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THE ADMINISTRATION’S PROPOSALS 

FOR FINANCIAL REGULATORY REFORM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

SEPTEMBER 23, 2009 

Printed for the use of the Committee on Financial Services 

Serial No. 111–76 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

BILL FOSTER, Illinois 

ANDRE ́ CARSON, Indiana 

JACKIE SPEIER, California 

TRAVIS CHILDERS, Mississippi 

WALT MINNICK, Idaho 

JOHN ADLER, New Jersey 

MARY JO KILROY, Ohio 

STEVE DRIEHAUS, Ohio 

SUZANNE KOSMAS, Florida 

ALAN GRAYSON, Florida 

JIM HIMES, Connecticut 

GARY PETERS, Michigan 

DAN MAFFEI, New York 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

BILL POSEY, Florida 

LYNN JENKINS, Kansas 

CHRISTOPHER LEE, New York 

ERIK PAULSEN, Minnesota 

LEONARD LANCE, New Jersey 

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

September 23, 2009 .......................................................................................... 1 

Appendix: 

September 23, 2009 .......................................................................................... 49 

WITNESSES 

WEDNESDAY, SEPTEMBER 23, 2009 

Geithner, Hon. Timothy F., Secretary, U.S. Department of the Treasury ......... 8 

APPENDIX 

Prepared statements: 

Bachmann, Hon. Michele ................................................................................. 50 

Marchant, Hon. Kenny ..................................................................................... 52 

Geithner, Hon. Timothy F. .............................................................................. 54 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Waters, Hon. Maxine: 

Letter from Assistant Secretary Kim Wallace, U.S. Department of the 

Treasury, containing figures on Treasury’s workforce diversity, dated 

August 13, 2009 ............................................................................................ 62 

Geithner, Hon. Timothy F.: 

Responses to questions from Representative Kanjorski, Representative 

Bean, Representative Foster, and Representative Wilson ........................ 67 

(1) 

THE ADMINISTRATION’S PROPOSALS 

FOR FINANCIAL REGULATORY REFORM 

Wednesday, September 23, 2009 

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 9:33 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Members present: Representatives Frank, Waters, Maloney, 

Gutierrez, Watt, Ackerman, Sherman, Meeks, Moore of Kansas, 

Hinojosa, Clay, McCarthy of New York, Baca, Lynch, Miller of 

North Carolina, Scott, Green, Cleaver, Bean, Ellison, Wilson, Donnelly, Foster, Carson, Speier, Minnick, Adler, Driehaus, Kosmas, 

Grayson, Himes, Maffei; Bachus, Castle, Royce, Lucas, Manzullo, 

Jones, Biggert, Capito, Hensarling, Garrett, Neugebauer, Price, 

McHenry, Bachmann, Marchant, McCarthy of California, Posey, 

Jenkins, Lee, Paulsen, and Lance. 

The CHAIRMAN. The hearing will now come to order. 

I just want to explain that there is a hearing in the Committee 

on Education and Labor at which I have to testify on the antidiscrimination bill, so I will leave and will be coming back. 

We have the Secretary, whose prior effort to testify, which we appreciated, was interrupted by a voting pattern. We will have the 

Secretary’s testimony this morning. Then we will have the other 

regulators this afternoon. 

Tomorrow, we will have a hearing on the overall question of regulation, including particular emphasis on how to resolve the problem of ‘‘too-big-to-fail’’ and make that go away by appropriate remedies. On Friday, we will have a hearing on the bill sponsored by 

the gentleman from Texas, Mr. Paul, on auditing the Federal Reserve. 

And then, we will begin next week, legislative hearings on the 

segments of financial reform. The media reports that it is dead for 

the year are inaccurate. We will begin hearings on specific bills. We 

have had a number of hearings, but people have asked that hearings be—and this is appropriate—on specific pieces of legislation. 

And, obviously, other members are welcome to propose and circulate among the members alternatives to that so that various 

drafts could be available. 

But we will begin hearings next week on the legislative pieces. 

We intend to mark this overall regulatory package up in some 

pieces. At this point, it will be up to the leadership to decide 

whether it is done on the Floor in one sector or not. 

2 

I have told the leadership that, for example, if this bill were to 

come to the Floor as one piece, I would insist on at least 3 full days 

of debate. I intend to do everything I can to make sure—in fact, 

I will not, as chairman, call up the bill unless we have adequate 

time for amendments and debate. These are very important issues 

for the country, and it is essential that they be acted on in a fair 

manner. 

So we will begin legislative hearings next week. It will be a very 

busy schedule for this committee. We will have legislative hearings 

and markups. No markup will be scheduled for a day when we will 

be leaving town. I expect, in many cases, we will be talking about 

2-day markups on sections of this bill. If, in an extreme case, we 

have to do some more, as long as we are seriously engaged in that, 

we will go ahead with it. 

And it is my expectation that the legislation we have been talking about—which really goes back and has its genesis in the April 

2008 speech of Secretary Paulson. While we don’t have, obviously, 

everything in there that he wanted and we have some things that 

he didn’t talk about, this really is an effort that began with that 

speech. And we will be voting on this on the Floor of the House 

in November. 

I have spoken to Senator Dodd. He has been consulting with his 

ranking member, Senator Shelby. They expect, I believe, also to be 

acting this year. So that is the expectation. That is the schedule. 

I would just—you know, members have been alerted this is going 

to be a very time-consuming committee for the month of October 

and on into early November. I do look forward, as of Christmas, to 

ignoring most of the subjects we will be covering for some period 

of time. But that is where we are. 

Now we will begin this hearing with the Secretary of the Treasury. I alluded in my opening comments to our schedule. I wanted 

to address one particular issue that I think has not gotten enough 

attention, and that is the collection of actions that are proposed by 

the Administration and that we intend to go forward with, with 

some changes, to deal with this problem of ‘‘too-big-to-fail.’’ 

The ‘‘too-big-to-fail’’ problem is one of the ones that most aggravates people in the country. The notion that, if incompetence gets 

large enough, it should be immunized from any kind of correction 

is, obviously, as unfortunate a concept as we can have. I believe we 

will be putting together a package of legislation that will substantially diminish that problem. 

First of all—and this is, again, something that goes back to Secretary Paulson in April of 2008—we will be providing a mechanism 

for putting nonbank financial institutions out of everybody’s misery. There will be death panels exacted by this Congress, but they 

will be for nonbank financial institutions that will not be considered ‘‘too-big-to-die.’’ 

And I say that because we have this euphemism that we are 

going to be resolving these institutions. It has not been my experience—and when someone says they are going to resolve something, 

they kill it. And we are talking about dissolution, not resolution. 

We are talking about making it unpleasant for the entities. This 

is not a fate people would want. We will do this in several ways. 

3 

But we will begin—last year, Secretary Paulson and Federal Reserve Chairman Bernanke and others in the Bush Administration 

told us that the problem was—and we had two major nonbank institutions to deal with in this situation: first, Lehman Brothers; 

and then AIG, in quick succession. 

And the approach in Lehman Brothers was to pay none of the 

creditors. That led the Administration, the Bush Administration, to 

believe that the consequences of that were so negative that they 

could not allow it to happen again, so, with regard to AIG, they 

paid all the creditors. 

The problem was, as they saw it, they had no option other than 

pay everybody or pay nobody, that the ability to step in and unwind this in a more orderly fashion was not available to them. 

When Wachovia failed, it did not have the same disruptive effect. 

So we will give them the mechanism to do that and the mechanism to do that will protect the taxpayers and allow these institutions to be put out of business in the appropriate way. 

We will also have powers given to a collection of Federal regulators to make it much less likely that we will reach that situation 

with the large institutions. Remember institutions fail frequently, 

and generally we have ways of dealing with them. We will be enacting legislation, I believe, to keep them from getting to the point 

where they are so large and so overleveraged that this will be happening. 

Now, one proposal—I want to say, there had been some talk 

about a list being established by the Federal regulators of the institutions that were systemically important. I believe that would be 

a mistake. While those who proposed it in good faith thought it 

would be a kind of scarlet letter on them, in fact, others have seen 

it as a badge of honor. 

So we are, I believe, going to empower the regulators to take action to stop this from happening, but we are not going to have a 

preordained list. I think we are likelier to get to the Potter Stewart 

principle. As lawyers will recollect, he said in the pornography 

case, ‘‘I know it when I see it.’’ The regulators will know a systemic 

threat when they see it, because the systemic threat could be one 

large institution or a series of smaller institutions doing the same 

bad thing. Irresponsible subprime mortgages turned out to be a terrible systemic threat. No one institution was at that point. 

When you get to that—and we are still working, and there will 

be disagreements, but I think ultimately an agreement, on who 

does it, what combination of existing Federal regulators will have 

the power to designate and then enact restrictions. Those institutions or those activities which are deemed to be risky will be restrained. There will be restrictions on excessive leverage, and there 

will be restrictions on activities. Such a regulator would, I believe, 

have told AIG to stop issuing credit default swaps and to begin to 

unwind that portfolio in an orderly fashion and to increase their 

capital. 

So I do want to stress, yes, there is no one magic bullet that does 

away with ‘‘too-big-to-fail.’’ But you will have an ability to resolve 

them in ways that protect taxpayers and give people a disincentive 

to get into that situation. And you have a power, before you reach 

4 

that, to restrict their activities, both quantitatively and qualitatively. That will be very much what we do. 

The gentleman from Alabama is now recognized for 4 minutes. 

Mr. BACHUS. I thank the chairman for holding this hearing. 

And, Secretary Geithner, I thank you for returning to our committee to discuss the President’s proposals for regulatory reform. 

The Administration has presented to Congress a far-reaching 

regulatory reform proposal which, as of today, has failed to achieve 

anything approaching consensus, either on Capitol Hill or even 

among the Federal regulators who would be responsible for implementing it. 

The lesson that we learned from the events that led to the financial crisis and subsequent government actions is that our 1930 regulatory system is not up to the task of monitoring the safety and 

soundness of complex financial institutions in the 21st Century. We 

do need smarter regulation, but not necessarily more regulation. 

We need enforcement of existing regulation, not another layer of 

regulation or more government bureaucracy. 

And, finally, what we do not need and what we have had too 

often is government policies which encourage harmful business 

practices or incentivize those practices or, when they went terribly 

wrong, blessed them with bailouts. 

The chairman used the term ‘‘liquidate and resolve.’’ And I think 

that most of my colleagues welcome that, as opposed to what the 

Administration started by saying, and the chairman, using words 

like ‘‘rescue,’’ because ‘‘rescue’’ implies that the taxpayers will be 

presented with the ultimate bill. 

Unfortunately, the Administration’s regulatory reform plan continues the pattern that we have seen with health care and energy 

of a big-government solution that replaces individual choices with 

bureaucratic mandates. Their plan establishes the Federal Reserve 

as the systemic risk regulator, despite the fact that the Fed has 

historically done a poor job of identifying and addressing systemic 

risk before they become crises. 

It tasks the Fed with identifying a class of systemically significant firms that the market will view as ‘‘too-big-to-fail,’’ as the 

chairman said, and then compounds this mistake by creating a socalled resolution authority that will promote continued taxpayerfunded bailouts of these institutions rather than actually 

unwinding and shutting down their operations. 

And, finally, the Administration plan would establish a massive 

new government bureaucracy known as the Consumer Financial 

Protection Agency, which consumers will ultimately pay for on top 

of the numerous regulatory agencies and the regulatory legislation 

and patchwork that currently exists. 

Mr. Chairman, my deep-seated reservations about the Administration’s financial reform proposals, which, again, I point out are 

shared by Members on both sides of the aisle and many of the regulators themselves, should not be interpreted as a rejection of commonsense reform. Although Republicans have taken a different 

path than the Administration’s, we are not saying ‘‘no’’ to reform. 

Republicans are saying ‘‘no’’ to more bailouts and ‘‘no’’ to more of 

the same approach of misguided government regulations and interventions which helped bring about the crisis in the first place. 

5 

Republicans have offered a clear alternative to the Administration’s approach to reform and will continue to do so. The Republican plan promotes effective consumer protection by streamlining 

and consolidating the functions of the bank regulators, including 

consumer protection, into a unified agency. 

End the bailouts. Our plan directs all failed nonbanks to an enhanced bankruptcy process that will force creditors and counterparties of those firms to bear the cost of failure rather than sticking 

the taxpayer with the tab. To promote sound monetary policy, our 

plan relieves the Fed of its current supervisory duties and prohibits 

the Fed from bailing out any specific financial institution. 

Mr. Chairman and Mr. Secretary, I thank both of you. I look forward to working with you and my colleagues in the months ahead 

as we address regulatory reform. Thank you. 

The CHAIRMAN. And we have an imbalance of speakers, although 

the same numbers. So I will go to Mr. Hensarling next for 2 minutes, if he is ready. Two minutes is what was on the sheet I was 

given. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

And welcome, Mr. Secretary. 

When it comes to the Administration’s financial regulatory plan, 

not unlike their trillion-dollar health care plan, it will prove to be 

terribly expensive and lead to forms of rationing. 

First, the Administration’s proposal rewards regulators with 

sweeping new Draconian powers, like the CFPA, to regulate industries as diverse as car rental companies, advertising agencies, and 

neighborhood department stores, all of which will simply make 

credit more expensive and less available to struggling small businesses and American families throughout our Nation. 

The Administration proposal also includes the designation of certain companies as Tier 1 financial holding companies. The Administration’s proposal, I fear, will simply codify the policy of ‘‘too-bigto-fail’’ and enshrine us as a bailout nation. 

Now, some maintain that bailouts have brought us to the verge 

of a recovery. I hope and pray we are on the verge of a recovery. 

But I remind all, Mr. Chairman, there is no such thing as a jobless 

recovery. No jobs, no recovery. Since the Administration has taken 

office and enacted their economic agenda, 3 million more of our 

countrymen have lost their jobs, and we currently suffer under the 

highest unemployment rate in a quarter of a century. 

The Administration’s continued bailouts of Fannie Mae, Freddie 

Mac, AIG, Chrysler, GM, and the list goes on, have hampered our 

economic recovery and helped our Nation pass a very important 

milestone: the first trillion-dollar deficit in our history, not to mention a budget which will triple the national debt over the next 10 

years. 

There is a huge difference between adding emergency liquidity to 

a panicked financial system and bailing out firms fortunate enough 

to be designated ‘‘too-big-to-fail.’’ Under the latter policy, the big 

get bigger, the small get smaller, the taxpayer gets poorer, and our 

children get saddled with the mother of all debts. 

Clearly, reforms are needed, but the best way to end taxpayer 

bailout of failed companies is to simply end taxpayer bailouts of 

failed companies. The best way to protect consumers is with comVerDate Nov 24 2008 15:29 Apr 06, 2010 Jkt 054867 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\54867.TXT TERRIE
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petitive markets, vigorous enforcement of antifraud laws, and effective disclosure that is easily understood. 

Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. 

The CHAIRMAN. The gentleman from Illinois, the chairman of the 

Subcommittee on Financial Institutions, Mr. Gutierrez, is recognized for 3 minutes. 

Mr. GUTIERREZ. Mr. Secretary, first of all, thank you for appearing. 

Exactly 1 year ago, we experienced the most agonizing week of 

the current financial crisis. And this committee began to address 

the root causes of the social and economic trauma that crippled our 

economy and caused millions of Americans—and we should remember this—to lose trillions of dollars of their hard-earned wealth. Let 

me repeat that: Trillions of dollars of hard-earned wealth were lost 

by the American people. Not so much the guys on Wall Street, they 

lost, but the people on Main Street lost. 

