S. HRG. 111–215 

TAKING STOCK: INDEPENDENT VIEWS ON TARP’S 

EFFECTIVENESS 

HEARING 

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

NOVEMBER 19, 2009 

Printed for the use of the Congressional Oversight Panel 

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TAKING STOCK: INDEPENDENT VIEWS ON TARP’S EFFECTIVENESS 


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54–354 2009

S. HRG. 111–215 

TAKING STOCK: INDEPENDENT VIEWS ON TARP’S 

EFFECTIVENESS 

HEARING 

CONGRESSIONAL OVERSIGHT PANEL 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

NOVEMBER 19, 2009 

Printed for the use of the Congressional Oversight Panel 

( 

Available on the Internet: 

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(II) 

CONGRESSIONAL OVERSIGHT PANEL 

PANEL MEMBERS

ELIZABETH WARREN, Chair 

REPRESENTATIVE JEB HENSARLING

PAUL ATKINS

RICHARD H. NEIMAN

DAMON SILVERS


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C O N T E N T S 

Page 

STATEMENT OF 

Opening Statement of Elizabeth Warren, Chair, Congressional Oversight 

Panel .............................................................................................................. 1 

Statement of Paul S. Atkins, Member, Congressional Oversight Panel ...... 5 

Statement of Damon Silvers, Deputy Chair, Congressional Oversight 

Panel .............................................................................................................. 9 

Statement of Dean Baker, Co-Director, Center for Economic and Policy 

Research ........................................................................................................ 12 

Statement of Charles Calomiris, Henry Kaufman Professor of Financial 

Institutions, Columbia Business School ...................................................... 20 

Statement of Simon Johnson, Professor of Global Economics and Management, MIT Sloan School of Management, and Senior Fellow, Peterson 

Institute for International Economics ......................................................... 45 

Statement of Alex Pollock, Resident Fellow, American Enterprise Institute ................................................................................................................. 55 

Statement of Mark Zandi, Chief Economist and Co-Founder, Moody’s 

Economy.com ................................................................................................. 64 


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(1) 

TAKING STOCK: INDEPENDENT VIEWS ON 

TARP’S EFFECTIVENESS 

THURSDAY, NOVEMBER 19, 2009 

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

The Panel met, pursuant to the notice, at 9:36 a.m. in Room SD– 

138, Dirksen Senate Office Building, Elizabeth Warren, Chair of 

the Panel, presiding. 

Present: Elizabeth Warren [presiding], Paul S. Atkins, Damon 

Silvers, Dean Baker, Charles Calomiris, Simon Johnson, Alex Pollock, and Mark Zandi. 

OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Chair WARREN. This hearing will come to order. Good morning. 

I’m Elizabeth Warren. I’m the chair of the Congressional Oversight 

Panel. I am calling to order this hearing on the effectiveness of 

TARP. 

This will be the Panel’s 14th public hearing, but not its last, so 

I welcome you all here. 

Last fall, with the country in the midst of a crisis, Secretary 

Paulson appealed to Congress for the emergency authorization of 

$700 billion to restore confidence in the system and to rescue the 

economy from what he said would be a catastrophic collapse in the 

financial sector. 

Today, more than a year later, many conclude that the Troubled 

Assets Relief Program succeeded in achieving this fundamental objective. But, TARP was not designed merely to rescue large banks; 

the broader, long-term goals were aimed at strengthening the overall economy and dealing with the alarming number of mortgage 

foreclosures. 

The problems are unmistakable. Uncertainty persists about the 

stability of our financial institutions and whether they can survive 

without the benefit of government guarantees. One in nine mortgage holders is in default or foreclosure. Unemployment is at 10.2 

percent. More than 100,000 families are declaring bankruptcy 

every month. 

TARP has also failed to check the culture of excessive risktaking 

that brought on this crisis while it has created price distortions and 

moral hazard that plague meaningful efforts at recovery. 

The rules of the financial road, the inadequate and wrongheaded 

regulations and laws that headed us into this crisis, remain unchanged. In the midst of these uncertainties, Secretary Geithner 


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will make the decision whether to extend TARP; indeed, he will 

make that decision, presumably, in the next few weeks. Our December oversight report will contribute to this debate by assessing 

the overall performance of the program in its first 14 months and 

by highlighting some of the critical policy choices that have not yet 

been resolved. 

Today, we are fortunate to have a very distinguished panel of 

five leading experts in the field of finance and economics on hand 

to discuss what TARP has achieved and where it may have fallen 

short, as well as the state of the financial sector and the progress 

of the economic recovery. We are honored to be joined by Dr. Dean 

Baker, the codirector of the Center for Economic and Policy Research; by Dr. Charles Calomiris, the Henry Kaufman Professor of 

Financial Institutions at Columbia Business School, and a member 

of the American Enterprise Institute’s Shadow Financial Regulatory Commission, and codirector of the American Enterprise Institute’s Project on Financial Deregulation; Dr. Simon Johnson, the 

Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan 

School of Management, and a senior fellow at the Peterson Institute for International Economics; Dr. Alex Pollock, a resident fellow 

of the American Enterprise Institute, and former president and 

CEO of the Federal Home Loan Bank of Chicago; and Dr. Mark 

Zandi, a cofounder and chief economist at Moody’s Economy.com. 

I want to thank you all for joining us here today. 

Before we proceed with your testimony, allow me first to offer my 

colleagues on the Panel a chance to make their opening remarks. 

[The prepared statement of Chair Warren follows:] 


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Chair WARREN. Panelist Atkins. 

STATEMENT OF PAUL S. ATKINS, MEMBER, CONGRESSIONAL 

OVERSIGHT PANEL 

Mr. ATKINS. Well, thank you very much, Madam Chairman. 

And thank you all very much for joining us here today. I really 

look forward to hearing what you all have to say. 

As Elizabeth just said, today’s topic, I think, is very important 

and timely. TARP is now more than a year old, and much has 

changed in that year, and much for the better. Is that a coincidence 

due to other factors, or is it due, in some part, to TARP? There are 

still problems, of course, in the marketplace for financial products 

and financial services, including thinly traded markets in once very 

liquid securities, too much government influence and interference 

in corporate direction and affairs, and outright failures of TARP recipients, which raises questions, I think, about Treasury’s credit 

analysis in the first place, since TARP funds were originally supposed to go only to strong institutions. 

So, has TARP been a success? Our discussion today, I hope, will 

shed some light on that question. In many ways, we can only see 

part of the picture, because we are—I think, are still too close to 

the event, and TARP itself seems not to be at an end. 

EESA, the statute that gave the Treasury Department the power 

to establish TARP, I think is a poorly drafted statute with many 

internal inconsistencies and ambiguities. That probably is embarrassing for the drafters and those who approved it, but it is rather 

understandable, given everything that was going on at the time, including a financial crisis and a national election campaign. In fact, 

I think the underlying premise of EESA, that Treasury would acquire assets, did not really materialize, of course, except in one 

small program, the Public-Private Investment Partnership, which 

has not really even gotten off the ground and probably is unlikely 

to do so in any meaningful way. So, thus, Treasury’s implementation, I think, is an issue that must be considered in the context of 

its statutory authority. 

So, to assess the success of a program, one must consider its 

goals, its implementation, the conclusion, and any fallout that results from the implementation, including unintended consequences, 

bad precedent, and including, in this case, of course, moral hazard 

and costs. Of course, the benefits have to be weighed, as well. 

As the goals, TARP is a program that Congress hoped would stabilize the financial system. The mortgage foreclosure provisions are 

an adjunct to that mission. So, did TARP stop the bleeding? Did 

it help to stop the panic in the liquidity crisis? It probably was a 

contributing factor, but TARP is not a fiscal stimulus program or 

a means to change the regulatory structure of financial institutions. Those targets were undertaken by the new administration 

and a new Congress through other statutes. 

So, I think we cannot debate the success of TARP without focusing on how it ends. It’s one thing to get an airplane into the air— 

you need speed and heft and enough runway to make course adjustments, depending on the crosswinds and unexpected turbulence—it’s another thing to bring the airplane safely to the ground. 


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The crisis is over, but we still see Treasury doling out billions of 

dollars to TARP—of TARP funds to firms large and small, from 

GMAC to banks with, say, a million or two—a hundred million or 

two in deposits. These are hardly institutions that are too big to 

fail, since their failure would not rock the financial system today. 

So, what’s the rationale for doing these transactions? Treasury 

has not articulated one, and it’s not even apparent that Treasury 

has any plan or decisionmaking standards for doing so. Treasury 

certainly has not made anything manifest to this Panel yet. 

So, how will the program end? What will it look like next year 

if the Treasury Secretary extends it beyond the end of this year? 

We have another hearing coming up about that in the future. 

So, I look forward to our discussion today and to the insights 

that you all have to give us. 

Thank you very much. 

[The prepared statement of Mr. Atkins follows:] 


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Chair WARREN. Thank you. 

The Chair recognizes the Deputy Chair, Damon Silvers. 

STATEMENT OF DAMON SILVERS, DEPUTY CHAIR, 

CONGRESSIONAL OVERSIGHT PANEL 

Mr. SILVERS. Yes, thank you, Madam Chair, and good morning. 

First, I want to express my appreciation to our staff for organizing this hearing with such a stellar panel. I also want to particularly recognize my friends, Alex Pollock and Dean Baker, who, 

like all of you, have contributed so thoughtfully to the intellectual 

discussion around the impact of TARP and the nature of the financial crisis. 

The question of the economic impact of TARP is complex. I think 

you heard a little bit of that complexity from my fellow panelist, 

Commissioner Atkins. 

TARP has been accompanied by other major interventions in the 

economy, in the context of trying to contain and manage the financial and economic crisis, both in the form of the stimulus package 

and massive interventions in the credit markets by the Federal Reserve. In that context, it is often difficult to isolate the impact of 

TARP distinctly within that landscape. I’m particularly interested 

in this hearing trying to do that, trying to isolate the impact of 

TARP, and then, secondly, trying to understand the—what the impact of TARP is in a larger economic sense. 

This Panel, in its February report, did a valuation of the initial 

TARP investments in the Capital Purchase Program, the SSFI, and 

the TIP. At the time we did so, we recognized that a financial valuation is not the end of the story, that there was a much larger and 

more complex question of the economic impact of these actions. 

That question has been much harder to get our arms around than 

the question of whether or not, from a simple, sort of, transactional 

perspective, the public got a good deal. So, I hope this hearing will 

address that. 

Now, I’m particularly concerned, in that context, about the question of TARP’s impact on the availability of credit for the real economy. This was the subject of some—indirectly, of some—of remarks 

this week by Chairman Bernanke, who noted that we have a continuing problem of credit availability in the business sector which 

he attributed to the weakness of our banks. 

In this context, I simply do not think it is a relevant question 

whether we would have been better off had there been no TARP. 

I think that, if I’m not mistaken, each of your testimony makes 

clear that each of you believes that some sort of significant government action on a large scale was necessary last October. I think 

what we should focus on, rather, is whether or not the way that 

we have managed the financial crisis, the way in which TARP has 

been structured and implemented, was and is fair to the American 

public, and secondly, whether it has really repaired our financial 

system or simply bought time, at the risk of exposing us to a Japanese-style lost decade. 

These questions have been addressed at some length in the written testimony you all have submitted, and very thoughtfully. And 

I commend all of you. I—it was an education. And I look forward 

to the hearing this morning. 


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Thank you. 

[The prepared statement of Mr. Silvers follows:] 


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Chair WARREN. Thank you, Deputy Chair Silvers. 

I also should note that Richard Neiman, Superintendent of 

Banks for the State of New York, is unable to be with us. A lastminute call on his duties, by the Governor of New York, meant that 

he could not join us this morning. And he sends his apologies. Also, 

Congressman Hensarling had hoped to be with us, but he is in 

markup with the House Financial Services this morning. So, you’re 

down to the skeleton crew, here. 

I would like to ask each of you for opening remarks. I’m going 

to ask that you hold the remarks to 5 minutes, and I’ll try to be 

strict about that if anyone goes over, in the reminder that your 

written remarks will become part of the record, in any case, and 

we want to be sure to save enough time that we can have a 

thoughtful question-and-answer. 

So, I’d like to start with you, Dr. Baker, if I could, please. 

STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR 

ECONOMIC AND POLICY RESEARCH 

Dr. BAKER. Thank you very much for inviting me to speak here 

today. 

What I’ll say is, I think that the TARP has been somewhat successful. Certainly, the TARP, together with other actions that have 

taken, have prevented the collapse of the financial system, something we should all be thankful for. I will say, I think that’s somewhat of a low bar, in the sense that there were other measures, 

and basically, with the pretty much unlimited resources of the Fed, 

that should have been expected, in any case. 

But, the more important point I’ll say is that I think the TARP 

ended up—ends up being largely counterproductive, in the sense 

that it really abused public faith, and I think we pay a big price 

for that. And I’ll give two specific points, that, first, I think it misrepresented the urgency. We had—I should say, the proponents of 

the TARP at the time misrepresented the urgency at the time the 

TARP was passed, and, perhaps more importantly, they oversold 

the benefits that—there were claims made, specifically, that would 

extend credit to businesses, we’d, in fact, prevent a recession, that 

we would save homeowners from foreclosure. They clearly have not 

happened, and the fact that those claims were used to help sell the 

TARP to Congress undermines faith in government. 

