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

61–927—PDF 2009

S. HRG. 111–715

NOMINATION OF TIMOTHY F. GEITHNER

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

ON THE

NOMINATION OF

TIMOTHY F. GEITHNER, TO BE SECRETARY OF THE TREASURY

JANUARY 21, 2009

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

BILL NELSON, Florida

ROBERT MENENDEZ, New Jersey

THOMAS R. CARPER, Delaware

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

MICHAEL B. ENZI, Wyoming

JOHN CORNYN, Texas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

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

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

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

Schumer, Hon. Charles E., a U.S. Senator from New York ................................. 6

ADMINISTRATION NOMINEE

Geithner, Timothy F., nominated to be Secretary of the Treasury, Washington, DC ............................................................................................................. 9

WITNESS

Volker, Hon. Paul, former Chairman, Federal Reserve Board, Washington,

DC .......................................................................................................................... 7

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

‘‘Questions for Mr. Geithner,’’ New York Times editorial, January 21,

2009 ................................................................................................................ 69

Letter from Timothy F. Geithner to Senators Baucus and Grassley, dated

October 8, 2008 ............................................................................................. 71

Geithner, Timothy F.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 77

Biographical information ................................................................................. 82

Responses to questions for the record ............................................................. 94

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 3

Committee staff memorandum ........................................................................ 207

Letter from Senator Grassley to Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Henry M. Paulson, Jr., and Timothy F.

Geithner, dated September 23, 2008 ........................................................... 237

‘‘Geithner Accepted IMF Reimbursement for Taxes He Didn’t Pay,’’ National Review article by Byron York, January 14, 2009 ............................ 238

‘‘More Questions for Mr. Geithner,’’ New York Times editorial, January

15, 2009 .......................................................................................................... 240

‘‘A Geithner Tax Amnesty,’’ Wall Street Journal editorial, January 15,

2009 ................................................................................................................ 242

‘‘More Questions About Geithner,’’ National Review article by Byron York,

January 16, 2009 .......................................................................................... 243

‘‘Geithner Can’t Explain His Failure to Pay Taxes,’’ National Review

article by Byron York, January 19, 2009 .................................................... 245

Schumer, Hon. Charles E.:

Opening statement ........................................................................................... 6

Prepared statement .......................................................................................... 247

Volker, Hon. Paul:

Testimony .......................................................................................................... 7

Page

IV

COMMUNICATIONS

Komisar, Lucy .......................................................................................................... 249

Trimbath, Susanne, Ph.D. ...................................................................................... 258

(1)

NOMINATION OF TIMOTHY F. GEITHNER,

TO BE SECRETARY OF THE TREASURY

WEDNESDAY, JANUARY 21, 2009

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:08 a.m., in

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

(chairman of the committee) presiding.

Present: Senators Rockefeller, Bingaman, Kerry, Lincoln, Wyden,

Schumer, Stabenow, Cantwell, Nelson, Grassley, Hatch, Snowe,

Kyl, Bunning, Roberts, and Ensign.

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Alan Cohen, Senior Budget Analyst;

Cathy Koch, Senior Advisor, Tax and Economics; Ayesha Khanna,

International Trade Counsel; Joseph Adams, Economic Development Advisor; and Mary Baker, Detailee. Republican Staff: Kolan

Davis, Staff Director and Chief Counsel; Mark Prater, Deputy

Chief of Staff and Chief Tax Counsel; Theresa Pattara, Tax Counsel; Jim Lyons, Tax Counsel; and Nick Wyatt, Tax Research Assistant.

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

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The committee will come to order.

Franklin Delano Roosevelt once said, ‘‘Confidence thrives on honesty, on honor, on the sacredness of obligations, on faithful protection, and on unselfish performance. Without them, it cannot live.’’

The nominee before us today has pretty much been nominated to

restore confidence in the U.S. economy. It will not be easy. To restore this confidence we must restore faith in the honesty and

transparency of financial institutions, we must honor the obligations to which we have committed ourselves, and we must protect

the principles on which our economic system is based.

In these troubled times it is also essential that the American

people, and the Congress, have confidence in a nominee and his

leadership. As a key member of President Obama’s economic team,

we must believe that he can help put our economy back on track.

This trust must be earned, and once earned, this trust must be

maintained. Close scrutiny of Mr. Geithner’s tax returns uncovered

several errors, and questions have arisen regarding his employment of household help. I expect him to answer questions regarding these issues honestly and completely.

2

These are disappointing mistakes, but after discussing them with

Mr. Geithner I believe them to be innocent mistakes. I believe that

Mr. Geithner has sufficiently corrected the errors, and I know a

man of Mr. Geithner’s talent and dedication will be meticulous on

these points in the future. More broadly, I also expect Mr. Geithner

to give the American people, and Congress, the respect that they

deserve.

The Secretary of Treasury cannot ask Congress to make middleof-the-night decisions that cost taxpayers hundreds of billions of

dollars. The Secretary cannot refuse to explain why immediate

massive action must be taken without time for consultation or discussion. The Secretary cannot ask Congress to commit massive

funds on the basis of a 3-page proposal. If ever there was a time

for those kinds of actions, that time has passed.

Rather, we must have faith that the Secretary’s actions, and

those of the Treasury Department, will be open and they will be

transparent. We must know that the Secretary will help enforce

the laws passed by Congress. The Secretary must protect the fundamentals of our economy, and the Secretary must unselfishly give

of himself to successfully complete the task at hand.

The global economic crisis required unprecedented action. The

Troubled Asset Relief Program—the TARP—authorized $700 billion to stem the financial crisis. When Congress authorized this

money, we promised the American people that the U.S. Government would be good stewards of their hard-earned tax dollars. The

Secretary must ensure that these dollars were not spent in vain.

We also promised that we would keep the TARP program honest.

I fought for a Special Inspector General to oversee the program

that was enacted. The Secretary must ensure that the Special IG

has access to all the information and resources that he needs to get

the job done.

And, in the midst of this financial crisis, there is no room for selfishness. I worked to include limits on executive compensation in

TARP, and I expect Mr. Geithner to vigorously enforce these limits.

We cannot allow taxpayer money to fund golden parachutes to

some of the very people responsible for this crisis.

We must also work together to protect hard-working Americans

from being forced out of their homes. The Emergency Economic

Stabilization Act requires the Treasury Department to work with

banks to stem mortgage foreclosures, and I expect Mr. Geithner to

carry out this mandate.

I urge Mr. Geithner to find ways to help small businesses. In

Montana, all businesses are small businesses. They are struggling.

They are feeling the brunt of both the credit freeze and the economic slump. Small businesses are the engine of local economies;

collectively, they are too big to fail. We must ensure that TARP

does not ignore them.

In addition to administering TARP, Mr. Geithner will be responsible for overseeing the Internal Revenue Service. The IRS employs

nearly 100,000 people. He is responsible for collecting the tax revenues that fund our government. We owe it to all Americans to ensure that all taxpayers file their returns honestly and in a timely

fashion, especially now. The IRS must collect all revenues it is

3

owed. We must pursue those who evade their taxes by improperly

moving their assets offshore.

These are all important priorities, but the health and prosperity

of the American economy cannot be solved with domestic policies

alone. We must engage with the world’s economic powers, engage

with them. We must urge them to reform their policies, as well as

our bilateral and multilateral relationships.

I think foremost of China. Secretary Paulson established the

U.S.-China Strategic Economic Dialogue, otherwise known as the

SED. Continuing a good, strong, vigorous, constructive dialogue

similar to the SED, I think, is critical, and we can waste no time

doing it. Pursuing such a dialogue is not just talk, it is about reforming our relationships to unwind unsustainable balances. It is

about getting our relationship on firm footing. It is about finding

a balance that is sustainable and mutually prosperous.

We also need to reform our relationship with Cuba. The Secretary oversees the Office of Foreign Asset Control, otherwise

known as OFAC. OFAC has allocated way too much precious time,

money, and effort to enforcing our trade embargo with Cuba. This

makes it difficult for Montana farmers, farmers in other States, to

sell their products in a market 90 miles from the United States.

This also squanders resources that OFAC could use to fight terrorism financing around the globe.

The Secretary’s responsibilities are formidable. I have confidence

that Mr. Geithner is up to the job. I have confidence that he will

address the important obligations that he will inherit with honesty

and honor, and I have confidence that, with the help of his unselfish performance, America will overcome these troubled times and

emerge with renewed strength.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Congratulations to the nominee. Not so much

congratulations to the office he has been selected to go to, because

I know it has a great deal of personal sacrifice and financial sacrifice.

Thank you, Mr. Chairman, for the hearing.

Today we perform one of the most important functions of this

committee: we examine the qualifications of the man nominated to

be the next Treasury Secretary. I come into this hearing with a

profound sense of concern and worry about the future of our financial system. Yesterday, I was heartened to hear President Obama

say, ‘‘What is required of us now is a new era of responsibility.’’ For

President Obama, that era of responsibility will begin with his

Cabinet, and I look forward to helping facilitate that.

Of course, today, most people are worried about a financial crisis,

but my worry has been deepened by my dissatisfaction with the decisions made to alleviate that crisis and by what I have learned

about certain people entrusted to make those decisions.

On October 1 of last year, I voted for the Emergency Economic

Stabilization Act, which created the Troubled Asset Relief Program,

or TARP, by acronym. It was not an easy decision to support that

legislation, but the financial panic at the time led me to believe

4

that something needed to be done. Plus, legislation that was important to many taxpayers, and to Iowans specifically, was added to

the TARP bill.

However, last Thursday I voted against allowing the Secretary of the Treasury to access the second half of the $700 billion in bailout funding. Instead of using the first payment of $350 billion to

purchase troubled assets, as the name Troubled Asset Relief Program suggested and how it was sold to us, the money has been erratically and arbitrarily distributed in a monstrous act of government intervention and ownership over our financial markets.

In addition to the TARP program, taxpayers’ dollars are on the

line in bail-outs of Bear Stearns and AIG. The Federal Reserve has

loaned money to three special-purpose vehicles which are all limited liability companies that use Fed funds to purchase troubled assets. Maiden Lane I accepted residential and commercial loans, as

well as derivatives, including credit default swaps from Bear

Stearns in connection with its purchase of JP Morgan. In similar

deals related to the AIG rescue, Maiden Lane II holds residential

mortgage-backed securities, while Maiden Lane III holds the collateral debt obligations purchased from the credit default swap

counter-parties.

It would seem that the Feds’ investment in these SPVs is based

on a valuation of assets, which was conducted in all three cases by

BlackRock Financial, who also, I understand, now manages these

assets. I championed the need for a Special Inspector General for

the TARP and supported the various congressional oversight duties, including the mandate for GAO reports on the program, which

at least shed some light on the activities and transactions under

the TARP. Similar transparency and oversight of the bail-out conducted outside of the TARP is also needed.

In addition to these concerns about how the TARP and other

bail-outs have been managed to date, we have to consider what we

have learned about the nominee’s tax history. The nominee’s troubled tax history was made public last week in a bipartisan Finance

Committee document. I think I am accurate in saying we have operated in the same way we always have since Senator Baucus and

I have been leaders of this committee, to make that information

public if the nominee decided to go forward.

I ask unanimous consent that the committee’s staff memorandum released to the members on Tuesday, January 13, along

with supporting documentation, be printed in the hearing record.

The CHAIRMAN. Without objection.

[The memorandum and supporting documents appear in the appendix starting on p. 207.]

Senator GRASSLEY. Since the report was issued, additional questions have arisen, specifically about the nominee’s failure to pay

self-employment taxes on his IMF income reported on his tax returns for the years 2001 through 2004, and the press has documented many of those questions.

So, Mr. Chairman, I would also ask unanimous consent to enter

five articles and editorials in the hearing record.

The CHAIRMAN. Without objection.

[The articles and editorials appear in the appendix starting on p.

238.]

5

Senator GRASSLEY. Over the past few years, this committee has

spent a lot of time examining the tax gap. The tax gap is the difference between what taxpayers legally owe and what they actually

pay. The nominee has been found to be a tax gap participant. In

addition to failing to pay self-employment taxes while working for

the International Monetary Fund, the nominee’s returns contained

other irregularities that added up to his owing $48,268 in taxes

and interest to the IRS.

When asked by staff and members of this committee to explain

these irregularities, the nominee has offered many excuses that

range from statements that he should have known to explanations

that if only his accountant had warned him he would have done

the right thing.

A troubling fact has emerged. The IRS audit in 2006 yielded a

demand by the IRS that the nominee pay self-employment taxes for

the years 2003 and 2004. The nominee paid the taxes due for those

years. During the audit, it became clear that the same liability existed for the nominee’s 2001 and 2002 returns. The IRS, however,

was barred by statute of limitation from collecting for those years.

Shortly after President-elect Obama expressed an intent to nominate him, on the advice of the transition team, the nominee amended his 2001 and 2002 returns and paid the amount owed. Furthermore, the nominee received tax allowances from the IMF to pay the

difference between the ‘‘self-employed’’ and the ‘‘employed’’ obligations of the Social Security tax.

In considering the nomination, this committee has a difficult

road to travel. There are some who believe that the nominee’s actions can be explained as simple and common mistakes. To some,

he is possibly the only man for the job of healing the recession that

we have before us, and a very fractured economy.

His involvement in building and implementing the TARP gives

him unique insight into how we have gotten to where we are today.

To some he is not merely the best choice, to some he is the only

choice.

On the other hand, we need to consider how much the nominee’s

tax history could reflect on a Secretary of the Treasury. As Secretary, the nominee would be in charge of the IRS. If confirmed,

would the nominee be able to effectively lead his department? How

much does this troubled tax history reflect on his judgment as a

decision-maker? These are some of the issues that this committee

must consider.

So I ask the nominee, are you the general drawing on your financial expertise who will marshal the financial troops and assets of

the Treasury Department to lead our Nation to prosperity, or are

you the general, with this troubled tax episode of the past, who will

lead the Nation’s tax policy and administration system? These are

two key questions that we face today. I look forward to the testimony.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.

Now, as our witness is from the Empire State, I notice that one

of the invaluable members of our committee, also from the Empire

State, is here, and I recognize him to say a few words to introduce

you to the committee.

6

OPENING STATEMENT OF HON. CHARLES E. SCHUMER,

A U.S. SENATOR FROM NEW YORK

Senator SCHUMER. Thank you, Mr. Chairman. First, thank you

for your outstanding leadership of this committee and your fine

statement. I want to thank Senator Grassley. I know he is very sincere about the difficulties he is weighing.

It is my privilege to be here today to introduce Timothy Geithner

as President Obama’s nominee to be Treasury Secretary.

Mr. Chairman, in these times, as our financial system is sailing

into uncharted and turbulent waters, there is no navigator more

suited for this job by way of intelligence, experience, inclination,

and temperament than Tim Geithner. Tim has made some mistakes, which he has freely admitted and corrected. But these errors

pale before the myriad mistakes made by the operators of financial

institutions and government regulators overseeing them. We need

the very best, not the second-best person in Treasury to correct

those mistakes.

Tim’s career in government began 20 years ago as a staffer at

Treasury. His abilities quickly launched him up the career ladder,

and by the mid-1990s he was Senior Crisis Manager with thenSecretary Rubin, and then-Deputy Secretary Summers, and helped

guide the U.S.—and indeed the global financial system—through a

series of international financial crises, including the Asian financial

crisis in 1997 and 1998.

For the past 6 years, Tim has served as president to the Federal

Reserve Bank of New York. From that position he has tried to raise

awareness of the risks posed to the economy by the current crisis

and to call Congress’s attention to the inadequate powers and authorities of the Treasury Department and the Federal Reserve to

deal with this economic maelstrom and brave new economic world.

Far before many other regulators, Tim had recognized the extent

of the danger that our economy faced and was trying to raise

awareness. In the aftermath of the Bear Stearns failure, Tim noted

the current crisis was so severe that it was ‘‘not something that the

market can solve on its own.’’ In July, he called on Congress to establish a legal framework for dealing with the failures of non-bank

financial institutions. Had we heeded his advice then, the Treasury

Department and the Federal Reserve might not have faced the failure of Lehman Brothers with an empty regulatory toolbox.

Tim has also been a leader on financial regulatory reform. In

September of 2006, he led other regulators in calling for enhanced

regulation of hedge funds. In April of 2008, Tim called for a major

overhaul of the system, not just in structure, but also in the way

regulators do their jobs and the policies that we implement to ensure stability. He noted that ‘‘our objective should be a system that

preserves the unique strengths of our financial markets in providing individuals and entrepreneurs access to capital and credit,

but with a greater capacity to withstand stress.’’

However, as he takes on this monumental position, there are a

few things he must keep in mind. First, he must lead the Treasury

Department in a full reexamination of the TARP program, as you

stated, Mr. Chairman, and the other governmental responses to the

crisis to ensure that they are achieving their goals of stability, promoting lending, and protecting taxpayers. The previous TARP proVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
7

gram gave the banks too much dessert before it made them eat any

of their vegetables. Secretary Geithner must be the responsible

parent and restore some balance to this situation; I have confidence

he will.

Second—and we know he will do this since he has already started—Tim must lead a national—in fact, an international—conversation about the structure of financial regulation. Without major reforms to the way that we and others oversee financial institutions,

the history of the last 18 months is doomed to repeat itself.

Finally, and perhaps most difficult of all, Tim must help guide

the U.S. economy back on to stable, long-term footing. The satirical

newspaper, The Onion, recently ran a headline that struck a nerve,

because I think it is all too true. It read: ‘‘Recession-Plagued Nation Demands New Bubble to Invest In.’’

The fact of the matter is that, for far too long this country has

relied on easy credit to support its growth. We need to redevelop

stable, long-term industries that can survive the ups and downs of

the business cycle. We need to reinvigorate American manufacturing, stimulate American savings, and end our national addiction

to debt. We cannot be a country that imports more than we export,

borrows more than we save, consumes more than we produce. It

will not be easy, but I am confident that, if we commit ourselves

to this task, under Tim’s hand on the tiller, America will emerge

as the strongest Nation on the planet for the next 50 to 100 years.

In closing, Mr. Chairman, Tim faces a daunting set of challenges

and tasks, but he is uniquely qualified for this position. I am proud

to say that I will strongly support his nomination.

I would like to close by thanking him for his willingness to continue serving his country in troubled times. God knows that he has

paid his dues, and then some, over the past 18 months, not to mention the past 20 years. And while he could easily go to the private

sector and work less hours for more money than he will make as

a government employee, he has chosen to accept the challenge that

President Obama presented to all of us and to continue to devote

himself to serving his country and striving to make the world economy a better and safer place. For that, I commend him.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator. Thank you for that introduction.

I would now like to call on Hon. Paul Volker, former Chairman

of the Federal Reserve Board, for introduction.

STATEMENT OF HON. PAUL VOLKER, FORMER CHAIRMAN,

FEDERAL RESERVE BOARD, WASHINGTON, DC

Mr. VOLKER. Mr. Schumer, Mr. Chairman, members of the committee, it is a real privilege for me to be——

The CHAIRMAN. Mr. Chairman, you might want to pull your

microphone a little closer to you. Perhaps turn it on, first.

Mr. VOLKER. That might help.

The CHAIRMAN. That might help. Thank you.

Mr. VOLKER. It is even more of a privilege, when you can hear

me, to appear before the committee. [Laughter.]

The CHAIRMAN. Yes, indeed.

8

Mr. VOLKER. And to support Tim Geithner’s appointment as Secretary of Treasury.

You know, a good many years have passed since I last appeared

before this committee, but during all of that time there has never

been a more critical time for the American economy, and particularly for financial stability. That is true not just in the United

States, but globally.

To put it starkly, we are in a serious recession with no end clearly in sight. The financial system is broken. It is a serious obstacle

to recovery. There is no escape from the imperative need for the

Federal Government to come to the rescue, to right the economic

and financial ship of state.

Over time, the hard fact is that several trillions of dollars will

be necessary to be committed in a combination of budgetary expenditures and various guarantee and insurance programs, and extensions of credit by the Federal Reserve.

Obviously, commitments made of that magnitude raise very large

questions. They are not only questions of avoiding waste of the taxpayers’ money, important as that is. There are also risks of undermining confidence in the dollar and raising fears of future inflation.

They need to be recognized.

All that underscores the importance of this committee’s responsibilities, and even more it underscores particularly the role of a

new Secretary of the Treasury. It is that person who necessarily

will carry the principal responsibility within the administration for

developing, explaining, and implementing a program to restore financial stability and restructure the financial system.

