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67–232—PDF 2010

S. HRG. 111–1016 

PRESIDENT’S PROPOSED FEE ON FINANCIAL 

INSTITUTIONS REGARDING TARP 

HEARINGS 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

APRIL 20, MAY 4, AND MAY 11, 2010 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

(III) 

C O N T E N T S 

APRIL 20, 2010 

OPENING STATEMENTS

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3 

WITNESS

Barofsky, Hon. Neil, Special Inspector General for the Troubled Asset Relief 

Program (SIGTARP), Department of the Treasury, Washington, DC ............. 5 

MAY 4, 2010 

OPENING STATEMENTS

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 31 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 32 

WITNESSES

Geithner, Hon. Timothy F., Secretary, Department of the Treasury, Washington, DC ............................................................................................................. 34 

Bartlett, Hon. Steve, president and CEO, Financial Services Roundtable, 

Washington, DC ................................................................................................... 70 

Sorensen, John K., president and CEO, Iowa Bankers Association, Johnston, 

IA ........................................................................................................................... 72 

Chessen, James, chief economist, American Bankers Association, Washington, 

DC .......................................................................................................................... 73

Baird, Patrick S., chairman, AEGON USA, LLC, Cedar Rapids, IA .................. 75 

MAY 11, 2010 

OPENING STATEMENTS

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 81 

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 82 

WITNESSES

John, David C., senior research fellow, The Heritage Foundation, Washington, 

DC .......................................................................................................................... 84

Elliott, Douglas, fellow, economic studies, Brookings Institution, New York, 

NY ......................................................................................................................... 86 

DeMarco, Edward, Acting Director, Federal Housing Finance Agency (FHFA), 

Washington, DC ................................................................................................... 88 

McLernon, Nancy, president and CEO, Organization for International Investment (OFII), Washington, DC ............................................................................. 90 

Page

IV 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baird, Patrick S.: 

Testimony .......................................................................................................... 75 

Prepared statement .......................................................................................... 105 

Response to a question from Senator Bingaman ........................................... 109 

Barofsky, Hon. Neil: 

Testimony .......................................................................................................... 5 

Prepared statement .......................................................................................... 110 

Responses to questions from committee members ......................................... 118 

Bartlett, Hon. Steve: 

Testimony .......................................................................................................... 70 

Prepared statement .......................................................................................... 137 

Responses to questions from committee members ......................................... 140 

Baucus, Hon. Max: 

Opening statements...................................................................................... 1, 31, 81 

Prepared statements............................................................................. 142, 144, 146 

Chessen, James: 

Testimony .......................................................................................................... 73 

Prepared statement .......................................................................................... 148 

Responses to questions from committee members ......................................... 157 

DeMarco, Edward: 

Testimony .......................................................................................................... 88 

Prepared statement with attachment ............................................................. 161 

Elliott, Douglas: 

Testimony .......................................................................................................... 86 

Prepared statement .......................................................................................... 174 

Geithner, Hon. Timothy F.: 

Testimony .......................................................................................................... 34 

Prepared statement .......................................................................................... 178 

Responses to questions from committee members ......................................... 180 

Grassley, Hon. Chuck: 

Opening statements...................................................................................... 3, 32, 82 

Prepared statements..................................................................................... 199, 201 

John, David C.: 

Testimony .......................................................................................................... 84 

Prepared statement .......................................................................................... 203 

McLernon, Nancy: 

Testimony .......................................................................................................... 90 

Prepared statement .......................................................................................... 208 

Sorensen, John K.: 

Testimony .......................................................................................................... 72 

Prepared statement .......................................................................................... 215 

Responses to questions from committee members ......................................... 223 

COMMUNICATIONS

Investment Company Institute ............................................................................... 227 

Mortgage Bankers Association ............................................................................... 230 

(1) 

PRESIDENT’S PROPOSED FEE ON FINANCIAL 

INSTITUTIONS REGARDING TARP: PART 1 

TUESDAY, APRIL 20, 2010 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:10 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Schumer, Nelson, Carper, Grassley, Snowe, 

and Crapo. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; John Angell, Senior Advisor; and Mary 

Baker, Detailee. Republican Staff: Emilia DiSanto, Special Counsel 

and Chief Investigative Counsel; Jason Foster, Senior Investigative 

Counsel; and Jim Lyons, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

The epistle of James says, ‘‘See how great a forest a little fire 

kindles!’’ The financial crisis of 2008 kindled a fire that spread 

throughout our entire economy. That fire destroyed more than 8 

million jobs. That fire led to more than 6 million foreclosures. And 

that fire led to 3 million bankruptcies. 

The spark for that fire was lit in the financial industry. To generate huge profits and big bonuses, the financial sector was playing 

with fire. Big banks were providing bad mortgages that they should 

have known folks were not going to be able to pay. And they would 

have known it if they had done their homework on the loan applications. 

Next, big banks bundled good and bad mortgages together and 

sold them to investors. They called these bundles collateralized 

debt obligations, or CDOs, and they called selling them securitization. Then the big banks insured the collateralized debt obligations 

against failure. They called their insurance policies ‘‘credit default 

swaps.’’ Credit default swaps allowed the banks to protect their 

risks and make big profits, even if the mortgages that they were 

writing went bad. Basically, they had to hedge their bets and made 

a lot of money on the transactions. 

Unfortunately, the financial system did not have enough money 

to cover all of its bets. Now there are charges that big banks may 

have been both assembling packages of mortgages on one side and 

betting against them at the same time. 

2 

* For more information, see also, ‘‘Background and Issues Related to the Administration’s Proposed Tax on Financial Institutions,’’ Joint Committee on Taxation staff report, April 16, 2010 

(JCX–26–10), http://www.jct.gov/publications.html?func=startdown&id=3681. 

Then the spark kindled the flame, and suddenly our Nation’s 

economy was engulfed in the fire. The Dow plunged, dropping to 

just above 6,500 in March of 2009. Unemployment rose above 10 

percent. Then-Treasury Secretary Paulson knew that he had to act. 

He came to Congress with a proposal to save the economy. The proposal turned into the emergency law that authorized the Treasury 

to distribute almost $700 billion through the Troubled Asset Relief 

Program, otherwise known as TARP. 

I knew when we were working on this legislation that we needed 

to hold the Treasury and TARP recipients accountable for how the 

money was spent. TARP was spending hard-earned taxpayer dollars to save the big banks, and those big banks had been paying 

out bonuses worth billions of dollars. Those big banks had sometimes been rewarding excessive risk-taking. 

So I proposed that we build right into the law a special unbiased 

investigator. This investigator would ensure the transparency and 

accountability of TARP funds. That proposal resulted in the Special 

Inspector General for the Troubled Asset Relief Program, and that 

person is sitting before us today, Mr. Neil Barofsky. Welcome, Mr. 

Barofsky. 

Mr. Barofsky is responsible for overseeing the TARP program. 

He keeps track of where the money goes, how it is spent, and 

whether it is paid back. That leads us to the purpose of today’s 

hearing. The TARP legislation anticipated that there might be 

losses. Congress anticipated that the banks might pay back something less than all the TARP money. The most recent estimates anticipate that the Treasury will end up losing about $89 billion. We 

need to think about how we are going to get that money back on 

behalf of American taxpayers. 

In January, President Obama proposed a bank fee to recover 

TARP losses. His fee is estimated to raise $90 billion over 10 years. 

It would apply to the 50 largest financial institutions in the country. This committee is going to take some time, over the course of 

several hearings, to consider the President’s proposal and other options to recover TARP losses. We want to understand the best approach to designing a fee, to whom it should apply, and how it 

might affect the economy and the markets. We need to learn 

whether banks will pass it on to consumers and how it might affect 

lending to small businesses. We need to take into account what European countries might do as they consider similar levies.* 

We will begin today with Mr. Barofsky. We will ask who has benefitted from the TARP program, how much they have been repaid, 

and why some TARP beneficiaries might never be able to pay back 

the American taxpayers. The financial crisis of 2008 kindled a 

great fire that spread throughout our entire economy. So let us examine how widely that fire has spread. Let us see who benefitted 

from our efforts to put out the fire. And let us try to learn what 

we can to prevent such further economic fires in times to come. 

Senator Grassley? 

3 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. I welcome you here, Mr. Barofsky. You and 

I are both big believers in transparency, oversight, and accountability, and I thank you for leading that effort. Even though it is 

on a very narrow area of government, it sure is an important one, 

when $700 billion was put out by Congress. 

Today, we are discussing what the President calls a ‘‘financial 

crisis responsibility fee.’’ However, the Assistant Secretary for Tax 

Policy told the dozens of people in attendance at a briefing for Senate staff on the President’s fiscal year 2011 budget earlier this year 

that the President’s proposed fee is actually an excise tax. 

This is similar to the name game that the administration played 

with excise taxes in their health care bill. Although they referred 

to the excise taxes as fees, the legislative text clearly states that 

they are actually excise taxes. I will refer to it as the TARP tax 

and not the bank tax, as some call it, because the proposal applies 

not only to banks, but also to insurance companies, securities brokers, and thrifts, among others. 

The statute that created TARP required the President to submit 

a plan by 2013 to recover any losses under TARP so that the taxpayers are actually repaid for any TARP losses. However, 3 years 

before it was required the President proposed this excise tax, the 

TARP tax. One problem that surfaced recently is that congressional 

Democrats are already reportedly planning ways to spend the 

money raised by the proposed TARP tax. 

One proposal gaining steam among many on the other side lately 

is to add the TARP tax to the Financial Regulatory Reform bill. 

The congressional majority is so strapped for money to pay for outof-control spending, that they are looking to the banks and other 

financial institutions for money. 

This reminds me of the story about a reporter asking Willy Sutton, a notorious bank robber, why he robbed banks. Sutton allegedly said, ‘‘Because that’s where the money is.’’ I cannot emphasize 

this next point enough: if Congress decides to pass the TARP tax, 

money should go only towards paying down the deficit. Otherwise, 

the TARP tax would not even pay for the losses from TARP, it 

would just enable more taxing and spending by those who want to 

spend more. 

All economists state that corporate entities do not actually bear 

the burden of taxes—people do. I wanted to know which people 

would bear the burden of the proposed TARP tax, so I wrote a letter asking the nonpartisan experts at the Congressional Budget Office and Joint Committee on Taxation a series of questions along 

that line. 

The CBO responded to my letter by saying that customers would 

probably pay higher borrowing rates and other charges. Employees 

might bear some of the cost, and investors could bear some of the 

cost. The CBO also said that the TARP tax ‘‘would also probably 

slightly decrease the availability of credit for small businesses.’’ In 

addition, the CBO said, ‘‘for the most part, the firms paying the 

fees would not be those that are directly responsible for loss realized by the TARP.’’ 

4 

One other item from the CBO letter worth noting is that the 

TARP tax would not apply to firms in the automotive industry. 

That is really odd, since CBO’s March 2010 TARP report states 

that the automotive industry accounts for $34 billion of the program’s estimated total cost of $109 billion. Chairman Baucus and 

I invited GM to testify before our committee at one of the later 

hearings, but GM representatives said that they did not want to 

testify. I think it is pretty obvious that the GM silence is deafening. 

On another TARP-related matter, I want to thank you, Mr. 

Barofsky, for investigating the multi-million-dollar severance payments that Treasury is allowing TARP recipients like AIG to pay 

their departing executives. As you know, I have communicated on 

several occasions with Treasury and the TARP Special Master for 

Executive Compensation about this troubling issue, and I have basically run into a stone wall. 

I am also pleased that you, Mr. Barofsky, are going to investigate 

the possible conflicts of interest on the part of key people at Treasury who worked on the TARP executive compensation regulations. 

Since those regulations helped executives walk away with huge 

severance payments, we need to find out if they were drafted by 

people who used to represent the very executives affected by the 

regulations. Treasury claims that all of the proper recusals were 

made, but it has provided none of the documentation necessary to 

verify their claims. So I trust that you will be able to get to the 

bottom of these important questions and report back to this committee in the near future. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

It is now my honor to introduce you, Mr. Barofsky. Thank you 

very much for your service to the country. I am very gratified, 

frankly, that we have named this position, set out this position in 

the legislation. I can remember thinking how important it was to 

find somebody to be kind of like an auditor to have the authority 

and power to see how this money is being spent. We also designed 

it in a way to give you the powers that you needed, not just housed 

in, say, some back room at the Department of the Treasury. 

But second, I am very happy with your performance. That is, we 

selected a very good person to do this job, and we thank you very 

much for your service to the country. I think you have helped restore some confidence of the American people that this program is 

conducted properly, as much confidence as any one person could. 

But thank you very much for your service to the country. We would 

like to hear from you. 

Senator GRASSLEY. Mr. Chairman, I want to thank you for saying what you just said, because I think it is so important in the 

checks and balances of government, and particularly in the oversight that committees have to do—and this committee does a good 

job of oversight—that they know that you are behind what is being 

done here and what he is doing. I think it is so important, and I 

thank you so much for saying that. 

The CHAIRMAN. Mr. Barofsky? 

5 

* The SIGTARP Quarterly Report to Congress, dated April 20, 2010, can be found at http:// 

www.sigtarp.gov/reports/congress/2010/April2010lQuarterlylReportltolCongress.pdf. 

STATEMENT OF HON. NEIL BAROFSKY, SPECIAL INSPECTOR 

GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM 

(SIGTARP), DEPARTMENT OF THE TREASURY, WASHINGTON, 

DC 

Mr. BAROFSKY. Chairman Baucus, Ranking Member Grassley, 

members of the committee, first of all, I would like to thank the 

chairman and the ranking member for your kind words today and 

your unwavering support of our office as we have been conducting 

our oversight for now nearly a year and a half. It is a privilege and 

an honor for me to appear here today and to release to this committee our most recent quarterly report to Congress.* 

We do have some good news to report. Aspects of the financial 

system, there are clear signs, are on their way to recovery. Many 

of the larger TARP banks have been able to repay their TARP 

funds far in advance of what anyone anticipated, and, as a result, 

the expectations for losses to the TARP, while certainly still substantial, have been trending downwards, with OMB’s recent estimate back in February of approximately $127 billion, and the CBO 

estimating at $109 billion, and both of them estimating that the 

concentration of losses was in three areas of the TARP: support to 

AIG, support to the automotive industry, and support to struggling 

homeowners. 

On the other hand, while TARP does appear to be succeeding in 

its statutory goal of getting Wall Street back on its feet, it is not 

meeting its goal of getting Main Street back on its feet. Long-term 

unemployment remains at the highest in recent memory. Smaller 

and community banks are failing at an alarming rate, with 50 already this year, and the statutory goal of preserving home ownership is falling horribly short: 2.8 million foreclosures last year, with 

estimates for this year that will even eclipse that. 

The Home Affordable Modification Program (HAMP), Treasury’s 

TARP-funded mortgage modification program, was originally intended to help 3 to 4 million homeowners stay in their homes by 

modifying their mortgages to sustainable levels, but it appears that 

it may never come close to meeting that goal, with fewer than 

230,000 permanent modifications more than a year into the program. 

Last month, we issued an audit report on the HAMP program 

where we detailed some of the failings of the program and made 

recommendations, addressing areas such as transparency, problems 

with Treasury’s execution of the program, and problems and concerns about the program’s very design, which leaves it vulnerable 

to ultimate failure because of high levels of re-defaults, that is, circumstances when borrowers, even after they receive modifications, 

are either unable or unwilling to continue making their payments 

because of the high rate of the payments or because of being hopelessly under water. 

In an apparent response, within days of the release of that report, Treasury announced major modifications to the HAMP program, addressing for the first time the issue of negative equity for 

underwater mortgages, one of the significant indicators of reVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
6 

default. While Treasury’s actions have addressed some of the recommendations and issues raised by SIGTARP, they, too, present 

their own set of concerns. 

In our quarterly report, we identify several of those issues and 

make further recommendations in areas about continuing problems 

with transparency, problems with the potential vulnerabilities to 

fraud, and problems with the design of some of these revisions that 

may lead to them being ineffective or leading to arbitrary results 

for certain borrowers. 

It is important for Treasury to address these issues that we have 

raised here in this quarterly report, in our audit, and similar concerns raised by the Congressional Oversight Panel in GAO, otherwise it risks that the HAMP program will be remembered not for 

being the catalyst for recovery in the housing market, but for its 

bold announcements, modest goals, and meager results. 

In our quarterly report, we also review what we have been doing 

in our Investigative Division. When the chairman and the ranking 

member insisted upon the creation of SIGTARP, over the objections 

of many, including those at Treasury and others, they did so in recognition that, in part, with a program of this size, it would inevitably draw those who would seek to profit criminally off of a national crisis. At SIGTARP, we have been building a sophisticated 

white-collar investigative law enforcement agency to meet that 

threat. 

In this past quarter, as detailed in our quarterly report, we have 

had some success. Charles Antonucci was indicted or criminally 

charged up in the Southern District of New York for his fraud as 

the CEO and president of Park Avenue Bank for trying to steal $11 

million from the TARP. 

On the civil side, we worked with the New York State Attorney 

General to secure civil securities fraud charges against Bank of 

America and its former CEO and CFO for their role in a fraud that 

affected the TARP, and we supported the SEC in its case that resulted in a $150-million settlement with Bank of America and resulted in important governance changes at the bank. 

Out in California, we assisted the U.S. Attorney’s Office in the 

Southern District of California in obtaining criminal charges 

against Glenn Rosofsky and Michael Trap for their role in a fraud 

that is alleged to have brought in more than $1 million in a scheme 

that was designed to take criminal advantage of struggling homeowners by falsely promising them mortgage modifications that 

never materialized. 

Mr. Chairman, Mr. Ranking Member, members of the committee, 

again, it is a privilege to be here, and I look forward to answering 

any questions that you may have. 

The CHAIRMAN. Thank you, Mr. Barofsky. 

[The prepared statement of Mr. Barofsky appears in the appendix.] 

The CHAIRMAN. I would like to start off by just asking, at this 

point, what do you think the losses are and how long will it take 

to kind of realize definitely what those losses might be? One can 

argue that over the next few years that the losses will be less, but 

it would be helpful to the committee if you could say what the 

7 

losses are today and say how much that will be reduced over the 

next several years. 

Mr. BAROFSKY. It is very hard to determine. Our role basically 

is to report what others have done as far as the analysis of these 

results, what OMB and CBO have done. They see those areas really as concentrated, as I said before, in three areas: AIG, which they 

estimate being between $36 to $50 billion in loss; in the automotive 

industry, between $31 to $34 billion in loss; and of course, in the 

housing program, which will ultimately be an entire loss because, 

the way the program is designed, it is a subsidy. It is not intended, 

or there is really no mechanism for any recovery. 

Whether those losses will be realized in the longer term really 

will depend in large amount on what happens with the economy, 

particularly with the automotive industry. That is going to depend 

to a certain extent, as the economy recovers, are people going to 

buy more cars? Are GM and Chrysler and GMAC going to be able 

to return to profitability? 

Because of our interest in those companies, AIG and the automotive industry, it is an equity investment. Our fortunes, and the 

ability for them to repay, will hinge and depend on how successful 

they are in rebuilding those companies. It is difficult to determine. 

I think it will take several years for us to get a sense, a real sense, 

of what those losses may be, but, if the economy improves, we certainly hope to see that these losses will continue to decrease. 

The CHAIRMAN. What is your sense of this proposed bank fee, 

bank tax, and who it is levied on, and to what degree will that 

allow the TARP expenditures to be recouped, to be repaid? If you 

look at whom the tax is levied on, as it is proposed by the President, anyway, to what degree, and how efficiently, will that return 

dollars back to taxpayers? 

Mr. BAROFSKY. Well, I think section 134 of the Emergency Economic Stabilization Act (EESA), of course, is the statutory mechanism that provides for recoupment. There is certainly a lot of flexibility in there in how the recoupment is directed, but there is some 

flexibility in how it is ultimately designed and who it is targeted 

for. It is very broad in its language to the financial industry. I 

think it is borne in a certain way because of the way TARP was 

originally intended, which was, of course, to be direct purchases of 

troubled assets, mortgage-backed securities. 

I think, as originally envisioned, the government is going to buy 

up to $700 billion worth of these securities, and then in 5 years 

make a determination of how those investments are doing. If they 

are short, it would make sense to make the financial industry, 

those from whom Treasury would have purchased these assets, 

come back and levy a fee or a tax in order to recoup those investments. 

It becomes more difficult because of the way TARP has morphed 

now into 13 different programs, a lot of them primarily in capital 

investments. So those that are more able to repay will have repaid 

and there would not be a loss associated. Those who are doing 

poorly, and therefore would not be able to necessarily repay a tax— 

like if AIG and the automotive industry are short—it would be 

more difficult to impose a tax on them. So I think that creativity 

8 

and flexibility will be important in fashioning the appropriate result. 

The CHAIRMAN. Some people suggest, first of all, that TARP 

money went to banks and that that helped the banks, but it also 

helped the economy generally. I guess the argument is, if the fee 

is essentially on banks, it is on those institutions as well that— 

what, it is appropriate because the benefits of TARP in the first 

place were not only specifically directed, but also widespread? I do 

not quite understand the argument. Why should the fee only be on 

certain institutions and not more widely spread, even though those 

other institutions got a lot of the benefit from TARP? 

Mr. BAROFSKY. Well, I think that certainly there are multiple 

sides to this argument and this discussion. It really boils down to 

a policy determination for the Congress and the administration to 

decide who is appropriate to fulfill section 134’s requirement for 

recoupment, but there are certainly arguments on both sides. 

The financial industry and the larger banks certainly benefitted 

beyond just the dollars that were invested in them, and not just 

from the TARP, but from, as a whole, the response from the government to the financial crisis, the implicit guarantee that they 

have of government support. It has been widely reported that they 

are able to more easily and more cheaply raise money than their 

smaller counterparts, giving them a competitive advantage and giving them opportunities for high profits. So, it is a very complicated 

question, Mr. Chairman, for sure. 

The CHAIRMAN. Do you have any thoughts on how the fee is 

structured? As I understand it, it is significantly structured to discourage over-leveraging. Your thoughts on the structures as opposed to, say, a profits tax. 

Mr. BAROFSKY. To be honest with you, Mr. Chairman, until we 

see something hard and in writing as far as a legislative proposal, 

when it is in this early stage of discussion, we do not really get involved from an oversight perspective. Once it is more fully formed 

and we are going to be responsible for overseeing it, is sort of when 

we roll up our sleeves and dig into it. But we really have not had 

the opportunity to fully analyze the proposal as it has been described in the press. 

The CHAIRMAN. Thank you. My time has expired. 

Senator Grassley? 

Senator GRASSLEY. Thank you, Mr. Chairman. 

A year ago, CBO and OMB projected the loss from TARP to be 

$250 billion. OMB now estimates TARP will lose $127 billion; CBO 

estimated it at $109 billion. It has been reported recently in a New 

York Times article that I have here that some Treasury officials— 

I think unnamed, as I recall—expect the bail-out program to ‘‘eventually turn from red to black.’’ If Treasury says that eventually 

there may not be losses, does this excise tax make sense? Before 

you answer that, would the amount of losses, if any, not be more 

certain in 2013, the year the TARP law says the President is supposed to propose a plan to recoup taxpayers’ losses from TARP? 

Mr. BAROFSKY. Certainly with more time there will be more certainty as to the extent of the losses. 

Senator GRASSLEY. OMB says that the auto industry is responsible for $31 billion of all TARP losses; CBO says that they are reVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
9 

sponsible for $34 billion. Does it make any sense to levy a tax to 

recover TARP losses and then carve out GM and Chrysler, the companies responsible for 30 percent of the losses? 

Mr. BAROFSKY. It is a difficult question, Senator. As I noted, 

based on the structure of the way section 134 was originally intended as the TARP was envisioned versus how it is now, that is 

a difficult policy question. 

Senator GRASSLEY. In March of 2009, and that is obviously just 13 months ago, the President announced an initiative to use $15 

billion in TARP funds to fund what are called SBL (Small Business 

Lending) loans. However, small business did not actually receive 

that money, and lending to them has not increased because the initiative was reduced to a $21-million pilot program. So, there is a 

difference between the $15 billion intended and the actual $21 million that is a pilot program. In January, the administration proposed taking $30 billion out of 

the TARP program and setting up a separate, non-TARP program 

to support small business lending. We do not have actual legislative language yet, but I am concerned about what that would mean 

for the ability of your office to conduct oversight. 

Could you explain why the previous small business lending program never materialized and why you think you should retain jurisdiction to oversee the newly proposed $30-billion program, and 

also, what are the risks to accountability and transparency if oversight from your office would be blocked by a change of legislative 

language? 

Mr. BAROFSKY. Senator, if I may answer your second question 

first. We think that this would be tremendously dangerous and 

wasteful to the taxpayer if this $30-billion program is taken out of 

the TARP without our oversight continuing. 

There is virtually no difference between the newly proposed program and the existing Capital Purchase Program. It involves the 

same five regulators making decisions on who gets money and who 

does not. It is the same capital structure. It is the same eligibility 

criteria. It is the same type of investments. It is actually the same 

money, TARP money. We estimate that approximately 95 percent 

of existing TARP recipients, because of the way the program is 

going to be set up, can just transfer their TARP investments into 

SBL investments. 

So 95 percent of the CPP recipients will not change anything 

other than moving out of the TARP and into this new program. 

Meanwhile, at SIGTARP we have grown organically with the Capital Purchase Program. It was there when we were created. A large 

part of our oversight, on the audit side, the reporting side, and on 

the investigation side has been built around growing and learning 

the CPP program, which this Small Business Lending Fund is the 

mirror image of. 

From an audit side, we have done audits into the decisionmaking process, how it works, and the impact of outside influences. 

We have made a series of recommendations about transparency 

and program design. Perhaps most importantly, on the investigation side, we have conducted literally dozens of criminal investigations into those who have tried to criminally profit off of the Capital Purchase Program. We have developed a very sophisticated foVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
10 

rensic team. These are the types of crimes that the SBLF will also 

be—as I said, it is virtually identical to CPP. 

Our complex accounting types of fraud, capital raise issues, the 

issues that we have already seen that we have spent a significant 

amount of time learning and training and getting up to speed on— 

to take this and to throw away the 14 months of expertise and 

training that we had, from an audit perspective, from a criminal 

investigative perspective, and taking that out and leaving this program adrift, essentially, with a new oversight body that may or 

may not have the resources to get up to speed, certainly will be a 

gear-up process that could take at least a year to get even close to 

where we are, even if they have the necessary resources and expertise, I think would be a tremendous disservice to the American taxpayer and it would essentially leave a program, which in many 

ways has a greater vulnerability to being taken advantage of because of the incentive programs, essentially without effective oversight. 

I think it would be a tremendous waste of taxpayer dollars, and 

I would strongly encourage this Congress to include SIGTARP 

oversight. It is not an expansion of our jurisdiction; it is the continuation of our jurisdiction over the same exact parties with the 

same exact money. I was very disappointed when the administration changed course on us after initially saying that we were going 

to be included in the proposed legislation, and then later telling us 

that we would not. 

Senator GRASSLEY. Would it not be more accurate to say that, if 

we do not do anything, you will be included? Is it your view as a 

lawyer, if they set this up, we have to transfer what you do now 

over to that? I thought you would automatically have jurisdiction 

unless the law was changed to take it away from you. 

Mr. BAROFSKY. If they rip this out of the TARP, as they are suggesting doing, we may have jurisdiction to a certain extent on some 

of the monies, but we would not necessarily have complete jurisdiction over the program. 

Senator GRASSLEY. All right. Well, then I think you have answered my question, that you will have jurisdiction unless Congress changes the existing law. 

Mr. BAROFSKY. Yes, that is correct. 

Senator GRASSLEY. I hope the members of this committee will be 

aware of that so that we do not let something like that slip 

through. 

I will wait for a second round for other questions. 

The CHAIRMAN. All right. Good. 

Senator Nelson? 

Senator NELSON. Thank you for your service. 

A big part of the ultimate losses of TARP is coming from AIG, 

and a big part of the losses in AIG that will not be paid back is 

as a result of the credit default swaps being paid off, these insurance policies, at 100 cents on the dollar. 

Now, do you think that these derivative counter-parties, such as 

Goldman Sachs, that received the preferred treatment, put them at 

the front of the line when the circumstances occurred as they did 

with AIG? Do you think that they should be put at the front of the 

line? 

11 

Mr. BAROFSKY. I think that, when making these policy considerations, everything should be on the table. The fact is that Goldman 

Sachs and seven of the eight largest counter-parties refused to negotiate with the Federal Reserve Bank of New York to negotiate 

concessions, which ultimately did lead them to receiving 100 cents 

on the dollar. 

We issued an audit report on this where we explored the reasons 

and the justifications for this, but I certainly think it is a relevant 

policy consideration among the other policy considerations in designing the section 134 EESA recoupment that is contemplated by 

the statute. 

Senator NELSON. Well, what in the world made the Federal Reserve sit there and take that by these counter-parties saying, oh, 

we are not going to negotiate with you on this? It seems like the 

Federal Reserve should have been in the driver’s seat. 

Mr. BAROFSKY. Well, Senator, we agree. When we released our 

audit report, we went through the reasons that the Federal Reserve gave for what we described as a very ineffective negotiating 

strategy that was ultimately doomed to fail, as well as what we 

saw was a simple lack of effort, even within certain limitations 

they put on themselves with the negotiations—things like requiring 

that they would not do any deal unless all of the counter-parties 

agreed, or refusing to put a little pressure on them because of their 

status as a regulator to sort of encourage the negotiations to move 

forward instead of saying to them, basically, do not worry, it is just 

a voluntary negotiation—but the fact is that they did not do what 

they had done just a couple of weeks earlier with respect to the recipients of TARP funds and the Capital Purchase Program. 

In other words, the then-president of the Federal Reserve, now 

Secretary Geithner, did not get on the phone and call the CEOs or 

call a meeting of the CEOs of the big banks and the counter-parties 

and call them together and make a strong emphasis on a negotiation like they did with CPP, telling them that this was important 

for the country, pointing out the incredible support that the Federal Reserve and the taxpayer had given to AIG, and they would 

all have suffered, most likely, horrific losses without that support, 

and using that bully pulpit to try to voluntarily get negotiated fees, 

even after one of the banks, BBS, actually agreed and said in certain circumstances they would agree to a concession. We have been 

critical of that, because we think at the very least they should have 

tried a little bit harder. 

Senator NELSON. Of the $89 billion that you think that we are 

not going to get back, the people, the taxpayers are not going to 

get back from the bail-out, is most of that attributable to AIG? 

Mr. BAROFSKY. To be clear, all we are doing is, we have not done 

our own analysis. We are just sort of reporting what CBO and 

what OMB have reported. But it does look like, based on their estimate, that anywhere from $36 to $50 billion of their estimated 

losses will be attributable to AIG. 

Senator NELSON. And, of course, all of those credit default swaps 

that were paid off with all those firms, like $13 billion just for 

Goldman Sachs and go on down the line, that would total up to 

about $50 billion, would it not? 

12 

Mr. BAROFSKY. Just on the Maiden Lane facilities alone, which 

is the portion where the Federal Reserve purchased from those 

counter-parties at market value the CDOs, the other half of that, 

the collateral that had been posted, most of that money came from 

the taxpayer through the Federal Reserve and back-paid. That 

alone was tens of billions of dollars. 

Senator NELSON. This is an outrage. 

Let me ask you about HAMP. Would you talk more about your 

recommendations regarding HAMP’s effectiveness and your recommendations on fraud and the voluntary nature of HAMP’s principal reduction program? 

Mr. BAROFSKY. With respect to fraud, in the new designs of the 

program it increases incentives in short sales, which are circumstances where Treasury is going to be providing incentives to 

homeowners, as well as to the servicers, to encourage them to basically turn in the keys to their house and have it being sold to someone for less than what the mortgage is actually worth, so, if a 

house is worth $100,000 and the mortgage is $150,000, to effect 

that sale at $100,000, and then for the servicer and the mortgage 

investor to release the borrower for the difference. It is basically a 

short sale. 

Certainly encouraging those, we have no problem with that as a 

program design. Short sales are generally regarded as being less 

expensive to investors. It is not as painful as foreclosure; it is not 

as expensive as foreclosure. The problem is that these types of 

sales have historically been vulnerable to a special type of short 

sale fraud. It is called ‘‘flopping,’’ sort of the opposite of flipping. 

That is based on an artificial deflation of the value of the home. 

Say the home is really worth $125,000 in my example, but there 

is a benefit for the fraudsters, if they could get the investors, the 

people who own the mortgage, to believe that it is only worth 

$100,000, so they provide false information. If they do that, then 

they get the home below market value and could flip the home almost instantly and make a nice, tidy profit. 