Predatory mortgage lending, combined with risky investment 

practices and poor underwriting standards, financed by some of the 

largest financial institutions in this country, created the financial 

and economic debacle that we must now address. 

Over a decade ago, the Federal Reserve was given the power by 

this committee—I was here; I got elected in 1993—to stop predatory mortgage practices through the Homeowners’ Equity Protection Act. It took the Federal Reserve 12 years to implement the 

rules and regulations that could have prevented many, if not all, 

of the worst abuses by predatory lenders and originators, abuses 

that were a direct and immediate cause of our current crisis. 

Why did it take so long? While there were many theories to explain this, I believe it took the Fed this ridiculously long time, including the FDIC, which did absolutely nothing either, because it 

was distracted by their other regulatory obligations and by a sense 

in Washington, D.C., of do less, do nothing, leave it alone, it is 

okay. 

The default of these toxic mortgages and the securitized products 

based on them caused trillions of dollars in losses and caused the 

2008 freeze in credit markets, which nearly destroyed not only our 

financial system but the entire international financial system. 

The message to those of us who want to restore the stability to 

the financial system could be no clearer or louder. If we do not include a strong, effective Consumer Financial Protection Agency 

within our regulatory reform legislation, Congress will have failed 

to address the current and any future economic challenges facing 

our country. 

We must also address the economic threat inherent in institutions known as ‘‘too-big-to-fail.’’ I believe we must work to a comprehensive, risk-based pricing regime which eliminates the incentives for these financial firms to grow to the point of becoming ‘‘toobig-to-fail.’’ 

One of the ways we can prevent an institution from becoming 

‘‘too-big-to-fail’’ is through a pricing regime which discourages 

banks from growing so large and interconnected. We must not only 

increase capital requirements, but we should also require decreased 

7 

leverage ratios and increased contributions to the Deposit Insurance Fund. 

Let me ask that this be submitted for the record, my complete 

statement, because it is clear to me, Mr. Chairman, we are going 

to have, you know, our classical debate. Our colleagues on the 

other side have already thrown health care into this, big government. I hear ‘‘socialism’’ coming any second. They are going to say, 

‘‘No, no, no. Global warming doesn’t exist, no. We don’t need to do 

anything about global warming. We really don’t need to do anything about this.’’ 

We do need to do something, and Mr. Geithner knows it probably 

better than anybody else. We can never allow a Lehman Brothers 

again to have a 30:1 ratio. We can’t allow that kind of leverage. 

And government is the only one that is going to stop it from happening again. 

Thank you very much, Mr. Chairman. 

The CHAIRMAN. The gentleman from New Jersey, Mr. Garrett. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. 

Before I begin, I just want to say I don’t believe anyone from either side of the aisle believes that everything was done right in the 

past and we can just continue going in that same direction. I believe from both sides of the aisle everyone agrees that reform is 

necessary. It is just the nature of that reform, to make sure that 

we do not limit growth nor do we provide for instability. We want 

just the opposite; we want economic growth and stability to come 

out of reform that we do. I think we can agree on that. 

One point, the chairman raised the issue of timelines and moving 

forward and what he would like to do. When I think about that, 

you go back. In April, the Administration thought before the G–20 

they wanted to have a reform proposal out on the table. That 

wasn’t done. Then there was talk by that G–20, not a complete proposal. Then, by the end of Memorial Day, there was talk of doing 

a markup and having that done for resolution authority. And that 

wasn’t done. And then there was talk of dealing with the systemic 

regulator and getting that through, and that was not done. And 

then, of course, in July, we were told that we were going to be dealing with the consumer agency. And that was kicked until September. And then that was eventually kicked to September when 

we came back from break. And, of course, now that is kicked now 

to mid-October. 

So it seems that all those timelines have not really been met 

quite as they had wanted to meet them. And we really don’t have, 

today, any legislative text from the legislative side of the aisle. I 

do appreciate that the Administration has provided us with legislative language, which is absolutely necessary for us to deliberate on 

these things. But it is appropriate, of course, for Congress to come 

up with their own legislation. 

Now, in the Senate, of course, we have Senator Dodd, as some 

would say, throwing a wrench into the works, because he has come 

up now with an idea of a single regulator. And why I use the word 

‘‘wrench’’ is because the chairman has said there will never be any 

prospect of merging the OCC and the OTS. So we are at different 

ends of that spectrum on that area. 

8 

So I guess what I would be curious hearing from you today is, 

is there a need to be able to deal with each of these issues deliberatively, to have time actually to have the legislation before us, and 

maybe move until 2010 before we actually have the completion of 

all this legislation? 

I thank you, and I look forward to your testimony. 

Mr. GUTIERREZ. [presiding] The time of the gentleman has expired. 

And now we will hear from the person that we are all gathered 

to hear from and that we have many questions for, the Secretary 

of the Treasury, Mr. Geithner. 

Please proceed. 

STATEMENT OF THE HONORABLE TIMOTHY F. GEITHNER, 

SECRETARY, U.S. DEPARTMENT OF THE TREASURY 

Secretary GEITHNER. Thank you, Mr. Chairman, Ranking Member Bachus, members of the committee. It is a pleasure to be back 

before you today and to talk about how best to reform the system. 

I am pleased to hear the enthusiasm for reform across both sides 

of the aisle. And, of course, we all recognize the task we face is how 

to do it right and how to get it right. 

Our objective, of course, is to provide stronger protection for consumers and investors, to create a more stable financial system, and 

to reduce the risk that taxpayers have to pay for the consequences 

of future financial crises. We have outlined a broad set of proposals 

for achieving these. We provided detailed and extensive legislative 

language. 

We welcome the time and effort you have already put into considering these proposals and the suggestions you have made, many 

of you individually and collectively, have made to improve them. As 

the President likes to say, we don’t have a monopoly of wisdom on 

these things. Our test is, what is going to work? That is our test. 

What will work? What will create a more stable system, better protections, with less risk to the taxpayer? 

I want to focus my remarks briefly on what I think are the two 

key challenges before us at the center of any debate on reform. The 

first is about how you achieve the right balance between consumer 

protection and choice and competition. And the other is how to deal 

with the moral-hazard risk people refer to as ‘‘too-big-to-fail.’’ 

So, first, on the consumer challenge, our system of rules and enforcement failed to protect consumers and investors. The failures 

were extensive and costly. They caused enormous damage not just 

to those who were the direct victims of predatory practice, fraud, 

and deception, but to millions of others who lost their jobs and 

their homes or their savings in the wake of the crisis. 

And to fix this—and I will just say it simply—we need to have 

strong minimum national standards for protection. They need to 

apply not just to banks but to institutions that compete with banks 

in the business of providing credit. They need to be enforced effectively, consistently, and fairly. And there need to be consequences 

for firms that engage in unfair, ineffective practices, consequences 

that are strong enough to deter that behavior. 

We believe we cannot achieve that within our current framework 

of diffused authority with the responsibility divided among a comVerDate Nov 24 2008 15:29 Apr 06, 2010 Jkt 054867 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\54867.TXT TERRIE
9 

plex mix of different supervisors and authorities who have different 

missions and many other priorities. We think it requires fundamental overhaul so that consumers can understand the risks of the 

products they are sold and have reasonable choices, and institutions have to live with some commonsense rules about financial 

credit. 

Of course, the challenge is to do this without limiting consumer 

choice, without stifling competition that is necessary for innovation, 

and without creating undue burden and cost on the system. 

Our proposal tries to achieve this balance by consolidating the 

fragmented, scattered authorities that are now spread across the 

Federal Government and State government. And it is designed to 

save institutions that are so important to our communities—credit 

unions, community banks, other institutions that provide credit— 

from making that untenable choice between losing revenue, losing 

market share, or stooping to match the competitive practices that 

less responsible competitors engage in, competitors that had no 

oversight, that were allowed to engage in systematic predatory 

practices without restraint. 

Now, some have suggested that, to ensure no increase in regulatory burden, we should separate rule-writing authority from enforcement. But our judgment is this is a recipe for bad rules that 

are weakly enforced—a weaker agency. So we think we need one 

entity with a clear mission, the authority to write rules and enforce 

them. 

Now, just briefly on this deeply important, consequential question of moral hazard and ‘‘too-big-to-fail,’’ no financial system can 

function effectively if institutions are allowed to operate with the 

expectation they are going to be protected from losses. And we can’t 

have a system in which taxpayers are called on to absorb the costs 

of failure. We can’t achieve this with simple declarations of intent 

to let future financial crises burn themselves out. 

We need to build a system that is strong enough to allow firms 

to fail without the risk of substantial collateral damage to the economy or to the taxpayer. And this requires that we have the tools 

and authority to unwind, dismantle, restructure, or close large institutions that are at the risk of failure without the taxpayers assuming the burden. It requires that banks pay for the costs incurred by the government in acting to contain the damage caused 

by bank failures. And this requires higher capital standards, tougher constraints on leverage across-the-board, with more rigorous 

standards applied to those who are the largest, most complicated, 

posing the biggest risks to the system. 

Now, this package of measures is central to reform. You can’t do 

each of these and expect it to work. You have to take a broad, comprehensive approach. And the central objective, again, is to make 

the system strong enough so we can allow failure to happen in a 

way that doesn’t cause enormous collateral damage to the economy 

and to the taxpayer. 

As the President said last week, taxpayers shouldered the burden of the bailout, and they are still bearing the burden of the fallout in lost jobs, lost homes, and lost opportunities. We look forward 

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10 

tem. We can’t let the momentum for reform fade as the memory of 

the crisis recedes. 

Thank you, Mr. Chairman. 

[The prepared statement of Secretary Geithner can be found on 

page 54 of the appendix.] 

Mr. GUTIERREZ. You are very welcome. 

Mr. Bachus, you are recognized for 5 minutes. 

Mr. BACHUS. Thank you very much, Chairman Gutierrez. 

Just last night, Chairman Frank released a memo—I am sure 

you have probably seen it—to his caucus where he suggested 

changes to the Consumer Financial Protection Agency. And, specifically, the chairman intends to drop, or seems to, the plain vanilla 

requirement, which has received so much attention. 

The White Paper was where the Administration highlighted that. 

I know Elizabeth Warren, who first proposed a financial protection 

safety council, I think that was sort of the main emphasis—that 

plain vanilla. And it is in your draft legislation that the Administration sent to the Hill. 

What is your position on leaving out plain vanilla? You didn’t 

mention it this morning. 

Secretary GEITHNER. Thank you. 

I have read the note quickly. And, in general, we are very supportive of the changes proposed by the chairman, including the one 

you referenced. 

But let me just explain the basic rationale for where we started. 

Our basic framework is designed to use disclosure to make sure 

consumers are less vulnerable to predation. 

Mr. BACHUS. Of course, now, you know, Mr. Secretary, about 18 

pages of the present disclosures are because of Federal requirements. 

Secretary GEITHNER. No, I agree. But I think, as anybody realizes, how many of you read those disclosures and understand what 

they mean? 

Mr. BACHUS. No, I agree with you. 

Secretary GEITHNER. It is really a remarkable failure to provide 

the kind of ability to choose that is so central to any reasonable financial system. 

So, in general, Mr. Bachus, we think it is a reasonable idea to 

try to make sure consumers have the ability to choose a simple 

product, not something they don’t understand. And maybe the most 

effective way to do this to make sure you get disclosure right. 

Mr. BACHUS. Okay. Although a lot of the disclosure is because of 

Federal regulation. So, I mean, that is the reason— 

Secretary GEITHNER. But you said something that I often say and 

completely believe: that, in many ways, this is about smarter regulation. And, you know, what you cite in disclosure is an example 

that you can have a lot of requirements and not achieve the objective of clarity. 

Mr. BACHUS. Sure. I agree. Okay. 

In your testimony, on page 8, you spent a lot of time this morning on the systemically significant, the Tier 1. You say that the 

identification of a firm as a Tier 1 will not convey a government 

subsidy. 

11 

But isn’t it a fact that a firm that has been identified as Tier 1, 

just that identification tends to imply government subsidy, given 

that creditors will know that the firm has been determined to be 

so important that it can’t fail? 

Secretary GEITHNER. We are deeply worried about that risk. And 

you are absolutely right, as is the chairman, to point out the risk 

in any regime that creates the expectation that the government 

will be there if you screw things up. 

But let me just make clear what is important. It is very important that these institutions that matter, whose future could threaten the economy as a whole, are subject to higher constraints on leverage in the future, more conservative cushions of capital and liquidity so that they can absorb losses they face when they make 

big mistakes. 

So what we are trying to do is to make it clear that, if you have 

this particular source of threat to the system, we are going to hold 

you and subject you to more conservative constraints on risk-taking. 

Now, you can’t do that without identifying who those institutions 

are. But you have to do it in a way that doesn’t, as you said, create 

an expectation that the government will be in there if they fail. 

But that is why you can’t just do it with tighter capital requirements. You have to give them the tools for the government to intervene to save them, but to act in a way that allows them to be dismantled and restructured and—I won’t use the chairman’s language—again, without the taxpayers assuming that burden. That 

is the central imperative for reform. 

And you are all right when you say that the key thing we have 

to do is not reinforce any expectation that the government is going 

to step in and protect people from losses in the future. Our job, 

though, is to make sure the system is less vulnerable to the collateral damage that can be caused when people make big mistakes. 

Mr. BACHUS. But can you assure us that the government won’t 

step in if they fail? 

Secretary GEITHNER. You know, Mr. Bachus, as I said, we had 

a little natural experience as a country last fall in what happens 

when— 

Mr. BACHUS. It wasn’t so little. 

Secretary GEITHNER. No, I would just say we had a test of the 

proposition that you can solve a crisis by hoping it is going to burn 

itself out. You saw how deeply damaging it was to the country as 

a whole. 

So you can’t fix this system, make it more stable in the future, 

by hoping and promising that you are going to—how should I say 

it— 

Mr. BACHUS. Not have more bailouts. 

Secretary GEITHNER. —abolish the fire station, lock the doors of 

the fire station when the crisis breaks out. It is not a strategy that 

works. 

Mr. GUTIERREZ. The time of the gentleman has expired. 

The Congresswoman from California, Maxine Waters, is recognized. 

Ms. WATERS. Thank you very much. 

Thank you very much for being with us today, Mr. Secretary. 

12 

I would like to quickly respond to some of your testimony. You 

outlined some critical objectives, and you said to achieve these objectives will require changes across the entire financial system. 

And you laid out some of the changes. I would like to add a little 

something to that. 

On August 13th, Assistant Secretary Kim Wallace sent me some 

figures on Treasury’s workforce diversity. I would like to thank you 

for those numbers. And I will enter them into our record today. 

And I would like to ask you to provide a little bit more specific 

breakdown of workforce diversity within each division. I am especially interested to see what roles each class of minorities occupies. 

For example, how many are lawyers, how many are policy staff, 

how many are administrative assistants? 

And I am not going to ask you to do that today; I am going to 

ask you to respond in writing. And I thank you very much. 

Second, I would like to focus on the suggested language you sent 

over on over-the-counter derivatives. As you know, I am very concerned about credit default swaps, which are a type of derivative. 

We allowed the SEC to ban short-selling, as it did last fall. The 

SEC also created new rules to significantly limit naked short-selling. 

The rationale behind this is that short-selling was used to improperly speculate in financial stocks. This caused what has been 

referred to as a crisis of confidence, which undermined each company’s ability to operate. The same can be said about a company’s 

credit default swap price. A naked credit default swap can be used 

to speculate on a company’s creditworthiness and drive the value 

of the bonds lower. 

