U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

50–417 2010

S. HRG. 110–1015 

OVERSIGHT OF THE EMERGENCY ECONOMIC 

STABILIZATION ACT: EXAMINING FINANCIAL 

INSTITUTION USE OF FUNDING UNDER THE 

CAPITAL PURCHASE PROGRAM 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

ON 

THE FINANCIAL INSTITUTIONS USE OF FUNDING UNDER THE CAPITAL 

PURCHASE PROGRAM 

THURSDAY, NOVEMBER 13, 2008 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 


pwalker on DSK8KYBLC1PROD with HEARING
(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

BOB CORKER, Tennessee 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

AMY S. FRIEND, Chief Counsel 

JONATHAN MILLER, Professional Staff 

JENNIFER FOGEL-BUBLICK, Counsel 

DEAN V. SHAHINIAN, Counsel 

AARON D. KLEIN, Economist 

LYNSEY GRAHAM REA, Counsel 

JULIE Y. CHON, International Economic Policy Adviser 

DAVID STOOPLER, Professional Staff Member 

LAURA SWANSON, Professional Staff Member 

JAYME ROTH, Professional Staff Member 

DEBORAH KATZ, OCC Detailee 

DREW COLBERT, Legislative Assistant 

LISA FRUMIN, Legislative Assistant 

MARK POWDEN, Legislative Assistant 

NATHAN STEINWALD, Legislative Assistant 

DANIEL SCHNEIDERMAN, Legislative Assistant 

GREGG A. RICHARD, Republican Professional Staff Member 

JENNIFER C. GALLAGHER, Republican Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 


pwalker on DSK8KYBLC1PROD with HEARING
(III) 

C O N T E N T S 

THURSDAY, NOVEMBER 13, 2008 

Page 

Opening statement of Chairman Dodd .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Crapo ................................................................................................... 4 

Senator Johnson ............................................................................................... 6 

Senator Martinez .............................................................................................. 7 

Senator Casey ................................................................................................... 8 

Senator Brown .................................................................................................. 9 

Senator Schumer .............................................................................................. 10 

Senator Bayh .................................................................................................... 13 

WITNESSES 

Martin Eakes, Chief Executive Officer, Center for Responsible Lending ........... 14 

Prepared statement .......................................................................................... 59 

Barry L. Zubrow, Executive Vice President, Chief Risk Officer, JPMorgan 

Chase ..................................................................................................................... 16 

Prepared statement .......................................................................................... 76 

Response to written questions of: 

Senator Schumer ....................................................................................... 115 

Senator Casey ............................................................................................ 117 

Gregory Palm, Executive Vice President and General Counsel, The Goldman 

Sachs Group, Inc. ................................................................................................. 18 

Prepared statement .......................................................................................... 80 

Response to written questions of: 

Senator Schumer ....................................................................................... 129 

Senator Casey ............................................................................................ 129 

Susan M. Wachter, Worley Professor of Financial Management, Wharton 

School of Business, University of Pennsylvania ................................................ 21 

Prepared statement .......................................................................................... 86 

Response to written questions of: 

Senator Schumer ....................................................................................... 137 

Anne Finucane, Global Corporate Affairs Executive, Bank of America .............. 22 

Prepared statement .......................................................................................... 94 

Jon Campbell, Executive Vice President, Chief Executive Officer of the Minnesota Region, Wells Fargo Bank ....................................................................... 24 

Prepared statement .......................................................................................... 103 

Response to written questions of: 

Senator Schumer ....................................................................................... 138 

Senator Casey ............................................................................................ 140 

Nancy M. Zirkin, Executive Vice President, Leadership Conference on Civil 

Rights .................................................................................................................... 26 

Prepared statement .......................................................................................... 108 

Response to written questions of: 

Senator Schumer ....................................................................................... 142 


pwalker on DSK8KYBLC1PROD with HEARING

pwalker on DSK8KYBLC1PROD with HEARING
(1) 

OVERSIGHT OF THE EMERGENCY ECONOMIC 

STABILIZATION ACT: EXAMINING FINANCIAL INSTITUTION USE OF FUNDING 

UNDER THE CAPITAL PURCHASE PROGRAM 

THURSDAY, NOVEMBER 13, 2008 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 10:05 a.m., in room SD–538, Dirksen Senate Office Building, Senator Christopher J. Dodd (Chairman of the 

Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD 

Chairman DODD. The Committee will come to order. 

Let me thank our witnesses in advance of their participation in 

this morning’s hearing, and as is the normal practice, I will begin 

with a brief opening statement. I will then turn to—I believe Senator Crapo is going to be making an opening statement, and then 

to my colleagues who are here for any comments they may have 

as well on the subject matter of today’s hearing, or any other matter related to the issue before us. 

This hearing is the third hearing we have had in as many weeks 

on the oversight of the economic stabilization act that was adopted 

in the waning days of this Congress, and we did not have a hearing 

during the election week, but we have had oversight hearings every 

other week during that period of time on a variety of subject matters. And I fully recognized at the time that because of the election 

cycle, not all of my colleagues could be here for those hearings, but 

I appreciate very much those who were able to attend and participate, as well as the witnesses who came before us. 

So today is our fourth hearing, and we will continue, by the way, 

through the month of November, into December if necessary, to follow up. Obviously, this matter requires our ongoing attention, as 

all in this room certainly fully understand. And so I would just advise my colleagues to fully expect a very active Committee during 

these weeks, as well as, obviously, beginning in January, I presume 

even before the Inauguration on the 20th, to have an active period 

of time, whether it is confirmation hearings or continued oversight 

of the subject matter that is, of course, our financial situation in 

the country. 

Today’s hearing is entitled ‘‘Examining the Financial Institution’s Use of Funding under the Capital Purchase Program,’’ and 

so I welcome all who are here. Today the Committee continues its 


pwalker on DSK8KYBLC1PROD with HEARING
2 

oversight of the implementation of the Emergency Economic Stabilization Act of 2008, known as EESA. Three weeks ago, we heard 

from the administration witnesses about what steps they were taking to implement this important legislation. Today we hear from 

four of our largest firms that have received assistance pursuant to 

that law. We are also joined by three very distinguished witnesses 

who will share their views on the effectiveness of recent actions by 

lenders and regulators and on what additional steps would be appropriate in order to help stabilize and strengthen our economy. Forty-one days ago, President Bush signed into law the $700 billion EESA bill. Ten days later, on October 13th, the Secretary of 

the Treasury announced that nine of the largest financial institutions in our Nation, including the four who are with us today, 

would receive a total of $125 billion of EESA funds in the form of 

direct equity investments by the Treasury Department. 

These investments of taxpayer dollars are not the only taxpayerbacked benefits that have been made available to these and other 

financial institutions. On the contrary, they amount to just a fraction of the approximately $5 trillion taxpayer dollars that have 

been put at risk in recent weeks and months for the benefit of our 

Nation’s financial institutions. And I want to enumerate those because it is the subject matter of the hearing today to understand 

what the expectation is coming back as a result of those kinds of 

commitments. 

Those $5 trillion have been committed in several forms, and let 

me enumerate them for you: one, the guarantee of all non-interestbearing deposit accounts at federally insured banks and thrifts; the 

increase in deposit insurance for interest-bearing accounts to 

$250,000 per account; the guarantee of senior unsecured bank debt 

for a period of 3 years, which financial institutions may opt out of; 

the decision to place Fannie Mae and Freddie Mac, whose mortgage 

financing is used by virtually every home lender in the country, 

into conservatorship and provide them with a $200 billion Federal 

backstop; the guarantee of hundreds of billions of dollars in money 

market funds; the decision by the Treasury to reverse over two decades of tax law to allow companies, including financial institutions 

and banks, to write off their taxes the losses of companies that 

they acquire; the guarantee of major segments of the commercial 

paper market; and, last, the creation by the Federal Reserve of numerous facilities and special purpose vehicles for bank holding companies, primary dealers, and commercial firms so that they can 

find sources of reliable, affordable financing for their business activities. The Fed alone has committed $1 trillion in tax dollars so 

far to the recovery effort. 

By any measure, these actions amount to an extraordinary commitment of public resources. On some level, all of us, including 

members of the public, expect that this extraordinary commitment 

befits the extraordinary financial crisis now facing our Nation. It 

is an unprecedented sum for these unprecedented economic times. 

It is no secret that some who have received funds under EESA, 

including some of the institutions represented here this morning, 

did not ask for this funding. Nevertheless, they accepted it. Indeed, 

given the irrationality of the markets that seemed to target and 

take down one renowned firm after another, these public investVerDate Nov 24 2008 21:13 Apr 01, 2010 Jkt 050417 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 E:\HR\OC\A417.XXX A417

pwalker on DSK8KYBLC1PROD with HEARING
3 

ments serve as a seal of approval. That explains why so many 

other firms are quickly lining up for their capital injections. 

Given that fact, it is reasonable, I think, for us to ask, now that 

they have the money that they have received, what are they going 

to do with these resources. What is their responsibility to the citizens of our country who are making enormous sacrifices to support 

the financial sector and the economy as a whole? The acceptance 

of public funding carries with it a public obligation, in my view. 

One cannot benefit from taxpayer support in all of its many forms 

and assume that one has no duty to serve that same taxpayer. The 

people of this great country of ours are generous and understanding, but they are entitled, in my view, to expect that those 

who benefit from their sacrifices will act with appropriate restraints and purpose. In my view, lenders who enjoy benefits conferred by taxpayers owe those same taxpayers consideration that 

includes the following: 

First, that they preserve homeownership. This Committee has 

said this over and over and over again, beginning with the very 

first hearing almost 2 years ago, over and over again. In fact, one 

of our witnesses here today was a witness 2 years ago before this 

Committee and predicted some 2 million foreclosures. It now seems 

quaint, that number. And yet at the time, it was suggested that 

somehow he was exaggerating and engaging in hyperbole. We now 

know the numbers this morning indicate how bad that situation is, 

and I am going to continue on this. It is still confounding to me 

why the Secretary of the Treasury and others refuse to understand 

this is the heart of the problem. And until we address this, this 

problem is not going to go away. 

So the first issue is preservation of homeownership. The foreclosure crisis is the root cause of the larger financial crisis, and the 

root of the foreclosure crisis, of course, was bad lending practices 

in which many of the well-known lending institutions engaged. 

Until we solve the foreclosure problem, we will not have any hope 

of solving the larger economic issues. 

Now, I appreciate the efforts that numerous lenders have started 

to make in this area, including some who are here today, and I appreciate that very much. But more, much more, must be done on 

a lender-by-lender as well as on an industry-wide basis to address 

the foreclosure crisis. Even lenders who have modified a relatively 

large number of loans are doing so in a manner whereby many of 

those loans default or redefault. That does not seem to be good for 

anyone, borrowers or lenders. Now is the time to utilize Hope for 

Homeowners and other initiatives designed to truly preserve homeownership and stabilize the economy. 

Second, lenders who receive public funds should use those funds 

to lend. Many are failing to do that. CEOs have been directly 

quoted as saying they intend to use public dollars to acquire other 

financial firms and widen their capital cushion. Let me say as 

clearly as I can this morning, hoarding capital and acquiring 

healthy banks are not, I repeat not, reasons why Congress authorized $700 billion in emergency funding. The core purpose of this 

law and the purpose of virtually every other action taken during 

this crisis is to get lenders back into the business of lending. Credit 


pwalker on DSK8KYBLC1PROD with HEARING
4 

is the lifeblood of the economy, and it is absolutely essential to 

businesses and consumers. 

Lenders have a duty to use these funds, in my view, to make affordable loans to creditworthy borrowers on reasonable terms. If 

they do not, then in my view they are acting outside the clear intent of the statute and should reform their actions immediately. 

Third, and last, lenders who are eligible for EESA funding and 

for other items on the smorgasbord of Federal assistance to financial firms would do well to examine their executive compensation 

policies. EESA sets forth clear, if modest, I might add, restrictions 

on executive compensation for companies that receive financial assistance under this act. I would suggest that these restrictions 

serve as a beginning, not an end, to the restraint firms should 

show in compensating their most highly paid employees. 

Our Nation clearly is in a crisis. We all know this. We are at war 

in two distance countries. Our financial markets remain uncomfortably close to the precipice of collapse. Working Americans have 

been forced to cut back in their personal lives, even as they have 

been asked to shoulder the enormous burden of propping up the financial sector. At this time of austerity and apprehension, it would 

be regrettable if some carried on as if they do not owe a duty of 

restraint and modesty to those countless Americans whose sacrifice 

helps make your viability and prosperity possible of national economic peril. 

For those tempted to conduct business as usual with respect to 

their compensation policies, I would simply ask: Where would your 

company and your industry be today without taxpayer-backed deposit insurance, without taxpayer-backed guarantees of your bank 

debt, without taxpayer-backed special lending facilities at the Federal Reserve, and without all of the other special benefits that your 

industry is receiving courtesy of the American taxpayer? 

If you believe that you would be no worse off than you are today, 

then I invite you to return to the Treasury the billions of dollars 

in taxpayer investments, guarantees, and discounts that you currently receive. And I wish you well as you try to make it on your 

own. Until that happens, I think I speak for many Members of this 

Committee and the Senate in saying that we want to see more 

progress, and your friends in the financial sector, more progress in 

foreclosure mitigation and affordable lending and in curbing excessive compensation. And if that progress is not forthcoming, then we 

are prepared to legislate—now if possible, but next year if necessary. 

With that, let me turn to Senator Crapo for any opening comments he may want to make. 

STATEMENT OF SENATOR MIKE CRAPO 

Senator CRAPO. Thank you very much, Mr. Chairman, and, 

again, I appreciate the attention you have given to the need for 

strong and continuous oversight by this Committee after now seeing the extreme and serious repercussions throughout every aspect 

of our economy as a result of the credit crisis. 

According to one study, for every dollar of net losses on loans and 

securities, there is a multiplier of 10 in the reduction of credit. If 

we use the most recent number of $1 trillion in writedowns and 


pwalker on DSK8KYBLC1PROD with HEARING
5 

credit losses and take into consideration the fact that the banks 

have raised $350 billion in new capital, there would be a $650 billion net loss and, using that formula, a $6.5 trillion loss in credit 

available in the market. I am not sure whether these are the right 

numbers or whether we actually know what they are or what the 

deleveraging is. But it is clear that we are facing a significant credit loss, and it has the potential to become even worse. 

Secretary Paulson’s announcement that Treasury is not planning 

to buy toxic assets and that there are more effective ways to use 

the taxpayer dollars that have been provided provides a perfect opportunity to assess the results of the rescue package and to consider other directional changes. 

As you know, Mr. Chairman, I was not one of those who supported the notion of purchasing these toxic assets and have been 

very concerned that not only was the taxpayer not adequately protected, but that Treasury’s proposal to buy toxic assets created an 

incentive for investors to stay on the sidelines and watch what the 

Government would do to then step in at a later date and either buy 

or purchase or finance purchases from the Government at a discount. 

I am very interested in what ways our witnesses believe these 

taxpayer dollars should be used and in what direction we should 

go. I have always believed that the direct utilization of our resources to increase liquidity with specific actions was a more appropriate direction that we should take, and I am hopeful to hear the 

witnesses’ advice on those matters as well. 

In addition, Mr. Chairman, I hope that we can get into a strong 

discussion about some of the broad regulatory, structural reforms 

that we need to consider. Again, as you know, I have strongly argued for regulatory reform of our financial institutions, and this is 

an opportunity now for us to evaluate just exactly what is the regulatory structure our Nation should have. 

This week, the head of the CFTC said that he believes the 

United States should scrap the current outdated regulatory framework in favor of an objectives-based regulatory system consisting of 

three primary authorities: a new systemic risk regulator, a new 

market integrity regulator, and a new investor protection regulator. The risk regulator would police the financial system for hazards that could ratchet across companies to have broad economic 

consequences. The market integrity regulator would oversee safety 

and soundness of exchanges and the key financial institutions, effectively acting as a replacement for existing bank regulators and 

the SEC’s function of regulating brokerages. The investor protection regulator would protect investors and business conduct across 

all firms. 

This is a similar idea to the outline provided in March by Secretary Henry Paulson of the Treasury, and I for one believe we 

should evaluate these kinds of proposals. I hope we also evaluate 

the potential for a single regulator, as has been done in other parts 

of the world where we have seen some significant effectiveness. But 

whatever our new regulatory structure is, I think it is important 

that we move from the outdated regulatory structure that we have 

now into one that still protects a strong, viable market, but allows 

for the consumer protections and the other protections against the 


pwalker on DSK8KYBLC1PROD with HEARING
6 

systemic risks that we are seeing today that the Chairman has described. And I look forward to working with you closely as we 

evaluate this important part of our regulatory system. 

Thank you, Mr. Chairman. 

Chairman DODD. I thank you, Senator, very much. 

Let me just say to you very quickly here, it is my intent as 

Chairman of the Committee that we are going to examine thoroughly the whole issue of modernization of financial regulations. 

And these suggestions you have made this morning, among others, 

will certainly be a part of the Committee’s deliberation. It is maybe 

the most important issue for us in the long term for this Committee to address and make recommendations to the full Senate. 

Senator CRAPO. Thank you, Mr. Chairman. As we do that, we 

have got to be sure we get it right, and I look forward to working 

with you. 

Chairman DODD. Senator Johnson. Congratulations, by the way. 

Welcome back. 

STATEMENT OF SENATOR TIM JOHNSON 

Senator JOHNSON. Thank you, Mr. Chairman, for holding this 

hearing today. 

Since the passage of the bailout, which I voted against, this Committee has talked with the regulators regarding the implementation of the $700 billion package. While there are clearly some concerns about implementation, it is moving forward. I think it is 

equally important that this Committee talk with the institutions 

that are receiving this money, and I thank the witnesses for being 

here today. 

I have been concerned in past weeks with reports of continued 

executive compensation, expensive trips, and other benefits for 

CEOs of some companies receiving Government help, and reports 

that over one-half of Capital Purchase Program funds will be used 

to pay investor dividends. In a business environment where accountability has clearly been lacking and contributed to our current 

economic situation, I want assurances from financial organizations 

using Treasury funds that they will not misuse the taxpayers’ 

money and that there will be punitive actions by Members and regulators if funds are misused. 

I have a problem with the funds being used for executive compensation and dividends. Both of these should be rewards for a job 

well done, and that is currently not the case for many in this industry. 

The intent of the bailout was to stabilize troubled financial institutions and help those businesses and individuals on Main Street 

affected by the credit freeze—a freeze resulting from poor decisions 

in the subprime mortgage market. Those making the decisions on 

how to spend the $700 billion and those receiving the funds must 

remember this intended use. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator. 

Senator Martinez. 


pwalker on DSK8KYBLC1PROD with HEARING
7 

STATEMENT OF SENATOR MEL MARTINEZ 

Senator MARTINEZ. Mr. Chairman, thank you very much for calling this timely hearing, and thank you also for your very passionate remarks, and I tend to agree with much of what you had 

to say. 

Let me begin by just saying that over the last several days I 

have had the opportunity to travel around the State of Florida, and 

the news on the ground is really not good. Talking to bankers, real 

estate developers, and others in the home industry, it is clear to 

me that until we change the dynamics of what is occurring today 

where foreclosures continue to pile up, where we continue to see 

banks—and I am talking now about local banks, I am talking about 

community banks, I am talking about Main Street banks that are 

being told by regulators that even though they have performing 

loans that are on their books, because they are real estate loans, 

perhaps they should call them in. And all of a sudden we have now 

builders that are in the toughest of times but able to maintain that 

business going and keep people on the job, being told that their 

lines of credit are being canceled or not extended because the 

banks simply are being squeezed by regulators. 

This is a real problem. It also relates to the problem that they 

are facing at the level of not also being sure what is going to occur 

with TARP. You know, one set of rules was first put out. They were 

going to try to work under that set of rules, and now changes have 

been made to how the Treasury is handling the whole TARP matter. I think some clear guidelines so that bankers and others in the 

lending business know exactly what the rules of the game are 

going to be are essential, and I think the sooner we do that, the 

better that it is going to be. 

Florida has the third highest foreclosure rate in the Nation, and 

it is clear to me that Florida’s entire economy—and I think the Nation’s—is impacted by the homeownership crisis. And in my view, 

until we stem the tide of foreclosures, until we begin to find effective ways of—and I commend some of the banks that are here 

today for what they are doing. Some of them have been at some 

events that we have tried to sponsor to help families stay in their 

homes. To keep those loans as performing loans and active loans, 

as opposed to foreclosures, is something I think we need to work 

toward. 

Until we get to the bottom of this, until we get to the foreclosure 

crisis, I do not think any of these other problems are going to ameliorate. I think this crisis began with homeownership problems, 

and I think it is going to end when we get a handle on that side 

of the equation. And I believe that your comments are precisely on 

point. I think we need to ask that as these infusions of capital are 

being made to the large financial banks, that capital then move 

downstream and is out there to help local businesses who cannot 

get credit, to help borrowers who would buy a house if they could 

just get a loan, and maybe not with 20 percent down but with 

something different than that. 

The bottom line is that until we turn the tide of where we are 

today in terms of the housing crisis and the foreclosure crisis, I believe that our entire economy continues to be at risk. And I look 

forward to hearing the testimony from the witnesses today. 


pwalker on DSK8KYBLC1PROD with HEARING
8 

I very much support the efforts by FDIC Chairman Sheila Bair 

to put a more aggressive approach to loan modifications. I think 

she is on the right track, and I believe that it is time that we get 

this done and we get aggressive about it. We have done a number 

of things, the administration has done a number of things, all well 

intended and, I think, designed to do some good to the problem. 

But they have all been timid and they have been late. I think we 

need to get aggressive and get ahead of the problem once and for 

all. 

You are right. We heard a couple of years ago about 2 million 

foreclosures, and we wish that that was the end of the story. And 

if we do not get ahead of this, if downward spiraling prices of 

homes does not get stemmed, if we don’t get a floor on the housing 

economy, I think we are going to see this problem only continue to 

escalate. 

Thank you. 

Chairman DODD. Thank you for that, and, of course, the news 

this morning is, I think, 9,128 foreclosures on average per day in 

the month of October, up 5 percent from the month of September 

and up 25 percent from a year ago. So the problems persist. 

Senator Casey. 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. Mr. Chairman, thank you very much, again, for 

calling this hearing and keeping a steady vigilance of this problem. 

I just have a very short statement. 

I think that the witnesses here today know as well as anyone in 

this room knows, anyone in the country would know, that until we 

get serious about the foreclosure problem, we are not going to be 

able to tackle this, and no financial system or no financial institution is going to be in good shape until we do that. 

Unfortunately, the Treasury Department does not seem to have 

the same urgency with regard to preventing foreclosures and helping homeowners as it had to get the legislation passed and to help 

financial institutions. Of course, that is my opinion, but I think 

there is a broad consensus that they are not moving with the same 

intensity that they moved to get the legislation passed, the emergency economic stabilization legislation passed in October. 

This foreclosure problem is an ever bleeding wound on our economy, and until we get serious about it, we are not going to rescue 

our financial system and, therefore, stabilize our economy more 

broadly. 

I was just looking at the numbers today from across the country, 

but just in terms of Pennsylvania, the State that I represent, which 

is not in the top ten, fortunately for us, still, in October, the fifth 

straight month where Pennsylvania saw that more than 4,000 foreclosures filings, the largest—I should say the longest such stretch 

since at least 2005. 

So we have got much work to do on this issue, and I hope that 

the Treasury Department moves with much greater speed than 

they have demonstrated so far when it comes to preventing foreclosures. And that is why I think this hearing and so many like it 

are so important, Mr. Chairman. 

Thank you very much. 


pwalker on DSK8KYBLC1PROD with HEARING
9 

Chairman DODD. Thank you very much, Senator. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman, for calling this morning’s hearing and those hearings that have preceded it. Thank you 

for all the work you have done in the last several weeks with oversight and with what we need to do, discussing what we need to do 

in the future. 

I want to thank our witnesses. I commend the banks that have 

recently announced major efforts to modify loans in a broad and 

meaningful fashion. I appreciate the efforts of those on the panel 

who are advocating on behalf of our Nation’s homeowners. Thank 

you for that. 

It has been a month and a half since Treasury Secretary Paulson 

and Federal Reserve Chairman Bernanke and their colleagues 

came before this Committee to ask for the authority to commit 

$700 billion for stabilizing our economy. Congress responded quickly to provide that authority, as we know, but as Secretary Paulson 

recognized in his testimony then, such an extraordinary grant of 

authority must be accompanied by oversight and by transparency. 