Okay, well, getting to the first point, the success—I mean, again, 

just realistically, the TARP was—even if all the money were allocated, which, of course, we know it was not—was $700 billion. The 

Fed lent over 2 trillion, at the peak, on its various special lending 

facilities. In addition, we had the FDIC loan programs, loan guarantee programs, we had the guarantee of money market funds. All 

of these were very, very important. The TARP plays a role in that, 

there’s no doubt about it; but, to isolate the TARP and say that the 

TARP was essential—well, all of these programs were important. 

Had we not had the TARP, could you have gotten around it? Perhaps. It certainly contributed. You know, I don’t think there’s any 

point in denying that. 

In terms of how we went about doing this, I would say that obviously there was a lot of mishandling. Keep in mind, Troubled Asset 

Relief Program. We haven’t combined troubled assets. We saw that 


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Secretary Paulson—after he had the approval of Congress, the bill 

was signed into law, he waited a period of time and decided the 

best thing to do was inject capital directly into banks. I think, a 

right choice. But, the point was, that was not was originally proposed. 

The second point that he did—and I think this was a very serious mistake that I don’t think there’s been a full reckoning—was, 

he made a decision that he wanted to keep the bank situation secret, so he insisted that all the major banks had to take TARP 

money, whether they needed it or not. I think that was a very serious error. And I think that was corrected, to a large extent, with 

the stress tests that were produced in March. Many problems that 

I and others have raised with those stressed tests, but I think it 

was very valuable in having more transparency, and I think the 

markets actually responded to that. 

So, I think that there were some very, very major errors, in the 

early handling of the TARP, that I think it’s important to come to 

grips with, just as a matter of record and for future reference. 

Now, in terms of undermining public faith, I think this is a very 

important issue, because obviously the government’s going to continue to play a central role in guiding us out of this downturn, 

which is likely to be very long-lasting. And the events around the 

TARP certainly had the effect of undermining confidence in government. And just to very quickly mention a few: 

The selling of the TARP—to my mind, the best argument was the 

claim that the commercial paper markets were shutting down. 

That means the economy will shut down, because so many major 

corporations are dependent on commercial paper for meeting the 

payroll and paying other bills. 

Now, President Bernanke, after the TARP was passed, announced the creation of a special facility to directly buy commercial 

paper from nonfinancial corporations. My guess is, if Members of 

Congress had known that the Federal Reserve Board had that 

power and was prepared to exercise it, they might have put more 

thought into what the TARP looked like. I don’t think that’s a good 

practice, to deceive Congress, to deceive the public. 

Other aspects of TARP—we were told that money would be used 

to keep homeowners in their home. Clearly that was not the case. 

There was no provision made that if banks took TARP money, they 

were obligated to modify mortgages. That may have been a reasonable decision, but there was a selling of TARP as though that 

would do that. 

We were also told that TARP money would—that it would be tied 

to executive compensation. There were claims we’d have no excess 

compensation, golden parachutes. We know that, again, was not 

the case. Was that appropriate? Arguably, yes; arguably, no. But, 

the point was, it was sold that way, and people now see that you 

have the executives of these banks going with large bonuses. That, 

again, undermines confidence. 

Thirdly, the claim that somehow this would extend credit to 

small firms that were starved for credit at the time. Again, that 

was—there were no provisions in the TARP that would ensure 

that. Again, I think that’s not necessarily the fault of the banks; 

I think, realistically, given the severity of the downturn, it’s not 


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surprising to me that small businesses are having a very hard time 

getting credit. You could tell the same story in the last recession, 

or certainly the 1990–91 recession. That’s what happens in recessions. But, again, it’s a case of overselling the TARP. 

So, just to quickly sum up, I’d say that we have a real problem. 

This was not a well-thought-out, well-conducted program. Some of 

that is understandable, given the rush. But, again, I think we 

should make a point of trying to be honest with the public, even 

in the situation where there is some urgency. I think this was a 

mis-sold program. 

[The prepared statement of Dr. Baker follows:] 


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Chair WARREN. Thank you very much, Dr. Baker. 

Dr. Calomiris. 

STATEMENT OF CHARLES CALOMIRIS, HENRY KAUFMAN PROFESSOR OF FINANCIAL INSTITUTIONS, COLUMBIA BUSINESS 

SCHOOL 

Dr. CALOMIRIS. Thank you, Professor Warren. 

I’m going to skip the questions that I heard from the three of 

you, because—I hope we’ll have time for them; I’d love to talk 

about them, but I’ve got my own things I want to get in. 

I will start by saying I agree with what Mr. Baker said, that 

we’re not going to be able to sort out very easily TARP from 

TALF—and credit guarantees, more generally. What I think we 

can do—what I think I can do, as someone who’s devoted a couple 

of decades to the study of resolution policies by people, by governments throughout the last couple hundred years, is evaluate the 

design of TARP and whether it made sense; and not just whether 

we can snipe at it retrospectively, but whether they should have 

known better ex ante, and whether we can articulate principles 

that will guide the mistakes that were made, going forward—that 

is, that will prevent us from repeating it. Because, to me, there 

were big mistakes. The design was very poorly done. And the thing 

that’s more striking is that they should have known better. 

Let me be more specific. The mistakes were foreseeable, in the 

sense that we’ve had, over the past 30 years, an unprecedented 

amount of experience with financial crises and their resolution. 

And yet, the Fed, the Treasury, and Congress did not avail themselves of that experience when managing the crisis; rather, they invented new, untested, and, I would say, logically, inferior mechanisms. 

So, I think we do have a contribution that we can make, as 

economists who have specialized in this, in being able to say, ‘‘Wait 

a minute. This wasn’t such a smart thing in the first place.’’ 

Government loans and guarantees, of course, have already been 

very costly. Fannie and Freddie alone are going to cost the U.S. 

taxpayer upwards of 350 billion just on the subprime loans that 

were made during the crisis. And if you go forward from there and 

you add FHA’s new lending, so-called mitigation that’s not real 

mitigation, what you’re looking at is pushing, maybe, beyond half 

a trillion dollars, and that’s not counting all the other stuff. 

And then, of course, as you all pointed out, the incentive consequences are also huge. 

Have I already surpassed my time? Oh, thanks. 

Chair WARREN. No. You have nearly—— 

Dr. CALOMIRIS. So—— 

Chair WARREN [continuing]. 3 minutes. It’s counting down. 

Dr. CALOMIRIS. Thanks. 

So, the central question I want to talk about is, Was assistance 

done the right way? And I talk about, in my long paper, what the 

criteria are. First of all, you should only provide assistance in response to truly systemic risk. So, for example, we didn’t do that. 

Yes, we were facing systemic risk when we enacted TARP, but 

GMAC came back for second-round funding. There’s no systemic 


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risk; that’s pure politics. So, TARP was set up in a way that was 

open to abuse, and it’s being abused. 

Second, assistance should be selective. Well, it was selective, in 

some irrational ways, maybe, between choosing AIG and not choosing Lehman, but then it was a sort of convoy mentality in the approach taken to the commercial banks. So, the principle of selectivity, that we know from our past experience, wasn’t applied. 

And third, the taxpayers’ position should be senior. 

Now, I want to emphasize—and I go through this in depth in my 

paper—that there are different kinds of mechanisms that need to 

be used, depending on how severe a crisis is: discount window lending, preferred—as you get more severe, preferred stock lending; 

then different things you might call ‘‘bailouts’’—guarantees on assets and then outright rescues of firms. I’m not saying that those 

mechanisms shouldn’t be used, but the point is, we have vast experience with how to do this right, and we didn’t. And the key underlying principle, in addition to picking the right moment and being 

selective about which institutions, is to always put the taxpayer in 

a senior loss-sharing position. That’s incentive-compatible, it can 

always be done, no matter how severe the crisis, no matter which 

mechanism you’re choosing, and we didn’t do it. And it’s partly because of bad thinking and partly, perhaps, because of politics; I’m 

not sure. 

I want to briefly talk about mortgage mitigation. The same principles of being very rare in your use of it, being selective in how 

you apply mortgage mitigation, and using the principle of seniority 

in the taxpayers’ exposure, could have been, and should have been, 

applied to mortgage foreclosure mitigation. We should have targeted it properly. I proposed, starting in about March of 2008, approaches for doing this. Actually, I was inspired by the successful 

plan that Mexico implemented in the late 1990s, called the Punto 

Final program. And there are rational ways to do that. We never 

did it. We didn’t do enough of it early, and now we’re doing an 

across-the-boards approach that’s not working and wasting money 

on mitigation that’s not realistic. 

Chair WARREN. Now, Dr. Calomiris—— 

Dr. CALOMIRIS. We’re out of—— 

Chair WARREN [continuing]. We’re out of time. 

Dr. CALOMIRIS. Let—okay. 

Chair WARREN. Okay. We will—— 

Dr. CALOMIRIS. So, I—I’ll just wait for more opportunity. 

Chair WARREN. And you—and I promise, you will have them. 

Dr. CALOMIRIS. Thanks. 

[The prepared statement of Dr. Calomiris follows:] 


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Chair WARREN. Dr. Johnson. 

STATEMENT OF SIMON JOHNSON, PROFESSOR OF GLOBAL ECONOMICS AND MANAGEMENT, MIT SLOAN SCHOOL OF MANAGEMENT, AND SENIOR FELLOW, PETERSON INSTITUTE 

FOR INTERNATIONAL ECONOMICS 

Dr. JOHNSON. Thank you very much. 

I was chief economist at the International Monetary Fund 

through August of last year, and I’ve worked on financial crises 

around the world for the past 20 years, and I’d like to put the U.S. 

experience and the use of TARP in that comparative perspective. 

First and foremost, of course, this was a very severe financial crisis; perhaps the worst the world has seen since the end of World 

War II, both in its severity, the speed, and its global nature. And 

it came upon a government, the Bush administration, that was 

completely unprepared. The managing director of the IMF has entered into the public record the fact that we, at the IMF, urged the 

administration, with some specificity, after the failure of Bear 

Stearns, to plan for exactly the kind of contingency that befell us 

all in September, and we made some specific proposals in that direction. Unfortunately, the administration, as is already on the 

record, declined to take any such steps. So, this is why much of the 

TARP was on the fly. 

Having said that, though, I’m very sympathetic, having worked 

in other crises, to the difficulty of the situation that was faced by 

the designers and the early implementors. Of course, you have 

three main tasks in this kind of crisis: 

You have to stop the panic. And that really requires doing whatever it takes, and it particularly requires, in the U.S. kind of constitutional and fiscal arrangements, that you need congressional 

authority to put the government’s balance sheet behind the financial system. That’s what TARP did. That was essential. Not passing—if we—if the Congress had not passed TARP, you would have 

had a much bigger disaster, irrespective of how the money had 

been used. 

Secondly, you have to maintain domestic demand. And we’ve 

seen, obviously, a collapse of private demand—for example, for consumer durables in this country—as a result of the destruction of 

credit and the collapse of consumer confidence that is at least as 

bad as what we’ve seen in many emerging market crises. 

Now, the U.S. has many important differences from emerging 

markets, but, in terms of the severity of that collapse, it was absolutely on a par. And there, I think the broader policies of monetary 

policy, as my colleagues have mentioned the role of the Federal Reserve, but also the fiscal stimulus that was passed early this year 

was absolutely essential. Now, I’m sure we can find many things 

to quibble about, many things we, with retrospect, would like to do 

better; but, those policies were, I think, again, essential. You would 

have had a much deeper recession, unemployment would now be 

higher, unemployment would stay high for longer, if you hadn’t 

done those things. 

But, the third piece that you have to do in any crisis is lay the 

basis for a sustainable recovery. If you just take government money 

and throw it at the banks, if you bail out everybody unconditionVerDate Nov 24 2008 04:08 Mar 20, 2010 Jkt 054354 PO 00000 Frm 00051 Fmt 6633 Sfmt 6602 E:\HR\OC\A354.XXX A354

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ally, if you don’t apply an FDIC-type resolution process to your biggest banks when they’re failing—just give ’em the money, keep 

your jobs, don’t have to change anything about the governance of 

your banks—that is asking for trouble. That is not best practice, 

that is not what the IMF tells countries to do, that’s not what the 

U.S. tells countries to do, that’s not what the United States tells 

the IMF to tell countries to do. It’s—in fact, pretty much the exact 

opposite. 

If you look, for example, at the detailed content—I refer you to 

the detailed content of the Letter of Intent signed by Korea in December 1997. This was a well-designed program in this dimension. 

Not perfect. In this dimension. There are specific requirements— 

which the Koreans asked for, by the way; this was not imposed 

from the outside, but we were strongly supported by the U.S. 

Treasury, including people who are now in senior positions in this 

administration—that involved taking over, restructuring, 

downsizing problem banks. 

The bank cleanup is absolutely essential. It has to be done at the 

beginning, partly for political reasons, because that’s your opportunity, and partly for sound economic reasons, because you need 

the credit system to be cleaned up and coming back as the real 

economy comes back, let’s say, within a 6- to 12-month window, 

which is where we are now. Our banking system has not had that 

kind of cleanup, it’s not had that kind of restructuring; it is a thinly capitalized banking system, given the likely trajectory of this 

economy, given the plausible risk scenarios. And it has the incentive to go out and take excessive risk again. 

