institution is insolvent, they are

often likely to pull back in terms of their funding.

So the liquidity problem comes about not because the institution

is definitively insolvent, but just that there is some risk of insolvency. So liquidity and solvency are related, but you can have a liquidity problem without a bank being insolvent.

Mr. MCHENRY. And you can also have a bank with no liquidity

problems that is fully insolvent.

Mr. SOBEL. Well, the, sort of, crisis in the United States is a good

example of the latter.

Mr. MCHENRY. Yes. Okay. Thank you so much. My time has fully

expired.

Mr. Quigley.

Mr. QUIGLEY. Thank you, Mr. Chairman.

Yesterday’s panel talked about those same issues, but they also

mentioned that some of these smaller countries might break off

and that, in the end, it could be better for those countries and the

situation as a whole for them to do that. Do you agree, as a panel?

Mr. DUDLEY. I don’t have an opinion on—I don’t feel qualified to

offer an opinion as to what is in the best interest of countries. It

is for their citizens to decide and their leaders to decide.

Mr. QUIGLEY. Well, not just a political reason, an economic reason—the ability to control their own currency and—an economic

answer.

Mr. DUDLEY. You know, the economic answer would be, on one

hand, if you were to break away, you could have a currency that

depreciated against the euro, and therefore you could regain your

trade competitiveness. That is sort of the positive part of the story.

The negative part of the story, which is very negative, is the fact

that it would be very difficult for you to honor all your obligations

that you have in terms of euro liabilities. And so it would be hugely

devastating for any country that left the euro in terms of how their

financial system actually was able to perform going forward.

The euro system does not contemplate any country exiting. There

is no mechanism to do so. So, you know, we can speculate about

what would exactly happen if a country wanted to leave, but we

really don’t know the answer to that question.

Mr. KAMIN. Just briefly, the eurozone is a long-term project of

political unification and economic unification, you know, that dates

from World War II. And this is a project that the European authorities still take extremely seriously and are very committed to

continuing to perpetuate. So that is why we are—you know, they

are very committed to taking the steps needed to pull it together.

To amplify on President Dudley’s comments, indeed, while on the

one hand if a country or more were, you know, contemplating

breaking away, that would give it some more latitude in terms of

its exchange rate adjustment. But each of these countries is very

tightly linked into the financial system of the rest of the euro area,

you know, both in very complex and technical payments, infrastructure ways, as well as a more general web of financial relationships

and relations of confidence and trust. So any country contemplating

breaking away, you know, could face considerable disruption.

Mr. QUIGLEY. Mr. Sobel.
36

Mr. SOBEL. Thank you.

Building on Mr. Kamin’s remarks, I wanted to underscore his

point about the commitment in Europe to the euro. And Europe is

moving forward with closer integration, and the institutional

underpinnings for the euro area, as Mr. Kamin said, this is a

project. But I think it is worth thinking about the following.

Europe has made progress, considerable progress, in this regard.

The countries of Europe are undertaking considerable reforms. It

is a difficult environment, but if you look at what is happening in

Italy and Spain and Portugal and Ireland and Greece, there are

major reforms that are being implemented.

Last week, at the European Council meeting, there were major

steps made in terms of bolstering the fiscal compact and steps toward a much more rigorous fiscal system for the future. Over the

last period, they have created the European Financial Stability

Fund and now the European stability mechanism, putting substantial resources at stake.

For me, I think if you thought back 2 years ago, you would have

said that these reforms were unimaginable, that Europe would

have undertaken them. And yet Europe has responded fairly forcefully. And I just want to underscore that I think it does show the

commitment of European leadership to the euro. And I wanted to

reemphasize, it is very important that Europe succeed, and it is

very important to the United States that Europe succeed.

Mr. QUIGLEY. Thank you.

Mr. Dudley, very quickly, you talked about the loans that we

have to countries like Greece, Ireland, Portugal, and Spain being

relatively small exposure. I believe the Center for American

Progress put that number at about $113 billion. But you did say

that to the eurozone as a whole it is a much larger exposure.

I mean, what figure becomes significant, in your mind? I mean,

and what happens to the banks in the United States with that

$113 billion? I mean, how are they protected at all?

Mr. DUDLEY. I am not familiar with that particular number. I

would be—that sounds bigger than what my understanding of the

U.S. bank exposures are——

Mr. QUIGLEY. Could someone find out what that number is——

Mr. DUDLEY. We would be happy to get back to you.

Mr. QUIGLEY [continuing]. And report back to us, in terms of

Greece, Ireland, Portugal, Spain, and then the rest of the eurozone?

Mr. DUDLEY. But your point is well taken, that as you broaden

the exposures out to Europe as a whole, they become very, very

large. And what that means is that if the European system were

to get into difficulty, there clearly would be consequences for us

here in the United States.

Mr. QUIGLEY. Okay. Again, if you could get back to us with a realistic figure for those countries and the eurozone as a whole.

And if anyone—my time has expired, but if anyone could, now

or later, sort of explain their understanding of what happens to

American banks in that regard.

Mr. DUDLEY. Certainly.

Mr. MCHENRY. Thank you.

The ranking member of the full committee, Mr. Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.
37

Mr. Dudley, as I mentioned in my opening statement, you gave

a speech at the U.S. Military Academy at West Point during which

you indicated that our economy continues to face significant downside risks, mostly related to the stress in the eurozone. Obviously,

our hearing today has been called to consider the eurozone crisis,

and I appreciate your insights on that issue.

However, you also spoke of another significant downside risk confronting our economy and that is the continuing foreclosure crisis.

You even stated that obstacles to mortgage refinancing are so severe that they are undermining the impact of monetary policy.

In your address, you identified a number of measures that might

comprise a comprehensive approach to housing policy, including the

elimination of barriers to refinancing and measures that will enable borrowers who are underwater on their loans but continue to

make their monthly payments to earn accelerated principal reduction over time.