The problem is the valuation standards that Treasury is anticipating using on this are basically not very robust. It is broker opinions. Even that is not standardized. It is based on the review of the 

servicer. I am sorry; I see we are running out of time. So our recommendation is simply that, with this program and other programs 

involving principal reduction, they do what the FHA does, which is 

require a certified appraiser to make sure there is a good thirdparty look to prevent those types of fraud. 

Senator NELSON. You ought to take a look in Florida where some 

of this flopping is going on right now. 

Mr. BAROFSKY. No. Absolutely. It is a hotbed of that activity in 

the State of Florida. 

The CHAIRMAN. Thank you, Senator. 

Senator Carper? 

Senator CARPER. Thanks, Mr. Barofsky. Welcome. Thank you for 

your stewardship and the good work that is being done on this 

front. 

I just want to go back in time a little bit. You said this, but I 

just want to make sure that it is clear. When the last administration came to the Congress and asked for us to fund the TARP proVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
13 

gram, my recollection was they asked for about $700 billion or so. 

Is that right? 

Mr. BAROFSKY. That is correct. 

Senator CARPER. Yes. And the proposed use for the money at 

that that was to allow for the purchase of illiquid assets that were 

being held by a variety of entities. Is that correct? 

Mr. BAROFSKY. That is correct. 

Senator CARPER. For the most part, we did not use the money 

for that, but we ended up taking a different approach, and we injected a fair amount of that money into large financial institutions 

and we bought their preferred stock, as I recall. Is that correct? 

Mr. BAROFSKY. That is absolutely correct. 

Senator CARPER. Yes. What was the size of those institutions, 

was it $50 billion and above? Help me with that. 

Mr. BAROFSKY. It is huge. The initial roll-out, the first $125 billion, went to the largest of the financial institutions. Over time, as 

the capital purchase program expanded, ultimately it funded more 

than 700 institutions. We have breakdowns in our quarterly report 

of the various sizes of them, but they range from investments, even 

today with the repayments, as low as $300,000 up to Citi, which 

is still holding onto $25 billion. 

Senator CARPER. All right. Thank you. 

When we injected capital into those institutions, they had an obligation to us to pay, on our preferred stock, dividends. Is that correct? 

Mr. BAROFSKY. That is correct. Five percent. 

Senator CARPER. And were there any opportunities for them to 

lower that 5 percent by lending money that was injected to improve 

their balance sheet? 

Mr. BAROFSKY. To date that has not been part of the TARP program. It is part of the announced proposal for SBLF. 

Senator CARPER. How are we doing in terms of collecting the dividend income that is owed to the Treasury? 

Mr. BAROFSKY. Generally on a gross level, it is going pretty well. 

There have been about 104 TARP recipients who have missed dividend payments. Some have caught up. I think perhaps a couple 

dozen have caught up with those payments, so that leaves a balance that has still not made payments. That also includes a few 

TARP recipients that have failed, and obviously will never be making future dividend payments. 

Senator CARPER. Can you quantify the dividend obligations that 

sort of have not been fulfilled to the Treasury, just roughly? 

Mr. BAROFSKY. We do have it in our quarterly report. I believe 

it is $100-something million, but I can get you the exact number. 

Senator CARPER. One hundred and something million? 

Mr. BAROFSKY. I believe so. But as I said, I would be happy 

to—— 

Senator CARPER. That is close enough. 

Mr. BAROFSKY. All right. 

Senator CARPER. That is close enough. 

So we have infused all of this capital money. We bought this preferred stock. For the most part, we are receiving the dividend payments that we are supposed to. A good deal of the capital that has 

14 

been infused into the balance sheets of these institutions, a lot of 

it is being repaid. 

Mr. BAROFSKY. Absolutely. 

Senator CARPER. Being repaid essentially with interest, with the 

exceptions that you have mentioned. 

Explain to us how we are doing on the warrant side. We see that 

we have been able to exercise or sell our warrants and to realize 

profits in the billions of dollars. Can you just give us a brief update 

on that? 

Mr. BAROFSKY. The warrant sales have been successful. They 

brought back—and for the warrant sales, it is pure profit for the 

American taxpayer. When Congress designed EESA, they put in 

this requirement for warrants so the taxpayers can share on the 

upside. It has been successful. Billions of dollars have been returned from the sale of these warrants. 

We actually have an audit report that is going to come out on 

May 11 which will detail our analysis of how Treasury has been 

doing in administering the warrant process, but it started off, by 

certain outside estimates including the Congressional Oversight 

Panel, a little bit rocky as far as the percentage of return, but since 

that report has come out we have seen that they appear to have 

been doing better in getting market price for these. Recently, we 

have had auctions, which again have appeared to bump the prices 

up. It seems to be a pretty successful program. I will be able to provide a lot more detail on May 11, once we issue that audit report. 

Senator CARPER. As you said earlier, there are a number of institutions that have not yet been able to repay their monies, their obligations to the TARP, but that number is decreasing over time. 

AIG still owes a fair amount of money. Roughly what is that, 

now? 

Mr. BAROFSKY. It is about $46, $47 billion outstanding. 

Senator CARPER. I have been following in the press that they 

have at least reached agreements to sell certain of their assets. I 

think one of them is actually headquartered in Delaware, Alico, 

which is a big insurance company, I think maybe $15 billion. I 

have seen another one for $35 billion. Is that money that has already been credited to their other obligation to the Treasury or 

not? 

Mr. BAROFSKY. No, that money will not go to Treasury. The way 

the AIG investment is structured, the Federal Reserve gets paid 

back every penny before Treasury gets paid back. If those transactions go off as planned, that will help very much in reducing 

AIG’s obligations to the Federal Reserve, but it is not anticipated 

that they will be nearly enough to accrete to any credit for the debt 

to the taxpayer through Treasury. 

Senator CARPER. On the other hand, the monies that are owed 

by GM and by Chrysler come back to the Treasury, is that correct? 

Mr. BAROFSKY. That is correct. 

Senator CARPER. And do I understand that GM recently paid $1 billion of its obligation to the Treasury? 

Mr. BAROFSKY. GM has paid $1 billion, and I think they have announced that they are going to be paying back the debt portion— 

I think there is about $6 billion left—in its entirety very shortly. 

But we need to be a little bit cautious about that, because the way 

15 

that that payment is going to be made is drawing down an equity 

facility of other TARP money. 

So it is good news in that they are reducing their debt, but they 

are doing it by taking other available TARP money to repay the 

TARP. It is good news because it means that money, which was 

going to be available for future problems with GM, that there is a 

determination that they do not need it. But we should caution that 

it is not necessarily being generated out of earnings, but out of 

other TARP funds. 

Senator CARPER. When do you think we will have really good 

news from GM? 

Mr. BAROFSKY. I do not have that crystal ball, Senator. 

Senator CARPER. All right. 

And Chrysler. What is the story with Chrysler’s obligation? 

Mr. BAROFSKY. Chrysler’s obligation is mostly—again, we have 

an equity interest in Chrysler, so our future ability to recoup taxpayer investment is going to be wholly dependent on how successful Chrysler is and how successful the American automotive industry is. 

Senator CARPER. I have some more questions. Maybe we will 

have a second round. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. Being in this 

room, I immediately get overcome with health care, since we spent 

so much time here doing that. [Laughter.] 

The CHAIRMAN. Well, we are now talking about financial health. 

Senator SCHUMER. We are now talking about financial health, 

right. I want to thank you, Mr. Barofsky, for your testimony and 

your service in overseeing the implementation of the TARP program. 

As unpopular as TARP has become, I think most who would look 

at it would say it was absolutely necessary to save the economy 

from complete collapse. I was in the room when Chairman Bernanke and Hank Paulson, President Bush’s Treasury Secretary, 

told members of Congress, some of us, just how serious the situation was. They told us if we failed to enact the TARP we risked 

another Great Depression. We were staring into the abyss. When 

we heard it, I think there was a collective gulp in the room. Ben 

Bernanke talked about it in his very proffesorial, non-exaggerated, 

non-hyperbolic tones, and you knew how serious it was. 

So Congress came together and did the right thing, Republicans 

and Democrats, and the Bush administration, which had proposed 

it, signed it into law. So it is important to emphasize that the current financial reform proposal also contains multiple safeguards to 

make sure taxpayers are never again on the hook for rescuing the 

financial system. I think that is very important. Any costs incurred 

in winding down financial institutions would be covered by the industry, sort of the way it is in the banking industry with the FDIC. 

We certainly can, and should, work to prevent any more taxpayer 

bail-outs, but we also need to close the book on the last one and 

make sure that taxpayers get back every dime they paid to rescue 

the economy. A key piece of that legislation was a provision requirVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
16 

ing the President to assess the costs of the programs and ‘‘submit 

a legislative proposal that recoups from the financial industry an 

amount equal to the shortfall in order to ensure that the program 

does not add to the deficit or national debt.’’ That got a lot of people to vote for it. It was a tough vote, even then. I think we have 

to live up to those words. They should not be ignored. 

In keeping with the requirement under TARP to make sure taxpayers are whole, the administration did live up to its responsibility. It proposed a financial crisis responsibility fee to be assessed 

on financial institutions with over $50 billion in assets. As proposed by the administration, the fee would amount to 0.15 percent 

of the liabilities of these companies, other than deposits and tier 

one capital. 

There are, to be sure, legitimate questions about the details of 

the plan, and I salute Chairman Baucus for holding the hearings 

to try to answer them. But overall, I think the administration’s 

proposal is a common-sense way to make sure that taxpayer money 

is repaid, and I believe it should be included in the financial reform 

legislation soon to be debated on the Senate floor. I agree with the 

administration in this regard. 

As the President said when introducing it, ‘‘It is our responsibility to ensure that the taxpayer dollars that supported these actions are reimbursed by the financial sector so the deficit is not increased.’’ 

So, Mr. Chairman, I want to work with you and all of our colleagues on this committee to get recovery legislation ready in time 

to be included in the financial reform legislation that will soon be 

considered on the floor. 

Now, my question to you, Mr. Barofsky, is this: you were talking 

a little bit before about minimizing the losses; the government still 

holds billions and billions and billions of dollars of these kinds of 

assets and things. What do you think the administration can do, 

Congress can do to minimize the potential losses? You indicated 

earlier it will take years to know exactly what our losses will be, 

but now we are moving on here, and I think we ought to start looking at how to minimize our losses. 

Could you comment on that, please? 

Mr. BAROFSKY. I think one of the areas that is near and dear to 

our role is looking at inefficiencies in the program as they are run, 

and to fraud vulnerabilities. Those are going to be areas that are 

very preventable and avoidable losses. 

Some of the loss with respect to AIG and the automotive industry, that is going to depend on macroeconomic conditions, whether 

the economy improves, people buy more cars. There is very little 

within the TARP program, perhaps, to address those. 

But within the TARP program, we try to make recommendations 

so that the program runs efficiently, that it maximizes each dollar 

that is spent, and above all, we make sure that the right protections are there against fraud so money is not lost, for example, by 

providing it to institutions in the new small business program that 

are defrauding the TARP and getting money that is ultimately 

going to result in failure to the system or does not carry out its 

goals. Those are areas where we really have been working hard to 

17 

make sure that, when TARP money goes out the door, it goes out 

efficiently and it is not the result of fraud. 

Senator SCHUMER. Thank you, Mr. Chairman. My time has expired. 

The CHAIRMAN. Thank you, Senator, very much. 

A lot of questions here. One, small business. Generally, small 

businesses have been unable to take advantage of the funds that 

have gone into the big banks, whether TARP funds or Federal Reserve assistance, or whatnot. There are some who have suggested 

that banks make some money by borrowing at very low interest 

rates from the Federal Reserve and then lend out, I guess, to other 

banks, rather than lending to small business. Your thoughts on 

how or what could be done with the TARP program to help small 

businesses. Just your thoughts. It has been a real problem. How do 

we get more money to small businesses? 

Mr. BAROFSKY. I do think that there is some definite merit in the 

administration’s proposal about the Small Business Lending Fund 

and the idea to incentivize small business lending—that is, unlike 

the original outlay of TARP funds in the Capital Purchase Program, where money was sent out without any conditions or incentives or carrots or sticks about what to do with that money; they 

really had free reign to do with it as they pleased, back then, and 

really up until now, without really any accountability because of 

the administration’s refusal to require TARP recipients to report on 

their use of funds. 

I think that by incentivizing the banks through lowering their 

dividend rates to encourage them to increase small business lending—that can help. I think the administration’s finally adopting 

our long-term recommendation of requiring TARP recipients to report on their use of funds so that there is some accountability for 

the use of TARP funds will also assist, I think, in helping to meet 

that goal to further incentivize small business lending. 

The CHAIRMAN. Now are they reporting how they are using their 

funds? 

Mr. BAROFSKY. Treasury has finally sent out a survey. The responses were due, I think, just this past Friday. They are going to 

be publishing the results. It is going to be quantitative data as well 

as qualitative data. For the first time, Treasury is going to sponsor 

that. We did it ourselves in an audit report back last summer. It 

was a voluntary audit report, but for the first time Treasury is now 

going to require it and report on how TARP recipients are saying 

they are going to use those funds. 

The CHAIRMAN. Have you seen those proposed regulations? 

Mr. BAROFSKY. I am sorry? 

The CHAIRMAN. Have you seen those proposed regulations? 

Mr. BAROFSKY. It is actually just a survey that was sent out. We 

saw the survey, and we had input on the design of the survey. 

The CHAIRMAN. All right. So are you satisfied with that design 

or would you make some suggestions? 

Mr. BAROFSKY. We made some suggestions, most of which were 

adopted, some of which were not. But overall, we were all right 

with the design and what Treasury’s plan was. Now, of course, the 

question was always in execution. We think that getting the quantitative data and matching it with the qualitative data, the inforVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
18 

mation that is received from the regulators as well as from the 

banks, and putting that together and putting together a comprehensive report will be helpful. 

One of the recommendations that we made that they adopted 

was to make sure that those returning the surveys had a high-level 

official certify it under penalty of criminal penalty, and we think 

that will help assure that those people who are signing that are 

going to have the incentive to be accurate and truthful. But we are 

going to monitor how Treasury performs under this. 

The CHAIRMAN. I appreciate that. 

Any other thoughts on small business? A lot of us hear so much 

from community banks and also small businesses, and a lot of 

small businesses say they just cannot borrow because banks are 

not lending. 

Mr. BAROFSKY. It is a very difficult problem. I think a lot of it 

has to do with outside of the contours of the TARP. We have all 

heard anecdotal information about the push and pull between the 

regulators who may be tightening certain lending restrictions. 

There is the possibility that has been discussed, as you mentioned, 

that the banks are getting the money very, very cheaply, but reportedly a lot of them are just turning around and lending it back 

to the Federal Government by buying Treasury bills instead of 

lending it out and taking riskier—lending it out to small businesses. 

The CHAIRMAN. Right. 

Mr. BAROFSKY. What we try to do in this report as well is do just 

an overview of small business lending. We do a 5- or 6-page tutorial on some of the issues, what the SBA’s role is. One thing that 

we do come down on: there is no way that we can have lasting economic recovery without a return from small businesses. They are 

just too important as far as net job growth. 

The CHAIRMAN. I agree with that very much. I just hope we can 

find a better way. 

All of this discussion on TARP assumes everything is on the upand-up. Is there any fraud, waste, and abuse by certain actors in 

the TARP program generally so far as you can tell? 

Mr. BAROFSKY. The TARP is sort of a giant, several hundred billion—multi-hundred billion—dollar pot of honey, and it is going to 

draw some bees, and it is going to draw some flies. Our job is being 

very vigilant over this. We have absolutely seen those who are trying to take criminal advantage. As I mentioned in my opening 

statement, we have secured several criminal charges. We have had, 

not just in this past quarter, but we are really getting some traction in our Investigative Division. 

Now we have 84 ongoing criminal investigations, and they really 

apply across the TARP, not just into the bank program, although 

a lot of our resources are structured on those who have tried to 

steal from the TARP through fraudulent applications in that program. But we are also looking at the housing program, within the 

public/private investment program, really across the board. So, yes, 

Mr. Chairman, unfortunately there are those who seek to take 

criminal advantage. 

I think that what we have tried to do is on two fronts. One is 

through detecting and referring to Department of Justice for prosVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
19 

ecution. We have also committed a significant amount of resources 

in deterring, both through being very public about our being out 

there—and I think we have had a significant impact with that— 

but also in helping to design these programs. 

If I may—I see my time is up—a great example is in the Term 

Asset-Backed Securities Loan Facility (TALF) program, the Federal 

Reserve’s program to lend asset-backed securities. When that program was first described to us in early January of last year, it had 

virtually no protections whatsoever. It was going to rely solely on 

rating agencies and investor due diligence, basically the two things 

that got us into this entire mess with the financial crisis in the 

first place. 

I cannot give the Federal Reserve more credit for being willing 

to work with us. After we initialed our first report last February, 

a whole team came down from New York. I do believe that this program, as it ultimately became designed, is a very safe program. 

They followed our recommendation and did not put residential 

mortgage-backed securities into it, even after it was publicly announced that they were going to do so. So, I think that that is one 

of the areas where we have had some degree of success. 

The CHAIRMAN. Thank you. My time has expired. 

Senator Grassley? 

Senator GRASSLEY. Thank you, Mr. Chairman. 

One of the TARP programs now ramping up at Treasury is the public/private investment program. This is a $40-billion program, 

and it is the only TARP program designed to buy toxic assets. I understand your office has investigated potential conflicts of interest 

involving this program and that the investigation might include a 

Wall Street investment firm named BlackRock. 

As I understand it, BlackRock has a deal to work on Maiden 

Lane for the Federal Reserve Bank of New York as a toxic asset 

analyst, while a separate BlackRock company has a deal with 

Treasury to participate in the public/private investment program to 

buy toxic assets. 

Is there a conflict? What can you tell this committee about the 

results of your investigation? I do not expect you to tell us anything 

that would violate any investigation you are doing or stall it, but 

anything you could tell us, I would appreciate it. 

Mr. BAROFSKY. Sure. Senator, there are two different areas here. 

On our audit side, we are doing a number of audits that touch on 

BlackRock’s role, and it is an extensive role throughout this financial crisis. There are actually three different audits that touch on 

their role. So, for example, we are doing an audit looking at potential conflicts of interest and compliance rules in the Public-Private 

Investment Program (P–PIP) program. That touches on them. We 

are doing an audit on the Citibank Asset Guarantee Program, in 

which they also served a role, an advisory role, which touches on 

their role. We are looking at the TALF. We have an audit on collateral monitors. 

Even in the TALF program, for 2 months, they served in that 

role. As you said, they have a role beyond just those three programs with the Federal Reserve’s $1.25-trillion purchase of agency 

mortgage-backed securities with respect to Maiden Lane II and 

Maiden Lane III, two AIG programs, Maiden Lane I, the bail-out 

20 

of Bear Stearns, and the list goes on. We are considering doing a 

more over-arching audit report on their role throughout the financial crisis. 

On our investigation side, we do have a pending investigation 

into one of the P–PIP fund managers. We have not identified who 

that is because it is a pending investigation, but it is looking very 

specifically into a conflict of interest issue, specifically some of the 

data that was provided to us by Treasury—they helped alert us to 

this—showed that a fund manager who is managing two funds— 

one is the P–PIP fund and another one is a private fund—sold an 

asset out of the private fund and then bought it back from an intermediary into the P–PIP fund at a higher price. We are investigating that as a potential conflict of interest. 

I have to note that that behavior was made possible because 

Treasury refused to adopt one of our most important recommendations about strict ethical walls applying to P–PIP fund managers, 

but that is a separate investigation and we have not identified who 

the fund manager is. 

Senator GRASSLEY. All right. 

Now, a little bit on the point you just made. Why does Treasury 

not just exclude Wall Street investment firms that already work for 

the Fed? Are there not enough Wall Street investment firms available that do not already work for the Fed that could be doing this 

work? 

Mr. BAROFSKY. It would appear to be so, but based on the repeat 

performance of certain players in different aspects of the financial 

recovery, it does appear that from Treasury’s and from the Federal 

Reserve’s perspective, that that may not be the case. 

Senator GRASSLEY. Would you please conduct a review of any 

and all conflicts of interest related to BlackRock? I mean, I am 

making that request of you. 

Mr. BAROFSKY. And I will certainly sit down with our team, and 

we will get back to your staff on how to properly scope out that 

type of job. But I think it is certainly something that we have considered before, and it is something that needs to be looked at. 

Senator GRASSLEY. All right. 

On Friday, the Securities and Exchange Commission announced 

that it was charging Goldman Sachs with civil fraud in connection 

with selling mortgage-backed securities that were essentially designed to fail. The SEC alleges that Goldman misled investors by 

telling them that the pools of mortgages were put together by an 

‘‘independent’’ advisor when in fact both the hedge fund manager 

who created the security and Goldman itself were secretly betting 

that the investment would go bad. If the facts as alleged are true, 

then it confirms our worst suspicion about how the megainvestment banks could use their position to rig the game in their 

favor. 

As I understand it, the SEC is only looking at one of a series of 

investments known as ‘‘the Abacus securities.’’ Some of the Abacus 

securities were insured by AIG. Since AIG is a TARP recipient and 

losses on these securities may have contributed to the need for taxpayers to bail out AIG, I hope that your office will be examining 

the entire series of transactions in detail. 

21 

Has your office been involved in this investigation into Goldman, 

and if not, will you please investigate these other transactions and 

provide an independent assessment to us about whether any of 

AIG’s taxpayer-subsidized payments to Goldman can be recovered 

if they were based on this kind of fraud? 

Mr. BAROFSKY. Absolutely. We were not involved in the case that 

was announced Friday. Ultimately, the insurance that was written 

off of that was not by AIG; it was ultimately a company that got 

picked up by RBS. But there are, I believe, seven of these same 

types of deals that were insurance credit default swaps were written by AIG. 

I have been in contact with the SEC. We are going to coordinate 

with them, but we are going to lead the charge. We are going to 

review these transactions, working with them, as well as with the 

Department of Justice if necessary, to give a close review of these 

transactions and to see if there are allegations, if there are bases 

of fraud, and if AIG and, as a result, the American taxpayer were 

victims of any similar types of fraud. But we are absolutely going 

to do that. 

Senator GRASSLEY. I will ask my last question in writing, if you 

would respond, please. 

Mr. BAROFSKY. Absolutely. 

The CHAIRMAN. Thank you, Senator. 

Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. 

Thank you, Mr. Barofsky, for your outstanding work in safeguarding the interests of the taxpayer and providing transparency 

and accountability to this program that, regrettably, Congress had 

to approve during the financial crisis. So, you are doing great work, 

I think, on behalf of this country, and I want to thank you. 

Mr. BAROFSKY. Thank you. 

Senator SNOWE. One of the issues that has arisen with respect 

to TARP is eligibility for the net operating loss carry-back provision 

that the chairman and I worked on during the stimulus program, 

for example, extending it from 2 to 5 years. What emerged in a recent article that appeared in the Wall Street Journal was that JP 

Morgan, which is a former TARP recipient, had repaid its funding 

to the government, but nevertheless will now benefit from a $1.4- 

billion net operating carry-back loss due to its purchase price of 

Washington Mutual. It was clearly and explicitly stated in statute 

that no TARP recipient, either current or prior, would be eligible 

to use this net operating carry-back loss. 

Now, who is responsible for making this determination, and what 

should we do to correct this? Because clearly this was not the intent of Congress, so I think we need to go back to the drawing 

board on this to make sure that this does not repeat itself. 

Mr. BAROFSKY. Right. We have been closely monitoring this situation. Right now it is in Bankruptcy Court. The FDIC, as receiver, 

is in discussions, and there have been discussions about a settlement with JP Morgan that may allocate, as you say, a portion of 

this tax break to JP Morgan. 

We have been in contact with the FDIC, we have been in contact 

with some of the creditors who have been objecting to this, and we 

are going to continue to monitor that situation. We have not really 

22 

taken any action because we are waiting to sort of see how the settlements break down, but that is where it is right now—it is in 

Bankruptcy Court. Ultimately, whether there will be a negotiated 

settlement among the parties or whether the Bankruptcy Court 

judge will make a ruling, there are complicated legal arguments on 

all sides that we have been reviewing. 

Right now, we have sort of been taking a back seat and watching 

the process to see what actually happens before making an evaluation, but we have been on top of this, having our Legal Division 

follow it, but it is certainly a very complex discussion with the intricacies of bankruptcy law. At first our reaction was the same as 

yours: that this does not seem to be able to make sense. But as you 

sort of get through the weeds of bankruptcy law, it is a very complicated and complex issue that, frankly, we are still getting our 

arms wrapped around. 

Senator SNOWE. Well, would you provide us with your thinking, 

once a decision is made? I gather we cannot preempt any decision 

at this point on this issue, but I will look at it from that standpoint, and so will my staff. We will certainly evaluate it. But it 

clearly was not the intent, and it was very expressly stated. So, 

somehow it has gotten wrapped up in allowing this to happen and 

to providing that to a former TARP recipient. I think that certainly 

should not be the case. So what we need to do to address it ultimately, certainly, is something we should consider. 

Mr. BAROFSKY. Yes, Senator. I would be happy to have my legal 

team sit down with your staff and sort of discuss the issues. 

Senator SNOWE. All right. I appreciate that. 

Second, in the non-repayment of dividends—and you have indi- cated in your testimony that there are $188.9 million worth of dividends that have gone unpaid by 74 institutions—that is disconcerting, when 74 companies have already missed three or more 

payments. So this obviously could become a significant issue. Why 

is it, and what are you doing or what is Treasury doing to recover 

those dividends that are not being paid in a timely fashion? 

Mr. BAROFSKY. Well, unfortunately those institutions that are 

not paying, in most cases it is because their regulator has directed 

them to stop making dividend payments, basically because they are 

in trouble. Because the financial institutions are in trouble and 

their capital is bleeding, taking capital away through dividend payments, it is feared, could lead to the failure of the bank and then 

a complete loss of the TARP capital investment. 

One of the things we are doing—obviously through our Investigations Division—all these banks represented themselves to be 

healthy and viable before coming into this program, and for those 

that rapidly digressed from being supposedly healthy and viable to 

being unable to make quarterly payments of a 5-percent dividend 

payment, that raises some interesting concerns and some important issues. 

So from an investigation point of view, we are looking at some 

of these institutions and seeing whether there were misrepresentations. The other thing that Treasury is doing for some of these 

struggling institutions is actually recapitalizing its investment. We 

detail some of those in the quarterly report, where basically they 

are taking an up-front loss in certain circumstances by turning 

23 

their preferred investment into common or mandatory convertible 

preferred shares at a discount to par. They are recognizing this loss 

because basically they have come to the view that, if they do not 

do these things, the taxpayer investment will be completely wiped 

out, and better to take a hair cut now in the hope that the bank 

can recover. 

Senator SNOWE. And how many institutions would be in that category? 

Mr. BAROFSKY. I think so far there have been five institutions 

that have announced it. Citi was the first. There, it looks like, at 

least at current stock prices, we may actually make a profit as a 

result. Banco Popular down in Puerto Rico was the second. We detail three more smaller banks in the current quarterly report. 

Senator SNOWE. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Carper? 

Senator CARPER. I would like to go back and just pick up where 

I left off, if I could. We were drilling down, if you will, on figuring 

out who still owes money to the TARP and what is maybe our likelihood of collecting what is still out there. I think you mentioned 

that rather than Chrysler owing money back to the TARP, we have 

an equity position in Chrysler. Can you just take a minute and talk 

with us about that equity position, just describe it for us? 

Mr. BAROFSKY. Sure. Right now it is about 10 percent. That 

number can go down if Fiat meets certain performance metrics of 

introducing a smaller car, a fuel-efficient car, and shares technology. That number may come down to 8 percent. But essentially 

our ability to recoup that money will depend on how Chrysler does. 

The goal ultimately for both Chrysler and GM is to get to an IPO, 

initial public offering, of stock. 

That way Treasury will have a method of liquidating its interests 

through public sales of stock to the public. So the goal is that these 

companies can get back on their feet, return to profitability so that 

the shares of their stocks become attractive to the market, and 

then Treasury will be in a position to sell off its shares and ultimately recoup its investment. 

Senator CARPER. This reminds me just a little bit of what happened in 1980, when the Federal Government provided loan guarantees for Chrysler, and Chrysler was able to find funding in the 

private sector. The Federal Government simply guaranteed the 

loans, but we did have granted to us warrants which we exercised 

several years later. When Chrysler stock returned to higher levels, 

we took the warrants. 

I think we had warrants to sell Chrysler stock at about $10 a 

share, or to buy it at $10 a share, several years after the company 

had begun to recover. At that point in time we exercised our right 

to buy at $10 a share, and we turned around a week or two later 

and sold it for $30 a share and made about a third of a billion dollars for the Treasury. How does the situation with Chrysler resemble that or differ from it in this instance? 

Mr. BAROFSKY. I think it is dramatically different because we do 

have this direct equity investment. As you said before, and I am 

by no means an expert on the original Chrysler bail-out, but my 

24 

understanding is that it is as you described. Here, we are not really 

guaranteeing debt. We have actually given them money. A lot of 

the money has been written off. 

The investments in Chrysler preceded their bankruptcy and were 

during their bankruptcy, so it was money that was given, and a 

good chunk of it was recognized as being lost in bankruptcy. It 

went to the old institution. There is a bankruptcy plan that is right 

now pending and has not been approved with money that we have 

that has been lent to old Chrysler, and there is no real expectation 

that we are going to get that money back. 

Senator CARPER. How much money was that, roughly? 

Mr. BAROFSKY. I do not have the precise numbers. 

Senator CARPER. Less than $10 billion? 

Mr. BAROFSKY. I just do not have those numbers at hand, but I 

can certainly get them to you. 

Senator CARPER. Thank you. Would you, please? 

Mr. BAROFSKY. But a good chunk of the amount was there. But 

because we have an equity investment, if Chrysler outperforms and 

does really well, we will have a chance of getting a disproportionate 

amount of the money that was carried over in equity back, assuming the company does well, assuming that they have an IPO, and 

assuming that the Treasury will be able to liquidate those interests. 

Senator CARPER. And the point at which we recover some of the 

monies that we have invested in Chrysler would come with the 

IPO? 

Mr. BAROFSKY. Yes. 

Senator CARPER. And there is probably some stock level, some 

price level for the stock that above which we would actually break 

even? 

Mr. BAROFSKY. I think that the estimates are that it would have 

to have very significant market capitalization for us to get to the 

break-even point. I think that is why CBO and—— 

Senator CARPER. Let me just ask you a question, if I could, a 2- 

part question. One, if we could find out the answer to the first 

question that you said you would have your folks dig up for us, and 

second, at an IPO, how high the value of the stock would have to 

go for us to break even? 

Mr. BAROFSKY. It is sort of hard to give an exact number because 

it is not publicly traded right now. So the valuation would have to 

be equivalent to our investment. But with CBO and OMB, when 

they make their estimate of more than a $30-billion loss, it is based 

on the assumption that that price will never get high enough to result in a recouping of any of that. 

Senator CARPER. I think somebody is going to try to pass you 

some information there. 

Mr. BAROFSKY. In our quarterly report on page 116, we make reference to the assets and debts that are still in new Chrysler, and 

it is about a $3.5-billion original loan that was made before the 

company went into the bankruptcy and a $1.9-billion debtor-inpossession loan that also stayed in bankruptcy. So, those are two 

pieces that stayed in bankruptcy and will eventually be written off. 

Senator CARPER. Mr. Chairman, where I am going with this is 

to try to better understand how much of this roughly $100 billion 

25 

that is still owed is likely to be recovered, likely to be recovered in 

the next year or two. What is it? 2013 is out there. What is the 

significance of that date? 

Mr. BAROFSKY. Well, first of all, this is the estimate from CBO 

and OMB of what will never be recovered, other than through the 

recoupment. Section 134 of EESA, which has the recoupment 

standards, requires that basically, on the 5-year anniversary of 

TARP, October of 2013, the Director of OMB and CBO certify and 

report to Congress at that moment what the estimate of the permanent loss would be, and that triggers the obligation for the administration to submit a legislative proposal to recoup that from the 

financial industry. 

Senator CARPER. So we will hopefully know by that date if 

Chrysler is going to make it, if this is going to be a successful venture, and they will be able to maybe schedule an IPO. Is that not 

an unreasonable assumption? 

Mr. BAROFSKY. The goal for both Chrysler and GM is to have at 

least their initial IPOs of a portion of the ownership of the company well before then. 