Now, that’s not just my view, this is the view of the Bank of England. Andrew Haldane, who’s the head of financial stability of the 

Bank of England, has a paper out—came out about 10 days ago— 

in which he talks about the cycle. The cycle, this cycle, the boombust-bailout cycle, as a ‘‘doom loop.’’ This is very strong language 

from central bankers, I can assure you. They do not ordinarily 

speak in these terms. He is warning the U.K. and the United 

States, because his analysis is about both, that by providing unconditional bailouts on this basis—and that, I’m afraid, is how TARP 

has been implemented—we are asking for trouble. This will happen 

again and again until we deal with our banking system on a different basis. 

So, in conclusion, I would say TARP was necessary. It had to be 

passed. It created the potential for government support of the 

banking system. That was needed. But, in terms of the details, 

pretty much every detail of how it was—the money was actually 

used, I agree with my colleagues, that it’s actually made things 

worse. 

[The prepared statement of Dr. Johnson follows:] 


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Chair WARREN. Thank you very much, Dr. Johnson. 

Mr. Pollock. 

STATEMENT OF ALEX POLLOCK, RESIDENT FELLOW, 

AMERICAN ENTERPRISE INSTITUTE 

Mr. POLLOCK. Thank you, Madam Chairman, members of the 

Panel. 

I believe an enlightening historical analogy to TARP is the Reconstruction Finance Corporation, or RFC, of the 1930s. In both 

cases, the original liquidity idea developed into a solvency idea, 

providing additional equity, not just more debt, to banks in the 

form of preferred stock. TARP has made equity investments in almost 700 financial companies. The RFC made investments in over 

6,000 banks in its day. The vast majority of these were retired in 

full after paying dividends along the way. So, counting by the number of financial institutions, the RFC was about ten times as big 

as TARP. 

Now, this next line was especially put in for Congressman 

Hensarling, so I’m sorry he’s not here—— 

Chair WARREN. We’ll make sure it gets to him. 

Mr. POLLOCK [continuing]. That the RFC was run by a conservative Texas Democrat, Jesse Jones, who was a tough-minded, successful entrepreneur, who, among other things, owned banks, but 

who had dropped out of school after the 8th grade. An interesting 

contrast to this panel. [Laughter.] 

‘‘There was a disposition’’—wrote Jones, ‘‘on the part of President 

Roosevelt to use the RFC as a sort of grab bag or catchall in spending programs, but I insisted on its being operated on a business 

basis, with proper accounting methods.’’ 

So, let’s start with ‘‘on a business basis.’’ In my view, the managers of TARP are fiduciaries for the taxpayers as involuntary investors. Their principal goal should be to run the program in a 

businesslike manner, to return as much of the involuntary investment as possible to its owners, along with a reasonable profit on 

the overall program. That means the predominant discipline should 

be that of investment management, not of politics. 

All of the language of the Emergency Economic Stabilization Act, 

which authorized TARP, always speaks of TARP as acquiring assets, and approves funding for acquiring assets. However, with the 

$50-billion Home Affordable Modification Program, TARP is not acquiring any asset at all, but simply spending taxpayers’ money. 

And, very conveniently, whatever TARP spends is, under the Act, 

automatically appropriated. 

Now, an obvious difference of the RFC from TARP is that the 

RFC was a corporation—a government corporation, but a separate 

corporate entity, with the ability to account for itself as a corporation. In general, it seems to me that if such interventions as TARP 

or the RFC exist at all, they are better established as separate corporations rather than as ‘‘programs’’, mixed into other entities. 

As I quoted above, Jesse Jones said, ‘‘I insisted on proper accounting methods.’’ In contrast, it appears that, in more than a 

year, no financial statements for TARP have been produced for the 

Congressional Oversight Panel, the Congress, or the public. 


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Now, the Act requires only an annual fiscal year statement, but 

good managerial practice and proper accounting methods certainly 

require, at a minimum, quarterly financial statements. In my view, 

TARP should have full, regular quarterly financial statements 

which depict its financial status and results exactly as if it were 

a corporation. Moreover, TARP’s financial statement should include 

line-of-business reporting by its major activity areas. 

An essential principle is that government crisis intervention 

should be kept temporary. The emergency programs need to be 

turned off when the crisis is over, allowed to wind down over time, 

and finally disappear. Now, it’s easy to imagine how much the 

Treasury and the administration would like to extend, as long as 

possible, the power and independent capacity they enjoy through 

the operation of TARP, but, in my view, it’s time to observe its target expiration date of December 31st, 2009. The very fact mentioned before, that TARP disbursements are, by law, automatically 

appropriated, is reason enough to enforce a timely expiration. 

We’ve experienced not just a bubble, but a double bubble in real 

estate prices, one in housing and one in commercial real estate. 

The banking system—and, notably, smaller banks—are 

disproportionally concentrated in real estate risk—and in commercial real estate risk, in particular. The implications for bank failures are easy to see. 

At the same time, the FDIC has announced that its net worth 

is negative; that is, that the deposit insurer is itself out of capital. 

So, this gave me the idea that perhaps before its December 31st 

expiration, TARP should make a preferred stock investment in the 

FDIC. And if—— 

Chair WARREN. Mr. Pollock, I’m afraid you’re out of time. 

Mr. POLLOCK. Could I make one—— 

Chair WARREN. You certainly—— 

Mr. POLLOCK [continuing]. Final point? 

Chair WARREN [continuing]. May. 

Mr. POLLOCK. The overall program of TARP will either have an 

overall profit or a loss. I hope it has an overall profit, like the RFC 

did. But if it has a loss, the Act provides that the President shall 

submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall. This is a very interesting possible liability of the financial industry, and it’s one more good reason to demand full and proper accounting from TARP, as well as 

to question any disbursement which does not acquire an asset. 

Thank you very much. 

[The prepared statement of Mr. Pollock follows:] 


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Chair WARREN. Thank you, Mr. Pollock. 

Dr. Zandi. 

STATEMENT OF MARK ZANDI, CHIEF ECONOMIST AND 

COFOUNDER, MOODY’S ECONOMY.COM 

Dr. ZANDI. Thank you, Professor Warren and the Panel. It’s a 

pleasure to be here. 

My remarks reflect my own views, and not those of the Moody’s 

corporation. 

I’ll make four points: 

Point number one, I think the TARP has contributed significantly to the stability of the financial system. The system isn’t 

functioning normally. Small banks are failing at a high rate, and 

the structured finance market is dormant. But, the system is stable, and I think that’s significantly related to TARP. 

Now, it’s very difficult to disentangle TARP with all of the other 

policy efforts at the Federal Reserve, FDIC, and Treasury, but I 

think it’s fair to say that, without TARP, none of the other things 

would have worked, that it was a necessary condition for the stability in the financial system. So, without doing it, I think we’d be 

in a measurably more difficult place today. 

So, point number one, I think it’s been very effective. 

Point number two, different aspects of TARP have worked better 

than others. Let me sort of rank-order things from my perspective, 

from the best to the worst. 

I think the CPP program and the bank stress tests, absolutely 

necessary, have worked very effectively, and the success of that is 

evident in the repayments that are already occurring, that are coming in quite quickly. 

I think it would have been more desirable if TARP could have 

done what it was designed to do, and that was to buy troubled 

asset, but it was overwhelmed by the environment and the situation and the politics, and I don’t think there was any other choice 

than to step in and provide that equity. And I think it’s worked 

quite well. 

I think backstopping TALF and PPIP, also very effective—it 

hasn’t helped increase transactions, but it has had a very measurable impact on pricing in asset markets, which has significantly reduced pressure in the financial system. So, if you look at assetbacked spreads, they’ve come in quite dramatically since the time 

TALF was announced. I don’t think that’s any accident. So, to look 

at bond issuance and say it’s not working would be a mistake. It 

has helped very, very significantly in that way. 

I think the use of TARP money for the auto bailout was very efficacious, very important, very well timed, that if GM and Chrysler 

had not gotten that money, they would have been forced into liquidation, which would have resulted in mass layoffs at a time when 

the economy was reeling. I think that was critical to resolving that 

in an orderly way. 

What hasn’t worked, the housing stability efforts have been particularly disappointing. The take-up on HAMP and HARP will be 

incredibly low unless they are changed. And I think it should be 

changed. 


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And, of course, small business lending, that aspect of TARP has 

not worked at all, and that’s very important. I’ll get to that in just 

a second. 

So, point number two, there are differences in the relative performance of the different aspects of TARP. 

Point number three, the cost. It’s going to be significant. By my 

calculation, it’ll probably come in somewhere between 100- and 150 

billion, when everything is said and done. That’s a lot of money, 

but that’s well below the fears that many had when TARP was 

passed; certainly nothing close to the 700 billion. And, in fact, 

that’s a good lesson. I think it’s important—it was very important 

to pick a big number, to show the markets that the Federal Government was, in fact, not going to let the system fail. And that’s 

why that number was so key. In fact, it helped restore stability and 

actually reduced the ultimate cost of the plan. 

Finally, point number four, I think TARP’s objectives are not 

over. I think it needs to remain in place. Two key things need to 

be done, and TARP can play a key role. One is small business lending. Small businesses are key to the job machine. The job machine 

is not working. And part of the reason for that is the lack of credit, 

the collapse of the credit card industry and the tightening up of 

credit card lending. And, of course, the small bank failures are so 

key to small businesses in very small communities. And I think 

TARP needs to play a much larger role in the provision of credit 

to small businesses. 

And secondly, foreclosure mitigation isn’t done. House prices are 

going to resume falling, in my view, early next year, when a lot of 

these loans in the foreclosure pipeline get pushed through into a 

foreclosure sale. Nothing in our economy works well when house 

prices are falling. That’s still the largest asset in most people’s 

household balance sheet. And creditors aren’t going to extend credit 

unless they know how much people are worth. So, I think that 

needs to be worked on, and TARP will play a key role in that. 

Thank you very much. 

[The prepared statement of Dr. Zandi follows:] 


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Chair WARREN. Thank you, Dr. Zandi. 

We’re going to do questions round robin, sort of, although there 

are just three of us, so you should all feel free to intervene if we 

want to pursue a line together. That’s fine. 

I’d like to start, though, with a point you made, Dr. Zandi, and 

that sort of underlies the others, and that is, you make the point 

that TARP helped with bank stability, and was critical. I think this 

was your first point in both your prepared remarks and in your 

oral remarks today. But, the question I want to press on is, How 

stable is ‘‘stable’’? Do we have a group of very large financial institutions that are stable, so long as the government continues to 

pump money into them and to give them substantial guarantees, 

whether those are explicit guarantees or implicit guarantees, and 

that, in turn, forces us into the direction of asking about bank profitability—they are stable only if they have a business model now 

that works and that produces the kind of long-term profits that we 

can say, ‘‘Yes, this is now a functional banking system’’? 

And so, I think about these sources of bank profitability. There’s 

lending, which I thought was supposed to be the bank’s business. 

Business lending—evidently, not so much. And consumer lending, 

which seems to be, borrow money at a very low cost from the taxpayers, and then increase the interest rates and fees charged to 

consumers. A new study out by Pew Charitable Trust says they’ve 

examined the 400 largest credit cards and seen that, in less than 

a year now, interest rates on credit cards have gone up somewhere 

between 13 and 23 percent on these cards, at a time when the cost 

of funds has actually declined. There’s also been a big push on fee 

income. 

The other way that banks seem to be making money is by trading. They’re out making investments in the marketplace, which— 

I’m old-fashioned, but I didn’t think that was a traditional banking 

activity, and certainly raises the specter that, yes, they make profits today, but if they make bad trading decisions down the line, 

those banks are not so stable as they look. 

So, I want to start with Dr. Zandi, but I welcome anyone’s comments on this question. We describe our banks as more stable than 

they were, but is this because we just continue to guarantee them 

and put money into them, or is it because they have developed 

business models that, in fact, are not sustainable over the long 

haul? 

Dr. Zandi, you want to start that? 

Dr. ZANDI. Sure. I think it’s fair to say that the Nation’s largest 

banks are stable and viable, and will be profitable going concerns. 

I think that the smaller banking institutions—many smaller bank 

institutions will fail, in large part because of their bad lending— 

in large part related to the bad lending to commercial real estate 

lending, which is still being played out. 

But, in the case of the largest banks, particularly the banks that 

went through the stress test, I think, in fact, they’re probably overcapitalized. And the reason they’re not lending is because house 

prices are falling and unemployment’s rising. And I think once 

house prices stabilize and unemployment stops rising, we’ll see 

credit flowing more normally, because they are well capitalized. 


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Small banks are not, and there will be many bank failures. And 

that goes to the problems with small business. And—— 

Chair WARREN. Okay. And you’re confident—when you say 

they’re well capitalized, you’re confident that they’re well capitalized against the projected losses in their portfolio, on their toxic assets—— 

Dr. ZANDI. Yes. I think these—— 

Chair WARREN [continuing]. Removed from the books? 

Dr. ZANDI. I think the stress tests were substantive. I don’t think 

they were merely superficial. The stress tests were important in establishing confidence, but they were substantive, and that if you 

look at the loss rates that they had to capitalize to under the adverse economic scenario, those loss rates were significant. So, I believe that unless we get the adverse scenario or something worse, 

they’ll be fine. 

Chair WARREN. Dr. Baker, could I ask you to jump in on that? 