The current derivatives proposal does not have any limits on 

naked credit default swaps. We already allow the SEC to ban 

short-selling. We know naked credit default swaps can be used for 

the same speculative purposes as short-selling. Why shouldn’t we 

give the SEC the authority also to ban credit default swaps? 

Secretary GEITHNER. An important issue and a thoughtful question. What we do in our proposal—and this is something you need 

to reflect on—is we propose to give the SEC and the CFTC the ability—they do not now have this authority today—to effectively deter 

and prevent manipulation in the derivatives markets. And, that is 

a very important thing to do. We didn’t do that before. We have 

to fix that. We proposed a variety of ways of doing that. 

We don’t think that banning what you call naked credit default 

swaps is necessary or appropriate to that objective. But we do 

think it is critically important you give them enforcement authority 

and the tools necessary to address, prevent, and deter manipulation in the derivatives markets. And that should be a centerpiece 

of what your committee considers in reform of derivatives markets. 

Ms. WATERS. Thank you very much. 

Finally, I would like to ask a question about the Consumer Financial Protection Agency. I am extremely supportive of the Consumer Financial Protection Agency. I am a little bit worried about 

the concerns that have been identified by the FDIC and the Fed 

about their roles. 

Are you guys working through this in the Administration, to help 

everybody get online, to determine what this Consumer Financial 

13 

Protection Agency will be and what will be taken from each and 

not taken from each? Can we all get together on that? 

Secretary GEITHNER. Ultimately, the committee is going to have 

to make that choice. And, as I have said before, what you are hearing from the supervisors is just an understandable desire to protect 

authority they have today and make sure that people they have 

doing these jobs don’t face uncertainty about their broad future. 

And I understand that wish. 

But let me just say it starkly: Did that system work? How well 

of a job did it do? How did it work out for the country to have that 

authority spread out among those agencies? 

So, again, I think it is understandable they are expressing reservations and concern. You can’t expect them to do anything different. But our responsibility is to figure out what is right for the 

country, even if it is inconsistent with the individual institutional 

prerogatives of individual supervisors and even if it is going to be 

uncomfortable for the financial firms who are going to have to face 

tougher standards, better enforcement. 

Ms. WATERS. I appreciate that. It would just make it a little easier for us if the Administration could just get its act together with 

all of— 

Secretary GEITHNER. Again, one great virtue of our country is 

that these are independent agencies with independent authority, 

and they have independent traditions, and they have things that 

they want to defend and protect. And we all respect that. But our 

job, the committee’s job, the Congress’ job is to figure out what is 

right for the country. And I think, again, we had a test of whether 

that system works, and it didn’t work. 

Ms. WATERS. Okay. Well, finally, let me just ask you one question about the plain vanilla products. You support coming up with 

what is described as ‘‘plain vanilla’’ products. How important do 

you think that is to the Consumer Financial Protection Agency’s 

work? 

Secretary GEITHNER. Look, our judgment, in shaping these recommendations, was shaped by the, sort of, simple proposition that 

consumers should be given the choice of opting for a simple 30-year 

fixed-rate mortgage, for example. Now, they shouldn’t be restricted 

from the ability to do something different that better meets their 

needs, but that should be one of the options they are able to choose. 

And we want to make sure the system as a whole does a good job 

of providing that choice. 

But there has been a lot of concern that if you invest the government with the ability to decide what is appropriate here and what 

is there, that is going to lead you to the point where you actually 

have less competition and choice. 

We have been open to many suggestions many people have 

raised that you find a way to have stronger standards without creating the risk that, over time, you are going to see a bunch of bureaucrats, frankly, narrow legitimate choice and restrict competition. 

So, as I said earlier, I think the chairman’s proposals that I have 

just had a chance to read very briefly are, I think, a pragmatic, 

helpful way to make sure that you have a better balance of choice 

with protection. 

14 

Ms. WATERS. Thank you very much. 

Mr. GUTIERREZ. Mr. Hensarling, you are recognized for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

Mr. Secretary, I am hearing some things that are somewhat surprising to me, so I want to make sure my ears do not deceive me. 

I am sorry that Chairman Frank isn’t here; I know he went to another hearing. 

I thought I heard Chairman Frank say that, essentially, his vision of the resolution authority would constitute a death panel and 

end in dissolution. And then I thought I heard you say that you 

would not necessarily use the chairman’s language. 

So does that mean that— 

Secretary GEITHNER. I only meant the phrase ‘‘death panel.’’ 

Mr. HENSARLING. Okay. So— 

Secretary GEITHNER. But on the objective and strategy— 

Mr. HENSARLING. But under the Administration’s plan, then, a 

conservatorship versus a receivership would still be on the table. 

Is this correct? 

Secretary GEITHNER. Oh, absolutely. 

Mr. HENSARLING. Okay. It appeared that the chairman was going 

in a different direction. 

Secretary GEITHNER. But let’s make sure people understand 

what the choice is. Remember, what we are proposing to do is to 

take a regime that was set up, a process that was set up for small 

banks and thrifts that existed for more than 20 years, set up in the 

wake of the S&L crisis, to make sure the government has the ability to come in and act to help restructure— 

Mr. HENSARLING. I think we understand— 

Secretary GEITHNER. —without costing the taxpayer. 

Mr. HENSARLING. We understand that, Mr. Secretary. 

Secretary GEITHNER. No, but this is really what is important. 

So what we want to do is take that model and apply it to the 

largest institutions in the country, so that the taxpayer is less exposed to risk in that context. 

Now, without that authority— 

Mr. HENSARLING. Wait, Mr. Secretary, I am sorry, I have a limited amount of time. I understand the point. 

Something else that I thought I heard you say—I actually am 

somewhat confused after your answer to the gentlelady from California. Are mandatory, standardized products, also known as plain 

vanilla, are they on the table or are they off the table? 

Secretary GEITHNER. Those are a part of what we proposed in 

both our broad recommendations and our detailed legislative language. 

But, as I said, Congressman, we are very committed to trying to 

make sure that we find a balance that gets better protection for 

consumers without limiting choice and competition. And there are 

different ways to do that. 

Mr. HENSARLING. I understand that, Mr. Secretary, but it is a 

fairly simple question. In the original language that the Administration submitted, it has mandatory standardized products. I am 

just trying to ask, is that off the table? Are you now indicating 

there are other approaches? 

15 

Secretary GEITHNER. Yes, absolutely. 

Mr. HENSARLING. Okay— 

Secretary GEITHNER. But hold on. I would say that, again, these 

are judgments the committee is going to have to work through. 

And, as I have said and we have always said, there are different 

ways to find this balance. 

But what is important—and I think you can see a test of this in 

the credit card bill that this body passed a couple of months ago— 

of an approach that tries to find a balance, that does not limit 

choice, but gives better protection. The question is how best to do 

it. 

Mr. HENSARLING. Let’s speak about balance for a second, Mr. 

Secretary. In your statement earlier today, you said that the Administration’s proposal addresses core regulatory failures and 

weaknesses that directly contributed to the crisis and the dangers 

that could lead to the next one. 

As many of us look at your proposal for a CFPA, we see something that is very broad, very Draconian. As we read the legislative 

language, is it not true that ultimately Wal-Mart, Target, and 

Macy’s could be subject to regulation by the CFPA? 

Secretary GEITHNER. Let’s do the simple objective and the simple 

imperative we share, okay? Which is, if you are in the business of 

providing financial credit, that is your business, and you are competing with banks and thrifts who do that, there should be a common set of basic standards and protections. 

If you don’t do that, then we will have again what this country 

went through over the last 5 years. Because what you will do is 

allow one set of institutions to be subject to these rules, and all 

risk and activity will migrate to where there is no protection. 

Mr. HENSARLING. Okay, Mr. Secretary, I understand the rationale. But does that mean the answer is yes, that ultimately WalMart, Target, and Macy’s, if they offer credit, can come within the 

regulatory ambit of the CFPA? 

Secretary GEITHNER. Well, one of the great virtues of our system 

is these are judgments the Congress of the United States has to 

make and this committee is going to have to work through. 

Mr. HENSARLING. But the language—I am asking you, Mr. Secretary—the Administration’s language— 

Secretary GEITHNER. What we proposed is straightforward, black 

and white. We proposed it, and it is on the table. And, as I said 

from the beginning, we welcome the chance to work with you— 

Mr. HENSARLING. So if these firms are engaged in the marketing 

of consumer financial products or services, then they could come 

within the regulatory ambit, not unlike Starbucks, Chili’s, 

Applebee’s, rental car companies, Avis, Budget, Enterprise— 

Secretary GEITHNER. Congressman, I understand what you are 

doing. It is a reasonable proposition, the approach you are trying 

to take. 

But let’s do the basic imperative. If you allow institutions that 

are essentially doing what banks do to compete with banks with no 

adult supervision, no constraints, and are free to engage in unfair 

practices, then you will recreate again— 

Mr. HENSARLING. Do CPAs compete with banks? 

Mr. GUTIERREZ. The time of the gentleman has expired. 

16 

I recognize myself for 5 minutes. 

Secretary Geithner, a year ago, you were—Mr. Paulson and Mr. 

Bernanke, Lehman Brothers was about to collapse and go into 

bankruptcy. How much did the 30:1 leverage have to do with Lehman Brothers and its collapse? 

Secretary GEITHNER. Central to their vulnerability, AIG’s, Bear 

Stearns’s, broad swaths of the rest of the financial system, was excess leverage allowed to build up without constraint. 

Mr. GUTIERREZ. And when the Securities and Exchange Commission was visited by the Wall Street heads from many of the same 

companies you just referred to, and I think it was in 2005, and 

they said, listen, we really like not to leverage 5:1 and 6:1, but 

30:1, how significant was the decision by the Securities and Exchange Commission to allow that practice? 

Secretary GEITHNER. Well, again, it was very significant. The 

biggest part of the failure of our system was to allow very large institutions to take on leverage without constraint. And that is what 

really causes crises, what makes them so powerful. And that is 

why a centerpiece of any reform effort has to be the establishment 

of more conservative constraints on leverage applied to institutions 

whose future could be critical to the economy as a whole. 

Mr. GUTIERREZ. And I ask you that because that is what I 

thought, and I just wanted to see if we agree that this leveraging 

of 30:1, which was actually authorized by the Securities and Exchange Commission—you have never worked at an investment 

banking firm, though, right, on Wall Street? 

Secretary GEITHNER. I have not had that privilege, no. 

Mr. GUTIERREZ. Well, that is good. Because it was always interesting to me the kind of dynamics, as you were running through 

this, that Secretary Paulson headed up Goldman Sachs, and he 

was there trying to figure out how this leveraging was going to get 

unleveraged, the same leveraging that he went to the Securities 

and Exchange Commission. I want to make sure that never happens again, that we don’t have people in this kind of situation. 

So tell me exactly what we are going to do different that isn’t— 

okay, you are the Secretary of the Treasury. How are we going to 

make sure that another part, the Securities and Exchange Commission or somebody else, doesn’t go and do something like this that 

then corrupts your ability, undermines, corrupts your ability to 

keep the financial markets in check? 

Secretary GEITHNER. You have to ensure that any institution 

that poses that kind of risk to the country is subject to conservative 

constraints on leverage. There is no other way to do it. 

And, alongside that, you have to make sure you have the capacity, if they end up making mistakes that will threaten their viability in the future, that they bear the consequences of those mistakes 

without threatening the stability and the health of the rest of the 

economy, the rest of the innocent victims out there in the economy 

who were responsible— 

Mr. GUTIERREZ. And I probably failed to ask, so how do we 

stop—as you see this, we are done. We are done with our work. 

The President signed the bill. It is going to happen, much to the 

chagrin of my friends on the other side. They will do everything— 

two of them already brought up that maybe you and Barney Frank 

17 

disagree about the vanilla envelope. That is the opening thing, divide and conquer. It is not going to work. The plain vanilla envelope, two of them have brought them up. That is the new thing. 

That is the headline, ‘‘They Disagree.’’ Hopefully, it is also going 

to say, ‘‘Secretary Geithner Doesn’t Bite,’’ because I think that 

would be a mistake and lead us in the wrong direction. 

So how do we make sure that you or someone has the power, the 

ability, the oversight, the capacity? You see that in the bill that is 

signed by the President? 

Secretary GEITHNER. It is central. Without that, nothing will 

work. 

Again, I think in many of the concerns you have expressed on 

this side of the aisle, but also on your side of the aisle, are concerns 

about the threat of moral hazard. The question is how best to prevent that. I think what we learned from this crisis is you can’t expect the market to constrain excess leverage and you can’t fix a 

problem by hoping it will burn itself out. 

Mr. GUTIERREZ. Let me just ask, so how is it that we lost trillions of dollars, and how will it be different in the future? Because 

it is, like, mind-boggling to me, it really is, that trillions of dollars 

could be lost, that financial instruments could be sold on the markets. People bought these things, all right? And it is like nobody 

is going to jail. There hasn’t been a grand jury investigation. You 

know, like, nobody is doing serious jail time. I can’t believe that all 

this happened. And, I mean, for nickel-and-dime stuff in the neighborhood, they will call a grand jury. And this is stuff that has really caused a serious harm to our economy, and trillions of dollars 

have been lost, and there is no one going to jail. 

I just want to make sure that, as we look at this, we put some 

police and we police this. Because, you know, I believe in cops on 

the beat. I think we need some cops on the beat around Wall 

Street, too, lots of good, smart cops who are going to help you and 

others enforce the law. Because I have a funny feeling the law is 

only as good as the number of policemen that you put on the beat 

to make sure the law is enforced and you put people in jail when 

they violate the law. 

That is the end of my time. We will now recognize Mr. Garrett 

for 5 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. 

You know, Mr. Secretary, I just heard you say something that actually harkens back to last time you were here, and that is talking 

about the goodness of having independent agencies and regulators 

out there on the one hand, but on the other hand that you sort of 

expect them to take the actions that they did. Because that was actually something that you said, and I remember what you said, 

that institutions have this authority to regulate, and they are not 

enthusiastic about giving up that authority. They would just defend 

their traditional prerogatives of their agencies. 

And I think, frankly, all arguments need to be viewed through 

that basic prism. We will have a hearing later on, and I guess that 

is the prism where we will have to take their testimony at that 

point in time, that they are doing it just to represent their own turf 

18 

as opposed to what we are looking to you for, for the benefit of the 

country. 

One of my opening comments was the timeline, and you heard 

that whole perspective. Very quickly, with the immensity of this 

issue, the complexity of the problems, is it realistic that we can resolve all this and all of our differences in the next 7 weeks and get 

it done and get it done right that would not have any negative consequences in the future? 

Secretary GEITHNER. Again, that is a choice you are all going to 

have to make. I think it is realistic. But let me just say what the 

consequence of the alternative is. I am very confident that, if you 

decide that you are going to do this over a protracted period of 

time— 

Mr. GARRETT. But ‘‘protracted’’ could just be into next quarter or 

something like that. 

Secretary GEITHNER. Well, that is what people will say. But 

there is a huge risk that it will just make it harder, because people 

will say, ‘‘Gee, it seems kind of hard. Let’s not take this on. It is 

difficult. The crisis receded. Things aren’t going to be so bad.’’ I 

think that is a huge risk. 

Mr. GARRETT. I understand. I appreciate that. 

Let me ask you about another issue, which obviously was happening during the heat of the moment, and that is back in the situation with the Bank of America situation and the SEC Bank of 

America case. Obviously, I would assume that if Bank of America 

was working with the Fed and the Treasury at that period of time, 

I would have assumed, but you can tell me if I am wrong, that you 

all would have been talking with Bank of America as to what they 

could and what they couldn’t do with regard to the Merrill Lynch 

merger. 

