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THE IMPACT OF THE VOLCKER RULE 

ON JOB CREATORS, PART I 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED THIRTEENTH CONGRESS 

SECOND SESSION 

JANUARY 15, 2014 

Printed for the use of the Committee on Financial Services 

Serial No. 113–59 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

GARY G. MILLER, California, Vice Chairman 

SPENCER BACHUS, Alabama, Chairman 

Emeritus 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

ROBERT HURT, Virginia 

MICHAEL G. GRIMM, New York 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

MARLIN A. STUTZMAN, Indiana 

MICK MULVANEY, South Carolina 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

TOM COTTON, Arkansas 

KEITH J. ROTHFUS, Pennsylvania 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

TERRI A. SEWELL, Alabama 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

PATRICK MURPHY, Florida 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

SHANNON MCGAHN, Staff Director 

JAMES H. CLINGER, Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

January 15, 2014 .............................................................................................. 1 

Appendix: 

January 15, 2014 .............................................................................................. 65 

WITNESSES 

WEDNESDAY, JANUARY 15, 2014 

Bentsen, Hon. Kenneth E., Jr., President and Chief Executive Officer, the 

Securities Industry and Financial Markets Association (SIFMA) ................... 9 

Funk, Charles, President and Chief Executive Officer, MidWest One Financial 

Group, on behalf of the American Bankers Association (ABA) ........................ 11 

Ganz, Elliot, Executive Vice President and General Counsel, the Loan Syndications and Trading Association (LSTA) ......................................................... 14 

Johnson, Simon, Ronald Kurtz Professor of Entrepreneurship, MIT Sloan 

School of Management ......................................................................................... 12 

Robertson, David C., Partner, Treasury Strategies, Inc., on behalf of the 

U.S. Chamber of Commerce ................................................................................ 15 

APPENDIX 

Prepared statements: 

Bentsen, Hon. Kenneth E., Jr. ........................................................................ 66 

Funk, Charles ................................................................................................... 86 

Ganz, Elliot ....................................................................................................... 97 

Johnson, Simon ................................................................................................. 104 

Robertson, David C. .......................................................................................... 111 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Hensarling, Hon. Jeb: 

Written statement of the American Association of Bank Directors ............. 122 

Written statement of the Independent Community Bankers of America 

(ICBA) ............................................................................................................ 126 

Ellison, Hon. Keith: 

Washington Monthly article by Haley Sweetland Edwards entitled, ‘‘He 

Who Makes the Rules,’’ dated March/April 2013 ....................................... 127 

Foster, Hon. Bill: 

Written responses to questions submitted to Hon. Kenneth E. Bentsen, 

Jr. ................................................................................................................... 147 

Perlmutter, Hon. Ed: 

Bloomberg article by Kasia Klimasinska entitled, ‘‘U.S. Posts Record 

December Surplus on Fannie Mae Payments,’’ dated January 13, 2014 . 148 

Amendment to the Dodd-Frank Act offered by Representatives Miller 

of North Carolina and Perlmutter ............................................................... 150 

(1) 

THE IMPACT OF THE VOLCKER RULE 

ON JOB CREATORS, PART I 

Wednesday, January 15, 2014 

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

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Members present: Representatives Hensarling, Bachus, Royce, 

Capito, Garrett, Neugebauer, McHenry, Campbell, Pearce, Posey, 

Luetkemeyer, Huizenga, Duffy, Hurt, Grimm, Stivers, Fincher, 

Stutzman, Mulvaney, Hultgren, Ross, Pittenger, Wagner, Barr, 

Cotton, Rothfus; Waters, Maloney, Velazquez, Sherman, Meeks, 

Capuano, Lynch, Scott, Green, Moore, Ellison, Perlmutter, Himes, 

Carney, Sewell, Foster, Kildee, Murphy, Delaney, Sinema, Beatty, 

and Heck. 

Chairman HENSARLING. The committee will come to order. Without objection, the Chair is authorized to declare a recess of the 

committee at any time. 

The hearing today is entitled, ‘‘The Impact of the Volcker Rule 

on Job Creators, Part I.’’ I wish to alert all Members that we have 

already scheduled Part II of the hearing on this topic on February 

5th. It will be with regulators who promulgated the rule. 

I will now recognize myself for 5 minutes to give an opening 

statement. 

As a Nation, we just marked the 50th anniversary of the War on 

Poverty, tragically a failure on more than one level. To win, we 

need more jobs, which means we need less Volcker. 

In 2 weeks, the President will deliver his sixth State of the 

Union Address. Early in his term, he received from the Democratic 

Congress every single major policy initiative he asked for: the stimulus; Obamacare; and the Dodd-Frank Act from which the Volcker 

Rule arises. He got it all. The results of this are an unprecedented 

spending spree and a regulatory tsunami, the effects of which are 

now apparent to all. We have become a part-time worker, unemployment check, food stamp, insolvent Nation with few opportunities and even fewer hopes for the truly needy amongst us. 

The President’s policies have exacerbated the very income inequality that he now decries. Under President Obama, 6.7 million 

more Americans have fallen into poverty. America is suffering 

under the highest poverty rate in a generation, median household 

income has fallen each year that he has been in office, and a record 

47 million Americans receive food stamps. 

2 

With a record like this when it comes to the War on Poverty, 

some Americans may just wonder which side the President is on. 

And if history proves a reliable guide, during the State of the 

Union Address the President will offer more of the same: more food 

stamps; more unemployment checks; and more minimum wages, all 

neatly wrapped in the politics of division, redistribution, and envy. 

That is not right, that is not fair, and it is not what hard-working, 

struggling families in the Fifth District of Texas are looking for. 

Joseph of Mabank, Texas, told me, ‘‘I am a disabled veteran and 

have been without work for over a year. All I want is to have a 

good-paying job and let the rest come as it happens.’’ 

Claudia from Mineola, in my district, was laid off for 9 months. 

She finally found a job that paid her 25 percent less and added 60 

miles to her daily commute. She said, ‘‘I don’t have the American 

taxpayers bailing me out or lending me money that I can’t pay 

back.’’ 

It is for Joseph and Claudia and all of the unemployed and underemployed Americans that we have to fight, and you cannot win 

a war on poverty as long as you are conducting a war on jobs. 

And that brings us to the subject of today’s hearing, the 900-plus 

page compound, complex, confounding, confusing, convoluted 

Volcker Rule. Like most of the other 400-plus rules of Dodd-Frank, 

the Volcker Rule is aimed at Wall Street but it hits Main Street, 

and regrettably the poor and downtrodden amongst us become collateral damage. 