Mr. Chairman, you were accomplishing the former, the oversight. 

I am not convinced we have achieved the latter. Almost 3 weeks 

ago, the people of northeast Ohio learned that National City Bank, 

which had been in business since 1845, would be purchased by 

PNC. The taxpayer funds that would have been allocated to National City were instead allotted to PNC. PNC will be able to take 

advantage of the recent decision by the IRS to permit banks to 

write off the losses of banks that they acquire without limitation. 

I do not fault in any way PNC in this. Given the Government’s 

decisions, its actions made sense. It gives every indication it will 

be a good corporate citizen, as National City has been in Cleveland. 

But while this was the first acquisition funded by the Emergency 

Economic Stabilization Act, it appears it will not be the last. Several banks have indicated they plan to use taxpayer capital for acquisitions. I have asked Treasury a number of questions regarding 

the planned acquisition of National City as well as the larger issue 

of using taxpayer funds to finance mergers and acquisitions. Several of my colleagues on this panel have done the same. I am not 

aware of any answers having yet been supplied. 

The American people are waiting for answers, too. Many of them 

were not thrilled with the idea of committing $700 billion in taxpayer money to some of the very companies that engineered this 

crisis. They know we face a credit crunch, but must reconcile that 

against companies that seem to be carrying on business as usual, 

as Senator Johnson said, with their lavish retreats and their 

healthy bonuses. 

I hope our witnesses today will provide some answers. We all understand, as Secretary Paulson discussed yesterday, the need to 

change tactics when one approach does not work or when, as Secretary Paulson said, circumstances change. But the purpose of the 

legislation we passed remains the same: to unfreeze the credit markets. If taxpayers’ funds are not going to be used for lending, then 


pwalker on DSK8KYBLC1PROD with HEARING
10 

we need to give serious thought to whether this effort still makes 

sense. 

The whole purpose of the economic rescue bill is to prevent a recession from becoming something worse, maybe not the Great Depression, but perhaps the Not So Great Depression. I mean no offense to our witnesses, but I did not vote to save Wall Street. I 

voted to save Main Street. I voted to save Main Street not just 

from the credit crunch that has engulfed the country for the past 

few months, but from the grinding pace of foreclosures that has 

gripped my State for several years. 

I do not see how any strategy to right the economy can succeed 

if it does not bolster banks’ lending efforts and fix the damage from 

the evaporation of lending standards over the past several years. 

We have only solved half the problem if we get credit to a tool and 

die shop, but its employees are losing their homes. 

We are finding ourselves forced, in effect, to impose underwriting 

standards in the middle of a loan rather than at the outset. That 

inevitably is going to be messy. Some loans will still default. Some 

people just bought too much house or lost a job and simply cannot 

afford their mortgage or any mortgage. But we owe it to the millions of homeowners facing foreclosure to work with them. It is in 

the investor’s interest to keep that person in the home rather than 

taking on the expense of foreclosure and selling it into today’s market. And it is in the Government’s interest to accept an imperfect 

approach as the better alternative to inaction. 

As Franklin Roosevelt said some 70 years ago, ‘‘Better the occasional faults of a Government that lives in a spirit of charity than 

the consistent omissions of a Government frozen in the ice of its 

own indifference.’’ 

We cannot be indifferent to the millions of Americans who face 

the prospect of losing their homes. We need to live in a spirit of 

charity while making very rational—very rational—decisions on 

how to deploy the resources of the Federal Government to help 

both the struggling credit markets and the millions of people who 

depend on them. 

Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator, and before 

turning to Senator Schumer, you have made the point, and it deserves being remade. I read this morning about we are going to see 

the Treasury move now to consumer issues on credit cards and car 

loans, and that sounds good. But to put that ahead of homeownership to me is just, once again, denying the underlying problem that 

we face. 

Senator Schumer. 

STATEMENT OF SENATOR CHARLES E. SCHUMER 

Senator SCHUMER. Thank you, Mr. Chairman. I want to thank 

you for your diligence throughout this period of holding a whole series of hearings. It is vital that we make sure that the programs 

implemented by Treasury and the Federal Reserve are accomplishing the goals of restoring our financial system and our economy, and these hearings play a major role in that, so I thank you. 

Now, although we seem to have avoided the devastating effects 

of a full-fledged depression through the recent emergency intervenVerDate Nov 24 2008 21:13 Apr 01, 2010 Jkt 050417 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 E:\HR\OC\A417.XXX A417

pwalker on DSK8KYBLC1PROD with HEARING
11 

tions, particularly the Government backing interbank lending and 

business deposits at banks, we still face frozen credit markets for 

consumers and businesses as well as a recession that threatens to 

be too long and too painful for the entire country. 

I am glad that Secretary Paulson and the rest of the Treasury 

team have finally seen the light and decided to abandon asset purchases. It was the worst-kept secret in Washington that the asset 

purchases and the auctions Treasury proposed would not work and 

were likely to be scrapped. During the entire negotiations, from the 

days you and I, Mr. Chairman, and some of the others sat across 

the table, Treasury never figured out how to price the assets, 

whether by auction or by purchase. So it was just a matter of time 

until Secretary Paulson finally acknowledged that reality, and I am 

glad he did so we could move on. 

Now, many of my colleagues and I recognized that capital injections were clearly the correct approach from the beginning, and we 

gave Secretary Paulson the authority to do them without him asking for them. Now I suspect he is grateful we did, since it has become the most indispensable tool to restore confidence in our financial system, and I am glad we have moved away from auction and 

asset purchase and to capital injection. 

But the Capital Injection Program is not working either, not because there is a fundamental flaw in the concept of capital injection, but because of the way the program is structured. Because of 

the way it is structured, it is not meeting its goals of improving 

stability in the system and increasing lending the way it should. 

Treasury’s stated purpose for the capital injections was to give 

banks a strong capital base so that they could increase lending into 

the economy for things like credit cards, auto loans, and small business loans. But in these uncertain and difficult times where nobody 

is sure of asset values, banks are inclined to hoard rather than deploy capital. They do not know how much lower the value of the 

assets they have will go, so they are hoarding the new capital in 

case they go lower. And in its zeal to include the largest banks and 

avoid any stigma in participating, Treasury failed to make the 

rules strict enough to overcome that inclination. And as a result, 

the Capital Injection Program is not producing very much new 

lending. 

Even if Treasury may not be able—now I intend to ask the witnesses here from the banks why they are not lending more with 

this additional capital. But even if Treasury cannot change the 

terms retroactively, any new capital injection must come with 

tougher requirements. Treasury should revise the terms for the 

next $125 billion, and if they come to us and ask us for the additional $350 billion, I intend to write those provisions—do my best 

with, I know, the support of many of my colleagues here, to put 

those provisions into the new terms of the law. 

Because consumers and businesses around the country depend 

on credit, if it is not available, the recession will be deeper and 

longer than it has to be. And yesterday Secretary Paulson said, 

well, let us focus on auto loans and credit card loans and small 

business loans. But he is ignoring the best way to get to do it, 

which is through the Capital Injection Program, but a Capital Injection Program with some stringency, with making sure that the 


pwalker on DSK8KYBLC1PROD with HEARING
12 

institutions who take it—and I am against forcing institutions to 

take it; I think that was a bad idea—but that those who take it, 

need it, should have to meet some requirements. 

It is particularly true for small businesses that need credit to expand and create jobs. I just got a call yesterday and saw up in Buffalo a company of 300 employees, been there for a long time, cannot 

get a loan. Good-paying jobs in Buffalo, they do not come easy, and 

they are ready to go under even though the firm has been in business for a long time. And I am sure that story can be repeated in 

every one of our States over and over and over again. Small businesses need credit to expand and create jobs. They also need it to 

keep their doors open to protect the jobs they have. Millions more 

jobs could be in jeopardy if we do not fix the lending markets, and 

fast. The Federal Reserve Quarterly Lending Report for the third 

quarter reported that 75 percent of banks have tightened credit on 

commercial and industrial loans to small firms during the third 

quarter. That was up from 65 percent in the second quarter and 

50 percent in the first. 

So Senator Kerry and I have been working on adding some targeted small business items to the stimulus package, such as temporarily waiving all lender and borrower fees, and increasing the 

maximum loan amount, and I will be asking these questions in addition to encourage banks to lend to small business as larger 

banks. 

I also believe, as some have stated—I think you, Mr. Chairman, 

and I could not agree with you more—that tougher terms should 

include more stringent restrictions on executive compensation to 

ensure that there are not incentives for executives to take excessive 

risk and more help for struggling homeowners. Chairman Bair’s 

proposal in combination with the change in bankruptcy laws—and 

I believe this will only work if we change the bankruptcy laws— 

is the clearest and cleanest solution. 

One more point, Mr. Chairman. It is critical that we ensure the 

Government’s capital is not wasted in other ways. I am calling for 

any mergers completed with the help of TARP money first to be approved by Treasury. And this relates to my colleague from Ohio’s 

point. While there are mergers that should take place to improve 

systemic stability and encourage lending, in a very weak institution a merger may be the right way to go. Giving away Government money so that it can be used to gobble up competitors in a 

way that will not have any impact on the overall stability of the 

financial sector should not be endorsed. 

Mr. Chairman, the Government’s assistance has to include significant help from Main Street as well as Wall Street. Consumers 

and businesses must see improved access to credit as a result of 

the Government’s actions, and struggling homeowners must see a 

renewed commitment from the Government to help them avoid 

foreclosure. 

I look forward to discussing these issues with the panel, and 

thank you for holding the hearing. 

Chairman DODD. Thank you very much, Senator. 

We have been joined by Senator Bayh, and I do not want to 

spring it on you here just as you sit down, but would you like to 

make an opening comment, Senator? 


pwalker on DSK8KYBLC1PROD with HEARING
13 

STATEMENT OF SENATOR EVAN BAYH 

Senator BAYH. No, Mr. Chairman, except to say that I share the 

concerns of our colleagues as I understand that they have been expressed with regard to executive compensation dividends and, most 

of all, getting the capital that has been provided into the marketplace to get the job done for which it was intended. 

So I look forward to hearing from our panelists, and thank you 

for this very, very timely hearing. 

Chairman DODD. Thank you very much, Senator. 

Well, let me welcome our panelists, and I am going to introduce 

them briefly and then turn to them for any opening statements. 

Let me encourage you to try and keep your statements relatively 

brief, if you can, and then we take the full statements, obviously, 

as part of the record, and any supporting documentation or evidence that you think would be helpful for the Committee to have, 

we will consider it as accepted at this juncture. So I look forward 

to your full testimony. 

Let me, first of all, introduce Martin Eakes, and Martin is no 

stranger to this Committee. In fact, at the outset of my remarks, 

I pointed out that we had witnesses in February of 2007 to come 

and talk about the very issue which is the subject matter in part 

of today’s hearing, and it was Martin Eakes who made the statements that caused some voices in this city and elsewhere to ridicule his predictions of 2 million foreclosures 2 years ago. So, Martin, we thank you for being with us. 

Martin is the CEO and founder of Self-Help, a community development lender, and CEO of the Center for Responsible Lending. He 

has received numerous awards, including the MacArthur Foundation Fellowship in 1996, and I want to note, as I did a minute ago, 

that in 2007, Martin Eakes testified before this Committee—at one 

of our first hearings, I might add, under my chairmanship—that 

there would be 2 million foreclosures, a number that was met with 

great skepticism by people in the industry, and others. I think everyone would agree today that we would be lucky if that were the 

number, as Senator Martinez pointed out, that we were actually 

dealing with. 

Next to Martin Eakes is Barry Zubrow, who is Executive Vice 

President and Chief Risk Officer for JPMorgan Chase, also serves 

as the Chairman of the New Jersey Schools Department Authority. 

I do not know which is the tougher of those two jobs. We thank 

you for being with us. 

Our next witness is Mr. Gregory Palm, Executive Vice President 

and General Counsel, The Goldman Sachs Group, and a member 

of its Management Committee. He joined Goldman Sachs as a partner in 1992. Previously, Mr. Palm served as law clerk to Justice 

Lewis Powell of the Supreme Court. We thank you, Mr. Palm, for 

being with us. 

Then we will hear from Susan Wachter, who is the Richard 

Worley Professor of Financial Management and a professor of real 

estate and finance at the Wharton School, University of Pennsylvania. She served as Assistant Secretary for Policy Development 

and Research at HUD from 1998 to 2001. 

The next witness is Anne Finucane. Anne is the Global Corporate Affairs Executive of Bank of America Corporation, also 


pwalker on DSK8KYBLC1PROD with HEARING
14 

serves as the Northeast President, Executive Vice President of Corporate Communications, and a member of the CEO senior management team. She is someone I have known for a long time. Anne, 

thank you for being here with us today. 

We are then going to hear from Jon Campbell, who is the Chief 

Executive Officer of the Minnesota Region and Executive Vice 

President of Wells Fargo Bank. In his current position, he is responsible for the Wells Fargo Regional Banking Mergers and Acquisitions Program. 

And our final witness is Ms. Nancy Zirkin, well known to many 

of us here. She is Executive Vice President and Director of Public 

Policy for the Leadership Conference on Civil Rights. Ms. Zirkin 

joined the Leadership Conference in 2002, and under her leadership the organization has gone from a 10-person operation to four 

times as many who work on these issues, and, Nancy, we thank 

you for joining us this morning. 

With that, Martin Eakes, we welcome you to the Committee, and 

the floor is yours. 

STATEMENT OF MARTIN EAKES, CHIEF EXECUTIVE OFFICER, 

CENTER FOR RESPONSIBLE LENDING 

Mr. EAKES. Good morning, Chairman Dodd and Members of the 

Committee. Thank you for holding this hearing and for inviting me 

to testify. My organization Self-Help has made $5 billion of loans to 55,000 

low-wealth families to purchase their first homes. I take it personally when people are losing those homes. 

I am also the CEO of the Center for Responsible Lending, a nonprofit, non-partisan research and policy organization dedicated to 

protecting homeownership. I have been at this work a long time, 

more than 10 years, trying to stop abusive loans and foreclosures. 

In 1998, I helped put together the coalition in North Carolina of 

banks, credit unions, realtors, home builders, seniors, churches, 

civil rights groups, housing groups, to put together an almost unanimous bill to stop abusive lending in North Carolina. 

I have testified at Federal Reserve and congressional hearings 

starting in 2000, and virtually one or two every year since. In 2007, 

I testified in front of this Committee saying that we had a silent 

storm of foreclosures that were 20 to 30 times the magnitude of 

Hurricane Katrina in its devastation. Unfortunately, that storm is 

no longer silent. 

So you will excuse me, I hope, for being a little bit impatient at 

this point. I have taken calls and sat with hundreds of parents facing foreclosure, and every single one of them are numb in their face 

and have tears in their eyes, and I have had to watch them lose 

their homes. I have sat in State legislative hearings where 90-yearold grandmothers walk to the podium with their walker, saying 

that they were looking in the want-ads to get a job so that they 

could prevent foreclosure of their home. They were not going to get 

a job. 

Let me just say flat out that voluntary efforts by lenders and 

servicers, while admirable, will not fix the problem of bad loans in 

this country and the problem of foreclosures. The voluntary efforts 

have been too little, too late at every single stage of the crisis. It 


pwalker on DSK8KYBLC1PROD with HEARING
15 

is not that Hope Now, the voluntary association, intends to be ineffective, but there are structural barriers that make it so. Eighty 

percent of the foreclosures we see today are happening in private 

label securities. These are subprime loans and Alt-A that are in 

these complicated structured securitizations. 

Within those securitizations, the various tranches have what we 

call ‘‘tranche warfare.’’ When one party benefits, another one loses, 

and they threaten to sue the servicer if they continue modifying 

loans. Fifty percent of the subprime and Alt-A loans that are subject to foreclosure have piggyback second mortgages, which makes 

it almost impossible to structure and modify those loans, because 

you still have a party that is not part of the solution. 

Then, finally, one of the most pernicious barriers is that there is 

actually an incentive in the industry now to foreclose versus working out loans. Loan servicers who govern these securitizations get 

paid when they foreclose, but they do not get paid when they work 

out a loan. They just do not get paid. In the worst cases, the 

servicer gets paid twice when it forecloses. The world owes Bank 

of America, one of the best banks in America, a debt of gratitude 

for taking on the thankless task of cleaning up Countrywide’s 

wasteland of unethical lending practices. But Bank of America has 

not had time to get rid of Countrywide’s affiliates which prevent a 

conflict of interest in fees that are paid to its own affiliates every 

time there is a foreclosure. For most of Countrywide’s foreclosures, 

they would order a credit report and an appraisal, purchased from 

an affiliate that they owned 100 percent every time there was a 

foreclosure. They would order a forced placed insurance for people 

who got behind on their payments, again, from a company 100 percent owned by Countrywide. And, finally, when there was a foreclosure necessary, the trustee that was hired was 100 percent 

owned by Countrywide. In my book, that is simply corrupt. 

I have been in meetings where the senior executives of the largest banks have talked about being arm-twisted into accepting the 

$25 billion of Government risk capital at a dividend rate of 5 percent. Taking the money was an act of patriotism, agreed to in order 

to protect the anonymity of those other banks, those anonymous 

ones that really were weak enough to actually need it. 

Let me just say on this panel we have four of the strongest, best 

managed financial institutions in the world, but not a single one 

of these banks would exist today if it were not for support and 

backing from the Federal Government. If there were not Federal 

deposit insurance and access to the Federal-backed liquidity windows at the Federal Reserve and Federal Home Loan Bank, not a 

single one of these banks would have survived from August 2007 

until today. 

So there is a duty to fix these loans and make the steps, and 

there are two things we need to do right now. The first has been 

referenced already. Lift the ban on judicial loan modifications so 

that loans against a personal residence can get fixed if the lender 

is unwilling to do it voluntarily. Note that the recent bills that 

have been presented to fix this bankruptcy provision would not 

allow a modification of the home loan if the lender voluntarily 

modified it in advance. Lifting the ban on judicial modifications for 


pwalker on DSK8KYBLC1PROD with HEARING
16 

residences is what solved the debt problem for farmers in the 

1990s, and it will do the same thing here. No. 2, we should insist that Treasury invest up to $50 billion of the $700 billion, or 7 percent, in the plan proposed by Sheila Bair 

and the FDIC. It is the only plan that has been put forward thus 

far that will actually work to help the foreclosures on the ground. 

Many of you commented in your opening statements that we cannot solve this crisis until we go right to the source, which is foreclosures and the spillover effect. Every time a house gets foreclosed, it damages and destroys the neighbors all around it. 

The FDIC’s plan is really the carrot, if bankruptcy is the stick, 

saying do the right thing or we will let a court do it. This is a carrot. What the plan says is let us induce loan servicers to make the 

loan modifications that have not been able to be done voluntarily. 

It would set a 31-percent housing-payment-to-income ratio as the 

threshold for what is an affordable modification. And in order to 

have the lenders reduce the interest rates on their loans to as low 

as 3 percent or extend the term or defer principal to get the loan 

to an affordable level, the Government would then take on 50 percent of the redefault losses if those loans that were modified eventually went to default. Loan servicers have told us that is their biggest concern, so it addresses the problem not only taking on 50 percent of the losses, there is still an incentive for the lenders to not 

throw losses at the Government because they would still have 

losses themselves. 

This program could reach 3 million households. If 2 million of 

them were successful and one-third redefaulted, the one-third 

would create $100,000 of loss per house, let’s assume, times a million households, would be $100 billion of loss. The Government’s 

50-percent share of that would be $50 billion. It is a pretty paltry 

amount to invest to actually solve the problem that we have been 

facing. 

When are we going to insist that the taxpayer funds that were 

set up to solve this problem are actually spent on the people who 

are losing their homes, particularly in Florida and Arizona and 

Michigan, Ohio and California, places where the problem is utterly 

out of control? 

So I thank you for holding this hearing. I appreciate your work, 

and let me help you any way I can in putting some pressure on 

Treasury to do the right thing. 

Chairman DODD. Thank you, Martin, very much. And I am sure 

we are going to—I know I am going to raise the question with the 

other panelists about the Sheila Bair proposal, and just get prepared as witnesses to anticipate that question that Mr. Eakes has 

raised and address it. 

Mr. Zubrow, thank you for being with us. You have to pull that 

microphone a little closer to you. 

STATEMENT OF BARRY L. ZUBROW, EXECUTIVE VICE 

PRESIDENT, CHIEF RISK OFFICER, JPMORGAN CHASE 

Mr. ZUBROW. Thank you very much, Mr. Chairman. Chairman 

Dodd and Members of the Committee, thank you for including us 

in today’s hearing on the Capital Purchase Program. I am pleased 

to represent JPMorgan Chase before this Committee. You have 


pwalker on DSK8KYBLC1PROD with HEARING
17 

with you my detailed written testimony. Given the size of this 

panel, allow me to summarize a few key points. 

At JPMorgan Chase, we believe that the Government’s investment in our firm comes with a responsibility to honor the goals of 

the Capital Purchase Program. To that end, we are using the CPP 

funds to expand the flow of credit into the U.S. economy and to 

modify the terms of hundreds of thousands of residential mortgages. At the same time, we continue to maintain prudent business 

practices and underwriting standards that have helped JPMorgan 

Chase to create and maintain a fortress balanced sheet. 

What does this mean in practice? Let me begin with our loan 

modification efforts, which we believe will help to strengthen the 

U.S. real estate markets and to keep people in their homes. 

Last week, we announced the significantly expanded loan modification program that we expect will help roughly 400,000 additional families to stay in their homes. Since early 2007, Chase has 

helped about 250 families avoid foreclosure, primarily by modifying 

their loans or their loan payments. Our new initiative is reaching 

out to additional customers of Chase, but also to Washington Mutual and the EMC unit of Bear Stearns, which are now part of the 

bank. 

As part of these efforts, we are opening 24 regional counseling 

centers to provide borrowers with face-to-face help in high delinquency areas. 

We are hiring over 300 new loan counselors, bringing our total 

to more than 2,500, so that homeowners can work with the same 

counselor from the start to the finish of the process. 

Proactively, we are reaching out to borrowers to offer pre-qualified modifications, such as interest rate reductions and principal 

forbearance. 

We seek to expand the range of financing alternatives which are 

available to our customers and to provide an independent review 

of each loan before moving it into the foreclosure process. Until all 

of these changes are fully implemented—we hope within the next 

90 days—we have stopped any new foreclosure proceedings on our 

owner-occupied properties. 

The Capital Purchase Program’s goal of providing capital to the 

U.S. economy is absolutely consistent with our own core business 

of supporting our customers through lending operations. Despite 

the challenges economic conditions, we continue to provide credit to 

our customers, whether they are consumers, small businesses, 

large corporations, not-for-profit organizations, or municipalities. 

Throughout the past year, during some of the most turbulent and 

difficult conditions many of us have ever witnessed, we have prided 

ourselves on being there for our clients, whether by making markets, committing capital to facilitate client business, investing in 

infrastructure and other projects, or making loans to creditworthy 

borrowers. In short, we have been open for business and we continue to be open for business. The CPP enhances our ability to lend 

to consumers and businesses large and small, and we are committed to honoring the goals of this program. 

The Committee has also asked us to address executive compensation practices, and I am pleased to do so. JPMorgan is in business 

for the long term, and our compensation philosophy reflects that. 


pwalker on DSK8KYBLC1PROD with HEARING
18 

Simply stated, we believe that compensation should be based on 

the long-term performance of our firm and the individual’s contribution to his or her business, and to provide important and appropriate safeguards for safe and sound behavior. We require our 

senior executives to retain at least 75 percent of all their equity 

awards that are granted to them so that their interests are aligned 

with the long-term interests of our shareholders. We offer no golden parachutes or special severance packages. Our top executives 

are subject to the exact same severance provisions as all of our employees. 

Even prior to the CPP, our firm had in place a bonus recoupment 

policy. We have obviously amended that to ensure full compliance 

with the terms of the CPP. 

We are not yet in a position to provide specific information about 

compensation for this year, given that the year is not complete. 

However, given the type of year we are experiencing and even 

though we have produced profitable results in each quarter to date, 

I have little doubt that employees and executives will make substantially less than they did last year. Let me also state very clearly that the CPP money will have no impact on the compensations 

that are taken for JPMorgan Chase employees or executives. 

The Government’s investment in our firm came along with a special responsibility, as you have noted, Mr. Chairman, to America’s 

taxpayers. We fully intend to honor that responsibility by promoting the goals of the CPP while also acting prudently and sensibly and in the interests of all of our shareholders to maintain a 

healthy and vibrant company. 