Further, you stated, ‘‘I am encouraged by the recent decision by

the FHFA to make it easier for certain borrowers with high loanto-value ratios to refinance.’’ You went on to say, ‘‘I hope this initial

step will be followed by others that collectively move in the direction of stabilizing house prices. I believe this would not just be good

economic policy, but it would also be extremely beneficial for taxpayers, who now effectively own the credit risks of those home

loans guaranteed by Fannie Mae and Freddie Mac.’’

I completely agree with your policy prescriptions. However, when

FHFA Acting Director DeMarco appeared before our committee, he

testified that he has concluded that the use of principal reduction

within the context of a loan modification is not going to be the

least-cost approach for the taxpayer. We have asked Mr. DeMarco

to provide the details of this analysis, but he has not yet provided

us with that information.

These are my questions. Given that, as you said in your statement, taxpayers effectively own credit risks of loans guaranteed by

the GSEs, do you believe that enabling borrowers with loans owned

or guaranteed by the GSEs who are underwater to earn principal

reduction would be in the long-term interest of the taxpayers? That

is number one. I want to ask my questions because I want to make

sure I get them all in.

Two, we have looked in detail at the FHA refinancing proposal

you referenced. And even the FHA estimates that this new program may help, at the most, 900,000 additional borrowers. Is a program that helps 900,000 borrowers adequate to contribute to a stabilization of house prices? Or, do you believe that significantly

greater numbers of borrowers need to be helped to yield the stabilization of house prices?

And, finally, how is the failure to stabilize the housing market

and help borrowers who are underwater undermining the impact of

the monetary policies implemented by the Federal Reserve? And

what are the consequences for our economy?

Mr. DUDLEY. Thank you, Congressman Cummings.

Let me take your last question first, how are the problems in the

housing sector undermining the effectiveness of monetary policy. It

is undermining the effectiveness of the monetary policy because the

decline in long-term rates is not being fully taken advantage of by
38

households in terms of their ability to refinance their mortgages.

So people have mortgages that are, you know, 51⁄2, 6 percent, 61⁄2

percent who can’t refinance because the value of their homes has

fallen sufficiently far that their mortgages are now worth more

than the value of the home, and so they can’t easily refinance. This

obviously makes monetary policy less effective because if they could

refinance they would get the advantages of those lower mortgage

rates, which would put more money in their pocket.

The second thing I would say is, you know, to the extent that you

could do some of these things for housing, it has truly two, sort of,

benefits. One, if you could stabilize housing prices—if you took

these steps, I think you could stabilize housing prices. And if you

stabilize housing prices, I think you would actually start to see

more demand for housing. And if you saw more demand for housing, then housing prices would start to go up. And that would actually bolster household confidence, because houses are a very large

component of the household balance sheet. So if home prices are

stable or rising, people are going to feel a little bit better about the

outlook not just for housing but also about their own willingness

to go out and spend and consume. So we think this would be very

favorable for the housing sector.

Now, in terms of your two questions on principal reduction, we

think that you can devise a program for homebuyers that have

mortgages that are underwater to incent them to continue to pay

on those mortgages by giving them some program of principal reduction. Now, obviously, the devil is in the details, so you have to

have a good program design. But we are confident that one can design a program which would be net positive to the taxpayer.

In terms of the HARP program that you talked about, the

900,000, you know, obviously, you know, every bit helps. Obviously,

I would like to see the program broader so that more households

can participate, because that would be helpful in stabilizing the

housing sector and it would make monetary policy more effective.

Mr. CUMMINGS. Thank you very much.

Mr. MCHENRY. Mrs. Maloney for 5 minutes.

Mrs. MALONEY. First of all, I would like to welcome Mr. Dudley.

New York is so proud of him and his service to our country. And

I would like to welcome all of the participants today, and of course

my colleagues.

I would like to ask Mr. Dudley, what would be the impact on the

U.S. economy and American taxpayers if Europe experiences a

deep depression?

Mr. DUDLEY. Well, thank you for the kind words, Congresswoman Maloney.

Obviously, if Europe went into a deep recession, there would be

significant consequences to the United States. The first consequence would be in terms of our ability to sell goods and services

to Europe. We would have trouble exporting to Europe, and that

would have consequences for employment and manufacturing here

in the United States.

The second transmission channel would be back to our U.S.

banking system. As we have discussed earlier, U.S. banks do have

a large exposure to Europe, and so if the European economy is

doing very poorly, as you suggest, clearly that would put stress on
39

U.S. banks’ capital and liquidity, and so that could have implications for credit availability here in the United States.

And, third, if Europe were to go into a deep recession, this would

also be, I think, quite challenging for financial markets, for the

U.S. equity market and for other financial markets. And so that

also would have negative consequences to household wealth and to

consumer confidence, so I think that would also affect the U.S.

economy.

Mrs. MALONEY. Well, some economists are predicting that there

will be a breakup of the euro. So I would like to ask Mr. Kamin

and Mr. Dudley, how would the breakup of the euro affect the U.S.

economy? And do you believe that will happen or won’t happen?

Starting with Mr. Kamin, then Mr. Dudley.

Mr. KAMIN. Thank you, Congresswoman Maloney.

So, in reference to that and as I said earlier, the European authorities are deeply committed to their project of political and economic unification and deeply committed to the perpetuation of the

eurozone, which means, in turn, that they understand the deep seriousness of their current situation and they plan to take the steps

needed.

Mrs. MALONEY. Well, then, why aren’t they taking the necessary

steps to properly combat the crisis? Many economists say they have

enough resources to combat it themselves. Do you think they need

a TARP-like approach? If they won’t combat their own political

problem, should we come in and handle their problem for them?

Mr. KAMIN. Well, it is certainly not for us to handle their problems for them. And they are very cognizant of their problems. And

they have announced a number of steps in the past week and then

in the past few months to address their problem: as announced last

Friday, a new set of disciplines on fiscal behavior to raise the confidence of investors in their long-term sustainability——

Mrs. MALONEY. Well, what does their actions bear on the actions

that have already been taken by the Treasury and the Fed? And

do you support the actions that Treasury and Fed have taken?