Dr. BAKER. Yeah. I’d be a little more pessimistic, for a couple of 

reasons. I mean, I think the stress tests were very useful, and I 

think they did help, as I said, a lot for transparency, but in terms 

of the adverse scenario, we’re actually looking at higher unemployment rates today—I mean, the current rates in the projections, 

going forward—than what we had in the adverse scenario. 

Also, I’d point out, those stress tests only ran through 2010, and 

we’re looking at having a very bad time going at least into 2011, 

if not further. So, I think we probably are looking at high loss 

rates, perhaps higher than in that adverse scenario, for some time 

into the future. So, I’d be a little less confident. And not to say that 

they’re all going to collapse, but I’m less confident about their 

soundness, going forward. 

Now, getting to your specific questions about the models, I don’t 

know that we have viable models, going forward. I mean, if you 

look at where the profits for the major banks were coming from 

prior to the crisis—well, a lot of this was coming from 

securitization of assets, which, even assuming we get the market 

fixed, securitization back in a proper place—we could argue there 

almost certainly will be less fees from that, going forward. I think 

many of us hope that there’ll be less fees from things like credit 

cards, bank overdrafts, because that is the purpose of legislation 

being debated in both the House and Senate. That was an important part of the profits for many of the major banks, and smaller 

banks, as well. 

Also, you had situations of, do you want to call it, ‘‘mis-selling,’’ 

whatever, auction-rate securities, other instruments being sold to 

small governmental units that were almost certainly inappropriate 

to them, that did amount to large fees, in many cases, for the 

major banks. 

So, these are areas of profitability that I think there’s at least 

a hope, that many of us have, will not be there in the future. 

So, do they have a viable model? Well, you’d mentioned, quite 

rightly, that many of them are making big profits on trading. 

That’s fine, but that’s inappropriate for a bank. And we have a situation where Goldman—I mention them because they’re just most 

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but quite clearly with both explicit and implicit Government guarantee. The implicit Government guarantee: They’re too big to fail. 

No one thinks we will let Goldman go under. And the explicit guarantee, that they have, I believe it’s still, $28 billion in loans, 

through the FDIC, that are guaranteed by—and I shouldn’t say 

‘‘through’’—guaranteed by the FDIC. So, this is not a proper model, 

to be having the government have the FDIC guarantee money for 

the banks to then speculate with. So, that’s certainly not a viable 

model, at least that I would envision, going forward. 

Chair WARREN. Mr. Pollock, could you add? 

Mr. POLLOCK. Jesse Jones, in his most instructive memoirs, 

which I recommend to everybody, says what you’re always doing in 

a panic is buying time. Why are you buying time? Because what 

typically happens in the wake of the crisis is, bank operating profits and margins become very large. And so, you have a race, if you 

will, or a balancing, between large operating profits created by the 

very low interest rates, and recognized losses. So, the low cost of 

carry—say, carry on $8 trillion, which is about the total loans of 

the banking system—it’s not that the banks have no loans; they 

have $8 trillion dollars of loans, now being carried at extremely low 

refinancing rates. That generates big operating profits, which allows you to take the time to write down the past losses. This is the 

classic pattern. It happens over and over again. A great example 

was the dealing with the loans to less-developed countries, in the 

1980s, which followed this pattern. 

So, that’s what we’re now observing, Madam Chair. 

Chair WARREN. Thank you. 

Dr. Calomiris. 

Dr. CALOMIRIS. I want to address your question about the credit 

crunch. 

Chair WARREN. Yes. 

Dr. CALOMIRIS. It’s going to get a lot worse, or persist over time, 

especially for small businesses. I am not giving you that comment 

as an academic, but as a business consultant to banks, especially 

credit card banks. I can tell you exactly what they’re doing and exactly why they’re doing it. 

First of all, looking at banks more broadly, capital scarcity persists, so lending isn’t going to happen when banks have scarce capital. Even if, from a regulatory standpoint, they can be allowed to 

go ahead and do some lending; there’s extreme caution. 

Chair WARREN. So, I just want to—— 

Dr. CALOMIRIS. I have a long list. 

Chair WARREN [continuing]. Draw a line under—— 

Dr. CALOMIRIS. Yeah. 

Chair WARREN [continuing]. What you’re saying. I’m going to let 

you do your entire list. But, you would say, when Dr. Zandi says 

they are overcapitalized and have more than enough capital, 

that—— 

Dr. CALOMIRIS. It’s laughable. 

Chair WARREN. Okay. 

Dr. CALOMIRIS. But, I’ll explain why. 

Chair WARREN. Okay. 

Dr. CALOMIRIS. I’m sorry, I don’t mean to be insulting. I’m just 

saying, of course they’re not overcapitalized—— 


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Chair WARREN. I—— 

Dr. CALOMIRIS [continuing]. For two reasons. 

Chair WARREN [continuing]. Just want a chance to draw this out. 

Dr. CALOMIRIS. First of all—— 

Dr. ZANDI. And I consult to them, as well, by the way. 

Dr. CALOMIRIS. Right. Well, let me tell you—let me give you an 

example. 

Banks are not just meeting the statutory capital requirements. 

Regulators can set capital, on a bank-by-bank basis, any way they 

want. You don’t know what the bank’s capital requirements are. I 

do know what my clients’ capital requirements are. Their capital 

requirements, instated by their regulator, might be twice what the 

statutory minimum is. Why? Because regulators right now are 

playing a political game of overkill to try to impress Congress with 

how tough they are, so they can survive the shakeout that’s happening right now. That’s a big part of what’s going on. The FDIC, 

in particular. Actually, they talk out of both sides of their mouth, 

because they don’t want to scare away—they don’t want to make 

their banks too mad. But, I’m telling you, literally double the statutory capital requirement is being imposed. 

Secondly, small business lending—well, small businesses don’t 

want to invest or hire people, because of the huge risks; and not 

just economic risks, but political risks right now. Most small businesses pay personal income tax rates. Look at what healthcare, energy taxes, and other personal income tax rates are being discussed 

in Washington, and you tell me, if you’re a small business, if you 

want to be investing. 

When you look at the credit card bill, the credit card bill did exactly what I thought it would do, which is hugely raise interest 

rates on credit cards. The most damaging piece of the credit card 

bill, I’m sure was unintended. It mortgagized outstanding credit 

card balances. In other words, you can’t raise interest rates on outstanding credit card balances. That means that a credit card balance—let’s say, $1,000—is now a mortgage. Well, that means that 

the way you think about that, as a credit card bank, is completely 

different. You don’t have the option to increase the rate, so you’re 

going to have to start off with a very, very high rate. It’s just basic 

economics. 

So, FAS 166/167 is about to make things much worse, because 

it’s, again, overkill. What it’s going to do is impose the same capital 

requirements off balance sheet as on balance sheet. We should 

have capital requirements for off balance sheet, but it shouldn’t be 

one-for-one. I’ve analyzed this for over a decade, and there are 

ways to solve this problem. 

The problem right now is, we’re in an overkill environment, and 

the credit crunch is just going to continue. I mean, there’s no way 

that it’s going to come to an end quickly. And it’s not the banks’ 

fault. 

Chair WARREN. Dr. Johnson. 

Dr. JOHNSON. Just to answer your question, it’s not a stable system that we have now. When you have an entity such as Goldman 

Sachs, that has direct access to the Federal Reserve, as Dr. Baker 

said, and is allowed to take any kind of risky investments they 

want, you’re basically running a big hedge fund. 


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Now, I understand the strategy is to allow these banks to recapitalize themselves by making large operating profits, but that assumes they know how to manage their risks, that assumes there 

aren’t additional shocks, and assumes they don’t pay out a large 

amount of those profits as bonuses, which seems to be their intention. 

These are very different days from previous attempts to recapitalize and stabilize the banking system, such as the 1980s, when 

the strategy worked, over a period of time. So, I think we’re asking 

for trouble now. 

Chair WARREN. Thank you, Dr. Johnson. 

I’ve gone way over— 

Panelist Atkins. 

Mr. ATKINS. Okay, thank you very much. 

Chair WARREN. Thank you all. 

Mr. ATKINS. Interesting discussion. What I first want to do is go 

back in time. You all have addressed TARP, and, everybody, I 

think, agrees that it’s difficult to unwind that, along with all the 

other programs, and we have to view TARP as part of, the bigger 

government response. 

But, I just want to pose a question, because when we think of 

TARP and we think of that spring and summer after Bear 

Stearns—and some of you all have raised this issue—it was sort of 

a sleepy spring and summer, where I think of—it was an opportunity that wasn’t grabbed by regulatory agencies, and the government in general, to plan for what was going to happen, and a lot 

of folks in the marketplace didn’t view things with the concern that 

they should have. So, I just want to pose a question. What if there 

had been no TARP? I mean, how would we be worse off than we 

are now? Because we see all the problems that we see now. We 

have markets that are still sort of dysfunctional; they might be stable, but in some of them the Fed is the main player. And would 

there have been any difference had we just continued the adhocism that we had seen earlier in 2008? Because I still don’t see 

the market confidence there. But, I was just wondering—pose this 

to all of you—Dr. Baker to Dr. Zandi, you know, everybody in between—what you all think of that. 

Dr. BAKER. Well, I’m not convinced we’d be in a hugely different 

world. I think that you would have seen, obviously, more active Fed 

intervention, more of the sorts of AIG/Bear Stearns bailouts, 

workarounds, however you want to call it. I was sort of struck— 

we had—you know, after Lehman failed—I think that just about 

everyone would agree that was a mistake, to let Lehman go under. 

And the Fed, some weeks afterwards, came up with the statement 

that they didn’t have the legal authority. Now, the reality was, at 

least in my view, that no one was in a position to challenge the 

legal authority of the Fed as they acted. Now, whether or not they 

had the legal authority, would a court—could one envision a court 

having said—you know, suppose the Fed had set up some sort of 

structure, AIG-type structure, to keep Lehman afloat—would the 

courts have said, ‘‘You can’t do that. You have to let Lehman go 

under’’? It’s a little hard for me to believe. Maybe that would have 

happened, but it’s a little hard for me to believe. 


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So, if we envision the world without TARP, I think we would 

have had more AIG-type workarounds. Where would we be today? 

Probably with a less stable financial system. I think that stands to 

reason. It’s also possible—again, suppose we imagine this crisis 

continuing, where you had major banks teetering, week by week. 

Congress could have acted subsequently. I mean, my biggest criticism about the way Congress acted at the TARP was that there 

wasn’t time to really debate, ‘‘Okay, if we’re going to put forward 

700 billion, what conditions do we want to address now?’’ Because 

we all know, in Washington, the best time to do something is at 

a crisis. I mean, now we’re having a debate, going forward, on financial reform, and we’ll see what comes of that. But, you had an 

opportunity to at least have placeholders. You didn’t need final reform, but you could have had placeholders. 

And, just to be very specific, suppose we said—we’d put in a 

placeholder, saying that there would be an onerous capital requirement on institutions of larger than 50 billion assets that would go 

into effect January 1st, 2011. Well, that would be a real strong incentive for Congress to work out a more substantive reform. 

Things like that could have been done in the period leading up 

to the TARP. They weren’t, because the argument was, ‘‘We have 

to do this tomorrow.’’ And that’s literally what was being said at 

the time. And that, I think, was the biggest flaw. It wasn’t, ‘‘We 

either do this right now or we don’t do it.’’ We would have had 

other opportunities, and we rushed in with something that wasn’t 

well thought out. 

Dr. ZANDI. Yeah, I think the world would have been measurably 

worse without TARP. And I think we get a sense of that when you 

think back to the days when TARP was constructed. When TARP 

was voted on for the first time by Congress, and voted down, the 

market responded violently. There was complete turmoil. And if 

Congress had not reversed itself and voted for TARP a week later, 

I think the markets would have completely shut down and we 

would have had major financial failures, and the system would be 

measurably worse. 

Now, we would have ultimately responded to that and done 

something else. It wouldn’t have been called ‘‘TARP,’’ we’d be here 

talking about something else. We would have responded, but we 

would be in a measurably worse place. The banking system would 

be less stable. It would be more concentrated. Our problems would 

be significantly greater. And in all likelihood, we’d still be in a recession, in my view. 

Dr. CALOMIRIS. I think that that’s the point. The point is, unfortunately, your counterfactual was an incomplete one—that is, What 

replaced TARP is the key question. And I think that we could presume that what you would probably see instead of TARP would be 

forbearance, forbearance that is like what we did with the guarantees, an across-the-board sort of debt-guarantee program that 

would have found a way to extend guarantees from the Fed, from 

the FDIC, from the Treasury, somehow, on an ad hoc basis. And 

we know that, from a risk standpoint, the worst kind of government interventions are forbearance interventions, because there 

you put institutions in a situation where the zombies persist, and 

they have even stronger incentives to take on risk. 


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So, at least if you recapitalize a financial institution, you give 

them some money that they hope to keep. So, given that forbearance probably would have replaced it, from a risk standpoint, it 

would likely have been worse. 

So, I—you know, it’s a hard counterfactual. 

Mr. ATKINS. All right. 

Dr. Johnson. 