Many believe that irresponsible lending was one of the causes of 

the current distress in the financial markets. No one wants a repeat of those mistakes. Every day we seek to make capital available in a responsible, safe, and sustainable way to help get the 

economy back on track. 

John Pierpont Morgan once said that he wanted to do first-class 

business in a first-class way. That continues to be a guiding principle for us. It remains our goal and our commitment to our customers, to our shareholders, our employees, and to the taxpayers 

of this Nation. 

Thank you very much. 

Chairman DODD. Thank you very much. 

Mr. Palm. 

STATEMENT OF GREGORY PALM, EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, THE GOLDMAN SACHS 

GROUP, INC. 

Mr. PALM. Thank you. Chairman Dodd and Members of the Committee, on behalf of Goldman Sachs, I wish to thank you for inviting us to participate in today’s hearing. 

Clearly, the last several months have been an extraordinary and 

unsettling time in financial markets and the economy generally. 

The actions taken by Congress, regulators, and the administration 

to address the market dislocation have been significant and decisive. We also recognize, however, that much remains to be done, 

and hard and thoughtful work will be required by all of us. We look 

forward to working with all concerned parties to work our way 


pwalker on DSK8KYBLC1PROD with HEARING
19 

through the current crisis and to identify and address the failings 

that have led to this difficult situation. 

First, the Committee asked us to discuss our plans for the use 

of funds provided under the CPP. Goldman Sachs’ principal businesses are investment banking, securities, and investment management. A number of our core businesses require the commitment of 

capital. In investment banking, offering strategic advice remains at 

the center of what we do. But clients frequently expect our advice 

to be accompanied by access to the capital necessary to make that 

advice actionable and practical. In short, our value to clients depends not only on the quality of our advice, but on our willingness 

to draw on both our expertise and balance sheet to help finance 

transactions or support a company’s strategic direction. 

In addition, Goldman Sachs plays a very significant role as a 

market maker. As you know, market making is essential to the liquidity, efficiency, and stability of financial markets. In dislocated 

markets, the role we play as a market maker on behalf of our clients can be challenging, but it is even more important. Illiquid 

markets and the resulting lack of price discovery produce volatility. 

Having the ability to take the other side of a client’s transaction 

and establish a price for an instrument contributes to the broad 

functioning of markets. With the $10 billion in capital received through the TARP Capital Purchase Program, Goldman Sachs has additional capacity to 

inject capital and liquidity, which will contribute not only to the 

stability of financial markets, but to their vitality and growth. 

In addition, we play an important role as a co-investor with our 

clients. Goldman Sachs has and will raise funds to inject capital 

across the corporate capital structure. These funds will extend 

needed capital to a variety of companies whose growth opportunities would otherwise be limited. 

For example, we recently established a $10.5 billion senior loan 

fund that makes loans to companies in need of capital. The fund 

invests both our own capital and that of our clients. This is significant because the normal market mechanisms to facilitate the extension of credit in many areas have broken down. In the next 

year, Goldman Sachs expects to launch additional funds and deploy 

capital to various parts of the market. 

You also have asked us to discuss the compensation in the context of executive compensation standards for financial institutions 

that participate in the Capital Purchase Program and how we align 

compensation with performance. 

First, perhaps an obvious point, since the year is not yet finished, 

no financial compensation decisions have been made at Goldman 

Sachs. We are only now in the process of reviewing performance 

and making recommendations for year-end compensation. The 

Compensation Committee of the Board of Directors, which is comprised solely of outside independent directors, determines the appropriate compensation for Goldman Sachs’ executives. 

Second, we have complied and will comply with all executive 

compensation standards and restrictions imposed as a result of our 

participation in the CPP. The CPP executive compensation requirements will be a focus at our Board Compensation Committee meeting next week. 


pwalker on DSK8KYBLC1PROD with HEARING
20 

I would also note that Goldman Sachs has never had special 

golden parachutes, employment contracts, or severance arrangements with its executive officers, and that we have always believed 

that the potential for increased compensation should never be an 

incentive for excessive risk taking. 

Third, and most importantly, I want to make clear that the 

firm’s bonuses for 2008 will be paid only out of the firm’s earnings 

for 2008, not its capital, and certainly will not increase as a result 

of having received TARP funds. 

Since we became a public company, we have had a clear and consistent compensation policy. We pay our people based on three factors: the performance of the individual, the performance of the 

business unit, and the performance of the firm taken as a whole. 

And that is a long-term perspective. 

Compensation for each employee is comprised of salary and 

bonus. Generally, the percentage of the discretionary bonus awarded in the form of equity increases significantly as an employee’s 

total compensation increases. In fiscal year 2007, for example, the 

equity portion of our senior-most executives’ compensation was 60 

percent. 

All of the equity rewards are subject to future delivery and/or deferred exercise. This aligns employees with the long-term interests 

of our shareholders. In that vein, our CEO, CFO, COOs, and Vice 

Chairmen are required to retain at least 75 percent of the equity 

they have received as compensation since becoming a senior executive officer. 

Overall, we believe our compensation policy, which is consistently and rigorously applied no matter how good or bad the market 

environment, has produced a strong record of aligning performance 

with compensation. 

Since 2000, Goldman Sachs has exhibited a correlation between 

changes in net revenues and compensation of 98 percent. I will not 

dwell on our record over that period because I would like to make 

one final point. 

All that said, while we are on track to deliver positive results for 

year-end 2008 despite remarkably challenging markets and events, 

net revenue for the year will be lower than in recent years. As 

such, compensation also will be down very, very significantly this 

year across the firm, particularly at the senior levels. We get it. 

As to mortgage servicing, finally, on the subject of modifying 

home loans, I would emphasize that Goldman Sachs has never 

been a significant originator of residential mortgages. A Goldman 

Sachs affiliate, Litton Loan Servicing, services residential mortgage 

loans. We acquired Litton a little less than a year ago. As part of 

its business, Litton expends significant resources to identify homeowners who may be in danger of losing their homes and works with 

them on potential solutions, like loan modifications—whether it involves lowering the interest rate, changing the principal amount, or 

otherwise. These are all designed to allow the homeowners to stay 

in their homes. Over time Litton has been able to demonstrate to 

loan owners that loan modifications very often produce lower losses 

than foreclosures. 

In the last 12 months, for example, Litton has modified in excess 

of 41,000 mortgage loans totaling approximately $7.5 billion in 


pwalker on DSK8KYBLC1PROD with HEARING
21 

principal balance. The number of employees dedicated to this effort 

over this period has increased 400 percent. 

Although modifications to existing mortgage loans are not a 

magic panacea that will cure all that ails the current housing market, we believe that thoughtful restructuring of existing arrangements to provide homeowners with payment relief is a positive step 

toward combating its decline. 

Mr. Chairman, we look forward to working with you and the 

Committee to accomplish the important tasks set out in the Emergency Economic Stabilization Act. I would be happy to answer any 

questions. 

Thank you. 

Chairman DODD. Thank you, Mr. Palm, very, very much. 

Dr. Wachter, we thank you for being with us this morning. 

STATEMENT OF SUSAN M. WACHTER, WORLEY PROFESSOR OF 

FINANCIAL MANAGEMENT, WHARTON SCHOOL OF BUSINESS, UNIVERSITY OF PENNSYLVANIA 

Ms. WACHTER. Thank you. Chairman Dodd and other distinguished Members of the Committee, it is my honor to be here today 

to provide my perspective on the ongoing mortgage crisis and how 

and why stabilizing the housing market is essential to stabilizing 

the broader U.S. economy. 

The ongoing crisis in our housing and financial markets derives 

from an expansion of credit through poorly underwritten and risky 

mortgage lending. Until the 1990s, such lending was insignificant. 

By 2006, almost half of mortgage originations took the form of 

risky lending. 

The unprecedented expansion of poorly underwritten credit induced a U.S. housing asset bubble of similarly unprecedented dimensions and a massive failure of these loans and to today’s system breakdown. 

Today’s economic downturn could become ever more severe due 

to the interaction of financial market stress with declines in housing prices and a worsening economy feeding back in an adverse 

loop. We have the potential for a true economic disaster. 

I do not believe we will solve our banking liquidity problems if 

the housing downturn continues, and the housing market decline 

shows no signs of abating. 

Moreover, despite bank recapitalization and rescue efforts, economically rational loan modifications that would help stabilize the 

market are not occurring. We must directly address the need for 

these loan modifications in order to halt the downward spiral in 

mortgage markets and the overall economy. 

It is critical to bring stability to the housing market. While today 

prices may not be far from fundamental levels, just as they overinflated going up, there is great danger for overcorrection on the 

downside. 

In our current situation, as prices fall, market dynamics give rise 

to further expectations of price decline, limiting demand, and supply actually increases due to increased foreclosures, causing prices 

to decline further. A deflationary environment with demand decreases due to expectations of further price decline was in part responsible for Japan’s ‘‘lost decade’’ of the 1990s. 


pwalker on DSK8KYBLC1PROD with HEARING
22 

We cannot rely on a price decrease floor at currently market-justified fundamental levels if we rely on market forces alone, even, 

it appears, if augmented by the interventions so far of the Federal 

Reserve and Treasury. In fact, home inventories are not declining, 

and up to half of the inventory of homes are being sold through 

foreclosures at fire-sale prices in many markets. The Case-Shiller 

Price Index reflects the massive deterioration of housing wealth so 

far. Since the peak in 2006, housing values have fallen over 20 percent. While another 5- to 10-percent fall could bring us to marketclearing levels, actual price declines may far exceed this. And as 

house prices decline, these declines undermine consumer confidence, decrease household wealth, and worsen the system-wide financial stress. 

While banks have been recapitalized through the Capital Purchase Program—and there is discussion of the use of this funding 

for acquisitions—as yet, there is little evidence that bank lending 

has expanded. In order for the overall economy to recover and for 

conditions not to worsen, prudent lending to creditworthy borrowers needs to occur. Without financing for everyday needs, for 

education, small business investment and health, American families are at risk. And today the U.S. economy and the global economy are depending on the stabilization of their financial well-being. 

Moreover, the plans that are already in place do not appear to be 

leading to the modification of loans at the scale necessary in order 

to assure a market turnaround at fundamental levels instead of a 

severe and ongoing overcorrection. 

Barriers to economically rational loan modifications include conflicting interests, poor incentives, and risks of litigation to modify 

loans, particularly to modify loans deriving from mortgage-servicing agreements. 

Given the freefall in housing markets and its implications for 

credit conditions and the overall economy, there is a need for policies to address these barriers today. 

It is both necessary and possible to take effective action now. 

While housing values may not be far from fundamental levels, as 

housing values continue to fall, resolving the problem will become 

increasingly difficult and costly. Thus, solutions that are now possible may not be available going forward. Without expeditiously 

and directly addressing the housing market mortgage crisis, the 

Nation is at risk. 

Thank you. 

Chairman DODD. Thank you very much, Doctor. That is very 

worthwhile testimony. 

Ms. Finucane, welcome to the Committee, and I want to underscore the point that was made by Martin Eakes, the appreciation 

of what Bank of America did. I think it was a number like $8.4 billion or something dedicated to foreclosure mitigation. That has not 

gone unnoticed. We welcome you to the Committee. 

STATEMENT OF ANNE FINUCANE, GLOBAL CORPORATE 

AFFAIRS EXECUTIVE, BANK OF AMERICA 

Ms. FINUCANE. Thank you. Good morning, Chairman Dodd and 

Members of the Committee. 


pwalker on DSK8KYBLC1PROD with HEARING
23 

At the outset, I would like to emphasize Bank of America’s continued strength, stability, and commitment to serving local communities, even during these challenging times. Bank of America 

earned $5.8 billion in the first three quarters of this year, reinforcing our position as opposed to one of the most profitable financial services companies in the world. 

In recent months, Bank of America has taken three major steps 

that are contributing to the alleviation of the financial crisis faced 

by our Nation. 

First, at the encouragement of the Federal Government but with 

no Government assistance, Bank of America acquired Countrywide 

Financial Corporation at a time when the mortgage industry was 

being viewed with increasing alarm as a risk to the broader health 

of the national economy. Since that acquisition, Bank of America 

has announced providing relief for more than $100 billion in loans, 

enough over 3 years to keep up to 630,000 borrowers in their 

homes. 

Second, with the encouragement of the Federal Government but, 

again, with no Government assistance, in the midst of the impending failure of Lehman Brothers, Bank of America announced plans 

to acquire Merrill Lynch. 

Third, despite having completed our own capital-raising effort 

with no Government assistance, Bank of America agreed to participate in the TARP Capital Purchase Program. We agreed to participate in this program at the encouragement of the Treasury, and we 

do so in the belief that it is in the best interests of the national 

financial system. 

With regard to the Bank of America home loan modification program, we are intensely focused on helping borrowers stay in their 

homes. In the last 6 months, Bank of America has announced two 

major home retention programs that together will address the 

needs of up to 630,000 homeowners and $100 billion in current 

home loans. We have more than doubled the number of our home 

retention professionals in the last year to more than 5,600 individuals who are equipped to serve eligible borrowers with this new 

program, elements beginning on December 1. A foreclosure process 

will not be initiated nor will it be advanced for a customer likely 

to qualify until Bank of America has made a decision on a customer’s eligibility. Modification options will include, among others, 

FHA refinancing under the Hope for Homeowners Program, interest rate reductions, and principal reductions. 

Now I would like to address more specifically our participation 

in the TARP program. Under the TARP program, we have received 

$15 billion from the Treasury in exchange for shares of preferred 

stock. This investment by Treasury is designed to be a profitable 

one for the Federal Government. With these capital levels, Bank of 

America is focused on serving the financial needs of our customers, 

so we would look at about a 9-percent Tier 1 capital ratio. 

So what are we doing? Well, by example, in the third quarter of 

this year, we have made more than $50 billion of mortgage loans 

and more than $6 billion of home equity loans. Further, business 

lending remains strong, and we have continued making loans to 

States and municipalities in a time of extraordinary uncertainty. 


pwalker on DSK8KYBLC1PROD with HEARING
24 

While the fourth quarter results are not available until January, 

thus far this year our total commercial, large corporate, and Government commitments have increased by more than $33 billion, or 

6 percent. The funding of new loan commitments this year has increased by 6 percent over the previous year. And, in addition, we 

have committed or reaffirmed nearly $23 billion of credit to State 

and local governments thus far in 2008. And with this enhanced 

capital, we are now actively engaged in the purchase of mortgagebacked securities contributing to the increased liquidity in the market, which was one of the original objectives of the TARP program. 

Finally, I would like to address the issue of executive compensation, which has been the subject of much discussion here today and 

in relation to the TARP program. Executive compensation at Bank 

of America will not be paid using the capital infusion received from 

Treasury last week. The Bank of America Board of Directors instead determines executive compensation on an annual basis based 

on the financial performance of our company, and as I stated previously, Bank of America has earned $5.8 billion in the first three 

quarters of this year. 

Nevertheless, as these earnings are reduced compared to previous years, this year’s bonus compensation pool for senior managers at Bank of America is expected to be reduced by more than 

50 percent. While final decisions on our compensation have not 

been completed by the board, executive compensation levels are not 

impacted nor will they be enhanced by last week’s capital infusion 

from the Treasury. 

With that, I will conclude my testimony. Thank you, Senator 

Dodd, and Members of the Committee. 

Chairman DODD. Thank you very much, Ms. Finucane. 

Mr. Campbell, thank you. Welcome to the Committee. 

STATEMENT OF JON CAMPBELL, EXECUTIVE VICE PRESIDENT, CHIEF EXECUTIVE OFFICER OF THE MINNESOTA REGION, WELLS FARGO BANK 

Mr. CAMPBELL. Mr. Chairman and Members of the Committee, 

I am Jon Campbell. I am Executive Vice President of Wells Fargo’s 

Regional Banking group. Thank you for allowing me to comment on 

Wells Fargo’s participation in the Capital Purchase Program. 

Wells Fargo believes that our financial system is more important 

than any one individual company. We believe the Capital Purchase 

Program is a positive step toward stimulating the United States’ 

economy. It is Wells Fargo’s intention to use the CPP funds for additional lending and to facilitate appropriate home mortgage solutions. 

Wells Fargo continues to be one of the strongest and best capitalized banks in the world. The investment from the U.S. Government 

adds to our already strong balance sheet and will enable Wells 

Fargo to offer appropriately priced credit at a time when several 

sectors of the financial industry have shut down. 

Since mid-September when capital markets froze, Wells Fargo 

has led the industry in lending to existing and new creditworthy 

customers. During this time nonprofit organizations, hospitals, universities, municipalities, small businesses, farmers, and many others had nowhere to turn when their existing capital market chanVerDate Nov 24 2008 21:13 Apr 01, 2010 Jkt 050417 PO 00000 Frm 00028 Fmt 6633 Sfmt 6602 E:\HR\OC\A417.XXX A417

pwalker on DSK8KYBLC1PROD with HEARING
25 

nels vanished. We were there to provide credit so they could continue to offer the services that our communities depend upon. 

We are able to lend through these difficult times because of our 

emphasis on prudent and sound lending which includes understanding what our customers do and what their financing needs 

are. As demonstrated over the past several years, we are willing 

to give up market share if a product is not in the best interest of 

our customers. And simply put, those companies that didn’t put the 

customer at the center of every decision they made are no longer 

here today. 

We intend to expand lending in all of our markets. As demand 

warrants, we will have more than adequate capital to lend to creditworthy customers in an appropriate manner and, as required, will 

pay back the CPP investment with interest. 

Wells Fargo remains a strong lender in areas such as small business and agriculture. By volume, we are the No. 1 commercial real 

estate lender in this country. In fact, we grew commercial real estate loans 37 percent year to date in 2008. And our middle market 

commercial loans—made to Fortune 1500-sized companies across 

the country—are up 24 percent from this same time last year. 

As far as consumer lending is concerned, we are certainly open 

for business. Our consumer loan outstandings have increased almost 9 percent in the third quarter of 2008 in comparison to the 

same quarter in the previous year. 

The Committee has asked whether CPP funds would be spent on 

executive compensation. The answer is no. Wells Fargo does not 

need the Government investment to pay for bonuses or compensation. 

Wells Fargo’s policy is to reward employees through recognition 

and pay based on their performance in providing superior service 

to our customers. That policy applies to every single employee, 

starting with our Chairman and our CEO. For example, the disclosures in our 2008 proxy statement show that the bonuses for all 

Wells Fargo named executive officers were reduced based on lower 

2007 performance. 

Mr. Chairman, since the middle of 2007 when you convened your 

Housing Summit, Wells Fargo has implemented the principles you 

laid out by working with borrowers at each step of the mortgage 

crisis. With the changes in our economy and the continuing declines in property values across many parts of the country, even 

more people do need our help. 

As a number of new foreclosure relief programs require capital 

to implement, the availability of CPP funds will make it easier to 

successfully reach delinquent homeowners. This capital, leveraged 

with the announcement this week of a streamlined large-scale loan 

modification process that applies to loans serviced for Fannie Mae 

and Freddie Mac, will enable Wells Fargo to utilize a variety of 

programs quickly and also institutionalize an approach that 

servicers can rely on going forward. 

The strength of our franchise, earnings, and balance sheet positions us well to continue lending across all sectors and satisfying 

all of our customers’ financial needs, which is in the spirit of the 

Capital Purchase Program. 


pwalker on DSK8KYBLC1PROD with HEARING
26 

Mr. Chairman and Members of the Committee, thank you, and 

I look forward to your questions. 

Chairman DODD. Thank you very much. 

Last, but not least, Ms. Zirkin. We thank you very much for 

being before the Committee. 

STATEMENT OF NANCY M. ZIRKIN, EXECUTIVE VICE 

PRESIDENT, LEADERSHIP CONFERENCE ON CIVIL RIGHTS 

Ms. ZIRKIN. Thank you, Senator Dodd and other Members of the 

Committee. Again, I am Nancy Zirkin, Executive Vice President of 

the Leadership Conference on Civil Rights, our Nation’s oldest and 

largest civil and human rights coalition. 

Let me begin by saying why the foreclosure crisis is so important 

to LCCR. Homeownership has always been one of the most important goals of the civil rights movement. It is the way most Americans build wealth and improve their lives, and it is essential to stable communities. 

For decades, LCCR has worked to break down barriers to fair 

housing, as well as the barriers from redlining and predatory lending, to the credit that most people need to own a house. 

For these reasons, we have argued for a number of years that the 

modern mortgage system was terribly flawed, that countless irresponsible and abusive loans were being made, often in a discriminatory way, and that without better regulations things would not 

end well. 

Now, after years of denial, I think it is quite obvious that the 

mortgage crisis is definitely not contained. But to date—and despite the best efforts of you, Mr. Chairman, and others—the whole 

collective response, based on voluntary efforts, has not done much 

to actually turn the tide. 

At the same time, there are helpful ideas out there now such as 

the FDIC proposal and the efforts of Bank of America and others. 

However, LCCR remains convinced that the best way to quickly reduce foreclosures is to let desperate homeowners modify their loans 

in Chapter 13. It would give borrowers leverage to actually negotiate with servicers and give them a last resort when the negotiations do not work. 

It does not use public funds, and more importantly, it would 

quickly help other homeowners and our economy by keeping the 

value of the surrounding homes from being eroded, stopping a vicious cycle that can only lead to more foreclosures. 

We recognize that the bankruptcy relief has faced intensive opposition from industry, which is ironic to us given the number of 

lenders that have obtained bankruptcy relief themselves. 

Opponents say that allowing bankruptcy would make investors 

hesitant, limiting ‘‘access to credit’’ for underserved populations. 

Well, the fact is right now, because of the years of irresponsible 

lending, there is no access to credit for most of the people, anyway. 

We are glad that since your last hearing several banks and the 

GSEs have planned to drastically increase their loan modification 

programs, following what the FDIC is doing with IndyMac. We are 

all for voluntary efforts. Every home that is saved is a step in the 

right direction. 


pwalker on DSK8KYBLC1PROD with HEARING
27 

However, industry efforts have not provided enough affordable, 

lasting solutions for the borrowers. This obviously has a lot to do 

with securitization and second mortgages. Until these obstacles can 

be overcome, industry efforts cannot be a substitute for actually 

helping homeowners directly. The stakes are simply too high because the credit drought will not be mitigated until foreclosures are 

controlled. 

While LCCR is disappointed that the bankruptcy relief that was 

blocked earlier this year, we are encouraged by some of the recent 

discussions with FDIC about a new mortgage guarantee program. 

As we understand it, the plan would give new incentives for loan 

servicers to reduce payments to 30 percent debt-to-income ratio in 

return for Government guarantees. 

If the plan can be implemented quickly, and just as importantly, 

if it is quickly used by the servicers, we believe it will be a great 

improvement over existing efforts, including Hope for Homeowners 

Act, moratorium, or even the existing IndyMac plan. It also aims 

directly at the cause of the economic crisis—foreclosures. So it is 

a wise investment, especially with the latest controversies over how 

Wall Street has been using our tax dollars. 

For all of these reasons, while we have a few reservations, we 

strongly believe that the FDIC plan is well worth a try, and it 

should be adopted as quickly as possible. 

Before I conclude, I would be remiss, especially because this is 

the 40th anniversary of the Fair Housing Act, if I did not note that 

any measure to implement the financial rescue law must be done 

in a way that is fully consistent with all applicable civil rights 

laws—something I discuss in greater detail in my written testimony. 

Again, Mr. Chairman, thank you for the opportunity of testifying, 

and I look forward to answering questions. 

Chairman DODD. Thank you very, very much, Ms. Zirkin, and I 

appreciate your testimony and the testimony of all our witnesses. 

It has been very helpful this morning. 

I am going to have the clock on for 7 minutes, and we will try 

to keep to that, if we can. We have good participation here today, 

and I want to make sure everybody has a chance to raise some 

issues. 

Let me, if I can off the bat, focus my first question to the bank 

representatives here, and I include Goldman Sachs in that because 

I know you are in the business of becoming a bank. You are the 

fourth largest bank holding company, I believe, and so I am going 

to ask the question of you as well. Let me ask the three questions 

and then ask you to respond, if you can. 

One important tool used by the Federal Government to address 

the freeze in credit markets was the guarantee, as you are all 

aware, of senior unsecured bank debt for all maturities. This program covers all lending institutions for 30 days, after which any 

bank can opt out of the program. 

So my first question to you, I would like to ask whether any of 

you here at the table this morning have any plans to opt out of this 

program. 