Mr. KAMIN. Well, I certainly support the actions of the Fed and

Treasury because they pay my salary.

Mrs. MALONEY. Yeah. Team player.

Mr. KAMIN. But I think the way to think of it is, the European

authorities have their plate full. They have to do certain things

they need in order to stabilize the situation in Europe. Our job——

Mrs. MALONEY. Well, my time is running out, and I would like

to also hear from Mr. Dudley. I only have a few seconds left.

So, Mr. Dudley, could you respond?

Mr. DUDLEY. I think I would say two things. One, I——

Mrs. MALONEY. The breakup of the euro, what would that mean

to—what would the impact be?

Mr. DUDLEY. Well, this is not something that I anticipate, for the

reasons that Mr. Kamin said.

Mrs. MALONEY. Yeah.

Mr. DUDLEY. I think the European leadership is fully committed

to the European Union, and they are going to take the steps that

they need to move toward greater fiscal integration. As I said earlier, it is a political problem. And so maybe they are not moving
40

as fast as some of us might like, but they are moving, I think, in

the right direction.

The second thing I would just stress is, you know, all the things

that the Federal Reserve has done with respect to the foreign exchange swaps, this isn’t about helping Europe, this is about helping

ourselves. This is about ensuring the flow of credit to U.S. households and businesses. We are doing this for ourselves.

Mrs. MALONEY. Okay. My time has expired.

Mr. MCHENRY. I thank my colleague.

Good questions, very good questions. We will begin a second

round of questions.

Look, to get into a very specific question following up with Mrs.

Maloney, let’s say Greece withdraws from the euro. Do you have

the scenarios—is that part of the scenarios that you worked

through? And would that have—you know, so, walk through that

process.

Mr. DUDLEY. Yeah, I don’t think that we would characterize that

we worked through specific, you know, horrible scenarios surrounding Europe. What we do instead——

Mr. MCHENRY. You don’t go through——

Mr. DUDLEY [continuing]. Is do contingency planning to make

sure that the Federal Reserve System can handle very stressful environments and ensure that the U.S. banking system can handle

very stressful environments, regardless of the source of that stress.

So, for example, the United States right now, we are in the process—the Federal Reserve is right now in the process of putting the

U.S. banks through a very severe stress test. And that exercise,

which, you know—and that stress might come from Europe, but it

could come from some other source. So I think our job is to make

sure that the U.S. banks can withstand a bad economic environment regardless of the source of that stress.

Mr. MCHENRY. Okay.

Mr. Sobel, I will begin with you. Play out the scenario for the

next 6 months to a year. What does the administration, what does

the Treasury, what do they foresee happening with this euro crisis

over the next 6 months to a year?

Mr. SOBEL. As I was saying earlier, I think Europe is making

progress. They have put in place a number of forms, and they will

undoubtedly continue to further move ahead with reforms. Europe

is developing its firewall to provide time and space while the countries are putting in place reforms and as these take hold. And we

will remain fully engaged and continue to work with them, continue to support them staying on the reform path.

And I think that the Europeans are very closely monitoring the

situation. They have talked about having a review of the adequacy

of their financial resources and backstopping in March to ensure

what I think is important, which is that governments have adequate access to affordable financing and also that banks have adequate funding.

Mr. MCHENRY. So that is your view over the next 6 months to

a year?

Mr. SOBEL. I think it is a process and——

Mr. MCHENRY. Okay.
41

Mr. Kamin, I will ask you the same question. I hope you have

a better answer.

Mr. KAMIN. Well, obviously, it is extremely difficult to plot

out——

Mr. MCHENRY. That is why I am asking the Federal Reserve.

You run through tough scenarios, I understand. But play this out

for the next 6 months to a year. What do the American people—

what could they expect to see? Give us the range here.

Mr. KAMIN. A great deal depends on how European authorities

follow through on the commitments that they have already stated.

They have a very full agenda of items that they need to work on.

The Friday summit, the last Friday summit involved an EU or

intergovernmental agreement among at least the 17 eurozone countries—plus, there are additional countries in the EU but not in the

eurozone—to work out, to agree on a system of financial disciplines, to consider a bilateral loan by the Europe to the IMF in

order to facilitate their lending, in order to move up the——

Mr. MCHENRY. That is history. So let’s go through——

Mr. KAMIN. Those are the items that are on the Europeans’ agenda. And so what we look forward to over the next weeks and

months is their implementation—their agreement on those items,

which will in some cases require ratification by the member states,

and their implementation of those.

And that is the process that we are looking forward. And if they

move through decisively on that and put these measures in place,

there is some chance, perhaps a good chance—it is hard to know—

that eventually that will build the confidence needed and we will

see the crisis easing. If they do not succeed in the near term in

achieving that type of progress and follow through and that disheartens markets and investors, then we can see more adverse outcomes.

But that is basically the framework we are using to look at the

next period, is the progress being made by European authorities.

Mr. MCHENRY. Mr. Dudley.

Mr. DUDLEY. I agree with what Steve has said. You know, the

devil is now in the details. So we have a broad outline of the way

forward, but now we have to actually see the details of how they

are going to implement it, and then we have to see the political

process support it. And that is really, you know, going to be critical

over the next 3 to 6 months.

Mr. MCHENRY. So you are talking structurally. Let’s talk about

the banks, the European financial institutions.

Mr. DUDLEY. Well, I think that the important thing here to recognize is that if the European countries put their fiscal houses in

order, then the banking problems in Europe become much more

manageable. Because why investors are worried about European

banks is in large part because they are worried about the sovereign

debt holdings those banks have. So if the European countries put

their fiscal houses in order, this will go a long way to solving the

European banking situation.

Mr. MCHENRY. Is that how you see it, Mr. Kamin.

Mr. KAMIN. Very much so.

In addition to that—so that is the critical challenge the European

authorities must meet. At the same time, there is a parallel process
42

that will go on for the European banks as they strive to meet their

heightened capital requirements. And there are some risks there

that have been much talked about in the media about how they

will achieve their higher requirements. Will they do it through

deleveraging? Will they do it through raising capital? And that is

another process that we will be following closely.