First, Volcker is a solution in search of a problem. It is important 

to note that of the roughly 450 financial institutions which failed 

during or as a result of the crisis, not a single one failed because 

of proprietary trading. In fact, financial institutions which varied 

their revenue stream were better able to weather the storm, and 

thus keep lending, and thus support jobs. Instead, these bank failures have come largely from concentration in lending in the 

subprime and sovereign debt markets. And who steered these financial institutions into these markets? Sadly, but not surprisingly, it was Washington, and they are still at it. 

At one of our earlier hearings on the Volcker Rule, a Democratic 

witness claimed the burdens placed on our economy by Volcker 

were no big deal because ‘‘it only applies to just a few banks.’’ If 

thousands upon thousands of negative comments the regulators received in response to their proposal from community and regional 

banks, and businesses both big and small, do not lay that claim to 

rest, I believe today’s hearing will. 

The statement that Volcker only applies to just a few banks 

ranks right up there with, ‘‘If you like your health care plan, you 

can keep it.’’ For if it were true that the 900-plus page regulation 

applies to just a few banks, why did the Public Utility Commission 

in my native Texas warn that my constituents could experience 

higher and more volatile electricity prices because of Volcker? That 

is higher electricity prices for the poor. And why will the Volcker 

regulation, as one study points out, take $800 billion out of the productive economy and sideline it? That is the equivalent of taking 

more than $6,900 out of every American household’s paycheck. 

As a Nation, we can do better. We must do better. The path out 

of poverty is not food stamps or unemployment checks, it is not the 

3 

culture of victimization or the politics of envy, and it is certainly 

not the Volcker Rule, which will harm many of our capital markets, 

equity joint ventures (EJVs), collateralized debt obligations (CDOs), 

venture capital, and especially the CLO market. 

The path out of poverty is well-known. It has everything to do 

with strong, faith-based institutions; strong families; strong communities of support; strong schools designed for students, not 

teachers’ unions; and small businesses and entrepreneurship with 

access to affordable and available capital so there are boundless job 

opportunities for all, especially the poor, and as chairman of this 

committee, this is what we will work toward. 

The Chair now recognizes the ranking member, Ms. Waters, for 

5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. Normally, I 

would thank you for holding a hearing, but it looks as if this hearing that you have called is more focused on an attack on the President and the Administration than really dealing with the Volcker 

Rule, so I am going to try and direct my comments to the Volcker 

Rule. 

It has been more than 5 years since the beginning of the financial crisis which resulted in the largest destruction of wealth in a 

generation. And while many observers still disagree about its central cause, we know that proprietary trading played a significant 

role. Such trading has indeed produced tremendous profits for some 

of our largest financial firms, but it also contributed to losses during the height of the crisis. In fact, one academic study estimated 

that by mid-April of 2008, banks had lost roughly $230 billion on 

certain proprietary holdings, which regulators and other interested 

parties had believed were simply inventories of assets held to facilitate client trading. 

In the wake of these devastating losses, taxpayers stepped in to 

staunch the bleeding, and Congress took action to ensure that such 

an emergency would never happen again, enacting comprehensive 

legislation to address the many causes of the crisis, from the bad 

loans at the heart of the collapse, to the exotic securitizations that 

drove the demand for predatory mortgages, to the opaque derivatives markets that created tremendous interconnectedness and risk 

in our financial system. 

A key part of Wall Street reform is the Volcker Rule. If properly 

implemented, the rule will provide that banks insured by taxpayer 

dollars can no longer engage in proprietary trading or investments 

in risky vehicles like hedge funds. The concept of the rule is simple: 

Loan-making, deposit-taking banks should not be engaged in risky 

speculative activity on the backs of the American taxpayers. 

Many observers of our financial system agree with this. Standard 

& Poor’s has pointed out that, ‘‘the implementation of the Volcker 

Rule could have favorable implications for the credit profiles of 

some of the largest U.S. banks such as reducing trading portfolio 

risk.’’ John Reed, the former Citigroup chairman, notes that, ‘‘A 

strong Volcker Rule is one of the most important provisions to prevent too-big-to-fail financial institutions, stop conflicts of interest, 

and support credit in our economy.’’ And even Chairman Hensarling has stated to The Wall Street Journal that, ‘‘We have to do 

a better job ring-fencing, fire-walling, whatever metaphor you want 

4 

to use, between an inspired depository institution and a noninsured 

investment bank.’’ 

In the face of this statutory directive to implement Volcker, our 

regulators have undertaken their tremendous task of wading 

through 18,000 comments and have engaged with stakeholders 

during dozens upon dozens of meetings. We see the European 

Union potentially moving forward with a similar effort, and the 

United Kingdom has passed legislation implementing a similar 

measure known as the Vickers Report. All of these actions should 

be applauded. 

At the same time, I understand that regulators are working diligently to address some issues related to the rule that have come 

up in the last month, including the issue related to collateralized 

debt obligations backed by trust-preferred securities. Most of the 

Democratic members of this committee urge regulators to provide 

an exemption for banks that would be consistent with their treatment under the Wall Street Reform Act. I appreciate the regulators’ responsiveness on this point and believe their recent interim 

rule has provided important relief to community banks. 

Mr. Chairman, the Volcker Rule will ensure Federal dollars are 

no longer used to protect losses from risky trading. Doing so will 

protect the U.S. economy from suffering another debilitating financial crisis, and will ensure taxpayers are never again asked to rescue failed financial firms. And now that we have the rule’s framework in place, I look forward to conducting real oversight and ensuring that our regulators are faithfully enforcing this provision 

which will be central to the success of the Wall Street Reform Act. 

I thank you, and I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from West Virginia, the Chair of our Financial Institutions Subcommittee, Mrs. Capito, for 2 minutes. 

Mrs. CAPITO. Thank you. I would like to thank the chairman for 

yielding me time and for having this hearing. 

Two years ago, Mr. Garrett and I had a joint hearing talking 

about the challenges of the implementation of the Volcker Rule, so 

this is our third hearing. And just over a month ago, five agencies 

charged with writing this rule released their final version. 

Throughout the discussion, the focus has been to limit certain activities at large complex financial institutions. However, within 

hours of the release of the final rule, it was apparent that financial 

institutions and small businesses on Main Street would be significantly affected by the rule. The ranking member talked about this 

issue. 