Second, I would like to know from the panelists if their institutions have made use of any of these number of facilities that were 


pwalker on DSK8KYBLC1PROD with HEARING
28 

created to help maintain liquidity, and since they were created including the commercial paper funding facility, as I have said, 

whether the panelists’ intentions are to make use of these funds. 

And, third, for those of you whose institutions offer money market funds, has the Federal guarantee on those funds been helpful 

to keeping those funds in your institutions? 

Why don’t we begin with you, Mr. Zubrow? 

Mr. ZUBROW. Thank you very much, Mr. Chairman. 

With respect to your first question about the guarantee of senior 

bank debt and whether or not JPMorgan Chase is going to opt out 

of that program, we are still evaluating that and have not yet made 

a determination on that. Obviously, once we do, we are happy to 

come back to you and let you and your staff know how we have decided to handle that. 

With respect to the commercial paper funding facilities, we certainly think that those have been very helpful in the marketplace, 

and certainly we have been an active issuer of commercial paper, 

and many of our clients have been active issuers of commercial 

paper. And it is absolutely clear that those facilities have been very 

helpful in bringing back investors into that marketplace, and I 

think that has been a very helpful step forward. 

Then with respect to your third question with respect to the Federal guarantee program, you know, there again, you know, we 

think that that has been a helpful addition to liquidity in the marketplace, and we think that it is going to make a big difference for 

bringing investors back into the market. 

Chairman DODD. And it has helped keep those funds in your 

own—— 

Mr. ZUBROW. And it certainly helped keep funds in the money 

market funds. We have certainly seen a significant increase—we 

obviously saw a major increase in inflows into our funds, particularly our Treasury funds, with these different additional programs 

both for ourselves and across the industry. We have seen a shifting 

back into what are called the ‘‘credit funds’’ or the ‘‘prime funds,’’ 

which suggests, you know, greater liquidity going into the corporate sector. 

Chairman DODD. So all of these issues have been very helpful to 

JPMorgan Chase? 

Mr. ZUBROW. Correct. 

Chairman DODD. Yes. Mr. Palm. 

Mr. PALM. With regard to your three questions, first, on the optout, we have no plan to opt out, but we are still evaluating the program. And as I understand it, certainly the final details of the program have not been announced, and comments have been provided. 

Second, the CP facilities and so on, again, I think those have 

been helpful broadly across markets and certainly for our clients. 

And, third, on the money market funds and so on, we believe 

that will ultimately be quite helpful. What we saw at our firm, 

which sounds similar to JPMorgan, was there was a great flow of 

monies out of some of our funds into other funds, i.e., the Fed-related funds, and now some of that money has flowed back. 

Chairman DODD. Because of the guarantee. 

Mr. PALM. I think so, yes. So obviously, indirectly ultimately that 

will be of benefit to the credit markets and companies. 


pwalker on DSK8KYBLC1PROD with HEARING
29 

Chairman DODD. I agree with that as well, but the institution— 

Goldman Sachs has benefited clearly as a result of the Federal 

guarantee. 

Mr. PALM. Yes, we believe it is a benefit to the market. 

Chairman DODD. Ms. Finucane. 

Ms. FINUCANE. I think we see it positively on all three fronts. 

Certainly the money market fund insurance has been a real positive. We have no plans to opt out. We do need some further guidance to fully understand that. And the same on the commercial 

paper, it is a real positive. 

Chairman DODD. Well, thank you for that as well. 

Let me jump, if I can, I want to—I will exclude Mr. Eakes and 

Ms. Zirkin from the discussion—I am sorry. I apologize. Mr. Campbell from Wells Fargo. 

Mr. CAMPBELL. It is OK, Mr. Chairman. I actually was not offended at all. 

Chairman DODD. No, no, no. 

[Laughter]. 

Mr. CAMPBELL. Quickly, as it relates to the senior debt guarantees, we are still in an evaluation phase, and so I am not in a position to answer that. But we would be happy to get back to you on 

that. 

As it relates to the commercial paper guarantee, it clearly made 

a very positive difference in the marketplace. There were numbers 

of companies who had depended upon that market for many years 

for liquidity that were frozen out. That market has—— 

Chairman DODD. Including Wells Fargo? 

Mr. CAMPBELL. To some extent, but actually, my answer is more 

from my perspective as a banker and looking at the customers we 

take care of. And I saw it more there. Since I am not part of our 

treasury group, I do not want to comment on what the effect was 

specifically on Wells. 

And as it relates to the money market fund guarantees, the only 

comment I would offer is that while it has been very helpful and 

it has clearly helped with outflows, there is a consideration we all 

need to be thoughtful of, and that is, what is the impact on core 

bank deposits where we have now created basically a similarity between the money market funds and deposits? And I just think we 

have to be careful and—— 

Chairman DODD. That is a legitimate point. 

Mr. CAMPBELL [continuing]. Consider that as we move forward. 

Chairman DODD. But Wells Fargo has benefited itself from that 

guarantee is my point. 

Mr. CAMPBELL. Yes. 

Chairman DODD. Now, I will exclude Mr. Eakes and Ms. Zirkin 

because you have commented on the FDIC, the Sheila Bair proposal, and I appreciate your comments. I have certainly expressed 

myself at several hearings on that idea. But as we saw yesterday, 

Secretary Paulson-while it was dressed up in a way of continuing 

to look at it, the fact is he rejected it flat-out, in my view, and I 

think that is terribly regrettable, in my view, in light of the potential benefit here. But I would like to ask the other panelists to comment specifically on that proposal as to whether or not you think 

it has merit and whether or not your institution would be supVerDate Nov 24 2008 21:13 Apr 01, 2010 Jkt 050417 PO 00000 Frm 00033 Fmt 6633 Sfmt 6602 E:\HR\OC\A417.XXX A417

pwalker on DSK8KYBLC1PROD with HEARING
30 

portive of such a move. And I realize there are details to everything, so I am not expecting you to sign off on details. But the overall thrust, in light of the fact that the voluntary program, the very 

meeting we had here 2 years ago in this room in which I begged 

the institutions and they promised they would, setting up principles to do workouts, then it was the voluntary Hope for Homeowners, then it was the Hope for Homeowners Act we passed—and 

all of these measures, frankly, have not produced anywhere near 

the results we all had hoped they would. 

And I do not disagree, by the way, the bankruptcy provision. And 

if we got a chance next week, I may off that on the floor of the Senate as part of a package out here. Senator Durbin of Illinois deserves great credit for having raised this issue for a long time. I 

do not know how my colleagues feel about it, but we have a chance 

we may raise that one. 

But in light of that—I do not know whether that would work or 

not—this does not require action by the Congress to do what Sheila 

Bair has suggested. It takes cooperation from the Treasury to make 

this happen. So I would like to know from the other witnesses here 

how you react to that proposal. We will begin with you, Mr. 

Zubrow. 

Mr. ZUBROW. Yes, Senator. JPMorgan Chase is certainly very 

supportive of the types of programs that Chairwoman Bair at the 

FDIC has proposed. We think that there is a lot of merit in some 

of the suggestions. As you said, there are a lot of very important 

details that need to be worked out, and we are certainly actively 

interested in engaging in discussions with her as well as with the 

Committee on those details. 

I do think that, you know, we certainly think that the efforts 

that we have also taken voluntarily on loan modifications are yielding results and are an important part of the effort. But certainly 

taking it further is very important. 

Chairman DODD. One of my colleagues may raise the issue of, 

boy, this gets into a very—but I recall a lengthy debate we had 

here over the issue of contracts and trust arrangements when it 

comes to securitization. And this really does get esoteric, but at 

some point I hope we would get back to that discussion on 

securitization and whether or not the contracts or the trust arrangements pose the problem of new statutory authority. But I 

gather your answer is that basically you think the Sheila Bair idea 

has merit and should be pursued. Is that a fair analysis? 

Mr. ZUBROW. That is correct, and we are certainly happy to also 

talk about the securitization point. 

Chairman DODD. I appreciate that. 

Mr. Palm. 

Mr. PALM. As I indicated at the beginning, since we are not really a significant mortgage originator—I think our subsidiary is the 

30th largest loan servicer—probably anything I have to say on this 

topic should be taken as from a level of being a novice at some 

level. But I would say two different things. 

One, I think I referred to our subsidiary, Litton—— 

Chairman DODD. You did. 

Mr. PALM [continuing]. Which was a family business created 

back in 1988, and the current CEO who still runs it is the son of 


pwalker on DSK8KYBLC1PROD with HEARING
31 

the original founder. They believe very strongly that loan modifications are a way to actually benefit the investor as well as the 

homeowner, because foreclosures really are not the most economically best thing to do. 

Having said all that, and, again, not being an expect in the program that has been announced—and as Mr. Zubrow has indicated, 

there are a lot of details—I think, you know, we are impressed by 

the fact that there is a program that looks as though it may be 

helpful and, indeed, be supplemental to some of the other actions 

and activities being taken. 

I cannot say that Goldman Sachs is, you know, standing here 

supporting it because it is just not—we are not not supporting it, 

either. It is just that we have looked at it. We would be happy to 

be involved in further commentary and happy to provide people to 

you since, as my colleague Mr. Litton, for example, I know is testifying tomorrow before one of the House committees, and he truly 

is the expert in this area. 

Chairman DODD. I am sure Barney Frank will ask him the question, and you can tell him to get ready for it. 

Mr. PALM. Pardon me? 

Chairman DODD. Tell him to get ready for Barney’s question. 

Mr. PALM. Oh, OK. Thank you very much. 

Chairman DODD. Yes, Ms. Wachter, Dr. Wachter. 

Ms. WACHTER. Yes, obviously, I am speaking personally based on 

economic incentives. I do think that Sheila Bair’s plan absolutely 

needs to be tried, and I must say I am puzzled by why it appears 

as though the Treasury has, in fact, rejected it. I do not quite understand. It seems to me that this will provide incentives, it will 

provide risk sharing, and it will at least move toward the resolution of our major problem, which is un-economic foreclosures, foreclosures that should not take place for the investor or for the borrower or for the neighborhood. 

That is not the entire solution, but I do think it needs to be tried. 

Again, the details matter and I am not completely familiar with the 

details. 

Chairman DODD. Ms. Finucane. 

Ms. FINUCANE. Thank you, Chairman Dodd. I think we are directionally positively disposed. I would say this: that there are some 

of us who have gone ahead with our own programs that are very 

comprehensive and far reaching. So, clearly, we are on this path already. And to the degree that we can understand the details—the 

concept is out there, but the details are critical for us. I think we 

are generally positively disposed, and, clearly, the more we can do 

systematically to deal with this issue, the sooner, the better. 

Chairman DODD. Mr. Campbell. 

Mr. CAMPBELL. We would agree with the context that we need 

to do something more broadly than is currently being done. A lot 

of us have done a lot of things, but in terms of a systemic response, 

there is still much to do. 

Chairman DODD. And this proposal? 

Mr. CAMPBELL. At this point, while we have not seen all the details, clearly the things that we have worked hard on in our own 

programs, one of you raised in your opening comments about the 

issue of redefault. And so as we look at the detail, what we will 


pwalker on DSK8KYBLC1PROD with HEARING
32 

clearly want to focus on are the criteria and standards being set 

in whatever large-scale program is set actually set up a mechanism 

that results in long-term sustainable homeownership as opposed to 

modifications that fall apart in a short period of time because all 

the considerations were not made at that time. 

Chairman DODD. I thank you very much. 

Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

I am going to direct my first question also to the bank witnesses. 

Secretary Paulson said that the Treasury Department is exploring 

the development of a potential liquidity facility—and I do not know 

that we know what the details are there—for highly rated, AAA, 

asset-backed securities. He said that he believes this effort would 

draw private investors back to that market and increase the availability of consumer credit. I just would like to ask those who are 

banking witnesses to comment on this proposal. 

Do you think it has merit? Mr. Zubrow? 

Mr. ZUBROW. Thank you, Senator. I believe that the Secretary introduced those ideas in statements yesterday, and there are not a 

lot of details around exactly how he envisioned the program might 

work. So I think it is a little bit difficult to really comment on 

whether or not it will work until there are more details. 

I do think that it is important that we find mechanisms to bring 

investors back into the marketplace for asset-backed securities. 

Certainly right now, to the extent that we are continuing and do 

make credit card loans, other types of loans that can be securitized, 

those loans right now are residing on our balance sheet, and certainly for the long-term health of the financial system we need to 

re-attract long-term investors into structures. And certainly anything that the Treasury Secretary, either in conjunction with the 

Fed or others, can do to encourage investors to come back into that 

marketplace, it will be very helpful. 

Senator CRAPO. Thank you. 

Mr. Palm. 

Mr. PALM. The reopening of a market for asset-backed securities 

of whatever type, whether you are talking about the credit cards 

area or whether you are talking about, you know, simply mortgages 

themselves, because it is quite clear that, you know, the banks at 

this table themselves do not have the capital for those who are in 

the business to extend all home loans that are actually necessary 

in this country; and those markets have to be open. 

Having said that, you know, we read yesterday that announcement, too, and we are not aware of any of the details yet or exactly 

how it would work. But it certainly is something that really has to 

be explored because the capital necessary to support the extension 

of credit, whether it is consumer credit, whether it is credit to businesses, whether it is credit to homeowners through mortgages, in 

essence, has to be supported by a much broader range of investors 

as opposed to just bank deposits, for example. 

So we have to do something to reopen those markets, which, as 

you know, have been almost totally shut. 

Senator CRAPO. Yes. Thank you. 

Ms. Finucane. 


pwalker on DSK8KYBLC1PROD with HEARING
33 

Ms. FINUCANE. Well, I think we are all a little bit new to this 

insomuch as he made these announcements yesterday. There was 

not a preamble to it. I think I mentioned earlier in my opening remarks that we are ourselves back into the secondary markets, purchasing mortgage-backed securities. We see the problem that he 

has outlined, particularly with credit cards, the securitization of 

credit cards and moving that debt. 

So the issue is clear. I think we would like to understand better 

specifically what he means. So I think you are hearing from all of 

us that conceptually it is interesting. We have no sense of what the 

details are. 

Senator CRAPO. Thank you. 

Mr. CAMPBELL. I would say the same. Obviously, we have not 

seen the details. Wells is a bit different in one way, and clearly, 

as it relates to the mortgage market, having a securitized market 

is critical because we cannot fund all of those mortgages. 

As it relates to credit cards and student loans, we have not 

securitized those assets. Those are assets that we have chosen to 

hold in our portfolio, and so as it relates to us specifically, it would 

not do much for us, at least in two categories. Clearly on the mortgage product, it is very important that those markets function effectively. 

Senator CRAPO. Thank you. What I hear from all four of you, basically, though, is that the notion of going into some type of development of a liquidity facility for these highly rated, AAA, assetbacked securities is an important focus that we should be taking 

with our efforts right now. Is that correct? Did I misunderstand 

that from any of you? 

[No response.] 

Senator CRAPO. I will take that as acknowledgment. 

Is there a no here? Mr. Eakes, would you like to respond to that? 

Mr. EAKES. I wanted to put in a word of caution. I think until 

we fix the problems that we have with asset-backed securities, we 

should be careful about trying to promote its regrowth. So the ratings agencies were a problem in rating AAA paper. We are basically talking about setting up a Government-owned structured investment vehicle, SIV, that got Citibank into trouble. We need to 

think about the regulatory structure. We need to make sure that 

the loans that are made cannot be passed into a structure without 

responsibility or liability passed back to the people who originated 

it. 

And, finally, I think that by putting $250 billion of equity into the banking system, normally that should leverage $10 to $12 for 

every dollar of equity, so we have basically enhanced the balance 

sheet capacity of the banks in America by $2.5 to $3 trillion that 

they can add. The whole credit card market, the entire credit card 

market in America is about $1 trillion. So we have the ability to 

have, as the Wells representative mentioned, the ability to hold 

much of these assets on bank balance sheets because of the equity 

we have invested. 

So I just think we have some significant problems in the assetbacked market as we have heard the technical discussions about 

how do you modify loans once they are in there, what can you do; 

and we have in no way fixed those problems yet. 


pwalker on DSK8KYBLC1PROD with HEARING
34 

Senator CRAPO. Those are good cautions. Your answer to the 

question raises another point, though. You indicated that the injections of liquidity should have a 10 to 12 factor of leveraging in the 

marketplace. And I would just like to ask any of our witnesses: Has 

that, in fact, occurred? Have we seen that kind of—— 

Mr. EAKES. It will take time, but that is the normal leverage 

level for banking equity. 

Senator CRAPO. But we are not seeing it right now. 

Ms. FINUCANE. Could I just—— 

Senator CRAPO. Yes. 

Ms. FINUCANE. I think it is still premature. We received this 

money a week ago. The investments were made literally a week 

ago. So I think it is premature to be thinking what has the effect 

been other than you are seeing movement, and I think that is a 

positive. 

Senator CRAPO. And we are seeing the movement. 

Ms. FINUCANE. Well, we are seeing the early stages of some 

movement, but it is just so early, 1 week in. 

Senator CRAPO. All right. 

Mr. CAMPBELL. I think the other thing—— 

Mr. EAKES. The combination of equity and raising the deposit insurance means that over time there will be a growth of balance 

sheet capability by the banks who have received these equity injections. 

Senator CRAPO. OK. I assume what I am hearing is that we are 

seeing movement and that that is positive movement. Mr. Campbell. 

Mr. CAMPBELL. The only caution I think we all have to remember 

is that there are two sides of this equation. There is clearly the capability that our balance sheets now have, but there also needs to 

be economic stimulation that requires the need for borrowings as 

well. And so I think clearly the capacity side has been addressed. 

I think one of the economic issues that we as a country struggle 

with is how do we move from a stagnant environment to a growth 

environment that then can utilize the capacity that has been generated. 

Senator CRAPO. Well, thank you. I see my time has expired. 

Chairman DODD. Thank you very much, Senator. 

Senator Johnson. 

Senator JOHNSON. For the four representatives of financial institutions, beginning with Mr. Zubrow, does your institution intend to 

use capital purchase funds for investor dividends or to acquire 

other institutions? 

Mr. ZUBROW. Thank you very much, Senator, for that question. 

Obviously, the money has gone into our capital base. We pay dividends out of our retained earnings. So far this year, JPMorgan 

Chase has had profitable quarters in each of our quarters, and we 

anticipate that will be the case for the fourth quarter. And so we 

would anticipate that dividends will continue to be paid out of our 

earning stream and not out of our capital base. 

Obviously, we recognize that there is a restriction in the CPP 

which limits our ability to increase or change our common dividend 

policy, and certainly we have no intentions of doing that until the 

funds are repaid. 


pwalker on DSK8KYBLC1PROD with HEARING
35 

Senator JOHNSON. Do you intend to purchase other organizations? 

Mr. ZUBROW. You know, I think that there has been a lot of debate in the press about, you know, whether or not the CPP is going 

to be used to somehow purchase healthy organizations. And I think 

that, you know, we obviously have participated in two very important acquisitions during this year, you know, very much in conjunction with Federal regulators, both the acquisition of Bear Stearns 

and the acquisition of Washington Mutual, both of which, you 

know, we would characterize as acquiring, you know, failing institutions, and through those acquisitions we really think that we 

helped protect the soundness of the financial system, and certainly 

in the case of Washington Mutual, prevented the need for any 

FDIC funds to go into that—you know, against the Deposit Insurance Fund. 

So, you know, when we think about acquisitions, right now, you 

know, it is very much in line with those types of situations where 

we think that we can be helpful to the safety and soundness of the 

system. 

Senator JOHNSON. There is no intention to purchase healthy institutions? 

Mr. ZUBROW. Right now, you know, we obviously are presented 

with a number of different types of acquisition opportunities, and 

we will continue to evaluate those based on our historic criteria. 

But, you know, certainly right now there is not something that, you 

know, I would characterize as saying we are looking to purchase 

a healthy banking institution. 

Senator JOHNSON. Mr. Palm. 

Mr. PALM. First, on the dividend point, I will reiterate much of 

what JPMorgan has said. We pay dividends out of our retained 

earnings. We have had earnings in each of the first three quarters 

this year. We really do not pay dividends in a sense out of a certain 

amount of the TARP capital that has come into us at all. 

I would also just like to mention the fact—I think which others 

have alluded to, so I will, too—that in advance of the TARP money, 

we had obviously engaged our own private capital raise of over $10 

billion literally a week before so that we have right now a very 

healthy and highly capitalized balance sheet, which I think, as I 

said earlier, all augur well for the goal of increasing liquidity and 

capital committed to markets and what people want to accomplish 

in business and otherwise. Because one thing I would say is that 

there is no purpose whatsoever for us to sit on money because we 

pay out returns to the Government in the case of the preferred that 

you have purchased, we pay out returns to a variety of other people, and our interest is putting money to work, not sitting on it. 

On the topic of acquisitions, I can say two things. One is, as you 

probably know based on our history, our growth has basically always been organic as opposed to, you know, major acquisitions. We 

have done a few from time to time, but that is just the way we 

have developed. The most obvious example would be our asset 

management business, which, over a period of 10 years, we built 

from $50 billion in assets to almost $1 billion in assets, and that 

was all done basically through organic growth. 


pwalker on DSK8KYBLC1PROD with HEARING
36 

Now, we have no acquisition on the table right now, you know, 

involving a healthy bank that we are looking at. In the same way 

as other institutions here, a variety of proposals no doubt will be 

presented to us over time, and I think as you also know, we are 

sort of new to this sector to the extent that we are in the so-called 

classic banking sector and we are finding our way. 

Whether or not, for example, we provide liquidity to the market 

by purchasing, you know, we will call it deposits from failed institutions or otherwise, I cannot say. But in terms of the acquisition 

point you make, we have no current plan. 

Chairman DODD. Could I just interrupt for 1 second on that point 

that Senator Johnson has raised? There was a statement put out 

by Goldman last evening, and it says—was this last evening? A few 

days ago, excuse me. But it goes on talking about the company, and 

let me just finish this statement. It is ‘‘creating a new one, GS 

Bank USA, that will have more than $150 billion in assets, making 

it one of the ten largest banks in the United States, the firm said 

in a statement last night. The firm will increase its deposit base 

‘through acquisition and organically.’ ’’ 

Now, that is the statement from Goldman. I want to raise that 

with you. 

Mr. PALM. I think that the acquisition point does not mean that 

we are acquiring or have a current plan to acquire, you know, a 

particular healthy bank. As I think you are well aware, there are 

a variety of situations now where there are failing institutions and 

otherwise where their deposit base, in essence, for want of a better 

word, is being sold. And so we may end up acquiring deposits in 

that way. But it is not a plan for the use of the TARP money. 

Chairman DODD. I apologize, but I just wanted to raise that. 

Senator JOHNSON. What does Bank of America have to say? 

Ms. FINUCANE. Well, obviously we got the money, and we will 

use the money to strengthen our capital ratios and to invest and 

to loan. So we have already—I think I mentioned earlier in my oral 

testimony that we have already gone into the secondary market, so 

that is some of how we would deploy the money. 

Certainly we would not be using it to increase our dividend. Like 

the others, we pay dividends on retained earnings. 

I think relative to healthy banks, we are in the midst of our 

Countrywide transition and soon hope to have acquired Merrill 

Lynch. So I think we are fully engaged, shall we say. I think on 

the longer term, I think the question is more about are there troubled assets or troubled banks to which these healthier companies 

can continue to make investments. I think it is—we do not know 

of any, and it would be inappropriate for me to comment on that. 

That is the job of our CEO. But there would be no plans in that. 

Senator JOHNSON. Mr. Campbell. 

Mr. CAMPBELL. Senator, Johnson, three comments. The answer 

as it relates to dividends is, no, we will not use the CPP funds to 

pay dividends. The one caution, I think, we all have to be thoughtful on is that continuing to pay dividends at appropriate levels, 

while we maintain appropriate capital levels, is critical to investor 

confidence remaining. And so I would just say that while we clearly 

agree with you that the use of the funds is not for dividends, to 


pwalker on DSK8KYBLC1PROD with HEARING
37 

consider restricting dividends could have unintended consequences 

that we all should be thoughtful of. 

Point two as it relates to using the funds for acquisitions, just 

to be clear, we did acquire—we announced to acquire Wachovia. 

We made an announcement 10 days before the CPP was announced. And so earlier this week we completed our own capital 

raise to assure that we have the appropriate levels of capital to 

complete that transaction. So, clearly, we are not using CPP funds 

to complete that transaction. 

And, third, as it relates to our plans for further bank acquisitions, I would be right beside B of A in saying we are fully consumed. It is critical that we do a really good job of transitioning 

the Wachovia transaction for the good of their customers, their 

communities, and all of our shareholders. 