Now today, the nomination of Timothy Geithner as Secretary of

the Treasury awaits your advice and consent. After many years in

the Treasury and the Federal Reserve, I have some appreciation of

the nature of the position of Secretary of the Treasury and the

qualities it demands. I also believe I have good grounds for judging

the qualifications of Mr. Geithner.

He occasionally reminds me that our paths briefly crossed some

25 years ago when I addressed his graduating class at Dartmouth.

Now, I cannot claim that I provided any impetus or inspiration for

his career. In fact, my memory is that the public address system

closed down shortly after I began my address. But what has become amply clear in the ensuing 25 years is Tim Geithner’s commitment to public service. His career path up through the ranks of

the Treasury is a model. It is a model I would like to see inspire,

and be emulated by, others attracted to public service.

I think it is also true that he is exceptionally well placed to enhance the professional strength of the Treasury, which should be

a matter of some concern to this committee.

More immediately relevant has been the years Mr. Geithner has

spent as president of the Federal Reserve Bank of New York, a position that I once held. The New York Fed, by its nature, by its location, stands at the hub of the world of finance. It is the agent

of both the Federal Reserve system and the U.S. Treasury, interacting with the markets, with major financial institutions, and

with foreign official counterparts, a point you made, Mr. Chairman,

in emphasizing that this is a global problem, not simply a national

problem.

9

The role of the bank is vital in time of crisis, and as you know

we are in the midst of the mother of all financial crises. As point

man, Mr. Geithner had a key role, and it has been recognized,

within the Fed, within the Treasury, and by market participants

and by officials of other countries. He is not only articulate in public, but well respected in the more restrictive world of scholars and

economists concerned with finance.

Now, I cannot reasonably claim that any one person is absolutely

indispensable but, as you address his nomination, consider that

Mr. Geithner brings unique qualifications in terms of hands-on experience, recognition in financial markets, and the confidence in

which he is held by the new President of the United States. You

have the constitutional duty to confirm his nomination and to exercise that duty with great care. I do hope that that process can be

completed with some dispatch so that President Obama can have

his full team in place to deal with the pressing financial crisis that

simply will not wait.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Chairman.

I now turn to the witness, Mr. Geithner. Mr. Geithner, your prepared statement will be automatically included in the record. I am

going to ask you to proceed for about 5 minutes or so.

Before you proceed, is there anyone here in your family that you

would like to introduce?

Mr. GEITHNER. Thank you, Mr. Chairman. I would like to introduce my wife, Carol, sitting behind me, and my father, Peter

Geithner, on my left.

The CHAIRMAN. Could you both stand, please? We want to thank

you very much for your participation in being part of this team,

too. Thank you very much for your participation.

Mr. Geithner, you can proceed.

STATEMENT OF TIMOTHY F. GEITHNER, NOMINATED TO BE

SECRETARY OF THE TREASURY, WASHINGTON, DC

Mr. GEITHNER. Chairman Baucus, Ranking Member Grassley,

and members of the committee, it is a great honor for me to stand

before—to sit before—you today. I want to thank you for meeting

with me over the last few weeks and for giving me a chance to hear

your interests and your concerns.

I am deeply grateful to the President for asking me to lead the

Treasury Department of the United States at this critical moment

in our Nation’s history. I am particularly grateful to my wife, to my

family, for all their support and for their sacrifice.

I want to thank Senator Schumer and Paul Volker for their kind

words this morning. I am very grateful to you both for sitting with

me here today.

Throughout my career, I have had the great privilege of serving

our country in institutions responsible for U.S. economic policy. In

these roles, I have learned some very important lessons about government and about economic policy. I believe that confidence in the

strength and integrity of our financial system, confidence in our

commitment to fiscal prudence, confidence in the value of our currency, are absolutely critical to the fortunes of all Americans.

10

I believe that markets are central to innovation and to growth,

but that markets alone cannot solve all problems. Well-designed,

strongly enforced financial regulations are absolutely essential to

protecting the integrity of our economy.

I also believe that, as America’s economic fortunes become ever

more closely tied to those of the rest of the world, that we need to

invest more at home in helping Americans deal with the challenges

of trade and technological change.

Finally, I believe that our national security depends critically on

our economic strength. We can have a great and positive impact on

the global economy, but only if the quality of our ideas and our actions win the support of other nations.

We now confront extraordinary challenges: a severe recession

here and around the world, a catastrophic loss of trust and confidence in our financial system, unprecedented foreclosure rates,

small businesses struggling to stay afloat, millions of Americans

worried about losing their jobs and their savings, and a deep uncertainty about what tomorrow holds.

At the food bank where my wife and son volunteer, the lines are

long and getting longer, and these things are happening across

America. Our test is to act with the strength, speed, and care necessary to get our economy back on track and to restore America’s

faith in our economic future.

This will require action on four fronts. First, we must act quickly

to provide substantial support for economic recovery and to get

credit flowing again. The history of financial crises is a history of

failures by governments to act with the speed and force commensurate with the severity of the crisis. If our policy response is tentative and incrementalist, if we do not demonstrate by our actions

a clear and consistent commitment to do what is necessary to solve

the problem, then we risk greater damage to living standards, to

the economy’s productive potential, and to the fabric of our financial system.

Senators, the ultimate cost of this crisis will be greater if we do

not act with sufficient strength now. In a crisis of this magnitude,

the most prudent course is the most forceful course.

Now, the American Recovery and Reinvestment Plan that is now

before the Congress will meet that test. It provides powerful and

direct support to help get people back to work, to encourage private

investment, to break the cycle currently crippling our economy, a

cycle in which concern about growth hurts investment in spending,

causes further job losses, and makes it harder for families and

businesses to get access to credit.

This plan, the American Recovery and Reinvestment Plan, is a

critical part of the solution, but it has to be accompanied by aggressive action to address the housing crisis and to get credit flowing

again. Last fall, Congress passed the Emergency Economic Stabilization Act. Your action—and I know this was a difficult decision

for many of you at the time—helped prevent financial catastrophe.

The actions of the Senate last week to authorize additional resources will enable us to take additional steps to reinforce recovery.

President Obama and I believe that this program needs reform.

I know there are serious concerns about transparency and accountability, confusion about the goals of the program, and a deep skepVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
11

ticism about whether we are using the taxpayers’ money wisely.

We have to reshape and redesign this program to ensure there is

credit available to support recovery. We will do this with conditions

to protect the taxpayer and the necessary transparency to allow the

American people to see how and where their money is being spent.

This program, this financial program, is absolutely essential to recovery, and we need to make it work.

Second, as we move quickly to get our economy back on track

and to repair the financial system, we must make investments that

lay the foundation for a stronger economic future. The strength of

the recovery will depend critically on the investments and reforms

we initiate now to make our economy more productive in the future, the reforms to expand access to health care and reduce its

cost, to move towards energy independence, to sharpen and deepen

the skills of American workers, and to modernize our infrastructure. These investments will make our economy more productive

and more competitive in the future.

Third, our program to restore economic growth has to be accompanied—and I want to emphasize this, has to be accompanied—by

a clear strategy to get us back as quickly as possible to a sustainable fiscal position and to unwind the extraordinary interventions

taken to stabilize the financial system. We need to demonstrate,

with clear and compelling commitments now, that when we have

effectively resolved this crisis and when recovery is firmly established, that we as a Nation will return to living within our means.

Finally, we must move ahead with comprehensive financial reforms so that the U.S. economy and the global economy never

again face a crisis of this severity. Senators, in this crisis our financial system failed to meet its most basic obligations. The system

was too fragile and unstable, and because of this the system was

unfair and unjust. Individuals, families, and businesses who were

careful and responsible were damaged by the actions of those who

were not.

So we need to move quickly to build a stronger, more resilient

system with much greater protections for consumers and for investors, with much stronger tools to prevent and respond to future crises. We have experienced a great loss of faith in our economy, but

we have not lost the most fundamental of American abilities: the

ability to adapt to change and to reform. This will take time. It will

require action on a scale we have not seen in generations. We will

have to keep at it until we restore the confidence of Americans, and

of the world, in America’s economic leadership.

This is my commitment to you, and this is President Obama’s

promise to the American people. We are a strong Nation with great

resources. We can meet these challenges. Our shared goal is a

healthy, more stable, and more competitive free market economic

system that can once again do what it does best: encourage people

to invest and invent, to innovate and create jobs, and to build

stronger communities and better lives.

I want to say how grateful I am to my colleagues at the New

York Fed and at the Federal Reserve system. Like the career staff

at the Treasury, they are an exceptionally talented and dedicated

group of public servants. They are brave, creative, and pragmatic,

and it has been my great privilege to work with them.

12

Senators, before I finish, I want to address directly the concerns

many of you have raised about the mistakes I made in preparing

my tax returns. These were careless mistakes, they were avoidable

mistakes, but they were unintentional. I should have been more

careful. I take full responsibility for them. I have gone back and

corrected these errors and paid what I owed.

I want to apologize to the committee for putting you in the position of having to spend so much time on these issues, when there

is so much pressing business before the country. If you and your

colleagues give me the opportunity to serve as Secretary of Treasury, then I will do everything I can to justify your trust and your

confidence.

Thank you.

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

The CHAIRMAN. Thank you, Mr. Geithner.

Before I ask my questions, our committee has a tradition of asking three standard questions of all nominees. Here they are:

First, is there anything that you are aware of in your background

that might present a conflict of interest with the duties of the office

to which you have been nominated?

Mr. GEITHNER. No.

The CHAIRMAN. Do you know of any reason, personal or otherwise, that would in any way prevent you from fully and honorably

discharging the responsibilities of the office to which you have been

nominated?

Mr. GEITHNER. I do not.

The CHAIRMAN. Do you agree, without reservation, to respond to

any reasonable summons to appear and testify before any duly constituted committee of Congress, if you are confirmed?

Mr. GEITHNER. Absolutely.

The CHAIRMAN. Thank you.

The basic question I think that most Americans have today—I

mentioned it earlier—is the lack of confidence in today’s financial

system. It has been quite a while, unfortunately. You have alluded

to some actions that might be taken to restore that confidence in

your prepared statement. Could you just today, now, directly tell

the American people what you are going to do to help restore that

confidence as quickly as it possibly can be achieved? What are you

going to do?

Mr. GEITHNER. Senator, you are absolutely right. We have seen

just a catastrophic loss of trust and confidence. When you lose trust

and confidence, it is very hard to restore it, and it takes a lot of

care and attention to bring it back.

What the President is going to do is, he is going to come before

the Congress—we hope in the next few weeks—and lay out to the

American people a comprehensive plan to help stabilize the core of

our financial system so that the banks that are so critical to our

economy are able to provide the credit necessary to get recovery

going; he is going to lay out a comprehensive plan for addressing

the housing crisis in this country, which has been so central to the

recession and its basic causes; and he is going to lay out a broad

set of programs for trying to directly address the constraints that

are now making it harder for small businesses, for students, for

13

people who want to buy a car, for municipalities across the country,

to get access to credit, to make those things. Those three things are

going to be the central part of the President’s program.

As he does that, he is going to make sure—we will make sure—

that we have in place strong, carefully designed conditions to protect the taxpayer, conditions that improve the possibility that private capital will come in and replace the government’s role as

quickly as possible, and with a set of measures to provide much

greater transparency about how the money is being spent, and the

results the investments of the taxpayer are producing.

We are going to have to work much more closely together, Senator, with the Treasury, the Fed, and the FDIC, working together

rather than separately. We are going to, as you said in your opening, have to work much more closely with other countries and with

the international financial institutions, because this is a global crisis. It is going to require a global response.

Our actions here will be more effective if they are taken in close

coordination with the actions of the other major financial centers.

We are going to have to work much more closely with the Congress. I think the world needs to see Congress and the executive

branch working together to solve this problem.

We will not be effective in restoring confidence unless we see a

clear commitment by the country as a whole to work to take the

actions necessary to solve these problems, and we will consult carefully with you and work as hard as we can to address the concerns

raised by you and your colleagues.

The CHAIRMAN. And those changes, those conditions, clearly include very significant limits on executive compensation, on reports,

and transparency, that track how the dollars are being spent, and

also address conflict of interest potential.

Mr. GEITHNER. Absolutely, Senator. Larry Summers, who is the

president of the National Economic Council, provided the Senate,

the Congress, with two letters last week that laid out a set of detailed conditions and reforms to the program. We are going to look

very carefully at the recommendations by the congressional oversight body, by the GAO, and everybody else who has looked at this

basic program. We will adopt those conditions that we believe will

help make the program more effective.

The CHAIRMAN. You alluded to the tax issues. I would like to give

you a chance to, in a little more detail, explain what happened.

Mr. GEITHNER. Thank you, Senator, for giving me a chance to do

that. Let me just try to explain a little bit why I believe, looking

back now, I got myself in this position.

In 2001, I left the Treasury Department. I went to work for the

Council on Foreign Relations temporarily, and then ultimately

went to the IMF that year. That year, I had several sources of income. Three employers reported income to me and to the IRS on

a Form W–2 as an employee. I also received self-employment income that year, reported to me on several 1099 forms. I paid selfemployment taxes on the income reported to me as self-employment income. I paid income taxes, taxes on my W–2 income, as I

always had done so. I believed, mistakenly, that I was supposed to

file as an IMF employee, as I would normally file tax as an employee generally.

14

Now, that was a mistake. As I look back at all the documents

that I provided to the committee in response to your careful questions, it was very clear, both in the initial documents the IMF staff

gave me to explain the way the IMF system worked, in the quarterly statements I received from the IMF, in the annual tax forms

I received, in all those documents, looking back, it was very clear.

But when I made that initial mistake and I failed to correct it

initially, I repeated it over the times I had income from the IMF,

even in those years where a tax preparer prepared my returns. In

2006 when the IRS conducted its audit, I went back and hired an

accountant to help me work through that problem, and I paid what

the IRS auditor at that point said I owed.

Now, if I had thought about it more carefully at the time and I

had asked more questions, I would have gone back and asked a

bunch more questions about that, and I would have approached it

differently. But as I said in my opening statement, these were careless mistakes, they were avoidable mistakes, but they were completely unintentional. I take full responsibility for them. Again, I

apologize for putting you in the position where you have to spend

so much time looking through these questions, particularly now.

The CHAIRMAN. Thank you.

Senator Grassley?

Senator GRASSLEY. Yes. Mr. Chairman, if I could, I would like to

give Senator Kyl 10 seconds for something he wanted to say.

The CHAIRMAN. Absolutely.

Senator KYL. Mr. Chairman, I simply want to note—and I know

we all have conflicts—I have some really unavoidable conflicts over

the next hour and a half or so. I will not ask for any special consideration, but I do want whatever rounds of time we have available

for questioning, and to submit written questions at the conclusion

of that that I might still have.

The CHAIRMAN. Yes. There will be time.

Senator KYL. Thank you very much. I appreciate it.

The CHAIRMAN. There will be time.

Senator GRASSLEY. Yes.

The Treasury Secretary is responsible for overseeing the IRS,

which is tasked with enforcing the tax laws. In a 2007 report, the

GAO indicated that as of 2007, the total unpaid tax debt was $290

billion. This is just the amount that the IRS knows taxpayers owe.

This does not include the amount due from taxpayers who do not

properly report income. Social Security and Medicare taxes are a

key component of the tax gap. The person ultimately responsible

for tax policy must be credible on the issues of tax reform and compliance.

I was a champion of the IRS Restructuring Act of 1998. This legislation imposes significant penalties on IRS employees who do not

pay their taxes, including the possibility of being fired. Not discussing your tax returns, Mr. Geithner, would be like sweeping

them under the rug, an option that the IRS employees and the average taxpayer do not have available to them.

Given that the staff and media reports raised significant questions about your late payment of self-employment taxes, I think it

is important to set the record straight before we proceed. As a result, I would appreciate responses to the following questions. These

15

questions, I hope, elicit short answers, since you have been very

clear in your opening statement and in answer to Senator Baucus.

Were you liable for self-employment taxes on your IMF income

from 2001 through 2004?

Mr. GEITHNER. Yes.

Senator GRASSLEY. Did you submit an application for tax allowances for your income and self-employment taxes for the years

2001 through 2004?

Mr. GEITHNER. I did.

Senator GRASSLEY. Did you sign these applications that included

a certification that you would pay the taxes that you received allowances for?

Mr. GEITHNER. I did, yes.

Senator GRASSLEY. All right.

Did you receive checks for the tax allowances you applied for?

Mr. GEITHNER. Yes.

Senator GRASSLEY. Did you receive statements with these checks

that indicated the amount of the allowance that should be used for

income and self-employment taxes? If yes, why did you remit your

income taxes but not your self-employment taxes? Only if you want

to add to what you said to Senator Baucus.

Mr. GEITHNER. I did not, and I should have. I mistakenly believed that I was meeting my obligations fully, including selfemployment taxes, but I did not prepare my returns in a way that

caught that mistake initially.

Senator GRASSLEY. Did you use software to prepare your 2001

and 2002 tax returns?

Mr. GEITHNER. I did.

Senator GRASSLEY. You did not?

Mr. GEITHNER. I did.

Senator GRASSLEY. Oh, you did?

Mr. GEITHNER. Yes.

Senator GRASSLEY. All right.

Which brand did you use? [Laughter.]

Mr. GEITHNER. I will answer that question, Senator, but I want

to say, these are my responsibility, not the tax software’s responsibility.

Senator GRASSLEY. All right.

Mr. GEITHNER. But I used Turbo Tax to prepare my returns.

[Laughter.]

Senator GRASSLEY. Did the software prompt you to report income

and pay self-employment taxes on your IMF income?

Mr. GEITHNER. Not to my recollection, Senator.

Senator GRASSLEY. If yes—well, not to your recollection.

Well, I thank you for answering those questions. While I understand that the tax code is complex and sometimes even tax preparers get it wrong, it would seem that minor due diligence on your

part may have prevented the oversight in failing to pay your selfemployment taxes. I appreciate that you prepared your own returns in 2001 and 2002. I believe that the tax code should be simple enough so that individuals can meet their responsibilities under

the tax code without having to pay expensive lawyers and accountants; however, I believe that the average American is aware of

their obligations to pay Social Security taxes, despite the fact that

16

in many cases it may be their employer who remits their taxes on

their behalf.

It is deeply problematic if a U.S. citizen with your financial

knowledge and expertise does not consider whether he should be

making a contribution to the Social Security trust fund when his

employer makes clear that it is the employee’s responsibility. You

cannot blame the tax code for such tax return errors, and you also

cannot point a finger at tax return preparers—or, in this case, the

IMF, which appears to do a lot to ensure that people know the law.

Individuals have a responsibility to understand their taxes and ultimately account for them.

Mr. Geithner, over the last 5 years Chairman Baucus and Senator Conrad have been aggressive on efforts to close the tax gap.

I have tried to help them in that effort. We have made some

progress over that time, but the problem is still huge. Commissioners Everson and Shulman have put a dent in the tax gap.

Treasury brought forward tax gap proposals, and we have enacted

a couple of significant ones. One dealt with credit reporting, the

other with stock basis reporting. Congress passed a pilot project on

private debt collections and a 3-percent withholding proposal for

government contracts.

So, Mr. Geithner, my two final questions: do you take the tax gap

seriously? Do you plan to continue to implement the Bush administration tax gap strategy, some of which I laid out here? Is there

any reason that we should reverse tax gap legislative proposals?

Mr. GEITHNER. Senator, the President is committed to working

with the Congress on an effective program to close the tax gap. I

share that commitment and, if confirmed by the Senate, I will work

very hard to try to bring forward to the Congress and continue the

progress that you helped lead and initiate to try to close that gap.

There are a bunch of ideas I have heard from you and your colleagues on how best to do that and, if confirmed, I will listen very

carefully to any sensible idea, working very closely with the Commissioner of the IRS in trying to achieve that basic objective. But

the President is committed to that, and of course I share that commitment.

Senator GRASSLEY. Are any of the proposals that we have already put forth lacking in support from the new administration?

The two that I mentioned, for instance. There may be more. But

private debt collections and a 3-percent withholding proposal on

government contracts. Those are a couple of enacted proposals that

are out there, our attempts to close the tax gap.

Mr. GEITHNER. Senator, my sense is that better reporting by

third parties and more comprehensive withholding are going to be

absolutely critical. The two proposals you raised, I would like to

spend a little more time thinking through and talking to you about

them. I have heard concerns on both sides of those issues but, if

confirmed, I will come listen carefully to your concerns and figure

out how best to meet those concerns.

Senator GRASSLEY. If you could give me an answer in writing on

those two issues, I would appreciate it, before your confirmation.

Mr. GEITHNER. Absolutely. Absolutely.

The CHAIRMAN. All right. Thank you, Senator.

Senator Bingaman is next.