Dr. JOHNSON. I would just add, to those points, the global context. You have to remember that they were forced into this by a 

sequence of events, by—into using TARP for the capital purchase 

program for the attempt at recapitalization—by what happened in 

the U.K. and what the Europeans did the day after the G7/IMF 

meeting. Now, the alternative, I agree with my colleagues, would 

have been, if you hadn’t passed TARP, the Fed would have had to 

have done something. It would have done it very quickly. And I 

agree with Charles, it probably would have been a very messy 

thing. And, I think, constitutionally, it would have been a very 

complicated thing. Obviously, Federal Reserve didn’t want to do 

that, they had good reason not to want to do it. This is an issue— 

we’re using the fiscal power—it’s a fiscal balance sheet of the 

United States. The authority to do that rests with the Congress, no 

question about it. So, getting the authority was absolutely what 

they needed to do, and they got it in a rush, because no one was 

prepared; they hadn’t thought ahead. 

Mr. ATKINS. Okay. Thank you. 

Chair WARREN. Mr. Silvers. 

Mr. SILVERS. This has been so interesting, it’s hard to know even 

where to pick up the threads in a thoughtful way, but I’ll try. 

Do you all agree that—and I think several of you have said this 

in the testimony, but I just want to make it clear—do you all agree 

that the primary thing that we did in TARP, with the capital purchase program investments in October, was to implicitly put the 

balance sheet of the Federal Government behind the financial system, that that was the meaning of that act, in more than the precise dollar amounts that went into different firms? 

Mr. POLLOCK. I’d say, Mr. Silvers, that the key, as I mentioned 

in my testimony, is the difference between debt and equity. I see 

financial crises as evolving through three periods: 

The first period is denial and hoping for the best, which I characterize as ‘‘the subprime problem is contained,’’ period. 

The second period is a lending period; central bank is lending 

money. But, if somebody has negative capital, it doesn’t matter how 

much you lend them; they still have negative capital—they’re still 

broke, even if you’re lending them money. So, in a really bad crisis, 

there is an issue of replacing capital. 

Now, what happened in that situation was, you might say, an act 

of honesty. The government’s balance sheet already was the capital 

of the financial system; we made it explicit. I think that making 

it explicit probably did, as the other panelists have said, significantly help. 

The other thing that significantly helped was the stress tests 

programs, which others have mentioned. But I think the most important thing about the stress tests was that it threw out markVerDate Nov 24 2008 04:08 Mar 20, 2010 Jkt 054354 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 E:\HR\OC\A354.XXX A354

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to-market accounting. It made mark-to-market accounting irrelevant. The combination of those two got us the normalization of—— 

Mr. SILVERS. Right. 

Mr. POLLOCK [continuing]. Spreads that we’ve seen. 

Mr. SILVERS. Yeah. You’ve answered far more than I asked. I just 

wanted to make sure that we all have agreement here, that this 

is the meaning of what they did. 

Dr. Calomiris is shaking his head, so maybe you don’t agree. 

Dr. CALOMIRIS. I think that you pose a great question, and here’s 

my answer to it. 

Mr. SILVERS. All right. 

Dr. CALOMIRIS. ‘‘Was it the announcement or was it the actual 

cash flowing?’’ is the way I would put your question. Okay? 

Mr. SILVERS. Okay. 

Dr. CALOMIRIS. So, first of all, the announcement had—it depends on which dimension of financial—— 

Mr. SILVERS. Right. 

Dr. CALOMIRIS [continuing]. System you’re talking about, and 

which institution. And so, if you’re asking the question—from the 

standpoint of the bear run that was occurring on Goldman Sachs 

and Morgan Stanley stock price, the announcement was it. The actual cash flows, probably not very important. And from the standpoint of Goldman Sachs, I would say the announcement was it; 

they didn’t need the flows. 

From the standpoint of smaller banks, I would say that the flows 

mattered, to the extent that they’re going to survive and be able 

to where—you know, survive this crisis—the flows mattered more 

than the announcement of the program. 

So, I think—and the—and I would say that the overall policy toward small business lending and consumer lending really depended 

much more on the followthrough. And so, that’s really—— 

Mr. SILVERS. Can—— 

Dr. CALOMIRIS [continuing]. Where the key issue is. 

Mr. SILVERS. Can I—— 

Dr. CALOMIRIS. And it—— 

Mr. SILVERS. Can I stop you right—— 

Dr. CALOMIRIS [continuing]. Hasn’t been there. 

Mr. SILVERS. Can I stop you right there? You say there were— 

in your view, there were certain large financial institutions that 

needed confidence, not cash. Were there not—what’s your view of 

the large financial institutions for whom cash would—whom there 

simply wasn’t enough—might not have been enough cash? Right? 

Citi, B of A, and the like. 

Dr. CALOMIRIS. Right. 

Mr. SILVERS. You agree that there’s a continuum—— 

Dr. CALOMIRIS. I agree. I agree. I was trying to draw the two extreme points. 

Mr. SILVERS. Right. 

Dr. CALOMIRIS. But, I agree with you, that when you talk about 

Citibank, the physical assistance is just as important, maybe more 

important. So, I think that there’s a—depending on what you’re 

talking about, the answer is different. But, I think the crucial point 

is that, from the standpoint of actually getting consumer and small 


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business lending flowing again, which we are not getting, it’s the 

followthrough that matters, not just the announcement. 

Mr. SILVERS. Well, and—— 

Dr. CALOMIRIS. And that’s the problem. 

Mr. SILVERS. Yeah. Well—— 

Dr. CALOMIRIS. The announcement wasn’t good enough for that. 

Mr. SILVERS. All right. Well, on that—I’m sorry—Dean. 

Dr. BAKER. I was just going to say, very quickly, I think that, you 

know, putting this in a little context, we, in effect, had this implicit 

‘‘too big to fail.’’ We’d rescued Bear Stearns, certainly Fannie and 

Freddie. The—that was taken away when Lehman collapsed. 

TARP, in effect, put that back in. So, in that sense, I think it was 

the announcement playing the largest part. But, certainly, for the 

smallest banks, obviously, there was no ‘‘too big to fail’’ with them. 

Mr. SILVERS. Dr. Johnson, you had your hand up. 

Dr. JOHNSON. Yes. To answer your original question, yes, but, 

the way you stop a panic, the way you turn the corner in any financial crisis, is, you have to provide—public sector provides capital. 

The reason you’re—and the characteristic of the crisis, the private 

sector won’t provide capital anymore; it’s too afraid of what’s happening. And the issue most countries have is whether they can afford it, whether the IMF, some outside entity, will provide the capital, on what basis. We didn’t have those problems, but we had the 

problem of whether Congress would go for it. And also, what Treasury wanted to do. Treasury’s intentions were very unclear and 

made more murky, in this regard, their stated intentions around 

the TARP prior to that. 

Mr. SILVERS. Dr. Johnson, if we take that point, we now have 

three very large TARP—you said, in your prepared remarks, that 

you thought we had a thinly capitalized banking system. I believe 

Dr. Zandi expressed a somewhat different view. Right. Now, we 

have four large banks that represent the majority of bank assets 

in the United States: Citi, B of A, Wells, and JPMorgan Chase. One 

of those banks has been allowed to return TARP funds: JPMorgan 

Chase. I think there’s some consensus that, in terms of Dr. 

Calomiris’ continuum, they were always at the very strong end. 

So, the other three are not being allowed to return TARP funds. 

This seems to me to be consistent—the other three represent a very 

substantial part of our banking system—this would seem to me to 

be consistent, Dr. Johnson, with your remark that the banking system is thinly capitalized, at least in the eyes of the regulators, who 

are not allowing them to return the capital. 

That ties, in my view, to this question of what we actually did, 

in terms of putting, effectively, the public’s balance sheet behind 

the private financial system, because it appears to me now—and 

I’ll ask you to respond, since the Chair is allowing me this indulgence, here—if we pull back—do we now have a circumstance in 

which we have strengthened the private balance sheets, such that 

we can pull back on the public balance sheet? And that leaves 

aside the question of how we pull back on the public balance sheet. 

But, have we got there? 

The fact that three of the four largest banks in the country are 

not being allowed to return TARP funds suggests we haven’t. You 

all are the experts; I’d welcome your observations on this. 


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Dr. JOHNSON. So, yes, we have a thinly capitalized banking system, as I said, relative to the trajectory of the economy. That’s the 

way I would put it—relative to what I’d see as the real risk scenario. So, this is also in the minds of the management of these 

companies; they have raised their capital substantially, they’re now 

at the levels that Lehman had right before it failed. So, is that 

enough capital? Probably not, in their minds. 

And Charles, I think, is making a good point, that, in any crisis, 

the regulators tend to tighten on capital. They—I mean, without 

even worrying about losing jurisdiction, which I’m sure is an issue 

here. But, this is a natural reaction. You need to have more capital. 

So, the problem, of course, was, we didn’t put enough capital in, because, in the United States, we shy away from things that feel like 

the government is owning a productive enterprise. Most other 

countries don’t have that scruple; they’d tend to treat this on a 

much more pragmatic basis—the government use the public balance sheet, overcapitalize, and then get out, privatize that, sell that 

off. We don’t like to do that, here. So, it was done on a thin-capital 

basis. 

Dr. ZANDI. I think the large banks, in aggregate, are very well 

capitalized, and, in fact, arguably, overcapitalized under the most 

likely economic scenario. Now, I think, given the uncertainties with 

regard to that scenario, and the fact that, if you go into a scenario 

that’s more adverse, that it could be very adverse, given a 10.2-percent unemployment rate, it makes sense to be very cautious in allowing institutions that you think are at the bottom end of that 

spectrum to give back their capital. You want to be sure that in 

your economic forecast that you’re making is the right forecast before you do that. 

So, I think the way this process is working is entirely appropriate. You’re saying that the institutions at the good end of the 

spectrum can repay, institutions at the bottom end can’t repay, 

until it is absolutely certain that the coast is clear. And how can 

we say that it is? Unemployment’s 10.2 and rising, and house 

prices are falling. How can we? 

Mr. SILVERS. Well, this brings me back to, really, the point of 

this hearing, which is the economic impact of TARP, because if the 

bottom end of—and this may sound like a statement, but it’s going 

to wind to a question—if the bottom end of the banking system, in 

terms of capital adequacy, represents, say, 40 percent of the banking system’s assets, which is roughly what the three institutions 

that are not being allowed to return TARP money are—and then 

there’s a whole lot of weakness, obviously, in the small bank sector, 

which you all have discussed—but, if the bottom end is that big, 

what does this tell us about the relationship of what we’ve done in 

TARP? If the bottom—and then, let me just add one more complicating thing—if the bottom end is that big, and the Chairman of 

the Federal Reserve is saying that, ‘‘we’re not getting business 

lending, because our banks are weak’’—what does this tell us about 

the way we have managed TARP in relationship to the economic— 

not the financial, but the economic—consequences of the way we 

have managed it? 

Dr. CALOMIRIS. If I can answer your first question—— 

[Laughter.] 


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Which I haven’t had a chance—— 

Mr. SILVERS. Feel free. 

Dr. CALOMIRIS. I think that I have a very different calculation 

than my friend Mr. Zandi on where the very largest financial institutions are. I think it is a spectrum. I agree with him there. But, 

I think that it’s highly debatable whether, if we really did markto-market, or even—not just mark-to-current-market, but mark-torecovery-value—on some of those banks, whether they would be 

solvent. I don’t believe that one of them would be. And so—when 

you look into the weeds of this, you will find different pros and 

cons. For example, in Citibank,—I understand, most of their securities are not going to be resetting to interest rate—adjustable rates. 

And that’s a positive, in terms of risks of default, going forward, 

on that portfolio. But, you know, overall, there’s a lot of negative 

within that portfolio, too. 

If you read Michael Pomerleano’s analysis of this, which he started about a year ago and has been continuing to do, it’s very much 

more pessimistic on recovery values of those portfolios. I’m not telling you that he’s right, but I’m telling you that I don’t think, based 

on my conversations with bankers, that anyone thinks that it’s obvious that one or two of those banks are even solvent. Now, on the 

other hand, I think that there’s a big difference among them. And 

I don’t really want to go on the record saying that a particular 

bank is insolvent, but I’ll just say that I think that, arguably, one 

of them is, and that the other two are pretty weak. 

Mr. SILVERS. Why don’t we just go down the line, here. 

Mr. POLLOCK. I would say, when it comes to being thinly capitalized, banking systems are, by definition, thinly capitalized. Walter 

Bagehot wrote, ‘‘The profitability of banking depends on the smallness of the capital.’’ He was right. So, when you get into a panic 

and prices are moving in ranges that aren’t going from 99 to 98 

and a half, but from 99 to 42, of course we have capital problems. 

I think the way this relates to TARP is the issue of timing that 

I said before; TARP has made these investments. The point of the 

investments is to buy time for the operating earnings. We’re talking about something that’s less than a year so far for these investments, or maybe a year. So, my view would be, the investments 

could stop on December 31st, but the existing investments are 

going to be managed over a period of several years. Continental Illinois was bailed out by an RFC investment in 1934. It repaid the 

investment in 1939. That’s 5 years. In 1939, it was the most profitable bank in the country. 

So, I think, in TARP we have to have a similar several-year time 

period for the management of the investments that the government 

has made as fiduciary for the taxpayers. As I said, that’s where I 

think the focus should be. 