Senator JOHNSON. My time has expired. 

Chairman DODD. Thank you very much, Senator. 

Senator Martinez. 

Senator MARTINEZ. Thank you, Mr. Chairman. 

I want to go back to the issue of your efforts to attempt to solve 

families’ problems and keeping people in their homes, and I specifically want to speak to both of you since you seem to be both having 

active programs in this regard. 

How are you managing or are you able to work out loans in 

which the paper has been securitized? Have we been able to get to 

the point where those—not the paper you are holding, but that 

which has been securitized? Are you working those out? 

Ms. FINUCANE. Yes, we are having some luck at that. About 12 

percent of our mortgage portfolio we own, and the rest is—— 

Senator MARTINEZ. Twelve percent you own, so the vast majority 

of it is in the other category. 

Ms. FINUCANE. We feel that we have the covenants to be able to 

cover about 75 percent of that in terms of in the best interest of 

both the investors and in the best interest of the homeowner. But 

we are making progress. 

Of course, our program does not fully engage until December 1st, 

but even heretofore, we have been able to work out about 200,000 

homeowners to prevent foreclosure. 

Senator MARTINEZ. Mr. Campbell, we welcome you to the State 

of Florida. What are you going to do for our homeowners that are 

in trouble? 

Mr. CAMPBELL. Let me respond to that. First of all, our portfolio 

is different than many other peers’ portfolios in that it is composed 

primarily of two categories: our own owned loans, and then a high 

percentage of loans that we service for Fannie and Freddie. Fortunately, we have not had the same degree of negative amortizing 

loans and some other problem assets. 

Having said that, we have always believed that, to get to your 

issue specifically, one of the things that had to be accomplished 

very quickly was to come to some agreement with the people who 

we service for, and in our case that means Fannie and Freddie. So 

this week’s agreement to the streamlined program with Fannie and 

Freddie will clearly help us greatly in our servicing responsibility 

and being able to reach resolutions that are appropriate for those 

homeowners that we are responsible for the servicing. 


pwalker on DSK8KYBLC1PROD with HEARING
38 

Just a couple statistics in our case. It is all about contact. Currently, we are reaching about nine out of every ten customers who 

are beyond 60 days delinquent, so we are having good connections 

at the beginning. And then in about seven out of ten situations, 

they actually do ask us to help them figure out a resolution to their 

situation. And then in about five out of ten, we are actually able 

to mitigate foreclosure and enter into some form of modification 

that we believe increases their long-term sustainability of that 

homeownership. 

Senator MARTINEZ. I guess what you are saying is that you are 

not being hampered in your ability to do that by the issue of 

securitization in your situation. 

Mr. CAMPBELL. It has been challenging in that we had—for all 

the things you have heard, we have had to be extremely careful to 

make sure we were complying with our agreements, which in our 

case are primarily Fannie and Freddie, and the fact that we now 

have agreement and we have institutionalized that, it is a strong 

improvement from where we were. 

Senator MARTINEZ. Mr. Zubrow. 

Mr. ZUBROW. I think the issue that you raise and others have 

raised is obviously a very important one across the securitization 

industry. I would note that in the House hearings yesterday the 

ASF organization which represents a number of the major investors and securitization pools, you know, indicated that they had a 

much greater willingness to work with the industry to devise a 

methodology to address this issue. And so we very much welcome 

that movement and look forward to working with them on this. 

It is absolutely clear that there has to be a balancing of what is 

the value to the holders of the paper to be able to have a loan 

modification and an avoidance of foreclosure. We certainly think 

that that is a balancing which can be done in the appropriate circumstances to the benefit of the securitization holders, and we certainly look forward to working with the different industry groups 

to devise a much more streamlined process to be able to get to that 

end. 

Senator MARTINEZ. OK. Dr. Wachter, I wanted to ask you if you 

could tell us your view of the bankruptcy issue. I know that it is 

appealing to think that a judge could just modify the mortgage. 

However, my lawyerly sense tells me that if you have a contract 

and all of a sudden it is going to be dramatically modified by a judicial fiat, there may be something that investors might look 

askance at, and there may be a liquidity issue going forward in 

terms of mortgage money. 

Can you tell me your view of that? I am trying to stay away from 

those that obviously have a point of view that may be different and 

maybe looking to you as an impartial observer. I have no idea. I 

am violating my own lawyerly world, which is not to ask a question 

you do not know the answer to. But I have no idea where you are 

coming from, and I would love to know your thoughts. 

Ms. WACHTER. I do believe that the importance of contracts that 

can be relied on is critical to any system that is a basic capitalist 

system because you have to rely on contracts in order to determine 

what the risk is. 


pwalker on DSK8KYBLC1PROD with HEARING
39 

On the other hand, as I said in my oral comments, the Nation 

is at risk, and I do think we need to have loans modified that are 

economically rational to modify at a much faster pace than is currently occurring. I do think that the Fannie and Freddie announcement yesterday is going to be quite helpful, but it does not get to 

those securitized loans that Mr. Zubrow just pointed to, and he 

said that he was looking forward to sitting down and getting some 

of those issues resolved. 

We have been in this crisis for a year now, or more, and it is 

worsening. We need to have those folks at the table. We need to 

get those issues resolved. And I think all options have to be at that 

table in terms of getting people together and incentivized to discuss 

what will happen going forward. 

Senator MARTINEZ. Do you think the IndyMac model that is 

being utilized by the FDIC would be one that could be—— 

Ms. WACHTER. Absolutely. 

Senator MARTINEZ. [continuing] A more helpful model than a 

bankruptcy model? 

Ms. WACHTER. That absolutely appears to be consistent with current contracts so that is indeed a solution. But the problem is that 

even that solution does not appear to be formally being adopted. In 

fact, quite the contrary, it appears to be rejected. 

Senator MARTINEZ. Maybe we can work on that one first. 

My time is up. Thank you, Mr. Chairman. 

Chairman DODD. Thank you very much. 

Senator Casey. 

Senator CASEY. Mr. Chairman, thank you very much. 

I wanted to address my first question to Mr. Eakes, Dr. Wachter, 

and also Nancy Zirkin, with regard to some of the discussion we 

just heard in this context, this very simple but important question, 

I think, in terms of what we are going to do prior to even the next 

administration. 

What should the Congress do this month to take action—which 

I think there is consensus on, I think it is a strongly held belief 

that I have—that we cannot, as so many have stated today, deal 

with this problem adequately unless we address directly the question of foreclosures and modifications of troubled mortgages? But 

what should the Congress do this month to address that problem? 

Nancy, we will start with you. 

Ms. ZIRKIN. Yes, it is my pleasure. Thank you, Senator. 

I think, first of all, I am very disappointed about the Treasury’s 

decision yesterday because for us, while we do not know everything 

about Sheila Bair’s plan, it sounds promising, and we have to do 

something. It sounds promising principally because it really gives 

servicers incentives. It also seeks to change the terms of the mortgage, interest first and then principal if necessary. 

I invite you all to read a fascinating study by a professor of law 

at Valparaiso University—I believe it is unpublished, and I can get 

you a copy—Alan White. And he makes the point that unless you 

do these things, that is, restructure either the interest or the principal, then it is just kicking the can down the road. And for our 

communities they are in desperate straits. We cannot afford to 

have Congress wait. The Bank of America is doing a really good 

job, but it is not going to kick in for another month, I am hearing. 


pwalker on DSK8KYBLC1PROD with HEARING
40 

And the magnitude of this problem is so huge that what I think 

Congress ought to do is pressure Treasury into the FDIC plan and 

pass bankruptcy reform, Senator. 

Senator CASEY. OK. Thank you. 

Doctor. 

Ms. WACHTER. Well, I certainly think we need faster action on 

the potential solutions that are at the table and perhaps more understanding why they have not been embraced. If there is a good 

reason, we need to hear it. 

We also need to bring the securitization industry to the table to 

directly ask them the question you have asked us: What will it 

take? 

Senator CASEY. Mr. Eakes. 

Mr. EAKES. I know Senator Martinez does not want to hear this 

exactly because he had very legitimate questions about the bankruptcy provision. But if there was one thing you could do in the 

next month, it would be to pass that provision, and here is the reason why: It was limited in its effect to loans that are going to go 

into foreclosure, so it is not going to impact other loans. It is going 

to only impact those loans that would otherwise suffer the loss to 

the borrower of being out of their homes and the loss in the neighborhood of having a vacant home. It costs the taxpayer nothing, 

and actually the State of Florida will be the State that has the 

largest number of residential units that are underwater—not the 

real water, but underwater in that their debt will be much higher 

than the value of the property. 

With some of the payment option ARMs, you cannot solve or 

modify those loans without doing both. You have to lower the interest rate and you have to lower the balance, or you cannot keep the 

families in those homes. So I think if you had only one shot to 

make in the next month, that is the one with the protections that 

are built into that bankruptcy provision. 

I would also add that if—when we had the discussion about the 

equity investment in the banks, no bank is going to use the equity 

investment to pay dividends or to pay executive compensation. 

That is not really the right question. Normally, equity invested in 

a bank has a return in good years of 20 percent; in average years, 

15 percent. So if you are only being charged by Treasury 5 percent 

and you earn an average year on equity of 15 percent, you have 

got a 10-percent earnings gain. So for one of the banks that received a $25 billion investment of equity, they potentially will have 

an earnings attribution specifically because of this program equal 

to $2.5 billion. That would just be sort of standard banking numbers. 

So the question would be: Can you use that $2.5 billion that is 

going to be contributed to your operations to enable you to support 

this bankruptcy type provision? When I have talked—and I have 

talked to the CEOs and senior executives of virtually all of the 

banks and this table, and others, their major concern was not that 

they would lose money on the homes that would go through the 

bankruptcy provision, as narrowly as it was drafted. They were 

worried that the other debts, like credit card debts or car loans 

that are in trouble, would create an ancillary loss for the bank. My 

belief, which I believe really strongly is that once you have gotten 


pwalker on DSK8KYBLC1PROD with HEARING
41 

deposit insurance protection, once you have had all the liquidity 

benefits that Senator Dodd elicited, and once you have a direct taxpayer investment in the company, it should not be too much to ask 

for each and every one of these banks to say, ‘‘We are going to take 

a little bit of loss on our credit cards in order to fix the problems 

that are devastating the coasts of Florida.’’ We are only halfway 

through the problem of subprime loans alone. You know, the number of loans that have been foreclosed that were subprime is less 

than the number of seriously delinquent subprime loans that are 

still outstanding and in trouble. We are only halfway through the 

subprime, not to mention a third of the way or less with the AltA and the payment option ARM. We are nowhere near the end of 

this tunnel. 

So I would say that is the No. 1 thing to do quickly, and then 

I mentioned earlier the Sheila Bair/FDIC proposal is just an absolute no-brainer. There is just no reason that we should not get that 

done in the next week. 

Senator CASEY. Thank you. I think what we have with the housing market and the foreclosure problem itself is an ever bleeding 

wound which we have not dealt with. I am out of time, but I do 

want—just for the record, Mr. Chairman, one of the missing pieces 

of information here, it seems, is a very definitive number in terms 

of the number of homeowners that have been helped in the last 

year or two, with all the efforts that are made, the voluntary efforts by Treasury and the administration, the statutory provisions 

that you led the charge on and our Committee worked on, as well 

as the recent Emergency Economic Stabilization Act. There is no— 

there does not seem to be a fixed number on the record of how 

many have been helped, and I noticed going through the—I did not 

have time to ask this, but with regard to the institutions represented here, you go down the list: JPMorgan Chase, Goldman, 

Wells Fargo, and Bank of America. References in your testimony 

to how many homeowners have been helped in the last 2 years, the 

last year, how many projections, how many people are projected to 

be helped, and they are all over the lot. And one thing, if Treasury 

is not requiring it, I think this Committee should, in terms of amplification of the record, have each of your institutions submit for 

the record of this hearing, for this Committee, exactly how many 

homeowners have been helped and the documentation of that, and 

then also the projection that you have of the number of homeowners you will help in the next year or 5 years—some kind of very 

specific report so at least this Committee—if Treasury is not requiring it, as they should, at least this Committee will have an accurate record of what your numbers are, because I see numbers all 

over the lot: 250,000 families helped, 41,000, all these numbers 

floating around, and there is no specific reporting requirement. 

So, Mr. Chairman, if there is a way to make that part of the 

record as well as to encourage Treasury to require it—— 

Chairman DODD. You just did. We will make the request, and 

this is a formal request now. 

Mr. EAKES. Could I add one more point to that question? 

Chairman DODD. Certainly. 

Mr. EAKES. On page 4 of my written testimony, we talked 

about—we look at the actual modifications that have been reported 


pwalker on DSK8KYBLC1PROD with HEARING
42 

through Hope Now, the voluntary industry association. And one of 

the things I want to emphasize is that we need to have a system 

that gives you loan by loan, loan-level reporting of the modifications that can be studied, not identifying data, because if someone 

gave you a report and said here is the number of modifications I 

made, you have no idea whether that was meaningful or not. So 

the State Attorneys General have reported that of all foreclosures, 

80 percent received no modification whatsoever in the past year. Of 

the remaining 20 percent, the vast majority of the modifications reported by good lenders—the good guys—were what are called repayment plans, which is where you add to the payment each month 

and actually increase the monthly payment for the borrower. Only 

about 290,000, over all of the lenders in the last year, were actually 

modifications that reduced the payment level. 

And so I am optimistic. I think we have tremendously capable 

banks who have made announcements this week that are very encouraging. But I am also a little bit factual that I have heard 

pledges, and the problems are just so intractable that if we wait 

and give it time, 18 more months, Florida is going to be a disaster. 

I mean, it is already hurting, but it is going to be even worse than 

it is now. So we just cannot rely on voluntary modifications unless 

you are going to get the data, you know, in a loan-by-loan fashion 

that says here is what the payment was before the modification, 

here is what the interest rate was, here is what the loan balance 

was, and here is what it is after the modification. 

Senator CASEY. I am finished, but I would amend my request to 

include that kind of information, because I think you are right. 

Just an assertion of modifications can be, I guess, in the eye of the 

beholder and depending on what information you convey. 

Ms. WACHTER. And if I may just for a moment, I just wanted to 

encourage that as well. What Mr. Eakes says is absolutely right. 

There are loan modifications and loan modifications, and they need 

to be tracked so that we know actually the loan modifications are 

real. 

Senator CASEY. Yes. Thank you. 

Chairman DODD. Thank you, Senator Casey. 

Before I turn to Senator Brown, I just want to pick up on this 

bankruptcy provision. I appreciate Senator Martinez’s raising it. 

This Nouriel Roubini is a noted economist, and just to quote him, 

he said, ‘‘When a firm is distressed with excessive debt, it goes into 

bankruptcy court and gets debt relief that allows it to resume investment, production, and growth. When a household is financially 

distressed, it also needs debt relief.’’ 

The lack of debt relief to the distressed households is the reason 

why this financial crisis is becoming more severe, and the economic 

recession with a sharp fall now in real consumption spending is 

worsening. 

The idea that you can go into bankruptcy court and protect your 

boat, if you want to, your car, and your vacation home—you can 

do that. Those are all contracts, and you can protect those in a 

bankruptcy court. But you cannot protect your primary residence. 

There is something fundamentally false about that notion. Your 

boat, your car, and your vacation home, I can protect. But I cannot 


pwalker on DSK8KYBLC1PROD with HEARING
43 

protect your primary residence and let you get back on your feet, 

work this thing out, and get on your feet again. 

So I just hope—and I do not know whether we are going to do 

it next week or not, but I certainly intend, along with others here, 

to try and raise this. And I hope in the context—we are talking 

about distressed mortgages. We are not talking about doing it for 

a limited period of time. But we ought to be able to build a bipartisan coalition of support. That is the one single thing I know of 

that I think could make a difference, that we could make a difference on, aside from the efforts by the Treasury to step forward. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. Thank you for your 

passionate and very sensible words there. 

Mr. Eakes, I want to follow up on Senator Casey’s question to 

you about the loan modification and the FDIC proposal. Do you believe if Treasury and FDIC and Sheila Bair and the administration 

can work on that under the provisions that we wrote into the bill 

a month or so ago, do you think that would deter banks from participating? And if it did have that effect, would it matter? Since 

this does not seem to trigger Treasury’s concern about possible—— 

Mr. EAKES. What would deter them? 

Senator BROWN. Would requiring banks to participate in the 

Capital Purchase Program, engaging in loan modification similar to 

the FDIC proposal, would that deter banks from doing it, from participate in the program, in your mind? 

Mr. EAKES. I do not think so. I mean, we have seen the banks 

at this table and others who have announced their own programs. 

So if I missed your question, I will try to come back. So the Treasury/Sheila Bair proposal is to help induce, so it is offering a benefit 

that is explicitly tied to doing loan modifications that are deeper 

than what is becoming the industry standard. Right now we are at 

a standard that says if a borrower is paying 38 percent of his or 

her household income for a monthly mortgage payment, that is OK. 

Well, when I grew up and most of us grew up making home loans, 

we thought 25 percent was the level that was acceptable for housing payment. 

So what is unique in the Sheila Bair plan is that the proposal 

is you would only get this guarantee or public benefit if you reduced the payment for the borrower down to 31 percent. We have 

got some lenders whose loans are higher than 38 percent, which is 

the standard that we have heard this week, as the ratio of payment 

to income who are making loans now at 50 percent, 45 percent. 

So what is going to happen? One month later the borrower is 

going to come in and say, ‘‘Well, how about reducing my payment 

to 38 percent?’’—which we have acknowledged is the affordable 

level. The banks—unfortunately, the $250 billion is largely already 

committed, and so it would have to be some sort of renegotiation 

or jawboning. There is not going to be new banks, I do not think, 

unless we expand the $250 billion to be a larger share of the $700 

billion. 

Senator BROWN. OK. Thank you. 

Mr. PALM. Senator Brown, could I mention—— 

Senator BROWN. Sure. 


pwalker on DSK8KYBLC1PROD with HEARING
44 

Mr. PALM. There may be an industry standard, but Litton, for example, applies 31 percent and has applied it for a long time. 

Mr. EAKES. That is fabulous, and that is why—— 

Senator MARTINEZ. What is the name of the entity? 

Mr. PALM. Sorry. Our subsidiary, they use a 31-percent level, the 

one that has been referred to, and that is one of the reasons why 

they think you can actually do something positive for both the 

homeowner as well as the investor. 

Mr. EAKES. And I will bet that Larry Litton’s redefault—he is a 

great guy—that his redefault, once you get a borrower to the 31- 

percent level, which is more affordable, is much lower than the 

modification plans that allowed a much higher portion of your 

monthly income to go to the debt. I bet you—— 

Mr. PALM. Well, it is conceivable that it would not be much lower 

simply on the basis that if people do not have the income to pay 

more than a certain percentage—— 

Senator BROWN. OK. Let me shift. Ms. Zirkin, in your testimony 

you discuss the failure of voluntary efforts to provide much relief. 

You recommend we put in place an affirmative duty on servicers 

to engage in sensible loan modification. Mr. Eakes pointed out earlier the incentive for them to foreclose. Talk to me about your 

thoughts there, expanding on that. 

Ms. ZIRKIN. What we have seen, Senator, is that the voluntary 

efforts—and I am just going to say it—have not worked. Martin 

Eakes has just outlined research that said, as I understand it, very 

few, relatively speaking, were actually helped. 

Senator BROWN. So how do we get servicers to do these loan 

modifications? 

Ms. ZIRKIN. I believe there are two ways. It is the bankruptcy 

bill, bring them to the table—voluntary has not worked—and the 

FDIC plan, because there are incentives, as I understand it, in this 

plan to bring the servicers to the table, because they have incentives, they will be able to modify loans. But it is a very complicated 

problem in terms of, as we all know, of the securitization problem, 

and unless people are forced to come to the table with all these intricate loans all intertwined, it is not going to happen. And yet 

every month, every week, more and more homes are foreclosed on, 

and I believe at this rate it is already a tsunami. But it is going 

to affect not just Florida, not just Nevada, not just a few States in 

major ways, but every single State. 

I hope that answers your question. 

Senator BROWN. Do you want to say something, Ms. Finucane? 

Ms. FINUCANE. Yes, I would. I would just like to say that on behalf of the banks, or at least sort of directionally speaking, first of 

all, it is true that traditionally the interest rate modifications were 

not part of these workouts, but they are now, and they have been 

there the vast majority of the workouts now, one. 

Two, at least in our case, even though we have not launched the 

$8.4 billion program for what we think will be 400,000 homeowners, we already have in this year been able to prevent 200,000 

people from foreclosure. So if we had a foreclosure potentially of 

about 300,000, 200,000 of those did not go into foreclosure, and the 

vast majority of those are interest rate modifications. 


pwalker on DSK8KYBLC1PROD with HEARING
45 

So I just want to speak on that I think the progress being made 

in the last year is enormous, and I just do not want that to go unnoticed. 

Senator BROWN. OK. Thank you. 

Let me finish with asking a question of the three bank witnesses, 

Mr. Zubrow, Mr. Campbell, and Ms. Finucane. It is a follow-up of 

Senator Johnson’s question an hour or so ago. 

Since none of you, you say, the three banks here, have plans to 

acquire a healthy bank, would you object to a prohibition on that 

activity for CPP recipients? Mr. Zubrow. 

Mr. ZUBROW. I think, Senator, one of the issues that, you know, 

obviously has to be considered is that any sort of prohibition is, you 

know, hard to figure out in its actual application as to what you 

would call a healthy bank versus an unhealthy bank, and whether 

or not the funds that were going to acquire that were coming from 

the CPP or from other funds, you know, that the banking organizations already have. 

So, you know, I think that while we have certainly made it clear 

that, you know, our interest is, you know, focused on the work that 

we have already done with the unhealthy banks, it is hard to figure 

out how such a prohibition would actually be applied. 

Senator BROWN. Ms. Finucane. 

Ms. FINUCANE. Yes, I am not sure we understand exactly what 

the concern is insomuch as obviously that is not where we have put 

our attention. We are in the middle of two acquisitions we have 

made with companies that I think you would consider less than 

healthy, one. 

Two, prospectively, we have talked about that we will put this 

money to work both for our capital ratios for lending and for investment in the secondary market. 

So it is just very hard to anticipate what over the next 5 years 

might come and whether you would not actually encourage us to 

do that. 

Senator BROWN. Mr. Campbell. 

Mr. CAMPBELL. I would say that clearly the intent at Wells Fargo 

is to use that capital to continue to lend and lend more, as well as 

to help remedy the crisis that exists in the home mortgage business. And as a result of that, to put other provisions on us that 

would not allow us to pursue normal activities that we have pursued over the years, I think we would probably would not be in 

favor of that kind of prohibition, because just like others here, 

while we are currently not in a position because of decisions we 

made to pursue acquisitions, in 3 or 4 years we may very well be 

in a position where we would like to do that, and then having 

agreed to a provision that would not allow us to do it would certainly not be something we would like. 

Senator BROWN. OK. Thank you. 

Thanks, Mr. Chairman. 

Chairman DODD. Thank you very much, Senator Brown. 

Let me ask you, I have just been going over the numbers for our 

lending institutions that are here that the capital infusion allows. 

In the case of Wells Fargo, you will be receiving or have received 

$25 billion. In the case of Bank of America, it is $15 billion, but 

I notice that Merrill Lynch is getting $10 billion, so I presume that 


pwalker on DSK8KYBLC1PROD with HEARING
46 

is $25 billion for Bank of America. Goldman Sachs gets $10 billion, 

and JPMorgan Chase gets $25 billion. 

Just out of curiosity, there are two sets of issues. Obviously, the 

foreclosure mitigation is a set of issues, and then the question is, 

of course, getting lending, getting credit out the window. 

Have any of your institutions set up Committees, forming any 

groups at all within your institutions that are out trying to identify 

creditworthy customers that may be the source of some of these billions of dollars, $125 billion that is going out to nine institutions; 

for some of them here today I have identified the number. I would 

be interested in yes or no, we have or we have not. Has there been 

any effort at all to utilize this money, this pool of money, to go out 

and identify the kind of borrowers out there that would help begin 

to release the stagnation that is occurring in the credit markets? 

Mr. Campbell. 

Mr. CAMPBELL. I would be happy to comment on that. Wells 

Fargo has demonstrated an ability to generate revenues at doubledigit levels for long periods of time, and so for us, it is not a new 

endeavor. Our company has always been about driving our performance through prudent revenue growth, and so for us, this is 

just what we do for a living. We are constantly seeking to increase 

the levels of credit that we provide to our marketplaces, and as I 

said in my testimony earlier, I think we are proud of the amount 

of lending that we have been able to do during these very unprecedented, difficult times. 