Three weeks ago, we learned that financial institutions which 

held CDOs backed by trust-preferred securities could be required 

to take an immediate writedown on these investments in order to 

comply with accounting principles. These potential losses facing institutions could have been very significant, and especially punitive 

for smaller institutions. It is important to note when the rule was 

written and published in December, or before the final rule was 

published, this issue was not even a part of the rule to where they 

could have had any comment or any public weigh-in on this rule 

so we could have averted this. 

5 

To me, this just shows you that the uncertainty surrounding the 

rollout of the rule is a product of placing artificial deadlines on the 

agencies for writing these rules. There clearly was 

miscommunication between the agencies, which brought about 

these unintended consequences. In fact, the treatment of CDOs 

backed by trust-preferreds was not even mentioned, as I said, and 

the end result sent hundreds of banks scrambling with a very tight 

deadline. 

Members of both the House and the Senate, on both sides of the 

aisle, have expressed concern in the last few weeks, and I would 

like to thank the agencies for releasing an interim rule last night 

that provides clarity for how financial institutions will treat their 

investments and collateralize debts backed by trust preferred securities (TruPS). Their interim final rule is similar to legislation 

which I authored with Chairman Hensarling last week. 

I look forward to hearing the comments, and I want to thank the 

witnesses for coming today. Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, the ranking member of our Capital Markets Subcommittee, Mrs. Maloney, for 2 minutes. 

Mrs. MALONEY. This is an important hearing on the Volcker 

Rule, which is named after former Federal Reserve Chair Paul 

Volcker, a great New Yorker. Chairman Volcker initially proposed 

this ban on proprietary trading because he believes that banks 

which receive Federal deposit insurance should be serving their 

customers and not making risky bets for their own accounts. This 

was a sensible proposal because customer deposits would be at risk 

if the bets went wrong. 

The GAO report on proprietary trading calls proprietary trading 

a leading cause of the financial crisis, which, according to their report, took over $9 trillion of assets from our country and affected 

$12 trillion of economic growth that would have happened without 

the crisis. 

The road that this rule took from an idea in Chairman Volcker’s 

head to the final rule was long and difficult. It involved 5 different 

Federal agencies plus an oversight council, over 18,000 comment 

letters, multiple hearings in Congress, and now a 71-page final rule 

with 892 pages of explanatory notes. And there is still a great deal 

of work that needs to be done. Bank examiners will have to work 

with the banks to develop the detailed compliance and data reporting programs for which the rule calls. 

So as we press ahead with the implementation phase, I would 

urge the regulators to stay committed to a data-driven approach. 

If the data shows that there are unintended consequences, or if liquidity is seriously impaired, then the regulators need to be willing 

to make tweaks to the rule to get the desired outcome. At the same 

time, if the data shows that banks are evading the Volcker Rule, 

then the regulators need to be equally willing to exercise their authority to crack down. The Volcker Rule is the law of the land now, 

so it is important that we get it right. Thank you. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New Jersey, the Chair of our Capital Markets Subcommittee, 

Mr. Garrett, for 2 minutes. 

Mr. GARRETT. Thank you, Mr. Chairman. 

6 

Now, 31⁄2 years after its enactment, the regulatory tsunami of 

Dodd-Frank continues unabated. We should all know by now that 

Dodd-Frank solved few, if any, of the problems that caused the financial crisis. For example, instead of actually solving too-big-tofail, Dodd-Frank actually codified it. Instead of taking the time to 

solve the problems that caused the financial crisis such as the oversubsidization of the U.S. housing market by the Federal Government, the failed prudential regulation, and failed monetary policy 

by the Federal Reserve, Congress instead created a solution in 

search of a problem, and exhibit A is the Volcker Rule. 

As critics have pointed out, the Volcker Rule has the potential 

to significantly crimp the legitimate market-making activities to 

the detriment of the U.S. financial markets and disrupt the corporate bond markets, reduce liquidity, drive up borrowing costs, 

and harm investors. 

Unfortunately, it is difficult to know exactly how detrimental this 

rule may be, in part because it lacks clear rules of the road in favor 

of regulatory discretion, and in part because the regulators failed 

to support it with an adequate economic analysis. And this is to 

say nothing of how the rule will be coherently implemented and enforced by five separate regulators, each with different mandates 

and authorities. 

By the way, this is just one rule. We must also consider a number of other rules that haven’t been finalized yet, for example, the 

supplemental leverage rule, the liquidity coverage rule, the riskbased capital rule, the counterparty credit limits rule, the net stable funding rule, the credit risk retention rule, the rules for foreign 

banking organizations, the rules on security-financing transactions, 

the pay ratio rule, the derivative cross-border rules, the SEF rule, 

the clearing rules, the position limit rules, the OTC market rules— 

I could go on, but I don’t have the time. 

So what is the cumulative effect of all these rules together on the 

U.S. economy and American businesses? Mr. Chairman, similar to 

the Volcker Rule, no one really knows, especially the regulators, all 

of whom continue to thumb their nose at the law and continue to 

not perform the appropriate economic analysis. 

I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from New York, the ranking member of our Financial Institutions 

Subcommittee, Mr. Meeks, for 11⁄2 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

As we sit here today to discuss an important milestone in our efforts to reform our banking institutions and financial system, the 

adoption of final rules to ban banking institutions from engaging 

in proprietary trading and investments in private equity funds and 

other covered funds is a central piece of our new financial order 

that we passed and enacted almost 4 years ago. 

Just yesterday, the Subcommittee on Financial Institutions held 

a hearing on the QM rules which became effective just last week, 

another major piece of our new financial order. I am very pleased 

to see that we have finally made progress through the effective implementation of these two major financial reforms, which both in 

their own way ensure that the clients’, depositors’ or mortgagors’ 

interests are preserved and protected. 

7 

The Volcker Rule will finally settle a long-known problem in our 

banking system. Clients seeking investment advice or assistance 

from their bankers will know for sure that their bank’s own proprietary trading will no longer be able to conflict with their own interests. We have observed too many cases here and abroad where aggressive traders chasing the next big bonus abused this privileged 

relationship, passing their own toxic investment to other clients 

and benefiting from it at the same time. Moreover, we have seen 

too many big banks suffer volatile revenue, and even some go 

under because of their engagement in risky trading activities which 

can lead to massive losses and insolvency. 

I join with the ranking member to make sure the regulators help 

with CDOs, and I also ask the regulators to look to clear up some 

of the rules with reference to CLOs. I think those things would 

help us as we move forward, and I very much look forward to hearing the testimony of the witnesses. 

Chairman HENSARLING. The Chair now recognizes the chairman 

emeritus of the committee, the gentleman from Alabama, Mr. 

Bachus, for 1 minute. 