17

Senator BINGAMAN. Thank you very much, Mr. Geithner, for

being here. Let me just say, I thank you for your public service

over many years. I accept your statements that these problems

with tax returns were honest mistakes, so I intend to support your

nomination.

Let me go on to two issues I wanted to ask you about. As Chairman Volker just said here in testimony to us, the financial system

is broken. The question is: how do we restore the flow of credit in

our economy? It seems that there are sort of two ways that this has

been attempted. One is the backstopping of financial institutions

one way or another, what was done with Citibank, what was done

with Bank of America recently.

There has been talk of having a bad bank, and I know that the

idea there is to acquire these so-called ‘‘troubled assets’’ and thereby get them off the books of these companies. I guess the Brits

have come up with their proposal, as the Financial Times characterized it, to write a huge insurance contract for the banking sector. Could you just give us a brief comment as to the validity of

some of these proposals or the different ways that we might approach this? It seems like the whole thing has been pretty ad hoc

up until now.

Mr. GEITHNER. Senator, I agree with that concern. I should emphasize, we are at the beginning of this process over repairing the

system, not close to the end of that process, and it is going to require much more substantial action on a very dramatic scale. I

completely agree with what Paul Volker just said to you a few minutes ago about the basic scale of the challenges.

I think, again, the basic lesson of the financial crisis, if you look

at it, is the failure to appreciate early enough the magnitude of the

problem and the failure to move quickly enough, to have the government do what only governments can do in financial crises,

which is to take the risks that the private sector will not take.

My personal view is, for us to get through this and for us to

make sure that recovery is supported by the flow of credit that is

just vital, that we are going to have to do more to make sure institutions at the core of our system are strong enough that they can

lend, but we are also going to have to provide much more substantial direct support to credit markets so that the complicated mechanism that small businesses depend on, that student loan markets

depend on, that the automobile finance market depends on, that

the commercial and residential real estate markets depend on, that

those markets start to come back.

If we are effective on that front, we should be able to get risk

premia down, interest rates down, and get that basic mechanism

of credit markets flowing again. But you have to go at it on all

fronts. We have been carefully reviewing a broad range of proposals, consulting very, very widely among experts both in this

country and around the world about how best to do that. Our expectation is, our hope is, we will be able to come forward relatively

quickly with a comprehensive plan.

I do not want to provide any specific details today. I think one

of the things we have learned about the last 18 months or so is

that we have seen the costs in terms of uncertainty created by tentative signals not followed up by clear actions, with not a lot of

18

clarity and goals. I do not want to be, today, in the position of magnifying that basic problem.

Senator BINGAMAN. Let me ask about one other problem you are

going to be faced with as the Treasury Secretary, and that is salvaging the automobile industry in this country. I strongly support

doing that. I think it is very important that we have a domestic

automobile industry. There is an article in this morning’s Wall

Street Journal about the Chrysler-Fiat deal requiring U.S. loans.

In very rough frame, as I understand it, basically they are saying

that Chrysler has to get another $3 billion from the government in

order for Fiat to go forward with this. Fiat will acquire a 35-

percent interest without putting any cash in, and then at some

time in the future, assuming that the company is making profits,

Fiat will get another 20 percent for $25 million.

It is hard, frankly, to explain to the American taxpayer why the

taxpayer should not own Chrysler if we are going to put in $3 billion, or have some major up-side opportunity for the U.S. taxpayer

if we are successful in allowing Chrysler to succeed and prosper.

So, I do not expect you to comment on the specific deal, but do you

have any thoughts as to how we can assure taxpayers that their

interests are taken care of if we do put these large infusions of

cash into that sector?

Mr. GEITHNER. Senator, you are absolutely right that we are

going to have to, as we move forward, try to make sure that any

assistance the government provides is assistance in support of a

comprehensive restructuring that will leave the American automobile industry in a stronger financial position where they can be

profitable and healthy without government support going forward.

Our judgment is that that is going to require very, very substantial changes by all stakeholders in these companies, and we are in

the process now of putting together a team of people with expertise

in manufacturing, in restructurings, who understand how these

labor contracts work so that we can give the President the best advice and come to you and give you the best plan that meets this

test. But you are absolutely right to emphasize the point that assistance should come with conditions that give us confidence that

we are going to leave the industry stronger, more viable in the future without having to rely on government support.

Senator BINGAMAN. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Bingaman.

Senator Hatch, you are next.

Senator HATCH. Well, thank you, Mr. Chairman.

Welcome to the committee, Mr. Geithner. I appreciate the time

that I have spent with you, and I appreciate your explanations

here, both then and today as well.

Let me just say, I am sure you are as concerned about the prospects of trillion-dollar deficits as I am—trillion-dollar-plus deficits.

It seems to me that as soon as we get the economy turned around

we need to address spending in a very serious way. To me—and to

anybody with any brains, it seems to me—we have to engage in entitlement reform: Social Security, Medicaid, Medicare. And energy.

That is not necessarily an entitlement, but that is where the dolVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
19

lars are, and that is where we are going to need to find changes

if we are going to stop our country from going down the drain.

What are your thoughts on entitlement reform and on budget reform as well?

Mr. GEITHNER. Senator, I think you have framed it exactly right.

We start this process today with a deficit that the CBO estimates

in the range of $1.2 trillion. It is absolutely critical to the efforts

to get the economy back on track that we give the American people,

and investors around the world, confidence that we are going to

have the ability and the will, working with the Congress, to get our

fiscal position back down over the next 5 years to a sustainable position, but also that we are willing to start to take on and find a

consensus on a bipartisan basis for putting Social Security and

Medicare on a more sustainable financial position longer-term.

I think we have to do both those things together. Harder to do

given the magnitude of the deficit we start with, but the recovery

will not be strong enough unless we can make more credible than

we have been able to do as a country over the last several decades

our willingness to put our fiscal position back to a sustainable position, and that requires not just a credible set of commitments over

the next 5 years or so, but that we begin the process now of taking

on entitlement reform. The President is consulting with the Congress on how best to do that. We are looking for a mechanism that

offers the best prospect of getting bipartisan support early, and we

would very much like to work with you and your colleagues on how

best to do that.

Senator HATCH. Well, thank you. Many on both sides of the political aisle believe that our corporate income tax rate—and I am one

of them—which is among the highest in the industrial world, is a

major hindrance to our national and international competitiveness.

Now, I have two questions about this. First, do you agree or disagree that our corporate tax rates should be significantly reduced?

Second, some policymakers—including my friend, the chairman of

the Ways and Means Committee in the House, Charlie Rangel—believe that the corporate tax rate should be reduced, but only by

eliminating other so-called ‘‘corporate tax benefits’’ such as the Research Tax Credit.

Now, do you agree with Chairman Rangel’s approach or would

you prefer an approach that would not offset revenue loss from a

corporate tax rate by raising other corporate taxes?

Mr. GEITHNER. Senator, the tax policy of the United States plays

a very important role in creating incentives for investment, for

work, and for savings. We have to look at the entire framework of

the tax code, and we look at every new policy through the prism

of, what is it going to do to incentives for work and investment in

this country?

The President believes, and I share this belief, that we have substantial opportunities for reform of the entire corporate tax system.

We are not going to be able to do that immediately in the context

of the recovery investment plan, of course, but we hope to be able

to work with you and other members of this committee and the

Congress on a package of reforms that are going to try to give us

confidence that American business will be productive and competiVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
20

tive going forward, and we will be open to all ideas on how best

to do that.

The President, as you know, is committed to making the Research and Development Tax Credit, the R&D tax credit, permanent. There is a lot of merit in doing that. But again, I think, very

important, as we look at how to address a broad set of changes in

the tax front that we are going to be forced to address in the next

2 years, is that we give adequate attention to improving the overall

corporate tax system so that it makes sure that American businesses are as productive as possible going forward.

Senator HATCH. I get many complaints from my folks out in

Utah, especially our business people, that our corporate tax rules

place American firms at a disadvantage when it comes to competing abroad.

As you know, we are one of a handful of developed nations that

taxes home-based entities on their income, regardless of where it

was earned, while most other developed countries employ a territorial system of taxes—only that income earned within their borders. Now, do you think that moving towards territorial taxation

would make it easier for our companies to compete globally and

also simplify the corporate tax system in the process?

Mr. GEITHNER. Senator, that is an issue I am going to have to

think more carefully about, and would welcome a chance to listen

to you and your colleagues about exactly how we navigate through

that set of questions. But I think you are right. You have to look

at the entire package of incentives that it actually creates in the

context of what other nations do before you can make a judgment

about what set of reforms are going to try to meet this basic test,

which I think we are all committed to, of how to make sure that

American businesses are as productive as possible.

Senator HATCH. Well, thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Hatch.

Senator Kerry?

Senator KERRY. Thank you, Mr. Chairman.

Mr. Geithner, welcome. Glad to have you here before the committee. Let me just say that I look forward to voting for you, supporting your nomination. I think you are superbly qualified. I

know, not just through the testimony of Paul Volker, for whom we

have great respect, but others, that you come to this committee

with a great reputation for integrity, and I accept completely the

explanation you have given us with respect to the mistakes on your

tax returns.

The levels of negligence and the sins of commission of those responsible for the management and regulatory oversight of our financial system are absolutely staggering, so much so that the

former chairman of the Fed, for whom the committee and the country have great respect, Paul Volker, just said to us and to the country that ‘‘the financial system is broken.’’ He said that ‘‘this is the

mother of all financial crises.’’ You cannot really put it more starkly than that. It is in that context that I want to sort of put something to you.

I think that events have already overtaken what the House of

Representatives has passed and what is currently on the table in

21

the context of a recovery package. I do not want this committee or

the Congress to be put in the position of repeating any of the mistakes that have been made.

In that light, when you say that we need accountability and

transparency and we need this investment package, I could not

agree with you more: yes, we do. But the problem I have is that,

as it is currently proposed, the House package and the investment

package, I fear it stands a good chance of simply being wasted and

of not having the impact that we want our overall economic recovery package to have, because the system underneath it is broken.

People are fond of saying that we have a crisis of confidence. I

do not believe we have a crisis of confidence; I think we have a reality crisis. We have a real crisis of the fiscal reality of our lending

institutions. Since they all know it exists, they are all frozen and

they hold back. Until you fix that, we are not going to be in a position to make the investment package, and the other things we need

to do, take hold the way they need to.

I am convinced, as I think the President is, and you are, that we

are on the brink of an entirely sort of new economy if we invest

correctly and if we move towards the technology, education, research, and investment side with the full level that it is going to

take to open up those opportunities.

But none of those opportunities is going to properly open up if

a whole bunch of the money that we are putting in continues to

buy what I will call polluted assets, fundamentally. We are propping up shareholders, we are propping up, fundamentally, insolvent

institutions. Unless those institutions clear their books of those

toxic assets, we are simply going to compound this crisis.

First of all, I do not think the package is large enough. We just heard Mr. Volker talk in terms of $1 and $2 trillion. I think you

are not going to restore this process unless you come with a package that is comprehensive, ultimate in a sense, where the marketplace says, sort of with a breath of relief, this is going to do the

job, now I dare to lend, now I have books clean enough to lend.

In fact, I think you can advantage the American banking system

very significantly by moving aggressively in the global marketplace

to be the first to do this and finance it through the Treasuries, et

cetera, and ultimately winding up, I think, being less expensive to

the American taxpayer as a result.

So I would ask you to speak to that. I think that we need a package that we will have confidence is going to clean the books, put

those banks—I mean, Paul Krugman wrote an article just the other

day, you may have seen it, about the Gotham Bank, $2 billion of

assets, $1.9 billion of liabilities, but 400 of those assets are actually

mortgage and other kinds of relatively insecure assets, so really it

is $200 billion. So they are sitting there as what he calls a ‘‘zombie

bank.’’

There are too many zombie banks out there. I would like to know

if you and the President are prepared to put before us this comprehensive plan so we can vote with confidence that we are delivering to the American people, and delivering the message to the

marketplace that we need.

The CHAIRMAN. Mr. Geithner, very briefly. If you could answer

that question in negative 20 seconds, which is a short way of sayVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
22

ing we have gone 20 seconds beyond the allotted time. But please

answer very briefly.

Mr. GEITHNER. Senator, I share——

Senator KERRY. Well, with all due respect, Mr. Chairman, there

are lots of questions that ended at zero and the answers were provided afterwards.

The CHAIRMAN. Yes. Well, there are a lot of Senators who have

a lot of questions to ask, and I am trying to just be fair to all Senators.

Thank you, Mr. Geithner.

Mr. GEITHNER. Senator, I share the concerns you expressed and

agree with the objectives you set out. We are going to try to meet

that objective with the plan we put out to the Congress and the

American people. The challenge is how to do it in a way, as you

said, that is going to work and give people confidence that these

institutions have the strength and the ability to lend going forward. But we are going to have to do more than just try to make

sure that banks are strong enough that they can lend, but we are

going to have to make sure—you know, we have a very complicated

financial system and the capital markets are central to how our

economy works.

It is a very delicate, complicated balance, but we need to make

sure, as we stabilize the banks, make sure they are strong enough

to lend, that we are doing things that are going to be effective in

getting risk premia down, interest rates down, and credit flowing

again through those capital markets, and we are going to try to do

both of those things at once. But I agree with your concerns and

your objectives.

The CHAIRMAN. Thank you. Thank you, Senator.

Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman.

Welcome, Mr. Geithner. Obviously the role of the Treasury Department is to be a steward for both the U.S. financial and economic systems, both of which are in simultaneous crisis. Obviously,

your role as Secretary would be to chart a course out of this morass, and certainly the breadth and depth of your experience would

suggest that you certainly have the credibility and the experience

to move forward, given the fact that you have worked for three different administrations and five Treasury Secretaries.

Notably, leadership also requires translating vision into action

and into executing solutions. I want to just explore with you for a

moment your role in the credit derivatives market. It has been

mentioned, and impressively so, that you identified the magnitude

of that crisis and warned of the systemic problems that could occur

because there was no way to identify not only the size of that market, but also, in the event that there was a serious crisis, whether

or not our system could sustain that.

You gave a series of major speeches since 2004 regarding credit

derivatives, and ultimately, in June of 2008, you called for comprehensive regulation and financial overhaul. But what I would

like to know is, because you obviously had a major bully pulpit—

Wall Street is within your jurisdiction—what actions did you specifically take and whom did you go to? Did you go to the Board of

Governors, the Chairman of the Federal Reserve, to the Treasury

23

Secretary? What would you have done differently, given 20/20 hindsight? Why did you not aggressively pursue regulation earlier—I do

not know, maybe you did—with the Treasury Secretaries, or with

the Congress?

Also, when we look at what happened with Lehman Brothers,

there were different explanations from the Treasury Secretary, the

Chairman of the Federal Reserve, and a spokesman on your behalf.

It is unclear whether Lehman Brothers was allowed to collapse because it was judged that investors had time to take precautionary

measures or whether the Federal Reserve and Treasury lacked the

authority to do anything about it. Finally, I would like to explore

why there have been no purchases of toxic assets, which was the

original intent and purpose of the $350 billion that we provided

last fall.

So when I look at the entire picture, I am concerned about a lack

of confidence in where we stand today and our ability to get it

right. Actually, I think we did work with speed and force last September, much to the objection of the American public, frankly.

So I would like to know from you exactly what you did with respect to credit derivatives, Lehman Brothers, and why toxic assets

were not purchased. Thank you.

Mr. GEITHNER. Thank you, Senator.

Let me start on credit derivatives. When I became president of

the New York Fed, this critically important market, with tens of

trillions of notional exposure, was a market where trades were confirmed, if they were confirmed, by fax, by pencil and paper, by

phone. A very rudimentary, private execution framework existed.

Firms did not know what their positions were and their exposures

were.

What I did was to get the major institutions who are responsible

for about 95 percent of this market in the room at the New York

Fed with their primary supervisors from around the world—the

first effort done on this scale, I believe, ever. We got those institutions to commit to clear, concrete commitments to substantially

strengthen that infrastructure and put it on a stronger foundation

going forward.

The changes made over that period of time, starting in 2004–

2005, were very, very effective in trying to make sure that the infrastructure in this critical market was strong enough, stronger

than it was before, so that we could withstand a shock of this magnitude.

Now, as important as that was, I worked with the SEC, and

again with the lead supervisors of the major global firms around

the world from Switzerland, from Germany, from France, from the

United Kingdom, and from Japan to make sure that we were trying

to encourage very substantial improvements in risk management

so that these firms had a better sense of the risks they were exposed to in credit derivatives and a broad range of other complex

financial products.

Those efforts, I believe, had a lot of traction. They made the system stronger. They could have had more traction, of course. If more

had been done earlier and there had been more responsiveness to

those efforts, then this crisis would have been less severe. But

those things were very important, and I believe they are very effecVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
24

tive. I think that market today is on a path to the point where it

is going to have the basic strength and resilience you would expect

from a market that important.

Now, you raised—Mr. Chairman, could I continue on the two

other questions she raised?

The CHAIRMAN. Briefly. Yes, briefly.

Mr. GEITHNER. All right. Complicated questions to address this

quickly. But let me speak to the question you raised about Lehman, Mr. Chairman, and then perhaps I could respond in writing

to the other questions.

Lehman’s failure was an enormously complicated, enormously

consequential event. It did not cause this financial crisis, but it absolutely made things worse. Lehman failed fundamentally because

it faced a need for capital on a scale that the market was unwilling

to provide. The market was unwilling to provide it, in part, because

of the severity of the crisis at that point. Over the course of the

summer, things were getting dramatically worse, and everybody

was pulling back from risk on a dramatic scale.

Neither the Department of the Treasury, the executive branch,

nor the Federal Reserve had been given the authority by the Congress that would have made it possible for the government to put

in capital on a scale necessary to avoid default. We could not force

any institution to come in and buy Lehman Brothers or guarantee

their obligations, and no one was willing, without the government

taking a very, very substantial capital position, and we did not

have the authority at that point to do that.

That was a critical and tragic set of constraints. This country

should have never been in the position where we entered a crisis

of this severity without an adequate set of tools to address failure

by an institution that large, that consequential, and that systemic.

We did work very hard to try to limit the damage, but anything

that complicated and systemic was going to cause very, very substantial damage. It was clear at the time, it is absolutely clear in

retrospect, and one reason why it is so important.

The CHAIRMAN. You need to shorten it up a little more, please.

Thank you very much. Thank you.

Senator SNOWE. Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Wyden, you are next.

Senator WYDEN. Thank you, Mr. Chairman.

Mr. Geithner, you cannot fix a problem if you do not know what

the problem is. It seems to me we are not getting our arms around

the enormity of this, because no one has required America’s financial institutions to fully report the true measure of their liabilities.

Will you do that, and when?

Mr. GEITHNER. Senator, if confirmed for this office, I will work

very hard with the responsible regulators in the United States and

around the world so that we have a set of accounting requirements

and disclosure requirements that do a better job than we have done

to date in trying to make sure that investors in these institutions

have a better sense of the risks they face.

But I just want to point out—and this is critically important—

it is very hard to do in an environment with this much uncertainty,

25

and the scale of the recession ahead and the losses that will come

with that.

Senator WYDEN. I understand it is a challenge. But it is clear—

we saw that yesterday in the markets, the way they were responding—that the American people believe that there may be more

tough times ahead. People might default, not just on mortgages,

but on consumer loans and auto loans. I think that is priority business. You are going to have to get tough with those institutions.

It is a hard task, but that is something that I am counting on you

to do, if confirmed.

A second area I want to ask you about, we talked about in my

office. That is your role with respect to Citicorp when you were at

the Fed. Citicorp has been one of the primary recipients of funds

under the Troubled Asset Relief Program. It has had to be rescued

like no bank holding company to date. We looked at the statutes.

The Federal Reserve Bank has a significant supervisory role over

bank holding companies.

My view is that the alarm bells should have been going off in

2007. There, you had a situation where they had huge losses. The

CEO was leaving. Do you think you should have handled that situation differently in 2007?

Mr. GEITHNER. Senator, in that case—and I would say across the

financial system—nobody who has been part of this system, as a

member of the board of an institution, as a chief executive, as a

supervisor, as a regulator, as a central banker, as a treasurer, as

a finance minister, nobody who has been part of this system can

look at this crisis and not be deeply, deeply uncomfortable by the

failure of the basic checks and balances in our system. To fix this

going forward, I believe it is going to require—I am going to come

to your question just quickly—very, very substantial reform.

Senator WYDEN. What would you have done, personally, differently, if anything? Because it seems to me the Fed had significant supervisory authority there. The alarm bells were going off. I

want to know what you, looking back, would have done differently.