Chairman DODD. So there is no new entity that Wells Fargo is creating in light of the $25 billion. How about Bank of America? 

Ms. FINUCANE. I think it is a similar answer insomuch as we are 

focused on what can we do with the $25 billion—or right now it is 

$15 billion for us. We have obviously already gone out to the secondary markets. We see some other issues, though, Chairman 

Dodd, which is the interest rates need to come down for the mortgage borrower probably to make it more attractive. That has not 

happened yet. Second, that the American public really is not borrowing to the degree that it was before because of the credit 

crunch, because of concerns about unemployment. 

Chairman DODD. Is this chicken-and-egg, though? You know, one 

of the things is they are obviously not borrowing because credit has 

seized up, and credit has seized up because people are not borrowing. I mean, it seems to me we are going to in a circular motion 

here. I am looking for some proactive kind of thing that says, you 

know, here is a new pool of money for us and we are going to go 

out there and advertise and shop and people step up to the plate 

here, we are ready. 

Ms. FINUCANE. Right. Well, I think that we are ready, and we 

are certainly there to lend to any creditworthy individual or business, but we have got to do it judiciously, as you would expect us 

to. 

Chairman DODD. Yes. Mr. Palm, or maybe JPMorgan or whoever 

wants to comment on this. 

Mr. PALM. I will go next. We have not established a new committee. However, what I would say, as I indicated earlier, is our 

whole business is committing capital and using it, and we have got 

now additional capital, and we have to earn a return on it for all 


pwalker on DSK8KYBLC1PROD with HEARING
47 

of our shareholders, including the Government. And in that connection, our whole investment banking division is, in essence, there to 

service corporate relationships all around America. And part of the 

business model is to help them achieve whatever they are trying 

to do, and part of that may well be that they have something they 

need to do which will create, you know, productivity, jobs, innovation, or however you want to describe it, which will require additional capital. If you have more capital now, we will be able to commit some of it. That is a natural activity which, you know, just is 

a recurring phenomenon. There is nothing new there. But we are 

certainly active. 

Chairman DODD. Mr. Zubrow. 

Mr. ZUBROW. We actually have set up some new committees. 

There are—— 

Chairman DODD. I should have started with you. 

[Laughter.] 

Maybe we could have gotten a chain reaction here. 

Mr. ZUBROW. I was pleased not to be the first speaker for a 

change. But, Mr. Chairman, in fact, several weeks ago our Chairman and CEO, Mr. Dimon, tasked two subcommittees of our Operating Committee, which manages all the operations of the bank, to 

focus on just this very question. You know, how can we much more 

proactively reach out not only to our existing customer base but to, 

you know, other parts of the economy in order to utilize this capital, as well as other capital which we have, in order to help stimulate lending activity. 

Chairman DODD. OK. Well, that is good news. I appreciate, by 

the way, some of the steps that JPMorgan Chase has made as well. 

I should have made that point, as I did about Bank of America earlier. 

Let me ask our bankers here as well, you heard the kind of debate and discussion like we had just before you walked back in 

again on the bankruptcy provision, and you have heard Mr. Eakes 

describe it. I should have probably done that as well. This is only 

for distressed mortgages, for a limited amount of time. And I know 

historically there has been opposition for all the obvious—the 

cramdowns make you very uneasy, and the point that Senator Martinez raised, the discussion about contract issues and the like. 

Tell me how you feel now about this. Obviously, we have got a 

serious problem on our hands here, and we are looking for ways 

to move this. Is it still the position of those who are here individually—without trying to speak for the universe of bankers, Mr. 

Campbell, we will begin with you. Are you adamantly opposed to 

this idea of trying to do something for a limited amount of time 

under circumstances that might very well produce the very results 

that happened in the farm credit areas back a number of years 

ago? And I understand there are differences. I am not going to try 

and draw analogies that are perfect. But the idea here that would 

actually maybe promote the kind of steps that we are all trying to 

achieve, how do you feel about this now? 

Mr. CAMPBELL. Mr. Chairman, I want to start by, again, really 

confirming that we understand the sensitive nature of this crisis, 

and it is clearly in all of our best interests to find solutions. 


pwalker on DSK8KYBLC1PROD with HEARING
48 

Having said that, our view is still that while it may be an important fix right now, what does it do to the longer-term availability 

of credit to this market? 

Chairman DODD. But assuming we are doing it for a limited 

amount of time now—this is not in perpetuity. We are talking 

about 3, 5 years, whatever the number was. 

Mr. CAMPBELL. This is a very fragile market, and, frankly, one 

of the things that we have to consider is we have a very large inventory of foreclosed and unsold property. And so to potentially 

throw a curve into this segment of the market where potentially 

one of the outcomes, the likely outcomes to cramdowns, would be 

that the markets would—since there is less predictability in the 

market, it is likely that two things are going to happen; investors 

are going to require two things to happen to try and offset the uncertainties: one, downpayment sum will probably be increased, and, 

logically, prices would be increased to try and offset some of the 

uncertainties that exist by contracts being able to be just crammed 

down. 

And so while we have got this inventory and we need to find a 

way to stimulate the housing market, do we want to put at risk 

that market by taking that step? is the question I think we all 

have to step back and carefully and thoughtfully think through. 

Chairman DODD. So the answer from Wells Fargo would be no. 

Mr. CAMPBELL. No. 

Chairman DODD. Ms. Finucane. 

Ms. FINUCANE. Well, I think we have similar issues insomuch as 

I think we have concerns with what the investor community will 

do if they think they have got a bankruptcy court that can do it 

judge by judge, district by district. And so the marketplace can 

have great—the long-term issues may be greater than the shortterm gain, one. And it seems like it is a one-by-one—as I said, district by district, judge by judge. And we think there are some very 

fundamentally big, broad programs that each of the banks here 

have initiated as well as Chairman Bair’s initiatives that she has 

laid out that collectively may have the greatest impact. 

Chairman DODD. Again, maybe I am missing something here, 

and you folks work at this every day. How do I make the—when 

one of my constituents says to me, well, you know, the last time 

I looked, the credit availability for vacation homes was not bad. 

How do I explain to someone that you can cram down in a bankruptcy proceeding your vacation house and there seems to be credit 

availability? The institutions have worked that out. But I cannot 

do it for the primary residence. How do I explain the distinction 

and difference between one you can work out and the other I cannot, two homes? 

Ms. FINUCANE. Well, I think that is a good point, but that is 

not—I mean, the banks did not set up the bankruptcy laws. 

Chairman DODD. But that does not explain the difference why— 

I mean, I have got a vacation house and I have got my primary 

residence. Now, one house I can cram down and work out a mortgage on because the bankruptcy courts would allow me to do that. 

But on my primary residence, I cannot. 

Just to pick an example out of thin air, just say I had eight 

homes, and so seven of them I can protect in a bankruptcy proVerDate Nov 24 2008 21:13 Apr 01, 2010 Jkt 050417 PO 00000 Frm 00052 Fmt 6633 Sfmt 6602 E:\HR\OC\A417.XXX A417

pwalker on DSK8KYBLC1PROD with HEARING
49 

ceeding. But the poor guy with one house cannot. How do you explain that to people? What is the justification? 

Ms. FINUCANE. I think you are asking us something about bankruptcy law as opposed to what you began with, which is the issue 

around do we think that is a good solution to the foreclosure issue. 

And we can speak to the foreclosure issue, not bankruptcy law. 

Chairman DODD. OK. Mr. Palm, same question. 

Mr. PALM. Well, I likely misunderstand your question, perhaps 

given where we are in the food chain, because as I said, we are not 

a big mortgage originator. 

Chairman DODD. I know. 

Mr. PALM. I am assuming one of the issues that they have alluded to is simply the issue that the cost of credit to buy your single-family home is dependent on the fact that the lender thinks 

that, if all else fails, they at least get the property. And I think 

that is the theory of the lending, which is why rates are whatever 

they are. 

I think for vacation homes, my assumption would be—and you 

should never assume, I realize—the rates would be at a higher 

level simply on the basis that you would not have the same type 

of certainty, and we would perhaps need an economist to verify 

that fact. And having said that, in general, obviously, people who 

have multiple homes and vacation homes or whatever—and those 

are not the people who we are worried about here today—they 

would normally also have additional other resources, and, therefore, they would probably get—you know, even though the differential in interest is still going to be higher for—— 

Chairman DODD. I wish Mel Martinez were still here to talk 

about Florida. 

Mr. PALM. No, no. But I think the problem is, you know, as alluded to, there will be an uncertainty created in the market. I cannot say sitting here that you cannot do certain things in emergency 

situations if you really need to do them. Even if it is only a temporary period of time, the effect on the ultimate investors is something you really have to take into account in weighing the balance. 

Chairman DODD. I have saved Mr. Zubrow for last because he is 

going to surprise us again and tell me I am absolutely right and 

JPMorgan Chase supports this. 

Mr. ZUBROW. I am sorry to disappoint you, Mr. Chairman. I really do not have a lot to add to what the others have said. I would 

emphasize what, you know, you and others on the Committee have 

pointed to, which is that we are really in a very fragile market situation today. Notwithstanding all the very good efforts that the 

Committee and the Government have led in terms of trying to 

bring stability back into the markets, the marketplace is still extremely fragile. We lack investor confidence in many of the important markets that are required to really re-liquefy the home lending process. And so I think that there is, you know, grave danger 

to introduce a major change in the balance of outcomes that investors might be worried about through a major change in the bankruptcy provisions, and such change could really elongate the length 

of time that it takes to bring investors back into this marketplace. 

Chairman DODD. I guess my point—and I will end, and I am 

going to ask other witnesses to comment briefly on this. But the 


pwalker on DSK8KYBLC1PROD with HEARING
50 

only point I want to make is I just do not see any evidence yet that 

has been demonstrated to me that allowing a homeowner to take 

bankruptcy protection for a primary residence affects generally the 

credit availability for primary residences generally. I mean, that is 

the argument, and I just do not see the evidence of that yet. And 

that seems to be the point, that this would harm credit availability 

generally if you were to make this exception. 

So where is the evidence to support that? I do not see it. But I 

know Ms. Zirkin and Mr. Eakes and you, Dr. Wachter, might want 

to comment on this. 

Ms. ZIRKIN. I will be very brief because I am sure Mr. Eakes has 

something very important to say. 

[Laughter.] 

But let me say this: I was going to say, Senator, that there is 

no evidence, that we have heard this all the time, and I have not 

seen studies, I have not seen evidence. And we are at a point now, 

markets are fragile; the entire economy is fragile. We have markets 

going down every single day, 400 points, 300 points. It is very hard 

to find your way. And that includes giving $700 billion to the 

Treasury. 

Where I am going with this is that people might say that they 

know what the effect of a bankruptcy law is. I have not seen any 

evidence. But we are at the point now where we have to put it in, 

as you said, Senator, restore it to as it was in the 1970s and 1980s, 

basically, so that restore it for a year or 2 years, some period of 

time so that we can have the empirical evidence to see if it works 

or it does not, because people, as I said and as we all know, are 

out there suffering. 

Thank you. 

Chairman DODD. Dr. Wachter. 

Ms. WACHTER. We do need more evidence. There is small evidence, but it does not really go to your more major point, I think 

on your more major point, of what would it do now. We really do 

not know. I think there are tremendous risks on the side of doing 

a legislative initiative in this direction. 

On the other hand, as I said earlier, the Nation is at risk, and 

if we do not take effective action that, in fact, leads to a slowdown 

in foreclosures, this issue will be minor. So we have to have all options evaluated at the table. I think that if there were such an option seriously being evaluated, there might be more movement on 

other options, such as bringing the servicing industry to the table. 

Chairman DODD. Yes. I would just point out that I mentioned at 

the outset of my remarks that there are over 9,000 foreclosures a 

day. This is Thursday. We are going to get together here next 

Wednesday. Between now and next Wednesday, some 50,000 

homes we put at risk in the country, 50,000 families adversely affected. 

Mr. Eakes, any point on this you want to make? 

Mr. EAKES. Yes, with all due respect to my friends on the panel, 

it is clear to me not a single one of them have read the bill that 

deals with bankruptcy. Not a single one of them have studied the 

provisions in the way that they would have studied the TARP provisions. The bill’s proposals that have been put forth limit the 

cramdown, the bankruptcy adjusting the debt secured level down 


pwalker on DSK8KYBLC1PROD with HEARING
51 

to the market appraised value, only to loans that will be in foreclosure. Every banker here can tell you if they have got the data 

that less than 1 percent of the loans that are in foreclosure now 

are going to cure. 

So if you are only dealing with the loans that would go to foreclosure and you are going to lose more money and have the costs 

of a foreclosure in every case, the bank is going to be better off. 

That is one provision. 

The second provision that is in the bill that details matter is that 

every single lender/servicer has it within their control to prevent 

this cramdown. If you modify the loan to make it affordable so that 

the borrower has the ability to pay the mortgage, the provisions in 

these proposals would not allow a cramdown. You have it within 

your power as the lender, as the servicer, to prevent the bad effect. 

No. 3, there is evidence—between 1978 and 1993 half of the circuit courts in this country used the bankruptcy cramdown because 

they said this cannot mean what the words seem to say in the 

Bankruptcy Code; it does not make sense. And there was no difference in the rates charged to borrowers for the first—for home 

loans between the two different districts between 1978 and 1993. 

My good friend Lou Ranieri, who claims to me that he was the 

person in 1978 that lobbied and helped get this provision instituted, the ban on modifications solely for personal residences in 

1978, is now actively saying there is no way to solve the problem 

of these piggyback second mortgages unless we lift that ban. 

So I just crazy, really, when I hear this stuff that is going to disrupt the market. We have had proposals at various debates that 

said we will only limit it to existing loans, which means that it cannot have any impact on a future loan because it does not apply to 

them. 

So I just—you know, I know I am being overly passionate about 

this, but, you know, I have been watching the 9,000 per day, 45,000 

people lose their home and go into foreclosure every week. We do 

not have any time to spare. And it just drives me berserk, with all 

due respect. 

Chairman DODD. Well, I wish you would express yourself on the 

issue. 

[Laughter.] 

Senator Crapo. 

Senator CRAPO. Thank you very much, Mr. Chairman. 

Just one last question for Mr. Eakes. 

You were talking about the limited terms of the legislation that 

has been drafted. What is the term of the—isn’t there a limitation 

in the term of the bill? 

Mr. EAKES. No. 1, it limits the loans going backwards. I think 

it was January 1st, 2004 or 2003. So loans that were made after 

that date. In several of the versions, it limited it to existing loans, 

which means that you have an inherent sunset because those 

loans, as they get modified or go through payoff or refinance, there 

are a new loan. And then there was on top of that a sunset of— 

I can’t remember exactly, but it was 2 or 3 years afterwards. So 

during the current crisis, it is as narrowly tailored as any piece of 

legislation could possibly be to this specific problem. 

Senator CRAPO. All right. Thank you very much. 


pwalker on DSK8KYBLC1PROD with HEARING
52 

In my questions this round, if I have time for it, I want to cover 

two issues: one, credit default swaps, which I think we can talk 

about very quickly; and then, second, as I indicated in my opening 

comments, regulatory reform. But particularly, again, for the banking witnesses, but for anybody who would like to, let me just say 

I strongly support the efforts of our financial institutions today and 

our regulators to strengthen the infrastructure for clearing and settling credit default swaps by creating a central clearing system. 

And recent events in the credit market I think have highlighted 

the need for greater attention to risk management practices and, 

in particular, counterparty risk. 

A number of private sector initiatives are being developed to diminish counterparty risks to credit default swaps by achieving multilateral netting of trades and by imposing more robust risk controls on market participants. I just want to ask a general question 

to those who are engaged and would like to respond to this as to 

how you feel progress is being made here, and when do you anticipate that we might have a central clearing system up and operating. Do you want to start out, Mr. Zubrow? 

Mr. ZUBROW. Sure, Senator. Thank you. I think you have summarized very well much of the activity among the major banks participating in the credit default swap market to bring a much more 

robust process to it. We are an active participant in the Clearing 

Corporation/IntercontinentalExchange efforts to create a central 

counterparty, and right now the proposal is being reviewed by both 

the Federal Reserve Bank in New York, the SEC, the CFTC, and 

the New York State Department of Banking. Those different regulators have been in a meeting with the leadership of TCC/ICE, and 

we would expect to hear back from them sometime in the very 

short future, the next—you know, potentially this week or next 

week, you know, regarding getting the appropriate regulatory approvals to allow that organization to be up and running as a central counterparty. 

So, you know, we very much are in favor of having central 

counterparty clearing. We think that it will continue to make this 

marketplace a much more robust and safe marketplace. And while 

we cannot predict how quickly we will hear back from the regulators, assuming that they do so within a relatively short period of 

time, we would hope to have this activity up and running by the 

end of the year. 

Senator CRAPO. Thank you. 

Anybody else want to elaborate there? 

Mr. PALM. Goldman Sachs views this as vitally important that 

the proposals have been put forward, moved forward. We are involved in all the same discussions regarding the same new institutions, and we think it will be a big assist to the market. Whether 

it gets done by year-end or not is not, you know, entirely clear, certainly. It is dependent on a lot of things getting done. But it is the 

thing to do. 

Senator CRAPO. Bank of America? 

Ms. FINUCANE. Yes, we are all active participants in this, and I 

think we are all supportive about the procedure and the outcome. 

And I do not think you will have any disagreement from any of us. 


pwalker on DSK8KYBLC1PROD with HEARING
53 

Mr. CAMPBELL. I have to admit that this is beyond my capability, 

but we would be happy to have the people who are aware report 

back to your staff, if that is what you would like. 

Senator CRAPO. All right. Thank you very much. 

The last issue that I want to get into, as I mentioned in my initial comments, is regulatory reform. I have for a long time, even 

before we got into the thick of this crisis right now, believed that 

we need significant regulatory reform for our financial system in 

the United States. And I will not go into all the details for why I 

believe that, but, you know, our capital markets I think have needed to be served by a much better regulatory system for some time. 

Just yesterday, I believe it was, Walt Lukken, the Chairman of 

the CFTC, made a proposal that we reform and modernize our regulatory system. His approach, which I think is very similar to the 

one that Secretary Paulson made last March in his framework that 

he put forward, suggests that we have three regulators: one on systemic risk—by the way, my understanding is that depending on 

what kind of business you are in in the financial world today in 

the United States, you could have as many as seven different regulators, and that does not count all the State regulators and States 

and other potential impacts. And so this proposal is that we 

streamline it to a system in which we have three regulators, I assume some of them with increased regulatory strength: one for systemic risk, one for market integrity, and one for investment protection. 

I for quite some time have been interested in the one-regulator 

approach that we have seen over in Britain with the FSA, and my 

question is really a broad, open-ended question, and it has sort of 

got three parts, but it is all sort of the same question, and that is— 

and I open this to anyone on the panel who would like to respond. 

First of all, do you agree that we seriously need a new, modernized 

regulatory structure? Or is the regulatory structure that we have 

today one that we can just fine-tune a little bit and keep moving 

with? And, No. 2, if you do believe that we need to have a significant look at regulatory reform, what do you think of these proposals, the three different regulators or the one regulator based on 

principles rather than what I call the ‘‘gotcha’’ approach? 

I think you are all understanding where I am headed with this, 

but what are your thoughts as to where we should head in terms 

of the regulatory system we should have in place for the future for 

the United States financial system? And you do not have to answer 

if you do not want to, if you are not engaged on this issue, but I 

will start here on the left, and we can just move down. Mr. Eakes. 

Mr. EAKES. I would think some steps are more urgent than others. So, for instance, the OTS, in my view, has outlived its usefulness. If you look at Washington Mutual, Countrywide, IndyMac, we 

had institutions that were choosing what they perceived to be the 

weakest regulator in terms of the lending. If you look even at 

AIG—so a lot of the crises we have seen have touched through the 

OTS, and it would not be hard to merge the banks that it supervises into the OCC and merge the holding companies that it tries 

to supervise but is not really large enough to do into the Federal 

Reserve supervision. 


pwalker on DSK8KYBLC1PROD with HEARING
54 

Even with AIG, it is not really widely reported, but what really 

brought that company to its knees was the credit default swaps 

that were traded out of an office in London. That office was able 

to get exempted from all of the European regulators because nominally AIG’s holding company was regulated by the OTS because it 

owned a $2 billion thrift. So owning a $2 billion thrift enabled this 

to be—and the OTS is in no way capable of looking at the credit 

default swaps that AIG had all over the world. So I feel like that 

is the most critical case. 

When the difference between thrifts and banks was established 

several decades ago, the thrifts were providing 80 to 90 percent of 

mortgage loans. Now it is exactly the reverse; 70-plus percent, 80 

percent of all mortgage loans are made by banks. So the two institutions have converged, and having a choice of regulator, as Secretary Paulson and his staff have said, we should have banks succeed based on their business choices, not based on which regulator 

they happen to choose. 

Senator CRAPO. Thank you. Mr. Zubrow. 

Mr. ZUBROW. Thank you, Senator. We certainly agree that there 

needs to be changes in modernization to the regulatory system in 

the country. You have certainly highlighted and Mr. Eakes has 

highlighted, you know, many of the failures of the existing regulatory structure. We very much believe that having a single regulator for the financially systemic important institutions is an important part of how the system might be reformed going forward. 

We obviously have not had a chance to really go through Mr. 

Lukken’s proposals from yesterday, but I think that, you know, our 

ongoing view as we, you know, hopefully work with you and others 

on regulatory reform is to really focus on making sure that there 

is commonality of regulation for these key systemically important 

financial institutions so, as the Treasury Secretary has said, we do 

not end up getting regulatory arbitrage across the different groups. 

Senator CRAPO. Thank you. Mr. Palm. 

Mr. PALM. Happy to. I think anyone who thinks that the regulatory system in the United States and elsewhere is not in need of 

reform has not been around for the last 6 months. That would be 

my first point. We fully support a thoughtful approach to putting 

together a new regulatory system. Whether that is one super regulator as described, which you mentioned you might be in favor of, 

or, you know, a tripartite one, one of which consists of investor protection separate from I will call it the soundness of the particular 

financial institution, et cetera, you know, can be debated. Either 

system in theory can be made to work. I think the current system—and obviously we are new to being a bank. One of the things 

that first struck me was the fact that—actually, being a lawyer of 

sorts, I first got a book out which told me all the different types 

of organizations you were regulated by if you were in a particular 

business, and it was mind-numbing, including both regulatory arbitrage as well as—it is not even necessarily arbitrage. It is just people found themselves regulated by different people, having different 

rules, and so on, and some, from what I can tell, not regulated at 

all, full stop. 

So I think it is very important to modernize and move forward. 

Certainly, the FSA system in London has lots of positives to it. On 


pwalker on DSK8KYBLC1PROD with HEARING
55 

the other hand, if you step back for a second, even that system obviously did not save their economy from the consequences of what 

is going on now. 

So I think you want to have functional based regulation, and as 

I think Mr. Zubrow alluded to, systemic institutions, i.e., institutions who have global scale, you need to really have people who 

look after them as an entirety and understand their overall operations. We think that is important. 

Senator CRAPO. Thank you. Dr. Wachter. 

Ms. WACHTER. Yes, it is critically important going forward for 

the long run to restructure our regulatory system, and there is regulatory arbitrage, and that needs to be part of the issue that is addressed. And I do want to here agree again with Mr. Eakes. The 

insufficient oversight and lack of reserving for CDS issued by AIG 

was a critical part of the problem that we are facing today. 

I want to make two other points. One point, this is a global phenomenon now. We are going to need global cooperation on regulation, and it cannot just be in one nation because, as we see, capital 

flows are global. 

Second, again, FSA was not a cure-all. The U.K. had over the 

same period, not as much as we, but erosion of credit standards, 

and FSA did not see that happening or could not stop it; and at 

the same time as erosion of credit standards, a housing asset boom. 

This U.K. crisis is similar to the Japan crisis, is similar to the 

Asian financial crisis. So it is not just a better environment for regulation, a better structure, but it is better regulation. 

Senator CRAPO. Thank you. 

Ms. FINUCANE. I think I will just reiterate what I think you have 

heard from the other banks, which is we do believe that there 

needs to be greater transparency for a regulator. I am not sure that 

we would support one super regulator. Maybe there is too much 

risk in that, and there are complications. Consumer regulation 

versus capital markets might be too big a breadth, so I think we 

would consider that. 