Mr. BACHUS. Thank you, Mr. Chairman. 

Mr. Chairman, Mrs. Maloney said that the Volcker Rule is the 

law of the land. It actually is not the law of the land. It takes effect 

on April Fool’s Day. And what is the law of the land? We really 

don’t know. 

We started with a 37-word short paragraph in an 846-page bill, 

Dodd-Frank, which said you can make markets, but you can’t do 

proprietary trading. That sounds pretty easy, doesn’t it? Now we 

have over 900 pages of trying to distinguish between the two. 

Often, they are indistinguishable. But I think Federal Reserve Governor Daniel Tarullo told us what it is. He said a specific trade 

may either be permissible or impermissible, depending on the context and the circumstances under which the trade was made. That 

sounds like what Madam Pelosi said about Obamacare, ‘‘We will 

have to pass the bill to find out what is in it.’’ And we see how that 

has worked out. The Weekly Standard has this train wreck on it 

which is Obamacare. That was actually in July. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Ohio for 1 minute. 

Mrs. BEATTY. Thank you, Mr. Chairman, and Ranking Member 

Waters. 

We have certainly heard a lot about the history and opinionated 

views on that short section of Dodd-Frank, Section 6119. So, let’s 

fast-forward to where we are now on the rule: 18,000 comments, 

a final rule, and nearly 3 years later to where we are today. 

Though the regulators wisely developed a lengthy timetable for implementation, we are currently on the verge of strengthening our 

banking system, and improving our financial markets, and are one 

step closer to eliminating the idea that there are certain institutions that are too-big-to-fail. 

With respect to the TruPS, the CDO issue, the joint agency fix 

issued last night seems to me to strike the right balance between 

exempting only community banks versus exempting all banks. The 

regulators have done so by creatively constructing the exemption 

8 

not on the basis of the size of the bank holding the TruPS, but instead on the basis of the size of the banks issuing the TruPS. 

Thank you, and I yield back. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Colorado, Mr. Perlmutter, for 30 seconds. 

Mr. PERLMUTTER. Thanks, Mr. Chairman. 

In Dodd-Frank we tried to, by an amendment, return to the separation of commercial banks from investment banks and insurance 

companies. That amendment was defeated. An objection and prohibition against proprietary trading by banks was then passed by 

this House, was modified, and became what is now the Volcker 

Rule to try to rein in the Wild West approach that caused our economy to crash in 2008. 

So I take the words of Mr. Garrett and the chairman to heart 

that that is what they believe, but without something like the 

Volcker Rule and Dodd-Frank, this economy would be in the tank 

for years and years to come. 

With that, I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

Today, we welcome five witnesses. First, our former colleague, 

Ken Bentsen, Jr., is president and chief executive officer of the Securities Industry and Financial Markets Association. Mr. Bentsen 

served in this House as a Democratic Member from my native 

Texas from 1995 to 2003. We welcome him back today. 

Charles Funk is the president and chief executive officer of MidWest One Bank in Iowa City, Iowa. He previously served as president, chief investment officer, and senior vice president of a regional Midwestern bank. He currently serves on the American 

Bankers Association’s Board of Directors. 

Professor Simon Johnson is the Ronald Kurtz Professor of Entrepreneurship at MIT’s Sloan School of Management. He is also a 

senior fellow at the Peterson Institute for International Economics. 

Professor Johnson’s opinions on a variety of financial subjects regularly appear in mainstream news and Internet publications. He 

earned his Ph.D. in economics from MIT. 

Elliot Ganz is the executive vice president and general counsel 

of the Loan Syndications and Trading Association, where he is responsible for managing LSTA’s legal and regulatory affairs and its 

market practice and standardization initiatives. He holds a law degree from NYU. 

Last but not least, David Robertson is a partner and director of 

Treasury Strategies, a consulting firm that provides advice to corporate and other professional treasurers. As the leader of financial 

services practices, Mr. Robertson works with global and regional 

banks, payment and liquidity providers, and regulators. 

Each of you gentleman will be recognized for 5 minutes to give 

an oral presentation of your testimony. Hopefully, each of you is familiar with our lighting system of green, yellow, and red. And 

please remember to pull the microphones very, very close to your 

mouth when you speak. And without objection, each of your written 

statements will be made a part of the record. 

Mr. Bentsen, you are now recognized for 5 minutes. 

9 

STATEMENT OF THE HONORABLE KENNETH E. BENTSEN, JR., 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, THE SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 

(SIFMA) 

Mr. BENTSEN. Thank you. Chairman Hensarling, Ranking Member Waters, and members of the committee, thank you for providing me the opportunity to testify. 

SIFMA represents a broad range of financial services firms active 

in the capital markets. Those who have grappled with the Volcker 

Rule at any level deeper than that of a media sound bite know that 

balancing the statutory mandate to both prohibit and permit certain activities and investments in a way that does not harm the 

capital markets and the companies, governments, and investors 

who rely on those markets is a very serious business and horribly 

complex. It is no wonder that the proposed rule posed over 1,300 

questions and that the final rule runs 71 pages with nearly 900 

pages of comments. 

SIFMA and our members still believe the Volcker Rule is a policy 

response in search of a problem, and we remind the committee that 

no other country has adopted a corollary to it. It is, however, the 

law of the land, and our members are committed to complying fully 

with the rule. 

As the rule comes into full force, it will affect many markets and 

products. Our preliminary assessment shows that beyond the impact that will result from the significant new compliance costs, the 

rule will also affect venture capital, equity joint ventures and acquisition vehicles, municipal financing via tender option bonds, 

asset-backed commercial paper, commercial loans and lending via 

CLOs and CDOs and other securitizations, and trading of foreign 

sovereign debts. 

I would note that the relief issued yesterday by the agencies is 

certainly welcome relief for some, but it has not resolved the very 

serious issues regarding collateralized loan obligations that, left 

unresolved, will affect the cost of credit to Main Street businesses 

which benefit from that market. 

Our members are also beginning to focus on their conformance 

plans and the intense compliance programs that the final regulation requires. But this work is not the end of the story. Just as the 

financial sector will have to develop and implement conformance 

plans, compliance programs, internal controls, independent testing 

and auditing, training and records and retention, so too will regulators have more work to do to explain what certain provisions 

mean and how they are intended to work. 

Most importantly, just as five regulators ultimately coordinated 

to write one rule, they must now coordinate and be consistent in 

their interpretation, examination, supervision, and enforcement. A 

lack of consistency will not only create unnecessary and costly confusion; it will undermine the rule itself. 