Mr. GEITHNER. Senator, I believe across our system there has

been too much skepticism about the effectiveness of supervision

and the necessary rule it plays in making our system strong in the

future. Market discipline is not sufficient in containing risk and injecting the level of prudence necessary.

Supervision plays a critical role and supervision could have been

more effective. Our system created a very complicated set of accountability and responsibility among the myriad of supervisors

and regulators responsible for overseeing bank holding companies.

Part of the failure in the checks and balances was——

Senator WYDEN. Should your supervision have been more effective?

Mr. GEITHNER. Absolutely.

Senator WYDEN. Thank you.

Let me ask you about one other area. Yesterday, the unemployment rate in Oregon went to 9 percent, the highest in 25 years. We

have small businesses that cannot get credit, zero. They get no

bail-outs, and they are very angry because they feel there is a double standard with respect to how funds are distributed under the

financial bail-out legislation, that big institutions can walk off with

26

millions and they cannot get changes in these rules so they can get

a loan.

What specifically will you do to support a fairer distribution of

these bail-out funds, particularly so that small businesses that

have been hit like a wrecking ball can start getting credit again?

Mr. GEITHNER. Senator, a very important question. I absolutely

share your concern. I think across the country you are seeing exactly the same thing. I think the critical test of everything we do,

among other things, is, does it result in more access to credit on

appropriate terms for small businesses across the country?

The President believes, and I share this belief completely, that

you have to do very, very substantial support for overall growth

and demand, and the President’s program not just does that, it has

some very important targeted tax benefits for businesses across the

country, which will help meet those concerns.

But it is going to be absolutely important to try to make sure

that this program of support for the financial system is made available to small banks across the country that play such a critical role

in our communities, and that we do enough quickly enough to try

to get the basic markets that are central to small business lending

going again. I think that there is a lot we can do in that area. I

am open to ideas, look forward to suggestions, am happy to work

with you on it, but I think you are right to emphasize its importance, and it will be the critical test, fundamentally, of whether our

program is working.

Senator WYDEN. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Wyden.

Senator Kyl is next, but he is not here. Next after Senator Kyl

is Senator Schumer, but Senator Kyl can certainly have his time

when he returns.

Senator Schumer?

Senator SCHUMER. Thank you, Mr. Chairman. Thank you, Mr.

Geithner.

First question. Senator Kerry was talking to you a little bit about

good bank/bad bank. It is appealing because the alternative seems

to be almost a death of a thousand cuts, keep marking down the

assets further and further. The thing I worry about with it is cost.

I did a little calling this weekend to people who would know and

they said it could be $3 trillion, $4 trillion if you did the whole good

bank/bad bank across the board, which creates great worries for

the dollar and for inflation down the road. I mean, it just shakes

our financial system, something that large.

Do those estimates seem out of the ballpark to you? Even if it

is a little less than that, do we have worries in doing this in terms

of the cost effect on the dollar, et cetera?

Mr. GEITHNER. Senator, the good bank/bad bank type solutions

have been present at the solution to most financial crises around

the world. It is very important that we look carefully at whether

they are going to be as effective in this context as they have been

in some past cases. But you are right to say they are enormously

complicated to get right.

We want to be very careful that we are not just using the taxpayers’ money most effectively with the most potential impact and

leverage on the financial system, but also that we do these in ways

27

where the taxpayer and the government understand the risk we

are taking, that the system is going to be managed with the best

possible return going forward.

It is an enormously complicated set of questions. Those are

among the questions and options that a team of people—very smart

people, experienced people—are looking at today. It is possible that

something there will be part of the solution going forward. But I

do not want to, today, provide any more details on how best we can

navigate this.

Senator SCHUMER. But cost is a serious consideration, I would

presume?

Mr. GEITHNER. Right. We want to have the best impact on the

financial system with the least potential cost to the taxpayer, with

the least potential risk. Finding that balance is going to be hard.

Senator SCHUMER. All right.

Next question. We do have to get to the bottom of the real estate

dilemma, probably more than anything else here. I have always felt

you need both a carrot and a stick. Lots of carrots have been proposed without any sticks and not much has happened, whether by

Secretary Paulson, Senator Dodd, Congressman Frank. The stick

that I think works best is bankruptcy, that talk about bankruptcy

reform. We have now had a few banks become supportive of this.

(A) What is your view? I know President Obama has been for

this. (B) What about putting it in the stimulus?

Mr. GEITHNER. Senator, the President is supportive of changes to

the bankruptcy code in the mortgage area. He recognizes, as I

know do you and many others, that doing that requires enormous

care. It is very important that we make it more likely, not less likely. We get private capital to come in to the financial system. That

is going to be absolutely essential. We need to make sure we reduce

uncertainty about the basic rules of the game that govern property

rights and contracts going forward. So we are going to be supportive of trying to do that in the most careful way possible, and

we are open to suggestions. If confirmed, of course, I will work with

you and your colleagues about what the best device for doing that

is.

There is a great benefit in moving quickly to resolve uncertainty

about what the rules will be going forward, but it is also true that

we want to have a comprehensive housing package, and this is

likely to be an important part of that. So, we are open to suggestions on how best to move forward.

Senator SCHUMER. Great.

Third question. We just went through the second round of the

TARP. The greatest criticism, I think, from both sides of the aisle

is, you put the money in—Senator Wyden mentioned this in terms

of small business. It is across the board—and you do not see much

lending going out. That is probably because the banks are in such

a weakened condition that they are holding on to their capital for

dear life, because even if the dollar now is, they think, valued at

40 cents, it could go down to 20 cents. If they lend based on the

40 cents, they may be high and dry.

How do we make sure that the next round of the TARP pushes

more money out into the economy, small business, construction

lending, credit cards, college loans, autos, et cetera?

28

Mr. GEITHNER. A very important question, and it is the center

of the President’s considerations as we think about the plan we

want to present to the American people. I want to start just by

pointing out something you said, which is that without the actions

that the Congress made possible in the fall we would have seen a

much more dramatic contraction in lending across the entire financial system.

Senator SCHUMER. Right.

Mr. GEITHNER. Avoiding that was absolutely central. But moving

forward, we are going to have to try to make sure that the banks

that are at the core of the system are strong enough that they can

provide the credit necessary to get recovery going again, but we are

also going to have to provide much more substantial support to the

capital markets, credit markets more generally, because that basic

infrastructure is central to the basic mechanics of the markets that

support corporate lending, small and large business lending, to the

commercial/residential real estate markets, to student loan markets, to auto finance markets. Our view is, you are going to have

to do both. Again, the key lesson is, we have to do it with enough

force and clarity that people see impact quickly. Frankly, we have

to make it clear that we are going to keep at it until we fix it.

Senator SCHUMER. Thank you.

The CHAIRMAN. Thank you, Senator.

Senator Bunning?

Senator BUNNING. Thank you, Mr. Chairman.

Welcome, Mr. Geithner, a friend to the committee.

Of the many positions in the Federal Government about to be

filled, the Treasury Secretary is among the most critical today, obviously. We are confronting a severe financial panic, and one false

move by the Secretary of the Treasury could result in years of stagnation and high unemployment.

Even before the disclosure of the nominee’s tax problems, I had

serious reservations about this nomination. Mr. Geithner has been

involved in just about every flawed bail-out action of the previous

administration: he was the front-line regulator in New York when

all the innovations that recently have brought our markets to their

knees became widespread; he went along with the flawed monetary

policy decisions of Alan Greenspan and Ben Bernanke; he failed to

cite China for manipulation of its currency; and he stretched the

law beyond recognition to bail out Bear Stearns.

All those actions or failures to act raised questions about the

nominee’s judgment, but the failure to pay taxes specifically provided to him by the IMF is the most troubling because it reflects

a degree of negligence towards the law he will be charged with enforcing.

Mr. Geithner does not provide a satisfactory explanation for the

problem, certainly not one significant for a high-ranking public official whom the American people demand, and deserve, to hold to a

higher standard.

The committee has known about these matters since December

5th, but it was not until about 1 week ago that the information was

shared with the members of the committee. Soon afterward, the

chairman sought to hold a rushed confirmation to which I and others objected. This hearing is still rushed, and my staff had only

29

limited time to access the relevant information. Now the chairman

wants to mark up the nomination tomorrow.

As far as I know, the committee has never interviewed the IRS

personnel involved in the tax case, and none of the witnesses has

been made available to the staff or committee members. That is

unacceptable in light of evidence that the IMF clearly explained his

payroll tax obligations, as acknowledged by the nominee himself.

Mr. Geithner’s failure to pay all the Social Security and Medicare

taxes he owed until he was to be nominated is hard to explain to

my constituents, who pay these taxes on a regular basis. I could

spend a lot more time explaining my concerns about this nomination, but I would like to get to them later in questions that I will

ask the nominee. Thank you.

The CHAIRMAN. Thank you, Senator. I might say that I make no

apology in my efforts to try to help this administration get its economic team up and running in these very difficult and troubling

times, and that is why I think it is important that the committee

move expeditiously.

I would also say that all the relevant materials have been made

available, certainly at the staff level, to all Senators for a good

number of weeks. Given those two competing factors, it is the

chair’s judgment that this is the proper speed within which to take

up the hearing.

Senator BUNNING. Would the chair answer me one question?

The CHAIRMAN. Certainly. And also, hopefully, the nomination.

Senator BUNNING. Was the meeting noticed properly?

The CHAIRMAN. The meeting was noticed properly.

Senator BUNNING. Noticed in a timely fashion?

The CHAIRMAN. The meeting was noticed properly.

Senator BUNNING. That is not what I was told.

The CHAIRMAN. I regret that, then.

Senator BUNNING. Thank you.

The CHAIRMAN. Senator Roberts, you are next.

Senator GRASSLEY. It does not matter whether you are Republican or Democrat, it is how you arrived.

Senator ROBERTS. I have not switched parties yet. [Laughter.]

Senator GRASSLEY. I am telling him, it is not a partisan thing.

The CHAIRMAN. No, no, no. It is all arrival. It has nothing to do

with back and forth and party. It is all arrival, and you are the

next one entitled to speak.

Senator ROBERTS. Well, I appreciate that, Mr. Chairman. I am

sure not going to back off of it. Thank you very much.

Mr. Geithner, thank you very much for your willingness to serve

in this very, very difficult situation. We had a good talk in my office, and I found you very engaging, and I certainly thought that

you knew what you were talking about, and I thought our meeting

was very educational. I thank you for your phone call later after

the tax issue came up, in which you were very contrite.

I am not going to split the shingle on the tax matter, but I do

want you to know that, after that was reported, my phone lines lit

up, and they are now also lighting up in my offices in Kansas and

here, asking why we are considering a nominee for Treasury Secretary who had not paid the taxes that he owed. I will leave it

there. Except to say that, if you did not pay these taxes simply beVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
30

cause it was a matter of oversight and confusion, Mr. Chairman,

we have a wonderful example, I think, and the best case yet for undertaking reform to make the tax code simpler for all taxpayers.

I was intrigued by the suggestion in the Wall Street Journal that

we use this as an impetus for a tax holiday for all Americans who

have made a mistake and do not want to engage the IRS in the

briar patch and end up with some kind of a penalty. So, maybe you

can call for that, once you are confirmed. You are going to be confirmed, and you can work with the President and we can have a

tax holiday for all Americans who have these kind of problems.

Now, basically I know, as somebody has said—I think Senator

Wyden—over the past year you have been the architect or played

a role, along with Secretary Paulson and Mr. Bernanke, in the

structuring of several financial industry rescues, including the AIG.

Last week, Congress approved the release of the remaining $350

billion of the TARP funds.

I opposed the creation of the TARP program and the release of

the second round because I have very serious concerns about how

the first $350 billion was spent. I am not sure today, yet, how that

was spent. If confirmed, I would like to know what steps you will

take that will assure Americans that their hard-earned dollars are

being used wisely and appropriately under the TARP.

Here is really what I am getting at. It is a lot like what Senator

Wyden was pointing out, Senator Kerry was pointing out. I know

what the government can do. The government can do a lot of

things. The government can furnish our national security, and we

all know how that is done. The government can really do a lot in

terms of infrastructure, and we build a lot of things.

And goodness knows, in this committee and in the Congress, we

know we are a giant income transfer machine, and we figure out

whom we take from and whom we give to, wrapped with a lot of

strings and a lot of cost. That is the entitlement programs that you

and the President have indicated you would like to reform, and I

certainly join you in that.

But I never found out from Mr. Paulson and Mr. Bernanke, in

talking personally with them about the TARP funds, how they

were going to take a category of assets, toxic as they are, and put

them out there on the playing field and the government would set

a market price. How does the government set a market price? I

think that is a most unique and most unprecedented thing, and I

never could figure it out.

I said, who is going to do this? Privately, in conversation with

both gentlemen, they said, well, we will contract it out, we have so

many good people. Well, who are you going to contract it out with?

Well, maybe folks in academia. Well, that gave me a lot of good

feelings about that. I said, how are you going to do it? Well, we are

going to take a sliver of a category of assets. What sliver? Well, we

do not know yet.

We are going to put that on the playing field. I said, well, how

are you going to set a market price? Well, we will set a market

price and, if five people come on the playing field and say we are

going to buy that, obviously it is too high, we will have to lower

it. Then if we have a market price, we say, out there at maybe 20

cents on the dollar and nobody comes, we will have to raise it up.

31

I said, do we have the wherewithal to do that? There were just

questions, and I never got to the bottom of it. I do not think the

American people know who is doing this, how they are going to do

it, and what they are going to do. I think that is what you have

to do in the transparency here, because of your experience in what

we are doing with the TARP and what I would call the great omnibus bill, as opposed to the stimulus bill which is going to happen,

and I know that it needs to happen.

Now, there are a few banks in America that are so large they are

considered too big to fail. I have 350 mostly rural banks in Kansas.

I just talked to the Kansas Bankers Association this morning. They

do not like the conditions and they do not like the stringent regulations. They certainly do not like Barney Frank’s bill, where you are

going to sit down with the regulators and piecemeal this stuff out.

So they do not want to be tossed in the briar patch, and they have

contributed zero to the economic crisis we now find ourselves in.

I am just asking you, should these large banks that pose a systemic risk be broken into separate pieces in order to avoid such

large losses? Should they have a different, more stringent set of

regulations than the banks that I have in Kansas that have not

contributed to this problem, but yet find themselves with, to be

perfectly frank, FDIC SWAT teams running in, trying to say their

performing loans should be not-performing loans, and everything

else. So there has to be at least some forbearance in this, and I

know that, but there also have to be stringent regulations. I am 56

seconds over time. That puts me in, what, about fifth place?

[Laughter.]

The CHAIRMAN. It puts you on pretty much equal par with most

members of this committee.

Senator ROBERTS. Yes. And I am not going to ask you to respond,

because he will not let me, number one. Number two, I think you

know my concerns. We talked about it. Thank you for your willingness to serve, sir.

Mr. GEITHNER. Thank you, Senator. I have heard your concerns,

and I think they are the right kind of concerns.

Senator ROBERTS. Thank you.

The CHAIRMAN. Thank you.

Next, Senator Ensign is not here. Senator Cantwell, you are

next. The committee rule is, whoever is in the Executive Session

room first is the first to be recognized. You were in there first.

Senator CANTWELL. Well, thank you, Mr. Chairman. I appreciate

that.

Mr. Geithner, thank you for being here. I think, of your responsibilities for the position, you take an overall system of responsibility and accountability, even though we have various financial entities within the government that are independent.

So my questions to you, and I have questions that I hope you can

just answer ‘‘yes’’ or ‘‘no’’ to because I have four or five, and I will

try to be brief in describing them too. I am interested in your overall philosophy about how you are going to approach this from the

issues and experiences that we have just had.

So my constituents are not as concerned—or I should say I am

not as concerned—about your individual taxes. My constituents

and I are concerned about the potential for a continued cozy relaVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
32

tionship between the Federal Government and the financial institutions that they are supposed to oversee and regulate.

So my first question. You talked in your statement about comprehensive financial reform. Do you mean regulatory reform?

Mr. GEITHNER. Yes.

Senator CANTWELL. Thank you. I am glad to hear you say that

you did not have any concerns about using that term.

Earlier this week, or a few days ago, there was an article in the

New York Times—two different articles. Ms. Shapiro, who is the

head of the Financial Industry Regulatory Authority, talked about

the Madoff situation and the ponzi scheme, basically saying that

there were some issues, but there were no inquiries. But in another

article—this is January 15th, so I believe they were both the same

day, the statements—FINRA also, every 2 years, reviewed the

Madoff books, but apparently they missed the fact that maybe Mr.

Madoff was not actually making trades. Do you think, yes or no,

that that is a failure of FINRA?

Mr. GEITHNER. I do not think I can give you a ‘‘yes’’ or ‘‘no’’ answer about that, Senator, just to be fair, just because I do not know

the details of their responsibilities in that case. But I completely

agree that that case——

Senator CANTWELL. So ‘‘there was no evidence that the Madoff

dealer executing trades for Madoff, that they’’—this is coming from

FINRA. They are now saying, we do not have any proof that they

made any trades. But they basically said they had been reviewing

their books every 2 years since they started. So, if FINRA, this selfregulatory agency, had been reviewing their books every 2 years

and now are just coming to the conclusion that they never made

trades, is that a failure?

Mr. GEITHNER. Well, I understand what you are saying. I think

it is absolutely true that the enforcement mechanism failed to prevent this and to deter it, and to catch it soon enough. That is absolutely true.

What I do not know exactly is what their specific responsibilities

were and how well they discharged those responsibilities. But it is

absolutely true that the system of deterrence and enforcement

failed to detect this and prevent it.

Senator CANTWELL. So was that FINRA?

Mr. GEITHNER. Again, I am just trying to be fair. I do not know

enough about the details.

Senator CANTWELL. If you are a self-regulatory agency whose

main purpose is to clean up the industry and make sure there are

no problems, and you reviewed the books every 2 years, you do not

think that was a failure?

Mr. GEITHNER. Well, I am sure the system failed. What I just do

not know is the precise details of what they did and why they

missed what they missed, and what the responsibilities were.

Senator CANTWELL. But from an overall point, would you not say

that that was a failure?

Mr. GEITHNER. I would say, absolutely, that the system failed in

the Madoff case, like in many other cases we have seen.

Senator CANTWELL. All right.

Well, I think that this goes to the philosophy of how aggressive

someone is going to be. Given Senator Snowe’s question about the

33

derivatives market and your answer—and I appreciate what you

did at the New York Fed in setting up a system to deal with credit

derivatives, I appreciate that—but do you think you missed the

growing threat of the credit default swap market, because that was

at the same time and it turned into a pretty big industry.

Mr. GEITHNER. I absolutely did not miss that. It was my life’s

work at the New York Fed from the beginning to try to make sure

that we were getting the infrastructure in those markets more mature and stronger, and to make sure the institutions at the center

of those markets were managing their risks more effectively. Everything I have referred to in response to Senator Snowe’s question

was about the credit default swap market, creditors in markets

more generally—derivatives markets more generally, not just in

credit.

Senator CANTWELL. So you think the system that you set up established the oversight for credit default swaps in an efficient way?

Mr. GEITHNER. Senator, what I said is that we did a range of

things that were necessary and effective in making the system

stronger. But we are going to have to take a broad, comprehensive

look at the entire framework that surrounds derivatives and the incentives created for institutions within them. I was not implying or

suggesting that it is done.

Senator CANTWELL. All right. Can I ask you one more question,

because my time is up: do you support aggregate position limits for

commodities and credit derivatives across all platforms so that we

have effective management of this market?

Mr. GEITHNER. Senator, position limits have played an important

role in the design of our exchanges and they have played an important role in preventing manipulation and in sort of containing risk

in the system as a whole, and I believe they should be effective.

I would be happy to work with you and listen to your concerns on

how best to make them effective.

Senator CANTWELL. So do you support aggregate position limits

across all commodities and across credit derivatives?

Mr. GEITHNER. I would support examining carefully how best to

make sure that those limits to prevent manipulation and to ensure

the basic stability and financial soundness of exchange and central

clearing are adequate to support those objectives.

Senator CANTWELL. I know my time is up, Mr. Chairman. Thank

you.

The CHAIRMAN. Thank you, Senator.

Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman.

Welcome, Mr. Geithner. You and I have had an opportunity,

which I appreciate, to talk about what is high on my list in terms

of American jobs and manufacturing. I am not going to get into

specifics in terms of the auto industry today, but we have had, for

8 years, an administration that did not understand or support what

needed to be done to keep manufacturing jobs in the United States.

I would like to know, just in general, what role you see for manufacturing in the economy and, if confirmed, how you will utilize

multiple authorities that you have in order to be able to support

this vital industry.