Senator CARPER. Mr. Chairman, can I continue to ask a couple 

more questions? 

The CHAIRMAN. Yes, sure. 

Senator CARPER. Thanks. 

Can we just sort of turn to GM, if you do not mind, and explain 

the situation? Do we have an equity position in GM that we need 

an IPO to be able to recover or to profit from? 

Mr. BAROFSKY. It is essentially the same. With the repayment of 

this debt, which we discussed earlier, there is some preferred share 

interest, but overwhelmingly the interest is in an equity interest in 

GM. We have a controlling equity interest in GM. The new CEO, 

Mr. Whitaker, has announced an intention of having an IPO. It 

seems to be the intention that it will occur hopefully this year, that 

there is going to be a return to profit for GM. 

At that point—again, I think the initial public offering will not 

be for 100 percent of the private interest in GM, but it will start 

returning to becoming a public company, and we will be able to 

quantify what the government’s ownership interest in GM is worth. 

Then we will see. Basically, if the company continues to profitability, the shares of stock increase, there will be a continued demand in the marketplace for more shares of General Motors that 

will give the Treasury an opportunity to have subsequent public offerings and to sell off its interest into the market at hopefully what 

will be an ever-increasing value into their equity interests. 

Senator CARPER. All right. Thank you. 

We do not have a lot of people here, Mr. Chairman, at least on 

our side. 

The CHAIRMAN. We do not. 

Senator CARPER. But this is very interesting testimony. I think 

it is actually very encouraging testimony. 

The CHAIRMAN. It is. But it raises the question of what degree 

should the tax be? We do not yet know, within a reasonable period 

of time, how much will be paid back, which I think is a legitimate 

question to ask. But you are right. 

26 

Let me ask one more question, if I might, Mr. Barofsky. What 

is the status of the corporate governance audit that I requested? I 

mean, if we own some of these entities, virtually, whether it is GM, 

Fannie, Freddie, or whatnot, it raises very interesting questions 

about corporate governance, that is, interaction between, let us say, 

the Treasury and management of these companies. 

Mr. BAROFSKY. Mr. Chairman, in response to your request we, of 

course, initiated this audit. We are at the stage right now where 

we split up the responsibilities with GAO. It is a large task, and 

we frankly did not have jurisdiction over some of the entities, like 

Fannie and Freddie, because they are not TARP recipients, but 

GAO, of course, does. We split up the different tasks of this. 

I talked to my Chief of Audit just the other day, and right now 

we are in the process of exchanging drafts of the audit report with 

GAO. I do not think we have an estimated release date, but we are 

in the process of getting there. Hopefully within the next couple of 

months we will be able to release that audit report. 

The CHAIRMAN. I appreciate that. I think it is very important, 

and I thank you for doing that. 

How many Fed dollars went to assist distressed companies? 

Mr. BAROFSKY. We reported on this number back this past July, 

and I anticipate we are going to be doing a catch-up on that, on 

how much money, not just that came from Treasury and the TARP, 

but overall in the financial system what the level of support was. 

Back in July it was about $3 trillion all in for the various programs 

that support the financial industry. 

I recently saw an estimate in one of the media outlets, so I do 

not want to suggest that they do not get everything right, but that 

estimated the number still at about $3 trillion. We are going to go 

and revisit that previous report in our quarterly report and give an 

update on where that number is today, and we will include breakdowns from the Federal Reserve, from Treasury, and from many 

other entities that have provided support in this financial crisis. 

The CHAIRMAN. And when will that report be available? 

Mr. BAROFSKY. I think we are going to be doing it as part of our 

July quarterly report. 

The CHAIRMAN. Not until July. What is your best guess of the 

degree to which the Fed dollars get recouped? 

Mr. BAROFSKY. Well, to a certain extent that number will go 

down in certain categories and up in others, so, for example, when 

we last did our review, the $1.25-trillion purchase of agency 

mortgage-backed securities was still in the ramp-up phase, so that 

is completed now, so that money is now outstanding. Some of the 

other emergency programs have been shut down, so those numbers 

will decrease. I am not sure from a net perspective what has 

changed, but we can probably get you an answer to that just based 

off of their balance sheet in advance of the July report. 

The CHAIRMAN. I appreciate that. 

And how many institutions are overlapped, that is, get both 

TARP dollars and Fed assistance? 

Mr. BAROFSKY. I would say a significant number of the large financial institutions would have gotten support, and most certainly 

did get support from some of the guarantee programs, as well as 

the TARP. 

27 

The CHAIRMAN. Any way you can give us a proportionate 

amount, on average? I know averages are—— 

Mr. BAROFSKY. We do not have access to—I should not say we 

do not have access to. A lot of that Fed information is not publicly 

available—for example, who benefits from the discount window—so 

we have not been able to match that up. Frankly, we have not 

asked for that information, so we have not done that analysis. 

The CHAIRMAN. But some TARP recipients have benefitted from 

the discount window. 

Mr. BAROFSKY. One would presume. Not just the discount window, but the array of programs that the Federal Reserve and the 

FDIC did to support them during the course of this financial crisis. 

There is no question that the largest financial institutions probably 

all benefitted from those various programs, so there is debt guarantee, money market guarantee, all the different programs, the 

sort of alphabet soup of recovery programs. There is no question 

that the big players all benefitted from multiple programs, TARP 

and non-TARP. 

And look, today their return to massive profitability, in some 

cases record profitability, and the large pay-outs, executive compensation pay-outs that have accompanied it, are directly attributable to the support that this government has given them through 

TARP and these related programs. I do not think there can be any 

questions about that. 

The CHAIRMAN. That goes back to an earlier question of, where 

is small business here? I mean, we help, frankly, large institutions 

get back on their feet, but I do not think we have done a sufficient 

job in helping the smaller institutions, including small business. 

Mr. BAROFSKY. Ultimately, I think that the decision to provide 

this money to TARP recipients without any conditions, without any 

incentives or penalty for not applying it to actually make them go 

out and lend the money, has resulted in them using this money in 

ways to maximize their own profits and not necessarily to carry out 

the government’s goal in this program, which was to incentivize 

and increase lending. 

The CHAIRMAN. So it seems. 

Senator Carper? 

Senator CARPER. Thanks. Thank you, sir. 

So coming back to my line of questioning earlier, GM has repaid 

$1 billion, I think earlier this month, monies from the TARP. They 

stand to pay another $6 or $7 billion maybe by sometime this summer. But it sounds like they’re kind of taking money out of one 

pocket and putting it into the other to do that. Is that right? 

Mr. BAROFSKY. Yes. In fact, they have repaid $2 billion, and the 

$4.7 billion—I think I read an article this morning that they are 

getting ready to repay all of that very, very quickly. But yes. The 

source of that was an equity capital facility that is basically escrow 

money. Some of the money that was given to GM, it basically was 

not all given as a lump-sum check, saying, here, all this money is 

available to you. Some of it was put in what is called an equity capital facility, which they can draw down. 

They have to sort of report to the government what they are 

going to do with the money, the purpose of it. The way it is structured though, if there is any money left in that account after a cerVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 R:\DOCS\67232.000 TIMD
28 

tain period of time, it has to be used to repay the debt. Basically 

what GM is doing is it is pulling that forward, and it is taking the 

money out of this TARP capital facility to pay off the debt, the 

$6.7-billion debt that was previously owed. So $2 billion has been 

paid already, and it is anticipated, I think, very shortly that the 

remaining $4.7 billion will be paid off. 

Senator CARPER. All right. For the Federal Government to realize 

any additional funds from GM, does an IPO have to occur beyond 

the $4.7 billion, or are there other additional monies that they need 

to repay the TARP? 

Mr. BAROFSKY. I am trying to think if there is some theoretical 

or hypothetical way, but I do not think so. I think there has to be 

a liquidation of its ownership interest. I mean, theoretically, if they 

could find a private player who would be willing to buy Treasury’s 

equity investment outside of a public offering, that certainly would 

also accomplish that goal. But I think as a practical matter, given 

the vast size of the investment, it is most likely going to occur, and 

it has been identified as the plan to do it, through an initial public 

offering and then subsequent capital offerings of selling that into 

the market. 

Senator CARPER. And the assumption is that hopefully the value 

of the stock over time will appreciate as the market and the auto 

industry recovers in this country, and hopefully GM holds its market share. We will see how that all works. 

Did I understand you to say—changing course here just a little 

bit—with respect to the monies that have gone into this, the 

HAMP, we are not going to get any of that back, that is money that 

is gone? 

Mr. BAROFSKY. That is exactly right. The design of that program 

is for a $50-billion subsidy. That is money that is going to be going 

out. There is absolutely no mechanism for repayment. 

Senator CARPER. All right. 

Pivoting again, I just want to come back to the administration’s 

proposal. I think they proposed taking another $30 billion from the 

TARP and using that money for capital infusion into banks of, I 

think, less than $10 billion in assets. My recollection was that 

there would be a tiered approach with respect to the institution’s 

obligation to pay dividends on, I presume, the preferred stock we 

would purchase. 

On the money that has gone into the capital infusion already 

under the TARP, I think the dividend rate was 5 percent. Is the 

administration proposing that a similar dividend be set for the 

smaller banks that would be covered in this tranche or this program, but they could lower that obligation to as low as 1 percent? 

Is that part of their program, if they lend money to, I presume, 

small businesses? 

Mr. BAROFSKY. That is correct. And you have to start with the 

existing TARP recipients, because the initial participants in SBLF 

are going to be—approximately 95 percent of the existing CPP participants will be eligible to convert. So those that are currently paying 5 percent will have the option, and not just new applicants to 

the program, but those that were already in the CPP program, once 

they convert. 

29 

If they can demonstrate that they have increased their lending 

above 2009 thresholds, they can lower their annual dividend payment incrementally based on how much they can demonstrate that 

they have increased the lending, from 5 percent all the way down 

to 1 percent, for a period of up to 8 years. 

Senator CARPER. Does the administration have the authority to go ahead and launch this $30-billion program of capital infusion? 

Do they need our authorization to do that? Do they need something 

from the Congress? 

Mr. BAROFSKY. If they did it within the TARP, they would not 

have to. Their proposal is to take the money out of the TARP. Their 

explanation for the reasons why is that the Emergency Economic 

Stabilization Act that the Congress passed requires Treasury to put 

on certain restrictions to those institutions that receive TARP 

money. For example, the executive compensation restrictions, as 

well as restrictions on certain other things, repurchase of stock and 

related warrants so the taxpayer can share in the upside. 

Treasury has determined that those factors, as well as what they 

refer to as the stigma of being involved in the TARP, mean that, 

if they launch this program within the TARP, they will not expect 

that much additional participation, and that they have to take 

those sticks away in order to get smaller banks to come to the window and participate. So in order to do that, they absolutely have 

to take the legislation out of the TARP. 

One of the unfortunate things I was discussing earlier with Senator Grassley—originally it was contemplated that our oversight 

role would come with it, that part of the proposed legislation would 

take us, along with the $30 billion and the 95 percent potentially 

of CP recipients, so we can maintain and continue fluidly, without 

interruption, our oversight. But right now, the current intention is 

that we would not be included. 

Senator CARPER. I think you make a good point. 

Mr. Chairman, this is a point we have touched on a couple of 

times in this hearing, it seems. If we actually do this extra $30 billion, to my mind it seems like the idea of the oversight that you 

all seem to be doing a pretty good job on, we ought to continue 

that. 

Mr. BAROFSKY. Thank you. I appreciate that. It is very rare I ask 

for more work to do, but on this one I do not look at it as more 

work; I look at it as just the continuation of what we have already 

been doing and put so many resources into building. 

Senator CARPER. Great. 

The CHAIRMAN. Thank you very much. 

Senator CARPER. Thank you. 

The CHAIRMAN. You are doing a good job, Mr. Barofsky. We deeply appreciate it. Keep it up. 

Mr. BAROFSKY. Thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you. 

[Whereupon, at 11:39 a.m., the hearing was concluded.] 

(31) 

PRESIDENT’S PROPOSED FEE ON FINANCIAL 

INSTITUTIONS REGARDING TARP: PART 2 

TUESDAY, MAY 4, 2010 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:09 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Bingaman, Kerry, Wyden, Schumer, Stabenow, 

Cantwell, Nelson, Carper, Grassley, Hatch, Snowe, Bunning, 

Crapo, Roberts, and Enzi. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Andrew Fishburn, Detailee; and Mary 

Baker, Detailee. Republican Staff: Emilia DiSanto, Special Counsel 

and Chief Investigative Counsel; Jason Foster, Senior Investigative 

Counsel; Jim Lyons, Tax Counsel; and Preston Rutledge, Detailee. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Thomas Jefferson may have gone too far when he warned that 

‘‘banking institutions are more dangerous than standing armies,’’ 

but in this great recession we have certainly learned that financial 

institutions can dramatically affect the economy. 

Financial institutions have certainly affected each and every 

American taxpayer. It has been nearly 2 years since the financial 

crisis hit. The Bush administration responded with the Troubled 

Asset Relief Program, otherwise known as TARP. Today, we convene the second of our three hearings to consider President 

Obama’s proposal for a tax to recoup the losses from TARP. 

TARP helped to keep the financial sector afloat, and there is a 

decent argument that the financial sector received more benefit 

from TARP than just the dollars that TARP lent them. Two weeks 

ago, we heard from Neil Barofsky, the TARP Special Inspector 

General. He provided an update on TARP. He explained who had 

received TARP money and who would probably be able to pay the 

money back. 

Today, our first witness, Secretary Geithner, will describe President Obama’s proposal. Secretary Geithner will address concerns 

that the banks are likely to raise, and he can discuss different 

ways that the bank tax could be structured. 

Our second panel includes a cross section from the financial sector. It is no surprise that financial institutions are not enthusiastic 

32 

about the proposal. We look forward to learning how they think 

that a bank tax might affect their business. We are eager to learn 

their specific concerns. We need to understand the best way to design the tax so that it is fair and achieves its purpose. 

We need to understand who should pay the tax, and we need to 

understand what effect the tax would have on small businesses and 

the economy. We need to know if banks will be able to pass the cost 

of the tax onto customers and small businesses, and we need to understand the effects of the bank tax on small business lending. 

Small businesses suffered when credit dried up during the financial crisis, so we want to make sure that banks do not harm small 

businesses. We tried to make the banks pay back the American 

taxpayer. We want to learn how a bank tax will affect the economy. 

We need to know how it might affect the ability of financial institutions to compete, and we need to learn what kinds of bank levies 

other countries are considering. 

So let us examine the responsibility of financial institutions to 

bear some of the fiscal burden created by the financial crisis. Let 

us try to understand the best way to assess those burdens. And let 

us try to figure out the way that is best for the American economy. 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Thank you, Mr. Chairman, for a very important hearing. 

First of all, I want to thank two Iowans who have come here to 

be on the second panel, John Sorensen, president and CEO of the 

Iowa Bankers Association, and Pat Baird, chairman of AEGON 

USA, a Cedar Rapids company. He also happens to be the last 

chairman of the American Council of Life Insurers. 

The statute that created TARP said that the President is supposed to propose a plan in 2013 to repay taxpayers for any losses 

from TARP. However, earlier this year, 3 years before he was supposed to under the statute, the President proposed what he called 

the Financial Crisis Responsibility Fee. The President’s top tax official, the Assistant Secretary for Tax Policy, admitted that the 

President’s proposal was actually an excise tax and not a fee. Obviously, in 2013 we will have a much better estimate of projected 

TARP losses than we have right now in 2010. 

The President said that one of the purposes of the TARP tax is 

to repay taxpayers for any losses from TARP. I completely agree 

that taxpayers should be paid back every penny of TARP losses. 

Any losses that result from TARP will increase the deficit, which 

has bloomed under this administration. 

Therefore, to pay back taxpayers for any TARP losses, any 

money raised from the TARP tax would have to be used to pay 

down the deficit. If a TARP tax is imposed and the money is simply 

spent, that does not repay taxpayers one cent for any TARP losses. 

It is just more tax-and-spend, big government, while the taxpayers 

foot the bill for Washington’s out-of-control spending. I have heard 

that some in the majority are already looking to use the money 

raised from a TARP tax to spend it under their arbitrary pay-go 

rules. 

33 

These are the same pay-go rules that say expiring spending provisions do not need to be paid for, but expiring tax provisions do 

need to be paid for. Of course, that is inconsistent until you realize 

that it leads to more taxing and more spending, which results in 

bigger government. 

I hope that you, Mr. Secretary, will assure us that the President 

means what he says about repaying taxpayers and that the President would veto any TARP tax that simply spends the TARP tax 

money without paying down the deficit. 

In looking at the President’s TARP tax proposal, which I understand the President has already felt the need to change, it is interesting that GM and Chrysler, which are responsible for about $30 

billion of projected losses in TARP, are not subject to the President’s proposed tax. Also, Fannie and Freddie are not subject to the 

tax, and hedge funds, like John Paulson’s that is involved in the 

recent Goldman scandal, are not subject to the President’s proposed 

tax. 

Meanwhile, companies that did not take any TARP money are 

subject to a proposed tax, and also companies that were not eligible 

to take any TARP money are subject to the proposed tax. So, it is 

a questionable design that has been proposed by the President. 

When I asked the Congressional Budget Office to tell me who 

would bear the burden of the TARP tax, they said that one of the 

groups that would bear the burden of the tax would be consumers. 

One of the purposes stated by the President was to reduce risky 

behavior by financial institutions. However, CBO stated in their 

letter to me that the TARP tax ‘‘would not have a significant impact on the stability of financial institutions or significantly alter 

the risk that government outlays will be needed to cover future 

losses.’’ 

One area I am concerned about is the effect of the tax on small 

business lending. CBO stated in that same letter that it will reduce 

small business lending. This comes at a time when the President, 

and my friends on the other side of the aisle, are trying to increase 

tax rates on small businesses at the end of this year. 

The nonpartisan Joint Committee on Taxation has written that 

47 percent of all flow-through business income will be hit with the 

President’s proposed tax rate hikes. This hits small businesses especially hard because most small businesses are operated as flowthrough entities. I have yet to hear administration officials even acknowledge this fact. 

Instead, the administration officials choose to use the misleading 

talking points that the tax increases will only affect 2 to 3 percent 

of small businesses. I look forward to hearing the testimony today 

about this proposed TARP tax and its impact on small business. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Secretary Geithner, you know the usual form. Your statement 

will be included in the record, and just speak informally for about 

5 or 6 minutes. 

34 

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY, 

DEPARTMENT OF THE TREASURY, WASHINGTON, DC 

Secretary GEITHNER. Thank you, Mr. Chairman, Ranking Member Grassley, and members of the committee, for giving me a 

chance to talk to you today about the President’s proposed Financial Crisis Responsibility Fee. 

The cost of this economic crisis has been, and continues to be, 

enormous. It has hit Americans harder than any downturn since 

the Great Depression. Millions have lost their jobs, their businesses, their homes, and their savings. The resulting loss of revenue has added substantially to our national debt. 

The purpose of the Financial Crisis Responsibility Fee is to make 

sure that the direct costs of TARP are paid for by major financial 

institutions, not by the taxpayer. When you and your colleagues in 

Congress gave the Treasury Department authority to put out this 

financial fire, you included in the legislation a requirement that 

the President forward a plan ‘‘that recoups from the financial industry an amount equal to the shortfall in order to ensure that the 

TARP program does not add to the deficit or the national debt.’’ 

This is a simple and fair principle. Banks, not the taxpayers, 

should pay for bank failures. This is a principle with ample historical precedent. In the aftermath of the S&L crisis, Congress 

changed the law to require the FDIC to impose a fee on banks to 

recoup any losses from closing failed banks. 

This same principle is adopted in both the Senate and House financial reform bills, which require the financial industry to repay 

the government for any costs associated with the resolution of a 

failing financial institution. 

So I just want to take a minute now, briefly, to walk you through 

the key elements of the President’s proposed approach. First, the 

fee would be set at a level to ensure that the costs of TARP do not 

add to our national debt. A year ago, we estimated those costs 

could exceed half a trillion dollars; however, we have been successful in repairing the financial system at a fraction of those initial 

estimates. The administration’s last estimate was that the costs 

could be as high as $117 billion. 

Second, we proposed to assess this fee on financial institutions that have over $50 billion in assets and that were eligible for the 

emergency programs put in place to resolve the crisis. These firms 

are U.S.-based bank holding companies, thrift holding companies, 

certain broker/dealers—we call them primary dealers—as well as 

companies that control insured depositories and certain broker/ 

dealers—again, only those that were eligible for the emergency programs. 

Third, we propose that the size of the fee on individual firms be 

determined by the risk they propose to the financial system. We 

know, of course, that a combination of high levels of risky assets, 

high levels of leverage, combined with less stable sources of funding, were key contributors to this financial crisis, so under this proposal firms that take on more risk would pay more than firms that 

are managed more conservatively. 

This framework also has the significant benefit of including derivatives and off-balance sheet items that are not otherwise reflected under conventional accounting. This way the fee targets, 

35 

and would therefore help discourage, activities that pose the most 

risk to the stability of the financial system. 

Finally, the fee is designed to limit the risk of any adverse impact on lending. It would be assessed over a period of 10 years. It 

excludes over 99 percent of U.S. banks; banks, of course, provide 

the majority of small business loans to businesses and farms across 

the country. 

So I want to just emphasize this point: this fee would not apply 

to community banks, thrifts, and credit unions. It only applies to 

the largest firms that were directly eligible for the emergency programs; firms that were not eligible for that assistance are not covered. If covered firms try to pass on the cost of the fee to their borrowers, they will lose market share to other institutions. 

The CBO, in its review of our proposal, highlighted these advantages by noting that the proposal ‘‘would improve the competitive 

position of small- and medium-sized banks, probably leading to 

some increase in their share of the loan market.’’ 

Now, we are working with governments around the world who 

are considering similar efforts so that we can help create a more 

level playing field for our firms. We believe this fee is an important 

complement to the financial reforms now under consideration on 

the Senate floor. 

Those reforms will provide better protection for American families and businesses, require stronger limits on risk-taking by large 

institutions, bring transparency and oversight to the derivatives 

markets, and enable the government to break apart failing firms 

with no exposure to the taxpayer. 

Enacting this fee now will make it clear to the American people 

that they will not have to shoulder the direct cost of TARP, and 

passing the financial reforms now on the Senate floor will help protect the economy from future financial failures. 

Now, Mr. Chairman, we recognize that there are a number of 

possible approaches one could take to protect the taxpayer from the 

cost of TARP, and we look forward to working with you and your 

colleagues to design a fair and sensible approach. 

Thank you very much. 

[The prepared statement of Secretary Geithner appears in the 

appendix.] 

The CHAIRMAN. Thank you, Mr. Secretary. 

In designing this fee, to what extent is it designed to recoup the 

taxpayers’ funds, and to what degree is it designed to deter unnecessary risk? 

Secretary GEITHNER. The purpose of it is to meet the legal obligation in the law to recoup the funds, and, in deciding how best to 

do that, we looked at a variety of different forms of fee tax levy. 

We chose one that would have the additional benefit of falling most 

heavily on firms that are taking the most risks. So the virtue of 

this design is, you can think of it as a ‘‘too big to fail’’ tax, a tax 

on leverage, a tax on risk, but its purpose, of course, primary purpose, is to meet the legal obligation in the law to cover the fiscal 

costs of TARP. 

The CHAIRMAN. How do you define the risk? 

Secretary GEITHNER. Well, the way this is designed, you would 

pay it in proportion to your assets adjusted by risk, minus the capVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00039 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
36 

ital you hold and your insured deposits. So again, if you take more 

risk with more leverage and you fund that risk with more unstable 

sources of funding, not with insured deposits, for example, then you 

pay more. If you are more conservatively funded, you take on less 

leverage, you have more capital, you rely on deposits to fund your 

lending, like of course banks do across the country, you pay less. 

The CHAIRMAN. And who defines risk? 

Secretary GEITHNER. The framework we are proposing is to rely 

on the established framework that U.S. regulators apply to define 

risk-rated assets. There is a long-established framework for doing 

that, and our judgment is, it does the best job of capturing risk on 

the balance sheets of banks. 

The CHAIRMAN. And is that Basel? 

Secretary GEITHNER. These are U.S. regulations. 

The CHAIRMAN. What are the regulations? 

Secretary GEITHNER. Yes. These are U.S. regulations imposed 

under U.S. law. They are, for reasons you understand, related to 

the importance of providing a level playing field for American institutions that compete around the world. They are negotiated in an 

international context, but our regulations often differ from, and in 

many ways are more conservative than, those that are negotiated 

internationally. But these are U.S. regulations defined by U.S. supervisors under U.S. law. 

The CHAIRMAN. All right. So basically the Basel committee determinations are not relevant? 

Secretary GEITHNER. No. Well, the framework we use on capital 

is this. In the United States, we decide what we think makes sense 

for our country, and then we negotiate with other countries around 

the world that have institutions that compete with our banks in 

their markets and around the world to try to bring the world to 

those standards we apply in the United States. The authority to 

design those is under U.S. law—regulations under U.S. law designed by U.S. supervisors—but we try to make sure that we are 

pulling the world to a similar approach on capital. 

The CHAIRMAN. But would a banker wonder about the degree to 

which this tax is going to vary because it would vary according to 

what the U.S. regulators say constitutes risk for the purposes of 

this tax? 

Secretary GEITHNER. That is a strength, Mr. Chairman, in our 

view, not a weakness in this proposal. Again, as we have seen, it 

is difficult to capture risk in a balance sheet of a financial institution, and you want to make sure that you are doing your best job 

over time at capturing those risks. 

So the fact that this framework for measuring risk in banks 

evolves over time is a strength in this proposal, but again, it is an 

established framework. There are clear rules. They are publicly 

available, and firms have to disclose, every quarter, what their 

risk-rated assets are, as well as their capital and their insured deposits. 

The CHAIRMAN. But to what degree might risk change the 

bottom-line tax that a bank might have to pay? 

Secretary GEITHNER. If the bank takes on more risk over 

time—— 

37 

The CHAIRMAN. I am talking about the definition, the degree to 

which the definition might change. 

Secretary GEITHNER. Again, if, over time, the responsible authorities in the United States decide that that framework has to be 

adjusted, do a better job of capturing risk, for example, like in derivatives or in complex financial products, then they would be required to hold more capital against those risks. If the bank continued to take on those risks, then its portion of the fee would be 

higher than would be the case if it were managed more conservatively. 

The CHAIRMAN. What about small business? At least some say 

the Basel committee regulations or determinations say that small 

business is risky. So would a small business portfolio be considered 

risky under this definition? 

Secretary GEITHNER. Again, the virtue of this approach is to say 

that you pay the fee in proportion to the risk in the exposure, so 

by capturing derivatives, complex financial products, it captures 

the economic risk in those exposures and it tries to measure those 

risks alongside other risks banks take, lending to businesses, families, and customers. 

But again, the basic principle is, the more risk, the more capital 

you have to hold, and the higher share of the fee you would have 

to propose. Again, Mr. Chairman, there are other ways to look at 

this, but, by measuring it against risk, we think it provides the 

best balance of approaches. 

The CHAIRMAN. I understand what you are trying to do here. But 

then the question I have is the degree to which banks can game 

with this. I do not know. I am no banker, but bankers are pretty 

clever—we have seen that in the last several years—and maybe 

will put some of this off balance sheets. I do not know. There must 

be some ways to game this formula. 

Secretary GEITHNER. Again, that is what we think is a strength 

in this approach. This is an established framework that U.S. regulators set and apply with enormous experience over time, and they 

adapt it over time as firms try to adapt behavior to get around 

these risks. Again, it is a clearly available published definition. 

Firms have to report every quarter whether they meet those definitions, what their risk is, how much capital they hold against that, 

and we think that is a strength in the approach relative to the alternatives. You have to compare these to the alternative approaches, but our judgment, looking at alternatives, is they would 

be both less effective in providing a disincentive to risk-taking and 

would have other disadvantages relative to this. 

The CHAIRMAN. My time has expired, but one quick question. 

Why this level of tax? It is, what, 15 basis points? What is the level 

of the tax? 

Secretary GEITHNER. Well, the—— 

The CHAIRMAN. Why is it not higher? 

Secretary GEITHNER. Well, again, the legal obligation—— 

The CHAIRMAN. Because one of the criticisms is that TARP gave 

all this money to these banks, and the banks did not go out and 

loan to small business. They did not make a lot of loans. Instead, 

they just invested it and bought Treasuries. They could pay the 

TARP money back because they made a lot of money. 

38 

Secretary GEITHNER. Yes. 

The CHAIRMAN. And without helping the economy that much. 

Secretary GEITHNER. You are exactly right that banks benefitted 

enormously from the emergency actions Congress authorized to put 

out this financial fire, but the legal obligation in the law is to make 

sure we are covering the direct costs of the TARP. So we proposed 

a fee that, over 10 years, would raise enough money to cover those 

direct costs. 

To answer your direct question about how large it would be, in 

terms of the size of the fee, it would be roughly the same as the 

fee now paid by banks for deposit insurance, roughly the same dimensions. 

The CHAIRMAN. All right. I will have more questions. 

Senator Grassley? 

Senator GRASSLEY. Thank you, Mr. Secretary, and thank you, 

Mr. Chairman. 

Regarding the TARP tax, the President stated, ‘‘My commitment 

is to recover every single dime the American people are owed.’’ In 

addition, there is a statutory requirement that the President propose a plan that recoups all losses from TARP so that TARP does 

not add to the deficit or debt. 

In light of that, would you, Mr. Secretary, assure us today that 

the President will veto any bill containing a TARP tax that does 

not go towards paying back the taxpayers, in other words, any bill 

that does not use the TARP tax to solely pay down the deficit? If 

you cannot give us those assurances, why won’t you? 

Secretary GEITHNER. Senator, the President believes very strongly that the resources raised from this fee should go to cover the 

TARP costs and reduce the deficit. We completely agree with that 

position. That is the President’s position, and he strongly believes 

that. 

Senator GRASSLEY. All right. 

The point is, though, let us suppose Congress would say, well, we 

want this money to be used to offset this program or for offsets to 

set up a new program. Then it is not being used to pay down the 

national debt. So then would the President veto a bill where the 

TARP tax was not used to pay down the national debt and was just 

being spent? 

Secretary GEITHNER. Well, Senator, for the reasons you said, the 

President believes very strongly that the proceeds from this fee, if 

adopted, should go to reduce the debt. 

Senator GRASSLEY. All right. 

Would you suggest to the President that he veto the bill? 

Secretary GEITHNER. Well, Senator, I would just repeat it: he 

feels very strongly about this. I do, too. I agree with him on this, 

and I think it is the right policy for the country. 

Senator GRASSLEY. All right. Let us go on. You did not really answer my question. 

The statute that created TARP requires that the President propose a plan in 2013 to recoup TARP losses. Instead of waiting until 

2013 when he was supposed to, the President proposed the TARP 

tax in this year, 2010. Would OMB and CBO not have a better idea 

in 2013, rather than 2010, what the projected losses from TARP 

are, if any? 

39 

Secretary GEITHNER. Senator, that is a very good question. Let 

me try to respond. You raised this in your opening comments, too. 

Why now? Why propose it now? Because you are right: we are still 

uncertain now what the ultimate cost would be, so we made the 

judgment to propose it now for the following reasons. This was an 

expensive financial crisis. It caused a lot of damage to our longterm fiscal position. 

We thought it was responsible fiscal policy for the country to 

make it clear now that we were proposing a way to help dig out 

of this mess and make a substantial contribution to offsetting the 

fiscal cost of this crisis. We thought it was responsible to do it now, 

at a time when people were looking for signals from our country 

that we have the political will to start to bring down our deficits 

to a more sustainable position. 

We also thought it was helpful to underscore the basic principle 

in the financial reform legislation that banks should pay for the 

cost of bank failures, so we thought proposing that now would add 

credibility to a position I think many people support on both sides 

of the aisle, that banks should pay for the cost of bank failures, not 

the taxpayer. 

The third reason, Senator, as I said, we think it helps reinforce 

the broader reforms that are designed to limit risk-taking in the financial system, and by proposing a fee that is in a sense a tax on 

leverage or a tax on risk, we thought would reinforce that broad 

objective we all share to help reduce risk in the financial system 

going forward. 

Senator GRASSLEY. But you still, I hope, would have to admit 

that we are going to know more of what the loss is from TARP in 

2013 than we do today, and the purpose of the tax was to recoup 

that, and only, I assume, to recoup that. 

Secretary GEITHNER. That is correct. Yes. 

Senator GRASSLEY. For no other purpose. 