Do you remember anything about those conversations as to what 

they should or should not be doing and what they should or should 

not be disclosing at that period of time? Do you have any recollection of that? 

Secretary GEITHNER. As you may recall, that happened at a time 

when I had been nominated by the President to be Secretary of the 

Treasury and I was pending confirmation. And so, throughout that 

period of time, I did what was the necessary and appropriate thing, 

which was to recuse myself from any engagement in any individual—on not just monetary policy, but any individual discussion 

with those firms. 

And so, although both the Secretary and the chairman occasionally gave me a little update on where they were going, I was not 

party to those discussions. 

Mr. GARRETT. Okay. So any information that they gave you, was 

any of the information that they gave you indicative of those issues 

that are now before the SEC, as far as what Bank of America 

should or should not be doing with regard to disclosure? I know you 

may not be sitting in at them, but as far as the information that 

was given to you? 

Secretary GEITHNER. No. I would say that what they did is what 

I think was appropriate, given that I was being considered for this 

job, was to make sure I was aware of the broad choices they were 

facing in terms of whether and what it was going to take to make— 

19 

Mr. GARRETT. So is that a no? 

Secretary GEITHNER. Well, again, I think that, as I said, what 

they did was, again, appropriate, which was to give me the occasional sense of what they thought they were going to be bequeathing me. 

Mr. GARRETT. Was that a no? 

Secretary GEITHNER. Well, again, I am trying to be fair to— 

Mr. GARRETT. Well, either they talked to you about it or they 

didn’t talk to you about it. 

Secretary GEITHNER. Let me say it this way. The issues that you 

raised that are central to the discussion of the SEC were not part 

of my discussion with them. 

Mr. GARRETT. Okay, so that is a no. Was not essential to the— 

so that is a no. 

Secretary GEITHNER. No, that is what I said, Congressman, 

which is that the issues that you raised were not part of or not central to what they— 

Mr. GARRETT. I don’t really care whether they were central or 

tangential. Was that part of the discussion at all? 

Secretary GEITHNER. I would really be happy to talk through this 

as long as you want. 

Mr. GARRETT. I only have 5 minutes. So, yes or no? Was it 

brought up with you and discussed with you at any way, shape or 

form; yes or no? 

Secretary GEITHNER. Not the questions of disclosure, no. 

Mr. GARRETT. Thank you. 

Now in the last 30 seconds to get into the meat of some of the 

derivative aspect. The derivative language that you have does not 

have exemptive authority in it, which raises some real concerns for 

some folks out in the industry in saying that your language has to 

be finite and clear enough and explicit enough in not giving the 

regulators that flexibility to use. Do you believe—are you with me 

open that? Do you know what I am saying? 

Secretary GEITHNER. I agree that you want to make sure that 

you get, to use a phrase, the right balance and you don’t have— 

you don’t have sort of, how should I say, exploitable loopholes that 

allow the complicated risky stuff to shift where there is no oversight, and that is a challenge. 

Mr. GARRETT. So you think it is flexible? 

Mr. GUTIERREZ. The gentleman’s time has expired. 

The gentlelady from New York is recognized for 5 minutes. 

Mrs. MALONEY. Thank you. 

Welcome, Mr. Secretary. And we appreciate your coming to testify before us as we work to enact some of the most sweeping financial service reforms in decades. 

First, I would like to publicly acknowledge and thank you for 

your leadership and efforts to help pass the credit card reform bill. 

It was very valuable and greatly appreciated. 

I would like to join the chairman and my colleagues on both sides 

of the aisle who have raised questions about the ‘‘too-big-to-fail’’ 

designation, and by designating these tier-one financial holding 

companies, aren’t we in essence saying that they are ‘‘too-big-tofail?’’ And I am concerned that with this designation and the perception of a government automatic bailout, these firms will take 

20 

more risks. And even though we will be limiting their leverage and 

requiring larger capital requirements, it still is a huge taxpayer 

guarantee to have a ‘‘too-big-to-fail.’’ 

And my question is, aren’t there some activities that are so risky 

and do not have any public benefit that should be not part of an 

institution that has a government guarantee? And I would say proprietary trading, which does not have a social benefit, it is basically 

making money for that particular firm, as opposed to—why should 

that have a government guarantee? It is often risk-taking and very 

profitable, but why should people be able to make a profit, and 

then when bad times come, get a bailout? 

Former Treasury Secretary Volcker has also talked about the 

concept of having certain government guarantees that we have in 

the FDIC and for necessary parts of commerce, such as insurance 

and commercial banking, but not having the guarantee for risky 

behavior, such as credit default swaps and derivatives. Let them go 

off in the corner and take all the risks they want. 

I would never want to hamper the free market system, but why 

should it have a government guarantee? And I use the example of 

one of the most successful companies in the country that was in my 

district; I was very proud to represent AIG, one of the greatest insurance companies in the world, probably the greatest one, brought 

down by risky behavior from another division in the bank. 

Wouldn’t it have been better to let the risky behavior be off in the 

corner, not have the guarantee, not having it pull down a great 

company and not costing taxpayers now $185 billion? 

But I do want to note that the TARP money is being paid back 

at a 17 percent interest rate, so the taxpayers are recouping their 

money. And I am proud that the private sector is bounding back. 

But my question is, why should we be giving a government guarantee for risky behavior that does not have a public benefit? Insurance has a public benefit. Commercial banking has a public benefit. 

Why should we be giving a guarantee to risky behavior? Shouldn’t 

we separate it out? That is the proposal put forward by Mr. 

Volcker. I think it has sound sense. 

Secretary GEITHNER. I think we agree with you. And we are not 

proposing, would not support, even if you wanted to, providing a 

guarantee to those institutions or to that kind of behavior. It would 

be irresponsible to do it. We would not consider it. We would not 

contemplate it. 

Mrs. MALONEY. Even proprietary trading? 

Secretary GEITHNER. Of course not. And nothing in our proposal 

would provide that kind of guarantee. 

Mrs. MALONEY. Would that be separated out? 

Secretary GEITHNER. But again, you are absolutely right; it 

would be a bad thing for the country. 

Mrs. MALONEY. But if it is allowed to be part of the bank, that 

can pull it down. So it has to be separate. 

Secretary GEITHNER. Well, that is a slightly different question. 

About the guarantee thing, again, it would be a mistake, and we 

would never support providing a guarantee for the institutions or 

for particular types of those activities, would not do it. 

Mrs. MALONEY. Great. On the toxic assets, could you comment on 

how we are progressing? Are we being successful? Have investors 

21 

used the PPIP program to purchase these toxic assets? How much 

of a challenge is it? Is it moving away from our banks? Is it still 

there? Could you comment on the taxpayer assets? 

Secretary GEITHNER. Absolutely. Toxic assets are a problem for 

any financial system if banks don’t hold enough capital against 

those losses and if they are unable to raise capital because the 

market doesn’t understand the risk in those banks. And if you 

measured against that, you have seen dramatic amounts of new 

capital coming into the financial system because of disclosure in 

some sense we force in the system. The markets for those kind of 

real-estate-related loans and securities are beginning to improve. 

The prices have increased. There is more liquidity in part because 

of the programs we have set in motion. 

But we are just on the verge now of making the initial allocations of capital to the fund managers, and we have some authority 

to come in and buy those securities. But, again, the suite of these 

programs has already had a pretty important impact on liquidity 

and price in those markets, and things are starting to improve. But 

the best measure of this is, again, the amount of private capital 

that has come back into the financial system because of the disclosure we forced on the major institutions. 

Mr. GUTIERREZ. The time of the gentlelady has expired. 

Congressman Neugebauer, you are recognized for 5 minutes. 

Mr. NEUGEBAUER. Thank you. 

Mr. Secretary, good to have you again. I want to go back to something that is really bothering me and that is that I hear you have 

said on numerous occasions now that the Treasury—I mean, that 

some of these regulators, FDIC, the Federal Reserve, all of these 

various regulators that disagree with you on this Consumer Protection Agency, and you keep stating, well, the reason they disagree 

with me is they are just trying to protect their turf. 

Secretary GEITHNER. I didn’t say it quite that way. I was a little 

more delicate in how I said it. There are principled reasons for disagreeing with any proposal as you know. 

Mr. NEUGEBAUER. Why don’t you let me get to my question. 

Secretary GEITHNER. I am sorry. 

Mr. NEUGEBAUER. I think you were a little bit more clear in that 

meeting with them about how you felt about—I understand that 

you had some remarks to make to them. But I think the question 

here that—we have a number of people who are in regulatory positions here who are supposed to be smart people, supposed to be experienced people, supposed to know what they are doing. They are 

telling you that, for example, the FDIC says that these changes 

would be very disruptive in the agency’s operations during a very 

critical time. The OCC says its exam is conducted in integrated 

exams, but the CFPA could not make supervisory recommendations 

to the banks to influence consumer compliance. 

So, Mr. Secretary, I get concerned that either these people are 

incompetent or maybe you are not right. You are saying they are 

wrong, and you are right, but we have four people, and there are 

others who say they think this is not a good process. And so I think 

we have to be very careful about if we don’t have competent people 

in place in these agencies and—because you think that they are not 

22 

looking after the best interest of the country; they are looking after 

their turf, then that is a very serious charge. 

Secretary GEITHNER. Well, I think it is just a simple observation. 

And let me just say, I have great respect and work very closely 

with all of those people, and they are doing an excellent job under 

very exacting circumstances. 

But if you were in their shoes and if I was, I would be making 

the same basic arguments. And there is principle in those arguments. It is not an unreasonable point for them to make. But you 

have to view it for the basic imperatives that they are defending 

instead of traditions and authorities that they have lived with for 

some time that they are comfortable with. 

But the basic—I cannot say it more strongly than this: How did 

it work in practice? Did it do what it was designed to do? And I 

think there is no basis for claiming that it worked. That is the only 

one way I can say it, which is a simple thing. We had a chance to 

see how it worked over decades, and it did not do what it was designed to do. 

Now, it wasn’t simply about how they exercised their authority 

because large parts of the system were outside their authority. And 

that made it harder for them in that context. But that is why I 

think you have to look back and step back and try to do something 

more fundamental. 

Mr. NEUGEBAUER. I think the other question, too, you have to determine exactly what part of this of what happened in the past was 

actually attributed to the consumer part of it, and because you are 

making a very radical change when we really haven’t really sat 

down I think and done the proper autopsy to determine how much 

of the activities happened because of inadequate or lack of consumer protection. 

Secretary GEITHNER. I think it is actually kind of simple and 

stark, and if we understand one thing, I think we understand that. 

To say it simply, where there were rules, they were weak and enforced, but there were large parts of the system without rules. And 

that is not a tenable balance for any system. 

Mr. NEUGEBAUER. I want to go back to the derivatives issue because we have had a number of companies come and testify or 

come and see I think individual Members of Congress and are very 

concerned about the proposals. These are companies that use these 

derivatives to hedge risks that they are not able to cover in other 

ways. And now that even though with the exemption, many of 

these are going to be—meet the eligibility requirements of the 

clearinghouses and so they are concerned they will not be able to 

use the exemption. And many of them say that with that factor and 

having to put up larger amounts of cash margins, they will not be 

able to actually hedge those risks. What are you proposing to make 

sure that we clarify this because this is a serious issue? 

Secretary GEITHNER. I completely agree with you and I think you 

are right to point out and they are right to point out that there are 

companies that make things and sell things that people need, that 

need the capacity to manage their business that allows them to 

hedge risks, and not all those things will be met, needs to be met 

through a simple standardized product that is traded on the exchange. 

23 

So preserving that is important. But the challenge for us is to 

make sure that in preserving that, we don’t create a large loophole 

that allows all that stuff that needs oversight to migrate to where 

there is none. 

The CHAIRMAN. The gentleman from New York, Mr. Ackerman. 

Mr. ACKERMAN. Thank you, Mr. Chairman. 

Mr. Secretary, I have two issues I would like you to comment on 

this morning. The first, many of us place a very large share of the 

blame for what happened in the secondary mortgage market 

squarely on the shoulders of the credit rating agencies. Quite a few 

firms and many pension funds essentially outsourced their own due 

diligence responsibility to these credit rating agencies. The biggest 

of them are called nationally recognized statistical rating organizations; that approval bestowed upon them by the SEC. And there 

seems to be in reality no qualifications for that other than that 

they have a big share of the market. 

Very often, these particular agencies got it wrong. In many instances, they have conflicts of interest. They got it wrong with complete immunity, and many investors, because they had this apparent government seal of approval—sort of was like the rabbi’s seal 

of being kosher. I don’t understand if some of them aren’t really 

acting as honest brokers. What is the purpose of that title that 

they have? Is that counterproductive and misleading, and could you 

tell us something about the Administration’s intentions when it 

comes to dealing with this issue? 

Secretary GEITHNER. Thank you for raising that. You are right; 

it was central to the failures, and the failures this time around 

were much worse than you saw in the failures of ratings in the 

past, much more damaging. 

The SEC I think released just—or is about to release or just released a set of broad recommendations for trying to address many 

of the problems you referred to, including reducing the risks that 

there are conflicts of interests or incentive problems that lead them 

to—or create greater risk of these ratings being wrong in the future. 

But in addition, we have suggested that we try to eliminate what 

we call rating dependence in the regulatory capital regime and 

other parts of the regulatory system, so we are not creating greater 

incentives for institutions to rely on these ratings. And as the 

chairman has proposed and many others have considered, we think 

a critical part of the reform of securitization markets generally is 

to make sure that people who sell these securities retain some of 

the risk in them. And that will help get the incentives right. And, 

of course, as always, we are open to suggestions of how to make 

sure we strengthen these reforms over the rating agency process. 

Mr. ACKERMAN. I will send you my suggestions. 

The second issue that I would like you to address is SIPC. It has 

been over 9 months since Bernie Madoff discovered that he was a 

crook and turned himself in. There are 10,000 claims that people 

who have lost their dignity, their wealth, their security, their 

homes, their family and whatever is left. SIPC has contracted out 

a lot of their work. One of the contractors just lost a computer, or 

it was stolen or whatever, and 2,200 victims’ files are now in the 

hands of we-don’t-know-who. 

24 

The problem here is that, of the 10,000 claims that have been 

filed, only 543 as of July have been paid. That means 95 percent 

of the people are just hanging out there absolutely desperate in 

most cases. How are investors supposed to have confidence in what 

is going on if SIPC can’t process the claims faster and make these 

people whole with this insurance policy that people believe they 

have? 

Secretary GEITHNER. Congressman, you are right; it is tragic and 

unfair, and the scope of damage caused by that fraud is just extraordinary. And I would welcome a chance to come talk to you or 

your staff or have us, with the SEC, walk you through what we can 

do to make that process work better, not just in this case but— 

Mr. ACKERMAN. I want to do that. But just tell me now there is 

a plan to speed this up somehow. When we couldn’t get the checks 

out to the auto dealers quickly enough, we found a way of doing 

that. Can we speed this up? 

Secretary GEITHNER. Again, I would be happy to work with the 

SEC and the other members of the board of SIPC to try to figure 

out how to do that. 

Mr. ACKERMAN. I yield back the balance of my time. 

The CHAIRMAN. In the 20 seconds the gentleman had remaining, 

if he would yield them to me, one of the items that I believe should 

be on the agenda of the committee next year, and of course the 

agenda of the committee is not something on which I have no influence, is looking at the degree of protection people get from the 

SIPC over and above Madoff. It is clearly inadequate to the expectations, to the role that it has played and I would hope in a bipartisan way we could look at expanding investor protection next year. 