The last thing I would just say is clearly from the banks, I think 

the bank holding company structure has been what seems to be 

victorious in the long run, so we would start from there as well. 

Senator CRAPO. Thank you. 

Mr. CAMPBELL. I will only add some thoughts that have not been 

said. 

First of all, we agree that there needs to be a revamping of the 

system. One of the things that I think we all need to be thoughtful 

of is what is the pace of whatever we go to, so just being thoughtful 

of the timing. 

Second, we would encourage this dialog to give us a chance to 

look at, in particular, the unregulated lenders that exist. I think 

that that has proven at this time to have been a category that did 

not get looked at and I think needs to be looked at. Certainly the 

point of around a systemic look is also high on our list of things 

to do. 

And, finally, being clear on what the role of the Fed will be in 

whatever this new regulatory approach might be from our perspective is a very important consideration. 

Senator CRAPO. Thank you. Ms. Zirkin. 


pwalker on DSK8KYBLC1PROD with HEARING
56 

Ms. ZIRKIN. I will be very brief, because we have, frankly, focused on our communities in distress. Previously, we had called for 

reform of the problem that has actually caused this, but I would 

agree with Mr. Campbell in that we must regulate unregulated 

lenders. 

Senator CRAPO. Thank you very much. 

Mr. Chairman, thank you for letting me go over. 

Chairman DODD. Not at all. Very good points, and it was very 

worthwhile to hear the testimony. 

As I said earlier, Senator Crapo has had a longstanding interest 

in regulatory reform. This is a major thrust of this Committee’s activities in the coming Congress. We have obviously got to grapple 

with the ongoing situation, but I do not intend to let that overwhelm this Committee’s responsibility, because underlying all of 

that is the issue of whether or not we are going to have a new architecture that reflects the 21st century global economy and obviously the problems we have entered into. 

This whole idea of regulatory competition for business I think 

has been dreadful and has really hurt us terribly in the country, 

and obviously that is a major point. 

I want to also make the point that I think we have been operating under a myth for too long, and I think it has hurt our country, and that is that the notion of consumer protection and economic growth are inherently contradictory. They are not at all. I 

think what we have learned over the last number of months is that 

consumer protection and economic growth go hand in hand. In fact, 

when you fail to do the first, you end up doing severe damage to 

the latter. And I think we need to get over that notion which too 

often has been the subject of testimony, that if you are going to 

protect consumers, it is going to hurt our economy. And I think we 

have learned, painfully, how false that statement is. So I would 

just add that element as we look down the road at this effort, and 

I thank my colleague. 

I just want to end on one question. It has been sort of—and I 

listened to all of you when you talked about the Capital Program 

and to what extent various things are—whether it is bonuses or 

dividends or acquisitions. And let me say on my part on the issue 

of acquisitions, again, my general view is I think if you are talking 

about purchasing or acquiring a failing institution, as several of 

you have done, it makes all the sense in the world to me. And the 

question of what is a failing institution, I realize you get into a 

gray area, and so you want to be careful about trying to draw too 

bright a line in that area. But, clearly, I think most of us would 

agree here that is a proper utilization of these funds. Acquiring 

healthy institutions with these funds is one that is disturbing. 

But this idea that there are retained earnings and private capital 

coming in, and obviously capital that has come from the Federal 

Government, I am a little nervous about this distinction, because 

money is fungible here, money is money. And, obviously, if you are 

not paying a dividend or you are not out there paying a bonus, that 

is going to increase the availability of capital in your institutions. 

So the notion somehow that I am going to be able to separate out 

here the money that I am getting from retained earnings or from 

private investment as opposed to capital coming from the Federal 


pwalker on DSK8KYBLC1PROD with HEARING
57 

taxpayer worries me a bit here, that in a sense this notion, as I 

tried to make at the outset in my remarks, it is not just $290 billion. It is over $5 trillion. I asked you the question earlier about 

these various new instruments and protections and guarantees and 

so forth. To make my point, the taxpayer is really behind your institutions. I do not know if I would go so far as Martin Eakes to 

suggest that some of you might not be here today at this table were 

it not for the fact the American taxpayers contributed significantly 

to your well-being. And the point here is—and, again, I respect the 

notion that a dividend is important for investors. But also, we are 

at such a critical moment that we need capital to go out, and the 

idea that at this particular moment your investors would be so adverse to the notion that that happen that they would be unwilling 

to accept the fact that there may be a period of time when a dividend does not go out. 

I just want to get over this notion somehow that we can draw 

these bright lines between private capital, retained earnings, and 

public monies as we talk about building up our capital requirements here to be able to then engage in the kind of lending practices that all of us need to see if we are going to see the capital 

and credit markets become unseized and unclogged, as they presently are. I just do not think—it flies in the face of reality that you 

can somehow draw these bright lines between public monies and 

private monies and retained earnings when it comes to some of 

these issues. 

I know you are hearing this from others, so I am not saying 

something you have not heard before, but this notion of responsibility as well—at this critical moment, none of us in this room have 

ever lived through anything like we are going through, and we bear 

the collective responsibility of getting it right, not just for us but 

for that generation coming along. This country deserves far better 

than it is getting in this deal, and we need to make it work right, 

and everybody has got to pitch in, including the investor. Including 

the investor. And I suspect they understand that better than 

maybe they are given credit for. 

So I just urge you today and I thank you immensely for spending 

a lot of time, going on 31⁄2, almost 4 hours here today, but this is 

extremely important, as I know you appreciate. And we do not 

have a lot of time to get this right. The real market, the real economy is suffering. 

I had dinner last evening with a very significant retailer in this 

country, and what is happening to retail sales, when you get 8 and 

9 and 10 and 11 percent reduction in retail sales, that is phenomenal in this country. And so it is reaching right down into people out there who depend upon that salary coming in every week 

to sustain not only their mortgages but their families. And so we 

have really got to pull together on this now. 

I hope you will go back to your respective institutions and share 

the thoughts we have expressed here today. And I think it has 

been interesting that you have heard it across these party lines. It 

is not just Democrats versus Republicans. You are hearing it from 

Mike Crapo. You are hearing it from Mel Martinez, as well as 

Sherrod Brown and Bob Casey. Chuck Schumer, by the way, has 


pwalker on DSK8KYBLC1PROD with HEARING
58 

some additional questions he wanted to raise, as my colleagues 

may have as well, and we will submit those to you. 

Chairman DODD. I thank you for being here today, and we are 

going to continue calling upon you and asking you for your advice 

and counsel as to how we proceed. But I thank you. 

The Committee will stand adjourned. 

[Whereupon, at 1:16 p.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 


pwalker on DSK8KYBLC1PROD with HEARING
59 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 149 here 50417A.001
60 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 150 here 50417A.002
61 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 151 here 50417A.003
62 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 152 here 50417A.004
63 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 153 here 50417A.005
64 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 154 here 50417A.006
65 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 155 here 50417A.007
66 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 156 here 50417A.008
67 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 157 here 50417A.009
68 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 158 here 50417A.010
69 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 159 here 50417A.011
70 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 160 here 50417A.012
71 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 161 here 50417A.013
72 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 162 here 50417A.014
73 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 163 here 50417A.015
74 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 164 here 50417A.016
75 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 165 here 50417A.017
76 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 166 here 50417A.018
77 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 167 here 50417A.019
78 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 168 here 50417A.020
79 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 169 here 50417A.021
80 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 170 here 50417A.022
81 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 171 here 50417A.023
82 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 172 here 50417A.024
83 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 173 here 50417A.025
84 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 174 here 50417A.026
85 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 175 here 50417A.027
86 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 176 here 50417A.028
87 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 177 here 50417A.029
88 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 178 here 50417A.030
89 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 179 here 50417A.031
90 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 180 here 50417A.032
91 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 181 here 50417A.033
92 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 182 here 50417A.034
93 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 183 here 50417A.035
94 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 184 here 50417A.036
95 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 185 here 50417A.037
96 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 186 here 50417A.038
97 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 187 here 50417A.039
98 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 188 here 50417A.040
99 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 189 here 50417A.041
100 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 190 here 50417A.042
101 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 191 here 50417A.043
102 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 192 here 50417A.044
103 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 193 here 50417A.045
104 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 194 here 50417A.046
105 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 195 here 50417A.047
106 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 196 here 50417A.048
107 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 197 here 50417A.049
108 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 198 here 50417A.050
109 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 199 here 50417A.051
110 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 200 here 50417A.052
111 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 201 here 50417A.053
112 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 202 here 50417A.054
113 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 203 here 50417A.055
114 


pwalker on DSK8KYBLC1PROD with HEARINGInsert offset folio 204 here 50417A.056
115 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 

FROM BARRY L. ZUBROW 

Q.1. ‘‘As you can see, many members of this panel are concerned 

that in spite of fresh government capital, banks are pulling back 

and reducing lending at a time when the country is already facing 

a potentially deep and long recession. How do your loan volumes 

for this year compare to the past few years?’’ 

A.1. As you are aware, economic conditions in the US and globally 

have continued to deteriorate since the passage of the Emergency 

Economic Stabilization Act (EESA): the US lost more jobs in 2008 

than in any year since 1945, home values are down 13% in the last 

year alone, and the stock market is down 21%. 

Despite these challenging economic conditions, JPMC continues 

to provide significant levels of credit, and we at JPMC have dedicated ourselves to being there for our clients—whether by making 

markets and committing capital to facilitate client business, investing in infrastructure and other projects, or making loans to creditworthy borrowers. At the same time, lending decisions must be consistent with prudent business practices and underwriting standards, appropriately mindful of market and credit risks. Lending activity of all types must be conducted according to prudential risk 

management standards, and the challenging economic conditions 

only elevate the importance of operating in a safe and sound manner. We are currently gathering data and hope to present information on lending activities to the Committee in short order. 

Q.2. ‘‘Are you pulling back active lines of credit from businesses 

and consumers? If so, why?’’ 

A.2. In the normal course of business, lenders continually evaluate 

not only whether to make new credit available, but also whether 

to re-examine existing facilities for both businesses and consumers. 

This is particularly true during the type of economic circumstance 

in which we now find ourselves. We take seriously our fiduciary responsibility to the funds we have received from the taxpayers, as 

well as all shareholders, and we take seriously our obligation to 

protect these funds from losses, which may require that in certain 

cases we reduce lines or exit market segments. Most of small business lines were underwritten based on the borrower’s stated income. We have reached out to borrowers and asked them to supply 

us with updated financials that support their income and their 

ability to manage their existing lines. If borrowers do not provide 

us with their updated financials, or their financial situation has deteriorated significantly, lines may be reduced. 

Q.3. ‘‘There is a lot of concern on this panel that the banks are 

planning on hoarding rather than deploying this capital. What are 

your forward plans for the use of the TARP funds?’’ 

A.3. TARP funding has helped to bolster JPMC’s Tier 1 capital 

ratio, which was already well above regulatory minimum capital 

levels, but has risen following the government’s October 28, 2008 

purchase of JPMC preferred shares. This capital position has allowed us, notwithstanding deteriorating economic conditions and 

shifting demand patterns, to serve our customers through a very 

broad range of financial activity. Our capital position has also alVerDate Nov 24 2008 21:13 Apr 01, 2010 Jkt 050417 PO 00000 Frm 00119 Fmt 6602 Sfmt 6602 E:\HR\OC\A417.XXX A417

pwalker on DSK8KYBLC1PROD with HEARING
116 

lowed us to intensify our efforts to modify the terms of residential 

mortgages to strengthen the US housing market by keeping hundreds of thousands of families in their homes. 

We believe strongly that American taxpayers deserve to know 

how banks that accepted TARP funding through CPP have been operating since October 24, 2008, and for as long as the government 

holds its preferred stock shares. We are currently developing 

metrics to demonstrate JPMC’s lending and market activity. We 

are committed to transparency and accountability, and look forward to providing Congress, regulators and the American people 

with regular updates about what JPMC is doing to merit the trust 

that has been placed in us through the Capital Purchase Program. 

Q.4. ‘‘We have been hearing from SBA that the number of banks 

participating in the 7(a) and 504 loan programs has been dropping 

significantly, partly because of a lack of liquidity and partly because the fees and cost of funds SBA lenders can’t break even. 

What do you see as the main reasons for the decline in the number 

of participating lenders?’’ 

A.4. A lender’s ability to originate SBA loans at break even or better has been adversely impacted by the SBA’s increased fees such 

as Lender Oversight Fees and Yearly Fees (basis point remittance). 

In addition, due to the combination of increased funding costs as 

a result of the disruption in the capital markets and the SBA’s cap 

above the base interest rate, the lender’s interest margin over its 

cost of funds is shrinking. 

Q.5. ‘‘If all of the SBA lender and borrower fees for both the 7(a) 

and 504 loan programs were completely eliminated for a period of 

time—not reduced, but completely eliminated—do you believe that 

this would help spur additional lending activity in the small business’’ marketplace? 

A.5. Yes, because borrowers would find SBA loans more affordable. 

In addition, lenders would have an increased chance of breaking 

even on the loan due to no Lender Oversight Fees or Yearly Fees. 

In addition, there are other actions that we believe could stimulate SBA lending such as: 

• Increase the SBA 7(a) loan limit from $2,000,000 to $3,000,000 

and the maximum guarantee from $1,500,000 to $2,250,000. 

• Increase the SBA Express loan limit from $350,000 to 

$1,000,000 and the maximum guarantee to $500,000. 

• Increase the SBA 7(a) guarantee percentage from 75% to 90% 

and the SBA Express guarantee percentage from 50% to 75%. 

• Create separate mutually exclusive 7(a) and 504 program limitations. 

• Change the SBA 7(a) size standards to mirror the current 504 

size standards. 

Q.6. ‘‘Loan modifications continue to be one of the most difficult aspects of this crisis. I’s like to ask the entire panel, what are the 

most significant obstacles standing in the way of broader loan 

modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them?’’ 


pwalker on DSK8KYBLC1PROD with HEARING
117 

A.6. Until recently, the largest single impediment was the inability 

to provide principal forbearance in GSE loans. Another impediment 

is the requirement by some investors that only delinquent loans 

can be considered rather than loans where default is reasonably 

foreseeable. For portfolio loans owned by Chase, rather than serviced for others, we enjoy more flexibility because, as the ultimate 

investor, we can readily consider more options and make judgments for ourselves unimpeded by contractual servicing obligations. 

While we have the ability today to modify and do modify investor 

owned loans, we need to be mindful of our contractual obligations. 

Chase currently is rolling out a consistent loan modification 

toolset across the Chase, EMC and WaMu servicing platforms. 

When the rollout is complete, we will have the ability to assess the 

affordability and NPV of affordable modification options versus 

foreclosures in an automated fashion. We will strive to make modifications on those loans that we believe are affordable and sustainable to the borrower and represent the best NPV alternative to 

Chase. 

The GSEs have provided a tool for their recently announced 

Streamlined Modification Program (‘‘GSE SMP’’) that we are in the 

process of implementing for their loans. 

Programs that promote the use of a standard set of assumptions, 

affordability parameters and NPV analysis will be very valuable in 

accelerating loan modifications. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY 

FROM BARRY L. ZUBROW 

Q.1. Which homeowners are eligible for the institution’s loan modification program? 

A.1. Chase currently modifies loans of borrowers who are owner occupants; however, there are different facets to the program that require different qualifications. For example, Chase currently modifies owned subprime hybrid adjustable rate mortgages (‘‘ARMs’’) to 

the initial interest rate, but the borrower must have a history of 

on-time payments to verify that it is the rate shock that may cause 

delinquency and the current payment is in fact affordable. 

Chase is also modifying loans serviced by others and is committed to expanding its Foreclosure Prevention program to include 

loans for individual investors or pooled for trusts placed in 

securitization, to the extent allowed by applicable servicing agreements. We are pleased to say Chase will be actively participating 

in the new ‘‘Streamlined Modification Program’’ and ‘‘Early Workout’’ programs recently announced by the Government Sponsored 

Enterprises (‘‘GSE’’) Fannie Mae and Freddie Mac. 

We are also developing a more efficient process that should further accelerate the pace at which we can modify loans. 

Q.2. How is success through the program defined? What does it 

mean that a certain number of homeowners have been ‘‘helped’’ 

through a loan modification program? 

A.2. Chase believes in tracking success of our loan modification 

programs by focusing on foreclosures prevented, not just modifications made. (This could include a ‘‘non retention’’ cure such as 


pwalker on DSK8KYBLC1PROD with HEARING
118 

short sale, which is sometimes the best option if a borrower has no 

income or sufficient income to afford a reasonable modification.) 

Chase also tracks efforts to reach borrowers as well as actual foreclosure prevention actions taken. This is an important metric because one of the most difficult problems we have in helping borrowers is actually communicating with them. Accordingly, Chase 

tracks outreach efforts—including borrowers dialed, and mail sent, 

and will begin tracking inbound visits to each of our 24 Chase 

Homeownership Centers set to open in early 2009. 

Most of the activity Chase will track is likely to arise from loan 

modification activities. We will track loan modifications by type of 

borrower (current or delinquent borrower) and type of modification. 

Chase is placing a strong emphasis on making only loan modifications that result in a new payment level that is affordable to each 

borrower. Chase will be tracking the re-default rate, the rate at 

which borrowers that have been modified default on the loan modification that was granted, to ensure that our programs permanently help borrowers rather than postpone inevitable outcomes. 

Loan modifications are not the only strategy that Chase will be 

pursuing. Chase believes that for a number of distressed homeowners, a refinance into a fully-amortizing FHA- or GSE-insured 

loan with lower payments may be a better alternative. So we will 

track refinances for borrowers we believe are at risk of default or 

are already delinquent, as well as the economic incentives (such as 

principal forgiveness, principal forbearance or rate subsidization) 

required to refinance these borrowers. 

In addition, Chase will track other foreclosure prevention tactics, 

such as payment plans (where a borrower agrees to pay back arrearages over time), deferments (where a borrower agrees to make 

late payments in the future), borrower stipulations (where a borrower agrees to make a set of payments, often as a prelude to a 

modification), and short-sales/settlements (a form of principal forgiveness where Chase agrees to accept less than the amount of the 

mortgage in exchange for the underlying property or the proceeds 

of the sale of the underlying property). Although short sales and 

settlements do not result in borrowers keeping their home, this 

may be an appropriate solution when the borrower has no interest 

in remaining in the home or where the borrower has had a financial hardship permanently impairing the borrower’s ability to make 

any payments, even those reduced by a modification. Lastly, Chase 

will track borrowers who become seriously delinquent or enter foreclosure but improve their situation by curing their delinquency or 

paying off the loan in full through working with our Homeowners 

Assistance Department. 

Q.3. If your program has already been implemented, how have you 

calculated the number of homeowners assisted through the programs? 

A.3. For our existing programs, the number is calculated based on 

the actual number of homeowners that are assisted through loss 

mitigation efforts which include both home retention efforts as well 

as other foreclosure prevention techniques that can assist consumers exit a difficult financial situation without impairing future 


pwalker on DSK8KYBLC1PROD with HEARING
119 

credit. These are further described in the response immediately 

above. 

Although we have been actively performing many of the foreclosure prevention tactics discussed above, Chase is currently rolling out the program to each servicing platform (Chase, Washington 

Mutual, and EMC Mortgage, formerly of Bear Stearns) and extending outreach efforts to borrowers who are not yet delinquent but 

may become so in the future. By the time the program is fully established, Chase will provide reporting on the number of homeowners helped. 

Q.4. If your have more than one loan modification program for distressed borrowers, please provide details on each. 

A.4. We expect to broaden the loan modification alternatives that 

Chase already offers as part of our Foreclosure Prevention program. The enhanced loan modifications tool set will allow for more 

flexibility based on the borrower’s current loan type and the borrower’s specific financial situation. Chase is working to finalize the 

offers and outreach strategy for both delinquent and current borrowers, but the offers are likely to include those described further 

below. 

Chase will identify owner-occupant borrowers we believe can 

benefit from a refinance into an FHA or GSE insured loan. These 

borrowers may qualify for principal forbearance, principal forgiveness, or below-market rates as part of their refinance. Eligible borrowers must be current and have reasonably good payment histories, except that delinquent borrowers will be screened to see if 

they qualify for the Hope for Homeowners product. 

For owned subprime hybrid Adjustable Rate Mortgages (ARMs) 

scheduled to reset for the first time, those loans will remain at the 

initial rate for life of the loan. To qualify for this program, borrowers must have a 2 or 3 year hybrid ARM and have a clean payment history. Borrowers do not need to contact Chase to benefit 

from this program—the rate lock will happen automatically. 

For subprime hybrid ARMs serviced but not owned by Chase 

scheduled to reset for the first time, we will also use the ASF Fast 

Track program to reduce payment shock. Qualifying borrowers will 

have their initial ARM rate frozen for five years. 

For borrowers whose loans are either owned by the GSEs or in 

their securities and that meet the GSE’s Streamlined Modification 

Program, Chase will offer a pre-approved modification. Similar to 

the Chase program, term extensions, rate reductions and principal 

forbearance will be used to achieve an affordable monthly payment. 

Borrowers must be 90-days or more delinquent, in an owner-occupied single family home, and have a current loan amount of more 

than 90% of the current value of the home. 

Borrowers not eligible for any of the systematic modification programs described above are reviewed on case by case basis to determine the suitability of a modification or other foreclosure prevention tactic. For example, borrowers not eligible for SMP because 

they are only in early stage delinquency, may qualify for the Early 

Workout Program offered by Fannie Mae. 

Loan modifications under the Chase programs are evaluated by 

developing an estimated target affordable payment of 31–40% of 


pwalker on DSK8KYBLC1PROD with HEARING
120 

the borrower’s gross income. The percentage depends on the borrower’s income level—higher income borrowers are allowed to have 

higher percentages. This target payment amount is subject to a 

minimum disposable income requirement. Once the target payment 

is calculated, the borrower is run through a payment ‘‘waterfall’’ 

where each modification option is tested to see if it can meet the 

affordable payment requirement. Concurrently, each modification 

option is subject to a Net Present Value analysis to confirm that 

the value of the modification exceeds the value of pursuing a foreclosure. The modification option at which an affordable payment is 

first reached, if yielding a positive Net Present Value to the loan, 

will result in a recommended borrower modification. 

Chase’s modification product hierarchy is currently being implemented for delinquent borrowers. Chase will be proactively reaching out to those borrowers in the coming months with an appropriate offer. The components of the modification hierarchy may include: 

• Elimination of negative amortization for pay option ARMs. 

• In addition to the above, reducing the interest rate to achieve 

a sustainable payment. 

• In addition to all of the above, establishing payments based on 

a new loan term as long as 40 years. 

• In addition to all the above, reducing rate to as low as 3%. 

This rate is frozen for three years and then increases a maximum of 1% per year until it reaches the prevailing market 

rate at the time of the modification. 

• In addition to all of the above, principal forbearance to as low 

as 90%–95%. This forbearance does not accrue interest but is 

due upon maturity or prepayment of the loan. 

• In addition to all of the above, introduction of a 10-year interest only period on the loan. 

• Other rate reductions and principal forbearance as necessary 

to meet affordability standards as long as it is NPV positive. 

In the near future, Chase expects to issue a similar hierarchy for 

borrowers who are current on their payments but are facing imminent financial distress. The modification hierarchies will be the 

basis for a loan-by-loan review of our portfolio to develop an offer 

that can be proactively presented to the borrower. 

Q.5. How many homeowners do you project will be assisted 

through your institution’s loan modification programs, and what information do you use to arrive at that calculation.? 

A.5. We anticipate our program will prevent 400,000 foreclosures 

in the next two years. We base this estimate on our historical volume of helping approximately 250,000 homeowners over the past 

two years as well as additional volume expected as a result of our 

Foreclosure Prevention program. These projections were developed 

by looking at populations we expect will qualify for the programs, 

estimating how many of those we will be able to contact, and of 

those borrowers that we are able to contact, how many will be able 

to take advantage of the program. 


pwalker on DSK8KYBLC1PROD with HEARING
121 

Q.6. Please also provide samples of the records and documentation 

you maintain regarding loans that are modified through your institution’s loan modification programs, with appropriate redactions to 

protect confidential information. 

A.6. Please see attached a sample of our reporting format for data 

we provide to the OCC (Attachment 1), a sample modification 

agreement through which we document our agreement with the 

borrower (Attachment 2) and a sample blanket modification letter 

(Attachment 3). Offer letters for the expanded program are not yet 

finalized. 