Mr. MCHENRY. With that, my time has expired.

Mr. Cummings, the full committee ranking member, is recognized.

Mr. CUMMINGS. Mr. Dudley and Mr. Kamin, the Federal Reserve

stepped up a couple of years ago during the U.S. financial crisis

and acted as a lender of last resort to the banks. In fact, the Fed

played a central role in containing the crisis and stabilizing the

American economy.

Why was it important for the central bank of the United States

to intervene during the financial crisis?

Mr. DUDLEY. Well, I think during the financial crisis what we

saw was a complete loss of confidence in private-sector financial

firms to engage with one another. And so it was very, very important for the Federal Reserve to provide a backstop form of funding,

so that people were more willing to actually come back into the

market and start to engage with one another.

Mr. CUMMINGS. Do you agree with that, Mr. Kamin?

Mr. KAMIN. Absolutely. The problem was basically a breakdown

of money markets and, as a result of that, a breakdown in the supply of credit to U.S. households and firms, as well as those around

the world. And that posed a dire threat to the global economy and

the U.S. economy, and that is why we intervened.

Mr. CUMMINGS. Well, during the 2008 financial crisis, the Fed

proactively took steps to prevent panic and acted as the lender of

last resort. The United States had and has a long-term fiscal problem, but that did not prevent the Fed from taking action to address

the immediate financial crisis at hand.

But the European Central Bank is not doing that in Europe. According to testimony we heard yesterday, the policies that the ECB

is pursuing will aggravate the potential for a default. According to

Desmond Lachman, ‘‘There is the very real risk that continuing to

supply substantial fiscal tightening will lead to a very deep economic recession. A deep recession would make it very difficult for

countries to reduce their budget deficits and would undermine their

political willingness to remain within the euro.’’

Yesterday, Reuters reported that Ireland’s European Affairs Minister, Lucinda Creighton, thinks that the ECB should become a

lender of last resort during the European crisis. Do you think that

the ECB should let up on austerity and start being a lender of last

resort?

I will take the answer from all three of you on that.

Mr. DUDLEY. I think the ECB is being actually quite aggressive

in being a lender of last resort to the European banking system.

They have now introduced a 3-year—a lending facility where they

will provide loans for a 3-year period, which is an unprecedented

length of time. They have broadened the collateral eligibility requirements so that it is more easy for European banks to bring collateral to the ECB to get funding.
43

Where the issue is in Europe, with regard to the European Central Bank, is their ability to buy primary debt issuance from the

sovereign countries. And this is prohibited by treaty. It is prohibited by treaty for the ECB to buy the sovereign debt issued by the

countries in the primary market. And some people are arguing that

they should, sort of, do it anyway, but, you know, Mario Draghi,

who is the head of the ECB, points, I think correctly, to the treaty

which prohibited such activity.

But I think, in terms of backstopping their banks, they are actually providing a lender-of-last-resort function for the banks.

Mr. KAMIN. I agree with everything President Dudley said, and

I would just add a couple of more points.

First of all, in responding to the decline in economic activity that

we have seen in Europe in recent months, the ECB has indeed lowered their policy interest rates a couple of times of 25 basis points

apiece. So they are taking actions to loosen monetary policy in response to financial and economic strains.

Additionally, while they are indeed, as President Dudley has

said, prohibited from buying sovereign bonds directly in the primary market from governments, they are not prohibited from buying bonds in the secondary market—in other words, buying them

from other holders of this debt. And, in fact, they have been doing

so for some time.

So they are very much committed to indeed acting as a lender

of last resort for banks and for supporting the European economy

in the ways that they view is within their purview. But a lot of the

heavy lifting will have to be done by governments and fiscal authorities, you know, in order to fully address the strains on the system.

Mr. CUMMINGS. Well, Mr. Kamin, do you think that it will be

necessary for the ECB to purchase country bonds to stabilize?

Mr. KAMIN. Well, they already are purchasing bonds, as I have

said, in the secondary market, and that appears to have been helpful to some degree.

Mr. CUMMINGS. Mr. Sobel.

Mr. SOBEL. Congressman, when one works at the U.S. Treasury,

one is trained not to talk about monetary policy by other central

banks. So even if I agreed with everything my colleagues have said,

I would only say that the ECB has played an important role in ensuring European financial stability, and we look forward to it continuing to do so.

Mr. CUMMINGS. Going back to you, Mr. Kamin, do you think the

ECB needs to increase the purchases of the country bonds?

Mr. KAMIN. I think, you know, much depends on both how the

economic situation evolves going forward and, in particular, how

European authorities follow through on the announcements they

have already made. So just as——

Mr. CUMMINGS. But don’t you think that would help to avert the

crisis—potential crisis?

Mr. KAMIN. Well, I think that, as I say, ultimately, what is required to avert the crisis and get it under control is a very concerted action by European authorities, and certainly a fiscal element has to be critical. The ECB, undoubtedly, will play some role,
44

but what that role will be is not for me, you know, to judge on. But

there will have to be some role.

Mr. CUMMINGS. Thank you.

Mr. MCHENRY. I thank the ranking member.

Mr. Gowdy from South Carolina.

Mr. GOWDY. Mr. Chairman, thank you. And I want to thank you

for your leadership on this issue, which, frankly, is unparalleled.

And while I had a series of questions, including whether or not the

breakup of the euro could result in a net devaluation of the resulting bank of basket currencies, as I have sat here for part of this

morning and heard your questions I think I am inclined to give you

my time so you can more fully——

Mr. MCHENRY. I am inclined to take it.

Mr. GOWDY. And I would like you to more fully develop that and

any other ideas that you think are of the moment.

So I would yield to the gentleman from North Carolina.

Mr. MCHENRY. Thank you.