And we will—that doesn’t relieve the current issue, but it will be 

on our agenda for next year. 

The gentleman from Delaware. 

Mr. CASTLE. Thank you, Mr. Chairman. 

Mr. Secretary, according to all the news this morning, yesterday 

there was a discussion draft of the Consumer Financial Protection 

Act distributed by the chairman of our committee to the Democratic members of the committee. My question to you is, were you 

or the White House in some way consulted about that, and are you 

familiar with it at this point? 

Secretary GEITHNER. The only thing I have seen is a 2-page note 

that the chairman circulated, which as I said earlier, I had a 

chance to look through briefly. And we were not consulted in advance of the note itself, but we have been spending a lot of time, 

both sides of the aisle, walking through a range of concerns and 

questions people have raised with the legislative language we have 

proposed. 

Mr. CASTLE. I hope it will be fair to ask if you could comment, 

perhaps in writing, at some point on that. Obviously there are 

some major, according to what we are reading, some major aspects 

of change there that we would be interested in your views on them. 

I would like to— 

Secretary GEITHNER. I would be happy to do that. But as I said, 

I think the broad thrust of those proposals looks very encouraging 

and promising to us. And there is nothing in there at first glance 

that troubles me significantly in terms of its practical value. 

25 

Mr. CASTLE. Along the same lines, worrying about the CFPA, I 

am concerned about the whole mission creep aspect of this. There 

are clearly problems, and you are absolutely right; I think we all 

agree there are things we need to do. I am concerned about mortgages. That could have been spelled out better. We have already 

dealt with credit cards to a degree, and the Federal Reserve actually had a good plan on credit cards, which we pretty much emulated to a degree. And there are subjects like student loans, which 

may go by the wayside if the new legislation on direct lending goes 

through the Senate, etc. But there are many things that financial 

institutions, particularly banks, do that have not been questioned 

in terms of how they carried out—commercial lending, I don’t 

think, has been questioned; the way they handled deposits, for example, even auto loans. And you could go through perhaps 10 or 

12 subjects. And I am concerned that if we get a very activist agency, that the agency may go beyond where it belongs and all of a 

sudden be disruptive to normal banking procedures in the United 

States. I cannot tell you what percentage of customers were actually impacted negatively by problems that perhaps could have been 

prevented. My hunch is it is a relatively small percentage, versus 

those satisfied with their banking. But at agencies like this concerns me and the authority that we are giving them. Do you have 

any thoughts about how to restrict what they could do, other than, 

obviously, we could do it legislatively, or are taking that up with 

the Administration as you prepare— 

Secretary GEITHNER. I agree. I think the legislation has to make 

sure that it is clear what authority they have and do not have. And 

one thing we proposed is to make sure they have a board as a 

check and balance against that risk that has on it representatives 

of the supervisors and others who have a stake in this. And I think 

you are right to point out the risks that we overdo it at this time. 

That was not the failure of the past. 

The past was probably we under-did it, and that did cause a lot 

of damage and does put at risk potentially a lot of what was desirable, healthy productive economic activity by financial institutions. 

So I agree with your concern and I think there are lots of different 

ways to make sure that you don’t create too much unbridled authority that would be damaging to what is an important part of our 

financial system. 

Mr. CASTLE. You can take this as a comment. And I heard your 

comment earlier about the regulators who exist now and the question is, how good a job did they do? Did you know they were going 

to be testifying later this afternoon? And more than one of them, 

at least three of them have made comments about particularly the 

CFPA that are somewhat critical and negative. 

And I heard your response, which was, well, they are protecting 

their jurisdiction in what they are doing to a degree. But in just 

reading their comments, and I haven’t heard what they are going 

to say this afternoon yet. I haven’t read the comments this afternoon. It seems to me there are some constructive points in there, 

and I would hope the Administration is listening to that, not necessarily in terms of doing everything that they are requesting, but 

listening to constructive comments that could help as far as consumption and the use of banking products is concerned. 

26 

Secretary GEITHNER. Absolutely. Again, as I said, our test is 

what is going to work. 

Mr. CASTLE. Exactly. Very quickly on another subject that I 

think Congresswoman Maloney brought up which is the whole 

TARP business. We are at about the 1-year anniversary now of the 

enactment of the legislation on the TARP. As we know, it wasn’t 

used quite as we expected it to be used. And some concerns remain, 

as expressed by the recent Congressional Oversight Panel report 

that these toxic assets still exist on the balance sheets of financial 

institutions. And you talked about this to a degree. 

You indicated, with capital improvement, etc., prices are improving, and it is better at this point in time. But I am not sure where 

the public-private investment program currently stands on where 

we are in that area. I think I have run out of time. If you could 

submit that in writing, I would appreciate it. 

Secretary GEITHNER. Absolutely. 

Mr. CASTLE. Perhaps we can share it with everybody here. 

Secretary GEITHNER. Absolutely. 

Mr. CASTLE. I yield back, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman for that suggestion. 

And if we haven’t already said it, we will have general leave, 

without objection, for anybody to submit any documents they want. 

And the Secretary has always been very good about responding to 

questions. So any supplemental questions people have, we will get. 

The gentleman from California, Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. 

I know you can justify just about any transfer of power from 

Congress to the Administration by pointing out that you and your 

successors are patriotic, cautious, and no matter what power we 

give you, you would only use it in the best interest of Americans 

and only under emergency circumstances. That being said, I take 

a look at section 1204 of the legislation you have proposed and can 

only describe it as TARP on steroids. When we passed the TARP 

bill, we limited the Administration to $700 billion. Section 1204, 

unlimited, we limit it to a certain number of years. Section 1204 

is there forever. In the TARP bill, we provided that if the taxpayers 

lose any money under certain vague provisions, you should go get 

that flown somebody in the financial services industry. 

None of us think that is going to happen because—but in any 

case, it is in TARP and a similar provision is in the legislation you 

proposed. 

In TARP, there are all kinds of special oversight, including Elizabeth Warren. In your proposal there is no special oversight. And 

in TARP, those institutions that benefit have all those—have at 

least some restrictions on executive compensation. In your proposal, there are no such restrictions. Now, section 1204 allows the 

FDIC to go spend an unlimited amount of money buying the debt 

obligations of, making loans to or assisting any systemically important institution in time of trouble? And that is in the first instance 

taxpayer money? Would great harm be done to this statute if we 

limited the Executive Branch’s authority to a mere $1 trillion and 

said that if you want to commit more taxpayer money than that, 

notwithstanding the fact that you hope to get it back from someplace else, but if you need more than a trillion, perhaps you ought 

27 

to come to Congress? Or is there an assumption on Wall Street 

that Congress makes the wrong decisions, is a bunch of people who 

cannot be trusted and that Wall Street cannot be safe unless they 

have access to unlimited funds without further congressional action 

beyond that which you propose? 

Secretary GEITHNER. Congressman, I don’t recognize most of 

your concerns in the approach we recommend. But I understand 

the concerns. And I think you are right to point out, as are many 

of your colleagues across the aisle, that it would be a mistake for 

us as a country through the reform process to harden or create an 

expectation that if you get yourself in trouble, that the government 

is going to come in and save you— 

Mr. SHERMAN. Mr. Secretary, I have such limited time. A trillion 

dollar limit, okay with you, not okay with you? 

Secretary GEITHNER. Congressman, again, you are taking a—first 

of all, you are fundamentally mischaracterizing. 

Mr. SHERMAN. Let us say I am fundamentally mischaracterizing. 

If I have an amendment to this section saying it is limited to a trillion dollars, is the Treasury going to oppose that, or are they going 

to support it? 

Secretary GEITHNER. Congressman, it is important to make people understand and make sure people understand the following 

thing, this Congress put in law, after the S&L crisis, a very important authority to allow for resolution—not a great word. 

Mr. SHERMAN. Mr. Secretary, I have asked you a simple question. I have very limited time. Would you support it or oppose it? 

And then let me move on. 

Secretary GEITHNER. I would not support proposals that would 

put this country in the position we were in, in 2007 and 2008, 

where we did not have the ability to act to protect— 

Mr. SHERMAN. The key thing then is that the Executive Branch 

have the power to commit, not just $700 billion, but a trillion or 

more without having to have Congress be involved at the time of 

the crisis. 

Secretary GEITHNER. No. That is not—would not be a fair description of our strategy. And again, the critical test is, do you 

want to put this country in the position again where we come into 

the worst financial crisis in generations without the ability to protect the taxpayer— 

Mr. SHERMAN. Reclaiming my time. The problem for Wall Street 

is that Congress had to be involved. It was embarrassing that they 

didn’t get their money for a few days. 

But let me focus on the one other question, and that is the only 

companies that are ever going to benefit from this are the systemically important institutions. 

Secretary GEITHNER. No, that is not true. 

Mr. SHERMAN. Well, it is limited to systemically support— 

Secretary GEITHNER. Look, the only rationale, Congressman, and 

you think that the experience of last year would make this compelling to people, that if your strategy— 

Mr. SHERMAN. In order for a company to benefit—do you want 

to look at Section 1203(b) 1 and 2 of the statute you presented? 

Secretary GEITHNER. You are mischaracterizing the benefit. 

28 

The CHAIRMAN. The gentleman’s time has expired. The gentleman has one last comment. 

Mr. SHERMAN. I would say, you can claim that all Americans 

benefit from a provision that can only help about 20 institutions, 

but they will have a release of their moral—an elimination of moral 

hazard. They will have lower cost of capital, and either the taxpayer will pay or the medium-sized banks will pay if it is ever 

used. I realize— 

Secretary GEITHNER. I hear your concern. But if we were proposing that, I would not support it. If you proposed that, I wouldn’t 

support it. But you are right about the concern. The question is 

about how to get the balance right. Look what happened to the 

country when we allowed a system to build up where we had no 

choices in the event of failure between stepping in or letting it 

cause enormous damage. 

The CHAIRMAN. The gentleman’s time has expired. 

The gentleman from Oklahoma, Mr. Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman. 

And Mr. Secretary, let us come at this from a slightly different 

perspective but along the lines of my colleagues. You have used the 

phrase ‘‘in practice’’ several times, and I appreciate that tremendously because this is not just an academic exercise; there are practical consequences to everything we do. 

My constituents, small financial institutions and what some 

would define as nontraditional institutions out in the countryside 

are very nervous about the Consumer Protection Agency bill, and 

their nervousness is not I think so much about protecting the consumer. They all support that. 

But there is a fear out there in the countryside, and this comes 

before Chairman Frank’s memo, there is a fear out in the countryside that the biggest institutions in this country with larger staffs, 

with greater budgets, with greater volumes of business will have 

the ability to meet these standards in a more cost-effective way 

than they will be, and that the ultimate net result, at least of the 

Consumer Financial Protection Agency, as envisioned by the Administration, will be to raise their cost disproportionately to the 

bigger institutions. 

And they are very concerned about that out there. That is an 

issue I think we need to address as we move through this process. 

And to touch on a slightly different subject and then whatever 

comments you might have, sir, on the derivative side of the equation, sitting on the Ag Committee, we have a little bit of involvement in those issues. I have a number of constituents and constituent industries back home in Oklahoma that use these kind of 

products to provide some sort of price stability for the commodities 

they sell over the period of time. Otherwise, they are a day-today—a day-to-day price, and that is a very difficult thing to do. 

They have expressed extreme concern to me, and I think there is 

some legitimacy to this, depending on how in the Administration’s 

proposal we address these capital and margin requirements, they 

are concerned, and I think legitimately, that potentially they will 

be driven, because they still need the price stability—they have to 

have the product—if we dramatically increase capital margin requirements or place them in a fashion that is counterproductive, 

29 

they will be driven to the biggest financial institutions because 

they will have to have someone who can afford to not only engage 

in the contract with them, but who can finance all these other options. Once again, the fear being, Secretary, that they will wind up 

having fewer people to do business with, and it will be a small 

handful of the biggest, which runs contrary to I think what we 

have been saying on this side of the aisle, which is ‘‘too-big-to-fail’’ 

is unacceptable, untenable, and yet there are real concerns out in 

the countryside that these pieces of legislation as proposed will 

drive more business to the biggest, will put the biggest at an even 

greater advantage over everyone else. So let’s visit for a moment 

about the practical consequences about these issues. 

Secretary GEITHNER. I understand both concerns, and I agree 

with much of what you said about them. On the cost issue for community banks, we think we found a way, but I think the chairman’s notice helped with clarification on this to give people reassurance that we can do this change in authority, reallocation of authority, without increasing costs. 

I think that is an important thing to do. And I think that is 

achievable. Again, it is not that there are no people in the country 

who are doing this job now. It is just that they spread across a 

range of agencies, and we want to take that authority and consolidate in a place where it can be done with less distraction. But I 

understand the question. I think that is the concern. 

I think we can achieve what is important to you and to those 

community banks. On the derivatives thing, you said well, again, 

we very much want to make sure we preserve the capacity of people in many different industries to use derivative markets, to hedge 

and protect themselves against the risks they confront. And we 

have tried to provide a way that gives them comfort for that. But 

we are obviously happy to work with you and your colleagues and 

with the FTC and the CFTC on how to provide the clarification and 

the assurance necessary, because again, we want to preserve that. 

Of course, the challenge again, as I said, is to do that without 

creating just a huge loophole that allows people to evade the basic 

protections we think the country needs. But I think you framed the 

concern right, and we are very much willing to work with you on 

how to do that. 

Mr. LUCAS. Because, after all, Secretary, in my region, we went 

through both an agricultural and energy property boom, bust, and 

bubble in the 1980’s. We were slaughtered economically. We did 

not receive capital injections. Our industries were not propped up. 

It took us, 10, 15 years in some segments to recover from it. We 

do not wish that on anyone else, but by the same token, let us not 

make the matter worse because the feud back home is, it was the 

big boys that damn near killed us all, not the little players. 

Secretary GEITHNER. And I think you are right. The people who 

provide that protection, write those commitments, whatever the 

form is, they need to hold margin and capital so it allows them to 

meet those commitments. And that was the big failure in the system. 

Mr. LUCAS. Thank you, Mr. Secretary. 

30 

The CHAIRMAN. The gentleman from North Carolina has returned from passing a bill under this committee’s jurisdiction on 

the Floor. And he is now recognized for 5 minutes. 

Mr. WATT. Thank you, Mr. Chairman. 

I hope my colleagues will support that bill when it comes to a 

vote. Actually, we passed it by voice vote, so you all are not even 

going to vote on it, the Defense Production Act Reauthorization. 

Mr. Secretary, my good friend, Mr. Lucas, was talking about 

practical considerations, and I am kind of into practical considerations, too. And I have been looking at this Consumer Financial 

Protection Agency proposal and how we got to where we are on account of a practical basis. It seems to me that we gave the Fed and 

the FDIC and the other regulators substantial consumer protection 

authority. Each one of them had consumer protection authority. 

But we also gave them an expectation, a mandate, just like the 

consumer protection ‘‘mandate’’ that we gave them to assure the 

safety and soundness of financial institutions. 

And I guess my question to you is, you have been in one of these 

agencies. You came out of one of these agencies. You were with the 

Federal Reserve. If I look at you and tell you that your obligation 

is to assure the safety and soundness of the institutions that you 

have responsibility to regulate and I look at you and I say, okay, 

I am also going to give you the authority to do consumer protection, 

tell me, just as a practical consideration, practical consideration, 

which one of those things are you going to do come crunch time? 

Secretary GEITHNER. Well, I think you say it right. The risk is 

if you have a range of different priorities, not one, than you are 

going to do less of a good job at focusing on the consumer side. 