Dr. JOHNSON. So, if I understood the question correctly, my answer would be that TARP has not been well managed with a view 

to building a sustainable recovery in the credit system. I think that 

the banks that pay back the capital probably shouldn’t have been 

allowed to pay back. I think it’s a tricky judgment. You want them 

to raise more capital; you, ideally, want them to raise more private 

capital. And then, you do reach a point where the government ownership gets in the way of that. I’m not suggesting the government 


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should run the banking system in this country. That, I think, very 

obviously would be a disaster. But, the government has to be involved, and you have to come back with a lot of capital, relative to 

the worst-case scenario, because the worst-case scenario is what 

people are worried about. That capital is your cushion against 

losses. And if they’re trying to get by with a little bit of—thin capital and a lot of implicit guarantees from the government, that’s a 

good deal, if it works. If it’s a bad deal, it’s not their problem; it’s 

your problem. And that’s a very bad arrangement. 

Mr. SILVERS. Does that arrangement, in particular, tend to give 

you a Japan scenario? 

Dr. JOHNSON. Well, the Japan scenario is the extreme version of 

what Charles talked about before—is forbearance. And it came in 

a particular set of macroeconomic circumstances I don’t think are 

going to be repeated here. But, the idea—I think that we will avoid 

that kind of—the zombie banks, the zombie companies. We do actually—we’re better—we’re not good, but we’re better at recognizing 

losses and at moving on, than was Japan. 

I think you’re just going to have—it’s going to be—it’s going to 

be some combination of sluggish credit for small business and excessive risktaking in trading markets that go bad. Of course, hedge 

funds fail all the time. They’re supposed to fail. Hedge funds are 

designed to fail. You go and set up another hedge fund. That’s the 

business model. And sometimes you have good years, and you 

share that with your investors, and sometimes you have bad years, 

and you just move on. 

Having your major banks in your—that’s fine. I’m not opposed to 

hedge funds. We should see it—recognize what it is. But, to have 

your biggest banks do that, as long as hedge-fund investors know 

what they’re getting into, that’s okay. But, if you have your biggest 

banks operate on that basis is reckless and irresponsible. It’s a bad 

idea. 

Mr. SILVERS. We’ve taken tons of time, but Dean hasn’t gotten 

his chance. 

Dr. BAKER. Yeah. Well, just quickly, to comment on some of the 

differences here on whether the solvency of the three major banks, 

there; someone questioned it. I think the differences largely depend 

on what our projections are, going forward. I mean, there’s a wide 

variance here, and really an extraordinary wide variance, because 

it’s not just on, sort of, unemployment, but we’re also looking at a 

situation where we could come up with very plausible scenarios 

that say that house prices more or less stabilize where they are 

now, or the real estate prices more or less stabilized. I can also give 

you very plausible scenarios where they fall by another 15 percent. 

And from the standpoint of bank solvency, that’s a huge, huge difference. So, again, Mark—you know, I’m not going to say who’s— 

we don’t know who’s right; we’ll find out in a year or two. But, the 

point is, there’s a very, very wide range, here, and it’s clear we 

could find plausible scenarios under which those three banks will 

all be just fine, but also plausible scenarios under which they may 

well face insolvency. 

Chair WARREN. Thank you. 

I want to follow up, if I can. I’m going to stay in the same line 

of questioning so we can still keep talking about this. But, I just 


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want to bear down on one part of this. Thanks to TARP, we now 

have some very large financial institutions who are operating with 

implicit guarantees. Citi has an explicit guarantee of more than 

$300 billion. That has enormous pricing effects in the market, and 

distortions in attracting capital. Obviously, it also creates the kind 

of moral hazard questions you’re all talking about, the idea that 

our largest financial institutions are giant hedge funds for which 

we can all celebrate when they have a good year, but—I think we 

have some recent experience that suggests they don’t always have 

good years. 

So, I want to just ask the question, following exactly the same 

line of questioning. If these largest financial institutions are raising 

capital only because the guarantees are there, and the guarantees 

are distorting market investments, risktaking, pricing, how do you 

wind back out of that? How do you get the ball to spin in the other 

direction? 

Dr. Calomiris. 

Dr. CALOMIRIS. The way you do is profitability. Just to remind 

you, from 1992 until 2006 was consistently an unprecedented highprofitability experience for the U.S. banking system. 

Chair WARREN. Dr. Calomiris, let me stop you right there. 

Dr. CALOMIRIS. But, that’s—— 

Chair WARREN. I’m all for profitability. 

Dr. CALOMIRIS. No, no, I’m just saying—— 

Chair WARREN. I get that. 

Dr. CALOMIRIS. That’s the only way out. 

Chair WARREN. No, I understand. But, that’s why I started the 

questions, back when I started my questions, with how they’re producing their profits. And they’re producing their profits from being 

a hedge fund—I think Dr. Johnson referred to that calmly as ‘‘reckless.’’ Was that the term? Taking on reckless risks. And the other 

way they’re producing profits right now is trying to squeeze consumers to try to get in ahead of a move; they’re borrowing cheap 

from the taxpayer and then increasing rates on the taxpayer for 

their consumer lending. And they’re not doing any other form of 

lending. I’m sorry, that’s not a sustainable profit model. So—— 

Dr. CALOMIRIS. No, I’m not—— 

Chair WARREN [continuing]. What’s our model, here? Should we 

all just go to Las Vegas and—— 

Dr. CALOMIRIS. No. 

Chair WARREN [continuing]. And bet it all on black–22? And if 

it comes in, we have a stable banking system, and if we don’t, we’ll 

just quit. 

Dr. CALOMIRIS. Well, no, of course not. But, what I would say is 

kind of troubling, and I agree with you; what’s troubling is, 

Citibank, of course, has made a lot of its profits from one activity 

that’s not going to be very profitable for it, going forward, and 

that’s the credit card business, especially with FAS 166 coming into 

play, starting in January, and because Citibank, unlike some small 

credit card issuers, will not be able to exempt itself through various 

loopholes from FAS 166/167. So, you have a huge problem, which 

is consumer credit is not going to be as profitable for Citibank as 

it used to be. 


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So, I think what I’m trying to get at here is that part of the problem is that we’re tying one hand behind the banking system right 

now with the overkill that we’ve done, and we’re actually taking 

the profitable business away from them, in two ways: first of all, 

I talked already about credit cards; but, secondly, small business 

lending. And small business lending is not going to be profitable 

until small businesses start demanding loans more. And I don’t 

think that’s going to happen until they’re more confident about the 

recovery. 

Chair WARREN. And if I can—— 

Dr. CALOMIRIS. And my view is, it’s not going to be a sustained, 

high-growth recovery; it’s going to be great 2010, and what most 

economists are projecting is 5-year growth rate for the U.S. economy around 2 percent. That is not good news for small businesses. 

And the regulatory and political risks they’re facing are really— 

So, I’m worried, but I’m saying, the way we get out of it is with 

profitability in the bread-and-butter of banking. And the problem 

is, I’m not seeing it right now. 

Chair WARREN. Dr. Johnson. 

Dr. JOHNSON. I think, broadly speaking, there are two ways out 

of this. One is to allow the banks to take more advantage of consumers than they have in the past. Kind of an extraordinary—— 

Chair WARREN. Ah, there’s a solution. 

Dr. JOHNSON [continuing]. Kind of an extraordinary concept. If 

you explained it to consumers, I’m not sure they would really go 

for it, given the way they’ve been treated. But, you could relax the 

rules, you could allow them to mislead consumers more, all kinds 

of trickery could be allowed, and that would, without question—as 

Charles said, that would allow them to boost their profits. 

Dr. CALOMIRIS. I’m sorry, that’s a distortion. I didn’t say anything about trickery. I’m talking about capital requirements, and 

I’m talking about limitations on interest charges. 

Dr. JOHNSON. I think an alternative way forward is to break up 

the biggest banks. The reason you have implicit guarantees in a 

system like this is because banks are too big to fail, or they’re perceived to be too big to fail. That’s what the debt market thinks. 

That’s why Goldman Sachs can borrow at a relatively small spread 

over Treasury’s. And it’s very hard to—there are, of course, regulated proposals to try and restrain that power and to try and make 

it a credible threat that if bad things happen, you would be able 

to close them down. Unfortunately, I think that the likelihood that 

those would work are really very low, because these banks are so 

big, and, when they fail—when they bet it all on black–22, and the 

bet goes bad, you can’t just say, ‘‘Well, you’re out of luck. Go away.’’ 

Because the damage—the collateral damage—I think the issue 

Charles raised—of small business is very important. That’s a macroeconomic effect. That’s the effect of a massive recession, primarily. That’s why they’re not going to be borrowing money, that’s 

not why they’re not going to come back. That is going to hurt the 

bank’s bottom line. But, that’s because the massive banks were 

able to get themselves into the position where some failed, and the 

ones who survived now have more market share, they have some 

more pricing power, which is part of the profitability, but they’re 

also taking a lot more risk. Even the standard VaR models, which 


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are deeply flawed, show risk levels in the big banks back to the levels of 2005, perhaps 2006. 

Chair WARREN. So, if I’m understanding you correctly, you’re 

saying that the advantage to breaking up the big banks is, we end 

up with more banks that can fail, because we let them fail, but 

more banks, then, that can figure out their profitable models and 

go forward. Is that—— 

Dr. JOHNSON. Absolutely. 

Chair WARREN. Is that the consequence of—— 

Dr. JOHNSON. If you—— 

Chair WARREN [continuing]. Breaking them up? 

Dr. JOHNSON [continuing]. If you try to run capitalism in which 

some people have a ‘‘Get out of jail free’’ card or a no-bankruptcy 

exemption, it goes badly. You cannot run a market-based system on 

that. And I think there’s broad agreement across the political spectrum. The question is how to implement that. My view is, you’ve 

got to keep it simple. And ‘‘simple’’ means more banks, financial institutions the size of CIT group, which was turned down for a second bailout this year, rightly, and which is going through bankruptcy, and that’s a good thing, and that’s not causing massive financial distress in the United States or around the world—you 

need more banks the CIT Group size, 80 billion—eight-zero—fewer 

of the Goldman Sachs size, 800 billion or going up to a trillion. 

Chair WARREN. Dr. Zandi, I think, has been cut out of the conversation. I want to be sure he gets a chance. 

Dr. ZANDI. Thank you. 

Taking a less ambitious approach than breaking up the big 

banks, maybe there are a few things you could influence that 

would have an impact on your exit strategy. 

And, in my view, the exit strategy becomes much easier if the 

economy stabilizes; again, if unemployment stops rising and house 

prices stop falling. And there are three things you could influence 

that would have an impact on that: 

First is, you could have an impact on small business lending. 

And I do think that’s very important to job growth. I agree with 

Dr. Calomiris—that they’re not getting credit, and that’s a problem. 

Second, the housing—the foreclosure mitigation, that’s not working well. And the foreclosure mitigation plan should be adjusted. 

And TARP money can be used for that, because a lot of the TARP 

money that’s been allocated to the current mitigation plan will not 

be used, because you’re going to get takeup. And there are things 

you could do to make that measurably better, and that would help 

in stemming the house price declines. 

And then, third, something we haven’t talked about—and I think 

this is really important to lending, more so than capital for these 

large institutions—one of the key reasons why the credit card lenders aren’t extending credit is, the structured finance market is not 

working well. It’s improved. Those spreads have come in. But, 

there is no bond issuance. 

The amount of structured finance issuance this year is less than 

$200 billion for the entire year. And I’m not suggesting we want 

to go back to 2 trillion a year, because that was obviously dysfunctional, as well, it represented a lot of bad lending. But, there’s got 


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to be a happy medium, because those institutions need to be able 

to use the structured finance market to clear off their balance 

sheet. And so, there are things that you could do with the TARP 

money to make that work better. 

So, those are—it’s not as ambitious as breaking up the big banks, 

but maybe these are some things you can do to make the system 

work a little bit better and get to the exit strategy quicker. 

Chair WARREN. That’s very useful, thank you. 

I’m way over my time. 

Panelist Atkins. 

Mr. ATKINS. Thank you, Madam Chairman. 

Well, I want to continue, actually, on this, because I do think 

that this ties into what we’re going to look forward to in the future, 

which I think is—TARP, for all its warts and what’s happened, you 

know, we’re stuck with. The Treasury Secretary has to make a determination by the end of the year as to whether he’s going to extend the program. So, the real question is, you know, If he does, 

you know, what should TARP look like next year? And, you know, 

when we talk about, you know, the whole structured finance market and securitization, that had a great benefit of lowering costs for 

everybody—for consumers—and helping the whole machine work 

the way it did up until last year. And it has—at least my perception is—like yours, it has ground to a halt. And then you have— 

Dr. Calomiris said you have government intervention, because you, 

unfortunately, do have deadbeats out there who don’t pay their 

credit card bills. And so, of course, that raises the costs for all the 

good folks, who do pay their credit card bills. And then you have 

government intervention on top that then, by preventing companies 

to differentiate, raises the costs for everybody. 

So, how do—how can—you know, if the Secretary does decide to 

extend this program, how can TARP work to help ameliorate this 

situation? And then, with the view that Mr. Pollock said, that 

TARP is constrained by the statute, literally, to buy assets. Treasury has veered away from that, I think, you know, very problematically, if that were to be challenged in court. So, I just want to solicit your opinions as to, you know, if they were to buy assets, how 

could this move forward? 

Dr. CALOMIRIS. Well, I would tell you that if I were king, here’s 

the—here are the things I would do. 