34

Mr. GEITHNER. Senator, I believe what the President deeply believes, that manufacturing plays a critical role in our economy. We

have the most productive manufacturing center in the world, by

many measures. That is a great tribute to our strength and resources as a Nation.

But the manufacturing industry in the United States is going

through an extraordinarily challenging period, and I think an effective response, as the President believes, is going to require that we

address rising health care costs, that we try to make sure that our

workers in the United States come out of our education system

with better skills to be able to compete better going forward, and

that we have trade agreements to do a better job of protecting the

interests of American workers and businesses.

I say this just because it is going to require a very comprehensive

approach. You cannot look at it simply through the prism of individual provisions of the tax code. You need to look at it comprehensively, at the overall environment in which American businesses,

not just in manufacturing but generally, operate.

I know the President is deeply committed to trying to make sure

that we come with a comprehensive strategy, looking across all the

provisions of policy instruments we have to try to address the objectives we share.

Senator STABENOW. Thank you. I know specifically that, as you

talk about more direct support in the credit markets, we both know

how critical that is as it relates to auto loans, as well as small business and manufacturers and so on, and being able to get, as many

colleagues have talked about, more credit available for small businesses and for community banks. We have only had two banks in

Michigan, as you and I have talked about, that have received any

of the TARP funding, and none in southeastern Michigan where

half the population is in Michigan. So, I appreciate your other comments on that.

One other question. We have not really talked about trade much,

but that directly relates to manufacturing. The massive interventions by the Japanese government back in 2003 and 2004 to weaken the value of the yen helped to fuel one of the largest bilateral

trade deficits in the United States in 25 years. In 2006, the deficit

hit $88 billion, two-thirds of which was autos and auto parts. The

misaligned yen subsidized auto exports in the United States for

years, and frankly contributed to the loss of over 4 million goodpaying American jobs in the last 8 years.

The yen has strengthened significantly over the last couple of

months, reflecting market conditions. For the past 2 weeks, it has

hovered at about 90 yen to the dollar. Last week, the Bank of

Japan Governor told the press: ‘‘With the recession deepening,

Japan could intervene in currency markets for the first time since

2004.’’ Many of us consider that move by Japan towards intervention at this time to be effectively trying to steal our stimulus. What

action would you take, as Secretary, in the event that Japan moves

to intervene in foreign exchange markets?

Mr. GEITHNER. Senator, that is, as you know, not just an important question, but an enormously delicate question. Let me just tell

you what I believe, and I spent a large part of my professional life

in positions at the Treasury responsible for exchange rate policy

35

and these issues. I believe that it is very important for the United

States and for the global economy that our major trading partners

operate with a flexible exchange rate system in which market

forces determine the value of exchange rates. I think that is good

economic policy for us, and I think it is good economic policy for

the vast majority of the other major economies. I look forward to

working with you and your colleagues in how we address the many

concerns that this very sensitive issue touches.

Senator STABENOW. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Rockefeller, you are next.

Senator ROCKEFELLER. Thank you, Mr. Chairman.

Thank you, Mr. Geithner. I look forward to supporting your nomination.

I am going to ask you something which is off the beaten path,

but which has not been asked and therefore needs to be asked, because we are talking about spending money, and recovery, and

stimulus, and the rest of it.

If you look at the American electricity situation, you make, obviously, the first conclusion: if you do not have electricity running,

nothing works, including any of your computers. So you look at

where we are now. We have about 7 percent coming from so-called

‘‘green’’ production, all of which I favor. You have wind, you have

solar, biofuels, all of that. All of that. Add that all up, 7, 8 percent.

You add on nuclear, which has its own particular problems. Nuclear, per se, does not bother me, but the concept of a Tomahawk

right down a cooling tower bothers me greatly, in spite of how

many steel rims you put around to protect it. That is about 20 percent. That is considered clean.

I spent some time talking with some people who have been appointed by our new President, and he pointed out, this one particular person at Office of Science and Technology Policy, that there

are already at work in this country at least two power plants producing electricity from coal that come in at a carbon reduction rate

which is right in the middle of where nuclear power is now. The

nuclear power does not produce carbon dioxide. In other words, the

emission rate, global warming rate, is the same.

I then go on to the fact that—I apologize to the ranking member,

but I have always considered ethanol a waste of time, for 15, 20

years, and a waste of money and on its way out. Then I am looking

for the great new discoveries that will take the place of this 51 percent that is now done by what is obviously dirty, and that is coal.

Coal is dirty. Clean coal is dirty. There can be no discussion on

the use of coal on a long-term basis unless we bring in engineers

from around the world and spend a lot of money to get them to be

able to reduce it to wherever these two plants already are. Maybe

we can just use their technology and then have to pay because of

the spike in the price for those who have to pay that electricity bill

and cannot afford to do so until competition begins to level things

out.

There is no way to talk about a stimulus package, a healthy

America, a functioning American economy when you have a 51-

percent gap in the pie because we decide as I think Congress may

try to do. The President has not been friendly towards clean coal.

36

He mentions it. Whenever he does, I put it in my mind, so much

that I forget that he has not said it very often. It is not a very

friendly administration that way. One person who likes this idea,

incidentally, is Larry Summers, but do not try it on Carol Browner.

So we have this situation where you cannot run a country unless

you find a substitute for what is now currently not clean coal. Nobody has found it. We have a 400-year supply in this country of

coal. It does not make much sense to me not to try to use American

ingenuity, international ingenuity, to reduce the carbon emissions

to approximately where nuclear power is, whatever that is. It is

considered clean, so therefore it has to be pretty good, 5, 6 percent,

whatever. Four.

So my question to you, sir, is, why is it that we are not talking

about putting this in the package, spending the money to answer

what to me is overwhelmingly the largest—you can solve all the

bank problems you want, pay executives fairly, regulate properly.

It will not make any difference if you do not have electricity.

Mr. GEITHNER. Senator, I found you compelling on this in private

and as compelling in public on this basic question. If I am confirmed to this job, I expect to be part of the team of people the

President has brought in to help figure out a way to put in place

an energy policy for the country that will meet not just the objectives that you laid out, but the broader imperative of using energy

more efficiently and in a way that is less damaging to the environment. I think you are right that it is going to be very hard to do,

complicated to do. The stimulus package now moving through the

Congress has changed as it has moved through. We are open to

suggestions on how to make that package most effective.

Senator ROCKEFELLER. You just got one.

Mr. GEITHNER. And I hear your suggestion, and I know you have

made it to others. I will try to make sure it gets a fair and considered hearing.

Senator ROCKEFELLER. Thank you, sir.

The CHAIRMAN. Thank you, Senator.

I note for the record that Senator Bill Nelson is present at the

committee today, and I welcome him here today. The organizing

resolution to provide for new Senators to new committees has not

yet passed. Maybe it will pass later today. There are three new

Democratic Senators who will be on this committee once that organizing resolution is passed. There will be two new Republican

members on the committee when that happens. I look forward to

all members—all new members—joining this committee in full capacity as quickly as possible, and that will hopefully be later today,

and future days.

But we welcome you here today and look forward to the time

when you are a full participating member, Senator.

A question kind of on my mind, and on the mind of several others—I think Senator Schumer alluded to it—is, in this dance between taxpayers and investors, as you try to get the credit markets

moving freely, how you are going to value these toxic assets and

what procedures you are going to use. If you buy them up and put

them into a so-called ‘‘bad’’ bank, I guess the basic question is,

most people think you will have to pay a premium if you go that

route as opposed to, for want of a better expression, nationalizaVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
37

tion. So my question is, how are you going to value those assets

as you set up a so-called ‘‘bad’’ bank? What procedures are you

going to use? It is a big question on the minds of many, many people, and certainly the minds of, I can say, members of this committee.

Mr. GEITHNER. Senator, I agree with you. It is an incredibly difficult thing to do and to get right, and getting it right will be central to the basic credibility of the program. But what we do will depend a little bit on the precise nature of the program we design

and lay out. I cannot give you an adequate response to how we do

it well without doing it in the context of the framework of the program we are going to lay out.

Obviously you can look at how the market is pricing similar securities. You can use model-based estimates by independent thirdparty evaluators to try to make a judgment about what the ultimate value of these things are. You can listen to supervisors give

their own expectation and these kind of things. There is a range

of approaches you can do, and all of them have risks, all of them

are imperfect, they all have limitations. Most people believe, I

think, you need to look at a mix of those type of measures, but it

is very hard to do, but critically important to get right. But when

we come up here and lay out for you the program we think is going

to be most effective, we will explain how we think we can best

solve this valuation problem so that we are protecting the interests

of the taxpayers.

The CHAIRMAN. That was going to be my next point. Clearly,

there is the impression here in the Congress that taxpayers have

not been sufficiently protected in the initial rounds of TARP. There

is, I think, a very deep concern that American taxpayers may not

be sufficiently protected this next time around.

So, I would urge you to err a little more on the side of protecting

taxpayers, because I think that will engender much more confidence in the country. A lot of investors who invested in these institutions did so at their own risk. American taxpayers are just trying to help us, help the government, help the country function economically, in a prosperous way, but in a fair way, fair to them. So

I would urge you, actually quite significantly, to err on the side of

taxpayers as you set up those valuation schemes.

Actually, I would like to submit for the record, Mr. Geithner, today’s New York Times. I am sure you saw it. These are questions

for you, questions by various people, for example, Charles Rossotti,

and a question about the complexity of the tax code. Anna Jacobson

Schwartz asked, again, what criteria you are going to use. Let me

see. I think Mitt Romney asked about how we can effectively regulate the financial services industry. Robert Shiller of Yale asked

what you mean by ‘‘resiliency when times are normal.’’

Greg Mankiw asked a question, too. Basically, if President

Obama supports the estate tax, why should a person who leaves

his money to his children pay more in taxes than a person with the

same lifetime income who spends all of his money on himself?

Of course, there is a question of Roger Myerson, who basically

asked, should a large financial institution incur higher reserve requirements or other regulatory penalties when they become too big

38

to fail? Really, I think it addresses the basic question of ‘‘too big

to fail,’’ which I think is a huge question our country is facing.

I urge you very strongly to figure out ways where we do not

allow institutions to reach the point where they think they are too

big to fail, because then I think they take riskier positions and it

is unhealthy to the system. Moral hazard questions arise much

more significantly. I just urge you to try to find a way, as difficult

as it is, to avoid that situation. Thank you.

[The article appears in the appendix on p. 69.]

The CHAIRMAN. Senator Grassley?

Senator GRASSLEY. Yes. Say, would you do me a favor? The next

time Senator Rockefeller talks to you about ethanol, would you remind him that Senator Grassley supports coal gasification and

clean coal technology? [Laughter.]

The CHAIRMAN. I will do that.

Senator GRASSLEY. Well, thank you.

The CHAIRMAN. I will remind him.

Senator GRASSLEY. Thank you.

Mr. Geithner, I am done asking about your taxes now. The

Treasury Secretary plays an important role in setting tax policy. As

Finance Committee members, we would like to get your views on

the trends in revenues. CBO reports that, over the past 40 years,

taxes as a percentage of GDP averaged 18.3 percent. In the year

2000, Federal taxes took 20.9 percent of GDP, a record post-World

War II level. Individual income taxes were at even more dramatic

levels. CBO reported individual income taxes to be 10.3 percent of

GDP. I have a lot of other statistics, but I think you know what

I am talking about.

Now, we hear a lot of criticism from those who opposed the bipartisan tax relief plan of 2001 and 2003—and I want to emphasize

‘‘bipartisan.’’ One of the main criticisms is that we cut income taxes

too much. That is, the allegation is that the bipartisan tax relief

plans gutted the Federal revenue base.

I was pleased to see Drs. Furman and Goolsbee indicate in their

Wall Street Journal op-ed of August 14th of last year that an

Obama administration would seek to keep the revenue base at or

close to the historic averages of GDP. So, three questions, and I am

going to ask them all at once.

Do you agree with Drs. Furman and Goolsbee? Do you disagree

with those who argue that the only path to fiscal discipline is to

maintain record levels of Federal taxation as a percentage of the

economy? Lastly, do you recognize that there is a down side to future economic growth if we return to record levels of Federal taxation?

Mr. GEITHNER. Senator, I agree that you need to look very carefully at the overall tax burden the tax code imposes on American

businesses and workers, and there is a point at which it would

cause damage to future growth in a way that would be troubling,

I think, to all of us. I think you are right that the current level of

tax revenues and GDP are slightly below the historical average,

partly because of the tax changes made over the last decade, but

significantly because our economy is going through such a deep recession.

39

I think, as we look at changes to the tax code going forward, we

have to be very careful to make sure we give the American people

confidence we are going to bring our resources and our expenditures more into balance. As I said in my opening statement, as a

country we need to make it clear to people we are going to be able

to live within our means in the future, and we are going to have

to look at a whole range of difficult things in that judgment.

But the test for changes to the tax code should be: what impact

are we going to have on incentives to save, invest, and create jobs;

are we being fiscally responsible; and are we producing a system

that is going to be simpler, easier to comply with, and provide a

level of fairness that the American people expect?

Senator GRASSLEY. Yes.

My next series of questions, I might not be able to get all the

way through, but I will stay around and do a third round.

As you and I discussed in my office, I brag a lot about the fact

that I conduct what I consider vigorous oversight of various executive branch agencies. I have done this during my entire time in

Congress. I consider it a constitutional responsibility of Congress.

But I also consider myself an equal opportunity overseer. I believe

that sunshine is the best disinfectant, regardless of which party

controls the Congress or which party controls the White House.

The primary way I conduct oversight activities is to write letters

asking detailed questions and requesting documents.

Responses to my letters and document requests are critical to

doing this oversight. Many Federal agencies have a stated policy—

now, this is where it gets down to the nuts and bolts—that treats

information requests from a chairman—and I was chairman, but

now we have a different chairman, a person who works very closely

with me, thank God—of a congressional committee and subcommittees differently from a request from a ranking member, like now

I am a ranking member.

Specifically, the policy treats only requests from chairmen as entitled to documents otherwise covered by law. But that stated policy finds no support in the text of any other law or Senate rule.

Furthermore, it is for the Senate and its committees and subcommittees, and not for the executive branch, to determine who

may speak for them.

Given my history of oversight, you can be sure to receive letters

from me during your tenure, if you are confirmed. I hope that, like

your predecessors, you will commit to responding to my inquiries

and document requests in a full and timely manner. That is my

question to you: would you do that?

Mr. GEITHNER. Yes.

Senator GRASSLEY. Thank you very much.

I think I will quit there, because we go into other things at this

point.

The CHAIRMAN. Senator Snowe, you are next.

Senator SNOWE. Yes. Thank you, Mr. Chairman.

I wanted to follow up with you, Mr. Geithner, on the original

purpose and objective of the rescue plan that we enacted in late

September and early October, which was obviously the purchase of

illiquid assets. Treasury’s shift away from that objective underVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
40

mined the confidence of the American people. It looks like TARP

is being implemented in an ad hoc fashion.

Now, I would like to explore with you what your thoughts are,

because obviously you played an instrumental role in devising this

rescue plan. Why did the Treasury fail to move forward with purchasing illiquid assets?

Second, in the examination of the Congressional Oversight Panel’s report that was recently issued, there really was a sharp condemnation and rebuke of the Treasury Department in its failure to

provide transparency and accountability. In fact, Treasury did not

respond to some of the questions and did not have a vision for the

program. Treasury did not have a strategy. It could not explain

why it did not purchase illiquid assets, other than saying that it

was too complicated to do so. Moreover, Treasury failed to explain

why providing a massive infusion of capital into banks would be

more effective.

So we need some explanations, because now we have approved the additional $350 billion, and I would like to know how you believe the new administration should proceed. But more importantly, why did the Treasury Department—and you were part of

that rescue plan design at the outset—move away from purchasing

illiquid assets? In retrospect, would it have been more successful

and effective to purchase illiquid assets from the banks?

Mr. GEITHNER. Senator, let me start where you ended. I do not

believe—well, let me do the affirmative. I believe that the actions

taken in October by the Treasury Department and the Chairman

of the Federal Reserve and the FDIC were absolutely essential to

trying to arrest the risk of a much more damaging, deeper deterioration in our financial system. I think that was the right decision

at the time. I think if that had not been done at that time, I think

we would be facing really a catastrophic failure in our financial

system. So I agree that that was the right set of proposals to make

at the time.

But let me just step back for a second. I was not Secretary of

Treasury then, I am not Secretary of Treasury now. If you confirm

me to be Secretary of Treasury, I will work very hard to meet the

concerns you expressed, and the American people have expressed,

your colleagues have expressed about how this program has been

implemented.

As I said in my opening statement, I think you are right to say

there has been confusion about goals, concern about transparency

and accountability, and really concern about, again, whether we

are protecting the interests of the taxpayers, as we have this great

obligation to do. I will be very careful in trying to make sure that

our program meets those basic concerns.

I think it was clear in the summer, if not before, that the United

States needed to have three types of authorities it did not have

coming into this crisis: one was the authority to put capital into financial institutions; one was the authority to provide a better,

more effective mix of insurance guarantees, and perhaps asset purchases to help deal with this broad legacy asset problem across the

system; but it was also critical for our country to have the capacity

to prevent and deal with catastrophic failures by non-bank financial institutions. All those authorities were very critical.

41

The Emergency Economic Stabilization Act that was passed by

the Congress back then provided some important new authorities

in that area, and it was absolutely central. But again, I think the

actions taken then, although they were not primarily my responsibility then, were absolutely central and they were the most effective use of that authority at that time.

Senator SNOWE. Well, do you understand why the public’s confidence has been eroded, and certainly ours, in terms of the Treasury putting forward the primary objective to buy those assets? The

Congressional Oversight Panel was abundantly clear in its criticism of the Treasury Department for failing to explain why it did

not buy those assets and making the case for why capital injections

into banks was a more effective strategy. Moreover, it is unclear if

the current approach is even working, and it does not seem to be

working at this point.

Do you think that it is working?

Mr. GEITHNER. I absolutely believe that the actions taken have

made a very substantial impact in avoiding the risk of a much

more damaging de-leveraging of the financial system, and if those

actions had not been taken we would be living today with a financial system that was causing much more damage to recovery and

growth than we are seeing.

But you are right to say the system is still under substantial

stress, and it is going to be very important, as we do a recovery

package, to do a more effective job of meeting your concerns and

those of the Congress and the American people so that we can demonstrate we are going to use these resources carefully and wisely

going forward.

Senator SNOWE. Thank you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Snowe.

Senator Ensign, you were unable to do your first round, so you

are next.

Senator ENSIGN. Thank you. I appreciate that. I had a leadership

meeting I had to attend, so I appreciate you letting me do that.

I have a couple of questions. First of all, I do not know if you

have seen the Congressional Budget Office scoring of the stimulus

package that the House put out. What I would like you to address,

very briefly, if you could, is on the spending side of it, most of the

effects are in the out-years, especially the investments in infrastructure. Those, the vast majority of them, are spent—on the energy side, only 7 percent I think is spent in the first 2 years; on

the rest of the infrastructure, I think less than half is spent in the

first 4 years.

With scoring like that, how does that stimulate our economy?

Hopefully, 2 years from now we are not dealing with the financial

crisis that we are dealing with today. I think we are all hoping we

are out of this thing by then. So how does that square with actually

spending $825 billion to stimulate our economy, which everybody

said, the economists that I have read said, you need a large stimulus package? Well, if only a tiny amount of the stimulus package

is actually going into the economy in the next 2 years, how does

that help stimulate our economy?

42

Mr. GEITHNER. Senator, a very important concern. That has

shaped the design of the entire package. You have to look at the

entire package, though. The entire package includes a substantial

amount of tax incentives that should work very, very quickly in affecting behavior.

Senator ENSIGN. On that, in last year’s tax rebates that were

sent out, in the analysis that I have seen, only 12 percent of that

actually went into the economy, actually got spent. You are trying

to drive the consumption end of it.

So part of that is, do you think that what has been proposed

here—because the biggest part of this is actually sending checks

out—is actually going to work differently this time than it worked

last year?

Mr. GEITHNER. Senator, a very important concern. But again, the

combination of business tax incentives and the tax reductions for

working Americans is designed in a way to have substantial and

very quick-acting effect on overall economic growth and behavior.

You are also right, that the spending provisions—you want to

make sure that they are going to spend that as quickly as possible.

We want to see as much spending, carefully designed, efficient

spending, go out quickly so that you have more jobs created right

away.

We have tried to be very careful to make sure that the spending

provisions and investment provisions of the package will have that

quick-acting effect, and to limit the risk that you have, what we

call very long tails, on these basic commitments. The President and

his economic team are looking at a range of ways to try to make

sure that we are spending these resources more quickly, while still

being very careful and very open and transparent about them.