Mr. WATT. But what is your highest priority if you are the ultimate regulator for the safety and soundness of financial institutions? Isn’t that far and away disproportionately a higher priority 

for you as a regulator in that scenario I just painted for you? 

Secretary GEITHNER. That is the risk in combining those responsibilities in a bank supervisory— 

Mr. WATT. You are being very kind when you say it is the risk. 

Actually, the Federal Reserve in a hearing had a witness up here 

that said that they really never thought of that as being on an 

equal plain with the mandate that they were given. It was kind of 

a second class authority that they had, but they never really 

thought about it until we got to this crisis. That is in testimony 

that we took before my subcommittee. 

Secretary GEITHNER. I don’t quite think that. I don’t know who 

made—I wouldn’t quite agree with that, because there are a lot of 

people who are good at this, who spent a lot of time looking at it, 

and it occupied an enormous amount of time. 

Mr. WATT. I am sure that is true. 

Secretary GEITHNER. But I think that the really important thing 

to recognize—I agree with what you are saying, but it was partly 

that. But a large part of it was the fact that there were all these 

other institutions that were allowed to compete with banks in providing credit that had no effective supervision, constraints, and 

oversight. 

Mr. WATT. I am not minimizing the people who were outside any 

regulatory framework, but folks who were inside the regulatory 

31 

framework got involved in these things with regulators that had responsibility first and foremost for their safety and soundness which 

they didn’t do a real good job of either, as it turned out, because 

of these bad consumer products. But even when they turned their 

attention to it, their primary focus was getting out of the ditch on 

safety and soundness and getting the economy back on an even 

keel. Even then, it really wasn’t about consumers. 

And it seems to me that if we are going to talk about practical 

considerations, the only way you are going to solve that practical 

consideration is to create an agency that goes to work every morning saying, my primary responsibility is to protect consumers. And 

if I run into a conflict between that and the safety and soundness 

regulator, then there is a mechanism for resolving that conflict, but 

there is no question what responsibility I have every day of the 

week when I go to work. Do you agree with that? 

Secretary GEITHNER. I completely agree with you. I believe in accountability. You want people waking up every day, figuring out 

how they are going to do a better job in preventing this from happening in the consumer area. 

Mr. WATT. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentleman from Illinois, Mr. Manzullo. 

Mr. MANZULLO. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. Mr. Secretary, would you agree that 

the root cause of the financial collapse of this country was the fact 

that subprimes were not regulated too closely? 

Secretary GEITHNER. No, I would say that it was one of a number 

of factors, but it was not the most important. 

Mr. MANZULLO. But if people had not been allowed to buy homes 

they could not afford, that was the bad product in the first place; 

isn’t that correct? 

Secretary GEITHNER. I agree that is what—the basic—what happened to housing prices was partly facilitated by what happened to 

subprime mortgages made everything more perilous and worse. 

There were other things happening than simply the subprime. 

Mr. MANZULLO. A lot of people believe that if the Fed had done 

its role, statutory role, which is to govern instruments and underwriting standards with regard to those mortgages, that we wouldn’t 

have had this meltdown. In other words, the basic product that 

gave rise to the derivatives and the CDOs would have been sound. 

Secretary GEITHNER. I don’t think I would say it quite that way. 

Remember, as we just said, a lot of what happened in the system 

was that we allowed institutions to underwrite a bunch of stuff, 

sell a bunch of stuff to people who couldn’t afford it. They were outside any scope of authority provided by the Congress with no effective deterrence. You can’t look it quite through the prism of the authority that Congress gave the Fed and the other supervisors because of the absence of any authority over— 

Mr. MANZULLO. No, I understand. But the Fed had the authority, 

did it not, to require, as it will beginning October 1st of this year, 

that there be written proof of a person’s income when applying for 

a mortgage? 

Secretary GEITHNER. Again, for the system to work— 

Mr. MANZULLO. I understand it. But did I make the correct statement or not? 

32 

Secretary GEITHNER. Well, again—I don’t think we are disagreeing. As I said many times before, I think the failure not just 

of the Fed— 

Mr. MANZULLO. If we are not disagreeing, why don’t you just say 

what I just said was correct? 

Secretary GEITHNER. I believe that the system would have—this 

crisis would have been less damaging, there would have been less 

damage to the economy as a whole if authority had been stronger, 

used more effectively, used earlier by a bunch of other authorities. 

Mr. MANZULLO. I understand. The point I am trying to make is 

the authority was there from the beginning with the Fed to stop 

the mischief. 

Secretary GEITHNER. I don’t think that is quite right. I think that 

you are right to say that if that authority had been used more effectively earlier, things would not have been as damaging. 

Mr. MANZULLO. Well, call it not as damaging or whatever it was. 

Okay? The point I am trying to make is that the Fed had the authority—and actually, this was pre-Chairman Bernanke. By the 

time he got appointed, it was too late. But the Fed had the authority to come in and say, we are going to stop the practice of giving 

people mortgages when they can’t even make the first monthly payment. They could have done that in two ways: getting rid of teaser 

mortgages, which is the instrument; and also saying that you have 

to have written proof of your earnings. That is where it started. 

And I guess the problem that we are having is the very agency 

that had the authority to stop it, you want to give them more 

power. And—well, you do. You want to make the Fed the super 

regulator of all of this which you are proposing, going from a plain 

vanilla to what I believe is Rocky Road at this point. 

Secretary GEITHNER. Let me say it starkly, what we are proposing is the clearest thing. We are proposing to take that authority away from the Fed and put it in an entity that we think we 

can do a better job of doing it in the future. 

Mr. MANZULLO. I am talking about the super regulator. 

Secretary GEITHNER. Again, that is not a fair description of what 

we are proposing. 

Mr. MANZULLO. Call it—you can characterize it the way you 

want. It is giving the Federal Government more authority. 

The CHAIRMAN. Would the gentleman yield? 

I think there is a confusion. I believe my colleague is talking 

about the systemic risk function, and you are talking about the 

consumer protection function. And I think that is where the— 

Secretary GEITHNER. Even on the systemic risk, the stability’s 

function, which is so important, what we are proposing to give the 

Fed is the authority to make sure they can actually supervise and 

apply conservative capital requirements on these large complex institutions; they can make sure that the payment system, which is 

what spreads crisis, runs with tighter capital margin requirements. 

Those are important authorities that are not as clearly established 

in the law as we think is necessary. That would be a good thing 

for the country. 

Mr. MANZULLO. I guess the point I want to make is, when you 

take a look at the 600 pages of legislation that you have proposed, 

if you take a look at Chairman Frank’s memo today talking about 

33 

exempting different groups from this new Consumer Financial Protection Agency, to me it is going to be almost chilling for groups 

to know who is, in fact, regulating them. Banks right now are 

being chilled to give money because of oppressive tactics by the regulators. Good loans in the past have now become bad loans, because of the mixed messages coming from the regulators. And now 

there will be exemptions as to who is exempt from this new Consumer Protection Agency. I am glad lawyers are, auto dealers. It 

says accountants and other businesses that perform tax preparation services, but accountants that do business planning evidently 

would not. 

So what you are proposing here are whole new sets of regulations, and the people, first of all, won’t even know whether or not 

they are regulated and, second of all, what laws would apply under 

the regulations. 

The CHAIRMAN. The gentleman’s time has expired. We have some 

time for my intervention. So the gentleman’s time has expired 

and— 

Mr. MANZULLO. Thank you. 

The CHAIRMAN. The gentleman from New York is now recognized 

for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Secretary, good morning. Let me just go slightly with some 

questions I have that has an international tinge to it. And the first 

question is dealing with the risk of regulatory flight. It seems as 

though and it seems pretty clear, I think, that it is a myth that 

firms are going to pick up and move away from the jurisdictions. 

Everything that I have looked at shows that is not going to happen. 

But there is a lingering question about whether financial firms 

with existing operations in multiple countries may relocate resources internally among these regional headquarters, potentially 

to the detriment of the United States. I was wondering if you could 

address this issue, you know, about that? 

Secretary GEITHNER. It is a real concern. You are right to point 

it out. That is why we made it clear to the Congress and to the 

world that as we, as the Congress considers putting in place 

stronger rules, we need to make sure that the world outside of the 

United States does so, too, so that we have a level playing field 

that can be enforced more evenly, and so that risk can’t just migrate to where it is going to face less strict supervision and oversight. 

So we have proposed that the major economies come together 

and agree to a new international accord on capital, a range of other 

agreements to put in place stronger standards across all the major 

financial institutions so there is a level playing field. It is an important thing to do, and I think, actually, there is a lot of consensus on that basic strategy. 

Mr. MEEKS. But likewise, I don’t know if you know—you may or 

may not know. Last week, for example, I dropped a Sense of Congress Resolution dealing with the Lehman bankruptcy in the U.K., 

and I know that part of that number of investors thought that their 

money was being invested in the United States, and it ended up 

in the U.K., and it is caught up in this bankruptcy process. And 

a number of these are foundations and universities that I have 

34 

been talking to that are very concerned because it is going to have 

an effect on them. 

I don’t know what is going on with it, but—in my resolution, I 

was asking for the U.K. and the United States to work more closely 

to try to make sure that we do this in a more timely manner. But 

likewise, then, when you talk about international—is there any 

talk about an international resolution authority so that this problem does not occur again? And can you also tell me or give me an 

update as to where we are with the Lehman bankruptcy? 

Secretary GEITHNER. I would be happy again to talk to the SEC 

and the U.K. authorities and help—and to the courts involved to 

help make sure that process is moving quickly. 

On the basic question you raised about the future, what you 

need—what Lehman illustrated is we did not have here and was 

not in London an adequate mechanism for managing that failure 

in a way that caused less damage. And to fix that, you need to 

change the law here. You need to change it in the U.K. and make 

sure that it is done in a consistent way so these globally active 

firms can be handled— 

Mr. MEEKS. Is that dialogue going on now? 

Secretary GEITHNER. The dialogue is going on now. But, as many 

of your colleagues have observed, it is a very complicated difficult 

thing. You are not going to be able to do it just by sitting around 

a table and talking with the other supervisors. It requires changes 

in the laws and regulations in each of our countries. So we are trying to make progress on that. 

Mr. MEEKS. Would that be subject at all to the conversation at 

the G–20 that is coming up in Pittsburgh? 

Secretary GEITHNER. It will. And you will see in the broader recommendations and reforms that are laid out there an update on 

progress in that area and a reference to where we are trying to go. 

Mr. MEEKS. Also, the role of the IMF, and I know that President 

Obama and other leaders are calling for a more stable and sustainable global trade system. For example, with countries like China 

and Germany are recess dependent on export-driven growth, and 

the United States is dependent on cheap international capital to finance deficit-driven consumption. There is talk, from what I understand, of the IMF playing a greater role. Can you share your 

thoughts on how this would actually work and how we could make 

it enforceable on an international basis? 

Secretary GEITHNER. Very hard to make it enforceable. I think 

probably not achievable. But what we want to make sure the world 

understands, that as we save more as a country, which we are already doing and we are going to have to do going forward, they are 

going to have to find future growth more from domestic consumption in those countries, and if they learn anything from this crisis, 

it is that basic imperative. So that—the strategy we are suggesting 

is that we try to get countries to commit to reforms that will help 

produce that and that the IMF plays its natural role as an independent assessor of whether countries are doing things at all that 

contribute to a more balanced pattern of growth globally. But you 

can’t expect in a world of sovereign states, and I would never recommend that this country, cede basic responsibility over basic economic policy to a committee of other nations or to the IMF. 

35 

The CHAIRMAN. The gentleman from Georgia. 

Mr. PRICE. Thank you, Mr. Chairman. 

Welcome, Mr. Secretary. 

My background is health care. So I know that as a physician, if 

you don’t make the right diagnosis, you can’t treat the patient correctly. And if the patient gets well, it is by luck. 

To the point of diagnosis, there are some individuals who believe 

we are in our current situation, in the current boat we are in, because—they will say this—because of a failure of capitalism and a 

failure of deregulation. 

My sense in talking with folks is that simply isn’t the case. I 

think that is very concerning because if we conclude as a society 

that the reason we are here is because of a failure of capitalism 

and a failure of deregulation, then I suggest that the solutions that 

we will come up with will not, in fact, correct the problem. Would 

you comment on those two matters? Do you believe we are where 

we are because of a failure of capitalism? 

Secretary GEITHNER. No, I would not use that phrase. 

Mr. PRICE. Do you believe we are where we are because of a failure of deregulation? 

Secretary GEITHNER. To some extent, we are. I think we screwed 

up regulation is a simple way to say it. 

Mr. PRICE. By having a system that wasn’t flexible or nimble and 

wasn’t minding the store? 

Secretary GEITHNER. Partly that. But partly we had a system 

where parts of the system and people were crawling over these institutions yet didn’t prevent excessive risk-taking; parts of the system, where there was nobody looking at it. It is not a sensible way 

to run a system. So I would—it is not as elegant as the phrase they 

used. I would say we just screwed up the regulatory system. 

Mr. PRICE. So you have folks who are crawling all over people, 

not doing their right regulatory job, and some products out there 

in the marketplace that aren’t being watched? 

Secretary GEITHNER. Well, it is institutions and markets where 

there were no effective constraints on risks that could threaten the 

economy as a whole. 

Mr. PRICE. And I would agree with you, I think. 

If one believes that, then why wouldn’t one have as a solution 

to simply charge the regulators that we currently have with the job 

of regulating the different products and institutions that are out 

there as opposed to creating a new bureaucratic institution that 

will take all of the time that it takes to get up and running, usurpation of authority from other individuals, who—I suspect we are 

marching down the road again of, who is minding the store? 

Secretary GEITHNER. I think, actually, we are trying to fix that. 

Because right now, it is hard to know who is responsible, who is 

principally responsible. One of the virtues of accountability is nobody will be confused if we do what we are proposing about who 

is responsible. And that is a good place to start. If you give that 

responsibility to a bunch of different people, better responsibilities, 

then you can’t hold them accountable for performance on that. 

Mr. PRICE. Have you read our proposal, the proposal from the 

Republican side of the aisle? 

36 

Secretary GEITHNER. I have, although I read it when it first came 

out, and I haven’t read it again recently, but I would be happy to 

go through it again. 

Mr. PRICE. Do you have any—the way that we addressed that 

was to take the current regulators and say, you all have to do your 

job, one, and if there are new products or financial institutions that 

are out there that aren’t being watched, somebody has to watch 

them, and you are charged with determining who is going to watch 

them. Is there something wrong that? 

Secretary GEITHNER. I just don’t think it goes far enough. Again, 

just due to practical reality, I think that would leave the current 

system basically intact, and we would be at too much risk of repeating this down the road. And I think that, again, a basic failure 

in our system was we left a bunch of institutions doing the same 

thing. Mortgages, credit cards, a bunch of credit-type products competing alongside banks where there was no effective deterrence enforcement. And I don’t think you can fix the system without fixing 

that problem. And I don’t think you can—I will say this more 

starkly than we need. But I don’t think you are going to fix it by 

creating a committee. 

Mr. PRICE. Well, I would suggest that the last thing that this 

government needs is another regulatory agency that may, in fact, 

repeat the same ills of the last. 

Secretary GEITHNER. If we did that, that would be a mistake. But 

again, what we are proposing is to take authority that is diffused 

around a bunch of people and other things and move it to a central 

place. It is not fair to characterize it—although I understand the 

risk—that is some new bureaucracy we are imposing on top of the 

system. It is more like more accountability and clarity so people 

know where to go to; you know where you go to when you see systematic failures. 