Number one, I agree with Alex that we should just bring TARP 

to an end, in terms of new funds. But, I—that doesn’t mean that 

we can’t address these two very important problems of consumer 

credit and small business credit. We already have something called 

the Small Business Administration. We have a lot of interesting vehicles there. I would caution you that I have a study that shows 

a lot of moral hazard in Small Business Administration lending. It 

needs to be reformed, but it could be expanded, potentially. But, 

that shouldn’t be done as part of TARP. 

In terms of what we can do for consumer credit, and for credit 

more generally, and for securitization problems, which Mark mentioned, I think we really have to get serious about not letting accounting standards, run wild, destroy the financial system. FAS 

166/167, it’s happening January 1st. It’s going to make a big difference. A bunch of accountants, sitting off in their monastery, 


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have decided that they’re going to destroy consumer credit and 

other credit markets through an excessive burden on securitization 

capital requirements. It’s—I’m not saying that they’re doing it 

mean-spiritedly, I’m just saying I think they’re wrong. And the 

problem is, no one elected them. I’m not saying we should politicize 

all of our accounting. I don’t know the answer. But, I know one 

thing—just as they were very unhelpful—FAS was very unhelpful 

in its mark-to-market accounting during the crisis, FAS 166 is 

going to be very unhelpful getting out of it. So, we need an answer 

for that. 

And I think, also, finally reforming the credit card bill to get rid 

of the limitation on increasing interest rates on outstanding balances—just that one thing, which I think was an unwitting part of 

the bill; I don’t think they intended to mortgagize credit cards— 

but, I think that that kind of reform could make a huge difference. 

So, I would say, shut down TARP, reform and expand SBA, potentially, get rid of this FAS 166/167 bomb that’s about to go off, 

and think about some slight tweaks to the credit card bill. 

Mr. POLLOCK. I agree on the problems with the Financial Accounting Standards Board, but I don’t see what TARP can do about 

it. The only investment of TARP, in terms of acquiring an asset, 

that occurs to me that could be helpful, going forward, is the one 

I mentioned: Namely, recapitalizing the FDIC. Other than that, I 

don’t see what it could do; and therefore, I think cessation of the 

new activities on December 31st makes sense. 

But TARP will last a long time. As I said before, we’re looking 

at a several-year period where these investments will exist. I think 

the profitability coming from banks isn’t what we talked about at 

all, it’s something very basic; it’s the yields on the fundamental assets minus extremely low cost of carry, which generates high operating profits. I said, you work through the asset writeoffs while 

these profits continue, and they ultimately succeed, if all goes 

right, in paying off the preferred stock investments, and then we 

rack up TARP and find out if we had an overall loss or profit, by 

business line. 

Mr. ATKINS. Dr. Baker. 

Dr. BAKER. Yeah, a couple of points. I want to get back to a point 

that Mark had raised about the issue of falling house prices. I 

think some of our policies—and part of this is TARP, part of this 

is other policies we’ve pursued—have been designed quite explicitly 

to keep house prices from falling. And I think it’s very problematic, 

because we’ve had a bubble—we had a housing bubble. We still 

have a bubble in many areas; it’s partly deflated. Other areas, it’s 

completely deflated. I don’t think we have interest, in those areas 

where it’s partly deflated, in trying to sustain that bubble for 

longer. In effect, it’s a form of forbearance. And we’ve had a number of policies. The Fed’s policy of buying mortgage-backed securities. The FHA, I think, has gone overboard; that’s why it’s in trouble. It’s made more loans than—in contexts where it should not 

have; it did not use good judgment in, basically, replacing the 

subprime market. And finally, we’ve also had the housing tax credit, which was certainly—a first-time-buyer tax credit, which was a 

boost to the market, at least thus far. 


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I don’t think we have an interest in trying to prevent house 

prices from adjusting. We may want to help homeowners. I’ve 

talked about ways. There’s other ways we could do it: bankruptcy 

reform, right to rent. But, I don’t think we have an interest in 

propping up house prices. 

The other point, again—just in terms of the unwinding—I’d just 

get back to what Simon had said—we have, basically, two alternative scenarios that we all sort of recognize, with the large institutions. One is to trust the regulators to do a good job. And I’m not 

questioning their competence, but it’s just—it’s a difficult thing. 

We’ve seen they did not do that. The alternative is to go the route 

he had suggested, of looking to break them up. Those are really the 

two options. Unfortunately, I think that Congress, with their reform measures, looks to be taking the route that, ‘‘We’ll do a better 

job next time.’’ And we could hope that’s true; I’m just not confident that it’ll turn out that way. 

Mr. ATKINS. Dr.—— 

Dr. JOHNSON. I wouldn’t spend the TARP money that’s available 

on any of these initiatives we’re discussing. You should—you 

should extend TARP for 1 year; you should save the money in case 

you need it. We are not out of the woods yet. I think we’re all 

agreeing there are serious risks. We have different versions of 

those risks. Those all could be large. Those all could impact financial institution. If you—either the money is committed or it’s no— 

you’re no longer authorized to spend it. You’ll have to go back to 

Congress again for another conversation. That, I think, would not 

be an easy conversation. And that, you know, you’re going to 

have—exacerbate the issues of turmoil. The world economy is not 

settled. Okay? The U.S. economy is certainly not settled back onto 

a sustainable recovery path. If you’ve still got some—you still have 

over 200 billion—$250 billion available in TARP, I would keep that, 

very carefully, and use it only when you absolutely need it. 

Mr. ATKINS. Yeah. The counter is that it does weigh down on the 

deficit, and, you know, obviously we have problems in that area, as 

well. But—good. 

Chair WARREN. Mr. Silvers. 

Mr. SILVERS. I have a couple of, sort of, more specific questions 

that the testimony has brought forward. 

I would just note, first, that having TARP funds in—TARP is accounted for, as a deficit matter, based on the losses. It’s not a $700- 

billion impact on the deficit. It was originally budgeted by CBO at 

250; it’s now at 150. I don’t have an independent opinion about 

whether those numbers are right, but that’s how it works. And so, 

I believe that Dr. Johnson’s comment has almost—has no deficit 

impact, per se. 

Now, let me come to my questions. Dr. Calomiris, you said something very interesting that I want to follow up on. You know, this 

Panel issued a report on guarantees. I guess it was our last report? 

Chair WARREN. Uh-huh. 

Mr. SILVERS. On guarantees. And we did the best we could at 

trying to figure out what the economic impact of the Citi guarantee 

was. We had a lot of trouble doing it. Perhaps apropos of Mr. Pollock’s comments about disclosure and accounting and so forth, we 


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just had a lot of trouble trying to figure out what it was—what its 

value was and how it moved. 

You made a comment that made me think that you might have 

an opinion as to what the ultimate net cost of the Citi guarantees 

might be, if any, to the Federal Government. 

Dr. CALOMIRIS. I could have an opinion about that, but I haven’t 

done that calculation. 

Mr. SILVERS. Well, let’s take the biggest—let’s take it at the 

crudest level. Do you think, based on some of the observations you 

made a moment or two ago about Citi’s portfolio—do you think that 

that guarantee, given that there is a fee involved—we’ve been paid 

for it in preferred stock and the like—do you think that guarantee 

is likely to end up being a positive or negative? Going to make 

money, or lose? 

Dr. CALOMIRIS. I—you know, I wouldn’t want to give you an 

opinion without—I’m willing to look at it, actually, and could—— 

Mr. SILVERS. I would very much—— 

Dr. CALOMIRIS [continuing]. Give you an opinion afterwards. 

Mr. SILVERS. I would very much appreciate it. 

Dr. CALOMIRIS. But, I don’t want to—— 

Mr. SILVERS. That’s fair enough. I’m ambushing you a little bit. 

I’d very much appreciate your opinion—— 

Dr. CALOMIRIS. Okay. 

Mr. SILVERS [continuing]. Afterwards. 

Mr. Pollock, you seem to have—— 

Mr. POLLOCK. I can’t speak to the specifics of it, but, generically, 

with this kind of a deal, you make money in most scenarios, and 

in the terrible scenarios, you lose a lot of money. 

[Laughter.] 

Mr. SILVERS. I see. Well, that’s a—certainly a—I think that’s a 

safe comment—— 

Chair WARREN. Safe prediction. 

Mr. SILVERS [continuing]. Safe prediction to make. 

Secondly, there is some type of dialogue around TARP that talks 

about one of the successes of TARP being the rise in our equity 

market prices. I think other people seem to be concerned that— 

about, sort of more broadly, the comment, Dean, you made, that we 

may—be going through sort of mini-asset bubbles in different markets, perhaps in housing, perhaps in equities. Dr. Johnson, you 

talked about—you talked, in your written testimony, about the influence of, essentially, what you called a ‘‘carry trade’’ on the equities markets, which is an analysis that, I believe, Nouriel Roubini 

has also made. There are some settings in which everyone knows 

what that means, and so forth; but, we’re in Washington, and not 

everybody does. Can you explain what you mean by that, and what 

you think the relationship between the state of the banking system 

we’ve just been talking about and the equities markets is? 

Dr. JOHNSON. Certainly. I think the statement—or—as used—or 

the terms most commonly used in financial markets today, is not 

particularly about the equity market; it’s much more about emerging markets. So, the question of—Where’s the next bubble? Right? 

Where do you have the overexuberance? And I think many people 

take the view, and I take the view, that we’re back to a pattern 

we’ve seen before, from the ‘70s, ‘80s, and ‘90s, which is—the fronVerDate Nov 24 2008 04:08 Mar 20, 2010 Jkt 054354 PO 00000 Frm 00100 Fmt 6633 Sfmt 6602 E:\HR\OC\A354.XXX A354

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tier of reckless lending, where borrowers get carried away is not actually in the United States, it’s in—somewhere in—it’s Asia, it’s 

around China, or it’s Brazil, or it’s Russia. Unfortunately, it’s funded by institutions that are based in the United States, so that creates financial system risk, which we’ve not been good at controlling 

in the past. 

I think the Federal Reserve made it very clear—and this is facilitated—I mean, this—that’s a general pattern—for example, recycling petrol dollars, I think, given the likely trajectory of oil prices, 

will again run through New York—from Middle East, through New 

York, out to Asia, for example. 

Very low interest rates in the U.S., which makes sense from a 

domestic U.S. point of view, given high persistent unemployment— 

will only facilitate this and make the U.S. more attractive as a 

funding currency. Some of that happens offshore, some of that you 

will see also coming directly as borrowing in the United States. 

Whether or not it—you see it in the balance of payments depends 

on whether people are willing to take the foreign exchange risk, 

which is an interesting question. But, this is to carry cheap interest 

rates. 

If you remember, the big discussion about low interest rates in 

the runup to—the role in the subprime crisis; people talked about 

the global savings glut. Not exactly a global savings glut, necessarily, this time, but cheap funding costs, easy monetary policy 

would definitely do the same thing. 

So, what they do is, this feeds the exuberance, this encourages 

overborrowing, and this comes back to damage the global financial 

system. 

Mr. POLLOCK. I’m sure—— 

Mr. SILVERS. And can I just make sure that I—because your 

statement didn’t quite get to what my question asked. 

It—am I right in understanding what you say to mean, that because we have very low cost of funds in the United States, a lot 

of financial actors, both domestic and international, go to dollar-denominated markets to borrow. And some of that money that they 

borrow is being fed back into our equities markets. Is that the answer to my question? Or is there—if not, please—— 

Dr. JOHNSON. I don’t think it’s a—I don’t think the mechanism 

we’re discussing particularly affects the equity markets. I mean, 

this is—— 

Mr. SILVERS. You don’t. Okay. 

Dr. JOHNSON. It’s a—the—there is an equity-market effect. Obviously, this is the cyclical effect of Fed, loosening and presume to 

tighten, and equity prices are based on a market view—— 

Mr. SILVERS. Right. Of course. 

Dr. JOHNSON [continuing]. Of what that tightening path is. And 

as you revise that view, that affects equity prices. 

I think the big dynamic and the carry trade that people worry 

about is funded in dollars, going to take risk in emerging markets—— 

Mr. SILVERS. In emerging markets. 

Dr. JOHNSON [continuing]. Which, for example, Goldman Sachs 

does within its own balance sheet, does private equity investments 

in China, funded by very low cost of capital in the United States. 


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Dr. ZANDI. Yeah, I don’t—— 

Mr. SILVERS. Gotcha. Thank you. 

Dr. ZANDI [continuing]. Think anyone’s arguing that there’s a 

carry trade into U.S. equity. It’s carry trade—I borrow here, and 

I’m going overseas and buying assets in Asia. So, I don’t know 

that—— 

Mr. SILVERS. Well, I thought that Roubini argued that it was 

U.S., but perhaps I’m mistaken. 

Dr. CALOMIRIS. If I could comment quickly—— 

Chair WARREN. Thank you. 

Dr. CALOMIRIS [continuing]. Just on the equity runup. I mean, 

there has been dramatic runup since March, but it’s important to 

keep in mind there was a dramatic fall, you know, even after the 

TARP was passed, until March, you know, so we’re still looking at 

equity prices that are down roughly 30 percent from what their 

pre-recession peaks were. 

Chair WARREN. Okay. Thank you. 

Mr. POLLOCK. I agree with everything that Dr. Johnson said 

about the carry trade. There’s one thing we could add, which is 

that when people talk about a carry trade, they’re often talking 

about a cross-currency position—— 

Mr. SILVERS. Right. 