We believe we are going to be able to do a substantially better

job than the government has done in the past in making sure that

the infrastructure and energy-related spending that the CBO report referred to is going to spend out more quickly than was true

in the past. But you have to look at the overall package as a whole.

The overall package is large and quick in the impact that it will

have on the economy.

Senator ENSIGN. How will the checks that are sent out by the

government in tax rebates—why is it going to be different now

than it was last year?

Mr. GEITHNER. Two reasons. One is this is, although it is a 2-

year reduction, it is part of what the President hopes to become a

permanent change in taxes for those workers, American workers.

That will help, too. It also comes in the form of a visible immediate

reduction in withholding that is sustained over that period of time.

Because of those two reasons, we think it will have more impact

on spending than the package you referred to last year.

Senator ENSIGN. And finally, do you, just philosophically when

you have studied—we obviously have examples in the past of severe economic times in our country, and other countries, Japan

during the 1980s and 1990s, and our Depression era. Do you think

that the New Deal is what brought us out of the Depression?

Mr. GEITHNER. Senator, I believe the consensus of historians and

economists is that——

43

Senator ENSIGN. It does not matter, the consensus. What is your

opinion? Because you are the one who has to be confirmed today.

Mr. GEITHNER. I share the belief that it was only when we had

in place very, very substantial fiscal stimulus and a much more effective plan to stabilize the banking system, and a broad change in

our exchange rate regime at that time, did we have a set of policies

that were going to be effective in bringing us out of depression. As

you know, that took a very long time. We got there later than we

should have as a country, in part because of some conscious judgments made, including by the Federal Reserve, frankly, to pull

back from supporting recovery too soon.

Senator ENSIGN. How do you explain the 1937 Depression within

the Depression, when a lot of those policies that you just mentioned

were already in place?

Mr. GEITHNER. Well, again, I think if you look back in the record,

like in Japan, as you referred, part of the problem was a bit of

early shift towards restraint before growth was strong enough, and

that is one of the reasons why the path to recovery in the United

States in the 1930s and the path in the 1990s was so slow and so

protracted, and it underscores the importance of doing a lot soon

and staying with it.

Senator ENSIGN. Did you think tax policies had anything—tax increases during the 1930s, 1937—had anything to do with the Depression within the Depression?

Mr. GEITHNER. Well, I do think there were a lot of aspects of the

government’s response in the 1930s that made the recession worse

and last longer.

Senator ENSIGN. Did the tax increases in 1937, in your opinion,

add to the Depression within the Depression?

Mr. GEITHNER. Senator, to be honest with you, I have more familiarity with the monetary policy and mistakes of the period of

time and those in the financial system than I do with the precise

dimensions of the tax and spending decisions then. Again, I think

the overall consensus, which I share, is that later mistakes were

partly of the nature of moving too quickly to pull back support at

a time when conditions were very fragile.

Senator ENSIGN. All right.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Senator Lincoln, you are next.

Senator LINCOLN. Thank you, Mr. Chairman. I appreciate you

having us all here today to move quickly.

Mr. Geithner, thank you for joining us. We appreciate your willingness to be here. We do all know that our Nation’s economy is

in dire need of being turned around, and we are looking forward

to working hard to make that happen.

I have also wanted to say I appreciate how much time you have

given me to visit in the last couple of weeks, the discussions that

we have been able to have. I think you certainly know from my

previous conversations that I have been very, very frustrated with

the way that the Troubled Asset Relief Program has been implemented. We have handed out tremendous amounts of taxpayers’

dollars to our Nation’s largest financial institutions, yet there has

44

been little or no relief that has trickled down to mainstream America, the businesses, the consumers out there, the homeowners.

That has brought great concern to us in Arkansas. In fact, these

institutions have actually tightened their credit, with little or no effort to kind of work with those consumers or small businesses.

Small businesses in my State have seen their finances cut off and

their loans called under threat of collection. Homeowners have seen

little help in terms of refinancing.

As the head of the New York Fed, you have certainly been intricately involved in the creation and implementation of TARP. I

know my colleague Senator Wyden asked this question probably in

one form or fashion, but really reflecting on, had you been the

Treasury Secretary during that process, what would you have done

differently?

I guess, more importantly, will the program stay on the same

track, so to speak, in the coming weeks and in what we see ahead

of us? Are you going to take it in a new direction? Hopefully you

will share with me some of those new directions.

Mr. GEITHNER. Senator, the President of the United States is

committed to fundamental reform of this program, and he wants to

make sure that we effectively and credibly address all the concerns

raised, by you and many others, about the way this has been done

so far.

As I said earlier, the critical test of this program will be whether

we do enough soon enough to make banks strong enough that they

can lend and help make sure that credit is flowing to the parts of

the economy where it can have the most impact, including to small

businesses. We are going to have to do that, again, with carefully

designed conditions to protect the taxpayer and with a much more

detailed set of provisions for transparency and accountability.

The President’s Director of the National Economic Council sent

two letters to the Congress last week with some recommendations

for how we could do that. We are going to take a careful look at

the recommendations of the Congressional Oversight Committee,

and all the other people who have looked at this stuff, and we will

look carefully at those and we will adopt the ones we think are

most effective in that area.

Senator LINCOLN. Good.

Mr. GEITHNER. But we understand and share the concerns about

the amount of impact we have seen from this so far, and we will

do our best to try to meet those concerns with a set of reforms that

will make it more effective.

Senator LINCOLN. Well, I hope so. With all due respect, I do hope

that it will not be the same track, so to speak. I hope that there

will be a new direction in how this happens. I also hope that—you

speak of details—when those details come to us, that you give us

an opportunity to really know the details of what your intentions

are. It is extremely hard to answer to our constituency if we do not

have more details, if it is just mostly rhetoric.

Two last questions, and you can answer them however you would

like in the time I have left. We desperately need some answers for

our small businesses. I have been very concerned about the lack of

detail in terms of how we are going to approach small businesses

and what we are going to do for them out of this TARP money.

45

They need it. They are the engines of our economy, particularly in

rural States, and it is absolutely essential, I think. So I hope you

can spread some light on the steps that you will take to make sure

that small businesses across this Nation will quickly receive some

help that they need.

I guess the last one: did you see the storm clouds coming? We

got this call in September of this unbelievable urgency, that the

sky was falling, and that we immediately had to give this unlimited authority and these huge amounts of taxpayers’ dollars. It was

amazing, because we had met with the Secretary of Treasury, as

well as the Chairman of the Federal Reserve months ago, and all

asked the question: what can we do to help?

In your seat as chairman of the New York Fed, did you see those

storm clouds coming? I guess, really, what could have been done

in the months or years ahead of this crisis that would have helped

us out a little?

Mr. GEITHNER. Senator, thoughtful, important questions. Let me

do small businesses, first. Four quick things. The recovery and reinvestment plan has a set of very important, powerful provisions

that will help directly address the kind of challenges facing small

businesses.

We believe that the resources, the authorization Congress gave

the administration back in the fall and last week should go to community banks so that community banks can also help work with

small businesses to meet their credit needs. We are open to ideas,

and are looking at and carefully thinking through changes to existing small business credit programs to see if we can make them

more effective in this basic challenge. I am open to suggestions

from you and your colleagues about how best to do that.

Finally, we believe we can put in place a more powerful set of

financing programs that will help get the credit markets that are

critical to small business lending going again, too.

But I think, as I said to your colleague, that will be a critical test

of the effect of this program going forward, but it is going to require that we make sure that banks are strong and able to lend

as we try to address the direct credit needs of those parts.

Now, on your second question about the storm. This crisis began

not in September, but it began back in early 2007. I was at the center of efforts to try to promote a much more aggressive response

early, not just on the housing side, but in the financial sector in

particular.

I was very involved in trying to make sure that the Central

Bank, in particular, was moving aggressively to make sure that

monetary policy was getting to a better place where it could support recovery and that we were encouraging banks to raise capital

necessary to play a critical role in recovery.

I did work very actively to try to encourage the administration

to get the broader authorities that we thought were going to be

necessary to address this. But this did not begin last September,

it began way before that. Although policy did move, it did not move

aggressively enough across the entire board. We are living with the

consequences of a deeper recession, in part, because of that.

Senator LINCOLN. Thank you.

The CHAIRMAN. Senator Wyden?

46

Senator WYDEN. Mr. Geithner, if confirmed, your department

will have a very large role in American health care. Suffice it to

say, there are scores of breaks and incentives in the code. In fact,

the biggest chunk of money in America’s health care system goes

out the door through the Federal tax code. It comes to at least $247

billion a year, and, as you and I talked about, it rewards inefficiency and also benefits the most well-off in our society.

Now, Chairman Baucus, to his credit, puts the reform of these

Federal health tax rules on the table. They are on the table now

because of the chairman’s very good white paper on health care. I

believe that it is possible to reform the Federal health care tax

rules and honor the pledges that our new President made on health

care. In other words, the new President said, I want to make sure

everybody can keep the coverage they have if they want, and he

said, I do not want to clobber the middle-class people with new

health care taxes.

So my question to you is, when you get your call from Tom

Daschle, our health care czar, and he asks you whether you are

open to reforming these Federal health care tax rules, as the chairman suggests in the white paper, a lot of us are interested in—if

Senator Daschle calls you and says, are you open to reforming

these Federal health care tax rules, what will your response be?

Mr. GEITHNER. If I am confirmed by the Senate and he calls me,

I will say that I am open to looking at changes to the tax treatment

of our health benefits so that we can achieve the President’s objective of expanding access and improving care in a way that is fiscally responsible over time.

Senator WYDEN. Well, I appreciate that answer. We are going to

be following up with you, and I am going to be working very, very

closely with our chairman on that, and our colleagues on both sides

of the aisle.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator, very much.

Senator Bunning?

Senator BUNNING. Thank you, Mr. Chairman.

Now I can get to some questions. Mr. Geithner, precisely when

did you first learn that you were required to pay to the IRS the

allowance for Social Security provided to you by the IMF that you

applied for each year? Precisely.

Mr. GEITHNER. Senator, the first time I learned that I had not

met my obligations to pay self-employment tax, this was when I received the notice from the IRS auditor that they had conducted an

audit of my tax returns. As I said, I took that extraordinarily seriously. That was the first time I was made aware that I had not

complied. Until that point, I felt I had complied.

But I want to just emphasize——

Senator BUNNING. I have a lot of questions.

Mr. GEITHNER. Can I say, quickly, one thing, though? I went

back and looked at all that material and, as I said in my opening

statement, it was very clear. I had many opportunities to catch

that initial mistake. Of course, if I had realized earlier I was not

complying, I would have moved more quickly to comply.

Senator BUNNING. Well, let me get to that.

47

I have found that the IMF goes to great lengths to make sure

that employees comply with their U.S. tax obligation. One current

IMF employee, who describes himself as a ‘‘lifelong Democrat,’’

called my office to express his disbelief that you did not know about

it. Every year, you had to file a written request for a gross-up payment to the Social Security tax.

I have one of the statements you signed right here. It says, ‘‘I

hereby certify that I will pay the taxes for which I have received

tax allowance payments.’’ You provided this to the committee. But

why did you not provide it to your accountant when he was preparing your returns for the 2003 tax year?

Mr. GEITHNER. Senator, as you said, I provided that form to the

committee. I absolutely should have read it more carefully. I signed

it each year. I signed it in the mistaken belief that I was complying

with my obligations. And you are right that this is my responsibility. In those years that my accountant prepared my returns, he

also did not catch my error. But those are my responsibilities, not

his.

Senator BUNNING. But you did not furnish this to your 2003

tax—you did your own in 2001 and 2002.

Mr. GEITHNER. I did my own in——

Senator BUNNING. Then you got an accountant.

Mr. GEITHNER. I did my own in 2001. I filed an amended return

in 2001 that was prepared by a tax preparer. In 2002, I did my

own. In 2003 and 2004, an accountant prepared my returns. I believed, Senator, I was giving my accountant all the necessary information so that he could help me prepare my returns. But as I said,

it was my responsibility. The critical mistake I made was at the

beginning, that first year, and because I did not catch it after that,

I kept making it.

Senator BUNNING. This individual called me and explained that

you were counseled to pay self-employment tax, but you and your

accountant later ignored that advice. Can you explain why this person—why did you ignore her advice at the IMF?

Mr. GEITHNER. Senator, I relied on the judgment of my accountant. I should not have relied on that judgment. That is my responsibility, not theirs.

Senator BUNNING. Would you have paid your 2001 and 2002 tax

had you not been nominated to be the Treasury Secretary?

Mr. GEITHNER. Senator, as I said initially, I should have asked

more questions when I concluded that audit at the time, and I did

not. When I think back on that, I regret not having done that. But

I should have done it at that point.

Senator BUNNING. Let me get on to currency in China and the

global trade imbalance. Mr. Geithner, in 2004 you gave a speech

in Singapore in which you expressed concern that Asian reserves

had reached $2.5 trillion. Last year, we had the largest trade deficit in history with China, and Asian reserves had reached nearly

$3.2 trillion. China’s reserves stand alone above $2 trillion and are

counting. Experts say the yuan is still undervalued by 30 percent.

Last year, President Obama co-sponsored legislation that I introduced with Senator Stabenow to create a WTO-consistent trade

remedy for manufacturers harmed by currency manipulation. I also

introduced legislation with Senator Stabenow to require the TreasVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
48

ury Secretary to cite China for currency manipulation under the

1988 Trade Act.

Do you believe that currency manipulation by China remains a

significant issue today, and what would you do to address it as

Treasury Secretary?

Mr. GEITHNER. I do believe that it is a significant issue. As I said

earlier, I believe it is important for the United States and for the

global economy that our major trading partners operate with a

flexible exchange rate system and that market forces determine the

level of those exchange rates. I think that is very important. I will,

when I have some time to think through how best to achieve that

objective, look forward to a chance to work with you and your colleagues in the committee on how we do that.

But you are right to emphasize the President’s commitment to

this. This is an important issue for the country. It is a difficult,

complicated question to work through.

Senator BUNNING. My time has expired. I have about eight more

questions that I will submit to you, and I would appreciate you responding.

Mr. GEITHNER. Absolutely, Senator.

Senator BUNNING. Thank you.

The CHAIRMAN. Thank you, Senator Bunning.

Senator Kyl, your presence has now been noted.

Senator KYL. Thank you, Mr. Chairman. I apologize.

The CHAIRMAN. You missed the first round, you missed the second round.

Senator KYL. That is all right.

The CHAIRMAN. If you want a full 10 minutes, you can take it.

Senator KYL. Yes. Thank you very much. I have at least that

much time.

Mr. Geithner, I am a little astonished that you would, in your

opening statement, assert that the American recovery and reinvestment plan will meet the test that you set out for its success. The

two key elements you discuss are providing powerful and direct

support to help people get back to work and to encourage private

investment.

Now, the two biggest components of the package are the component for a rebate for taxes and the infrastructure and energy

spending side. Let us take both of those.

As to the first, you and I discussed in my office—and we quibbled

a little about the exact percentage—but I quoted you Marty Feldstein’s statement that recent government statistics show that only

between 10 percent and 20 percent of the previous rebate dollars

were spent. You said you thought maybe it was closer to the high

side of that than the 12 percent that I had cited. But even if it is,

let us say, 20 percent, that at least was in one lump sum. People could see the $500 or $600 that they received. This is

going to be something on the order of 10 bucks a week, or whatever, in withholding. What makes you think that with all of the

previous tax rebates, including the most recent one last year not

providing stimulus, that somehow or other this most recent one

will, and therefore meet the test that you laid out?

Mr. GEITHNER. Thank you, Senator. Our view is that this is designed in a way that will help improve the prospects that a larger

49

portion of the tax benefit is spent. There are two reasons why that

is the case. The first is, this is an initial down payment on a reform

that the President would like to make permanent and pay for. Our

hope is that, with the expectation this is going to be an enduring

change in withholding and tax treatment for the Americans that

are eligible, it will have a more powerful effect on spending.

The second reason is that, because this is designed in a way,

rather than getting a one-time check in the mail initially, a lump

sum payment, people will see a change in withholding statements

every week and they will have the reasonable expectation that it

will be continued. For those reasons, we think it will have more impact on spending behavior and have more effectiveness than the

stimulus package that was designed earlier last year.

But I understand the concern people raised about it. None of us

will know for sure what the impact on behavior is going to be, but

it is designed very much to address the concerns you began with.

Senator KYL. Yes. I appreciate that. It is all a guess. Let me cite

the statement that Larry Summers made. We discussed this as

well. He wrote the following: ‘‘Investments will be chosen strategically based on what yields the highest rate of return for the economy.’’ It seems to me that this fails to meet that test either.

Let me turn, though, with that specifically in mind, to the CBO

analysis of the infrastructure. You are familiar with that analysis

and report of just a couple of days ago. For those who may not be

familiar with it, just a couple of their conclusions: CBO estimates

that less than half of the construction funds in the stimulus bill

will be released into the economy over the next 4 years. Less than

half within the next 4 years. Less than $4 billion would reach the

economy by September of 2010. So, most of the infrastructure

money would not even hit the economy until, we assume, it is already beginning to recover.

On the energy side, which is also high in terms of spending, CBO

estimates that only 7 percent of the energy money will be spent

within a year and a half period of time. How is that going to provide stimulus?

Mr. GEITHNER. Senator, I had a chance to respond to some of

those concerns while you were out of the room, but I just want to

repeat the formulation I said before. I think you have to look at the

overall package. The overall package of tax changes and investments and aid to States, in our judgment, based on very substantial consultations with a broad range of economists and people in

the Congress, we believe that package will offer very substantial

support quickly to the economy as a whole.

Senator KYL. If I can just interrupt you.

Mr. GEITHNER. Yes.

Senator KYL. So there is something in there that will—I mean,

you acknowledged CBO’s analysis. I guess you have no reason to

contradict it.

Mr. GEITHNER. No, no. I want to respond on that.

Senator KYL. Well, would you? That is what I am asking specifically.

Mr. GEITHNER. Yes.

Senator KYL. I am going to get to the other items. What you are

saying is, there are other items that might kick in earlier. I am

50

going to ask you what they are specifically, but tell me why you

think CBO is wrong, please.

Mr. GEITHNER. I have not read very carefully the CBO concerns,

but my colleagues have. Our judgment is that we can do a much

better job than the government has done in the past in getting

those resources out the door quickly. Of course, we want to be very

careful as we do it not to waste resources. But they were making

a set of judgments based on how this had been done in the past,

and the President said publicly, and his team is looking actively at

ways to get those resources out the door more quickly.

I think we all share the objective that we want to do things that

are going to have substantial support quickly, add to things that

make our economy more productive in the future, without adding

substantially to long-term expectations for expenditures that will

be harder to meet.

Senator KYL. But here is the point. Maybe it is not an order of

magnitude, but it is such a significant difference from what you are

trying to accomplish: less than half the money over a 4-year period.

Does it not seem implausible to you that marginal changes in how

you can improve getting the money out the door could conceivably

make up for that kind of a deficit?

Mr. GEITHNER. We think we can do substantially better than the

CBO estimates suggest. The President wants his team to do better.

He is committed to do it. We are going to do everything we can.

We are open to suggestions on how best to do that. But we share

your concern that in designing the package—again, we want to

have strong force quickly. Again, I think if you look at the overall

package——

Senator KYL. All right. Well, let us get to the overall package,

because you are kind of falling back on the defensive, well, maybe

this is not going to be very immediate, but there are other things,

how to transfer payments to States. How does an increase in Medicare or Medicaid spending give you the return on investment that

Larry Summers was talking about in terms of jobs and investment?

Mr. GEITHNER. Senator, I understand your concerns about those

proposals. But our judgment is, those proposals will help reduce

the need for States—without that support, States will have to

make very, very, very substantial reductions in critical government

services at a time when the economy cannot withstand those effects. So that scenario where we believe you can have very, very

substantial support to the economy, both in terms of employment

and expectations for businesses quickly——

Senator KYL. Well, the classic Keynesian concept here is that,

where there has been a deficiency in spending or a gap in spending, that government, in times of recession, needs to fill that gap

with more spending. That is the idea here. But States and localities

have been increasing their spending dramatically over the last 4 or

5 years; in 2008, by an average of 7 percent, and in a lot of States

it was a lot more than that. So it is kind of hard to argue that more

spending capability for the States is going to fill a gap in spending

by the States and localities, is it not?