The lack of an explicit mechanism or process for ongoing regulatory coordination and resolution of differences has emerged as 

our member firms’ greatest initial concern. Without it, there is a 

significant risk that agencies will have differing interpretations of 

similar provisions or activities covered by the rule, resulting in inconsistencies in their examination, supervision, and enforcement. 

10 

This will undoubtedly raise additional compliance burdens that will 

cause firms to needlessly restrict activities which are otherwise explicitly allowed, the net effect of which being the restriction of capital committed to certain markets and the resultant reduction in liquidity. 

What happens if the SEC and its examiners takes one point of 

view for the broker-dealer while the OCC takes another point of 

view for the national bank of the same affiliated institution? Add 

the complexity of the CFTC reviewing the activities of the national 

bank for its registered swap dealer. What if the FDIC takes one 

view for nonmember banks and the Federal Reserve another for 

member banks? 

This concern is significant as we move deeper into firms planning 

for conformance, implementation, and development of compliance 

regimes. For example, a number of the largest institutions must 

begin tracking certain metrics of their activities by July of this 

year. Our members have concerns as to how each agency will interpret the metrics described in the rule, and how and to which agency they will be reporting. Differences in approach across agencies 

would make the metrics reporting almost impossible, especially 

given the fact that metrics reporting will have to be programmed 

into the computer systems. Inconsistency in approach could also 

undermine the transparency and comparability of the information 

from institution to institution, thus making the information far less 

valuable. 

Regrettably, the final regulations are completely silent on regulatory coordination. The final Volcker Rule does not address how 

interpretations in guidance will be meted out, how examinations 

will be coordinated in form and result, how the agencies will work 

together on supervision in any respect, or how various cross-border 

compliance and coordination issues will be addressed. 

We believe that the immediate goal should be for the agencies to 

articulate a transparent and consistent roadmap for coordination 

on both near-time interpretive guidance and the long-term examination and supervisory framework, including realistic goals on 

quantitative reporting which prioritize utility of data. Further, we 

believe that it is incumbent upon the FSOC to exercise its authority to coordinate supervisory activities with respect to the rule as 

Congress provided for. Additionally, we strongly believe that there 

is an oversight role for Congress to play in ensuring such coordination and the consistent application of the rule, beginning with this 

hearing today. 

In conclusion, I wish to stress that there remain many outstanding questions as to how the Volcker Rule will be implemented 

and enforced. There is a strong likelihood that significant issues 

may arise in the coming weeks and months that are simply not on 

our radar screen today. The Volcker Rule is that complex. Failure 

to adequately address these issues when they arise could result in 

more compliance burdens that would undermine the activities beneficial to the economy. We look forward to working with Congress, 

our regulators and other market participants to ensure that the implementation of the Volcker Rule is not disruptive to the capital 

markets and the job creators they support. 

With that, I look forward to answering your questions. 

11 

[The prepared statement of Mr. Bentsen can be found on page 66 

of the appendix.] 

Chairman HENSARLING. Mr. Funk, you are now recognized for 5 

minutes. 

STATEMENT OF CHARLES FUNK, PRESIDENT AND CHIEF EXECUTIVE OFFICER, MIDWEST ONE FINANCIAL GROUP, ON 

BEHALF OF THE AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. FUNK. Chairman Hensarling, Ranking Member Waters, my 

name is Charlie Funk, and I am president and CEO of MidWest 

One Bank and MidWest One Financial Group, a $1.7 billion community bank headquartered in Iowa City, Iowa. I appreciate the 

opportunity to be here on behalf of the ABA to discuss the unintended consequences of the recently finalized Volcker Rule. 

Let me begin by thanking you, Chairman Hensarling, Ranking 

Member Waters, Subcommittee Chairwoman Capito, and many 

other members of this committee for the recent engagement with 

the regulators on the unnecessary and potentially significant losses 

on collateralized debt obligations secured primarily by trust-preferred securities. 

I would also like to thank Chairman Hensarling and Chairwoman Capito for introducing H.R. 3819, which ABA strongly supported, to provide relief to banks like mine which would suffer considerable losses under the agency’s rule. Your many voices on the 

issue and sense of urgency to address unintended negative consequences helped move the process forward to find a satisfactory 

solution. This solution will help many community banks like mine 

and, more importantly, the customers and communities we serve. 

ABA also applauds the regulatory agencies for moving quickly to 

find a resolution to the problem. This is a very good example of 

how the agencies should act when problems in a rulemaking arise. 

With such a complicated rulemaking as the implementation of the 

Volcker Rule, which totaled nearly 1,000 pages, inevitably there 

will be problems that were not anticipated. If the regulators had 

not acted, the immediate cost to my bank would have been over $1 

million. For the industry it would have been at least $600 million, 

with the impact on communities many multiples of that. 

Although this specific issue now appears to be resolved, it is indicative of a much broader problem. Just as the Dodd-Frank Act 

is the law of the land, so is the Volcker Rule. While we have concerns with the aspects of the rule, our focus now is to ensure that 

it be applied in a way consistent with its original intention to address the systemic risk, not impose costs on banks like mine unrelated to systemic issues. 

We are very concerned that the agency’s rule is so broad that it 

has consequences far beyond what Congress intended and will hurt 

legitimate investments that not only are safe and sound choices for 

banks, but that support the credit availability and financial service 

needs of our customers. As a result of the agency’s broad definition, 

many investments made by banks of all sizes in CDOs, CLOs, 

collateralized mortgage obligations, and venture capital investments will no longer be allowed. These pooled products are essential to ensuring credit reaches where it is needed most, as well as 

helping banks manage and mitigate risk by diversifying their expoVerDate Nov 24 2008 10:56 Sep 17, 2014 Jkt 088521 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 K:\DOCS\88521.TXT TERRI
12 

sure to borrowers. These are traditional banking assets, not the 

trading instruments that Volcker was designed to capture. 

There is a real irony in the fact that a rule designed to prevent 

banks from taking losses on short-term assets will instead force 

banks to sell long-term investments early, often resulting in a market loss. The loss to banks will be the gain of the less regulated 

nonbank sector which was complicit in the problems that led to the 

financial crisis as they will have an opportunity to buy assets with 

recovering values at discount prices. 

Finally, the rule also results in a compliance burden for community banks despite agency statements to the contrary. It is possible 

that community banks will need to put in place compliance programs to ensure they do not inadvertently violate the Volcker Rule. 

These compliance programs are costly and time-consuming, taking 

away valuable resources that could otherwise be used to serve local 

communities. 