Mr. POLLOCK [continuing]. Where not only have you borrowed 

cheaply, but you are borrowed or you’re short a currency you expect 

to be falling, versus, usually, fixed income in some other currency. 

So, there are two aspects to it. One is the cheap interest rate, the 

other is the expectations of a falling dollar. 

Dr. CALOMIRIS. If I can just add quickly to that. So, you can also 

talk about—look, banks make their money, let’s say, in about six 

different ways. One of them is by just taking up bets that come in, 

99 percent of the time, profitable. Riding the yield curve is a form 

of a carry trade. It’s taking interest-rate risk. Should banks really 

be all about taking interest-rate risk? I’m not sure. But, that’s how 

they make a lot of their money. 

They also do carry trade in foreign exchange. There’s a wonderful 

paper—I think it’s very good—on the carry-trade puzzle. It turns 

out—like the equity-premium puzzle in finance, there’s a carrytrade puzzle—it turns out that the carry trade, using any kind of 

reasonable utility models of risk, is just excessively profitable. But, 

when you look at the states of the world in which you lose on the 

carry trade, they’re extreme states of the world, so that it’s not a 

sort of normal distribution. So, the key—— 

Mr. POLLOCK. Just like your Citibank position, Mr. Silvers. 

Dr. CALOMIRIS. Exactly. And so—well, this is Alex’s point, also, 

about how banks make money—so, the reason—I mean, banks do, 

and have traditionally, taken bets that, like carry-trade bets or 

riding the yield-curve bets, that are their bread-and-butter, which 

sometimes finance professors criticize them for. 

Chair WARREN. Thank you. 

[Laughter.] 

Chair WARREN. We’ll take that. 

So, I want to go back to a point you made, Dr. Johnson, just a 

minute ago. You started your testimony, both your oral testimony 

and your written testimony, talking about what needs to happen 


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after a crisis like this, and you put very strong emphasis on the 

need for financial reforms, going forward, and how, without that, 

we really will be caught in a ‘‘doom loop.’’ And you talk about the 

need for reform in banking practices. You have suggested the need 

to break up large financial institutions. And we have talked here 

about how to back out of government guarantees so these markets 

can start to function normally again. 

You also just said you think we need to keep TARP open; otherwise, there would be a very uncomfortable conversation with Congress the next time we face a crisis. 

So, this puts, to me, the question—and that is, the TARP is what 

keeps these large financial institutions comfortable and powerful, 

and they are, as we speak, lobbying Congress for a continuation of 

the status quo, in terms of the means by which they earn their 

profits and the guarantees that they enjoy. So, I’m a little confused 

about why you would want to keep TARP open and keep the notion 

of a larger guarantee to come if you make mistakes, at the same 

time that you’re advocating critical reforms that seem to be, at 

best, facing an uphill climb. 

Dr. JOHNSON. Well, it’s a good question. And, you know, I am 

emphasizing the need for these fundamental reforms, break them 

up. And, I think, in the context—if you had a smaller system, 

where banks could fail, and that was—that’s obviously what we 

don’t have—I would still be in favor of being able to provide systemic support, when needed. And I think that is best practice. 

That’s not to say you should have open-ended money available for 

these massive financial institutions. And just as a practical matter, 

if you are faced by—with a choice between collapse or rescue, if you 

get to that point, ever, because of some—something happened, you 

didn’t—you know, the system didn’t work as you designed, I would 

choose rescue, because collapse means a second Great Depression. 

Chair WARREN. Well, I understand that. But, what I’m really trying to push on is the other half of the question, and that is—I understand your point, that we need reforms, but evidently we have 

not pinned reforms to the receipt of TARP money. And so, we are 

in the position of having given away the money without having 

asked for anything in return. And I’m just concerned about what 

that means and why we would want to extend in that direction. 

Dr. Calomiris. 

Dr. CALOMIRIS. I’m more optimistic, apparently, than most of the 

people on the panel, about reform. And I want to just take a 

minute to tell you what I think is some good news, which is, I 

think, tomorrow, but maybe as late as Monday, the Pew Trust 

Task Force on Financial Reform, in which I am a member, is going 

to issue a report, which is going to be a bipartisan consensus of 

prominent economists and a couple of lawyers, on how we can solve 

a lot of these problems. And it may seem unlikely, but actually I 

think that some of the problems associated with ‘‘too big to fail,’’ 

especially, are solvable. They’re not easy to solve, but they are solvable. And I think we’ve got a pretty interesting approach to it. 

So, I’ll just leave it at that, except to say, that’s part of the reason, I think, we don’t need to keep this fund, this open-ended fund 

open, because I think, actually, we’ll have another approach which 

is better. 


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Chair WARREN. Dr. Baker. 

Dr. BAKER. Well, I really look forward to the report tomorrow. 

But, in terms of, whether we keep TARP open, I think that we 

had a lot of inaccurate information that was behind the original 

passage of TARP, and that resulted in us not putting conditions on 

it that should have been put on it. And from that perspective, I 

think it makes perfect sense to say, ‘‘Well, why not go back to the 

drawing board. And in the event we do end up in a bad situation’’—again, I—you know, we could say—and I’ve said many bad 

things about Congress, but the fact was, they generally do respond 

to a crisis, and hopefully, if we get into this situation again, we will 

put better conditions on it that will ensure that the banking system 

is reformed. So, again, maybe this will all become moot after tomorrow, but, if not, my view would be, start over with TARP. 

Chair WARREN. I’m going to try and ask just one very quick 

question, and then I will yield. And that is—Mr. Pollock, I read 

your testimony with great care, and listened to what you had to 

say in your oral remarks. You make the point about investment, 

which I fully understand. But, the statute also requires that TARP 

money be used to deal with foreclosure mitigation. It’s quite explicit that that is an intent and what Congress had in mind when 

it authorized the $700 billion. So, you’re saying that you think 

HAMP is not the right way to do it. Can you give us some idea of 

what you think would be the right approach? 

Mr. POLLOCK. Thank you, Madam Chairman. I think it’s a very 

important question. 

I read the sections of the statute, with some care, that deal with 

foreclosure mitigation. What they say is, ‘‘When TARP acquires the 

mortgages’’—in other words, it’s about an acquisition of a mortgage—then we don’t want you to act like a cold-hearted moneylender, we want you to carry out—— 

Chair WARREN. I didn’t read that part in the statute. 

[Laughter.] 

Mr. POLLOCK. Well, I’d just suggest we could take a look at the 

sections. It seems to me—I don’t give this as a legal opinion, but 

just as a reader of the statute—that it’s phrased in the context of 

the statute’s assumption that TARP was going to be in the business of acquiring mortgage securities and mortgage assets, and 

that when it did acquire these assets, then the statute was telling 

it, here’s how you have to act as an owner of these mortgages. We 

want you to look at a modification with an eye to maximizing the 

present value for the taxpayers and to dealing in a fair way with 

borrowers. 

Chair WARREN. So—I want to make sure I understand—so, it’s 

your view that TARP is not designed as it has unfolded, that TARP 

money should not be used to deal with mortgage foreclosures? 

Mr. POLLOCK. That’s correct. It’s my view that reading the plain 

language of the statute, you would conclude that, yes. 

Chair WARREN. Thank you. 

Dr. Zandi. 

Dr. ZANDI. I would disagree. I think it’s very important for TARP 

to focus on foreclosure mitigation. And I think the only way to do 

foreclosure mitigation that will be effective is to help incent principal write-down, that the current problems with the HAMP plan 


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is the fact that it’s lowering rates temporarily to get the monthly 

payment down, and not addressing the negative equity that many 

of these homeowners face. And moreover, that’s resulting in less 

takeup, because the servicers and owners know that the redefault 

rates are going to be too high, and therefore, they’re not HAMPing 

them. So, the only way this is going to become more effective—and, 

of course, there are many issues with that—moral hazard, adverse 

selection, fairness, a lot of issues—but, the only way to make it effective will be principal writedown. 

Chair WARREN. Dr. Calomiris. 

Mr. POLLOCK. May I just add one point on—— 

Chair WARREN. Let—— 

Mr. POLLOCK [continuing]. The statute. 

Chair WARREN. Let me give Dr.—— 

Mr. POLLOCK. If you will—— 

Chair WARREN [continuing]. Calomiris a chance. 

Mr. POLLOCK [continuing]. Come back to me. Thank you. 

Dr. JOHNSON. Could I just return to the question—sorry. What, 

did you call—I thought—— 

Chair WARREN. Sure. 

Dr. JOHNSON [continuing]. You called me. 

Chair WARREN. No, no, I was—let’s do it all. Mr. Pollock, go 

ahead. 

Mr. POLLOCK. I just wanted to add that I assume that there is, 

in the Treasury Department, an opinion of the general counsel of 

the Treasury Department covering this matter, which I would suggest that—— 

Mr. ATKINS. It’s not very good—— 

Mr. POLLOCK [continuing]. The Oversight—— 

Mr. ATKINS [continuing]. But, anyway—— 

Mr. POLLOCK [continuing]. Oversight Panel might wish to request. 

Chair WARREN. Thank you. 

Dr. Calomiris and then Dr. Johnson. You’ll get the final word. 

Dr. CALOMIRIS. My—yes. I don’t know about—I know that your 

charge has to do with TARP, and I haven’t read the statutory language carefully, and I don’t think it’s a TARP issue; I think it’s not 

which pocket of the government we take the 50 to 100 billion, or 

whatever we’re going to take; it’s how to design the thing. 

And I want to agree with Mark Zandi, that if you look at the— 

and I mentioned it before—the Mexican program for business and 

consumer debt in the 1990s, they went for several years in gridlock, and then they finally said, ‘‘Well, suppose that the government steps in and shares the cost with creditors of writing down 

the principal, but you have to do it within 6 months.’’ Everybody 

did it. 

Chair WARREN. Yes. 

Dr. CALOMIRIS. So, that was what Punto Final meant, meant, 

you know, final point, ‘‘You do it now, or you don’t do it.’’ And so, 

that’s been, I think, the essence of what’s been missing. 

And the nice thing about that writedown of principal is that it 

works to help marginal borrowers, but not hopeless cases, because 

creditors won’t do their 80 percent, or whatever it is, writedown on 

a hopeless case. But, if you’re a close case, it really works. 


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Now, there are other good ideas, but I think if you don’t start 

from some sort of concept of government sharing costs of principal 

writedown, you’re not going to get the job done. 

Chair WARREN. Thank you, Dr. Calomiris. 

And Dr. Johnson. 

Dr. JOHNSON. Just to challenge, a little bit, the premise of your 

question to me a few minutes ago, which is, if we end TARP, if it 

ends at the end of the year, does that end ‘‘too big to fail’’? I don’t 

think it affects it at all. I don’t think you would even see that in 

the pricing of Goldman Sachs debt right now, because I think the 

guarantee is this implicit guarantee, and it’s the understanding of 

what would happen in these rare scenarios that, you know, can 

ruin the world economy. So, that’s one thing. I think those are separate questions. 

Secondly, I’m very much in favor of being prepared. One of the 

big frustrations out of the IMF is the culture of ministers of finance 

who don’t want to talk about the bad things that can happen, and 

don’t want to have any money available, because somehow having 

the money available will cause the bad thing to happen. We don’t 

run the FDIC with zero capital. Right? If we had zero capital, 

maybe it would be more credible. 

Chair WARREN. Actually, we do. 

Mr. POLLOCK. We do, at the moment. 

[Laughter.] 

Dr. JOHNSON. Yes, right. And it’s not a good idea. You should be 

prepared. And being prepared means that you have money to use, 

there are clear conditions under which you use it. You war-game 

the scenarios in which you’re going to use it. You talk about that 

clearly with Congress. You’re prepared. This is Dean Baker’s very 

good point. You’re never going to be prepared if you wait for the 

crisis. Right? 

So, I don’t—I think that there’s a bit of a gap between those 

things, and I’m in favor of being prepared and ending the ‘‘too big 

to fail’’ problem, which is the most obvious. I’m sure that ending 

it will only buy us another if we could end it, it would only buy 

us 20 years of tranquility; the banks will be back, one way or another in ways we can’t now anticipate. But, unless you do that and 

address that directly, none of these other changes are going to 

make much difference. 

Chair WARREN. Dr. Johnson, I take your point, and we can now 

take this conversation to the next phase, which is the part of the 

conversation about resolution authority and how we create ways to 

terminate large financial institutions that have failed if they didn’t 

have adequate government support. 

But, you and I are going to have to continue that conversation 

on an airplane. Dr. Johnson and I both must leave, because we 

have to get back to classes. 

And so, do you still want to ask questions, Paul? You’re welcome—I can hand the gavel over. 

Mr. ATKINS. Well, having—you have, like, 2 minutes—— 

Chair WARREN. So—all right—so, with that, I’m going to say, we 

will hold the record open so that we can send additional questions 

for the record and so that you can make additional comments. We 

will send those to you. 


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I appreciate very much both of our panelists coming here, our 

staff who put together this hearing, and very much appreciate all 

five of you coming. It was a very thoughtful, very informative hearing, and we appreciate hearing from you. 

Thank you. 

This hearing is closed. 

[Whereupon, at 11:30 a.m., the hearing was adjourned.] 


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