You know, I asked earlier about this notion of what happens

with Greece. And I certainly respect the fact that the Federal Reserve doesn’t—and the Treasury, you don’t want to be out there

saying that, you know, you have cooked this into the books, so to

speak. You have, sort of, priced in this, and the extension of the

swap lines is, sort of, in anticipation of Greece defaulting, whether

or not the term ‘‘default’’ is actually used.

You know, there is some notion that what would happen with

Greece, with our panel of experts yesterday, is that, you know,

Greece would basically, with an ongoing process with other euro

participants, have a very significant write-down that is, in essence,

a default, but through some other terminology. Therefore, CDS contracts aren’t triggered, as we have just seen with this last round.

So let’s price this in, okay? Let’s say that that process happens.

What we have seen is the eurozone put in place policies for Portugal, Spain, and Greece that appear to be failing. So what would

it take, what would you suggest it would take, in order for Spain

and Italy to not go through those same challenges, based on the existing policy? If those policies aren’t quite working with Portugal,

Greece, and Ireland, what makes you believe that they would work

with Spain and Italy?

Mr. Dudley.

Mr. DUDLEY. Well, first, I am not sure that they aren’t working.

I think that it is too soon to say exactly whether these countries

are going to be able to sustain the fiscal adjustment that they have

put in place, and I think the outlook is different for different countries.

The second thing I would say is that the swaps really have nothing to do with whether Greece leaves the euro or not. The swaps

were put in place for a very different reason. We were seeing that

European banks were having difficulty obtaining dollar funding,

and as a consequence of that, they were liquidating their dollar

book of assets here in the United States. So this was tightening

credit availability in the United States, which was going to have

a direct impact, if it was allowed to continue, on U.S. households

and businesses.
45

So the swaps were really about the ability of European banks to

obtain dollar funding and the consequences of that on the United

States. Whether Greece leaves the euro or doesn’t leave the euro,

I think that was immaterial to our decisionmaking on the swaps.

Mr. MCHENRY. So the policies in Portugal, Ireland, and Greece

you believe are working?

Mr. DUDLEY. I am not going to make an assessment about how

well individual countries are doing——

Mr. MCHENRY. Okay, because, you know, their debt-to-GDP ratio

is worse now than it was before the policies were put in place.

Mr. DUDLEY. I would say two things.

As you go from the peripheral countries to the core, the debt

challenges become much more manageable. In other words, if you

look at Spain or you look at Italy and you look at their debt-to-GDP

ratio and you look at their deficit-to-GDP ratio, they have to do

substantially less than what Greece has had to do.

And so I think that, from my perspective, you know, what Spain

and Italy need to do is completely achievable. It is completely

achievable. The question is just the political will to implement the

fiscal austerity on a reasonable timeframe and convince market

participants that they can actually do so.

You know, one of the problems we have right now is that it is

going to take time for countries to implement their programs, and

therefore it is going to take time for market participants to be convinced that they actually are on a sustainable path. And so the

question is, how do you get from here to then when they have actually had a chance to implement their programs?

Mr. MCHENRY. Mr. Kamin, you mentioned money market funds

in your testimony. Please expand upon that.

What is the—you know, in the downturn, in the financial crisis,

2008, 2009, the Federal Government stepped in and, in essence, insured—well, directly insured money market funds. So there is a belief among consumers in America that these are protected assets,

when, in actuality, they actually are in the market, they have just

performed very well over a very long period of time, and only one

has broken a buck in, you know, the last generation, we should

say.

So, if you will, just expound upon this money market exposure

and why these swap lines pertain.

Mr. KAMIN. I would be glad to.

So, first, money market funds, obviously, are an extremely important provider of dollar liquidity, both to U.S. financial markets

and financial markets around the world. So many European banks,

you know, rely heavily on lending and investing by U.S. money

market funds in these bank CDs, commercial paper and the like.

And that is an important source of the dollar funding they use in

order to provide lending to firms and businesses, both in the

United States and abroad.

By the same token, lending to European institutions comprises

a large fraction of the U.S. money market funds portfolio. Now, the

money market funds have been substantially reducing their exposure to the most vulnerable, so-called peripheral European economies, so that is no longer much of a source of risk. But that said,
46

they still have very substantial exposures to the banks of core European economies.

So in the event that—so that poses a number of risks. First, in

the event that the financial strains in Europe were to intensify,

money market funds will naturally be expected to further reduce,

you know, their exposure to those banks, which would increase

their financial straits. And, as well—and this is a problem that has

received much attention—you know, U.S. investors in money market funds, you know, might be inclined to take some of their funds

out. That could put the money market funds in a difficult situation.

This is something that, of course, we at the Fed and other agencies are very alert to, and that has been an important consideration

for the FSOC, you know, Financial Stability Oversight Committee.

And they are working on—you know, all regulatory agencies are interested in this. And, of course, the SEC has the primary regulatory authority, you know, for these money market funds, and

they are working through some reforms.

Mr. MCHENRY. So the swap line is about direct American exposure in that regard?

Mr. KAMIN. The swap line is about exposure in that regard and

many regards. Its point is to make sure, you know, that—to help

European and other foreign institutions get the dollar funding that

they need in order to continue providing credit, both around the

world and to U.S. households and firms. And by doing that, we

strengthen the liquidity position of these institutions. And by doing

that, we make them appear to be safer investments for money market funds and other investors.

Mr. MCHENRY. Thank you.

Mrs. Maloney.

Mrs. MALONEY. Thank you.

What is the single most important thing that Europe could do to

prevent a banking crisis here in the United States? Mr. Sobel, Mr.

Kamin, Mr. Dudley.

Mr. SOBEL. Well, let me address the question of what is the single most important thing Europe can do. And I think that it is

clear that Europe needs to pursue a comprehensive strategy to

overcome the crisis.

This is going to—and what I think needs to be done, in a nutshell, is the countries have to reform, they have to stick to their

reform plans. And it is going to be about implementation. It is not

going to be easy, but that is a first prerequisite for restoring confidence.

Second, at the European level there needs to be further progress

in strengthening the foundations of the eurozone. We saw that

with, last week, some steps with regard to the fiscal compact.