Mr. GEITHNER. Well, Senator, I think in the absence of those provisions, I think it is absolutely clear States will have to cut back

very, very dramatically, and that will raise unemployment and reVerDate 11-MAY-2000 14:28 Nov 29, 2010 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 61927.000 TIMD PsN: TIMD
51

duce demand for goods and services created by American businesses. So I think it really is essential to do and should be a part

of—and would be, I think, a part of—any credible fiscal plan to

help bring recovery back.

Senator KYL. So rather than encourage States to try to become

more efficient and to cut back on things that in tough times you

just cannot afford to do, you intend to send them the money so they

will not have to make those tough decisions.

Mr. GEITHNER. No, I do not think that is a fair way to characterize it. I think of course we would like these provisions to come

with conditions that will improve confidence in their citizens that

this money is being used wisely, but the critical priority for the

country now, I think, is to make sure that the government is providing enough support to get growth back on track faster. I think

these aid to States provisions are an absolutely important part of

that program.

Senator KYL. Well, one of the ideas with the bail-out—I mean,

this is essentially what that would then be—is that these be loans.

At least the American taxpayers get their money back. Would you

be supportive of conditioning some of the support to the States or

localities on being eventually repaid to the Federal taxpayer?

Mr. GEITHNER. Senator, I think that is an interesting idea. I do

not know whether that is practical. But I want to reinforce the

President’s commitment that, as these provisions are considered by

the Congress, that we are open to suggestions on how to design

this package in a way that is going to be most effective in achieving

this objective of getting the economy back on track. So we will be

open to any suggestion. We have tried to consult very widely. If

there are ways we can meet this objective more effectively, we

would like to try to do that.

Senator KYL. All right. Well, that is a suggestion. Now, what is

your response to it?

Mr. GEITHNER. Senator, I do not know if that is practical in this

context. We have tried to take advantage of the fact that there is

an established set of mechanisms Congress has used in the past to

provide aid to States in recessions. We are trying to use those and

adapt them to make them more effective. I do not know why that

idea has not been adopted in the past by the Congress. I would like

to think about it a little more carefully.

Senator KYL. Excuse me. Some of the money is just outright

grants. It is not tied to a Medicare or Medicaid formula, and so on.

Correct?

Mr. GEITHNER. That is correct. That is correct.

Senator KYL. All right.

Mr. GEITHNER. But again, the overall thrust is to try to make

sure that States are not forced to cut back dramatically at a time

of national weakness and peril.

Senator KYL. One of the things that the President announced as

a goal was that about 40 percent of the so-called ‘‘stimulus package’’ would be tax relief. Now, one can argue about whether—in

fact, the way it is scored, the proposal on the tax rebates is scored

as ‘‘spending.’’ But what percentage of the packages introduced in

the House of Representatives do you estimate to be——

52

The CHAIRMAN. If you could answer that fairly briefly, too, I

would appreciate it.

Mr. GEITHNER. Sure.

The CHAIRMAN. Thank you.

Senator KYL. The percentage number.

Mr. GEITHNER. Senator, I am not sure I am going to get the percentage exactly right, but somewhere in the realm of 40 percent is

in the provision that we would call tax incentives and tax changes.

Senator KYL. Well, 40 percent?

Mr. GEITHNER. I do not want to get the math wrong. But a substantial part of the package, the framework we proposed, I think

what emerged from the House’s committee now is consistent with

that, has a very substantial part in the form of tax incentives and

tax changes.

Senator KYL. All right.

Mr. Chairman, I have had the equivalent of two rounds. I am

willing to wait for my third round.

The CHAIRMAN. All right. Thank you.

Senator Cantwell?

Senator CANTWELL. Thank you, Mr. Chairman. And thanks for

having a second round.

Mr. Geithner, I wanted to emphasize how important this small

business issue is, and look forward to working with you. We will

have suggestions. A bank in our State, in Vancouver, WA, was just

taken over by the FDIC, by a bank from Oregon that had just received $214 million from TARP, obviously to help stimulate loans.

They are taking over the deposits of the Washington bank, but it

seems like the lines of credit for small businesses are frozen.

So this is a real issue, where these small businesses during this

time period—and you mentioned, obviously, the asset-backed securities and lending program, but some of those things are not in

place. They are not in place right now so, while these larger banks

are getting the lifeline, these small businesses are not getting the

line of credit that had been previously established. So we need to

act rapidly to fix that problem, so we will look forward to working

with you.

I want to go back to this regulatory reform issue, because it is

so important. The former SEC chairman, Mr. Levitt, basically described the CFMA, the Commodity Futures Modernization Act, at

least when he was talking about derivatives and credit default

swaps, as a failure. Would you agree?

Mr. GEITHNER. Senator, a lot——

Senator CANTWELL. I am sorry. I am sorry. He used the word

‘‘mistake.’’ Was a mistake.

Mr. GEITHNER. Was a mistake.

Senator CANTWELL. Yes.

Mr. GEITHNER. I do not think I agree with that. But I do agree

that we are going to have to take a very careful look at the whole

comprehensive framework of requirements, regulations, constraints, incentives that exist for the institutions that play a central role in those markets.

We want to make sure that the standardized part of those markets moves into a central clearinghouse and on to exchanges as

quickly as possible, and that is now happening because of the work

53

we have supported. We will look at a range of other changes too

to try to make sure these markets function the way we need, with

more benefit in terms of capacity to hedge and less risk to the system as a whole.

Senator CANTWELL. Why was it not a mistake?

Mr. GEITHNER. Senator, I guess I think that it is just a more

complicated set of problems that are created here. We have a situation where institutions at the core of the system did not understand and adequately manage the risks they faced and exposures

through those products and others. They did not understand the effects these things had on a bunch of other important markets for

credit and equity markets as a whole. But again——

Senator CANTWELL. So do you support the full regulation of credit default swaps?

Mr. GEITHNER. I would support taking a careful look at how to

put in place a more effective framework of regulation over the participants in those markets and the markets themselves. I am open

to suggestions on how best to do that, but we need to get it right.

It is going to be a really complicated, difficult thing to do.

Senator CANTWELL. What scares you when I say regulation of

those tools on the exchanges? What is bothersome about that?

Mr. GEITHNER. Well, as I said, I am fully supportive of moving

the standard part of those markets on to central clearinghouses

and exchanges. I think that is really important for the system and

will help reduce risks in the system as a whole. I think that is necessary, but not sufficient.

Again, we are going to have to look at the incentives the capital

requirements create for how much exposure through these instruments institutions hold. We need to look at how the hedges are

treated through regulatory capital and accounting. It is an enormously complicated set of questions. My resistance is not to the objective, it is just that I want to make sure we get it right.

Senator CANTWELL. And my resistance here is that I am tired of

these exotic tools. There is nothing exotic about what has happened

to our economy. There is nothing exotic about these people who

have lost their jobs. This is just the exotic tool of today, credit default swaps. What is going to be the tool of tomorrow that someone

else uses? So what I want to know is that this administration,

which I am so excited about—I love the fact that you just said ‘‘the

President of the United States.’’

I know the President of the United States, in this new capacity,

is going to do great things. But I want to know that this larger

issue of the financial markets being out of control and the fact that

they can create exotic tools faster than we can regulate them is a

tremendous problem for our economy. I want to understand how we

are going to fix that and not wait for the next tool to come along.

Mr. GEITHNER. I completely agree with you. I think you said it

very well, which is that innovation got ahead of risk management

and restraint and prudence. It is always the case; it is too slow to

catch up. A critical objective, and I know the President believes in

this deeply, is to try to make sure that our system is designed with

a set of rules to make that less likely in the future.

Senator CANTWELL. So how are you going to do that? I think Professor Stiglitz or somebody said, well, have every new tool come

54

through a clearinghouse before it is implemented. So, I am just

suggesting that as one idea that has been thrown out.

Mr. GEITHNER. Again, we will——

Senator CANTWELL. But how do you approve these before they get into action? Because a $62-trillion credit default swap market

that blew up this whole thing is definitely not the way to go.

Mr. GEITHNER. Well, Senator, we will be open to any suggestion

we think will work. We will consult very carefully and widely. I

know the President wants to come to the Congress quite quickly

and lay out a framework of recommendations for reforms. If you

confirm me for this job, I will play a central role, working with my

colleagues in the SEC, the Fed, all the bank supervisors, the accounting profession, et cetera, so we can meet the basic objective

you laid out to make sure that innovation in the future does not

get so far out in front of the checks and balances in the system,

that we are left with this level of risk and fragility in the system.

Senator CANTWELL. Well, I am going to look forward to knowing

and understanding some of those measures, and hopefully I will be

able to know more in the next few days.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator. I think that is a very important question. It is not just in the financial markets, but it is also

loopholes in the tax code, that very bright tax attorneys can figure

out ways to get around the tax code way too quickly, and it is very

hard for the IRS to keep up. In fact, I think in many respects the

IRS has not kept up. So, that is another area where you are going

to have to think about how we do not get too far behind, but in

fact how we not get behind as industries develop fancy, exotic instruments to make a buck for themselves at the expense of the rest

of America.

I am a little concerned with your answer. I understand it on the

surface. Your answer that, well, these things are incredibly, enormously complicated and you want to do what is right, I understand

all that. The slight concern I have is that, again, very bright people

in these institutions and their lawyers are going to come to you

with all of these fancy ways of doing all these things, and more

often than not it creates a lot of stuff that really does not help the

American economy.

There are many who think that we spend much too much time

in America developing these exotic financial products at the expense of, say, the manufacturing sector, at the expense of the real

economy, and the best and the brightest go to Wall Street, they do

not go to engineering schools and to develop better products.

So I am concerned, and I am hopeful that you are very, very—

maybe tough is the word, in coming up with a new regulatory regime and, I think, send a terrific signal that we are not going to

indulge a lot of exotic new stuff which is not really very productive

at all in the real sense of the term, but rather move a little more

towards the real economy and where we can start making things

and doing things to help strengthen our economy overall.

I have another question for you, and that is on China. I think

how we manage our relationship, the United States with China, is

extremely important and will in some ways determine the living

standards of Americans and Chinese, and for that matter, people

55

in other parts of the world. I applaud Secretary Paulson’s efforts

to set up this Strategic Economic Dialogue. I think that helped. It

was not the be-all, end-all. In fact, Secretary Paulson said not too

long ago, I read, even though that did help a lot, he is somewhat

convinced now that nothing ever happens unless there is a crisis.

You can talk to death, but nothing really happens unless there is

a crisis.

So our charge, our American charge to the next administration,

is to figure out ways to avoid a crisis, do what needs to be done

to avoid a crisis. We have been talking about that in the financial

sector. You yourself said that you saw this coming, the storm

clouds coming in 2007, early 2007. Yet for some strange reason,

this country did not respond to those storm clouds. Maybe people

did not listen to you enough. Maybe you were not sufficiently forceful, I do not know.

But nevertheless, in these turbulent and volatile globalization

times we all face, early-warning systems are going to be even more

important than before, and having the intestinal fortitude and the

courage to follow up is going to be even more important than it has

been in the past.

So with respect to China, I just urge you, and would like your

response as to how we get to the point where the RMB, the yuan,

is a market currency, it is not set by the Chinese government, as

it now is, and how we get off this mutual addiction—American consumers addicted to Chinese products and China addicted to loaning

to us. Your thoughts?

Mr. GEITHNER. Senator, I like to start, always, in this case by

emphasizing the obligation we have to put in place a set of policies

that are going to improve confidence in Americans and in investors

around the world in our capacity to run our country more effectively, not just to make our economy more productive in the future,

but to try to convince people we will be able to live within our

means and put our fiscal position onto more sustainable paths, and

to confront the very difficult long-term questions of entitlement

that we have had such a hard time coming to grips with in the

past. I think that is absolutely essential.

We can be careful, creative, effective in our relationships with

other countries, but unless we do that well, those efforts, diplomatic and otherwise, will not be effective in protecting our interests

as a country. I completely share and deeply believe your central

point about China’s importance to the global economy and to our

economic and financial future, and I think we have to get that

right.

Our interests as a Nation lie in trying to make sure China manages its transition as effectively as possible with the least potential

damage or risk to the global economy, and it is going to require a

very substantial, sustained engagement of attention and time. In

my time at the Treasury in the past, I was part of a lot of efforts,

some of which were not very effective, some of which were very effective, in trying to design forums with China and other countries

that would help make sure we can work on things together which

meet our mutual benefit. If I am confirmed, I will play a very active role in that effort.

56

I will repeat on the exchange rate front, again, just to say that

I believe that it is in the interests of the global economy, not just

our interests, that our major trading partners move over time to

a more flexible exchange rate system. An important, difficult challenge I will face is to try to figure out how best to advance that

objective, not just with China, but with our other major trading

partners as well.

The CHAIRMAN. It is going to take a humongous effort. Here

again, Secretary Paulson’s words, nothing much happens, just a lot

of talk, unless there is a crisis. It is just going to take a huge effort,

on your parts and on the parts of others, to do what needs to be

done to avert that crisis.

I have heard you a couple of times refer to entitlements. I am

just a little curious what you mean by that. I am a little concerned

it is kind of a throw-away by the administration to various people

who are concerned about entitlements. It is an easy thing to say.

Some people say, gee, it is entitlements, that is the problem.

I am concerned. I am just curious what your thoughts on that

subject are, because as you well know, the Social Security trust

fund is not in bad shape. I think the projections I saw, it is not

going to go belly-up for another 20 years, maybe. That is not the

huge part of the problem. We have a few years between now and

2041. That is not urgent today.

Second, with respect to the Medicare trust fund, which is more

urgent, there is the temptation to say, we are going to cut entitlements. I say ‘‘temptation’’ because the main reason that the Medicare trust fund is rising at such an alarming, rapid rate is not because of baby boomers.

The Congressional Budget Office did a study several months ago

and showed that that is a very small part of the problem. The main

reason is because health care costs in this country are rising at

such a rapid rate, not just for Medicare, but for the entire country.

We spend $2.3 trillion a year on health care in this country, roughly half public, half private.

So the real answer in entitlement reform is not entitlement cuts.

That is not the answer. I think we should stop saying it that way

because it raises incorrect expectations. The real answer is really

health care reform. It is getting a handle on the rapid rate of increase in health care costs. As you know better than most anybody,

we spend about twice as much per capita on health care than does

the next most expensive country, and we are ranked, America,

about 17th, 18th, or 19th worldwide on health care indicia. So, we

are not getting our money’s worth here. This is going to be hard.

I wrote a white paper on how to go down this road and address

health care reform. I think, frankly, it is the basis for all health

care discussions here in the Congress. It is very similar to President Barack Obama’s thoughts on this subject. So I urge you to not

talk too much about ‘‘entitlements,’’ but rather rephrase that and

say we have to address health care reform. That is the way we are

going to start getting a handle on this $1.1-trillion deficit that you

talked about.

Mr. GEITHNER. I agree, and I accept that advice. I think you are

right, that you cannot get to the broader solvency problems in

57

Medicare without getting there through health care reform that effectively addresses the rising costs. I think that is absolutely right.

I do think, though, it is also important, even though the magnitude of the financial challenge in Social Security is much more

modest, maybe particularly because of that, it is also important

that we look at ways we can start to address that question, too. Because again, as a country, we have an unsustainable fiscal position.

I think confidence in America will depend in part on us being willing to convince people that we are providing a framework, on a bipartisan basis, to try to put in place those kind of reforms.

The CHAIRMAN. I appreciate that. But Social Security reform is

a quite small part of the long-run problem. Very small.

Mr. GEITHNER. Yes. It is a much smaller challenge.

The CHAIRMAN. This $1.1 trillion that CBO estimated had nothing to do with Social Security, or had very little to do with Social

Security.

Mr. GEITHNER. Yes.

The CHAIRMAN. It had nothing to do with Social Security, because we are borrowing from it.

Mr. GEITHNER. Right.

The CHAIRMAN. What it really had to do with is all the other

problems, the loaning, TARP, and everything under the sun. That

is the reason.

Mr. GEITHNER. I completely agree.

The CHAIRMAN. So one should not say the problem is Social Security.

Mr. GEITHNER. No, no. I did not mean to imply that. I just meant

to say that this basic challenge of credibility on the fiscal side is

an enormously consequential and important challenge.

The CHAIRMAN. It clearly is.

Mr. GEITHNER. And it requires health care reform. I completely

agree. But that is necessary, not sufficient. We need to make sure

that, again, as we move forward, we do a better job of earning the

confidence of the American people that we are going to be able to

confront these things.

The CHAIRMAN. Thank you.

Senator Grassley?

Senator GRASSLEY. I appreciate the briefing and answers to follow-up questions that your staff at the Federal Reserve eventually

provided regarding the Bear Stearns deal. The only anxiety I had

about that, I was hoping to get those before we voted on the TARP

proposal on October 1, because I thought it was important.

But I want to move on beyond that to discuss with you what I

consider a lack of transparency with the level of public disclosure

about the assets being held by the Federal Reserve through Maiden

Lane LLC.

Specifically, it appears that the reported valuation of those assets

may be overstated. The reason is that much of the debt in the portfolio is guaranteed by Freddie Mac and Fannie Mae, which are in

turn guaranteed by the Federal Government. In other words, a

rosy scenario for Maiden Lane LLC is not necessarily a rosy scenario for taxpayers.

58

Is it not true, if the defaults of those loans are high, then the

taxpayer is still left holding the bag, even if the Federal Reserve

gets its money back from Maiden Lane LLC?

Mr. GEITHNER. Senator, what I would like to emphasize is that

we put in place, after we did that enormously consequential decision last March, a regime where, on a quarterly basis, we disclosed

publicly an estimate of valuation that is produced by a very carefully designed process to make sure it is independent and careful

so that we are providing, again, the best judgment of what the

value is in that context.

That is very important to me, and I think it is very important

to the Fed. I respect and appreciate your concern that we achieve

that. We believe it is designed in a way that is very careful with

a good set of checks and balances there, and I think that regime

will stand the test of time.

But on a quarterly basis the American people will see what that

estimate is, how it is changing over time, and therefore they will

see one measure—not a complete measure necessarily, but one

measure—of the risk to the American taxpayer in that judgment.

But before I conclude, you need to judge that against the benefits

we achieved in preventing default at an enormously fragile moment

in our country of a major systemic financial institution.

Senator GRASSLEY. What would be the situation if those assets

were not guaranteed by the Federal Government?

Mr. GEITHNER. Well, Senator, you are right to say that there are

risks in that portfolio, including the risks that you see a higher

level of default rate and losses across the American economy. You

are right to say that. But again, this provides what we think is the

best measure of the overall risk to the taxpayer.

Senator GRASSLEY. All right.

Given that the Bear Stearns and AIG bail-outs were conducted

outside of TARP, do you think that it makes sense to broaden the

authority of the Special Inspector General for the TARP to oversee

these funds as well? If you do not agree with me, why not?

Mr. GEITHNER. Senator, that sounds like a reasonable suggestion, but I want to think about it more carefully before I respond.

I do think it is important to point out that in the Emergency Economic Stabilization Act Congress also passed a set of important

new conditions for oversight and transparency in reporting on the

entire set of programs financed by the Fed, and, if there are ways

we can improve that, I would be happy to work with you and your

staff on how best to do that.

Senator GRASSLEY. Well, thank you.

You said in your statement today that you intend to reform the

TARP to ‘‘ensure that there is enough credit available to support

recovery’’ with ‘‘tough conditions to protect the taxpayer’’ and to ensure transparency.

How do you intend to reform the program, and how do you intend to increase transparency? Do you agree with Secretary

Paulson that the focus of the program must return to troubled assets rather than bailing out banks?

Mr. GEITHNER. Senator, I believe, as I said earlier today, that we

are going to have to have a comprehensive program using all the

authority the Congress provided us to try to make sure banks are

59

in a stronger position so they can lend and so that we get the credit

markets functioning again, and get risk premia interest rates down

in those basic markets.

At the same time we do that, we are going to try to put in place

a more effective, comprehensive housing strategy because that has

been at the center of this crisis. There are a lot of ideas up in the

Congress and in the regulatory community on how best to do that.

As we do that, we are going to lay out what we think are the

best conditions, most effectively designed to protect the taxpayer,

and we are going to take the best of the proposals out there from

the Inspector Generals, from the GAO, from the congressional oversight body, to try to improve the level of transparency and reporting provided.

Larry Summers laid out a number of specific suggestions in the

last two letters in the last 2 weeks about how best to do that. We

are open to any other suggestions on how to do that. If I am confirmed, a critical priority of the Secretary of the Treasury will be

to try to be responsive to those concerns you and so many others

have expressed about how the program has been implemented.