Secretary GEITHNER. That is correct. But Senator, also as you 

have acknowledged, the direct costs of TARP do not capture the full 

damage to our fiscal position caused by the financial crisis, nor, of 

course, do they really measure the benefit to the financial system 

provided by emergency programs. So for those reasons, we think it 

is responsible to propose a way now to start to dig our way out of 

this hole, part of the hole caused by the crisis. 

Senator GRASSLEY. All right. 

On another point, after this committee’s April 20th hearing, we 

learned that GM took $4.7 billion out of a TARP escrow account 

to repay the taxpayer TARP loan. A letter I received from Treasury 

last week says that, after the loan repayment, $6.6 billion was left 

over in the escrow account and that this money was available for 

GM’s unrestricted use. It is my understanding that the $6.6 billion 

has been released to GM. 

GM was quoted in the Sunday New York Times: ‘‘The bottom line 

is, our strong business performance has put us in a position that 

we don’t need these funds,’’ referring to the cash in the escrow account. In light of GM’s statement that it does not need the escrow 

funds, why should GM not simply return the $6.6 billion to the 

government? If GM does not need the funds, the taxpayers simply 

do need them. 

40 

Secretary GEITHNER. Senator, you are right to point out that GM 

is in a much stronger financial position today than any of us expected, and that has enabled GM to repay a portion of the assistance we provided much more quickly than anybody thought. It is 

also true, though, as I always emphasize, that we still have substantial equity investments left in GM. Those come with risks. 

We are going to work very hard, Senator, to make sure that we 

get that money back and get the government out of GM as quickly 

as we can, at least ultimate cost to the taxpayer. But because of 

the strength of the restructuring program GM was forced to undertake through bankruptcy, this firm is emerging stronger, more 

quickly than any of us expected. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Next, Senator Bingaman. 

Senator BINGAMAN. Thank you for being here, Mr. Secretary. 

NYU Professor Thomas Cooley argues that we should not only 

recover bailout costs that we have incurred, we should also create 

an ongoing charge for insuring against risky behavior. Now, what 

you have described is a way to pay back the taxpayer for the TARP 

funds that would have the effect of discouraging risky behavior, but 

why do we not consider both an ex-post fee, which is what you have 

proposed to recover TARP outlays, and also a so-called ex-ante levy 

to deter risk-taking at the expense of taxpayers going forward? 

Secretary GEITHNER. There are a lot of proponents of a so-called 

ex-ante fund financed by a levy on financial institutions as a fund 

that would go to cover the future cost of bailouts. As you know, 

Senator, the risk in doing that is it does create the perception that 

the government might undertake future bailouts, and that perception could undermine the efforts we are undertaking to reduce 

moral hazard in the system, make it more stable, make it less likely that investors and executives make decisions in the future on 

the expectation the government is going to come in and save them 

from their mistakes. 

So there are many proponents of an ex-ante fund, but I think the 

disadvantage in doing it that way is, again, it may create an impression, however designed, that there is a pool of money there to 

help fund future bailouts, and that, some people have argued, could 

add to moral hazard rather than reduce it. So that is the argument 

against. 

Senator BINGAMAN. Well, that would assume that the money, 

this ex-ante levy, be put in a fund which would be specifically for 

this purpose. You could take the fee you are talking about as a way 

to pay back the TARP funds and still add to that another fee which 

would go to the government so that the government would be more 

capable of doing whatever it had to do in the future, whether it 

was dealing with an oil spill, dealing with a hurricane, or whatever 

problems the government encounters down the road. 

Secretary GEITHNER. You are exactly right. The general proposal 

is, since there may be crises in the future that cost money, put 

money aside today, paid for by banks, to help cover those uncertain 

future costs. There are a lot of proponents of that approach, too. 

Again, we are trying to meet the narrow legal requirement in the 

law to cover the TARP costs, but I understand the merits of that 

41 

broader approach. I guess the risk in it, just to do both sides of it, 

is that, frankly, that money could get spent on other programs, 

then would not be there to actually protect the government from 

future financial crises’ costs. That would be the risk in doing—— 

Senator BINGAMAN. But it could go to reduce the deficit. 

Secretary GEITHNER. It could. 

Senator BINGAMAN. Just as Senator Grassley was asking you 

what this would be intended to do, you say this is intended, the 

fee you are now proposing, to reduce the deficit. We are all in favor 

of reducing the deficit. We can reduce it even more if we have more 

of a fee, right? 

Secretary GEITHNER. That is exactly right. Again, we are trying 

to meet the narrow requirement in the law to cover the direct 

TARP costs, but we recognize, of course, that that does not fully 

capture the cost of this crisis, and of course does not try to capture 

the cost of future crises. 

Senator BINGAMAN. Part of this banking crisis, or part of what 

has come out as we have tried to understand this banking crisis, 

is that various of these large financial institutions have off-balance 

sheet assets and liabilities. Is it your intention that this fee would 

be part of the taxable base for these large institutions? 

Secretary GEITHNER. Yes, and that is one of the virtues of this 

design. Again, unlike the conventional accounting approach, which 

does not yet capture all those things, this approach of using the established regulatory definition of risk-rated assets would capture 

those off-balance sheet exposures, including derivatives. 

Senator BINGAMAN. How do you see this applying to insurance 

companies, particularly an insurance company that has a thrift, 

that owns a thrift, for example? It would seem that it would make 

sense to treat insurers differently than banks, since that has always been the approach we have taken in the past. But how would 

they be treated under this fee? 

Secretary GEITHNER. Senator, again, let me just say at the beginning, there are many different ways to do this. The approach we 

have taken is to apply two simple tests. One is, you have to be 

larger than $50 billion in assets. A very small number of companies 

in the country, of course, meet that test. 

But in addition to that, you have to have been directly eligible 

for the emergency programs put in place to put out the financial 

fire. That means the Treasury’s Capital Purchase Program, the 

FDIC’s TLGP, a temporary loan guarantee program, and the Federal Reserve’s primary dealer credit facilities. 

So, firms that were eligible for those programs—and were above 

$50 billion—we think benefitted substantially from the emergency 

programs. Even if they did not take assistance, they had the ability 

to do that—that provided a benefit to them—and so we think the 

fee should be limited to those institutions. Now, some insurance 

companies that were structured as thrift holding companies owned 

thrifts before the crisis, or who bought thrifts to take advantage of 

these programs, would be covered by this fee. 

Senator BINGAMAN. My time is up, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Hatch? 

Senator HATCH. Well, thank you, Mr. Chairman. 

42 

Nice to see you here, Mr. Secretary. I finished reading, or am on 

the brink and I will finish ‘‘Too Big To Fail’’ and a number of other 

books over the last few weeks. I am just amazed that you look as 

good as you do after all that you have been through, according to 

those books. 

When this bank tax proposal was unveiled in—and you look well; 

I do not mean to indicate you do not. When this bank tax proposal 

was unveiled in January, President Obama scolded the large financial institutions by saying, ‘‘We are already hearing a hue and a 

cry from Wall Street suggesting that this proposed fee is not only 

unwelcome, but unfair.’’ 

He said, ‘‘By some twisted logic, it is more appropriate for the 

American people to bear the cost of the bailout rather than the industry that benefitted from it, even though these executives were 

out there giving themselves huge bonuses.’’ 

Well, let us just talk about fairness for a moment. Is it fair to 

apply this tax not only to companies that have repaid TARP with 

interest, but also the companies that did not take TARP money at 

all? I know that the administration believes that these companies 

benefitted from TARP in other ways, but really, did every single 

American not benefit from it as well? 

Secretary GEITHNER. Senator, you are exactly right. The American economy benefitted, all Americans benefitted. All financial institutions benefitted. All the customers of banks benefitted. But we 

thought the fairest way to do this was to apply the fee to the firms 

that contributed most to the crisis and that were eligible for these 

emergency programs. And even if you did not apply for the programs, eligibility for them conveyed a substantial financial benefit. 

Senator, I agree that it is not going to seem fair to everyone, and 

there is no perfectly fair approach. 

Senator HATCH. Well, it is not fair to everyone. It is not fair to 

everyone. What many believe to be unfair is that this proposal does 

not apply to the companies that benefitted the most: Fannie Mae, 

Freddie Mac, Chrysler, GM. Now, admittedly, all of them have 

problems. Some of these firms have paid out bonuses to their executives. They have matched some of the bonuses paid by large financial institutions. I do not want to go into those, but you could 

look at it. There are millions of dollars in compensation and bonuses. 

Do you then believe that there should be an exemption? Well, tell 

me why you do not do this to Fannie Mae, Freddie Mac, GM, and 

Chrysler? 

Secretary GEITHNER. A very good question. Of course, we thought 

about this very carefully. In the Fannie and Freddie place, it would 

just be one hand of government paying another. We would be paying the fee. 

Senator HATCH. Well, they are quasi-public entities. 

Secretary GEITHNER. Of course, unfortunately, as you know, 

when Congress authorized my predecessor to put them into a form 

of conservatorship, in effect that put us in the position where their 

gains are our gains, their losses are our losses. They are the American taxpayers’ losses. So, if they were to pay for the fee, we would 

be paying for the fee. 

Senator HATCH. Well, you seem to be saying they are vulnerable. 

43 

Secretary GEITHNER. No, I do not think they are. No, I do not 

think they are, actually. In fact, Congress did the right thing in 

making sure that we could keep them stable through the crisis before we reform them. The auto companies are a different case, Senator. In the auto companies’ case, I think it is fair to say that, despite the many mistakes they made over time in managing those 

businesses, they did not cause this financial crisis. Their challenges 

were made substantially worse by this financial crisis. 

We are proposing to cover their financial arms, but not the institutions we put through bankruptcy. Since they went through bankruptcy and restructuring, we did not think it was necessary or appropriate for them to be covered by a fee that, as you have seen, 

is designed to help us make sure that we are reducing risk in the 

financial system as we cover the potential costs of TARP. 

Senator HATCH. But there are a lot of banks out there that did 

not cause this problem too and will be stung by this fee. 

Secretary GEITHNER. That is true. But GM and Chrysler are 

unique in the sense that we put them through bankruptcy. They 

did not cause this financial crisis, so it is a slightly different approach. Again, we are not covering 99 percent of financial institutions in the country, so of our 9,000 banks and thrifts, our thousands of credit unions, hundreds and hundreds of other types of financial systems, we are not covering them, although you are right 

to say they benefitted, and people might argue for a much broader 

fee. But again, our judgment was, the fair thing to do was to capture those institutions that were the largest that benefitted the 

most. That seemed fair to us. 

Senator HATCH. Let us say that back in my home State of Utah 

they may be approaching the threshold of $50 billion in assets, so 

let us assume that they have $49 billion-plus and they are almost 

there. They are thinking about expanding into under-served areas 

of Utah or elsewhere. In such a case, would this tax not serve as 

a disincentive for the bank to want to expand and add new jobs? 

Secretary GEITHNER. Senator, you are absolutely right. In defining any threshold, you have to be careful to reduce the risk of having that kind of impact. We would be happy to work with you and 

your colleagues to design this in a way that the threshold is sensible and reduces that effect. But again, for banks that take deposits to fund loans to their business customers, they would not be 

bearing any material fee as part of the way we designed this. But 

we would be happy to work with you on how to design the thresholds so that they seem fair and just and reduce that risk. 

Senator HATCH. My time is up, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Next is Senator Stabenow. 

Senator STABENOW. Thank you, Mr. Chairman. Mr. Chairman, as 

you might think, I have thoughts about the discussion about the 

auto industry. Mr. Secretary, welcome. I wanted to follow up on the 

discussion because I think it is important, the point you made 

about the fact that the auto industry did not cause the crisis, it 

was not their reckless efforts in terms of investing and so on that 

caused where we are, but actually it was the frozen credit market 

that affected them, as it affected everyone else. 

44 

When we add to the fact that normally in a downturn—and we 

saw individuals who could not get credit, could not purchase vehicles, so we had almost a 50-percent reduction in vehicle sales, 

which was huge. Normally, if there is a reduction, they could go 

into the markets, they could get a line of credit, they could get a 

loan, and that was not available to them because of the frozen 

credit market. So, they were in an extremely difficult situation. 

Therefore, I think it truly is apples to oranges when we talk 

about it. Not that other businesses were not in the same situation, 

but the reality is, in auto manufacturing, for every one job in auto 

manufacturing there are nine other jobs somewhere in the economy 

that are impacted, so this is a fundamental part of our economy in 

terms of middle-class jobs and the economy as a whole, which 

threatened to undermine jobs and the economy even more. 

I also would say that the auto makers are still undergoing a very 

fragile recovery and are not out of the woods yet, and that part of 

recovering for us as an economy is to make sure that they are back 

on their feet. Frankly, that would help us from a taxpayer standpoint as they go into the marketplace to sell their auto stock. 

So I wonder if you might expand on your feelings in terms of the 

negative impact from a taxpayer standpoint of jeopardizing a recovery in the industry at this point when we have yet to be fully repaid, and will not be repaid until they are able to go into the marketplace. 

Secretary GEITHNER. Senator, I think you said it very well, that 

both the initial rationale for excluding them—and I think I would 

emphasize though that these firms, again, because of the extent of 

the restructuring that they went through as part of bankruptcy, 

are in a much stronger position today than any of us expected, and 

they are emerging stronger, more quickly than any of us would 

have hoped. Our judgment about whether they should be covered 

or not had nothing to do with their current financial condition. We 

just made the judgment that, because they did not cause the crisis 

and because they went through restructuring, it was neither necessary or fair to ask them to be covered by this fee. It was that 

simple judgment. 

Senator STABENOW. Thank you. 

And if I might also just follow on with colleagues who have 

talked about community banks, because they did not cause this either, and they have been hit on both sides, being told the financial 

regulatory system is tightening up for them. We are telling them 

to lend, others are telling them do not lend. I mean, they are 

caught in a very difficult situation. Therefore, our small businesses, 

who did not cause this either, are finding themselves in a terrible 

situation. So I wonder if you might talk a little bit more about 

whether or not you have run an analysis on the economic impact 

of the proposal as it relates to community banks and small business lending. 

Secretary GEITHNER. Well, as I said in my opening remarks, Senator, we think this proposal is good for community banks. Of 

course, the fee does not cover community banks, it only covers 

these 50 institutions that are less than 1 percent of total financial 

institutions. Therefore, in some sense, if these large institutions try 

45 

to pass on this fee—now, they do not need to pass on the fee; they 

have a choice about whether they pass on the fee. 

But if they try to pass on the fee, that would create greater opportunities for other banks not covered by the fee, the vast bulk of 

the American financial system, to step in and take that business 

away from them. So as the CBO said, as I quoted in the study, ‘‘We 

think we have designed this in a way that is good for small banks 

and community banks, and therefore good for their small business 

customers.’’ 

Senator STABENOW. Thank you. 

Thanks, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

Thank you for coming, Mr. Secretary. I would like to follow up 

on a question that Senator Grassley had asked you earlier. You 

said that the TARP law requires the administration to submit a 

plan to Congress for recouping TARP losses, but you failed to mention that the law said that this plan should come after OMB submits a report on TARP losses on October 4, 2013. Why do you suppose Congress wrote into the law that this plan should be submitted in 2013 rather than 2010? 

Secretary GEITHNER. Well, I cannot speak for the authors of it, 

but I suspect they wanted to be confident that the financial industry was in a stronger position at the point the fee would come into 

effect. The financial industry of the United States today is in a 

much stronger position than anybody expected because of actions 

we took to solve the crisis. 

Senator BUNNING. Or could they also want to know more about 

how much or how big the losses might be after 3 years? 

Secretary GEITHNER. Of course, Senator. 

Senator BUNNING. Or 4 years? 

Secretary GEITHNER. And we are early. We are early because we 

thought it was the responsible thing to do, because again—— 

Senator BUNNING. Can you understand why it looks suspicious 

that the administration is submitting the plan now when the TARP 

losses are not fully known? Can you understand why this looks like 

a political stunt to distract the public from the very unpopular 

TARP program in a transparent attempt to make it look like the 

administration is not in the back pockets of Wall Street? 

Secretary GEITHNER. Senator, I cannot understand. Again, we 

are doing the responsible thing, which is, in the face of a crisis that 

caused enormous damage to our fiscal position, we thought it was 

responsible, prudent, and reassuring to the American people to say 

to them, we are going to tell you how we are going to protect you 

from these losses. Now, you are right, we could have waited. 

Senator BUNNING. And by waiting, you would have known more 

exactly what the TARP losses would be. 

Secretary GEITHNER. True. But if we had waited, we would have 

left the world with a lot more uncertainty about whether we would 

have the will to cover those losses. So again, we thought the responsible—— 

Senator BUNNING. But the law makes you cover them. 

46 

Secretary GEITHNER. It does. But clarity now is responsible and 

reassuring. Delay is neither necessary nor desirable at a time when 

people are worried about our political capacity as a country to help 

dig our way out of the fiscal damage caused by this crisis. 

Senator BUNNING. All right. 

Concerning the amount of TARP losses, does Treasury expect to 

experience any losses from the AIG experience? 

Secretary GEITHNER. Senator, we publish, twice a year—OMB 

does separately and CBO does separately—estimates across the full 

range of investments we take. The latest estimate, I think, is a relatively old estimate done at the end of September, 2009. In that 

estimate, you will see that we still expect to be exposed to substantial risk of loss on our investments in AIG. 

Senator BUNNING. All right. 

Secretary GEITHNER. Much less than we thought, but still some 

risk of loss. 

Senator BUNNING. Were you at the New York Fed when AIG derivatives counter-parties were paid off at par? Part of that was 

cash from AIG which received TARP funds and part was from the 

Fed. Does it not follow that, if AIG counter-parties had not been 

paid off at par, then the infusion of taxpayers’ money would have 

been smaller and there would have been fewer TARP losses? 

Secretary GEITHNER. No. Senator—— 

Senator BUNNING. Wait a minute. 

Secretary GEITHNER. I am sorry. I apologize. 

Senator BUNNING. Let me finish the question. 

Secretary GEITHNER. I apologize. 

Senator BUNNING. And in that case, does the decision of the New 

York Fed to pay the full value not lead to a TARP loss? 

Secretary GEITHNER. No, Senator. And you and I have had a 

chance to talk about this many, many times, and I would be happy 

to talk about it as many times as you would like in the future. If 

we had not, if the Government of the United States had not 

stepped in to prevent AIG’s failure, the cost—— 

Senator BUNNING. Well, we have a difference of opinion. You saying one thing is not going to make any difference in what I believe, 

so let us just pass over that. Answer my questions about the TARP 

money. 

Secretary GEITHNER. The cost to the American taxpayer would 

have been larger, not smaller, if we had not acted the way we did 

in AIG. Larger, not smaller, higher burden on the American people, 

higher losses. 

Senator BUNNING. Well, only time will tell that. 

Secretary GEITHNER. No, I do not think time will tell. I think 

that—— 

Senator BUNNING. Well, right now we are at a loss at AIG. 

Secretary GEITHNER. Well, ultimately we do not know how much 

the loss will be. I think it will actually be a fraction of what these 

estimates are. But what I can say with complete confidence, Senator, is, if we had not acted the way we acted, those losses would 

have been dramatically higher. 

Senator BUNNING. All right. Last question. Mr. Secretary, your 

last appearance before this committee was February 2nd. At that 

time, several members submitted written questions to you for the 

47 

hearing record. I understand that we just received the answers to 

those questions late yesterday. 

Do you believe that 3 months is a reasonable period of time for 

members of this committee to wait for answers to their questions? 

And, if you had not been testifying today, how much longer would 

we have had to wait for those answers? Also, if we submit questions based on today’s hearing, how long will we expect to wait for 

an answer? 

Secretary GEITHNER. Senator, I believe this is my 33rd time testifying before the committee and Congress in my time in office. 

Senator BUNNING. You did not have to take the office. 

Secretary GEITHNER. You are right, I did not. But we try to be 

as responsive as we can. We are trying to meet all those requests 

as quickly as we can. We will continue to do that. But of course, 

we are trying to solve a lot of problems we inherited, and we are 

doing our best job on both those fronts. 

But of course, Senator, we will try to be as responsive as we can, 

as quickly as we can, in response to any questions you have at this 

hearing, or in the future. 

Senator BUNNING. Thank you. 

The CHAIRMAN. Senator Cantwell? 

Senator CANTWELL. Thank you, Mr. Chairman. 

Secretary Geithner, to continue, I guess, on the same lines my 

colleague was going on, I know that you have been in the press 

talking about what repayments we have had from TARP and the 

fact that you view it as somewhat of a profit, $15.6 billion or something like that. This is a proposal today about collecting somewhere 

between $100 and $115 billion. 

But when I look at the Federal assistance program, if you look 

at everything that has been there, it is somewhere around $10 trillion. I mean, that is what experts are saying. If you look at $2 trillion in FDIC assurances, $1.75 trillion in Federal Reserve commercial paper, that every time we put more paper out it reduces the 

value of the dollar. 

If you look at the $900 billion in term auction facility lending or 

$600 billion to insure money market funds, or $600 billion for 

Fannie Mae and Freddie Mac, $550 billion for Federal Reserve 

loans, $500 billion to insure FDIC deposits, $300 billion for FHA 

mortgage relief. So the number here is $10 trillion. Ten trillion. I 

know you are probably going to say, well, we are going to get some 

of that money back. 

The issue is, we still do not know what the Fed is doing. We do 

not know how many toxic assets the Federal Reserve has purchased. We do not know how many are going to default in the future. So why can we not get access to that information? Without 

that information, are we not just taking a stab in the dark here 

about the real cost to the American taxpayer? It is just as dark as 

the market is. 

Secretary GEITHNER. Senator, the TARP program is subjected to 

independent analysis about potential losses at least twice a year, 

and, as you saw in my opening statement and you see in the CBO 

estimates, the direct costs of that program are in the range of $100 

billion currently estimated over time. But you are also right that 

48 

the government did a whole range of other things as part of putting 

out this financial fire. 

I wrote the leadership of the Congress just a few weeks ago to 

provide our best sense of updated estimates of losses across those 

programs, the Fed, the FDIC, the money market guarantee program, that full set of programs. Those losses actually look very 

small overall, as measured by independent experts. The Federal 

Reserve programs—I should not be the one testifying on this—are 

likely to generate tens and tens of billions of dollars to the American taxpayer over the next 5 years, and they already have done 

so. The FDIC programs will result in—— 

Senator CANTWELL. I am glad you brought that up. That is great. 

So, do you think the American taxpayer should deserve access to 

that information so they can see exactly what is happening at the 

Federal Reserve? 

Secretary GEITHNER. I completely agree, and the Chairman of 

the Federal Reserve has been very supportive of changes that provide more information about the risks in the Federal Reserve’s balance sheet. There is an enormous amount of information available 

in the public domain today to allow people to make those estimates 

themselves, but again, I think all those estimates show that the 

Federal Reserve will provide the American taxpayer tens of billions 

of dollars on those programs because they were designed carefully 

to protect the taxpayer. 

The Federal Reserve charged a fee for those programs, and they 

are going to show an enormously substantial positive return to the 

American taxpayer, as I believe will the FDIC programs, and as 

did the Treasury’s money market guarantee program. 

Senator CANTWELL. Well, I think the number is roughly $10 trillion. Without getting access to that information, we do not know 

whether you are right or not. 

Secretary GEITHNER. You do not need to rely on my judgment for 

that, Senator. Again, the virtue of the fact that this information is 

in the public domain—and I know the Chairman will be supportive 

of more disclosure in this area—people can make their independent 

estimates of that. You do not need to rely on mine; you can rely 

on other people’s for that. I completely agree with you that the 

American people should have full disclosure and transparency 

about the commitments still outstanding and the risk in those commitments. 

Senator CANTWELL. Well, I do not think that we have that today, 

and we absolutely need it, so we will hold you to encouraging this 

information. I think some of my colleagues will just work a legislative process to get access to the information, but otherwise we do 

not really know what the American taxpayer is going to be on the 

hook for and what we are going to get repaid for. 

I wanted to ask you one other question, if I could, Mr. Secretary. 

You were here about 90 days ago and I brought up this question 

about access to capital for small businesses and community banks. 

At the time, you said we should take swift and deft action to help 

community banks get credit. Well, it is 90 days later, and we have 

still not seen a proposal. The, I think, ninth bank in my State just 

closed last Friday, so small businesses are not getting access to 

capital. Where is the proposal? 

49 

Secretary GEITHNER. Senator, we have been working very closely 

with the Majority Leader and his colleagues in the Senate and in 

the House on a very detailed program of tax incentives for small 

businesses and a small business lending facility to help small 

banks and to expand SBA programs. That legislation, which has 

been crafted very carefully over these last 5 months, is, I think, 

very close now to being brought to consideration, both in the House 

and the Senate. 

I know the Majority Leader is working closely with your colleagues in the Senate to make sure that he can bring that to the 

floor quickly. I agree with you about the importance of this. At the 

time we spoke here, we had already provided a broad outline to 

that proposal, and we have been working very hard on the details 

with your colleagues to make sure it meets the broad concerns of 

members of the Senate. 

Senator CANTWELL. I would say that swift and deft action has 

not been taken, and I have not seen this proposal, although we 

have had various conversations about the challenges. So, I would 

be very delighted to see the administration’s proposal. 

Secretary GEITHNER. But again, Senator, I want to make it clear, 

we provided that proposal early this year. We have been working 

for 5 months on it. We have shared it. We have taken a lot of consideration of comments made by you and your colleagues on this, 

and we think we have a very strong package of programs and 

would be happy to share that with you and talk you through it and 

see if we can make any adjustments to reflect your concerns. 

The CHAIRMAN. Senator Crapo? 

Senator CRAPO. Thank you very much, Mr. Chairman. 

Secretary Geithner, I want to shift gears with you a little bit. As 

you know, we have the financial regulatory reform legislation on 

the Senate floor as we are holding this hearing, and I would like 

to take this opportunity to ask you a couple of questions about that 

legislation, as we are dealing with it now on the Senate floor. 

It has already been pointed out here in the committee in this 

hearing that the bank tax that you are proposing here does not 

apply to Fannie and Freddie, and neither does the bill on the floor 

of the Senate. My question is this. The public really has focused 

a lot on taxpayer bailouts, on banks, automakers, and insurance 

companies. 

You can go through the scale of the support that has been provided there, and nowhere has the support been higher than with 

Fannie and Freddie. I think that right now we are looking at estimates that ultimately will cost the taxpayer about $381 billion, if 

I am looking at the most recent estimates. That estimate may be 

too optimistic. 

So, of all of the bailouts that we are dealing with, the problem 

with Fannie and Freddie seems to not only have been at the core 

of where we started this entire problem, but is also at the height 

of the cost to the American taxpayer. Yet, last Christmas Eve, 

Treasury announced that it was lifting the $400-billion cap on 

losses, and we see basically nothing but the full faith and credit of 

the U.S. taxpayer there backing Fannie and Freddie, yet it is not 

included in the legislation that is on the floor of the Senate. Could 

you tell me why? 

50 

Secretary GEITHNER. Senator, you are exactly right. We made a 

choice, given the complexity of the reform challenge ahead, that we 

would not move immediately to propose broad reforms of our housing finance system, including the future of Fannie and Freddie. We 

decided to do this in two stages. We did that because we thought, 

frankly, we would get a better outcome, a more thoughtful effort, 

more commitment to reform if we were further ahead in the process of repairing the damage to the housing markets. 

But we have begun a process, and we laid out broad principles 

and objectives. We are conducting congressional hearings, we are 

soliciting public comment on alternative proposals, and we look forward to working with you on trying to put in place a set of strong 

reforms that will fix what is broken in our housing finance market. 

It is not just Fannie and Freddie, of course. As you know, we do 

a lot of things in the housing market which we need to reassess. 

Many of those things contributed to making this crisis worse. 

Senator CRAPO. Like the mortgage origination process. 

Secretary GEITHNER. As you know—and you have made a lot of 

thoughtful comments on this process in the past—there are a range 

of things we are going to have to change in that process. This bill 

does do the necessary essential things to fix not just what caused 

the crisis, but what would leave us vulnerable in the future, and 

does include some important changes on the securitization front 

which are helpful. 

But you are absolutely right, it does not, and we did not attempt 

to take on that broader challenge now because we thought fundamentally we would get a better outcome, more support, more 

consensus for ambitious reforms, if we were further along in repairing the very damaged housing markets. 

Senator CRAPO. I understand your rationale. I do not agree. I believe we should be dealing with it now, and I would love to spend 

further time with you in terms of how we would approach it when 

we get to that point. 

But let me just ask another couple of quick questions here, still 

focusing on the financial regulatory reform bill. According to news 

reports, FDIC Chairman Sheila Bair has urged lawmakers to scrap 

section 716 of that bill which would force banks to spin off their 

derivatives businesses. Her argument is that that could destabilize 

banks and drive risk into unregulated parts of the financial sector. 

Her letter echoed fears that were recently raised by Federal Reserve officials as well, who have, in an unsigned memo, indicated 

that that provision would impair financial stability and be highly 

disruptive and costly to banks and their customers. Could you comment on whether you agree with Sheila Bair and the Federal Reserve officials who were reported on? 

Secretary GEITHNER. Senator, I want to start by emphasizing 

that the package of reforms that relates to the derivatives market 

in the bill crafted by Chairman Dodd and Chairman Lincoln is a 

sweeping, very strong, comprehensive set of reforms. 

They would bring standardized products onto clearinghouses. 

They would force centrally cleared products to be traded on either 

an exchange or an electronic trading platform. They would provide 

authority to put capital and margin requirements on major swap 

participants. They would give transparency and disclosure to a 

51 

market that operated largely in the dark. They would give tools to 

the SEC and the CFTC to police and deter fraud manipulation in 

these markets. 

This is the most comprehensive, sweeping reform. It is a revolution for the derivatives markets, for the country as a whole, and 

we strongly support a bill that incorporates a comprehensive set of 

protections and oversight over these markets going forward. 

Now, as you know, Senator Dodd and Senator Lincoln are now 

working through this provision, and they are considering how to 

deal with concerns raised by Chairman Bair, by Chairman Bernanke, and by members of the Senate, the concerns you expressed 

in your opening statement. I know they are working carefully on 

how best to accommodate those concerns. 

Senator CRAPO. But you are not expressing your opinion on that 

today? 

Secretary GEITHNER. We have not taken a position on that specific provision now. But Senator, I would like to emphasize the following basic strategy that has underpinned this reform process. To 

make the system more stable, we need to make sure that we are 

doing a better job of limiting risk-taking by core institutions that 

are so important in these markets. 

You would not make the system more stable by taking functions 

that are integral and central to banking and separating and putting them somewhere else. That will create a less stable system, a 

more unstable system. That basic theory, that basic strategy, underpins the entire approach that Chairman Dodd, Chairman Lincoln, and their counterparts in the House have brought to this important set of reforms. 

The CHAIRMAN. Senator Enzi? 

Senator ENZI. Thank you, Mr. Chairman. 

I appreciate all the comments that you have made. I voted 

against TARP when it came up because I did not think that it specified what the money was going to go to. We kept hearing an explanation that it was going to go to toxic housing things, and it did 

not. The money that has been loaned to the banking industry, is 

that where the money was lost, or was the money that was provided to Chrysler, AIG, GMAC, Fannie Mae, and Freddie Mac 

where it is lost? 

Secretary GEITHNER. No, Senator, you are exactly right. The investments that my predecessor made in the U.S. banking system— 

and when I came into office, he had made investments in banks 

representing 75 percent of the American banking system. Those investments, by almost any estimate, are likely to result in a positive 

return. To put it differently, the American people will make money 

on those investments. 

We have already had about $200 billion of those investments repaid to the taxpayer, replaced with private capital, with a substantial positive return, but we are still exposed to substantial risk of 

losses on the investments that the previous administration largely 

made in AIG and the program President Bush initiated in the 

automobile industry. Those are the most likely source of further 

risk going forward. But you are also right to point out, as your colleagues have, that in terms of Fannie and Freddie, they are still 

exposed to substantial risk of loss as well. 

52 

Senator ENZI. Well, I appreciate that you are trying to shove that 

back onto the other administration, but what we are talking about 

is recouping those losses, and we are talking about recouping them, 

not from the ones who actually lost the money. That is a little bewildering to me. 

In the administration’s proposal, the largest, most leveraged are targeted by assessing a tax at $50 billion or more in consolidated 

assets, excluding the FDIC-assessed deposits and the insurance 

policy reserves. There are a lot of reasons that have been cited as 

the impetus for the administration’s proposal. Is it your belief that 

one of the reasons is the need to eliminate risky transactions on 

the part of those financial institutions? 