And third, as Mr. Dudley was suggesting a minute ago, it takes

time for reforms to take hold. So they have to get from here to

there. And I think this is where the issue of the European firewall

comes into place. It is a firewall that has to be strong and credible,

and it needs to be there as a backstop to ensure that countries

have access to affordable financing at sustainable rates. And it is

important that banks in Europe have adequate capital and access

to affordable funding.

Mrs. MALONEY. Mr. Kamin. Mr. Dudley.
47

Mr. KAMIN. Oh, I very much agree with what Mr. Sobel said.

And I guess I would just put it succinctly: There is no single magic

bullet. The European authority—you know, what is needed in order

to address this crisis is decisive action and follow through by European authorities on all——

Mrs. MALONEY. Do you agree with what the majority’s witness,

Mr. Lachman, said, that Europe may need a TARP program? Do

you agree with his statement?

Mr. KAMIN. I am sorry, but I am not even sure what that might

mean, so——

Mrs. MALONEY. Well, I think you know what a TARP program

is. Do you think they need a TARP program or not?

Mr. KAMIN. Well, let’s put it this way. If by that you mean, sort

of, injection by European authorities into the banks of that continent, that represents part, okay, of the agreement that was concluded about a month and a half ago by European authorities that

they would raise the capital standards for banks in Europe. And

if those were not met, then governments might inject in some form

or another.

So I would say that could be—that is already kind of in the cards

as part of it. But that by itself is not enough. They have to work

on bolstering the fiscal position of the governments.

Mrs. MALONEY. Okay. Thank you.

Mr. Dudley, any comments.

Mr. DUDLEY. I agree with what has been said up to now, Congresswoman.

I think there is a number of steps that have to be taken. You

need a clear path of where you are going. You need the European

leadership to not waiver in their commitment to unite the

eurozone. You need a firewall to allow the countries time to show

that you can get there. And you need the countries to do what they

have to do in terms of demonstrating that they are committed to

getting their fiscal houses in order on a sustainable, long-term

basis.

And, last, some of these countries also need to take steps to improve their competitiveness. In other words, they have to do structural reforms to their labor markets, etc., to improve their competitiveness. Because it is not just a fiscal problem; it is also a competitiveness problem for some of these countries.

Mrs. MALONEY. Well, I would like to comment on a strategy that

came out of the 2009 G–20, where they agreed to triple the Fund’s

lending capacity. In response to that, for the IMF, our Congress approved a $108 billion line of credit to the IMF. And some Republicans have come forward with a proposal, or legislation, that would

rescind the IMF’s authority to spend any of this $108 billion contribution to the IMF’s European strategy.

So I would like to ask—let’s start with you, Mr. Sobel. Can you

explain some of the terms and conditions that are associated with

the IMF’s financial assistance to the Nation? And what does IMF’s

assistance really signal to the rest of the world or to other financial

backstops to help in this situation?

Mr. SOBEL. Thank you.

In my testimony, I indicated that the IMF funding plays a very

vital role in the system in helping countries. When countries face
48

stresses and difficulties, they frequently come to the IMF against

the background of a loss of access to financing, which imposes very

deep stress on the society and economy as a whole.

What IMF comes in and does is it works with countries to develop a more orderly path to restore growth and vitality. They do

so, first, by developing economic conditions. Money is tightly overseen. There are quarterly performance criteria on fiscal and various

other indicators to make sure that the country is moving on a track

that will restore it to stability. In addition, the Fund provides financing, and that allows the country, as I was saying, to make a

more orderly transition toward resumed growth.

Now, that is in the country itself. But when a country has problems, especially a large one, it has ramifications for the neighbors,

it can have ramifications for the global economy, as we saw in

2009. And so the logic of IMF assistance is not only to help the

country restore stability, but it is also to lessen the impact on the

global economy, which is very much in our interest.

And as we indicated earlier, from the vantage point of the United

States, one of the problems from a deteriorating situation in Europe is that this hurts U.S. exports, it hurts U.S. growth, it constrains financing to businesses, it hurts our stock markets, our

401(k)’s and the like. So the Fund’s support for the global economy

can be very vital in helping promote international financial stability.

Mrs. MALONEY. Would the IMF alone be able to fix the crisis, Mr.

Kamin?

Mr. KAMIN. I am not sure if I—the Treasury is the main agency

here, so I think I will defer to Mr. Sobel, if you don’t mind.

Mrs. MALONEY. Yeah. Okay.

Mr. SOBEL. We have said very many times that Europe has the

primary responsibility for addressing its problems. It has the capacity and resources to address its problems. We have welcomed

the fiscal actions they have taken. We have welcomed the actions

they have taken to put in place a stronger governance framework.

And we have welcomed the creation of the firewall.

We have been very clear that the IMF cannot substitute for a

strong and credible European firewall and a strong and decisive

and forceful European response to the crisis.

Mrs. MALONEY. What would happen if the Republican legislation

passed that denies the funding from the United States to the IMF?

Mr. SOBEL. So, in my view, the IMF helps serve U.S. interests

and—our interest in sustaining global financial stability, which is

important to the health of our economy. So, again, Europe has to

act. But the IMF can be a tool for helping achieve a sounder world

economy, and we want the IMF to have the resources to be able

to do its job and perform.

In 2009, Congress approved a $100 billion increase in our commitment to the new arrangements to borrow, as well as a modest

$8 billion increase in our quota. And the Fund has long had a backstopping goal for the global economy. I mean, the backstopping role

of the Fund through this NAB, the ‘‘NAB’’—it used to be called

something else, the ‘‘GAB’’—but it goes back to 1962, which is

when the swap lines were created, as Bill was mentioning earlier.

So this is vital to promoting global stability.
49

So my view is that, if we were to withdraw our funding, I think

it would harm market confidence, I think it would weaken U.S.

leadership in the institutions, I think it would put our standing in

the Fund in jeopardy, and I think it would cause the Fund to look

to others to play a more influential role in its operations and activities. So I think that our support for the IMF is very important.