In conclusion, the Volcker Rule should not impair traditional 

banking services that allow banks to meet the needs of their customers, nor impose unnecessary costs on any bank, particularly regional and community banks where no argument of systemic risk 

can be justified. Congress should be vigilant in ensuring that the 

rules are focused on the original intent to reduce systemic risk and 

not used to hinder the traditional business of banking, which is 

providing credit to customers. 

Thank you for allowing me to appear before you today, and I 

would be happy to answer questions during that time. 

[The prepared statement of Mr. Funk can be found on page 86 

of the appendix.] 

Chairman HENSARLING. Professor Johnson, you are now recognized for 5 minutes. 

STATEMENT OF SIMON JOHNSON, RONALD KURTZ PROFESSOR OF ENTREPRENEURSHIP, MIT SLOAN SCHOOL OF 

MANAGEMENT 

Mr. JOHNSON. Thank you, Mr. Chairman. 

I completely agree with what Mr. Funk said, which is that the 

original intent of the Volcker Rule is to reduce systemic risk. I am 

sure you all remember vividly the fall of 2008 when very large 

banks and quasi-banks such as Citigroup, Morgan Stanley, Merrill 

Lynch, and others suffered very large losses because they made big 

proprietary bets. They engaged in excessive risk-taking. They 

didn’t always call it proprietary trading, it is true. That perhaps reflected their misunderstanding of the risks in which they were engaged. And in September 2008, the Bush Administration came to 

Congress asking for a bailout, not, I think, particularly a bailout 

targeted at community banks, but a bailout targeted at some of the 

largest firms on Wall Street. 

Chairman Paul Volcker, I believe, correctly articulated that we 

should limit the amount of risk-taking that can be taken by what 

are now bank holding companies, very large bank holding companies. I would stress the largest six or the largest eight is the focus 

of attention here. They have FDIC guarantees on their deposits. 

They also have some degree of subsidy because they are perceived 

by many in the credit markets to be too-big-to-fail. They should 

13 

therefore, as a matter of general prudence and a matter of systemic 

risk reduction, be limited in the kind of proprietary bets they can 

take, and that is exactly what the Volcker Rule was designed to do. 

It has gone through a very long, involved process with an enormous 

amount of industry input, and there is now a good chance that the 

rule as proposed and as amended, including yesterday, will serve 

that purpose. 

I think, Mr. Chairman, you are exactly right to focus on the job 

creators, on what has happened to jobs in the United States. I am 

the former chief economist of the International Monetary Fund, 

among other things. I worked on financial crises around the world 

for more than 25 years. Unfortunately, the experience we have had 

in this country over the past half decade is very typical of what we 

have seen in lots of different countries and situations. When the financial system blows up, and when the biggest parts of any financial system get it wrong in terms of understanding the risks, or in 

terms of managing their positions, sometimes we call that proprietary trading, and sometimes it has different names. It is the same 

problem almost everywhere. 

And the damage, you are absolutely right, Mr. Chairman, is on 

the companies, it is on the community banks, it is on the people 

who try to create jobs. That is why we have had this deep, longlasting recession from which it is hard to recover. This is a typical 

experience of a finance-induced deep recession, unfortunately. 

I think when we look at the implementation of Dodd-Frank, we 

should be careful with regard to unintended consequences. I think 

the regulators came under appropriate pressure from both Republicans and Democrats because of the TruPS CDO issue. They responded in a way that I believe to be appropriate. I hope that you 

will continue to watch on these same details. 

However, I also recall that 2 years ago I appeared in a hearing 

before this committee along with a number of other witnesses, 

many of whom predicted dire consequences if the Volcker Rule 

were to come anywhere near to becoming a reality. 

Financial markets are forward-looking. As you know, we have 

the rule. Some details no doubt remain to be fully clarified. But we 

have the rule, and we have financial market reaction. Have we 

seen the drying up of sovereign bond liquidity? Have we seen big 

increases in spreads in the way that were predicted? I don’t believe 

so. 

If we do see consequences, unintended consequences, of course 

they should be addressed, and I think it is admirable that you are 

holding this hearing and you are holding these other hearings. 

That is exactly what we need, to look at the consequences, intended 

and unintended. 

In that context, I hope you also think again about business development corporations, which reportedly are being considered as a 

vehicle through which some of our largest bank holding companies—at least one of them—could find their way again into highly 

speculative proprietary betting type of business. So that is not how 

they are currently used, but that is how they could be used. Hopefully, we will have some discussion also about CLOs in that context 

as well. 

14 

To conclude, the Volcker Rule has a good chance of reducing systemic risk. It requires appropriate oversight from Congress. I am 

encouraged that you are providing that oversight. It requires the 

regulators to avoid and prevent the development of new loopholes. 

Thank you very much. 

[The prepared statement of Professor Johnson can be found on 

page 104 of the appendix.] 

Chairman HENSARLING. Mr. Ganz, you are now recognized for 5 

minutes. 

STATEMENT OF ELLIOT GANZ, EXECUTIVE VICE PRESIDENT 

AND GENERAL COUNSEL, THE LOAN SYNDICATIONS AND 

TRADING ASSOCIATION (LSTA) 

Mr. GANZ. Thank you. Good morning, Chairman Hensarling, 

Ranking Member Waters, and members of the committee. My name 

is Elliot Ganz, and I am the general counsel of the The Loan Syndications and Trading Association, or LSTA. The LSTA is an association which represents the interests of the many participants in 

the $3 trillion commercial loan market. We thank you for the opportunity to testify at this timely hearing. 

My testimony will focus on how the Volcker Rule’s definition of 

ownership interest could negatively impact credit availability for 

American companies by profoundly disrupting the market for openmarket collateralized loan obligations, or CLOs. This disruption 

could lead to a significant reduction in the amount of credit available to some of the most dynamic job-creating companies in America and would result in material and arbitrary losses to American 

banks which hold almost $70 billion of safe, well-performing CLO 

debt securities. 

The best place to start is by describing what a CLO actually is. 

A CLO is a securitization fund managed by an independent SECregistered investment adviser which issues securities and then uses 

that money to provide loan financing to American companies. CLOs 

finance approximately $300 billion of these loans, representing almost half of all loans made by nonbanks in the United States. 

These loans are made to some of the most dynamic companies in 

America, across all States and all industries, including broadband, 

satellite, cellular, health and hospitals, energy, airlines, automotive 

and retail. Who are these companies? They include such iconic 

American companies as Sears, Aramark, SuperValue Stores, Rite 

Aid, Good Year Tire, and Delta Airlines, who together employ hundreds of thousands of Americans. Hundreds of smaller companies 

also rely on CLO financing, including Regal Cinemas, Armstrong 

World Industries, ABC Supply, TempurPedic, and Quikrete ®. Just 

these five companies alone employ almost 50,000 people. 