Secretary GEITHNER. No. The reason for our proposal is to make 

sure we protect the taxpayer from losses in TARP. That is the legal 

obligation. That is what motivated the proposal. Now, in doing 

that, you could do that in lots of different ways, but we decided to 

recommend to the Congress a form of a fee that would have this 

additional benefit, which seemed fair to us, of making sure that 

firms paid it in proportion, effectively, to the risk they take. So, if 

you are more conservatively managed, you pay less. If you are 

managed with more leverage, more risk, you pay more. That 

seemed, to us, a simple, fair proposition. 

Senator ENZI. I am told, though, that the riskiest loans are probably those to small business. So does the administration’s proposal 

not kind of force these people to avoid these high-risk loans to 

small business and—— 

Secretary GEITHNER. No, I do not think it has that—— 

Senator ENZI. They create the jobs. 

Secretary GEITHNER. I apologize, Senator. I do not think it has 

that risk, for the reasons I said. What this does is, you pay in proportion to the risks you take. More risky things that are funded in 

more or less stable ways carry a larger potential burden. But 

again, this fee only applies to less than 1 percent of American financial institutions, and for that reason I think it is very unlikely 

to have any impact on the ability of small businesses to get credit 

at affordable rates from the American financial system. 

Senator ENZI. Thank you. I have some serious concerns about the 

unintended and potentially devastating effects that the Consumer 

Financial Protection Bureau, the CFPB, will have on consumers, 

small businesses, and the general health of the economy. In addition to the CFPB, the administration and some members of the 

Senate are pushing to add another burden to the banks that will 

punish consumers, and that is the bank tax, which is the topic of 

today’s hearing. Given the push to roll the bank tax into the financial regulatory reform bill, how will this additional tax impact capital reserves for lenders who would also be required to increase 

capital reserves, reduce leverage, and hold a percentage of all loans 

on their books? 

Secretary GEITHNER. Well, Senator, as I said, I think this would 

have no effect—no negative effect—on consumers and their access 

to credit, or small businesses, for the reasons I said. It only applies 

to less than 1 percent of financial institutions. I think the institutions that we propose be covered by this tax can afford, can handle 

that burden. 

53 

You are right to say, of course, that this cannot substitute for the 

additional efforts that are part of the reform proposals to make 

sure that we put in place more conservative capital requirements, 

leverage requirements, liquidity requirements on these institutions. 

Those things are important, too, but I do not believe this carries 

any significant risk of making it harder for Americans to get credit 

at reasonable rates, again, for the simple reason that it leaves untouched 99 percent of American financial institutions. 

Senator ENZI. And with that statement, then, you are sure that 

it will not negatively impact consumer credit availability for small 

community banks? 

Secretary GEITHNER. Again, I am very confident that it does not 

have that risk. I quoted CBO in making that judgment and saying 

that, if large institutions that are covered by this fee try to pass 

it on to their consumers, then they risk losing that business to 

other banks that are not covered by the fee. Since, again, more 

than 99 percent are left out, that is a reasonable judgment. That 

is why CBO came to that conclusion. 

Senator ENZI. I have a question that I will follow up on later in 

writing. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Senator Kerry? 

Senator KERRY. Thank you, Mr. Chairman. 

Mr. Secretary, thanks for being here today. There has been some 

concern expressed about the scope of the proposal and the fact that 

it covers institutions beyond banks. I want to get parochial, if I 

can, for a moment. 

I have heard from some institutions in Massachusetts that are 

concerned that they are covered by the fee because a very small 

percentage of their assets are either in a thrift or in a broker/ 

dealer. For example, there is a very successful property and casualty insurer. It does not own an insured depository. It sells auto, 

homeowners, worker’s compensation, other property and casualty 

policies. It does, however, have a small broker/dealer in its small 

life section, and it is limited to product offerings to mutual fund 

shares, variable annuities, variable life insurance. 

The broker/dealer does not provide any kind of investment advice 

to investment companies or insurance companies. It does not buy 

or sell securities in its own name or hold customers’ securities or 

funds. Because of the limited activities as a broker/dealer, this particular broker/dealer, it is exempt from the Securities Investor Protection Corporation membership requirements. It generates less 

than $1 million in revenue per year based on assets that are tied 

to old retail activity that goes back more than a decade. 

So the question is, since you have roughly less than three onethousandths, I think it is, of 1 percent in the company, would that 

kind of company be included by the fee or would it not be because 

the broker/dealer is not a primary dealer? 

Secretary GEITHNER. It would not be covered because the broker/ 

dealer is not a primary dealer. Again, we included companies that 

owned primary dealers because primary dealers were eligible for 

the Federal Reserve’s primary dealer credit facility, which was an 

exceptional emergency facility, but it would not apply to other inVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00057 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
54 

stitutions that did not own primary dealers or whose broker/dealer 

was not a primary dealer. 

Senator KERRY. And that will be set forth clearly? That will be 

a clear delineation? 

Secretary GEITHNER. Yes. 

Senator KERRY. I will give you another example. A mutual fund 

company has a thrift and an insured depository. They do not do 

any banking activities, take no customer deposits, make no loans, 

but they need to have the thrift because they need it to custody the 

assets of their 401(k) programs, et cetera. The insured depositories 

are used solely for trust purposes and not for any commercial activity or investment. Is that institution covered by the fee? 

Secretary GEITHNER. Senator, we have not quite figured out how 

to solve that particular problem. You are right to say there are a 

limited number of companies that are large enough to be potentially captured who own what we call depository institutions, but 

they do not take deposits, really, and they have to own that institution really for trust purposes. These emergency programs were not 

designed to benefit them. I do not think they were ever intended 

to be eligible for those programs. So, that is something we have to 

figure out how to solve, but have not figured out how to do it yet. 

Senator KERRY. Do you think we need to clarify that, perhaps? 

I mean, should we, perhaps, prophylactically, exclude non-TARP 

recipients who have an extremely small amount of assets in a thrift 

or insured depository? 

Secretary GEITHNER. I think there are lots of ways to do it, and 

we would be happy to work with you and your colleagues to do 

that. Of course, I think that it should be very clear ultimately in 

the laws and regulations provided, it should be crystal clear who 

is covered and who is not. 

The simple principle we are trying to hold to is the one I said 

at the beginning, which is that firms that were above $50 billion— 

not in their assets under management, we will not touch mutual 

funds at all—but were above $50 billion and were eligible, directly 

eligible for these emergency programs, we think, as a matter of 

principle, they should be covered. But I agree with you that there 

are some issues we have to clarify still about coverage. 

Senator KERRY. Right. That will depend also on what kind of assets you counted in the $50 billion. 

Secretary GEITHNER. That is exactly right. Exactly right. And 

again, to make it clear, you would not count the assets that we call 

mutual funds in that. 

Senator KERRY. I would like to make sure. If we could continue 

that dialogue. I know we will, and I appreciate your willingness to 

do that. 

Just one last quick question. In response to Ranking Member 

Grassley, the CBO indicated that the proposal would slightly decrease the availability of credit to small businesses. Can you speak 

to that for a minute? What impact do you think this is going to 

have? I am already hearing from a lot of small businesses who 

think it is tough enough. 

Secretary GEITHNER. I do not have, Senator Grassley and Senator Kerry, the report in front of me, so let me describe again what 

55 

our intent is and why we think it is designed in a way that would 

limit that risk. 

It only covers, again, a very small fraction of the American financial system and leaves outside most of the institutions who provide 

most of the credit to small business. So for that reason alone, we 

think it is designed to have very limited risk of any adverse effect 

on small businesses. 

Now, the firms covered would have a choice about how they pay 

for these costs. They can reduce compensation to their executives, 

they can lower their dividend payment, for example, or they could 

try to pass it on to their customers. But, if they try to pass it on 

to their customers, then they would face the risk that they would 

lose that business because the other more than 99 percent of the 

American financial system that is not covered by that tax would be 

able to come in then and take that business away. 

Senator KERRY. Well, I realize you have already said this. I know 

my time is up, but you have already said this. I am concerned that, 

however it works in practice, it may not be that clean-cut, and the 

result may be that the small businesses may have an impact. I 

would like to see. I do not know exactly, and I want to analyze how 

CBO came to that conclusion. But I think it is worth your analysis 

also to make sure that there is not an inadvertent unintended consequence of a tightening of that credit. 

Secretary GEITHNER. I share that objective, and we would be 

happy to work with you and your colleagues to make sure that it 

is designed in a way ultimately that gives us all reassurance that 

it will not carry that risk. 

Senator KERRY. I really appreciate that. 

The CHAIRMAN. Thank you. 

Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. 

To follow up on that question, Mr. Secretary, that is a concern, 

and we will hear from panelists who will be testifying subsequent 

to you who indicate that there clearly could be an effect. Although 

it applies to only 1 percent of the institutions, they hold a disproportionate amount of the assets. If the FDIC-insured deposits 

are exempted from the tax, they may try, obviously, to get more 

FDIC-insured deposits as a way to avoid that tax liability. Obviously, that is going to come into play for competition for those deposits, and that could affect the banks. 

So there could be a potential spill-over, not to mention the fact 

of the overall impact on the economy. I think there is no way to 

assess that at this point. Is that not true? I mean, so it could invite 

that competition, it could aggravate the lending supply, the credit 

supply to small businesses. So albeit maybe 1 percent, it has a true 

impact because of the size of these institutions that hold the considerable amount of the assets in this country. 

Secretary GEITHNER. Well, Senator, of course I agree with the 

concerns. Because of those concerns, we proposed to design the fee 

in exactly this way. We are again happy to work with you in making sure that, as we meet this obligation to protect the taxpayer 

from losses in TARP, we do so in a way that is fair and does not 

have this effect. 

56 

Now, again, you have to look at this against the alternatives. In 

our judgment, the alternative ways of doing this would carry greater risk of just the kind of problems you are saying. It would not 

be fair. But we are happy to work with you to make sure we limit 

this risk, because we all share an interest in making sure we are 

not making things harder for small banks and for small businesses. 

But I quoted in my opening statement the CBO conclusion that 

said this is likely to increase market share for small- and mediumsized banks. That is not the intent of this proposal, but if that was 

true that would be a positive effect. 

Senator SNOWE. But on what basis do they make that decision? 

Secretary GEITHNER. Again, simply on the basis that it only covers a small fraction of the firms in the U.S. financial system. If 

those firms try to pass on a share of these costs—again, this is a 

very modest fee. In size, it is going to be like the fee that banks 

now pay for deposit insurance, so it is a very small, very modest 

fee. 

But, if they try to pass on part of that, then they risk losing business to their competitors. That is the way the market works. That 

should have beneficial effects against the risks that you cited, 

which would not encourage more concentration. Again, in putting 

the fee on risk you help reinforce the broad objectives we have of 

limiting risk in the system taken by large institutions. I think that 

is a benefit, a strength, not a weakness, to the proposal. 

Senator SNOWE. Well, I think that is certainly something that we 

will have to be assured of in terms of unintended consequences 

during this fragile time in our economy, and most especially within 

the small business sector. If they hold 70 percent of all the assets 

in this country, that is an issue. I mean, we have to be concerned 

about the potential for spill-over. 

Secretary GEITHNER. Senator, again, I completely agree with you 

about the important objective of designing this in a way that reduces that risk. I think our proposal does that. Just one thing 

about our financial system. Banks in our country—and we have 

9,000 of them—only provide about half the credit to businesses that 

businesses rely on, that the economy relies on as a whole. The rest 

of that is provided by the broader capital markets. 

Of the banks that provide that credit, only a very tiny number 

are covered by this fee. Now, you are right that those large banks 

account for a large share of assets in the banking system, but a 

much smaller share of overall credit provided to the American 

economy. 

Senator SNOWE. Also, to follow up on some of the questions that 

have been raised with respect to small business lending and the 

availability of credit to small businesses, which clearly is a dire situation from all perspectives—in fact, NFIB released a survey back 

in mid-April that I think is an indication. If you look at these 

charts on the optimism, on the outlook in time to expand, these are 

all 25-year lows. That is significant from the standpoint of job creation. 

I know we have had conversations, and we are working with 

Gene Sperling, working with the chair, and we had a meeting last 

week representing the majority, minority, both on this committee 

and among the leadership in your department. The question is, 

57 

when? I mean, it has been 5 months. And I know the administration has had initiatives out there. 

I just cannot understand why we have not coalesced around an 

agreement on a small business jobs program. It is really dire. I 

think the depth of despair within the small business sector, and 

also among the American people in terms of jobs, when you think 

of the longevity of unemployment now, it is again the highest in 

2 decades, if not more than that, with respect to how long people 

are now unemployed; 40 percent are unemployed for more than 6 

months. I mean, that is significant. 

So when I look at these charts, and Mark Zandy testified before 

this committee as well subsequent to the release of this NFIB survey, indicating confidence is about as low as it has ever been. That 

is what he said. I think we all concur, from those of us who visit 

Main Streets in our respective States. I mean, that is a broad indication. So what are we doing about it? 

I think that this has just been a very lethargic effort when it 

comes to small business. Everybody is talking about jobs, everybody is talking about small businesses, but nothing is being done 

about it. That is why there is a desperation out there across America’s landscape, and it most definitely has manifested itself on 

Main Street, and rightfully so. I just do not see this impetus to get 

this done. 

Secretary GEITHNER. Well, Senator, we feel very strongly about 

this, as strongly as you. I agree with you: it is time now. We have 

a good package of tax incentives for small businesses, like zero capital gains rate for investment in small businesses. We have a small 

business lending facility that would give capital to community 

banks across the country that prepare to use that capital to expand 

lending; substantial expanded programs through the SBA, which 

we think will be very helpful—were part of the Recovery Act—and 

a special program for States to give them resources to support 

State programs that are directed exactly to this purpose. I agree 

with you, it is time. The Senate has been busy. I wish it had not 

taken this long, but this is something the Senate has to act on. We 

cannot do it. It requires legislation. But I think we are close to 

something that should come in with broad bipartisan support, and 

we think this would be a very helpful package. 

Senator SNOWE. Well, can I just ask one follow-up? I hope there 

is some energizing leadership on all sides here. I mean, I truly do. 

We can talk about jobs, jobs, jobs, but it is not materializing. That 

is why you are seeing the 9.7-percent unemployment rate remaining static for 3 consecutive months. That is the problem here, not 

to mention the people who are out there who have been unemployed for such a significant period of time. It also creates an anxiety and a panic. So, when can we expect some cash flowing from 

the lending facility, for example? I know that is something you 

have been arranging at the Treasury Department, lending facilities, for many months now. When will that happen? 

Secretary GEITHNER. When enacted with legislation. It requires 

legislation. When enacted, it would be very quick. I think this is 

the quickest program to market you could have, because all it requires is banks to come to apply. Again, we think it is the quickest 

way. It would have the highest return, and the potential costs are 

58 

very, very modest. Of course, we will propose ways to cover those 

costs so it would be fully deficit-neutral. It is a good program, it 

is time for it, and you are right to emphasize urgency. We would 

welcome your support. 

Senator SNOWE. I appreciate it. Thank you. 

The CHAIRMAN. Thank you, Senator. As you well know, we are 

planning on small business legislation with you and Senator Kerry 

quickly. It is needed. 

Senator Roberts? 

Senator ROBERTS. I thank the chair. 

Mr. Secretary, thank you for coming. I know you are an extremely busy man. Despite your very vigorous assertions, I still 

have very serious concerns that have been brought up by all of my 

colleagues about this bank tax and its potential impact on consumers and small businesses. The reason I am so terribly concerned is that, in a State like Kansas, we have 6,600 small businesses, and they employ over half of our employees, so whatever 

happens, or whatever could happen, is a big deal. 

I understand the tax is targeted at the large financial institutions, and you have certainly stressed that, to quote Willy Sutton, 

‘‘because that’s where the money is,’’ but I am convinced this tax 

will ultimately harm small businesses through higher costs for borrowing or reduced access to credit, or that the tax will be passed 

on to, and paid by, consumers. 

Now, I am not going to ask you to respond again because you 

have done that, and I hope your assertions are correct. By some estimates, the bank tax could remove up to $1 trillion in lending. Do 

you have concerns that removing this capital from the system, reducing lending to consumers and small businesses, will slow the 

economic recovery? 

Secretary GEITHNER. I do not have concerns, and if I did we 

would not have proposed this tax. And Senator, I just want to 

make the following observation, which is that I understand why 

the institutions that do not want to pay this tax do not want to pay 

it, and I understand that in making arguments against it they will 

threaten grave economic damage to small businesses if they are 

forced to pay this tax. 

But we have a legal obligation to cover the cost of TARP. We 

have to propose a way to do that that is fair. We would be open 

to other suggestions for doing it, but I cannot actually imagine 

other proposals that would carry less risk of damage to the lending—again, it is only less than 1 percent of institutions. 

The vast bulk of institutions that provide businesses to Main 

Streets across the country are not covered by the tax, and their 

competitive position, as CBO said, would be improved by this design. If there are other suggestions for how to do it in a way that 

is more fair, would carry less risk, of course we would be open to 

them. 

Senator ROBERTS. Well, if it does happen in regards to small 

business, rest assured, this committee will be eager to suggest various ways to you. I do not know about any threats that anybody 

has been making. If that is the case, that is the subject of another 

hearing. 

59 

What happens down the road for TARP? The TARP program is 

set to expire this October. Any TARP-related programs that will 

continue to operate beyond this date? 

Secretary GEITHNER. Beyond this date? No. We are putting this 

program out of its misery as quickly as we can, and we are going 

to return unused hundreds of billions of dollars of authority to the 

Congress, unused, much lower cost, saving the American taxpayer 

hundreds of billions of dollars relative to what people expected, and 

that will provide resources to help reduce our long-term deficits. 

Senator ROBERTS. Well, I have one for you here. There is the Home Affordable Modification Program I keep reading about, $50 

billion. If so, what exposure risk do the programs pose to the U.S. 

taxpayer in regards to the fact that, if we keep going here with 

HAMP—that is the acronym for the Home Affordable Modification 

Program; everything has to be an acronym here. 

Secretary GEITHNER. It is a terrible acronym, I agree with you, 

but it is a very good program. It will cost the taxpayer money. If 

we ultimately commit the $50 billion we have committed, we are 

prepared to commit to help resolve the housing crisis, then all of 

that money will be at risk of loss. 

Senator ROBERTS. But does that come from the TARP program? 

Secretary GEITHNER. Yes, it comes from the TARP program. It 

does. 

Senator ROBERTS. So down the road there is another program, another $50 billion worth of exposure if, in fact, that is a positive 

decision? 

Secretary GEITHNER. No. Again, it is an existing program we put 

in place more than a year ago, and we said we would not spend 

more than 50. If we spent up to 50, that money will be at risk of 

loss. But again, this program, Senator, is providing a very, very 

substantial benefit in helping stabilize house prices and helping, 

right now, more than a million Americans stay in their homes with 

much lower monthly payments. 

Senator ROBERTS. All right. 

In testimony before the committee April 20, the IG, Neil 

Barofsky, outlined where the losses in TARP concentrated—you 

have already talked about this a little bit—$50 billion for AIG; 

automobiles, $31 billion; housing, $49 billion. Any plans to recover 

these losses from those TARP recipients? If so, how would that be 

accomplished? If not, why not? 

Secretary GEITHNER. In AIG and the auto companies, again, 

these companies are going through very wrenching, difficult restructuring plans that are designed to help us recover as much of 

those investments as possible, and I think ultimately we are going 

to recover a very substantial fraction of those investments, again, 

at much lower risk of loss than we anticipated and that are in 

those estimates. Housing is different. The housing program, these 

are, in effect, direct expenditures, direct investments, and they 

have much higher risk of loss. 

But Senator, even in pointing out that the ultimate costs are 

lower than we feared and that we have achieved more stability at 

lower cost than we had hoped, there is still substantial risk of loss. 

Every 6 months from now until all the investments are back, we 

will provide estimates of what the ultimate losses are. 

60 

Senator ROBERTS. I think that is why some of our committee 

members, Mr. Chairman, wanted to wait until 2013. But at any 

rate, I am over time. I would like to submit a question for the 

record, however, to the Secretary. 

Thank you. 

[The question appears in the appendix.] 

The CHAIRMAN. Senator Carper? 

Senator CARPER. Thanks, Mr. Secretary. Good morning. How are 

you? 

Secretary GEITHNER. Very well, thank you. 

Senator CARPER. Good. Nice to see you. 

I think I am one of those guys who sees most glasses as half full, 

sometimes even when they are not. I think there may be an emerging good-news story here. I was at a dinner the other night here 

in Washington, a lot of people from around the country were there, 

fire fighters, a bunch of them, and their spouses and families. I remained with the crowd before I spoke, and I said, what do you 

think I should talk about? A number of people said, just give us 

some good news. Just give us some good news. We are ready for 

that. 

What I did is, I shared with them a little bit of the good news 

we have been talking about here today. I just want to go over a 

little bit, then I have a question or two to follow up with. 

I think most people felt when we established the TARP that we 

just gave money away to banks. Most people have not a clue that 

what we did is, we infused capital into the banks, we bought their 

preferred stock, they have an obligation to pay us dividends, and 

we also got, in a number of those interactions, warrants that we 

are now being able to execute. 

My understanding is that most, but not all, of the banks that 

have gotten money from the TARP, at least the lion’s share, have 

bought back their preferred stock. They paid their dividends in full, 

and in a number of instances we are beginning to exercise warrants. Bank of America is one that comes to mind, and I think we 

have exercised their warrants in a transaction that may have involved maybe $1.5 billion net gain to the Treasury. 

Could you just mention a couple of others in terms of the warrants? Maybe take a minute and explain to us how that works. 

Secretary GEITHNER. Well, in rough total we have had roughly 

$200 billion come back from these banks, all the major banks with 

over $20 billion in both dividends and proceeds from the sale of 

warrants, and independent analysts look at the total return for the 

taxpayer in those programs and would show that it is a very, very 

high return. The taxpayer got a very good deal on these investments because we were so effective in stabilizing the system, and 

you are right to emphasize that. 

Again, when I came into office, my predecessor—and this was the 

right thing to do, the necessary thing to do—had investments in 

banks representing 75 percent, three-quarters, of the entire American banking system. We came in and forced banks to go raise private capital to repay the taxpayer, to do that very quickly so we 

got the money back for the taxpayer at a very substantial positive 

return. 

61 

Senator CARPER. The money that we have not received back, 

there are some banks that have not, if you will, bought back their 

preferred stock, and we are not being able to execute our warrants. 

But have we executed warrants on most of them that we are going 

to be able to? 

Secretary GEITHNER. No. We still have a substantial number of 

really just small banks across the country that still have preferred 

stock outstanding, and, in the additional terms of these investments, they had 5 years before the dividend payment went up. So, 

we have substantial—— 

Senator CARPER. It goes up from what, 5 percent to what, 9? 

Secretary GEITHNER. Yes, from 5 to 9. 

Senator CARPER. Right. 

Secretary GEITHNER. So we have substantial repayment still 

ahead of us and substantial dividends ahead of us, and substantial 

warrants proceeds still ahead of us. But the broad numbers are the 

most important ones. Instead of a half a trillion in losses, we have 

around 100, probably lower than 100, with more than $200 billion 

back already, which is a substantial positive return in dividends 

and warrants. 

And as I said in response to Senator Cantwell’s comments, if you 

look at the FDIC programs, the Fed programs, other Treasury programs not covered by the TARP, those also have this characteristic 

of showing substantial positive return. 

Now, of course the ultimate measure of this is, how quickly do 

we bring down borrowing costs? In some ways, the best measure 

of success is not just the financial return but the cost of a loan to 

buy a house, a car, put your kids through college, help the municipal government build a new school. The cost of credit to businesses 

across the country is a fraction of what it was in the crisis when 

we came into office, much lower, much more affordable, even recognizing how tough it still is for small businesses across the country. 

Senator CARPER. All right. 

Talk to us, if you will, about AIG. AIG sold a number of very 

large assets, including one in Delaware, Alico—they are an insurance affiliate—for about $15 billion to, I think, MetLife. They also, 

I think, recently sold one of their foreign units for maybe $35 billion. 

Do I understand that money has gone to the Fed to repay an obligation there? Is there a further obligation that AIG has to the 

Fed? Then, what is their obligation to the TARP? 

Secretary GEITHNER. Those transactions you referred to have not 

yet been concluded, but when they are concluded they will return 

roughly $50 billion to, in this case, the Federal Reserve, but ultimately to the American taxpayer. Of course, AIG is still undertaking a series of other transactions that will make sure we get as 

much of those investments back as possible. 

But the very important thing as well to emphasize is the part of 

AIG that some people call their hedge fund, AIG Financial Products, that took on the enormous risks that brought the firm to the 

edge of collapse. We have been successful in bringing down the risk 

in that hedge fund very, very dramatically, so it is now a fraction 

of the level it was. So what we did is to, in a sense, step in, reduce 

62 

the risk, sell off the underlying businesses as quickly as we could 

in a way that maximized potential return to the taxpayer. 

The CHAIRMAN. Senator Wyden? 

Senator WYDEN. Thank you very much. 

Welcome, Mr. Secretary. Of course, we have a major financial reform bill on the floor. It has provisions, obviously, involving taxes 

and regulation. What I am most interested in is the question of 

transparency and accountability to American consumers and institutions. 

Let me start by asking you whether you believe that a buyer has 

a right to know that their banker is selling them a product that 

it is betting against. 

Secretary GEITHNER. Senator, I would say this. I think it is very 

important that we strengthen disclosure requirements across the financial system, that the SEC has the authority, stronger authority, 

to impose strong disclosure requirements, and stronger obligations, 

frankly, on institutions that provide financial services and sell 

products to their customers, whether they are retail investors, individuals, or sophisticated investors across the country. We would be 

happy to work with you on any proposals to help make sure that 

we are achieving that objective. 

Senator WYDEN. Here is what is going on. I filed an amendment 

on this, and I am asking this for a reason. You have banks trying 

to sell products to clients, products that the banks are betting 

against without telling the client that the bank is betting against 

the product. Now, we can have a debate about the details of it. I 

would like you to say ‘‘yes’’ or ‘‘no’’ whether you think the buyer 

has a right to know that a product is being sold to them that the 

bank is betting against. 

Secretary GEITHNER. Senator, I have an almost perfect record in 

responding to your questions at hearings, and, even with amendments that I completely agree with, I generally do not endorse 

them in the context that—— 

Senator WYDEN. I am not asking—— 

Secretary GEITHNER [continuing]. Without looking at them first. 

But I will study your amendment very carefully. And I would say 

the following: I completely agree that firms should have access to 

information about not just the risk in the investments, but any conflicts that may apply in that context. I am happy to work with you 

on that broad objective. I share your objective. 

Senator WYDEN. You share the objective that the buyer has a 

right to know? I am not asking you about whether you support the 

amendment, but on the question of the buyer having a right to 

know that a bank is selling them something they are betting 

against. You think the buyer has a right to know? 

Secretary GEITHNER. I do not want to say it exactly that way just 

because of how difficult this is, and complex. But on the basic principle that the buyer should have access to information they need 

to make an informed decision about the risk they are taking, absolutely, they should have access to that information. 

Senator WYDEN. And clearly, access to that information involves 

knowing that a bank is actually betting against it. I mean, Mr. Secretary, people are slackjawed on this particular proposition. I happen to think this is pretty complicated stuff, and that is why, under 

63 

my amendment, we give the oversight board a lot of discretion in 

writing the rules. 

But I think this is one that is fundamental to passing the smell 

test in this country with respect to basic fairness, so I hope we can 

work this out and look forward to working with you. We have done 

a lot of work together, and I want to work with you on this as well. 

One other question on the reform package. I think there is a 

sense that when you look at the housing bubble, the bad loans, the 

shoddy oversight, all of the kind of elements of this financial calamity that the country has suffered, there has not been the sense 

of accountability and oversight that is needed. 

Now, under the legislation, you would be chair of the Financial 

Stability Oversight Council, as I understand it. I would like to ask 

whether you would be willing to report to the Congress, in effect, 

and certify each year that the rules of the road on Wall Street are 

sufficient to protect the financial stability of the economy. It is not 

completely clear. It strikes me as a very useful council, but I think 

it would be very helpful to incorporate into it some kind of certification requirement that would come from you annually on this 

issue. 

Secretary GEITHNER. I am happy to work with you, Senator, on 

crafting that. I agree with you completely that this council should 

be required to report to the Congress regularly, to testify to Congress on broad conditions in the financial system, including to provide a judgment on whether the protections that exist, that are put 

in place, are adequate to provide a more stable system with better 

protections. 

Senator WYDEN. One last question with respect to the responsibility fee. I am trying to sort out the way an American bank is 

going to deal with the taxes relative to foreign banks. Part of this 

looks to me like it could impose a unilateral kind of fee on some 

of our financial institutions when banking, of course, is an international industry. So how would you address this question of ensuring fairness for American institutions relative to foreign ones? 

Secretary GEITHNER. I just should point out—I should have said 

this earlier—just one basic fact in design: it is designed in a way 

that, if you adjust your behavior, you take on less leverage with 

less risk, the fee diminishes. So it has this benefit of, you can adapt 

in a way that reduces the incidence of the fee. 

But we are working closely with other countries where U.S. firms 

compete with other foreign banks to encourage them to put in place 

a similar fee so we have a better chance of a level playing field. 

As you read in the papers, there is very substantial support for a 

fee like this from my counterparts in the U.K. and in Europe. 

Senator WYDEN. Thank you, Mr. Secretary. 

The CHAIRMAN. Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. 

I, too, want to talk directly about the financial crisis responsibility fee, which you have named it. Nobody knows better than you 

how unpopular the TARP has become. The number-one argument 

against the TARP is, taxpayer money was used to ‘‘bail out the 

banks.’’ So now we are debating comprehensive financial reform to 

ensure that we are never again faced with the Hobson’s choice we 

all faced, you as chairman of the New York Fed and we as SenVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00067 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
64 

ators, to rescue financial institutions on the brink of collapse or 

risk another Depression. We want to avoid that horrible choice. We 

sat through it once; once is enough. 

We certainly can, and should, work to prevent any more taxpayer 

bailouts, but we also need to close the book on the last one so people are convinced we mean what we say. We can make sure the 

taxpayers get every dime they paid into the TARP legislation, 

which I think will benefit the financial system overall and give 

more confidence in what we are doing. So I think it is important 

to do. It is also something we said at the time. 

A key piece of the legislation required the President to assess the 

cost of the programs and ‘‘submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall 

in order to ensure that the program does not add to the deficit or 

national debt.’’ 

Some argue, well, it should be proportionate to what each bank 

got. That is not what the legislation says. Look, I sat there when 

many of these major financial companies called up and said, unless 

you do this, we will be gone. So, just every major financial company 

should be grateful that this happened, and in my judgment, not 

quibble that they should do this or they should do that. Everyone 

benefitted, and the taxpayer did step up to the plate, frankly, 

under George Bush and Hank Paulson’s leadership. 

So the financial crisis responsibility fee sends an important message to taxpayers that we mean what we say. When the law requires the financial industry to pick up the tab for rescuing the 

economy, in part created by the problems of the financial industry, 

we follow through and get our money back. 

There are legitimate details as to the specifics of the plan, and 

some of those have been debated here. I think those are open to 

debate. But the first thing, I think it makes common sense to put 

this in the banking bill, in the regulatory reform bill. I know that 

is not the majority opinion around here, but I think it makes sense. 

What do you think? 

Secretary GEITHNER. Senator, first of all, I agree with everything 

you just said about the rationale for the fee. On the question of 

how to get it passed, that is really a judgment we leave to the Majority Leader and to Chairman Baucus and to Chairman Dodd, and 

we are open to any suggestion that meets the legal obligation we 

have and puts this in place. 

Senator SCHUMER. All right. I thought the administration’s position was, they prefer it to be in the bill. 

Secretary GEITHNER. Well, of course we would like it to become 

law. As you said, we want to demonstrate to people we mean what 

we say. We committed to do this, and we want to work with you 

to make sure that we put it in place with the best design possible 

as quickly as we can, and we are open to any suggestion for how 

to do that. We think there is a good case for doing it as part of financial reform, but that is a judgment that we cannot make that 

we leave to the Majority Leader and his colleagues. 

Senator SCHUMER. Thank you. As one of those colleagues, I will 

weigh in. 

Second, as you noted, the current estimates of the TARP losses are going down. They are $109 billion to $117 billion. They may go 

65 

down further. I believe the purpose of this is to be repaid, not simply to impose a new tax. My question is, if the losses keep getting 

lower, as they have been for months, would you recommend that 

the program end early after every nickel, every dime is repaid? 