Mrs. MALONEY. Thank you. My time has expired.

Mr. MCHENRY. Thank you.

And the vice chairman, Mr. Guinta of New Hampshire, is now

recognized for 5 minutes.

Mr. GUINTA. Thank you, Mr. Chairman.

Mr. Sobel, when I was here earlier during your opening remarks,

I thought I heard you say that the IMF has a very good rate of reimbursement, of repayment. So I wanted you to clarify that for me,

and then I wanted to ask you a followup question.

Mr. SOBEL. Thank you.

The IMF, in my perspective, is a very unique institution. So let

me just cite three factors.

One, as I was just describing, it can set the macroeconomic conditions for a loan to a country. That helps the country get back to

growth, but it also can help ensure that the country gets back to

growth through this quarterly monitoring process, and that helps

ensure that the Fund’s resources are safeguarded.

Second, the Fund is a preferred creditor. So everybody in the

world, all countries, all members of the Fund, recognize that the

Fund is first in line to be repaid. And its repayment record is just

excellent.

Third, it has a strong balance sheet, a very strong balance sheet.

It has good reserves. And, again, it has this ability to set these conditions. It has this ability—it has preferred creditor status.

And that is not only good for the members of the Fund, but another dimension of this is that when the IMF draws on our resources and provides it to another country, some people think, you

know, you are exposed to that country. In fact, we are exposed to

the balance sheet of the Fund. When the Fund draws resources

from us, we get a liquid, interest-bearing, and cashable claim on

the IMF and its strong balance sheet.

So those were the reasons that I was outlining that I feel that

the IMF is—that our claims in the IMF were fully secure.

Mr. GUINTA. The reason I ask is, I believe it was today’s Washington Post article, and I don’t know if you have seen it yet, but

it was entitled, ‘‘Will U.S. Taxpayers Be on the Hook for Bailing

Out Europe?’’ There was a quote from Anthony Sanders, who is a

professor at George Mason University, who said, ‘‘I would expect

the $100 billion’’—which, I believe, that is a line of credit that we

have issued to the IMF—‘‘I would expect the $100 billion to be used

and not be paid back,’’ is what he said.

So I am curious about two things: number one, why all of a sudden there would be this shift in an expectation of it not to be paid

back, number one; number two, the statements that have been

made by Mr. Geithner, followed up by the President of the United

States, suggesting that no additional funds should go to the IMF.

I am particularly curious to know if that line of credit should be

withdrawn, in your opinion.
50

Mr. SOBEL. First of all, I think that the action taken by Congress in approving the $100 billion NAB line in 2009, which was signed

into law shortly thereafter, was a vital step. The announcement of

the NAB was instrumental in contributing to strengthening global

stability in 2009. It was very visible at the time. And I strongly

support—we strongly supported that action.

Again, I am fully——

Mr. GUINTA. You would agree, though, that we are somewhere

different today than 2009—or Europe is somewhere different today

than they were in 2009?

Mr. SOBEL. Absolutely. I think my point is that we want the

Fund to have the resources to do its job. The NAB is part of that,

and we strongly back that.

I, again, am firmly of the belief that our claims in the IMF are

extremely secure. I think the repayment record of the Fund is stellar. I would be happy to sit with your staff and document that to

them.

Mr. GUINTA. Okay. I know that that quote——

Mr. SOBEL. So I just want to say, we will be repaid. And the

NAB line—so far, the IMF has drawn $6 billion from our NAB line.

Mr. GUINTA. Let me just get to my—I know that Professor Sanders made that statement yesterday in testimony, so it is something

that I would probably want to follow up with you on.

The final question I do have is, in the cases of Greece and Ireland and Portugal, their debt-to-GDP ratio, after receiving assistance packages, I believe actually increased or rose. So, while I understand your point about the impact globally that IMF has, it

doesn’t seem that countries get the point, that after they receive a

loan or a bailout, they are not fixing their debt-to-GDP ratio, which

is, quite frankly, the same problem we are having here in the

United States, in my view.

So, in a real short amount of time, can you tell me how one

would argue that bailouts are even working if that GDP-to-debt

ratio is increasing, not decreasing?

Mr. SOBEL. Congressman, I look forward to working with you

after this hearing.

So, when growth has slowed in these economies, that has had the

effect of depressing revenues. And automatic stabilizers exist in

these economies that boost——

Mr. MCHENRY. If you can turn on your mike and pull it to your

face, that would be good.

Mr. SOBEL. Okay.

So, basically, this tends to push deficits up in the short term.

Meanwhile, these countries are taking actions to bring their fiscal

houses in order against the background of the cyclical downturn in

the fiscal position.

The point I made is that the IMF support provides a more orderly transition to restoration of growth. And the Fund closely

monitors and reviews the performance to make sure the country is

getting on track toward a better position.

Mr. GUINTA. Would the chair yield an additional 30 seconds?

Thank you, Mr. Chairman.

So what you are saying—I understand what you are saying. You

are saying that the debt in the short term is going up, but these
51

countries are taking longer-term measures to stabilize their economy, to improve their economy, have a pro-growth economy, reduce

expenditures.

Can you tell me, then, in your opinion, if that is what we think

should be a standard, for us to be loaning money to the IMF, are

we, in fact, as a nation, imposing that same standard on ourselves?

Is the President of the United States imposing that same standard

on our country?

Mr. SOBEL. Congressman, I think the—I didn’t come here today

to——

Mr. GUINTA. Well, there is a tie between Europe and the United

States, isn’t there?

Mr. SOBEL. I think the President has proposed a bold fiscal

plan——

Mr. MCHENRY. If you will please put your microphone toward

you. We cannot hear you.

Mr. SOBEL. I think the administration has put forward bold fiscal

plans to promote growth and to restore fiscal sustainability and to

consolidate the deficit over the medium——

Mr. GUINTA. I would love to have that list. So I am looking forward to working with you, as well. And when we do get together,

I would love to see that list.