Many of these smaller companies have no access to capital markets other than through the loan market. In all, we estimate that 

companies which access the CLO market for financing employ more 

than 5 million people. 

CLOs have performed remarkably well over the years, including 

during and after the great financial crisis. Since 1996, cumulative 

realized losses to CLO debt securities has been less than 1 percent. 

Attracted by the safety and soundness of CLOs, their historical 

performance, and their reasonable risk-adjusted return, a wide 

15 

range of U.S. banks currently invest almost $70 billion in the highest-rated debt securities. While a significant amount of CLO debt 

securities are held by large banks, they are also held by at least 

30 other banks, including 21 with assets less than $25 billion, 

many of which are community banks. 

To be clear, banks are not buying CLO equity. These are the 

highest-rated debt securities of CLOs. They have none of the characteristics of equity and are simply not ownership interests. Yet, 

the Volcker Rule artificially and arbitrarily converts CLO debt securities into the equivalent of equity through an expansive definition of ownership interests, thereby making them prohibited to 

banks. 

Because the ability to restructure $70 billion of these securities 

is extremely challenging and the prospect highly doubtful, banks 

will be forced to divest, putting downward pressure on prices for 

CLO debt, thereby triggering further selling pressures, leading to 

a cascade of falling prices, despite the fact that these remain very 

high-performing, safe assets. 

The agencies yesterday provided limited relief to holders of CDOs and trusts. This was a $600 million accounting loss recognition 

problem. In contrast, if the price of CLO debt securities were to 

drop by only 10 percent, banks holding them would face potential 

capital losses of up to $7 billion, losses that would be attributable 

solely to the imposition of the final Volcker Rule. This furthers no 

regulatory objectives. 

The good news is that there is an easy regulatory fix to this problem. It requires no exemption or carve-out, simply guidance from 

the agencies that the term ‘‘ownership’’ as defined in the final rule 

does not cover CLO debt securities that contain only a contingent 

right to remove or replace a manager for cause, but contain none 

of the other indicia of ownership listed in the definition. We believe 

that adoption by the agencies of this simple proposal would allay 

the concerns of the CLO market and we urge the involved agencies 

to issue this guidance in the coming days so that CLOs can continue to provide financing to American companies. 

Thank you, and I look forward to your questions. 

[The prepared statement of Mr. Ganz can be found on page 97 

of the appendix.] 

Chairman HENSARLING. Mr. Robertson, you are now recognized 

for 5 minutes. 

STATEMENT OF DAVID C. ROBERTSON, PARTNER, TREASURY 

STRATEGIES, INC., ON BEHALF OF THE U.S. CHAMBER OF 

COMMERCE 

Mr. ROBERTSON. Thank you, Chairman Hensarling, Ranking 

Member Waters, and members of the committee. I am appearing 

on behalf of the U.S. Chamber of Commerce. I participated in the 

CFTC roundtable on the Volcker Rule, and my colleague, Anthony 

Carfang, has testified before both House and Senate subcommittees 

on the subject as well. I am here to represent the perspectives and 

viewpoints of corporate treasurers. 

In these forums, we have raised concerns regarding unintended 

consequences the Volcker Rule could cause. These include impaired 

market liquidity and reduced access to credit and capital, higher 

16 

costs and less certainty for borrowers, potential competitive disadvantages for U.S. businesses and financial institutions, increased 

compliance costs, higher bank fees, a shifting of risk out of banks 

into other less well-regulated sectors of economy, and capital flows 

into offshore markets. The true effects of this mammoth regulation 

will not be known until the conformance period ends; however, 

some problems which impact both businesses and individuals are 

coming into focus. 

It is important to recognize that U.S. businesses benefit from the 

most efficient capital markets in the world. Companies doing business in the United States operate with roughly $2 trillion of cash 

reserves, and that represents only 11 percent of U.S. GDP. In contrast, corporate cash in the eurozone is 20 percent of GDP, and in 

the U.K., the ratio is even higher at 32 percent. 

Reduced access to capital or certainty of access will require companies to hold more cash on their balance sheets, slowing economic 

growth. And how will companies generate more cash? Through layoffs, reducing dividend payouts that retirees depend upon, and by 

forestalling capital expenditures which fuel growth. 

Mr. Ganz did an excellent job of noting the jeopardy that the 

Volcker Rule places around collateralized loan obligations, but this 

may be only the first wave of capital formation problems that could 

arise. 

It is also noted that harmonization of the rule is needed. The 

Volcker Rule was written by five separate agencies, each with different areas of responsibility and different tools, histories, and 

processes for regulation and enforcement. Capital investment by 

business requires a stable and predictable regulatory environment. 

For the Volcker Rule to work and support economic growth, it is 

critical that its interpretation and enforcement be harmonized 

amongst all of the regulators to provide clear rules of the road. 

The real impacts of the Volcker Rule will not be known until the 

end of the conformance period winds down; however, we need to be 

particularly vigilant to its impact because currently we are under 

a very unusual macroeconomic scenario characterized by quantitative easing, which has pumped excess liquidity into the economy. We fear that this quantitative easing may actually mask the 

effects of the Volcker Rule for a period of time, but the start of the 

wind-down of QE is under way, and the potential has already 

boosted long-term rates. 

The Volcker Rule will not be implemented in a vacuum. We face 

a time of unprecedented regulatory change. Corporate treasurers 

have to contend with looming money market regulations that could 

imperil 40 percent of the commercial paper market, Basel III lending requirements, Basel III disincentives for commercial lines of 

credit, and the implementation of derivatives regulations that could 

reduce the ability of businesses to mitigate risk and ensure affordable access to raw materials. All of these dynamics are converging 

in one place, on the desktop of the corporate treasurer, and their 

combined impact upon a business’ ability to raise capital and appropriately take on and manage risk has not been fully vetted or 

thought through. 

Lastly, I would like to draw attention to some rulemaking process and procedural flaws that raise concerns about the level of rigor 

17 

that was conducted in crafting the regulations. The process to create the regulations did not permit sufficient dialogue. There was a 

comment period, but the nature of the regulation was so far 

changed that a reproposal would have been well in order. It also 

did not entail the required cost-benefit analysis or an assessment 

by the SEC on its impact on capital formation. 

Accordingly, we would respectfully request that Congress review 

the procedures for rule writing, especially with joint agency 

rulemakings, to ensure fair procedures for input and comment and 

hold agencies accountable in the consideration of the impacts and 

the costs on the economy and businesses. 