Secretary GEITHNER. Senator, let me respond to it this way. You 

are right that the current costs are somewhere between $100—— 

Senator SCHUMER. When you say that, I know you are not going 

to respond to it. 

Secretary GEITHNER. I am going to respond in just the perfect 

way. The cost is now estimated between $100 and $117 billion; we 

proposed a fee that, over 10 years, would raise $90 billion, so we 

have already built in some recognition these costs may come down 

over time. But of course, ultimately that is a question we would 

have to work with you all on to figure out what is fair and just. 

Again, since the TARP did not capture the full damage to our fiscal position caused by the crisis nor the benefits to the major 

banks, as you said, and since we want to reassure people—not just 

the American people but people around the world—that we are 

going to be responsible in repairing the fiscal damage, we think it 

is sensible to say it is $90 billion over 10 years. We can keep it in 

place longer if we need to to capture higher costs if they materialize. 

Senator SCHUMER. But what about the inverse? 

Secretary GEITHNER. Well, again, the inverse is a very interesting question we have to work with you on, but our judgment is, 

because the TARP did not fully capture the fiscal costs, we think 

that it is responsible to propose this at a level that raises $90 billion over 10 years. 

Senator SCHUMER. Thank you. 

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Mr. Secretary, I am just glancing at a Forbes article from about 

a week ago or so which outlines that the IMF is suggesting the various countries contribute to what looks to me like some kind of reserve fund, and as much as 2 to 4 percent of the country’s GDP, 

but it seems, as best as I can understand it from the article here, 

that it would be structured much differently, that is, on income, 

profits, and bonus payments and so forth, not on risk. 

I am just curious. What is our government’s position on those 

IMF negotiations over what kind of a fee makes most sense? 

Secretary GEITHNER. Mr. Chairman, the IMF actually, in analyzing a range of possible approaches to cover the fiscal cost of crises, made two recommendations. It proposed a fee very much like 

ours to cover the cost of this crisis and was very supportive of the 

broad design we laid out, but it also suggested that governments 

might also want to consider, as a down payment on the cost of future crises, putting a broader tax on profits against that potential 

contingency. 

But as I have said today, our judgment is that we have an obligation to cover costs of this crisis. We want to meet that obligation. 

We think this fee, like the IMF recognizes, is the best way to do 

that. We would be happy to work with you on other ways to do it, 

but we think this is the fairest way to do it. 

66 

In making this judgment, we did look at a broader profits tax, 

we did look at financial transaction taxes, the full range of those 

kind of taxes, but we concluded, as I believe the IMF did, that this 

was the best way to meet that legal obligation. Again, it is the largest institutions paying in proportion to the risk they take. It is like 

a ‘‘too big to fail’’ type levy, and we think it is better than the alternatives. 

The CHAIRMAN. I am a little unclear. Is theirs a risk-based proposal or is it based more on profits—— 

Secretary GEITHNER. The IMF made two recommendations, for 

reasons I do not quite understand. They suggested, for the cost of 

past crises, a fee on risk, like we have proposed is an appropriate 

approach, but they also suggested countries might want to consider, as a down payment on the cost of future crises, a broaderbased tax on profits for financial institutions. That is something 

that we looked at and did not recommend, do not feel it makes 

sense. But again, we are trying to meet a more limited objective 

now, which is to cover the cost of TARP. 

The CHAIRMAN. The assumption behind all this, not only this tax 

but also the financial regulatory reform, is we will be enacting laws 

that will prevent this catastrophe from happening again. Now, 

clearly, that is a big assumption. So, when you think about all this, 

what are some of the areas that we need to focus on to minimize 

reoccurrence of this kind of financial meltdown? 

Secretary GEITHNER. Well, the four essential, necessary things 

we have to do in these reform plans are to protect consumers 

against the kind of predation and abuse they faced, to limit risk 

and leverage by the major institutions—whether they look like 

AIG, or Wells Fargo, or Citigroup, or Goldman Sachs, or Lehman 

Brothers, or Bear Sterns. We want to make sure that they are subjected to more conservative constraints on leverage and risk-taking. 

We want to make sure we bring the derivative markets out of the 

dark into a framework of oversight and transparency, and we want 

to make sure that, if in the future these large institutions ever 

again manage themselves to the point they cannot survive without 

government assistance, we want to make sure we can put them 

through a form of bankruptcy without the taxpayer being exposed 

to loss. We think that combination of reforms is essential to deal 

with the cause of this crisis and is essential to make our country 

less vulnerable in future crises. 

Now, you are right, and you said this well, that we will face some 

risk of crisis in the future, but with these reforms we can dramatically reduce that risk and make sure that, if people make mistakes 

again, that they are not going to cause this kind of catastrophic 

damage and we can protect the American taxpayer and American 

businesses and families from the broad damage caused by this crisis. 

The CHAIRMAN. Maybe you can help me out on just a question 

I have. You said that the tax is going to cover, say, derivatives that 

are off the balance sheet, which I think is a good idea. How much 

are derivatives currently, according to Generally Accepted Accounting Principles, off balance sheet, or is there a footnote reference to 

them? How is the investor/public going to know in the future what 

these derivatives, swaps, and all these exotic instruments and so 

67 

forth held by an institution really are, even though they are off the 

balance sheet? 

Secretary GEITHNER. Well, the virtue, again, of these reforms is 

that firms will have to disclose every quarter the risks they have, 

whether it is in derivatives or other types of fancy, complex products, whether they are on balance sheet directly or off balance 

sheet. So where they have risk and exposure to those products, 

they will have to disclose those risks, hold more capital against 

those risks. If you adopt this fee as we have designed it, they cover 

their cost of the financial crisis if—— 

The CHAIRMAN. I understand if the fee is adopted. But what 

about those institutions that are not covered by the fee? 

Secretary GEITHNER. The reforms that the Senate is considering 

would require those kind of disclosure requirements and capital requirements across the American financial system, regardless of 

whether you are covered by this fee. 

The CHAIRMAN. So we are not going to see a lot of off-balance 

sheet problems, like Exxon or Lehman or others that we saw? 

Secretary GEITHNER. No, exactly. What happened in our system 

is people engaged essentially in banking, borrowing money short 

and taking risk in lending that money, and were able to operate 

outside the constraints of banking regulation, no capital requirements, no disclosure requirements, nobody in charge, nobody looking at them. This bill will fix that problem, that central problem, 

and make sure that those institutions, regardless of what they look 

like or call themselves, if they are engaged in that business of 

banking and risk-taking, play a critical role in our markets, they 

will come within a set of constraints to limit the risks they take. 

The CHAIRMAN. So how will all these products be shown on the 

balance sheet? 

Secretary GEITHNER. Well, again, they will have to disclose every 

quarter the economic risks they have in exposure to those products 

and hold capital against those risks. The reforms on derivatives, we 

discussed earlier, will bring about this very important set of reforms to make sure that that stuff comes out of the dark and is 

disclosed publicly, that standardized products are centrally cleared. 

If they are centrally cleared, they are traded on exchanges where 

there is transparency and price discovery. That is a huge, sweeping 

change in transparency and disclosure. 

The CHAIRMAN. What about non-standardized products? 

Secretary GEITHNER. There is still an important economic benefit 

in non-standardized, customized hedging products for companies 

that make things, produce things across the United States. We 

have preserved the capacity to do that, but you have to provide disclosure transparency on those products, and you have to make sure 

that the firms that write those commitments hold capital against 

those commitments. What we cannot do is allow a company like 

AIG, again, to write hundreds of billions of dollars of commitments 

to people who are trying to hedge risks without the capital to meet 

those commitments. 

The CHAIRMAN. Again, I do not mean to beat a dead horse here, 

but how will that be shown on the balance sheet? 

Secretary GEITHNER. They will have to disclose to their investors, 

to their shareholders, to their creditors, every quarter, the risk in 

68 

their assets, whether it is on balance sheet or off balance sheet, 

and the capital they hold against those risks. So, as part of the normal public disclosure requirements for these companies, these 

firms will have to disclose those exposures. 

The CHAIRMAN. All right. As long as there is full disclosure. 

Secretary GEITHNER. Full disclosure. 

The CHAIRMAN. All right. And in the interest of full disclosure, 

I meant to say Enron, not Exxon a little earlier, too. 

This whole discussion on the bank tax has assumed something 

along the design of the administration’s proposal that is risk-based. 

There has been virtually no discussion of what I take to be the 

House proposal, which is based on profits or income. I assume that 

you summarily dismiss, or at least come close to saying you very 

much do not favor a tax on banks’ income? 

Secretary GEITHNER. I definitely would not summarily dismiss. I 

would say again, and we have said to our colleagues in the House, 

that we are of course open to suggestions on how best to craft this. 

We want to work with you to do it in a way that is fair and sensible. 

As I said, we did look at a profits tax, as well as a financial 

transaction tax, and various forms of both of those. But we 

thought, Mr. Chairman, that this was a better design because it 

would have the additional benefit, not just of covering the losses in 

TARP, but in a form that would help reinforce our broader objectives of limiting risk-taking and leverage by the largest firms. A 

profits tax would not do that. The fee we propose would have that 

benefit. 

The CHAIRMAN. But you are not at all concerned about reducing 

American competitiveness with this fee? 

Secretary GEITHNER. Well, again, we have a legal obligation in 

the TARP to cover these costs, and we want to find a way to do 

this that would minimize the risk of any loss of competitiveness. 

One way to do that is to do what we have been doing, which is 

to work with other countries to encourage and put in place a similar fee. I think it is more likely that other countries will join us 

in the form of a fee designed as a tax on risk than a profits tax. 

So I think that it is probably true. I cannot be sure that the level 

playing field objective is best served by a tax on risk. 

The CHAIRMAN. Thank you. 

Senator Grassley? 

Senator GRASSLEY. In regard to that last point, I think New Zealand, Australia, and Canada already torpedoed this effort, so you 

might as well forget about it from the standpoint of international 

competitiveness, because they are going to make sure that they 

stay competitive. I think they see some of the intellectual dishonesty of trying to tax somebody to, let us say, lessen risk. Taxation 

has nothing to do with that risk. That is just my opinion. 

I have two questions I want to ask, and then I guess you will 

be able to go. GM filings at the SEC state that the taxpayers’ 

TARP loan bore an interest rate of 7 percent and ran until 2015. 

The SEC’s filings also list a $2.5-billion loan GM still owes their 

auto union health plan that runs until 2017, and bears an interest 

rate of 9 percent. 

69 

In light of GM’s statement that it does not need the escrow 

funds, should GM use some of the $6.6 billion to pay off a highinterest loan from the union health plan so the taxpayers are no 

longer subsidizing this expensive debt? It seems to me that that 

would be common sense. Your opinion? 

Secretary GEITHNER. I am not quite sure how to respond to that, 

Senator, but would be happy to talk to you about it in more detail. 

Again, we are going to be guided by what we think is the best way 

to recover these investments as quickly as we can with the least 

risk of loss to the American taxpayer, and we are in a much stronger position today in achieving that objective than any of us hoped 

because we were so successful in putting these firms through a dramatic restructuring. 

Senator Grassley, could I just respond, though, to your first question, your initial comment? The FDIC assessment regime that has 

been in place now for some time does incorporate this principle of 

risk-based pricing, so banks now pay a fee for deposit insurance in 

proportion to a bunch of objective measures of the risk they are 

taking. 

So that basic principle, I think, is a fundamentally sensible principle. It is already imbued in current banking practice in the 

United States. Many other countries would like to replicate that 

practice. I think ultimately we have a very good chance of getting 

support from other countries, but our obligation is to do what is 

necessary and appropriate for the American taxpayer in a way that 

is fair and just to them. Again, we are happy to work with you on 

other ways of achieving this, but we think this does the best job 

of achieving that objective. 

Senator GRASSLEY. On my questions, the point is—and you do 

not need to respond any more—if you pay off a 7-percent loan and 

you have a 9-percent loan out there, it is common sense that, if the 

taxpayers are helping General Motors to keep General Motors viable, they would be better off paying off a 9-percent loan than a 7- 

percent loan. I mean, you can try to fool other people, but I will 

tell you how farmers look at interest rates. You have to remember 

that GM lost over $3 billion last quarter, and that is not great either. 

Last question. You testified last week before the Appropriations 

Committee that you had not seen the GM ad. In that ad, the CEO 

of GM claims that it has ‘‘repaid’’ its government loan in full. However, as you know, prior to the bankruptcy the taxpayers loaned 

GM over $19 billion. That loan was certainly not repaid in full. 

Have you seen this ad since your testimony last week, and is it 

not a misleading ad to the average citizen? 

Secretary GEITHNER. Senator, I have not seen that ad. I did not 

see it in advance. We have been very careful to meet our commitment to make sure these companies are running themselves, and 

we are not in a position of deciding how they run their companies. 

But I want to emphasize that we were very careful to make it 

clear, as we have done all this time, to lay out for the American 

people the full scope of our investments in these companies. I want 

to emphasize again, as I did last week, that we still retain a substantial share of equity in these companies, which we hope to reVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00073 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
70 

duce, and will reduce, very quickly over time, but those investments carry some significant risk of loss. 

Now, Senator, I know you know this, but it was President Bush 

and my predecessor who made the judgment to decide to rescue 

these companies. Our obligation was to finish the job, and we did 

it in a way, because we put them through bankruptcy and restructuring, that puts them in a much stronger position today, and we 

face much lower risk of loss on these investments than any of us 

expected because these restructuring plans were so ambitious. We 

are very encouraged by the broad signs of improvement you are 

seeing, both in these companies and across the American economy. 

Senator GRASSLEY. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. 

Thank you, Mr. Secretary. We deeply appreciate all the time that 

you have taken to be with us today, a little over 2 hours. I know 

you have testified in many other committees, too. It is sometimes 

difficult and sometimes frustrating for you, I am sure, but it is very 

valuable. Thank you very much for taking the time. 

Secretary GEITHNER. A pleasure to do it. Happy to be here. Of 

course, I will respond to any of the questions submitted in writing 

as quickly as we can. 

The CHAIRMAN. You bet. Thank you. 

Next panel. Our first witness is Steve Bartlett, president and 

CEO of the Financial Services Roundtable. Next, John Sorensen, 

president and CEO of the Iowa Bankers Association. The third witness is James Chessen, chief economist at the American Bankers 

Association; and finally, Patrick S. Baird, chairman of AEGON 

USA. Thank you. 

You each have 5 minutes to speak, roughly, and your prepared 

statements will be in the record. 

Why don’t you proceed first, Mr. Bartlett? 

STATEMENT OF HON. STEVE BARTLETT, PRESIDENT AND CEO, 

FINANCIAL SERVICES ROUNDTABLE, WASHINGTON, DC 

Mr. BARTLETT. Chairman Baucus and Ranking Member Grassley, I begin my testimony again by thanking Congress, as we have 

in the past, and the taxpayers for the capital investments made in 

the financial firms under the TARP program. 

I reaffirm the commitment of the members of the Financial Services Roundtable, and indeed the financial services industry, to 

repay those investments in full. Let me say that again: we have repaid significant portions of TARP; we are in the process of repaying; and we will repay every dime, as Senator Schumer said earlier, under the TARP program. 

That is the law, and we will abide by the law because we support 

it. TARP, as has been said, was not a popular program, and yet 

TARP helped stabilize the financial system. It allowed financial 

firms to maintain the flow of credit to consumers and businesses 

during the time the economy was in crisis. 

However, the tax that the administration has proposed over the 

last couple of months and here today is another matter entirely. 

This seems to be a tax in search of a purpose. I have made a list 

of some of the purposes I heard this morning. It could be an additional tax in addition to what is provided in the law. It could be 

71 

an over-tax to over-pay the TARP losses. It is clearly a premature 

tax, as the law provides that that tax would not even be proposed 

for an additional 3 years. 

It is proposed as a back-door regulatory scheme regarding capital 

adequacy. Let me say, we support additional and higher capital 

standards in capital adequacy, but not through a taxing system. It 

is proposed to be a tax to pay for other programs, including the oil 

spill in the Gulf, and a tax to shift, indeed, market share from one 

sector of the banking industry to another. 

While the purpose of the tax is not clear, what is clear is that 

this tax, in its present proposal, is both premature and harmful to 

the economy. The industry’s obligation to pay the cost of TARP was 

settled when the program was established by law. The Emergency 

Economic Stabilization Act, which created the TARP program, requires the administration to submit a report to Congress on TARP 

costs 3 years from now, beginning in 2013. 

This recoupment program—and I have included a copy of the 

statute in my written testimony—is clearly stated. Section 134 

says, in part, ‘‘Upon the expiration of the 5-year period beginning 

on the date of the enactment of the Act, the Director of OMB shall 

submit a report to Congress on the net amount. In any case where 

there is a shortfall, the President shall submit a legislative proposal that recoups that shortfall from the financial services industry.’’ 

Congress delayed the calculation of the TARP program for 5 

years for two very obvious reasons. One is, we do not know the 

total size of the losses, if any. Second, it is counterproductive, for 

an economy that is just beginning its recovery, to take capital out 

of the economy now. 

In a letter to Congress, Secretary Geithner acknowledged the uncertain nature of any estimates of TARP costs and gains when he 

said that costs are ‘‘highly uncertain and depend on future financial and economic conditions.’’ The estimates of the losses in the 

last year alone range from $99 billion on the low side to $356 billion on the high side. I have attached to my testimony nine different official estimates that have changed approximately every 6 

weeks. One thing is certain, and that is the net losses will be less 

than they are believed to be now at $117 billion. 

The Treasury Department also said, on April 2—and these are 

their words—‘‘Treasury currently estimates that its programs 

aimed at stabilizing the banking system will earn a profit, thanks 

to dividends, interest, and early repayments in the sale of warrants. Total bank investments of $245 billion in fiscal year 2009 

that were additionally projected to cost $76 billion are now projected to earn a profit.’’ 

The three areas of losses that are in question, roughly one-third, 

one-third, one-third, are AIG, HAMP, and the automakers. But it 

is also clear that, even in those three, the size of those losses will 

likely decline steadily over the next 3 years. So, as I said at the 

outset, the members of the Financial Services Roundtable have repaid, will repay, and are repaying under the current law. 

I would also say, in terms of its economic effect, if you take $900 

billion out of the capital system beginning now, particularly in 

these economic times, you do reduce lending. If you take $90 billion 

72 

out, you reduce lending; by rule of thumb, approximately $900 billion would thus further damage the economy. 

Mr. Chairman, I have submitted my written testimony and will 

submit additional suggestions that can, and should, be done for 

Congress to deal with small business lending. In the Roundtable’s 

opinion, that is the single most urgent action that the Congress 

should be taking now, to make some way overdue and needed reforms to increase small business lending. I have included some specifics in my testimony. 

The CHAIRMAN. Thank you, Mr. Bartlett. 

[The prepared statement of Mr. Bartlett appears in the appendix.] 

The CHAIRMAN. Next, Mr. Sorensen? 

STATEMENT OF JOHN K. SORENSEN, PRESIDENT AND CEO, 

IOWA BANKERS ASSOCIATION, JOHNSTON, IA 

Mr. SORENSEN. Thank you, Chairman Baucus, Ranking Member 

Grassley, and members of the committee. My name is John 

Sorensen. I am president and CEO of the Iowa Bankers Association. The IBA exists principally to assist our members in serving 

their customers and their communities. 

The IBA counts 95 percent of 386 banks, with over 1,600 locations, as members. The median size of an Iowa bank is $100 million in assets. Iowa is principally a community banking State, but 

we also have a regional and money center bank presence, representing 20 percent of the $64 billion in State-wide deposits. 

Iowa’s financial diversity has benefitted both consumers and businesses alike. 

One of the local newspapers, the Dubuque Telegraph Herald, recently penned an editorial summarizing the importance of their 

local banks to their community. In it they said, ‘‘Healthy financial 

institutions create and sustain success in all sectors of our community. From their loans towards initiatives vital for economic and 

civic growth, to their charitable donations, to their leadership in 

various community endeavors, our local financial institutions play 

a significant role in our success.’’ Iowa banks in Dubuque, and everywhere, are weathering the economic fallout from the financial 

crisis which they did not contribute to. The larger question may be 

whether or not they are able to weather the policy response. 

The Senate is working on financial regulatory reform. It is important work, and necessary. Many lessons have been learned from 

the experience of the last 2 years. We should take steps to close 

the gaps in financial regulation, better manage risks posed by large 

systemically important institutions, and develop a government 

housing policy that does not result in undue risk-taking, but most 

of all, we should not burden the very institutions who have been 

responsibly serving their communities. 

The Obama administration now proposes an annual financial crisis responsibility fee on banks, thrifts, and their holding companies 

with consolidated assets of over $50 billion. The purpose is to recoup the cost of the Troubled Asset Relief Program, or TARP. The 

Iowa Bankers Association opposes any new tax or fees specifically 

targeting the financial services industry, for two principal reasons. 

73 

First of all, the fee will threaten the lending capacity of the 

banking industry. Much of our industry has been challenged by rising delinquencies, declining profitability, and depleted capital levels. A $117-billion tax or fee, on top of the spiraling costs of recapitalizing the deposit insurance fund, will further deplete resources 

needed to fuel our Nation’s economy and economic recovery. 

The Congressional Budget Office, in their March 4 letter to Senator Grassley, confirmed the costs of the proposed fee would ultimately be borne by varying degrees by an institution’s customers, 

employees, and investors. The CBO also predicts the fee would 

have a negative impact on the availability of credit to small businesses. Small businesses are the engine for job growth in our economy. We should avoid any policy that dampens credit availability 

and job creation at this critical time. 

In addition, setting a tax to target a specific industry, or even a 

set of firms within that industry, sets a very bad precedent. Our 

industry would be much better protected, and we believe consumers better served, when bad actors are addressed through adequate regulation rather than through tax policy. 

Second, it is clear the American taxpayers will not incur loss in 

their bank investments through TARP. Rather, Treasury projects a 

double-digit return on bank investments. Although losses are projected in non-bank TARP investments in AIG and the automobile 

industry, even these may subside as the economy improves and we 

approach the loss assessment date of 2013 as contemplated by the 

Emergency Economic Stabilization Act. 

To charge banks for losses generated by non-banks and other administration programs would be unfair, and I believe inconsistent 

with the spirit of section 134 of the Emergency Economic Stabilization Act. 

In conclusion, the proposed fee accomplishes little in the way of 

altering behavior that caused the financial crisis. The country 

would be much better served by focusing on how we maintain a dynamic and responsible financial sector where the rules of the game 

are consistently applied to all players. 

Thank you for your invitation to testify today. 

The CHAIRMAN. Thank you, Mr. Sorensen, very much. 

[The prepared statement of Mr. Sorensen appears in the appendix.] 

The CHAIRMAN. Next, Mr. Chessen? 

STATEMENT OF JAMES CHESSEN, CHIEF ECONOMIST, 

AMERICAN BANKERS ASSOCIATION, WASHINGTON, DC 

Mr. CHESSEN. Thank you, Chairman Baucus, Ranking Member 

Grassley. My name is James Chessen, and I do appreciate the opportunity to be here on behalf of the ABA. 

There is no question that the banking industry—indeed, the entire country—benefitted from the extraordinary actions taken in 

the fall of 2008. It was a time of considerable stress and required 

decisive action to stop the growing anxiety and uncertainty in markets worldwide. 

The programs implemented in this crisis, however, were not wellarticulated and often changed as issues arose. This was particularly true of TARP, which was originally, as the name implied, for 

74 

the purchase of troubled assets. In a matter of days after enactment, everything changed, and the policy shifted to putting capital 

in healthy, viable banks under the Capital Purchase Program. 

The fact that this was a program for generally healthy banks and 

one that promised a significant return to the government was lost 

on the public and often mischaracterized. As the economic recession 

took hold, the use of TARP funds extended well beyond providing 

capital to the banking industry and became a ready source of funds 

for dealing with the bankruptcies of non-banks, including General 

Motors, Chrysler, and AIG. It is the non-banking part of TARP 

where the losses are concentrated. 

The CBO, in response to your question, Senator Grassley, acknowledged that for the most part the firms paying the fee would 

not be those that were directly responsible for losses realized by 

the TARP. Had the TARP been limited to the banking industry, 

there would be no losses on that program. President Obama acknowledged this last December when he said, ‘‘Assistance to banks, 

once thought to cost taxpayers untold billions, is on track to actually reap billions in profits for the taxpaying public.’’ 

Treasury has already received, as Secretary Geithner said today, over $20 billion in dividends and warrants and has earned over an 

8.5-percent return already, a very good return, as the Secretary acknowledged, by any measure. 

Besides the unfairness of paying for losses outside of the banking 

industry, the tax would have significant unintended consequences. 

The proposed tax of $90 billion to $117 billion means that $90 billion to $117 billion cannot be used directly for lending, but that 

does not even begin to capture the impact on lending, as $1 of capital supports up to $10 of new loans. Thus, the total impact could 

be nearly $1 trillion in foregone credit over the next 10 years. 

Large banks, of course, are directly impacted by this tax, but it 

has a much broader impact on smaller banks as well. Because the 

proposed tax affects how small businesses fund themselves, it will 

inevitably alter all the economics of every way banks fund themselves, including the deposit market, the Federal funds market, the 

pricing of home loan bank advances, and the short-term repo market. All raised the cost of funding loans for community banks. Ultimately, it is the owners and borrowers, particularly small business 

borrowers, who often finance by local community banks, and also 

finance by large banks, who end up paying for the tax. 

There is a broader issue that worries community banks. Many 

small banks believe that, once the precedent is set to assess an additional tax on large banks, it is only a matter of time before the 

tax is spread to other smaller banks. 

Finally, it is worth noting that the estimates of losses on TARP 

continue to decline. That is the reason the law required the TARP 

losses to be reported in 2013, so there could be a clearer picture 

of the magnitude of those losses and the sources of those losses. It 

is too soon to know the extent of the losses from AIG and the auto 

companies. 

Given the continual downward revisions in expected losses, a discussion of repayment is premature. In fact, implementing such a 

tax now would likely lead to a greater withdrawal of resources in 

a shorter period of time than is appropriate or prudent, particuVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00078 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
75 

larly given the anemic state of this economy. It is counter to the 

efforts to getting this economy going and to lending to small businesses. 

Thank you, Mr. Chairman, Senator Grassley, for the opportunity 

to present ABA’s views. I would be happy to answer any questions. 

The CHAIRMAN. Well, thank you, Mr. Chessen. That was very interesting. 

[The prepared statement of Mr. Chessen appears in the appendix.] 

The CHAIRMAN. Mr. Baird? 

STATEMENT OF PATRICK S. BAIRD, AEGON USA, LLC, 

CEDAR RAPIDS, IA 

Mr. BAIRD. Mr. Chairman and Senator Grassley, thank you. My 

name is Pat Baird. I am chairman of AEGON USA, and I live and 

work in Cedar Rapids, IA. I have spent over 32 years at my company and in the life insurance industry. 

I am here today on behalf of the American Council of Life Insurers, or ACLI. The ACLI represents more than 300 legal reserve life 

insurers and fraternal benefit society member companies in the 

U.S. These member companies represent over 90 percent of the assets in premiums of the U.S. life insurance and annuity industry. 

You should know, as Senator Grassley noted, I was chairman of 

the ACLI from October of 2008 until October of 2009, which I believe is generally acknowledged as the most difficult of times in the 

history of the life insurance industry, so that experience, whether 

it is wisdom or baggage, I do not know, but I have it. 

I appreciate the opportunity to appear before you today to share 

our views about the administration’s proposal entitled ‘‘Financial 

Crisis Responsibility Fee.’’ At the outset, it is important for you to 

know that, while I intend to be very responsive and very open, 

there is still a lack of clarity in this bill as regards how it impacts 

the life insurance industry. 

To that end, some of that clarity, I think, was provided with Secretary Geithner’s comments earlier. Had we had the benefit of 

those comments earlier, I think my remarks today probably would 

have been different. So I still intend to make this responsive to 

you, but it may be a little bit by the seat of the pants, so you will 

have to give me a little bit of give on that. 

Before any new tax is imposed, it is important to know and identify what the goal of that tax is. In January, the administration released its first description of that proposal. At that time, the proposal cited two reasons for the tax. First, to reimburse the Federal 

Government for the expected shortfalls in the TARP program. It 

has been suggested that life insurers benefitted generally and/or 

indirectly from the government’s policies that assisted the economy, 

and we agree that this industry did benefit from the government’s 

extraordinary action that stabilized the economy. 

That argument, though, can be said about many companies, businesses, individuals, and industries within this country. However, 

our industry did not cause this crisis. As Secretary Geithner emphasized, those causing the crisis should pay and not those who did 

not. We all benefitted from having a stabilized financial system, 

but we do not believe that life insurers should be identified as an 

76 

industry that inordinately benefitted, and therefore needs to be 

taxed to recoup government funds. Like most of Main Street America, our industry was more of a victim than a perpetrator. 

A second reason given is to limit risk-taking or excess leveraging 

among large financial firms. Since insurers are prohibited by State 

law from engaging in excessive risk-taking, investing, or excessive 

leveraging, we do not believe this is justification to impose a tax 

on our industry. State investment laws are very clear, and they are 

uniform throughout the country. They impose strict limitations on 

the types of investments insurers can make. 

Given the stated reasons for the tax by the administration, it is 

unclear why the life insurance industry has been included. We 

have been told by members of Congress and their staff that life insurers are included in this proposal because AIG played a significant role in the economic downturn and financial crisis. We do not 

disagree with that assessment. 

However, AIG is a very unique, multi-faceted financial group 

with many different financial businesses, including, in part, regulated life insurance companies. These businesses other than life insurance constituted a large part of the total AIG, much more so 

than any other life insurance group in the U.S. It was primarily 

these other financial activities which fell outside regulated life insurance companies that resulted in AIG’s role in the financial crisis. For these reasons, we strongly feel that AIG should not, and 

cannot, be used as the benchmark for the life insurance industry. 

I also have a question as to the fundamental fairness to life insurers within the life insurance industry. In this proposal, insurers 

are to be included only if consolidated assets exceed $50 billion, 

and if within the consolidated group there is an owned bank, thrift, 

or broker/dealer. While some insurers may own a bank, thrift, or 

broker/dealer, as Secretary Geithner noted, most often they are 

very small parts of their total business and are ancillary to their 

core business of life insurance. 

For example, in my own company of AEGON USA, while we do 

not own a bank or a thrift, we do employ broker/dealers as distribution vehicles for our variable insurance products. For our company, the total assets of our broker/dealer are one-tenth of 1 percent of the total U.S. consolidated assets, and much less of our 

worldwide assets. 

Yet, given our understanding of the proposal, the entire AEGON 

USA, not one-tenth of 1 percent, would be subject to this tax. Like 

you, I heard from Secretary Geithner that perhaps certain broker/ 

dealers are now to be excluded from this, and that was new to us 

today, so please take that into consideration. 

Other life insurers may own thrifts to carry out trust services 

which are ancillary to the primary nature of our business. To Senator Kerry’s point, if those are immaterial and, again, ancillary to 

the core business of life insurance, we think that should be noted. 

It should also be noted that we are concerned this bank tax could 

cause competitive distortions among life insurers by imposing a tax 

on either those who own a thrift bank or broker/dealer or meet the 

$50-billion size requirement. These companies will be competing 

with companies who are not subject to the tax, but sell the same 

products. We are in a very competitive business. I have not seen 

77 

a tax that picks apart an industry and does not have unintended 

consequences. 

The Joint Committee on Taxation’s background document on the 

tax recognizes these differences between the regulation of insurers 

and other financial institutions and notes, among other things, that 

those life insurers who are assessed the tax will be at a competitive 

disadvantage in their sector of financial services as a result. We do 

not believe shifting the competitive field domestically or globally 

within an industry, in the manner that the Joint Committee itself 

indicated seemed ambiguous or arbitrary, would be the intent of 

Congress. 

The critical actions taken by the administration and Congress in 

2008 and 2009 responded to one of the most precarious economic 

situations in our country’s history. The crisis called for precipitous 

actions. We all understand and appreciate—and we really do—that 

the extraordinary actions taken brought stability and improvement 

to all aspects of the economy, including the various segments of financial services. 

As the Senate reviews the Treasury’s proposal or considers other 

proposals, as Secretary Geithner invited you to do, you really need 

to understand that the life insurance business is fundamentally different than banking. What is a risky practice within a bank may 

be a risk mitigator within a life insurance company. They are totally different businesses. 

We urge you to carefully consider whether it is appropriate to 

impose this tax on our industry; whether our industry benefitted 

from TARP disproportionately to other industries; whether it is 

worth the potential competitive disruption and resulting unintended consequences within the industry; and finally, whether a 

tax designed for the banking industry can be applied at all to the 

very different business of life insurance. 