Mr. PRICE. I would encourage you to take a look at our proposal 

once again. I would love to have your feedback on that. 

Secretary GEITHNER. Absolutely. 

Mr. PRICE. Before my time expires, I want to address the issue 

of TARP. And I am sorry I wasn’t here for an earlier comment, but 

my understanding is that your sense and the Fed Chair’s sense is 

that we have moved on from this remarkable threat that we had 

to our Nation a year or so ago and that TARP’s timeline was to be 

temporary and finite and hopefully end at the end of this year. 

Are you planning on ending TARP at the end of this year? 

Secretary GEITHNER. Can I say it slightly differently? Because of 

the force of the actions that the Congress authorized we took, we 

did pull the system back from the edge of the abyss, and we are 

able to wind down some of the emergency authorities necessary to 

rescue the system. 

But we still have a very damaged system. There is a lot of challenge ahead for the economy. As many of you observed, we are only 

just now seeing the economy start to grow again. And it is too early 

for anyone to declare victory, say this is behind us. And I think 

anybody who lives in this world would say that there is still a lot 

of pressure the system is going through. 

So, it is important that we not declare victory too soon, walk this 

stuff back prematurely. 

37 

Mr. PRICE. Thank you. 

The CHAIRMAN. The gentleman from Kansas. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. 

Mr. Secretary, how do we end ‘‘too-big-to-fail?’’ 

I don’t know if you have seen the recent proposal by Chairman 

Tom Hoenig from the Kansas City Federal Reserve. The proposal 

on resolution authority lays out explicit rules of how a large financial institution like Lehman Brothers or AIG could be resolved so 

that debt holders, shareholders, and management would be accountable and responsible before taxpayers step in. 

If you haven’t seen the proposal, I would be happy to get you a 

copy, and would appreciate your comments in writing. 

Others suggest we require the largest financial firms to undergo 

a regular stress test that would have aggregate information publicly released even in good times. 

I know some have argued the list of these firms should remain 

confidential, but doesn’t the market already know who these firms 

are based on the last round of stress tests? How do we create the 

right incentives for firms to maintain reasonable leverage ratios 

and strongly discourage ‘‘too-big-to-fail?’’ 

Secretary GEITHNER. I have a lot of respect for Tom Hoenig. I 

haven’t looked at his proposal, but I would be happy to do so and 

react to it. Anything that meets the objectives that you described 

I would be very supportive of. 

I think, again, to say it simply, to prevent the moral hazard that 

is inherent in any financial system, you can’t leave the market to 

do it. You have to put in place constraints on leverage in the form 

of capital requirements that help the institutions make sure they 

hold enough resources to cover losses. 

And you have to make it clear that the government has the ability, if you screw it up, to wind you down, restructure you, in effect 

put you out of existence without imperilling the health of the rest 

of the system. That is the basic, simple way to describe what you 

need in this approach. 

And, of course, we have also proposed that institutions have to 

pay for any losses the government absorbs in this context over 

time. That is helpful, too. 

But those are the two core pieces of any effective strategy. 

Mr. MOORE OF KANSAS. Thank you. 

Mr. Secretary, would you support creating a financial watchdog 

council where financial inspectors general would meet on a quarterly basis and be required to provide an annual high-risk report 

on the greatest risks and gaps in our financial regulatory system 

that need to be addressed? 

Secretary GEITHNER. Again, I would be happy to consider that. 

And I do think that one thing that is important to do is to make 

sure that you have a group of people looking at the whole system, 

trying to look over the horizon to identify early things that are happening that could threaten the system in the future. 

But I would be happy to look at that specific proposal. 

Mr. MOORE OF KANSAS. Thank you, Mr. Chairman. I yield back 

the balance of my time. 

The CHAIRMAN. The gentleman from California has now returned 

to claim his time. 

38 

Mr. ROYCE. Thank you, sir. I had a couple of bills on the Floor, 

Mr. Chairman. 

Let me ask you, if I could, Mr. Secretary, to what degree did 

bank regulators contribute to the drafting of your regulatory reform proposal? Were they involved in that? 

And let me just finish my thought, and then maybe you can explain. The reason I am asking that is because, as we look toward 

creating a more stable financial system and one that is focused on 

benefitting consumers, some regulators have expressed serious concern about the creation of a Consumer Financial Protection Agency 

and the separation of safety and soundness regulation from that 

consumer protection regulation authority. 

I was just going to read a quote from Sheila Bair of the FDIC. 

She said, ‘‘Separating consumer protection regulation and supervision into different organizations would reduce information that is 

necessary for both entities to effectively perform their functions. 

Separating consumer protection from safety and soundness would 

result in similar problems. Placing consumer protection policy-setting activities in a separate organization, apart from existing expertise and examination infrastructure, could ultimately result in 

less effective protections for consumers.’’ 

So Ms. Bair is expressing what appears to be a common sentiment among regulators. Bifurcating these two regulatory objectives 

will actually weaken protection for consumers, from the standpoint 

of a number of people who have looked at this. 

And I know the argument that they are simply trying to protect 

their regulatory turf. But when you listen to some of the economists and others that look at the past experience with bifurcating 

these two functions, there seems to be a point here. And I wanted 

to ask you about that. 

Secretary GEITHNER. Again, I want to do this carefully. I think 

that they are right to raise that potential concern, and I think I 

share that concern. And we would not be enthusiastic about a proposal for reform that would create that risk. 

But, again, we have had a lot of experience, as a country, with 

combining those authorities together. And we have been able to 

watch what happens when you put them together. And I think 

what you saw is a system that didn’t work. And I think it is absolutely within our capacity and the committee’s to find a way to separate those without having us undermine the capacity of bank supervisors to do safety and soundness. 

Remember, bank supervisors have on-site supervision. They can 

live in those institutions. There is no risk if you take the consumer 

authority away from them that they are going to have a more difficult job doing safety and soundness. And there is no reason to believe that consumer protection would not, frankly, be done better 

if you have clear accountability for people whose job it is to worry 

about that. 

Now, you can protect against the risk that you raise by making 

sure, as we proposed, there is a board with some checks and balances where supervisors are present. So if there is conflict—and 

the chairman in his note proposes some other things that I think 

are very helpful—that can be resolved. 

39 

Mr. ROYCE. I just look at the way in which—when we look at the 

GSEs, Fannie Mae and Freddie Mac, I just look at the way in 

which that bifurcation between the mission over at HUD and then 

OFHEO, with safety and soundness, I just look at the goals that 

were stressed at one end obviously in conflict with safety and 

soundness, and all of the overleveraging that went on and the, sort 

of, the mandates for the portfolio that half of it had to be subprime 

in the portfolio or Alt-A loans. I look at that and I see why the regulators are nervous. And that, also, is a chapter that we have experience with. 

But let me ask you another question, because I was going to ask 

if you believe the perceived government safety net under our financial system distorted market incentives and contributed to the financial collapse, especially in the housing boom and bust. Can the 

moral hazard from the perceived safety net itself, in other words, 

have something to do with the ballooning of the housing market? 

I am thinking of Fannie and Freddie there. That could be a contributor. 

Secretary GEITHNER. Absolutely. And that is the central risk in 

any system, in any reform proposal. And that is why we need to 

make sure you can’t ever again have institutions that are allowed 

to operate with the expectation of government support with no effective constraint on risk taking. That is the lesson, in some ways, 

of the GSEs, but also of other parts of the financial system. 

Mr. ROYCE. Well, in 1999, about 27 percent of all of the liabilities 

of firms in the U.S. financial sector were explicitly guaranteed by 

the Federal Government. Another 18 percent enjoyed at least some 

implicit support. That is an estimate of 45 percent back then. It is 

increasing today; the moral hazard is increasing. 

The CHAIRMAN. I am going to recognize myself and take my 5 

minutes. I want to pick up on a couple of things here. 

First of all, with regard to the regulators, I must say I am struck 

by their newfound interest in consumer protection. I have been on 

this committee since 1981. I have been the ranking member or the 

chairman since 2003. I do not remember the FDIC, the Federal Reserve, the Comptroller of the Currency, the OTS ever, ever volunteering anything about consumer protection. I guess it was the 

threat of absence made the heart grow fonder. But their record of 

consumer protection is abysmal. 

There was on the law books a requirement or an authorization 

to the Comptroller of the Currency to prevent unfair and deceptive 

practices, the UDAP. The Comptroller of the Currency in 2002, 

2003 was a Bill Clinton holdover—Comptroller, not partisan. He 

promulgated a very sweeping preemption that killed a lot of consumer laws. The former Chair of the Oversight Subcommittee, the 

Republican, Sue Kelly from New York, was appalled by this. We 

asked him what he would put in its place. Nothing. Because they 

hadn’t used their authority to promulgate the unfair and deceptive 

practices code. 

The Federal Reserve—the gentleman from Illinois mentioned it— 

they were given in 1994 authority to regulate mortgages. It wasn’t 

until after this committee acted that Mr. Bernanke began to use 

the authority. Yes, the Federal Reserve has taken some consumer 

actions—in every single case, after this committee acted. They had 

40 

the authority to promulgate that UDAP code. Only after this committee passed a bill taking it away from them and got it through 

the House, because they had never used it, did they use it. It is 

simply not the case that they have paid much attention to it. 

It is also the case, I believe, that the GSE example does not hold. 

The problem there was that the OFHEO was given too little authority. I was skeptical of that argument at first. By 2005, I joined 

the Republican chairman of the committee, Mr. Oxley, in trying to 

give them more authority. 

I agree it was a mistake when there was, first in the Clinton Administration and then in the Bush Administration, the serious 

ratcheting up of the mandate to sell houses to people who shouldn’t 

have bought them. And I objected to it at the time. 

But let’s get back to the regulators. It is turf. They never cared 

about consumer affairs. And I will now ask—and I will follow this 

up—I am going to ask every one of those regulators to give me the 

list of their consumer affairs activity. 

We had an Assistant General Counsel, the Deputy General Counsel of the Fed testify—the Minority asked that he testify—against 

transferring their consumer authority. I asked him—he said he had 

gone to the Board, it was under his jurisdiction—how much discussion there had been at those meetings. He said none. 

There was one Fed Governor, Ned Gramlich, who cared about 

consumer affairs. He was roundly ignored, as he acknowledged, 

and they wouldn’t do anything about it. So let’s be clear. 

Now, it is not that they are bad people. It is, in fact, safety and 

soundness is their main concern. They regard consumer affairs as 

a kind of a nuisance. 

And I do not think that there is anything inherently wrong with 

the consumer statutes, but we also, as the Secretary said, will have 

mechanisms so that if the regulators think safety and soundness 

is being interfered with, if they think that not jacking up people’s 

credit card rates unfairly is somehow going to keep the bank from 

failing—maybe if that is the only way a bank can stay in business, 

it ought to fail—but that will be where we are. 

So I want to be very clear that this—I am now going to be asking 

the regulators, I will follow this up, I would like them to submit 

to me their record in consumer protection. It is not very impressive. 

Now, Mr. Secretary, I will ask you one question. Internationally, 

you mentioned, with regard to the question from Mr. Meeks, the 

IMF issue. One of the legitimate concerns we have had from the 

businesses here is that they will be at a competitive disadvantage 

if we are tough and others are not. 

I do know, when I became the chairman-in-waiting of this committee in 2006, I was told that we had to repeal Sarbanes-Oxley 

or there would never be an IPO ever again in America, and they 

would all flee to the light-touch regulation of the Financial Services 

Authority, the head of which has subsequently said the era of lighttouch regulation is over. 

What are the assurances we can give American financial institutions they will not be put at competitive disadvantages if we were 

to adopt our rules? 

Secretary GEITHNER. We are going to negotiate an international 

agreement on a set of standards that apply a level playing field, 

41 

that people can understand, that can be enforced. And we are going 

to do that so that U.S. firms are not put in the position where their 

competitors will be able to profit from being able to operate with 

lower standards. That is a— 

The CHAIRMAN. Will we be able to take some action if we find 

others trying somehow to undercut us? 

Secretary GEITHNER. I think that is an important thing to do. 

But I think the important thing—my basic feeling is the strategy 

is, you get them to commit to this standard; you ask them to put 

it in regulation and enforce it for their firms. And it is pretty black 

and white if they are meeting it or not. That is the basic strategy 

to do it. 

And we have laid out a very detailed proposal with a timeframe 

for putting it in place so that we can all move together. 

The CHAIRMAN. Thank you. 

Mr. Secretary, we are going to try and wrap this up to get you 

out of here by noon. 

Mr. Marchant? 

Mr. MARCHANT. Thank you, Mr. Chairman. 

Mr. Secretary, I would like to go and talk about Lehman Brothers for a minute. In the Lehman Brothers case, it was not the 

amount of leverage that they had, but it was the fact that they 

were funding that leverage with overnight funds. I think it probably was the case with Bear Stearns, as well. 

As a result of that, you had the money market accounts went 

bust. And while a decision was made that there was no systemic 

risk—I guess that decision was made—and there would be no intervention on the part of Lehman Brothers, there was subsequently 

an intervention to guarantee the buck, basically, on money market 

accounts. And since that, basically, money market accounts have 

not been the preferred vehicle of investment by Americans. 

Is there anything in this regulation that would have regulated, 

not the percentage of leverage with Lehman, but the fact that Lehman and most of these guys were keeping major parts of their portfolio in their capital portfolio, these mortgage-backed securities, 

and then holding 30-year maturity instruments and funding them 

with overnight funds? Is there something that will regulate that? 

Who would be the regulator? And do you see that as—I mean, to 

me, that was the systemic risk involved. 

Secretary GEITHNER. I think you are exactly right, that it is not 

just the scale of leverage but the extent to which we are reliant on 

very short-term funding that can flee in a heartbeat. And that is 

what brought the system crashing down. 

And so, when we use the word ‘‘capital,’’ more conservative capital requirements, we are using it as a shorthand for longer funding requirements, more stable funding requirements, stronger liquidity cushions against losses to reduce that basic maturity mismatch, which is what creates the vulnerability to a run. 

So you are absolutely right about the diagnosis. And we are just 

using a shorthand when we say more conservative capital requirements. 

Mr. MARCHANT. So who will be the regulator? 

Secretary GEITHNER. Oh, I am sorry. We are proposing, again, for 

the large, complex institutions that those requirements are set and 

42 

enforced by the Federal Reserve, which is quite close to the system 

today, now that investment banks are bank holding companies. But 

we want to make sure that is absolutely clear, so there is more accountability. But the rules need to be more conservative and better 

designed to reduce that run risk. 

Mr. MARCHANT. So that there will be consideration given to—in 

all financial institutions, the consideration given to the source of 

the leverage? 

Secretary GEITHNER. Exactly. How you are funded is as important to how much risk you take. In fact, they are totally and completely related. And it is this mismatch between very short-term liabilities that can run and long-term assets that are liquid that 

allow the risk in them that creates the inherent vulnerability to 

crisis. 

So you need to both constrain leverage and make sure there is 

more conservative funding. 

Mr. MARCHANT. In the future, do you see—well, do you see in the 

system now—there is this continual mismatch. Has this corrected 

itself? 

Secretary GEITHNER. Well, again, banks operate with that mismatch. What they do is they take deposits and they lend them to 

people who need to buy a home or a business who wants to finance 

investment. That is inherent in any well-functioning financial system. But what you need do is to make sure that, again, you constrain leverage so that there is enough capital against risk and 

that there is as stable a funding base as you can achieve. 