Thank you, Mr. Chairman.

Mr. MCHENRY. I thank my colleague.

And for the committee’s information, we actually requested originally Mr. Sobel’s superior at Treasury, who perhaps could have answered that question, in particular, more sufficiently.

One final question. We have votes going on on the floor, and if

I could just ask one final set of questions here.

Mr. Dudley, in your written testimony, you said, ‘‘If the European situation were to deteriorate further, financial markets would

likely become more stressed.’’ And you go through the scenarios for

the American economy. Then you say—and this is bold language

for the Federal Reserve—‘‘At a time that U.S. unemployment is

very, very high, this is a particularly unacceptable outcome. In the

extreme, U.S. financial markets would become impaired.’’ And you

go forward there. Strong language for the Federal Reserve.

So, in the event of that scenario, that the European situation

were to deteriorate further, what is the Fed prepared to do to prevent this outcome?

Mr. DUDLEY. Well, I think my language was really more about

how unacceptable the high unemployment rate is and how, if the

unemployment rate were to go higher because of events in Europe,

that would be very unsatisfactory.

Mr. MCHENRY. To be specific—and my time is limited—I will

read you the whole paragraph. And I think that that is not what

the written statement says.

Mr. DUDLEY. I will stipulate to your interpretation, just in the

interest of time.

I think that, you know, the Federal Reserve is doing what we

think is appropriate to support lending here in the United States,

and that is why we have engaged with these foreign exchange

swaps with the five other central banks.
52

I don’t think we contemplate any other actions, at this time, to

do anything else in terms of providing assistance to Europe. It is

really their problem to solve, from the Federal Reserve’s perspective. The ECB has liquidity facilities in place, in terms of euro currency. They now have swap lines that we think are very sufficient

to provide dollar liquidity. So I don’t anticipate, even if the crisis

in Europe were to worsen, further steps on the part of the Federal

Reserve at this time.

Mr. MCHENRY. Mr. Kamin, would the Fed consider purchasing

sovereign debt held by U.S. banks to prevent this further deterioration of the European situation?

Mr. KAMIN. I will defer to President Dudley, who is on the Federal Open Market Committee and is the vice chairman——

Mr. MCHENRY. Mr. Dudley.

Mr. DUDLEY. Well, I can’t, obviously, speak for my fellow members on the committee, but I think the——

Mr. MCHENRY. Would you consider——

Mr. DUDLEY [continuing]. Bar to doing that would be extraordinarily high. I cannot imagine the circumstances in which we

would think that was an appropriate action from a monetary policy

perspective.

We have the legal authority to buy foreign sovereign debt, but

this is really surrounding our ability to conduct foreign exchange

intervention operations. We have a very small portfolio that we run

with the Treasury that represents our foreign exchange reserves.

And we have never gone out and bought large portions of foreign

sovereign debt in the history of the Fed that I am aware of.

Mr. MCHENRY. Okay. Would you consider accepting European

sovereign debt as collateral against loans?

Mr. DUDLEY. I think we——

Mr. MCHENRY. Against additional loans.

Mr. DUDLEY. You know, we need to be secured to our satisfaction. And we do take a lot of care in our discount window lending

and our other lending to make sure that the collateral that we give

is appropriately haircutted and the Federal Reserve is well-protected.

That is one reason why, even despite the large amount of sums

that the Federal Reserve disbursed during the financial crisis, we

did not lose a penny. We had no credit losses whatsoever. And the

Federal Reserve—my understanding is that the Federal Reserve

has never had a credit loss.

Mr. MCHENRY. So—excuse me—you would consider it?

Mr. DUDLEY. I wouldn’t necessarily rule it out. If the collateral

is good collateral and is appropriately haircutted, I don’t think I

would want to rule that out——

Mr. MCHENRY. Even if it is not Triple A rated?

Mr. DUDLEY. We accept collateral that is non-Triple A rated. So

the important point is the quality of the collateral, the appropriateness of the pricing of that collateral, and the appropriate level of

haircuts. You know, you do have to have protection in terms of the

size of the haircuts, so that is important. But I wouldn’t categorically rule that out.

Mr. MCHENRY. Should European banks consider equity raising?
53

Mr. DUDLEY. You would have to talk to the European banking

authorities, but the——

Mr. MCHENRY. Thank you.

Mr. DUDLEY [continuing]. Stress test there did suggest there was

a capital need. And equity raising, you know, I think I would be—

I think that would be a welcome part of that. Because if they raise

more equity, then they have to do less deleveraging.

Mr. MCHENRY. And that would be far preferable.

Mr. DUDLEY. That would be my personal preference.

Mr. MCHENRY. All right.

Mr. Kamin.

Mr. KAMIN. Yeah, I mean, they are already considering equity

raising. That is one of the ways in which they could achieve their

new higher capital standard, so that is very much in play.

Mr. MCHENRY. All right.

So, with that, you know, I realize your time is very important

here. We have votes on the floor. Members have had ample opportunity to ask questions this morning.

This hearing was about proper oversight from Congress of what

our political branch at Treasury is doing and to address what is

happening in Europe, what we see on the front pages and what

raises great concern across this country and around the world.

We also want to see what the range of options are from our central bank. And we realized, with this hearing, that there are an

enormous number of questions about this. But we do see that our

central bank, both with New York Fed represented here today and

the Board of Governors, certainly have looked at the risk associated

with this and have a range of plans that they can pursue and a

number of policy options that they have. I think that was very

clear from today.

What was disappointing is to not see that same level of planning

from the Treasury. And I think that would be additional questions

that we would have here on the Hill, as to what the Treasury

would consider going forward. And we hope to have additional

oversight to make sure that we have that disclosed to the public.

So we thank you so much for your testimony. Thank you for your

willingness to engage in these discussions. We realize the questions

were broad-reaching this morning, but we certainly appreciate your

willingness to be here. Thank you for your service to our government and to our people.

And, with that, this committee stands adjourned.

[Whereupon, at 11:17 a.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]
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