Thank you for the opportunity to be here. 

The CHAIRMAN. Thank you, Mr. Baird. 

[The prepared statement of Mr. Baird appears in the appendix.] 

The CHAIRMAN. Senator Grassley? 

Senator GRASSLEY. I think, Mr. Baird, the question that I was 

going to ask, but I will ask it anyway, you just answered. The 

President proposes to tax insurance companies based on the riskiness of their assets. Your comment on that? I think I expressed my 

view to the Secretary, that I think this is just a way of raising 

money, that it is not going to deal with the riskiness of one business versus another at all, or discipline whatsoever. But let us hear 

your comment precisely on my question about taxing insurance 

companies based on the riskiness of their assets. 

Mr. BAIRD. Senator Grassley, I think it is no doubt possible to 

find some way of measuring risk of assets relative to our liabilities. 

It is impossible to divorce risk in our business without considering 

assets and liabilities together because we match the two together. 

I think it is possible, but in no way can you use a bank model to 

go after an insurance company and actually tax it based upon its 

risk profile. They do not work together. 

Senator GRASSLEY. Mr. Sorensen, you heard me express in my 

opening comments, and you heard several members of the committee talk to Secretary Geithner about the possible impact of the 

78 

TARP tax affecting small business lending. Answer how you see it 

affecting small business lending from the standpoint of Iowa banks. 

Mr. SORENSEN. Yes, Senator. Obviously, in Iowa we have a number of community banks, so a number of those would not be directly impacted. But that said, we also have a large bank presence, 

and you heard some of the percentages mentioned earlier, about 

70-some percent of the overall national marketplace of assets of 

larger institutions that would be impacted by this tax. So, anything 

that would take those dollars out of the lending community at this 

point in time I think could be detrimental to small business lending. 

In addition, the industry, as you know, Senator, is recapitalizing 

the deposit insurance fund through a risk-based deposit insurance 

methodology, and so in addition to any potential additional tax burden, we would have the recapitalization of the deposit insurance 

fund, which also takes dollars, potentially, out of those local communities that would be available for lending. So, again, the combination of the two may be problematic. 

Senator GRASSLEY. All right. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

How can we help small business? I think everybody on this committee wants to figure out some way to give small businesses a 

break. We have been talking so far about the potential negative 

consequences of this bank tax, such as it is. Do you have any 

thoughts on how maybe it could be restructured to give incentive 

to banks to make small business loans? What if they got a portion 

of it that was a credit for business loans? 

I am just trying to think out loud here. Everything is an opportunity, and I am just trying to see if any of the four of you see an 

opportunity here to not just prevent harm to small business, but 

maybe affirmatively, positively figure out a way to help small business. 

Mr. Bartlett? Yes, go ahead. 

Mr. BARTLETT. Our group believes that taking action to increase 

small business lending is the most important thing that Congress 

should be doing today and this summer, and we regret that there 

has not been the sense of urgency from the administration to cause 

that to happen. We hope to rekindle that urgency. 

We have worked both with the Treasury and with Senator Warner in particular, as well as other Senators, on a capital assistance 

plan that would provide for an enhanced reserve. It is an extra reserve to enhance small business lending that we believe, with a 

fairly small amount of money, $1 billion or so—each billion dollars 

could provide up to $50 billion of additional small business lending. 

As Secretary Geithner said, it could be run through the States that 

have these funds in place, but they are unfunded, or have very 

small funding. 

Second is, we have provided to Treasury, SBA, and the Congress 

11 specific recommendations of steps that could be taken today by 

the SBA to increase SBA involvement in small business lending. 

Then third, I must say, Mr. Chairman, many of our companies 

have taken steps unilaterally to increase their small business lending. Bank of America announced an increase of $5 billion in 2010 

over 2009; JP Morgan Chase, $4 billion. U.S. Bank is committed 

79 

to a second, third, and fourth look at every small business loan to 

try to get it right, and we have also teamed up with some organizations to send small business owners to places, to incubators, where 

they can find ways to obtain additional lending. So we think it is 

the number-one issue facing the economy today and needs to be 

done. 

The CHAIRMAN. I look forward to seeing that list. 

Mr. Sorensen or Mr. Chessen, any ideas here? 

Mr. SORENSEN. Well, one thing, Senator. Certainly an improving 

economy certainly helps the small business environment, and we 

are starting to see that happen. Consumers are more confident. 

Also, businesses are buying from other businesses, which is an important step. Probably the programs that our members use the 

most would be the SBA programs, and the enhancements you made 

to the guarantee, and also the fee reduction changes to the SBA 

programs have been very helpful. 

The CHAIRMAN. Right. I hear a lot of that in Montana, too. That 

is a big difference. 

Mr. SORENSEN. Yes. There are also some things being done at the 

State level to provide funding in cooperation with lenders to try to 

get more small business credit available. 

Mr. CHESSEN. And I would say, Mr. Chairman, that a continuing 

frustration continues to be the regulatory burden and the pressure 

not to make loans. We see added pressure to have greater capital. 

We see proposals like this tax that adds an extra cost. We see a 

lot of regulatory burden coming, even with the financial package 

that is before the Senate now, where we have identified more than 

two dozen regulatory burdens for community banks. 

All those things add to the cost and uncertainty and end up making it more difficult to meet the needs of local businesses and small 

businesses everywhere. That is our frustration, particularly with 

this tax that is being proposed. Think of all the small business 

loans that are not made with a $9-billion yearly tax, not even 

counting the consequences of what that means for capital. 

The CHAIRMAN. Well, that sort of assumes how banks handle the 

tax. I mean, it is hard to know what they are going to do with it. 

There is a whole range of possible actions they could take, including cutting back on loans, especially to small business. You think 

it will all go to cut back on loans? 

Mr. CHESSEN. No, I do not think so. You are absolutely right. 

Also, with the CBO, to Ranking Member Grassley’s comments, I 

think there are many things. I think the first is, investors are likely to take losses. These stocks that are held are widely held. They 

are in a lot of people’s pension plans. 

I was shocked to know that in the day that this was announced 

by the administration, the largest six banks lost $18 billion in market capitalization. Investors moved money very quickly. That affected every pension plan that holds these loans. That is the first 

impact. It will affect personnel. It could mean staff layoffs in these 

banks as a consequence of what happens. 

We already have unemployment—banks and other businesses 

have already laid off people. It is naive to believe that it does not 

get translated into a higher cost of credit or less availability. All 

those are possible consequences, and frankly none of those are good 

80 

for all of us as either stockholders or small businesses in this country. 

The CHAIRMAN. Well, you make some good points. The major effort of this committee in the next month or so is robust small business assistance, and I very much hope we can get that passed. 

Thank you very much. You all have been very, very helpful. 

Thank you. 

[Whereupon, at 12:41 p.m., the hearing was concluded.] 

(81) 

PRESIDENT’S PROPOSED FEE ON FINANCIAL 

INSTITUTIONS REGARDING TARP: PART 3 

TUESDAY, MAY 11, 2010 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:10 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Conrad, Grassley, and Bunning. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Gabriel Adler, Senior International Trade 

and Economic Advisor; Blaise Cote, Research Assistant; Andrew 

Fishburn, Detailee; and Mary Baker, Detailee. Republican Staff: 

Jim Lyons, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The hearing will come to order. 

Criticism of the big Wall Street banks is nothing new. Nearly a 

century ago, Louis Brandeis wrote, ‘‘The goose that lays the golden 

eggs has been considered a most valuable possession, but even 

more profitable is the privilege of taking the golden eggs laid by 

someone else’s goose. Investment bankers and their associates now 

enjoy that privilege.’’ Justice Louis Brandeis. 

Ninety-four years later, with the financial crisis of 2008, much 

remained the same. Wall Street bankers still took the golden eggs, 

and the American taxpayers’ goose got cooked. 

The financial crisis of 2008 led to the Great Recession, and the 

financial crisis led to President Bush’s bank bailout, the Troubled 

Asset Relief Program, otherwise known as TARP. 

Today we convene our third and final hearing to consider President Obama’s proposal for a tax to recoup the losses from TARP. 

Three weeks ago, we heard from Neil Barofsky, TARP’s Special Inspector General. He provided an update on TARP. He explained 

who had received TARP money and who would probably be able to 

pay the money back. 

Last week, we heard from Treasury Secretary Geithner. He gave 

us details about how the bank tax would be calculated, he told us 

to whom it would apply, and he made the case for the tax. We also 

heard from a panel of financial industry experts. They outlined 

their concerns with paying the tax. 

Today’s hearing will help us to address many questions. Who 

should pay the tax? What is the best way to structure the tax? How 

82 

can we best ensure that the tax is fair? How can we minimize unintended consequences? 

Our hearings have demonstrated that the financial crisis had effects much wider than the direct costs of the TARP program. The 

financial crisis resulted in Federal spending to rescue the financial 

industry, and it resulted in increases in spending for unemployment insurance and assistance to help keep folks in their homes. 

Today, we hope to further our understanding of the extent of the 

economic effects of the financial crisis, and today we hope to learn 

the true costs of weathering the economic storm. We also delve 

more deeply into the economics of the bank tax, and we will examine its effects on consumers, on our Nation’s economy, and on our 

financial system. 

Douglas Elliott, from Brookings, and David John, from The Heritage Foundation, will discuss the policy and economic implications 

of a bank tax. Edward DeMarco from the Federal Housing Finance 

Agency, the overseer of Fannie Mae and Freddie Mac, will give us 

an update on the status of these two enterprises. We can ask him 

whether the bank tax should apply to Fannie or Freddie. And 

Nancy McLernon, from the Organization for International Investment, will tell us how she thinks a domestic bank tax will affect 

U.S. subsidiaries of foreign financial institutions, and she will give 

us an update on what the G–20 countries are doing. 

When we close our series of hearings today, we will have established a solid foundation to build on as we move forward on the 

bank tax. There will always be Wall Street bankers taking golden 

eggs laid by somebody else’s goose, but let us consider today whether we can get some of the bounty back for the American taxpayer. 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Thank you, Mr. Chairman. 

To repeat something that I think I said at each of the other two 

hearings on this tax issue, I want to make crystal clear that taxpayers should be paid back every penny of TARP losses. The statute that created TARP said that the President is supposed to propose a plan in 2013 to repay taxpayers for any losses from TARP. 

However, earlier this year, 3 years before he was supposed to 

under the statute, the President proposed what he called the Financial Crisis Responsibility Fee. Obviously, in 2013 we will have 

a much better estimate of the projected TARP losses than we have 

now this year, 2010. 

The President said that one of the purposes of the TARP tax is 

to repay taxpayers for any losses from TARP. I want to make sure 

that this actually happens and that it is not just empty rhetoric. 

Any losses that result from TARP will increase the deficit, which 

has ballooned under President Obama. Therefore, to pay back taxpayers for any TARP losses, any money raised from the TARP tax 

would have to be used to pay down the deficit. 

If a TARP tax is imposed and the money is simply spent, that 

does not repay the taxpayers one cent of any TARP losses. It is like 

getting a raise and saying that you are going to pay down your 

credit card with the extra money, but then choosing to spend the 

83 

money instead of paying down the credit card. It should not be any 

surprise to learn that your credit card balance did not go down. 

Saying you are going to pay down your credit card—in this case, 

the deficit—does not do any good. You have to actually do it. 

Many people in the Congress—I think primarily of the Democratic party—are already looking to use the money raised from the 

TARP tax for spending under the arbitrary pay-as-you-go rules. 

When I tried to get a commitment from Secretary Geithner on this 

point, he would not give me one. To me, that was very disappointing. However, I was encouraged that it sounds like the chairman 

of the Ways and Means Committee and I see the TARP tax the 

same way. 

Martin Vaughan wrote, on May 5th, a Dow Jones Newswires column titled, ‘‘House Panel Chairman: Bank Tax Plan Not Ready for 

Prime Time.’’ The column states, ‘‘Levin signaled he doesn’t favor 

pairing the bank tax with legislation already pending in Congress, 

such as the financial overhaul bill or a separate bill to extend expired tax breaks. First, he said, the tax should be used for deficit 

reduction and not to pay for new spending. ‘At this point, I don’t 

think the bank tax is ready to be a pay-for,’ Levin said.’’ 

Now, in looking at the President’s TARP tax proposal, which I 

understand the President has already felt the need to change, it is 

interesting that GM and Chrysler, which are responsible for about 

$30 billion of the projected losses of TARP, are not subject to the 

President’s proposed tax. 

Secretary Geithner said that GM and Chrysler were simply victims of the financial crisis and therefore should not be subject to 

the President’s tax. However, Ford did not take any tax money, 

and they survived just fine. In addition, with GM and Chrysler responsible for such large amounts of tax losses, it seems only fair 

that they should be subject to the TARP tax to pay back some of 

those losses. 

GM and Chrysler were both invited by Chairman Baucus and me 

to testify at this hearing and make their case regarding why they 

should not be subject to the tax, and both declined. Their silence, 

then, is deafening. 

Also, Fannie and Freddie are not subject to the tax. We will explore whether that makes sense at today’s hearing. And hedge 

funds are not subject to the President’s proposed tax. Meanwhile, 

companies that did not take any TARP money are subject to the 

proposed tax. 

The President’s proposed tax is so lacking in detail that members 

of Congress who are being asked to support it are having a very 

difficult time figuring out how it would apply and who would be 

subject to the tax. 

When I asked CBO to tell me who would bear the burden of the 

TARP tax, they said that one of the groups that would bear the 

burden of the tax would be consumers. CBO stated in their letter 

to me that the President’s tax would reduce small business lending. 

Under the new version of the tax proposed by the President, 

small business loans would be considered the riskiest assets held 

by a bank, and therefore subject to the highest taxes. Considering 

the 9.9-percent unemployment rate, the trouble small businesses 

84 

are having getting credit, and the proposed tax hikes on small businesses, I am very concerned with that aspect of the proposal. 

One of the purposes of the tax stated by the President is to reduce risky behavior by financial institutions. However, CBO stated 

in their letter to me that the TARP tax ‘‘would not have a significant impact on the stability of financial institutions or significantly 

alter the risk that government outlays will be needed to cover future losses.’’ 

That is not just me saying it. I hope you all know that the Congressional Budget Office is a nonpartisan organization, and they 

have come to that conclusion. If the United States imposes a TARP 

tax and other countries do not, it will make our financial institutions less competitive than their foreign competitors. Of the G–20 

countries, Australia, Canada, Japan, Russia, and Brazil are opposed to a bank tax, and South Africa does not want its banks 

taxed either. 

So I look forward to today’s testimony, and maybe we can come 

to some conclusions. But I guess I am looking for a conclusion that, 

if you want to make sure the TARP bailout is paid back, you have 

to know exactly how much is owed before you collect it. 

The CHAIRMAN. Thank you, Senator. 

I would now like to introduce the panel. Our first witness is 

David John, who is a senior research fellow at The Heritage Foundation. Thank you, Mr. John, for being here. Next, Mr. Elliott. 

Douglas Elliott, economic studies fellow at the Brookings Institution. Third, Edward DeMarco, Acting Director of the Federal Housing Finance Agency. Finally, we have Nancy McLernon, president 

and CEO of the Organization for International Investment. 

As is our regular practice, your prepared statements will automatically be included in the record, and I urge each of you to summarize your statements in about 5 minutes, 5 to 6. We are kind 

of easy around here. 

So, Mr. John, why don’t you go ahead? 

STATEMENT OF DAVID C. JOHN, SENIOR RESEARCH FELLOW, 

THE HERITAGE FOUNDATION, WASHINGTON, DC 

Mr. JOHN. Thank you for having me. I am not used to going first. 

Actually, it is a little overwhelming. 

First off—— 

The CHAIRMAN. Well, do you want the other guy to go first? 

Mr. JOHN. No, that is all right, actually. I will take it. I appreciate that. [Laughter.] 

Mr. JOHN. First off, let me clarify a little bit of my own terminology. You will find that I use ‘‘tax’’ and ‘‘fee’’ interchangeably, 

and I do that for a reason, because I thoroughly believe that this 

is not really a fee, this is a tax. In a sense, what the administration 

is proposing to do here is to get some of the chairman’s golden eggs 

and move them over to the use of the administration and the government rather than returning them to the consumers where they 

might have originated. 

To a large extent, I think Willie Sutton would be very pleased 

with this tax because, faced with a situation where the government 

is running massive deficits already, the administration has gone for 

its first effort in raising taxes where the money is. Willie Sutton, 

85 

of course, was a bank robber, and when asked why he robbed a 

bank, he is supposed to have said—he used to deny it—that that 

was why he robbed the banks. I think that taxpayers can be very 

justifiably angry with banks, and they can be justifiably angry with 

bankers. I know I personally was furious when the 2008 crisis hit. 

However, I am not sure that this proposed tax is an appropriate 

way to deal with the issue. For one thing, I think, as I say, this 

is more raising revenue than it is recouping losses, and I say that, 

to repeat what former Chairman Grassley said about the timing. 

If this had been proposed in 2013, then I would readily agree that 

this was a matter of recouping losses because we would know what 

those losses were. 

Second, what concerns me much more is that, while I agree that 

a 15 basis point tax is not going to be the difference between profitability and non-profitability of any financial institution, the way 

the administration has proposed to change it concerns me quite a 

bit. 

First off, as has been noted, loans—commercial loans, and that 

is both small business loans and regular commercial loans—do 

carry the highest risk-weighting under capital standards. The new 

way of doing this tax appears to be tracking the bank capital 

standards as a way of applying it. 

What is very concerning to me is that this new tax, if you are trying to recoup the same amount of money, roughly $9 billion a 

year for 10 years, is going to be divided very differently according 

to financial institutions based on their risk assets. 

You cannot simply say it is going to be 15 basis points across the 

board after subtracting a few items out. It is likely that the higherrisk items, which include the commercial loans, may be subject to 

30 basis points, may be subject to 25 basis points. We do not have 

that information. Until we have that information, I think it would 

be irresponsible to make a decision. 

There is also an interesting question that in the future there is 

an international agreement that we are going to change capital 

standards for all financial institutions. This is a rather crucial 

move because, the higher the capital standards, the more likely a 

financial institution can absorb its own losses and therefore not be 

subject to a bailout in the future. 

However, is this fee, whatever level it is going to be, going to be 

assessed by the bank regulators, which of course is the responsibility of the Banking Committee? Is it going to be assessed by 

Treasury? Is there going to be consultation? Will the fee be subtracted from the capital standards? This is especially true if, as the 

administration has said, they want to focus most of the money coming from the top six financial institutions. So, I am very concerned 

about the way this is structured. 

It is also structured in a way that does not apply to insurance 

companies and certain other types of financial institutions because 

the terminology and the regulatory technology is different. The 

whole setup is different. 

Finally, there is the question of Fannie Mae and Freddie Mac. 

Now, I would love nothing more than to privatize Fannie Mae and 

Freddie Mac and reduce their size to as small as possible, but, 

until that happens, applying a tax to them is really nothing more 

86 

than one arm of the government taxing another arm of the government, so maybe that should be a secondary level. 

Now, I listed a couple of other things in this testimony, pointing 

out, as has already been said, that if this were a recoupment fee 

it would apply to Chrysler and GM. I find it interesting, since they 

clearly qualified as financial institutions to come under the TARP 

program in the first place, then clearly they should be subject to 

the tax also. 

Then there is the question, of course, we are not going to assess 

it on the HAMP program, the Housing Affordable Mortgage Program, since those people cannot pay their mortgages in the first 

place, and therefore we certainly should not apply a fee to them. 

But we need to recognize that that is a significant source of losses, 

according to CBO, to the overall TARP program. 

So, when it comes right down to it, this is an interesting idea, 

but it is an unformed idea, and it is a policy mistake. There need 

to be an awful lot of questions that are answered, and answered 

in significant detail, before this committee or any other should really give it too much serious consideration. 

And then last, but not least, there is a question as to whether 

this tax actually is needed at this point or whether it should be 

looked at in 2013, as was originally said under the legislation. 

Thank you. 

The CHAIRMAN. Thank you very much, Mr. John. 

[The prepared statement of Mr. John appears in the appendix.] 

The CHAIRMAN. Mr. Elliott? 

STATEMENT OF DOUGLAS ELLIOTT, FELLOW, ECONOMIC 

STUDIES, BROOKINGS INSTITUTION, NEW YORK, NY 

Mr. ELLIOTT. Thank you for the opportunity to talk about this 

important topic. As was mentioned, I am a fellow at the Brookings 

Institution, but I should also mention, before that I spent roughly 

2 decades as an investment banker, mostly at JP Morgan, with my 

clients being financial institutions. At Brookings, I have focused 

principally on financial institutions, markets, and their regulation, 

and I have several dozen papers on the financial crisis and financial regulation available. 

I strongly support the idea of recovering from the financial industry the losses on the TARP so that taxpayers do not bear the ultimate cost. It sounds like there may be substantial agreement on 

that here. 

It is difficult to see why it would be more appropriate for the taxpayers to bear the cost than the industry, barring some substantial 

negative effect of imposing the fee. As I will explain, I firmly believe that the financial industry and the economy could absorb this 

relatively small fee without significant negative effects. 

I am less wedded to a particular way of imposing the fee, although I do like the general approach the administration has proposed, since it would help in a modest way to achieve other public 

policy objectives at the same time. In particular, it is structured to 

fall most heavily on the firms that represent the most risk to taxpayers going forward and that represented the greatest danger 

during the crisis. 

87 

It is also tilted away from the core lending activities, which are 

generally supported by deposit money which is exempted. It is, 

therefore, tilted towards the riskier activities that are less central 

to economic growth. These are worthwhile goals, although I do view 

them as secondary to the overall objective of repaying the taxpayers. 

Now, opponents legitimately point out that imposing a fee on a 

bank is likely to cause some of the costs to be passed through to 

the bank’s customers. In particular, they suggest that loans could 

become more expensive and harder to obtain. They are right directionally, but a review of the facts shows that any effect should be 

quite small, given the immense size of the financial industry. 

The administration is proposing to collect $9 billion a year for a 

minimum of 10 years. This compares to a core earnings power for 

the banking industry in basically normal times of approximately 

$200 billion a year after tax. In addition, non-interest expense, 

which is mostly compensation, is another $300 billion a year after 

tax. 

So, if you add these two together, you would see that the fee 

would be less than 2 percent of the $500 billion a year of after-tax 

income, plus after-tax expenses, again, which is mostly compensation. Two percent appears extremely reasonable, given the scale of 

aid that we taxpayers have provided the industry. I do, by the way, 

see this as a repayment mechanism, not a tax, though I do not care 

too much which particular word we use for it. 

Now, comparing this on another dimension, banks and thrifts reported $13 trillion of assets to the FDIC. Thus, the industry could 

cover the $9 billion fee by charging less than an additional 0.1 percent on each dollar of assets. 

Now, in practice, the industry might well absorb, say, half of this 

by taking what would be a 1-percent hit to income plus expenses, 

and then pass the other half on to customers. If they do that, they 

would need to charge approximately 0.05 percent, or 5 basis points, 

per dollar of assets as an additional charge. For comparison, the 

Fed would never bother with an interest rate move as small as 5 

basis points because the effect on the overall economy would be 

minor. It usually moves in increments of a minimum of at least 5 

times this size. 

Now, I notice that industry lobbyists are magnifying the reported 

effect by aggregating the 10 years of fees into a total of $90 billion 

as a hit to capital, and then indicating that this $90 billion could 

have supported $900 billion of lending at a 10:1 ratio of lendingto-capital. 

Now, they are broadly correct; however, they could just as easily 

have indicated that the industry could voluntarily support an additional $900 billion of lending simply by cutting non-interest expense by 3 to 4 percent for the next 10 years, principally by cutting 

compensation. I notice they have not volunteered to do this. 

In addition, $9 billion a year for 10 years has a significantly 

lower value in today’s dollars than simply multiplying 9 by 10 

years. Discounting at a 12.5-percent cost of equity would bring this 

figure down to under $50 billion, making the necessary adjustments even smaller. 

88 

In my written testimony, I explain why I believe it is fair for the 

banks and the other financial institutions that would be in this to 

pay this fee, even though, on a very narrow definition, the taxpayer 

will roughly break even on their support of the industry. 

The key point is that the government, appropriately, charged 

much less for its support than the value that this represented to 

the industry, this unprecedented level of assistance. Simply paying 

as promised does not automatically wipe the slate clean from a 

moral point of view. Making sure that taxpayers do not lose money 

from the TARP, taken as a whole, seems only fair and comes at a 

very modest cost to the industry in relation to the level of assistance we taxpayers provided. Further, as was noted, Congress has 

already specified that the costs should be borne by the industry. 

I also addressed some of the specifics of the fee in my written 

testimony, but I will leave that for the Q&A period in the interest 

of time. 

Thank you. 

The CHAIRMAN. Very interesting. Thank you, Mr. Elliott. 

[The prepared statement of Mr. Elliott appears in the appendix.] 

The CHAIRMAN. Mr. DeMarco, you are next. 

STATEMENT OF EDWARD DeMARCO, ACTING DIRECTOR, FEDERAL HOUSING FINANCE AGENCY (FHFA), WASHINGTON, DC 

Mr. DEMARCO. Good morning. Thank you, Mr. Chairman, Ranking Member Grassley, members of the committee. Thanks for the 

opportunity to testify on the Financial Crisis Responsibility Fee 

and the Nation’s housing and government-sponsored enterprises, 

Fannie Mae and Freddie Mac, which I will refer to as ‘‘the Enterprises,’’ and the Federal Home Loan Banks. 

As this is the Federal Housing Finance Agency’s first appearance 

and my own first appearance before this committee, let me begin 

by introducing FHFA and myself. 

The CHAIRMAN. Well, welcome to your inauguration. 

Mr. DEMARCO. Thank you, Mr. Chairman. 

FHFA was created on July 30, 2008, upon enactment of the 

Housing and Economic Recovery Act of 2008, or HERA. This longsought legislation to reform the oversight of the housing GSEs resulted in the joining together of two separate regulators and the 

transfer of certain responsibilities and staff from HUD to the new 

agency. Just 6 weeks into its existence, FHFA put the Enterprises 

in conservatorship. The financial support provided by the Treasury 

for the companies in conservatorship came from the HERA statute. 

As for myself, I am a 24-year career civil servant. During that 

time I have worked at GAO, Treasury, and the Social Security Administration, before joining one of FHFA’s predecessor agencies 

late in 2006, just as the housing bubble was beginning to burst. I 

became FHFA’s Acting Director last September. 

You have asked me to comment on the President’s Financial Crisis Responsibility Fee, and in particular whether this fee should be 

applied to Fannie Mae and Freddie Mac. We understand that the 

administration does not intend for Fannie Mae and Freddie Mac to 

be covered by the proposal and, given the Enterprises’ current financial condition and financial support from the Treasury DepartVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00092 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
89 

ment, I would agree with that view. Subjecting the Enterprises to 

the fee would not increase revenue to the Federal Government. 

FHFA placed Fannie and Freddie into conservatorship in September 2008, before the creation of TARP. In conjunction with the 

conservatorship action, the Treasury Department provided financial support to the Enterprises through the Senior Preferred Stock 

Purchase Agreements (Senior Preferred). The Senior Preferred is 

an ongoing, explicit, and irreversible contractual commitment by 

the Federal Government to ensure that Fannie Mae and Freddie 

Mac can meet their obligations by ensuring the Enterprises maintain a positive net worth. Fannie and Freddie have received no 

TARP funds. Funding authority for the Senior Preferred, as I said, 

has come from HERA. 

The Senior Preferred has worked as intended. Investors have 

confidence in the Federal Government’s commitment to honor these 

obligations, and investors have continued to support U.S. housing 

finance through investment in Enterprise securities. As a result, 

roughly three out of every four mortgages originated last year were 

guaranteed by the Enterprises. 

From July 2007 through the end of 2009, combined losses at the Enterprises totaled $207 billion. During 2009 alone, the Enterprises reported net losses of $94 billion. Their financial performance continues to be dominated by credit-related expenses and 

losses stemming principally from purchases and guarantees of 

mortgages originated in 2006 and 2007. 

Since the establishment of the conservatorships, the combined 

losses at the two Enterprises depleted all their capital and required 

them to draw over $125 billion from the Treasury Department 

through the Senior Preferred. With the first quarter results now reported by the Enterprises, their combined draws will be roughly 

$145 billion. 

With continuing uncertainty regarding economic conditions, employment, house prices, and mortgage delinquency rates, the shortterm outlook for the Enterprises remains uncertain, and they are 

likely to require additional draws under the Senior Preferred. 

The Enterprises already have the obligation to pay a 10-percent 

dividend to Treasury on draws made under the Senior Preferred. 

Today, this quarterly obligation exceeds $1 billion for each company, and those dividends are effectively being paid by further 

draws on Treasury’s Senior Preferred, so we are already moving 

money from one government account to another. 

In conclusion, the financial state of the Enterprises today makes 

them poor candidates for inclusion in a fee proposal because the 

Enterprises are projected to have continuing losses that will be 

funded by the Senior Preferred. Any additional fee assessments 

will add to those losses, resulting in increased draws from Treasury. Applying the fee to the Enterprises would be an exercise in 

moving money between government accounts. 

Thank you for the opportunity to appear today, and I would be 

glad to answer questions. 

The CHAIRMAN. Thank you, Mr. DeMarco. Good beginning. 

[The prepared statement of Mr. DeMarco appears in the appendix.] 

The CHAIRMAN. Next, Nancy McLernon. 

90 

STATEMENT OF NANCY McLERNON, PRESIDENT AND CEO, ORGANIZATION FOR INTERNATIONAL INVESTMENT (OFII), 

WASHINGTON, DC 

Ms. MCLERNON. Good morning. 

The CHAIRMAN. Good morning. 

Ms. MCLERNON. Chairman Baucus, Ranking Member Grassley, 

and members of the Finance Committee, thank you for your invitation to testify this morning. 

The Organization for International Investment represents the 

U.S. subsidiaries of many of the world’s largest international companies, or in-sourcing companies. In-sourcing companies—these are 

firms based abroad but investing in the United States—directly 

employ over 5 million Americans and support an annual payroll in 

the U.S. of over $400 billion. These American businesses generate 

6 percent of U.S. GDP, produce almost 20 percent of total U.S. exports, and pay 12 percent of total corporate taxes. 

While OFII member companies include a number of financial institutions, OFII represents a broad cross-section of industries. On 

behalf of these companies, OFII advocates for the fair, nondiscriminatory treatment of U.S. subsidiaries. We undertake these 

efforts with the goal of making the U.S. an increasingly attractive 

market for foreign investment and the economic benefits it brings. 

The global coordination of a financial institution tax is critical to 

OFII member companies because they operate across borders. To 

that end, ensuring that any fee is structured within agreed-upon 

principles with other developed nations and the G–20 is of great 

importance and will be the focus of my testimony this morning. 

I would like to emphasize four key points. First, the G–20 has 

not yet achieved consensus on the form, purpose, or use of a financial institution tax. Is the purpose to recoup funds? Should it be 

used to deter high-risk behavior? Or should the prime focus be on 

building a fund to be used for future financial crises? 

According to an IMF report sent to the G–20 last month, even 

among the G–20 countries that do support a tax there is no consensus about the type. There is also disagreement about which entities should be taxed, whether all banks, large diversified financial 

institutions, or insurance companies should be included. In fact, 

the G–20 is conflicted on whether such a tax is an appropriate element of regulatory reform in the first place. 

It is noteworthy, and I think mentioned earlier, that Canada, 

Australia, Japan, and other major developed countries do not support a targeted tax at all and do not intend to adopt one. Likewise, 

major emerging markets like China, India, and Brazil are firmly 

opposed to burdening their financial institutions with a new systemic tax. 

Which leads me to my second point. Before adopting a tax, the 

U.S. and its G–20 counterparts need to understand better how the 

tax would interact with financial reform initiatives, such as new 

capital and liquidity rules. 

That is why the leaders of the Financial Stability Board and the 

Basel Committee on Banking Supervision have encouraged the 

G–20 to undertake further study of these rules before considering 

a tax. Thus, the G–20 recently directed the IMF to study the potenVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00094 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
91 

tial effects of a tax, and in particular to closely examine the interlinkages between a tax and proposed regulatory reforms. 

Third, an uncoordinated approach would hamper recovery efforts. 

While recovery efforts have been effective to date, we are not yet 

clear of this crisis. Introducing a new, uncoordinated tax would create a headwind in the face of our economic recovery and discourage 

investment. 