And what we did not do well as a country is that there were 

large institutions, very important, very complicated, very risky, 

that didn’t have effective constraints on leverage and, as you said 

quite correctly, were allowed to fund themselves overnight with 

very, very high vulnerability to a run in a panic. 

And so, you need to make sure that both the capital requirements and the liquidity requirements, margin, etc., are applied to 

that set of institutions who present those kind of risks. If you don’t 

do that, we will be in this mess again. 

Mr. MARCHANT. And my last question will be, if you require in 

this new regulation that there be a retained portion of the portfolio 

retained by the institution, if you do not put rules with that retained asset, then you will end up forcing them to have this mismatch. 

The CHAIRMAN. The gentleman’s time has expired. If he can respond in writing to the gentleman’s question. 

And next, the gentlewoman from New York, I believe. Oh, no, I 

am sorry, you got flipped, so it is the gentleman from Texas. 

Mr. HINOJOSA. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary, for coming to visit with our committee. 

Assistant Secretary Barr requested a meeting with me to discuss 

some of the concerns that I had on this legislation we are discussing, and we recently met in my office. During that conversation, I expressed my concern about the negative impact the CFPA, 

as recommended by the Department of the Treasury, could have on 

the local economies across the country. In particular, I said, we 

were concerned about the impact that this was going to have on 

43 

the community banks, credit banks, and regional banks that played 

no role in the global financial meltdown. 

According to him—or, rather, according to the Secretary for Financial Institutions, the Treasury wants a level playing field. He 

wants all financial institutions to be examined and enforced by the 

CFPA. 

And I disagree. I think that the community banks and credit 

unions and regional banks should be exempted from that CFPA 

umbrella. They didn’t cause the problem; they did not create the 

financial crisis. In fact, as I and many of my colleagues here on this 

committee believe, community banks and credit unions provided 

some liquidity to local markets at a time when the large banks and 

the nonbanks had frozen the market liquidity. 

Thus, Mr. Secretary, why should they be punished for actions of 

others? 

Secretary GEITHNER. They shouldn’t be. And I agree with you 

that one of the great strengths of our country is we have a system 

with 9,000 banks, including thousands and thousands of community banks that, as you said, were not part of the problem and are 

playing a very important role in providing credit. We need to preserve that. 

But we have to make sure that, again, we are protecting them 

from the risk that competitors who are not subject to any regulation can take business away from them, and they are forced to try 

to compete with them by lowering standards, engaging in the same 

practices. That is why you need a more level playing field more 

broadly applied. 

But you are raising, of course, understandable concerns about 

this. We are very sensitive to those, too. And we would be happy 

to work with you and your colleagues to figure out how to get that 

balance right. 

Mr. HINOJOSA. I appreciate that. 

Also, I have worked in conjunction with Congresswoman Judy 

Biggert on financial literacy over the years and hope a provision on 

financial literacy will be incorporated into the bill. 

Mr. Secretary, will you support our literacy provisions being included? 

Secretary GEITHNER. Can I take and make sure that I talk to my 

colleagues to take a careful look at them before I commit? I would 

be happy to get back to you. 

Mr. HINOJOSA. Absolutely. And we will be glad to work with you 

to make sure that it is in a way that is going to help our consumers. Because I represent an area in deep south Texas that, had 

they had that financial literacy education, I think they would have 

refrained from signing so many predatory contracts and loans. 

Secretary GEITHNER. I could not agree with you more. We need 

to make sure that public education in this country does a better job 

of equipping people, as they go through school, with some basic understanding of finance and economics. And I completely agree with 

the emphasis you are giving to us doing a better job of financial 

education and financial literacy. 

Mr. HINOJOSA. We are trying to do the same on the Education 

Committee by requiring it for families wanting student loans to be 

44 

able to better understand their choices and make better choices, 

thus saving the family a big cost. 

With that, Mr. Chairman, I yield back. 

The CHAIRMAN. The gentleman from Minnesota. 

Mr. PAULSEN. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. 

An area of fertile discussion has been the area of risk management. And most firms understand the risks that they run, but they 

don’t often have the strength or the will or the foresight to say no. 

The competitive dynamic among firms creates the situation. And 

this is where a regulator with an eye towards aggregate risk in the 

system would be most beneficial, I think we could agree. 

How do you intend to have the regulator calibrate that aggregate 

risk so that the benefits of competition that accrue to society will 

be able to go forward, as opposed to creating another disaster or 

go too much in the opposite direction where it is going to really 

burden innovation? 

Secretary GEITHNER. I think it is a very difficult, complicated 

task. And I do think it is important to recognize that we can’t have 

a system that relies on the wise exercise of discretionary judgment 

by supervisors, because they will never be able to fully understand 

soon enough where those sources of risks are coming from. And 

that is why we put so much emphasis on trying to make sure that 

firms run with bigger cushions against the uncertainty we all live 

with. 

I think that is the only effective defense against this. And it is 

why—well, you can look at this in highway safety, all sorts of other 

examples of regulation where you need to have at the underpinning 

of stability some basic protections that are easily enforceable. 

Again, basically force firms to hold more cushion, resources, rainyday funds against the losses they might face in an uncertain future. 

But that future will be uncertain. You don’t know where the 

source of risk is going to come from. And you can have risk management, all sorts of fancy, sophisticated risk management, but if 

you get that basic judgment wrong about how much and you are 

left with inadequate resources against losses, then you will have a 

more risky system. 

Mr. PAULSEN. Okay. 

Mr. Secretary, I will switch gears a little bit. What is the nature 

of the guarantee right now that the Federal Government is providing for toxic assets? We have had discussion about that. Are 

there any private-sector solutions that are less costly? Is your office 

receptive to having private-sector solutions from parties outside of 

the government come forward? And which ones might have the 

most merit? 

Secretary GEITHNER. Of course. Of course. And, again, we have 

been very transparent about the detailed financial terms of these 

funds we proposed to use to bring private capital in alongside the 

government so people can look at the economics of that. But, of 

course, we are open to any suggestions on this stuff. 

And, ultimately, of course, this only works if you get the private 

market to come back. And you need investors to start to take risk 

45 

on their own if you are going to see these markets start to heal and 

improve again. 

Mr. PAULSEN. And let me ask this, Mr. Secretary. The Federal 

Reserve, in particular, has made so many dollars available right 

now that we have seen the devaluation of the dollar. And you have 

talked about our relationship with China and with foreign countries in the past. 

But the market is kind of telling us right now, at least with the 

trade-weighted dollar that is out there right now, that there is concern about the Fed creating too much money in the system and the 

Treasury overspending. You know, the dollar is telling us we are 

not providing that much restraint. 

I mean, shouldn’t that be part of the feedback loop that we have 

right now, kind of watching that? Do you have concerns about that? 

The Fed kind of being the parent and the Treasury Department 

overspending? In other words, do you think there is a chance that 

we might be stimulating the economy too much in the short term? 

Secretary GEITHNER. We can’t take that risk. And I don’t think 

that is a risk now we face. I mean, we have an independent Federal Reserve whose job is to make sure that we keep prices low and 

stable over time, growth sustainable. And they are committed to 

doing that. They have an exceptionally good record of doing that 

over time because they are independent. 

But, as a country, on the fiscal side, we are going to have to go 

back to living within our means to bring these deficits down. But 

our big risk still at the moment is that we make sure we have a 

recovery under way that is led by private demand. And we want 

that to be strong enough and sustainable before we step on the 

brakes. 

Again, you know, the big lesson of the United States in the 

1930’s and Japan in the 1990’s, countries throughout history, was 

to move too quickly out of the hope it was all going to be okay, and 

put on the brakes in a way that deepened the recession, raised the 

ultimate costs of recovery. We need to make sure we avoid that 

risk. 

But you are absolutely right to emphasize the importance, and 

no one feels more strongly about it than I do, about the importance 

that we go back to living within our means and that we walk back 

these exceptional measures necessary to fix the crisis as quickly as 

possible. 

And if you look at what we have done, you are already seeing 

dramatic reduction in the amount of support the government is 

providing to the financial system as we, you know, see things starting to improve. 

Mr. PAULSEN. Thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. The gentleman from Missouri. 

Mr. CLAY. Thank you, Mr. Chairman. 

Very quickly, Mr. Secretary, welcome back. And perhaps the 

most interesting aspect of the economic data pointing to a modest 

recovery is that it ignores the fact that foreclosures, the problem 

that imploded the financial markets and the economy in the first 

place, continue to rise. 

Already, this year, more than 1.5 million families experienced 

foreclosure in the first 6 months. Just in the month of August, a 

46 

total of 358,000 properties went into default or foreclosure. Although the pace of new foreclosures slowed between July and August, this rate is up 18 percent year over year. 

Does Treasury adequately address the entire issue of foreclosure 

and what started our financial crisis in your proposals? 

Secretary GEITHNER. Congressman, we do not have the ability to 

prevent all foreclosures. It is just not a realistic objective for us. 

But we are making a lot of progress and bringing more stability 

to the housing market and making sure that people are allowed to 

take advantage of a loan-modification program that reduces their 

monthly payments to a more affordable level. And we expect, within the next several weeks, to be in a position where half a million 

households are benefitting from modifications that substantially reduce their monthly payments. 

You are already seeing, of course, interest rates of mortgages at 

historic lows. Housing is more affordable today. There is a little bit 

more stability in housing values now. And people are able to refinance their mortgages even if they are underwater. And those 

things are helping together. 

But you are right to emphasize the fact that there are still a lot 

of people in this country who are facing the risk of foreclosure. And 

we are going to reduce that risk, but it is still with us. It is one 

of the reasons why we don’t want to leave people any illusion that 

we are through the worst of this crisis and it is time now to dial 

back and wind down those programs. 

Mr. CLAY. Would Treasury have an interest in private investors 

creating market instruments, for example like real estate trust investments, to which the government attaches a Federal guarantee, 

in order to encourage banks to remove toxic assets off their balance 

sheets? 

Secretary GEITHNER. Well, again, we are pragmatic people. We 

are open to anything that we think will work. And I would be 

happy to look at any proposal. We look at a range of proposals all 

the time. But I think I would be very reluctant to—well, let me say 

it differently. 

We want to make sure we are not exposing the taxpayer to losses 

they shouldn’t have to bear by subsidizing a bunch of new activity 

in this area. And we need to figure out ways to do these things at 

the least cost to the taxpayer and that are going to have the most 

impact on credit flows. 

But I would be happy to look at any proposal, though. 

Mr. CLAY. And I do understand the reason for caution here. 

And I will yield back. 

The CHAIRMAN. Thank you. We will just finish with Mr. Lance. 

And Mr. Baca has one request he will make. 

So, Mr. Lance, you will be the last questioner. 

Mr. LANCE. Thank you very much, Mr. Chairman. 

Good morning, Mr. Secretary. 

The books close a week from today on the fiscal year. As I understand it, the deficit will be this year $1.6 trillion. What is your current estimate, Mr. Secretary, regarding next year? 

Secretary GEITHNER. Congressman, in the mid-session review 

that OMB put out in August, there are revised assessments of the 

47 

Executive Branch about the deficit. I don’t have those numbers before me, but I would be happy to make sure you get that. 

But the government, of course, the way the system works, will 

provide another estimate of that in the President’s budget submission for the 2011 fiscal year in, I believe, January or February. 

Mr. LANCE. I certainly hope that we are we moving in the direction of trying to lower that, since, as I understand it, this is the 

highest annual deficit as a percentage of GDP since 1945. 

Secretary GEITHNER. And we agree with you, we are going to 

have to bring that down over time. 

Mr. LANCE. Yes. Well, thank you. 

As I understand it, the GAO said last week that if AIG misses 

its fourth equity dividend payment due on November 1st, you have 

the authority to appoint directly at least two members of the AIG 

board of directors. 

Have you begun examining that possibility yet? 

Secretary GEITHNER. The AIG board—we have seen a substantial 

transformation and, I think, strengthening of the board of AIG already. And, as you know, there is a new management team now 

in place helping to get this institution back in a position where we 

get our money back. 

Mr. LANCE. Thank you. But, as I understand it, you will have the 

ability to appoint new board members if the payment is not made. 

So I would hope that you would examine that situation by the 1st 

of November. 

Number three, regarding the tariff situation on Chinese tires, 

your opinion, sir? 

Secretary GEITHNER. My opinion? 

Mr. LANCE. Yes. 

Secretary GEITHNER. Oh. Well, the President acted to enforce the 

basic rules established not just by the United States but internationally, as part of Chinese accession to the WTO. And, you 

know, for our system to work, people have to have confidence that 

the rules that are there will be enforced. 

Now, of course, we are completely committed to making sure that 

we preserve an open trading system. As a country, we have a huge 

stake in making sure that markets overseas are open to U.S. exports and products. And we are working very hard to find ways to 

expand those opportunities for American exporters. 

Mr. LANCE. And, finally, and I know you have addressed this before, but I am still concerned regarding how the Tier 1 companies 

will work. And if they are not announced publicly and yet there are 

higher capital standards, then that will obviously be recognized by 

the market. It seems to me that you are sort of between a rock and 

a hard place if you don’t announce what companies are in Tier 1, 

and yet you have the higher capital standards. 

If you could elucidate us further on that. It is a very complicated 

topic. I know you have addressed it this morning, but any further 

comments you might have on it, Mr. Secretary. 

Secretary GEITHNER. You can’t have a fixed list. It is going to 

have to evolve over time. It is going to require a careful judgment 

of who poses the most risk to the system. But the most important 

thing, I think, as you said, is they need to live under appropriately 

48 

conservative constraints on leverage. And they are going to have to 

know what those constraints are. 

Mr. LANCE. Thank you, Mr. Secretary. 

I yield back the balance of my time, Mr. Chairman. 

The CHAIRMAN. Mr. Secretary, thank you for the time. But the 

gentleman from California had an important point. I recognize him 

for a minute. 

Mr. BACA. Thank you very much, Mr. Chairman. 

Mr. Secretary, the regulatory plan proposes moving all standardized derivatives to some sort of clearing process to help bring more 

transparency and understanding to the market. When Chairman 

Gensler came before us in July, he said that initially he would envision it being four to five clearinghouses competing with one another. 

My question concerns this competition. Wouldn’t this situation 

create the same conflict of interest that exists with credit-rating 

agencies, in that they would be funded by the same institutions 

whose products they would be reviewing? 

And my question is, are you concerned about the potential problem? And what kind of oversight do you envision in working to prevent against this? 

As the chairman indicated before, it wasn’t until 2003 that we 

began to have the oversight and accountability, especially as it pertains to capitalism and deregulation. 

The CHAIRMAN. If we could, let’s get to the answer. I think the 

question has been well put. 

Mr. Secretary? 

Secretary GEITHNER. Again, it is very important that the SEC 

and the CFTC have the authority to make sure that central 

counterparties operate with enough resources to protect themselves 

against the risk in central clearing. And there needs to be a level 

playing field evenly enforced. That is the only protection against 

the risk that competition erodes those standards, leaving with us 

a more risky system. 

The CHAIRMAN. Thank you, Mr. Secretary. I think if you could 

elaborate on that in writing, it would be—and I guess the concern 

would be, would they compete by offering, sort of, lower margin requirements? And is there some way to prevent that from happening? 

I thank the Secretary. 

We will reconvene at 2:00 p.m. I will say for people on the Democratic side, we will begin in the questioning at the seniority level 

where we left off. On the Republican side, I am told because everyone who was here was able to question, they will start again. But 

we will begin in the middle of our second row. 

The hearing is adjourned. 

[Whereupon, at 12:04 p.m., the hearing was adjourned.] 

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A P P E N D I X 

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