Q.7. Please describe in detail the outreach efforts you have made 

to distressed homeowners to inform them of their new options for 

loan modification under the programs you administer. Specifically, 

what additional measures have you taken since the implementation 

of the program? 

A.7. As noted above, we are working to implement enhancements 

to our overall Foreclosure Prevention Program. Since the initial announcement, we conducted a national print and radio advertising 

campaign and established a website featuring a toll-free number 

for borrowers seeking information and assistance. We have identified the locations of our regional homeownership centers and are 

in the process of hiring staff to roll out the openings over the next 

quarter. We began to contact customers eligible for the SMP recently announced by the GSEs. 

There are still instances when borrowers contact us and expect 

to learn of an appropriate solution but one is not currently available. In these instances, we are recording the borrowers’ information and will reach out to them when an appropriate solution is 

available. During the implementation period of the new initiatives, 

we have not made any new referrals to foreclosure. New program 

outreach efforts for delinquent borrowers will begin in January 

2009 and for current but at-risk borrowers in February 2009. 


pwalker on DSK8KYBLC1PROD with HEARING
122 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 212 50417A.057
123 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 213 50417A.058
124 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 214 50417A.059
125 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 215 50417A.060
126 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 216 50417A.061
127 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 217 50417A.062
128 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 218 50417A.063
129 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 

FROM GREGORY PALM 

Q.1. Loan modifications continue to be one of the most difficult aspects of this crisis. I’d like to ask the entire panel, what are the 

most significant obstacles standing in the way of broader loan 

modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? 

A.1. In Litton’s experience, the most significant obstacle to its loan 

modification efforts has been lack of customer response. Litton expends significant time and resources in attempting to communicate 

with homeowners. Litton reaches out to homeowners through numerous telephone calls and letters, as well as by often dispatching 

a representative to the customer’s home—all in an attempt to engage the homeowner in ways to try to save the home. 

Despite these efforts, over the past 12 months at least 25% of the 

loans Litton services that go into foreclosure are vacant, which is 

a 100% increase from 12 months ago. Many times these homeowners did not respond to loan modification offers and have simply 

walked away from their homes. In order to reduce these numbers, 

Congress and the Administration should encourage struggling 

homeowners to contact their servicer to attempt to work out a solution. Additionally, Litton has found that local community groups 

and other housing-focused organizations are often able to help 

homeowners reach a solution with their servicers and Congress and 

the Administration should support this type of local advocacy. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY 

FROM GREGORY PALM 

Q.1. All four of your testimonies mentioned the efforts your financial institutions are making to systematically modify mortgage 

loans to prevent foreclosures and keep homeowners in their homes. 

Several of the witnesses, with the exception of Mr. Campbell, supplied estimates of how many mortgage owners have been helped or 

are projected to be helped through these loan modification programs. I ask that each of the witnesses provide more details on 

these calculations, specifically: 

• Which homeowners are eligible for the institution’s loan modification program? 

• How is success through the program defined? What does it 

mean that a certain number of homeowners have been ‘‘helped’’ 

through a loan modification program? 

• If your program has already been implemented, how have you 

calculated the number of homeowners assisted through the 

programs? 

• If you have more than one loan modification program for distressed borrowers, please provide details on each. 

• How many homeowners do you project will be assisted through 

your institution’s loan modification programs, and what information do you use to arrive at that calculation? 


pwalker on DSK8KYBLC1PROD with HEARING
130 

A.1. Litton Loan Servicing LP (Litton), a Goldman Sachs affiliate, 

services approximately 440,000 residential mortgage loans. Over 

the past 12 months, Litton has modified more than 40,500 loans, 

representing approximately 11.3% of Litton’s average portfolio and 

35.5% of its average loan population that were 60 days or more 

past due. Litton services these loans but it does not own the loans. 

The responses to your specific questions below reflect Litton’s experiences as a residential mortgage loan servicers. 

Q.2. Which homeowners are eligible for the institution’s loan modification program? 

A.2. Litton offers loan modifications and loss mitigation opportunities to homeowners throughout the delinquency period. Litton does 

not, however, require a homeowner to be delinquent to discuss loss 

mitigation options. In order to identify issues as early as possible 

and to examine potential workout solutions, Litton encourages 

homeowners to discuss changes in their status or circumstances, 

including loss of income or other hardship that may affect their 

ability to make payments. Additionally, Litton does not preclude 

homeowners whose mortgages have been previously modified from 

requesting additional modifications. 

Q.3. How is success through the program defined? What does it 

mean that a certain number of homeowners have been ‘‘helped’’ 

through a loan modification program? 

A.3. A successful loan modification program reduces monthly mortgage payments to a sustainable level that allows homeowners to remain in their homes whenever possible. When Litton modifies 

loans, it considers writing down principal, waiving all or part of arrearage, decreasing the interest rate and extending the loan term, 

among other efforts designed to create a sustainable workout solution for the homeowner. 

Historically, Litton’s average modification involved a payment reduction of approximately $200 per month, which resulted in an average housing debt-to-income (DTI) ratio of 39%. However, in response to deteriorating macroeconomic conditions and a weakened 

housing market, Litton has implemented a new DTI standard of 

31%, which is consistent with FHA guidelines for new loans. Litton 

expects that after a period of making payments on the loan modification many of its customers will be able to refinance into a fixedrate FHA loan. Using this standard will allow Litton to do more 

loan modifications with greater payment relief to the homeowner, 

thus providing a more sustainable solution. Furthermore, investors 

will still benefit from modifications which yield a better outcome 

than foreclosures. 

Q.4. If your program has already been implemented, how have you 

calculated the number of homeowners assisted through the programs? If you have more than one loan modification program for 

distressed borrowers, please provide details on each. 

A.4. Litton has implemented multiple loan modification programs 

that seek to help at-risk homeowners stay in their homes. In order 

to pursue any of the loan modification programs described below, 

Litton, as servicer for loan investors, must demonstrate that the 


pwalker on DSK8KYBLC1PROD with HEARING
131 

modification results in a greater net present value to investors 

than a foreclosure. 

For ARM loans in which the homeowners is current but Litton 

believes is at risk of imminent default, Litton begins a streamlined 

modification offer campaign six months prior to a scheduled interest rate reset. These modifications extend the original terms of 

ARMs up to 60 months at the introductory rate. 

Customers with ARM loans that become 60 days delinquent as 

a result of an interest rate reset will receive a modification that 

locks in the introductory rate of the ARM for the remaining term 

of the loan. This type of streamlined modification is offered both to 

customers with whom Litton has active communication as well as 

those who have proved difficult to contact. 

If after receiving either of these types of modifications a homeowner experiences hardship in paying the monthly mortgage payment at the introductory rate, Litton will evaluate the homeowner’s 

specific situation to attempt to create a customized modification for 

that homeowner using the 31% DTI standard discussed above. 

For fixed-rate delinquent loans where Litton has active communication with the homeowner, Litton comprehensively evaluates the 

homeowner’s specific financial situation including income and DTI 

ratio to develop a tailored modification plan for the homeowner 

that attempts to solve for affordability. The custom modification 

will include one or more of: waiver of all or part of arrearages, 

principal reductions, decreases in interest rates and term extensions, among other efforts designed to modify the loan to achieve 

a 31% DTI. 

Litton also offers a streamlined loan modification program for 

fixed-rate delinquent loans for homeowners that have not responded to its loss mitigation offers. After 60 days of delinquency, 

these homeowners are sent a modification offer that is subject to 

three conditions: (1) sign and return the modification offer, (2) 

promptly provide Litton with proof of current income (such as a 

pay stub), and (3) make one payment at the new, lower, modified 

payment. If a customer meets these conditions, that customer has 

achieved a loan modification. If a homeowner responds to the offer 

but needs further payment relief, Litton will evaluate the homeowner’s specific financial situation and attempt to create a customized loan modification as described in the paragraph above. 

Q.5. How many homeowners do you project will be assisted 

through your institution’s loan modification programs, and what information do you use to arrive at that calculation? 

A.5. Next year, Litton anticipates to continue, if not increase, the 

number of modifications, but given the extraordinary market conditions surrounding the housing market and the unprecedented pressures on Litton’s customers, it is difficult to project the number of 

loans that Litton will modify in the coming months and years. Litton has proven and remains committed to constantly examining 

and re-examining its modification programs to best address both 

the needs of the individual homeowner and investors. Additionally, 

it will continue to seek partnerships with strategic community organizations, including housing counseling and foreclosure prevention programs, to increase its outreach to homeowners. 


pwalker on DSK8KYBLC1PROD with HEARING
132 

Q.6. Please also provide samples of the records and documentation 

you maintain regarding loans that are modified through your institution’s loan modification programs, with appropriate redactions to 

protect confidential information. 

A.6. Please see the attached sample modification letter. 

Q.7. In over a decade of serving in state and federal government, 

I have learned that even the best consumer programs are useless 

if those they target for assistance do not know they exist. Please 

describe in detail the outreach efforts you have made to distressed 

homeowners to inform them of their new options for loan modification under the programs you administer. Specifically, what additional measures have you taken since the implementation of the 

program? 

A.7. Litton expends significant time and resources to communicate 

with homeowners. Litton contacts homeowners whose mortgage 

payments are past due, whose loans are scheduled for a rate reset, 

as well as those who are not in default but Litton believes are at 

risk for imminent default. Some of Litton’s strategies include early 

and active contact with the homeowner through telephone calls, 

letter campaigns, home visits, participation in foreclosure avoidance fairs and collaborations with nonprofit housing counseling organizations. 


pwalker on DSK8KYBLC1PROD with HEARING
133 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 223 here 50417A.064
134 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 224 here 50417A.065
135 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 225 here 50417A.066
136 


pwalker on DSK8KYBLC1PROD with HEARINGInsert graphic folio 226 here 50417A.067
137 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 

FROM SUSAN M. WACHTER 

Q.1. Professor, in your testimony you mention bank mergers as a 

less than ideal use of the TARP funds. What do you think of giving 

Treasury the authority to approve mergers in order to ensure that 

TARP is only subsidizing mergers that improve systemic stability 

and/or increase lending to consumers and businesses? 

A.1. Lending is necessary. However, what is necessary to assure 

lending will be long run profitability and financial stability. Getting from where we are now to financial stability is critical and the 

role of directive lending, while seemingly helpful, could be counterproductive. 

Q.2. Professor, you also discuss the need for banks to continue 

lending to creditworthy borrowers. Do you think the Administration has done enough to encourage banks to do this lending in a 

difficult environment? 

A.2. No, I do not think the administration has done enough to encourage banks to lend in this difficult environment. The administration has not taken the necessary steps to avoid severe housing 

price overcorrection which will interact with the recession in an adverse feedback loop for both. 

Q.3. What additional steps do you think the Administration could 

take? 

A.3. Similar to the plan Paulson has discussed in the Wall Street 

Journal on Dec. 3rd, it is necessary to lower mortgage rates and 

increase lending through Fannie Mae and Freddie Mac. However, 

I believe it will be beneficial to extend these lower rates to refinancing for existing loans, as well as mortgages for new home purchases. By reducing mortgage rates, the government will provide 

an opportunity for many to buy into the housing market and to 

purchase a home at low mortgage rates and an incentive to pay existing, refinanced mortgages even if the home is underwater as opposed to letting the home go to foreclosure. This shift would break 

the cycle of unsold inventory and decreasing demand causing house 

prices to fall. 

Q.4. Loan modifications continue to be one of the most difficult aspects of this crisis. I’d like to ask the entire panel, what are the 

most significant obstacles standing in the way of broader loan 

modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? 

A.4. There are legal and incentive barriers to optimal loan modifications inherent in contractual private label servicing agreements. 

These barriers, both legal and incentive based, need to be addressed. Useful steps would be to adopt a plan similar to that proposed by the FDIC for IndyMac (along the lines suggested by Sheila Bair) and also to implement REMIC legislation that has been 

discussed. Solutions that provide incentives and raise the cost to 

servicers of not optimally modified loans through penalties are both 

needed to stem the adverse loop that leads to further foreclosures 

and a worsening housing market outlook. 


pwalker on DSK8KYBLC1PROD with HEARING
138 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 

FROM JON CAMPBELL 

Q.1. As you can see, many members of this panel are concerned 

that in spite of fresh government capital, banks are pulling back 

and reducing lending at a time when the country is already facing 

a potentially deep and long recession. How do your loan volumes 

for this year compare to the past few years? 

A.1. Wells Fargo has been one of the few banks to continue lending 

through the credit crisis. At the end of the third quarter 2008, average loans were up 15% from the previous year and 13% 

(annualized) from the previous quarter. We were able to generate 

such strong growth because of our prudent credit discipline and by 

thoroughly understanding our customers’ financial needs. After our 

release of fourth quarter 2008 earnings on January 28, 2009, we 

will be able to provide more updated information. 

Q.2. Are you pulling back active lines of credit from businesses and 

consumers? If so, why? 

A.2. Through our ongoing customer management programs, and 

our adherence to prudent lending principles, we modify lines of 

credit on a case-by-case basis and only make reductions when we 

feel it is warranted. 

Q.3. There is a lot of concern on this panel that the banks are planning on hoarding rather than deploying this capital. What are your 

forward plans for the use of the TARP funds? 

A.3. We are scheduled to release our fourth quarter earnings on 

January 28, 2009 but before that time we cannot provide any forward looking guidance on our lending for the fourth quarter or beyond. We can tell you that we intend to use the Capital Purchase 

Program funds to make more loans to credit-worthy customers and 

to find solutions for our mortgage customers late on their payments 

or facing foreclosures so they can stay in their homes. As indicated 

previously, through the third quarter of 2008, Wells Fargo had increased loans by 15% from the previous year, strong evidence of 

our commitment to continue lending through this challenging cycle. 

Q.4. As you all know, small businesses are the lifeblood of our nation’s economy. I have been hearing from a number of companies 

in my state that the credit crisis is really hurting them not only 

because they can’t get new loans, but also because their lines of 

credit are drying up and they are finding it difficult to make payroll. The SBA made a couple of important technical changes suggested by Senator Kerry and me in a letter last week, but we need 

to do a lot more to spur lending in this sector, or millions more jobs 

could be in jeopardy. 

A.4. We believe the point of the statement is what needs to be done 

to get SBA loans moving again and below are three areas that if 

the changes were implemented could result in an increase in loan 

activity: 

7a loans 

• Raise the threshold to $3 million—the borrowing needs of 

small business have gone beyond the old limit of $2 million. 


pwalker on DSK8KYBLC1PROD with HEARING
139 

• Raise guaranty to 85% for 7a loans no matter the size of the 

loan as added incentive for lenders. 

• Adjust the 7a size standards to match 504 program standards—this would make more small businesses eligible for SBA 

loans. 

• Raise spread over index (Libor or Prime) to match SBA Express limits from 2.25/2.75% to match limits set for 

SBAExpress loan program. The current SBAExpress limits are 

4.5/6.5%. 

SBAExpress 

• Raise guaranty from the current 50% to 75% for all lines and 

loans. This would encourage banks to make more use of the 

line of credit feature of this product. This is especially critical 

now since many small businesses suffer from a lack of working 

capital. 

• Raise the current threshold from $350,000 to $1 million. 

Other 

• SBA current program for micro-loan funding is inadequate for 

the borrowers under $35,000. This has been a long-time source for 

the funding of very small businesses using non-traditional community based lenders as the distribution network. The funding organizations provide needed technical assistance coupled with the loans. 

Q.5. We have been hearing from SBA that the number of banks 

participating in the 7(a) and 504 loan programs has been dropping 

significantly, partly because of a lack of liquidity and partly because the fees and cost of funds SBA lenders can’t break even. 

What do you see as the main reasons for the decline in the number 

of participating lenders? 

A.5. The issue of cost of funds is significant. We and other lenders 

are seeing loan spreads (profit) decline since the cost of money has 

been high/volatile and the interest rates we are able to charge on 

SBA loans are too low. 

—The lack of liquidity in the market is a major problem. The secondary market for SBA loans has not been a reliable option for 

most of 2008. Wells Fargo does not sell SBA loans, however many 

lenders rely solely on the secondary market to generate the liquidity necessary for making more loans. These lenders are now caretaking portfolios and are out of loan origination. 

—Fees do continue to be a problem. In particular, the ongoing 

portfolio servicing fee which is currently set at .55 bps is a big expense for all lenders. Layering on top of this are large annual lender oversight fees, for example Wells Fargo paid $123,000 in 2008. 

The combination of these fees does give all lenders pause, but it 

truly pushes many mid-size and small lenders out of the SBA program. 

—More and more lenders are getting frustrated with the difficulties of collecting on loan guaranties from the SBA. The Herndon 

Center is unpredictable when considering lender liquidation requests. Lenders are being second-guessed and minor issues are 

often being used as the basis for refusing payment of a loan guaranty. Lenders are questioning the value of the guaranty. Many do 


pwalker on DSK8KYBLC1PROD with HEARING
140 

not want to go through the hassle of offering SBA loans because 

they feel that future collection on an SBA loan guaranty is too unreliable. 

Q.6. If all of the SBA lender and borrower fees for both the 7(a) 

and 504 loan programs were completely eliminated for a period of 

time—not reduced, but completely eliminated—do you believe that 

this would help spur additional lending activity in the small business marketplace? 

A.6. Yes, anything that can be done to reduce the cost of capital 

via the elimination of fees would provide a significant psychological 

boost for SBA Lending. Right now both borrowers and lenders need 

incentives to once again get money flowing. This would be especially helpful for businesses in need of working capital, those purchasing existing businesses and for commercial real estate transactions. But the elimination of fees is only one piece of the puzzle— 

we need a holistic approach that can really give the industry a true 

shot in the arm. 

Q.7. Loan modifications continue to be one of the most difficult aspects of this crisis. I’d like to ask the entire panel, what are the 

most significant obstacles standing in the way of broader loan 

modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? 

A.7. Yes, it would be very helpful for Congress to provide clear authority to HUD to allow the agency to implement the Section 601 

Accelerated Claim Disposition Program. This program is under review at HUD and would enable servicers to take a troubled loan 

out of a Ginnie Mae pool, apply a loan modification to keep the borrower in their homes and replace the newly modified loan back into 

the securitized pool. This procedure would be on par with what is 

permissible for conventional loans and would be a very useful companion to the Hope for Homeowners program. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY 

FROM JON CAMPBELL 

All four of your testimonies mentioned the efforts your financial 

institutions are making to systematically modify mortgage loans to 

prevent foreclosures and keep homeowners in their homes. Several 

of the witnesses, with the exception of Mr. Campbell, supplied estimates of how many mortgage owners have been helped or are projected to be helped through these loan modification programs. I ask 

that each of the witnesses provide more details on these calculations, specifically: 

Q.1. Which homeowners are eligible for the institution’s loan modification program? 

A.1. We have a wide array of various loan modification programs. 

Each has varying eligibility requirements. There are very few loans 

that we service that once the loan is in default is not eligible for 

some form of loan modification. Many ‘‘eligibility’’ requirements relate to specific ‘‘automatic’’ or ‘‘streamlined’’ loan modification programs. Again, the eligibility requirements can vary based on investor or specifics of the program. With respect to loans owned by 


pwalker on DSK8KYBLC1PROD with HEARING
141 

Wells Fargo Home Mortgage, we recently announced a streamlined 

loan modification program. To be eligible for this program a borrower must be 90 days or more past due, the borrower must own 

and occupy the home, the property must be a single family residence, and the borrower can not be in bankruptcy. 

Q.2. How is success through the program defined? What does it 

mean that a certain number of homeowners have been ‘‘helped’’ 

through a loan modification program? 

A.2. Wells Fargo Home Mortgage considers a customer ‘‘helped’’ 

through a loan modification program if a loan is brought out of default status while finding an affordable payment that the borrower 

is able to support on a long-term basis. Success is helping eligible 

borrowers achieve this, reducing the number of loans that proceed 

to foreclosure sale while minimizing losses. 

Q.3. If your program has already been implemented, how have you 

calculated the number of homeowners assisted through the programs? 

A.3. The streamlined program applicable to loans owned by Wells 

Fargo Home Mortgage was implemented on December 15, 2008. 

That is, we put certain foreclosure sales on hold and commenced 

efforts to contact and notify eligible borrowers. It is too early to calculate the number of successful loan modifications. 

Q.4. If you have more than one loan modification program for distressed borrowers, please provide details on each. 

A.4. As indicated previously, we have and will continue utilizing 

our case-by-case loan modification program. In addition to the 

streamlined loan modification program for loans owned by Wells 

Fargo Home Mortgage, we have implemented a number of programs for loans we service for others. That would include the ASF 

Streamlined loan modification guidance, Fannie Mae and Freddie 

Mac’s Streamlined Modification Program. The criteria for these 

programs is similar to what was implemented for the Wells Fargo 

Home Mortgage owned loan program. 

Q.5. How many homeowners do you project will be assisted 

through your institution’s loan modification programs, and what information do you use to arrive at that calculation? 

A.5. We estimate that approximately 7 of every 10 borrowers are 

eligible for a Wells Fargo Home Mortgage owned loan modification—and that would include the streamlined loan modification 

process. We base this on an analysis of loan level data, and an estimation of the number of borrowers who will respond to the program. 

Q.6. Please also provide samples of the records and documentation 

you maintain regarding loans that are modified through your institution’s loan modification programs, with appropriate redactions to 

protect confidential information. 

A.6. Yes, we are mailing you a packet regarding loan modifications 

and will provide that to you directly. 

In over a decade of serving in state and federal government, I 

have learned that even the best consumer programs are useless if 

those they target for assistance do not know they exist. Please deVerDate Nov 24 2008 21:13 Apr 01, 2010 Jkt 050417 PO 00000 Frm 00145 Fmt 6602 Sfmt 6602 E:\HR\OC\A417.XXX A417

pwalker on DSK8KYBLC1PROD with HEARING
142 

scribe in detail the outreach efforts you have made to distressed 

homeowners to inform them of their new options for loan modification under the programs you administer. 

Q.7. Specifically, what additional measures have you taken since 

the implementation of the program? 

A.7. We send out multiple letters of notification providing the borrower with information about the program and urging them to contact us. We send tens of thousands of letters each month urging 

borrowers to contact us. Additionally, we attend borrower outreach 

events sponsored by non-profit and other agencies. 

We make over 2 million outbound telephone calls each month in 

an attempt to reach borrowers. For customers who do not respond 

to the letters, we follow up with multiple telephone calls at various 

times of the day again advising the customers of the program and 

determining their level of interest in the program. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER 

FROM NANCY M. ZIRKIN 

Q.1. Nancy and Martin, you both spent a considerable portion of 

your time on the bankruptcy issue, so I don’t want to make you repeat yourselves, but I just want to emphasize one point. Isn’t it 

true that despite some improvements, and major new programs announced by several lenders at the witness table today, that investors and 2nd mortgage holders continue to present major obstacles 

to loan modifications? 

A.1. That is correct. For example, many loans are broken apart and 

spread across various tranches of complicated investment securities, which means that a wide number of people have often-conflicting interests in a loan when a borrower cannot afford the payments. The only way to modify such loans, without court intervention, would be to put the entire loan back in the control of one person who can make the necessary decisions—which, in the case of 

securitized loans, has often been compared to trying to unscramble 

an egg. 

Q.2. And isn’t it also true that the only way to overcome those obstacles in a broad-based fashion is through bankruptcy? That the 

bankruptcy courts are the only entity with the power to overrule 

the objections of either group? 

A.2. That is also correct. While I’d certainly be interested in any 

alternatives that industry opponents of the bankruptcy bill might 

have for overcoming those obstacles, those opponents still haven’t 

proposed any. 

Q.3. Loan modifications continue to be one of the most difficult aspects of this crisis. I’d like to ask the entire panel, what are the 

most significant obstacles standing in the way of broader loan 

modifications, especially to the securitized loans that no single person really controls, and what steps can Congress and the Administration take to overcome them? 

A.3. The key obstacles are—as you noted—the modern 

securitization process, and the complications in many cases brought 

on by the use of piggyback loans. Not all loan modification efforts 


pwalker on DSK8KYBLC1PROD with HEARING
143 

face these obstacles, which is why efforts like Hope Now, Hope For 

Homeowners, and—even better—FDIC Chairperson Sheila Bair’s 

loan guarantee idea are all very important. But in most case, voluntary modifications just don’t work, because it takes permission 

from too many people—making the bankruptcy route, which doesn’t 

rely on permission, an absolutely essential part of the response. 


pwalker on DSK8KYBLC1PROD with HEARING