But again, the critical test for us is going to be, how do we make

sure that there is more strength and confidence in the core of the

financial system, and how do we get these credit markets functioning again so that lending is available on a scale and a condition

that will make it more likely we get out of this sooner?

Senator GRASSLEY. Mr. Chairman, you took 9 minutes. Could I

have 4 more minutes?

The CHAIRMAN. Clearly.

Senator GRASSLEY. All right.

Regarding the three special-purpose vehicles involved with JP

Morgan, which absorbed Bear Stearns and AIG, when will financial

statements of these entities be made public? That is one. Does the

use of these private vehicles not result in less transparency, since

JP Morgan and AIG may otherwise have had to report such investments to the SEC reporting? Do you think that these entities

should be subject to the SEC reporting requirement, why or why

not? So, three questions.

Mr. GEITHNER. Senator, important questions. I think that the regime put in place around disclosure and the accounting standards

applied to those entities are very strong. I believe that the checks

and balances in place, again, provide a very effective set of provisions. They were designed in a way to meet Generally Accepted Accounting Principles, again, with a disclosure regime that is consistent with what we would apply generally to financial institutions. But as always, I am a practical person, and if there are ways

we can improve on that record I would be open to doing so, working

with my colleagues at the Fed.

Senator GRASSLEY. All right. So then I think you are disagreeing

with me, and maybe my impression of it is wrong, but I think there

is less transparency, but you are saying there is not. Is that what

you are saying?

Mr. GEITHNER. I believe——

Senator GRASSLEY. Because we will have to sit down and talk

about that then.

60

Mr. GEITHNER. Right. Right. Again, I think what has to go into

this is a range of different things. One is, you want to make sure

that there is a carefully designed regime for setting the value on

these things.

Senator GRASSLEY. Yes.

Mr. GEITHNER. And that the accounting regime that applies and

the disclosure requirements that apply meet the important objectives you laid out. We believe this framework meets those objectives. But as I said, I am a practical person and am happy to listen

to suggestions on how to improve that.

Senator GRASSLEY. All right.

Why is it that BlackRock is the only firm qualified to value and

manage the assets of special-purpose vehicles? Did you consider

any other firms? If yes, why was BlackRock selected? If no, why

were others not considered?

Mr. GEITHNER. Let me just address the Bear Stearns case in particular, because that is initially where we asked BlackRock to come

provide this very important service.

Senator GRASSLEY. Yes.

Mr. GEITHNER. As I have testified before, we had to move very,

very quickly in that time frame, and we believed at that moment

we had no alternative. They come with a world-class reputation

and set of expertise in doing that, and we thought the interests of

the American taxpayer would be best served by having them there

on our side as we made those consequential judgments.

Now, if you look at the judgments the Fed has made, and the

Treasury going forward, we have been able to take advantage of a

broader set of expertise and institutions in helping do this, and we

recognize that there are other sources of expertise that would meet

our obligations going forward. Of course, we would want to make

sure that we are having the best expertise at the table on the side

of the taxpayers to make these judgments.

Senator GRASSLEY. This will be my last question. My staff has

informed me that they were told, in both the briefings with your

staff as well as AIG officials, that the underlying assets on all

these SPVs actually have value, that the majority of the assets in

these private entities are ‘‘performing.’’

If that is the case, I do not understand why a Federal bail-out

was necessary. Is it not true that the only reason that these assets,

including mortgage-backed securities and collateralized debt obligations, have value is because of the Federal Government guarantee?

If not, do you think the predominance of subprime mortgages was

overstated and that the frequency of defaults was overstated?

Mr. GEITHNER. I do not believe so, Senator. Again, what the financial system is facing, and has been true, again, as I said for 18

months, is an acute rise in uncertainty, a substantial withdrawal

in financing, and the combination of those two things has made the

markets unwilling to take risks markets have to take for economies

to work.

To help address that problem, the government of the United

States and the Federal Reserve have done extraordinary things,

and those things have involved risk to the taxpayer. We had to

judge those risks against the benefits we achieved for the economy

of avoiding defaults with catastrophic consequences. But you are

61

right to emphasize the fact that there were risks in the judgments

we made. We try to carefully control those risks to make sure we

understand them carefully, and that there are good checks and balances for how these are managed going forward. But we have to

judge that risk against the benefits we created for the economy and

the financial system of preventing default with catastrophic consequences.

Senator GRASSLEY. Let me make a statement, instead of asking

a question. Assuming you are right and they have value, then

should we not be pointing the fingers at the big—well, I had better

say it this way. I think we ought to be pointing fingers at the three

big credit rating agencies for downgrading credit ratings of the securities. That is the way I see it.

Mr. GEITHNER. Well, I agree with you that the rating judgments

by the credit rating agencies have been—how can I say it more

starkly than what you did? There were systematic failures in judgment about the level of the risks in the securities they were rating,

and that played an important role in contributing to this crisis.

Senator GRASSLEY. All right.

Thank you, Mr. Chairman.

The CHAIRMAN. Senator Kyl?

Senator KYL. Thank you, Mr. Chairman.

I am going to submit some questions to you in writing, and I will

need the answers before I think it will be appropriate to vote. But

a couple of them, we discussed: your agreement with the proposition that Treasury needs to maintain an important role in helping to fight terrorism, with the emphasis on the international

banking system.

Mr. GEITHNER. Absolutely.

Senator KYL. Some questions relating to the value of the dollar,

some questions relating to corporate finance. In particular, here are

the incentives and disincentives regarding debt versus equity financing, which are important to a lot of things we have been talking about.

I also, to follow up on my previous questions, want to have you

put in writing for me as to each of the major programs of the socalled ‘‘stimulus package,’’ why you think they are going to be job

creation and investment friendly. If you can actually relate the

kind of job or jobs that you think are going to be created by that,

I would prefer that as well.

So I will give you a general question, and then on a program-byprogram basis, I would like to have you answer that. I remember

that you are going to be judged in a year or two, and this is not—

or should not—be a political exercise. It should be what works, as

President Obama said in his remarks yesterday. What works? I understand that there are political reasons to support a lot of programs, but your job, and what you said here, is to evaluate whether they actually work to stimulate the economy, to provide jobs and

investment. I think you will be judged on how you answer those

questions.

I went home last week, and I got an earful from my constituents.

They want me to ask you a whole bunch of questions, and I am

going to give you an opportunity to expand in a more fulsome way

on the matters relating to your income tax.

62

But another area that there seemed to be great interest in—and

I will just formulate a question for the record—relates to your work

in supporting Secretary Paulson, or working with him, on the decision relating to Citibank, both with respect to the acquisition of

Wachovia and the position you took on that when Wells Fargo

came into the picture, as well as the judgments that you and others

made regarding what Citibank needed and what it would need. I

mean, it turns out that Citibank is in worse shape than I think you

all anticipated at the time.

But in order to try to give you a fuller opportunity to respond to

some of the things that people are asking, let me state this predicate. One of the arguments for your being nominated is that you

have been there, you know the TARP program, you have been

working with these things, that you are very intelligent, that you

have good judgment, that you take your obligations seriously.

Given all of that, which I will stipulate to, it seems implausible

that, in effect, your only answer to the income tax issues that arose

is that you have no answer, that you do not know why the mistakes were made, but they were made.

Let me focus on a couple of these things and ask you if there is

some better answer than that. On the form that you filled out—

and by the way, could you tell us, how many times did you fill out

the tax allowance application? Was that once a year for 3 or 4

years?

Mr. GEITHNER. I cannot see that form, but I believe that form is

an annual form. But Senator, as I said initially in response to

Chairman Baucus’s question, I had forms I received on a quarterly

basis. You could say every payroll statement I got gave me an opportunity to realize this mistake earlier. The initial documentation

the IMF gave me as a new employee laid this out clearly. When

I went through that in providing those forms for the committee, it

was very clear that this was an avoidable mistake. It should have

been avoided.

As I said, if I had caught it earlier and not established that initial pattern in how I was meeting my obligations, I would not have

been in the position where, for those 2 years I was working there

in the tax years that applied, I had not met those obligations.

Senator KYL. Yes.

Mr. GEITHNER. You are right. I had many opportunities to see it,

but having missed it initially, I kept missing it.

Senator KYL. Thank you for that. That was not really the point

I was trying to make. What a lot of my constituents have said is,

obviously there is no defense that ‘‘I just missed it’’ when you are

audited by IRS. In fact, most people, even if they have a relatively

small obligation, pay a penalty on that.

That is another issue about why, in effect, somebody in your position received what could be considered preferential treatment

without having to be penalized. In fact, at least two or three of my

constituents said, would I support a safe harbor of, anything under

$35,000, you do not have to pay penalties? I said, well, I will be

happy to ask Mr. Geithner if he would support that. I rather doubt

it.

Mr. GEITHNER. Senator, could I respond just on the issue of penalties?

63

Senator KYL. Sure. Yes. Go ahead.

Mr. GEITHNER. When the IRS conducted its audit and told me

what I owed, their initial assessment included an assessment of

penalties. But at that point they explained to me—and I paid those

penalties initially, as you would expect me to do. But at that point

they explained to me that they had found this to be a—they used

the word, I think, ‘‘common’’ problem and they encouraged me to

apply for a waiver of my penalties, and they subsequently granted

that waiver. But that was a judgment they made. That just goes

to the point, I think, that they felt this was a common enough problem that it was not unusual in my circumstances.

Now, having said that, this was completely my responsibility. As

I said at the beginning, if I had not made that initial mistake in

how I thought I was complying with my obligations, I would have

corrected it far sooner.

Senator KYL. I am sure that when you sign documents you try

to be careful about what you sign, and that you at least read some

of what you are signing. This is what strikes me as somewhat implausible. When you are given a piece of paper to sign, you would

at least look at the title, I would presume. The title says ‘‘Tax Allowance Application for U.S. Federal/State Income Taxes and Social Security Tax.’’

So, I mean, if that is all you read, you know exactly what it is

that you are being asked to sign. Then there are about 9 or 10 lines

down at the bottom—9, I think—in which, twice, it is asserted

‘‘which I will pay.’’ The conclusion is, ‘‘and that I will pay the taxes

for which I have received tax allowance payments from the fund.’’

Do you remember ever reading that?

Mr. GEITHNER. Senator, as I said, when I went back and read

that when providing it to the committee, it was very clear, and I

should have read it more carefully. But again, I thought I was complying at that point, had no indication, no knowledge that I was

not. That is why I signed it. Having done it that first time, I systematically signed it going forward. I should have been much more

careful. I understand your concern with that. As I said, there was

ample opportunity in what the IMF provided me that I could have

caught this earlier.

Senator KYL. Now, my understanding is that you—I do not know

if you sat right down and wrote the checks, but soon after knowing

what the tax allowance was for the Federal and State taxes, you

sat down and wrote those checks. Is that correct? I think that is

what you told us.

Mr. GEITHNER. Yes. Every quarter, I wrote a check which I believe covered my tax liability as an American citizen. But, of

course, I was mistaken in that, and because in that initial year

when I did my full returns I did not catch that mistake, I continued it. As I said, although I think maybe you were out of the room

when I said this, because in subsequent years, when my returns

were prepared by an accountant, they did not catch it, I was left

with a mistaken belief that I had fully complied.

Senator KYL. On the reverse side of the application there are

three lines right in a row: Federal tax, State tax, SE, meaning selfemployment tax. What explanation do you have for writing the

64

check for Federal, writing the check for State, and somehow totally

ignoring the next line?

Mr. GEITHNER. Again, you are absolutely right, that every quarter I received a form with those lines on it. In fact, if I go back,

I think even every payroll statement lays it out that way. But

again, because that first year—remember, I always thought I was

an employee of the IMF. I was not self-employed by the IMF, I was

an employee of the IMF and my income was reported on a W–2.

So I did my taxes the way I had always done them when I had

W–2s and treated that as employee income. And because of that

and the way I did my returns, I did not catch it early enough. But

you are absolutely right, Senator, that I had ample opportunity on

each of the forms—and I provided these forms to the committee—

to catch this earlier.

Senator KYL. You knew that you were doing something by signing this, that you were applying for something. What did you think

you were doing when you first signed this?

Mr. GEITHNER. I thought I was certifying that I had met my obligations, which I thought I had.

Senator KYL. You did not even appreciate that you were applying

for what they euphemistically call a ‘‘gross-up’’ in your salary in

order to offset the tax liability?

Mr. GEITHNER. I think that form is designed to make sure that

the allowance they are providing is calculated appropriately. I

think that is what I was signing, again. But the critical thing, and

you are right to say this, is the language is very clear. If I had read

it more carefully at the time, I would have caught it, but I signed

it in the mistaken belief that I was complying with my obligations.

Senator KYL. Yes. The title is ‘‘Tax Allowance Application.’’

Were there any written communications between your tax preparer and you relative to the audit which concluded that you owed

additional taxes for 2003 and 2004?

Mr. GEITHNER. I do not know, Senator. But I believe I gave the

committee, and of course the presidential transition team, all the

documents relevant to that audit.

Senator KYL. Would you double-check and make sure?

Mr. GEITHNER. I will.

Senator KYL. There is a reason for my request, and I will follow

it up with a second question.

In discussing this with your auditor, it had to go something like

the following: so I owe some additional taxes? Yes. What for? Well,

you are supposed to pay the self-employment tax, which you did

not pay.

Now, I know if I got a letter of audit from the IRS, first of all,

my knees would be shaking and I would be scared to death, and

I would try to figure out what I did wrong if they concluded I did

something wrong. It would be a big deal in my life. I assume that

you took this seriously and it was a big deal in your life as well,

right?

Mr. GEITHNER. Absolutely.

Senator KYL. And when you found out what you had done wrong,

it is incomprehensible to me that you did not immediately realize

that you had done it wrong for the entire time that you had been

at the IMF.

65

Mr. GEITHNER. Senator, as I said before, I took the audit very seriously. I hired an accountant to go back and help me figure out

what I had done wrong and how to correct it. I paid what the IRS

said I owed.

Senator KYL. I Understand that. But I am asking about your

state of mind. When you first became aware of the fact that you

had an additional liability as a result of this audit and you found

out why you had that additional liability, it strains credulity to

think that it did not immediately occur to you that you had that

liability for the whole time that you were at IMF.

Mr. GEITHNER. Senator, as I said, if I had thought about it more

at the time I would have asked a lot more questions and I would

have handled it differently, and I regret not having done so.

Senator KYL. Yes.

Mr. GEITHNER. This was my mistake, and it is my responsibility.

Senator KYL. I appreciate that. And what I am really asking you

is whether you did think about it long enough to realize that you

had the liability for the 2 years previous as well.

Here is the question that at least a couple of constituents wanted

an answer to, and it is a perfectly legitimate answer if you answer

the question yes, but you have said otherwise: is it not a fact that

you immediately, or very quickly, realized that the same mistake

that was made in 2003 and 2004 was probably made for 2001 and

2002, but that the statute of limitations had run and you did not

have to pay the tax for those other 2 years?

The auditor said you did not have to pay anything more than for

2003 and 2004, and you accepted that. I think 99 percent of taxpayers would say, well, I am glad the statute of limitations ran out

and I did not have to go back and pay the other 2 years.

So I guess my question is, was your state of mind such that it

did not even occur to you that you were taking advantage of the

statute of limitations by not going back to 2001 and 2002 obligations, which were identical to the 2003 and 2004 obligations?

Mr. GEITHNER. Senator, as you said, an IRS audit is an extremely serious thing. I took it very seriously. I looked very carefully at what they said I owed. I paid what they said I owed. As

I said to you many times, when I think back on it now I should

have asked a lot more questions. I should have taken more care in

considering it at the time. But when the IRS conducts an audit and

they tell you that this settles your obligations, I paid what they

said I owed.

Senator KYL. Sure. And any taxpayer would. But my question to

you is a little different than that, and that is whether you thought

at the time, or at any time thereafter, even I did not do anything

different those first 2 years I probably would have owed that too,

except that the statute of limitations has run out so I do not have

to pay that. Did that thought never cross your mind until you became a candidate for nomination as Secretary of the Treasury?

Mr. GEITHNER. Senator, again, as I said, the IRS told me what

my obligations were, I met those obligations, and I did not think

about it again until I was going through the vetting process and

I disclosed all this material to those committees. They came and

asked me a bunch more questions about that, and it was in that

context that I decided that it was appropriate for me at that point

66

to go back and correct for that earlier error. And as I said to you

before, I regret having not done that sooner. I believe I should have

done it sooner, and if I had thought about it more maybe I would

have come to that judgment sooner.

Senator KYL. But you are saying that that is the first time that

it occurred to you that you also could have a liability for 2001 and

2002?

Mr. GEITHNER. That was the first time I had thought through

carefully the question about whether I should go back and cover

that. But again, I should have thought more carefully before. If I

think about it today, I would have handled that differently.

Senator KYL. If there is anything that you would like to supplement the record with in respect to our exchange just now, I would

appreciate it if you would do that as well when you provide these

written answers, including if you can determine whether there was

anything in writing between you and your accountant, or anything

else that would bear on the question of whether, in fact, you relied

upon the statute of limitations rather than just having failed to

think about it.

Again, I will say: it is legal to rely on the statute of limitations.

There is nothing wrong with relying on the statute of limitations.

I think what some people find implausible is that that is not what

you are saying you did. What you are saying is that you did not

think about it until it was brought to your attention in connection

with your nomination. Is that correct?

Mr. GEITHNER. I said, Senator, that I did not—looking back on

it, did not think about it carefully enough and did not ask enough

questions, and I regret not having done that.

Senator KYL. But that is different from the question I just asked

you. You are not now then saying that it did not occur to you, prior

to your nomination, that you might also have an obligation for

2001 and 2002, which is barred by the statute of limitations. Is

that correct?

Mr. GEITHNER. Senator, of course I was aware of the fact that

I had began work at the IMF in 2001 and 2002, but again, I did

what I thought was the right thing to do at that time, which is,

the IRS told me what Iowed——

Senator KYL. Yes. I am sorry to take extra time here, but would

you answer my question rather than dancing around it, please?

The question is whether it occurred to you before you were nominated or before you were approached to be nominated, that in point

of fact you did not have to go beyond 2003 and 2004 because of the

statute of limitations.

Mr. GEITHNER. Senator, I did not believe, when I settled that

audit and paid what they owed me, that I had obligations to go

back. I did not think about that until I was going through the vetting process and had disclosed at that point to the transition members reviewing my tax records the entire circumstances surrounding that episode.

I had not thought about it in the intervening years, had no occasion to think about it, and I might not have thought about it unless

I had gone through that process. But having thought about it then,

I did what I thought was right, which was to go back and correct

for that error.

67

Senator KYL. All right. That is a relatively clear answer, the answer being: no, you did not think about it until it became important in connection with your nomination.

Mr. GEITHNER. Well, what I said was that I did not think about

it until, having gone through that process and disclosed all this to

the transition team. I was forced to go back and go through it

again and think about it. Having done that, I did what I thought

was appropriate then.

Senator KYL. Yes. And that is the first time it occurred to you

that it may be that you avoided the liability because of the statute

of limitations.

Mr. GEITHNER. I did not believe, Senator, that I was avoiding my

liability. Senator, I have worked in public service all my life. My

first job in government was as an employee of the Treasury. I grew

up in government with a deep appreciation of the obligations that

come with that.

I would never put myself in the position where I was intentionally not meeting my obligations as an American taxpayer. In

this case I made a series of mistakes, but they were not intentional

mistakes. They are my responsibility. I take those things extremely

seriously. Again, I regret those mistakes, but they were not intentional. I have corrected them, but they are my responsibility.

Senator KYL. All right. Rather than me asking for any additional

testimony, review carefully what you said. If you think it needs to

be modified, because you are under oath here, in a way, please provide that for the record.

The CHAIRMAN. All right. Thank you, Senator.

I have a couple of questions from Senator Grassley which I would

like you to look at, and you can respond in writing.

[The questions appear in the appendix.]

The CHAIRMAN. As is our usual practice, Senators will have written questions for you and will submit those to you. I ask that all

Senators submit those questions by 5 p.m. this evening. I urge you,

Mr. Geithner, to respond to those questions before our mark-up of

your nomination tomorrow morning at 10 a.m.

Mr. GEITHNER. All right. Thank you, Senator.

The CHAIRMAN. The hearing is adjourned.

[Whereupon, at 1:42 p.m., the hearing was concluded.]

(69)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

201

202

203

204

205

206

207

208

209

210

211

212

213

214

215

216

217

218

219

220

221

222

223

224

225

226

227

228

229

230

231

232

233

234

235

236

237

238

239

240

241

242

243

244

245

246

247

248

(249)

COMMUNICATIONS

250

251

252

253

254

255

256

257

258

259

260

261

262

Æ