The G–20 has recognized at each of its summits that uncoordinated, unilateral action encourages arbitrage. Given that financial 

markets are global, institutions may respond to a U.S.-only tax 

simply by offshoring activities to markets that do not impose the 

tax. This would remove significant amounts of capital from the 

U.S., which would materially diminish lending and could slow U.S. 

economic recovery. 

Additionally, if the U.S. moves alone on a tax it would tilt the 

competitive playing field against institutions located in the United 

States, including U.S. subsidiaries of companies headquartered 

abroad. 

Finally, if the U.S. nevertheless decides to impose a tax unilaterally, it should be structured so that it does not discourage worldwide investment in the U.S. In particular, a tax on in-sourcing financial groups should not be based on their worldwide operations. 

Historically, the United States has taxed all in-sourcing companies on income derived from the U.S. An in-sourcing financial company’s liability for a financial tax should be similarly limited in 

order not to fail a standard of fundamental fairness. 

For example, if a U.S. subsidiary of a German-headquartered financial institution was taxed in the U.S. on its worldwide operations, it would face significant double taxation should Germany 

decide to tax its own financial institutions. In response, Germany 

may decide to even retaliate against U.S. institutions. And what if 

France decides to get in the game? You can see how an uncoordinated approach can have a multiplier effect on global institutions. 

The threat of double tax on in-sourcing financial institutions 

would discourage their investment in the U.S. and impact available 

capital. What is at stake? According to government statistics, the 

U.S. operations of international companies hold almost 30 percent 

of total U.S. commercial and industry loans. 

In conclusion, given the possibilities of arbitrage, contradictory 

regulations, and adverse competitive impacts, OFII believes the 

U.S. should only implement a tax when other major financial centers are prepared also to adopt comparable measures. Going alone 

is not in the United States’ interests in this globally interconnected 

economy. 

Thank you. I welcome any questions. 

The CHAIRMAN. Thank you very much. 

[The prepared statement of Ms. McLernon appears in the appendix.] 

The CHAIRMAN. Mr. Elliott, I think you hinted, and I would just 

like more precise testimony, on how much benefit the banks have 

received, given all the assistance that they have been given, whether it is TARP money that they received, even support for Fannie 

and Freddie, which is expected to be about $400 billion. 

92 

The first stimulus bill was about $125 billion. The Recovery Act 

authorized $800 billion over 10 years. Add to that the Federal Reserve, which put in place a number of emergency credit programs, 

which offered up to $1 trillion in assistance at the peak of the crisis. Add to that how much the Federal economy contracted. The figure I have is by about 2 percent of GDP, or $300 billion, in 2009. 

Automatic stabilizers are expected to add about 2.5 percent of GDP 

to the Federal Government in both 2010 and 2011. 

So in all, is it not true that trillions of dollars, Americans’ tax 

dollars, were put on the line to reverse the damage caused largely 

through the risky investment and lending practices of the financial 

institutions? Therefore, the direct cost of the proposed tax is much 

less than the cost to the entire economy given the financial collapse. 

Mr. ELLIOTT. Yes, I do agree with that. First of all, there is more 

in my written testimony, but to answer your question here, it is 

difficult to be precise. However, there were trillions of dollars of 

taxpayer money put on the line. First of all, guaranteeing Fannie 

and Freddie is a guarantee of over $5 trillion of mortgage assets, 

just that alone. The Federal Reserve is backing up the securitization market. We put hundreds of billions of dollars directly into 

the banking industry, as you know, and did that at a below-market 

price, appropriately and deliberately. 

We have provided guarantees of hundreds of billions of dollars of 

additional debt taken on by the banks under the Temporary Liquidity Guarantee Program. We have guaranteed money market 

fund assets. I cannot even, in the time we have here, go through 

all the programs. It is many trillions of dollars. 

It is difficult to know what the value of that was for the industry, 

but I have to believe it was well over $1 trillion because, if we had 

not taken those actions, the meltdown that was bad enough that 

we experienced would have been significantly worse. It would have 

come through in securities prices and the values of loans, and these 

are very predominantly held by the organizations we are talking 

about imposing the fee on. 

The CHAIRMAN. And is the same principle true even after, say, 

GM pays back some of its TARP money, and even though AIG pays 

back some, and I presume that Fannie and Freddie are going to finally get out of that hole. Given all that, is it true that the bank 

tax of roughly $9 billion a year is much less than the benefit that 

the banks have received generally because of U.S. taxpayer assistance given to the economy, even after some of those institutions 

have repaid those funds back to Uncle Sam? 

Mr. ELLIOTT. Absolutely. The likely loss on the TARP is something in the neighborhood of $90 billion. I think the size of this fee 

is roughly appropriate. The value to the institutions we are talking 

about imposing the fee on, again, it is difficult to quantify, but I 

am confident it was well over $1 trillion if you compare it to the 

alternative if we had not taken those actions. 

The CHAIRMAN. What do you say to Ms. McLernon’s point, that 

my gosh, if we impose this now we are going to be shooting ourselves in the foot because other countries are not imposing the 

same fee? 

93 

Mr. ELLIOTT. Well, I would say two things. First of all, as I am 

sure came through in my general testimony, many of the theoretical concerns that have been raised are not, to my mind, significant practical concerns because the size of this fee is so small compared to the size of the industry. 

Second of all—and I have talked to officials of many of these 

countries—the countries that are opposed to the tax are the ones 

that did not have to rescue their industries or that had to do very 

little. To my mind, this is a recoupment mechanism. This is the 

same type of thing that is being proposed for the resolution mechanism on the financial reform bill. That is, we will not require any 

prefunding, but we will agree that the industry will be charged to 

recoup it afterwards. To my mind, that is all that is happening 

here, and it was made explicit when Congress passed the Emergency Economic Stabilization Act that established TARP. 

So, clearly there are many details to be worked out, there are legitimate arguments on both sides, but the general principle of recouping this money starting soon, I think, is a very strong one. 

The CHAIRMAN. All right. 

Senator Grassley? 

Senator GRASSLEY. None of you addressed something that the 

President proposed about the tax on the insurance companies. He 

is proposing to tax insurance companies based on the riskiness of 

their assets. Although the concept of risk-weighting of assets is 

common in the banking world, it is not common in the insurance 

world. So, I want your opinion of whether or not you agree with 

that proposal or if it is misguided. 

Mr. ELLIOTT. May I, Senator? 

Senator GRASSLEY. Yes, you can. 

Mr. ELLIOTT. Risk-weighting of assets is actually quite common 

in the insurance industry. When you look at the regulatory structure, they have a risk-based capital structure that is particularly 

relevant for the life insurers, but also applied to property/casualty 

insurers, so this is actually not an alien concept to the insurance 

industry. 

Mr. JOHN. I am going to slightly disagree, in that I agree with 

Doug’s general statement, as I usually agree with his general statements. I just do not always agree with his conclusions. But the application in the banking industry is very explicit. There is a very 

detailed form that financial institutions, regulated by the bank regulators, must fill out that dictates to them how each asset class 

must be treated, et cetera. 

You cannot simply lift that out and drop it into the insurance industry, because they use different accounting methods, they use 

different regulatory methods, et cetera. So while I agree with 

Doug’s general statement, I think the actual application would be 

very difficult and very confusing. 

Senator GRASSLEY. All right. 

I will ask Mr. John and Mr. DeMarco about what you have 

talked about a lot, but I want to get something specific on the 

record. The Congressional Budget Office estimates that the Federal 

taxpayer bailout of Fannie and Freddie will cost $389 billion by 

2019. What responsibility do Fannie and Freddie bear for the financial crisis? Since the President’s proposal is meant to target 

94 

those responsible for the financial crisis, should Fannie and 

Freddie not be subject to the President’s proposed tax, and I would 

say by the year 2013, not right now? 

Mr. DEMARCO. Senator, clearly, the collapse of Fannie Mae and 

Freddie Mac, their being placed in conservatorship, the Senior Preferred agreements that Treasury has put in place that have provided substantial financial support to the companies, have come at 

a cost to the taxpayer, and it is clearly a key part—a part—of the 

story of the country’s financial crisis of the last few years. 

That being said, the recoupment of those expenses, I believe, is 

something that needs to be considered in a larger context. I certainly, as the conservator of Fannie and Freddie, am very much 

looking forward to the administration and the Congress getting together and working on a comprehensive approach to housing finance reform. 

If, in that context, Congress and the administration think it is 

appropriate for the country that there be some consideration of the 

taxpayer expenses that supported housing finance in the last few 

years, I believe that is the context in which to consider that question. 

As I set forth in my opening statement, to assess this particular 

fee at this time to Fannie and Freddie would not accomplish anything in terms of increase in revenue to the government. 

Mr. JOHN. I also agree that Fannie and Freddie had a significant 

role in causing the 2008 financial crisis. I think, however, that 

many other types of institutions that are not subject to this fee, 

ranging from the credit rating agencies to, frankly, some of the 

monetary policy actions of the Federal Reserve, to a wide variety 

of other entities that are out there, had equal roles in causing the 

2008 crisis. 

That points out to me even further that what this is is not really 

anything that is aimed at recouping the cost of the 2008 financial 

crisis. This is really nothing more than a tax on significant financial institutions. I am very concerned that, once the principle has 

been established, whether it is 15 basis points across the board or 

whether it is risk-weighted, as the administration now proposes, 

that it is going to be frightfully easy to raise that to ever-higher 

levels in an effort to close an already staggering budget deficit. 

Senator GRASSLEY. Does anyone on the panel disagree with what 

Ms. McLernon said? I think you said this: if the United States imposes a TARP tax and other countries do not, it is going to make 

our institutions uncompetitive with foreign competitors. That is 

your position, right? 

Ms. MCLERNON. Well, that it would make the companies that are 

invested in this country, including U.S. subsidiaries of foreign companies, uncompetitive with others around the world. 

Senator GRASSLEY. All right. And is there any disagreement by 

anybody on the panel on that point? 

Mr. ELLIOTT. Yes, I do. Not because of the direction, but simply 

the magnitude of this is so small compared to the industry that I 

do not think it will significantly affect competitiveness. 

Senator GRASSLEY. All right. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Grassley. 

Next, Senator Conrad? 

95 

Senator CONRAD. Thank you, Mr. Chairman, and thank you for 

holding this series of hearings. I think they are very important, 

and you have had really excellent witnesses. 

As I look back on what happened, it seems to me that it was a 

confluence of factors that led to the collapse: an overly loose monetary policy under the control of the Federal Reserve, abnormally 

low interest rates from 9/11 going forward, an overly loose fiscal 

policy under the control of the Congress and the administration, 

massive Federal deficits even in good economic times, coupled with 

an air of deregulation that meant there was nobody watching the 

store with respect to AIG and derivatives. In addition to that, 

subprime loans being made. By the way, Fannie Mae did not make 

those loans. Fannie Mae bought them, as did Freddie. In a way, 

they were victims of this collapse as much as anything. 

That is not to say that there were not serious policy errors that 

were made with respect to Fannie and Freddie, because clearly 

they did have an implicit Federal guarantee that became explicit. 

Really, to hear how big the hole is with respect to all of these elements is sobering, indeed, and ought to be for all of us. 

As I look at it, this overly loose fiscal policy, overly loose monetary policy created the seed bed for bubbles to form. What we got 

were a series of bubbles. It was not just a housing bubble. We got 

an energy bubble, with oil prices over $100 a barrel. We got a commodity bubble, with wheat prices over $20 a bushel, virtually unheard of. So you had a series of bubbles form, and when bubbles 

burst there is economic wreckage, and we have it in spades. 

So the question now is unwinding it all. First of all, we had to 

provide enormous liquidity to the system to prevent a global financial collapse. We came perilously close to that, I believe, but it was 

averted. That is something the Federal Reserve deserves some 

credit for, the previous administration deserves some credit for, the 

current administration deserves some credit for, Congress deserves 

some credit for. But we are not out of these woods yet. 

So, what more needs to be done? Well, clearly, given the fact that 

one in every six workers is either unemployed or under-employed, 

we have to continue to provide liquidity, but very soon we have to 

pivot and we have to focus on the growing deficit and debt like a 

laser. 

That takes me to the question of, what are the funding sources 

necessary, combined with spending cuts, because both are going to 

be necessary? There is going to need to be additional revenue; there 

is going to need to be spending cuts. That is going to be tough medicine, but it has to be done in the interest of this country, otherwise 

we will be Greece sometime in the future. 

Mr. DeMarco, Fannie and Freddie continue to make draws, as I 

hear it, $145 billion through this quarter? Is that the correct number? 

Mr. DEMARCO. That is correct, Senator, with the first quarter financials that Fannie reported yesterday and Freddie last week. 

When the draws made based on that are done, it will be about 

$145 billion combined. 

Senator CONRAD. So, if this fee were imposed on Fannie and 

Freddie, it might feel good to us—I am kind of attracted to that 

part of it—but it is just money going out of one pocket of the govVerDate Nov 24 2008 16:14 Aug 04, 2011 Jkt 000000 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 R:\DOCS\67232.000 TIMD
96 

ernment into the other pocket of the government. Is that not the 

case? 

Mr. DEMARCO. That is correct, Senator. It might sort of be akin 

to rocking in a rocking chair. It does feel good, but it does not get 

you anywhere. 

Senator CONRAD. Yes. It does have a certain, I do not know, 

rough justice to it that they pay, along with everybody else who has 

benefitted by this set of policies, but you do not actually move anything. I mean, you are stationary. You are moving money around, 

but it is from one government pocket to another. 

Mr. DEMARCO. I mean, certainly, Senator, the shareholders in 

both companies have taken their loss in the collapse of the companies. The executives at the companies have absorbed their losses. 

Most of the senior executives at each company are no longer there. 

Much of their compensation was in the form of company stock, 

which is now not worth much. Frankly, the employees at the companies have taken a hit as well, and for them some of their retirement has also been in company stock. 

Senator CONRAD. So, from your standpoint, what does make 

sense in terms of filling the hole? Because on the TARP, $700 billion was authorized. We now know we are going to get over $600 

billion of that back. That is the current estimate by CBO, that we 

are going to get more than $600 of the $700 billion authorized 

back. It leaves a hole of about $90 billion. What do you think would 

be the appropriate burden sharing here? 

Mr. DEMARCO. Senator, with respect to the broad recoupment of 

TARP, I really do feel like that is beyond both my responsibility 

and expertise, but I have reviewed not just the statements of the 

panelists here with me today, but prior testimony, and I think that 

the committee has been given a pretty balanced set of perspectives 

on both the pros and cons of this particular fee, the potential unintended consequences. 

I would add only that I do think that the actual costs—I mean, 

you focused on this $600 billion out of $700 billion being repaid. I 

think that the actual cost really is still to be determined, and that 

the component parts that make up this $90- or $100-billion projected gap still are left to be determined. The HAMP program, the 

Home Affordable Modification Program, makes up about half of 

that, and it is too early to know what the actual ultimate cost of 

that will be. 

Senator CONRAD. All right. My time has expired. 

The CHAIRMAN. Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

Mr. DeMarco, your testimony states that, in the first 2 years of 

the housing crisis, losses from Fannie and Freddie totaled $207 billion. Since that figure only covers losses through 2009, I assume it 

does not include the $10 billion recently given to Freddie and the 

over $8 billion that was just requested by Fannie Mae. 

Mr. DEMARCO. That is correct, Senator. My testimony was required by the committee before Fannie Mae had filed its first quarter financial statements, so I was not able to provide that in my 

written statement. 

97 

Senator BUNNING. Do you have any idea when the open-ended 

taxpayer bailout of these GSEs will stop, and will Fannie and 

Freddie ever be able to repay the taxpayer? 

Mr. DEMARCO. Senator, I do not know what the ultimate cost of 

this will be. As I said in my opening remarks, the dividend that 

each company owes to the Treasury on a quarterly basis, the 

amount of money drawn, already exceeds $1 billion a quarter. So 

for this quarter, Freddie owed $1.3 billion in dividend payment, 

Fannie owed about $1.5 billion. 

Now their draw is about to go up again, so those dividend payments will go up next quarter. The ability to make those dividend 

payments is itself challenging and, as I said in my opening remarks, is effectively being paid by taking down yet more money. 

So they are struggling to make the dividend payments, and that 

says nothing about principal payment to pay down on the approximately $145 billion that has been drawn. 

Frankly, Senator, I think we are all looking forward to the administration and the Congress coming to a final resolution about 

the future of the country’s housing finance system, and in that context an ultimate resolution of Fannie Mae and Freddie Mac that 

will be the final determinant of the kind of question you asked. 

Senator BUNNING. In other words, you do not know. 

Mr. DEMARCO. Senator, the actual cost, I do not know. 

Senator BUNNING. Nor do we. That is why I asked. 

Mr. DEMARCO. Senator, I would like to add, though, because I do 

think that this is important for both the committee and the public 

to understand, that with the two companies in conservatorship, 

FHFA, as conservator, is focused on a daily basis on doing everything we can, and working with the companies, to minimize the 

losses that are going to be incurred. 

A lot of that goes to efforts on foreclosure mitigation to try to find 

ways of working through these seriously delinquent loans in a way 

that minimizes the cost to the company, and hence to the taxpayer. 

But these losses are the realization of losses on mortgages that 

were made earlier in this decade. 

Senator BUNNING. When you appeared before the Banking Committee some time ago, I asked you whether an Inspector General 

had been appointed for Fannie and Freddie. At that time you stated that the White House had not responded to your repeated requests for an Inspector General. Is there any ongoing progress you 

could report from the White House on this very urgent issue? 

Mr. DEMARCO. Senator, I am actually very pleased to report 

positive progress on that point. Recently, the White House, in fact, 

nominated an individual, a career official at the Justice Department by the name of Steve Linick, to be the Inspector General for 

the Federal Housing Finance Agency. Mr. Linick’s nomination has 

been forwarded to the Banking Committee, and I am looking forward to the Banking Committee acting upon that nomination. 

Senator BUNNING. Last week, the Wall Street Journal reported 

that 96.5 percent of American mortgages are now governmentbacked through GSEs, FHA, or the Veterans Administration. Is 

that an accurate number, 96.5? 

Mr. DEMARCO. It seems a little high for the current flow of mortgages, Senator, but it is clearly quite substantial. So, if it is off, I 

98 

do not suspect it is off by much. That is for new flow. We are talking about new production. 

Senator BUNNING. With the way government-backed mortgages 

dominate the market, is there any hope of having a private sector 

secondary mortgage market in the United States in the near future? 

Mr. DEMARCO. I believe that there certainly is the prospect of 

getting there, Senator. By the near future, I think that what this 

requires is, it requires the administration and the Congress to assess, what is the government’s proper role in the housing finance 

system going forward? 

Once we know the government objectives and government role, 

including the extent to which the Federal Government wants to be 

in a credit loss position with respect to mortgages, then we need 

to figure out, what are the going-forward institutional arrangements to most efficiently and effectively assure liquidity and stability in the Nation’s mortgage market. 

I personally, Senator, believe that this can be done with private 

companies and with private risk equity, but, before we get there, 

policymakers do need to make some fundamental determinations 

about the appropriate role of the government and the objectives of 

the government, the public policy objectives of the government with 

respect to housing finance. From there, I believe that we can then 

legislate changes that will get us a housing finance system that 

will take us into the future. 

In the meantime, what we have today, including the FHA, 

Fannie Mae, and Freddie Mac, is essentially the country’s housing 

finance system, and to ensure stability for our economy, to ensure 

our citizens are able to continue to buy homes, sell homes, refinance their mortgages, what we have right now needs to continue 

to function in order to provide that stability to our economy. 

Senator BUNNING. I have just a couple more questions, Mr. 

Chairman, if that is all right with you. 

The CHAIRMAN. Go right ahead. 

Senator BUNNING. Thank you. 

To Mr. John, according to the testimony this committee received, 

the administration’s plan to use TARP for mortgage modification 

will result in almost a total loss to the Treasury. Would it have 

made more sense to consider this program part of fiscal spending 

policy rather than part of TARP? 

Mr. JOHN. Well, probably it should have. When it comes right 

down to it, the TARP program was not really set up to deal with 

either the auto industry or individual mortgage modifications. The 

House and Senate Banking Committees have tried, on any number 

of occasions, to set up ways to modify mortgages, all of which have 

been rather stunning in their lack of success. This was just one 

more opportunity to give it a try, and it has been about equally 

successful. 

Senator BUNNING. Ms. McLernon, will international finance 

firms be less likely to create jobs in the United States if the administration’s bank tax is enacted, especially if our trading partners do 

not do the same? Are you aware of countries that have already rejected the idea of a bank tax? 

99 

Ms. MCLERNON. Yes. Thank you, Senator. There are several 

countries that have already rejected a bank tax, and I do think 

that having the U.S. act alone will encourage a couple of different 

things. Number one, it will encourage offshoring of activities to a 

market that does not impose such a tax. 

Despite what Mr. Elliott said earlier, regardless of how small it 

is, nobody wants to leave themselves vulnerable to double taxation. 

No one wants to pay their tax bill twice. If the U.S. acts alone 

without seeing the full scope of what G–20 countries can agree to 

on underlying principles of a tax, I do think that it will reduce investment from financial institutions based abroad in the U.S. They 

would have a disincentive to invest here 

Moreover, many in-sourcing companies among my membership 

are within the U.S. to fund their activities here, so it could have 

a multiplier effect on the economy overall by reducing the amount 

of capital in our market. 

Senator BUNNING. And other countries rejecting the idea of 

taxes, bank taxes? 

Ms. MCLERNON. Yes. Canada, Australia, Japan, and the BRIC 

countries, including Brazil, Russia, and India, have expressed 

strong reservations about a tax. In addition, Singapore and Switzerland, two non-G–20 countries with major attractive financial 

centers, have also voiced concerns. 

Senator BUNNING. Thank you, Mr. Chairman, very much. 

The CHAIRMAN. Thank you. Thank you, Senator. 

It just strikes me that there is just something that does not connect here. If you look at the amount of funds that banks received 

and paid back on their losses and compare that with the bonuses 

that those same companies paid in those years, they are a little out 

of whack. 

For example—this is according to a report by New York Attorney 

General Andrew Cuomo—in 2008, the nine original TARP recipients received $225 billion in the first tranche of TARP funds, and 

lost a combined $81 billion, and paid $32 billion in bonuses. So in 

the same year that these nine institutions lost $81 billion, they still 

found a way to give more than 800 employees bonuses exceeding 

$3 million each, and almost 4,800 employees bonuses exceeding 

$1 million each. 

So, if in the worst year our economy faced since the Depression, 

the financial industry can create a bonus pool of over $32 billion, 

do you believe that the industry would have trouble absorbing a $9- 

billion annual tax to pay back the American taxpayer, to pass 

along the cost to individuals and small businesses? Mr. Elliott? 

Mr. ELLIOTT. No, I do not believe they would have significant 

trouble. As I was pointing out, if you look at total compensation 

just on commercial banks, that does not include investment banks 

as part of that. It does not have investment banking arms of commercial bank operations like JP Morgan. You are talking about 

$300 billion, even on an after-tax basis, of non-interest expense, of 

which about $200 billion is compensation. 

The CHAIRMAN. What about Fannie and Freddie, Mr. DeMarco? 

I am a little concerned about the bonuses paid to Fannie and 

Freddie executives, current and prior. Was there any recoupment 

there? 

100 

Mr. DEMARCO. Mr. Chairman, when the CEOs of each company 

left the companies at the time of conservatorship, and the senior 

officers with them left, they took nothing with them. We used authority Congress had given us with respect to golden parachutes. 

There, as I mentioned earlier, much of their compensation prior to 

conservatorship had been in the form of company stock, and the 

stock prices have collapsed, so there has been cost there. 

With respect to the current employees, a couple of things I would 

point out. The first is that, for the senior officers of the company, 

total compensation is down 40 percent from pre-conservatorship 

levels. One of the single biggest risks that I deal with, Mr. Chairman, with respect to overseeing the companies in conservatorship, 

is ensuring that we are able to attract and retain capable talent 

to be able to run these two institutions with $5.5-trillion worth of 

obligations while we work through the country’s housing crisis and 

we consider the future of these companies and the housing finance 

system. 

The folks who are working at these companies now have a great 

deal of uncertainty about the future of their employer, because it 

is in the hands of Congress to determine what the postconservatorship outcomes will be. In the meantime, there is a great 

deal of stress working through the problems of the housing crisis 

and the substantial delinquencies that we have. 

We have tried very hard as conservator to strike an appropriate 

balance, to see substantial reductions in compensation, to restructure compensation in a much more appropriate way. We have 

worked very closely with the Special Master for TARP compensation in doing that, but we are also working to make sure that we 

have appropriate talent still at the companies to be able to operate 

them during this time of great uncertainty. 

The CHAIRMAN. What about prior executives, 2 or 3 years preceding the collapse? They paid themselves a lot of money, and that 

is also the time when there were some accounting irregularities. 

Mr. DEMARCO. Yes, Mr. Chairman, that is correct. Now, with respect to going back to the accounting debacles, one of the predecessor agencies for the Finance Agency, the Office of Federal Housing Enterprise Oversight, took administrative action with respect 

to the CEOs and several of the senior executives at each of those 

companies and reached settlements with each of them that did involve the repayment of millions of dollars. 

The CHAIRMAN. Frankly, I thought it was an outrage, what they 

were paying themselves, given what they were doing at the time, 

and as a GSE at the same time. 

Mr. DEMARCO. Mr. Chairman, I am not going to disagree. I think 

that that is quite true. 

The CHAIRMAN. Thank you. 

Some raise the question that this fee might impede small business loans. I would like one of you to address that. Maybe you, Mr. 

Elliott, Mr. John, or somebody, the degree to which this is going 

to. 

Mr. ELLIOTT. Sure. Probably we each should, since I think we 

have somewhat opposing views on this one. 

The CHAIRMAN. All right. Why don’t we get both then? Both of 

you, then. 

101 

Mr. ELLIOTT. From my point of view, again, we are talking about 

such a small figure when you look at what is likely to be passed 

through, because I do believe some will be absorbed in terms of a 

hit to the shareholders, and very modest compensation reductions. 

I think, on average, you are looking at maybe a 5 basis point passthrough. That is so small, even if it did flow through directly to 

small business, they are not going to notice that in terms of, they 

are paying 8, 10 percent anyway, possibly higher. 

So, there has to be some effect if there is any pass-through; I do 

not think it is large. If this were a sufficiently large concern for 

you, even though I do not personally believe it needs to be, it is 

certainly possible to exempt small business loans or reduce it by 50 

percent or something. 

The CHAIRMAN. All right. 

Mr. John? 

Mr. JOHN. I would point out that it is one thing to apply 15 basis 

points across the entire banking industry, but the administration 

says that they want to focus it on 50 financial institutions and to 

get most of the revenue from 6. Among those six, you have some 

of the larger commercial lenders. 

To the extent that this fee is divided off according to risk levels 

using the standard banking capital guidelines, you are going to 

find that it is most completely applied, whether that is 15 basis 

points, as I said, or 25, or 30, or whatever, to the commercial loans 

of all size of those particular financial institutions. 

Now, those financial institutions do a substantial amount of direct lending, and in certain cases they will find that specific products are no longer profitable, and therefore they will not offer 

them. They are not required to, after all. 

But on the other hand, they also provide loans to smaller financial institutions, and the cost of that, as Doug has said, is going 

to likely be passed on to them, so you can expect that there will 

be some effect. We do not know precisely what the effect is until 

we examine the balance sheets of, in particular, those six major financial institutions and get more data from the administration on 

precisely how they mean to apply that. But I think it would be a 

mistake to just simply assume that there will be no effect whatsoever. 

The CHAIRMAN. I do not know if anybody is expecting no effect. 

Why could they not take some of it out of their bonuses? 

Mr. JOHN. Well, the problem with the bonuses is—and I am not 

defending the bonuses; I was just as appalled as anyone else—it is 

important to remember that in 2008, especially among the initial 

TARP recipients, the numbers that you cited there, that a significant amount of those bonuses were required by contracts, so it was 

not quite the same as most of us have a view of bonuses as something that is strictly discretionary according to the employer. In 

many cases, in financial institutions it is not necessarily discretionary, it is in the contract in some form or another. 

Yes, you can move from one thing to another, but that is not the 

way financial institutions work. What they will do is to price particular products. If you increase the marginal cost of a particular 

product, which is the way that the administration’s new version of 

102 

this bank tax would be applied, that is going to mean that certain 

products are going to be offered less than others. 

You cannot just simply say to them, well, what we are going to 

do is to tax a certain portion of your compensation. Of course, if 

that is your goal, then that would be one way that you could structure such a tax, but that is not the way this one is being set up. 

The CHAIRMAN. Yes. I just wonder sometimes if the way financial 

institutions, especially investment banks and large banks, structure their compensation plans, partly, leads to some of the unnecessarily risky bets and decisions that some of those institutions 

make. 

Mr. JOHN. Oh, I am sure it does. 

The CHAIRMAN. Just to fatten up their bonuses. 

Mr. ELLIOTT. If I might say one thing in that regard, just quickly. A good thing is, given that what the banks usually do is to take 

their revenue pool and divide it up between the shareholders and 

the employees roughly 50–50, anything that reduces their revenues 

net of this fee is almost automatically going to be split to some extent, with employees taking a substantial portion of it. 

The CHAIRMAN. All right. Go ahead. 

Ms. MCLERNON. Mr. Chairman, I just wanted to add the point 

that, again, despite how small a tax may be in the U.S., we are in 

a global market, and companies will be subject, or could be subject, 

to tax all over the world if things are not structured in some sort 

of coordinated way, which, as I explained earlier, could lead to a 

multiplier effect. 

So, I do not see how it would not impact small business loans, 

the capital markets in general, if things are not done in a coordinated way so that each individual country can act independently, 

but within agreed-upon guidelines. The G–20 is set to meet again 

in June in Toronto. They have asked the IMF to study this issue, 

and I expect some sort of draft report back from them in June. 

Given that we do have until 2013, by law, to recoup the funds, 

it seems worth it to take the time to see what the IMF says, to see 

what the G–20 says, and for the U.S. to show leadership in this 

regard. If it acts alone, and then other major countries start to act 

alone, we could have a multiplier effect that would affect all business loans, not, of course, just small business. 

The CHAIRMAN. Well, the U.S. could show more leadership by 

leading, by acting. If we sit around and wait for all these other 

countries to agree, my guess is, not much is going to happen. A lot 

of countries look to the United States for leadership. If the United 

States does something, it is reasonable and leads, I think, to a good 

chance that other countries will take note of that and try to figure 

out a way to do something that is similar, if not exactly the same. 

So sometimes you have to step up and lead, but you have to talk 

while you are leading and listen while you are leading, but you 

have to take some action, too. One could make that argument, it 

seems to me. 

Ms. MCLERNON. Right. I certainly see your point, but there are 

different ways to lead. If the U.S. decides unilaterally what piece 

of the pie that they want, and other countries want a similar piece, 

then that will have an effect on the capital markets that I do not 

think that we are looking to have occur. Once again, companies, no 

103 

matter how small, given that we live in a global economy, may just 

decide to offshore certain activities out of the U.S. 

The CHAIRMAN. Well, if they are small, they are not going to get 

hit. They are not going to get hit by this tax. 

Ms. MCLERNON. Well, I am saying no matter how small the tax. 

The CHAIRMAN. But I am talking about, it only hits the largest 

companies. It only hits a few companies, not very many. Not very 

many. All right. 

Mr. DeMarco? 

Mr. DEMARCO. Mr. Chairman, thank you. Just one other, somewhat related, observation. This last set of exchanges has really gotten to the incidence of the tax, if you will, on certain assets or activities that a bank would take if subject to the tax. I would observe that we are still waiting to see the actual details of the assessment base, but there is another set of institutions FHFA oversees, and that is the Federal Home Loan Banks. 

The Federal Home Loan Banks provide funding to institutions 

that may be subject to this fee, and since the assessment base appears to be risk-weighted assets minus some specific liabilities (including deposits), there is a question about—15 basis points does 

not sound like much, and it is not in many contexts, but it certainly could have an important impact on the relative cost of different types of liabilities on a bank’s balance sheet that might 

cause it to alter its funding. 

The CHAIRMAN. That is a good point. Also, I think the question 

I think either Senator Bunning or Senator Grassley raised about 

the effect on insurance companies too, they are different institutions that are affected differently. We have to do the best we can 

to make sure that this is tailored and designed the right way that 

is fair to everybody. 

All right. This has been very helpful. Thank you very much for 

the hearing. 

The committee is adjourned. 

[Whereupon, at 11:28 a.m., the hearing was concluded.] 

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