I appreciate the opportunity to appear before you today on behalf 

of the U.S. Chamber of Commerce. The Chamber supports the passage of H.R. 3819 and respectfully requests that the bill be amended to include an exemption for CLOs. 

Thank you. I look forward to answering your questions. 

[The prepared statement of Mr. Robertson can be found on page 

111 of the appendix.] 

Chairman HENSARLING. The Chair now recognizes himself for 5 

minutes for questions. 

Mr. Robertson, I think I just heard you in your testimony say 

that because of an aspect of the Volcker Rule, companies may have 

to build up to $1 trillion of additional cash reserves. Did I understand that correctly? 

Mr. ROBERTSON. That is correct. 

Chairman HENSARLING. I have to tell you, even by congressional 

standards, that is a fairly staggering number. 

I think I also heard you say that from your experience, companies may have to downsize and lay off workers. You were here for 

my opening statement. I am thinking about two constituents I 

have, Claudia and Joseph, who are either unemployed or underemployed. So elaborate how you come to the conclusion that these 

companies may have to downsize and lay off workers because of the 

Volcker Rule. 

Mr. ROBERTSON. Thank you. 

One of the things that is a characteristic of our financial market 

is very robust capital markets, very strong access to commercial 

credit. So as a result, companies are able to invest, they are able 

to support their working capital needs through just-in-time financing. This allows them to run their balance sheets very efficiently 

and direct their cash toward working capital and investment. 

The minute that companies begin to doubt the ability of the market to provide financing for them or to manage financial risk, they 

are going to need to insure themselves against that, and that is 

going to require them to hold more cash, because they won’t know 

if they can get credit; and secondarily it is going to require them 

to hold more cash to hedge financial risks if they don’t have access 

to derivatives and other hedging tools that are used for their activities. Basically, the comparison is between the United States with 

its robust markets, and Europe and the U.K., which have less robust markets. 

Chairman HENSARLING. Mr. Ganz, you spent a fair amount of 

time in your testimony speaking of the CLO market. You also have 

a fairly staggering number—I notice, on page 2 of your testimony: 

18 

‘‘In all we estimate that companies that access the CLO market for 

financing employ more than 5 million people.’’ How do you derive 

that statistic? 

Mr. GANZ. We did a survey of all of the loans that were held in 

CLOs, and then we tracked that against—we used a service to 

track that against how many employees each of those companies 

employed. 

Chairman HENSARLING. You also say in your testimony, ‘‘Often 

these growing job-creating companies have no other access to the 

capital markets other than through the loan market,’’ specifically 

speaking of the CLO market. How did you come by that conclusion? 

Mr. GANZ. The companies that borrow through CLOs are called 

non-investment-grade companies. That means they have no ratings, so they can’t access the investment grade markets. They can’t 

access the regular bond market. Some of them can’t even access the 

high yield market, particularly the smaller ones. So the only place 

they can get money is from the leveraged loan market. That is an 

institutional market largely, and CLOs provide 50 percent of the financing in that market. So it is a very big deal. And, again, I think 

it is very important to note most companies in America are noninvestment grade. 

Chairman HENSARLING. Like many other Members of Congress, 

again, I have constituents who are unemployed, I have constituents 

who are underemployed, and my guess is if I did a survey, most 

have never heard of the Volcker Rule, most have never heard of the 

collateralized loan obligation market. What should I tell these constituents about why they should care about the Volcker Rule? 

Mr. GANZ. In this context, the expansion of one paragraph in one 

small section of the Volcker Rule artificially converts debt securities into equities and has a profound impact on the banks that hold 

these. Those banks are going to have to divest their securities. So 

besides the impact that it has on the CLO market itself, the banks 

that hold those securities are going to take an immediate capital 

hit. If they take an immediate capital hit, they are going to have 

less money to lend into those communities. 

Three banks filed letters to the agencies, three smaller banks 

with assets in the $20- to $35 billion range, and they addressed 

that specifically. They have somewhere between $300 million in 

CLO notes up to about $1 billion, and if they have to take a $30 

million hit or more, that is going to be less money available to lend 

into their communities. 

Chairman HENSARLING. Thank you. My time has expired. 

The Chair now recognizes the ranking member for 5 minutes. 

Ms. WATERS. Thank you very much. 

To Mr. Funk, and I think Mr. Johnson, and maybe others who 

recognize that both sides of the aisle cooperated and worked to 

make sure that the regulators quickly addressed the TruPS CDO 

issue, and just as we were able to do that, I think that we are able 

to work with regulators on some of the other issues that are being 

identified, such as the CLO issue. And I think that we should be 

focused more on what we can do to implement Volcker, because it 

is the law, but at the same time deal with any unintended consequences. And since we have already demonstrated that we are 

willing to do that, and the regulators are showing that they are 

19 

willing to respond, let us focus on what we can do to make sure 

that we deal with some of the other issues with which you are concerned. 

For example, CLO. Let us take the CLO issue, Mr. Robertson. 

You have identified this as a real concern. Have you thought about 

ways in which the regulators can address these concerns, and are 

you willing to work with us to address these concerns? 

Mr. ROBERTSON. Yes, absolutely. And I think actually Mr. Ganz 

outlined clarifying that CLOs were not meant to be captured under 

the rule that was trying to catch hedge funds. So clarifying that 

these are debt securities, not equity securities, they are not deemed 

to have an ownership interest in equity. 

Ms. WATERS. Are you willing to work with us in the way we just 

demonstrated we can work on unintended consequences? 

Mr. ROBERTSON. Oh, absolutely. 

Ms. WATERS. Mr. Johnson, a number of comments have been 

made about compliance, and, of course, Mr. Funk, we are concerned 

about any costs that are caused by compliance, and we want to 

make sure that we do everything that we possibly can to assist you 

with compliance without costing a lot of money to the bank. How 

can we do this, Mr. Johnson? Do you have any thoughts on that? 

Mr. JOHNSON. Congresswoman, I understand that the regulators 

are addressing this. It is a live issue. I am not sure it is completely 

resolved. But incorporating a relatively minor compliance requirement within the existing reporting and supervision for community 

banks, I think that is—I am not saying it is trivial, but that is not 

adding a big additional burden. I think that makes sense. 

This rule is not targeted at the community banks. There are 

some spillovers that you are identifying in this discussion. But I 

think you can incorporate it within the existing supervisory framework. 

If I could just add a point on the CLOs, Mr. Ganz has a very 

straightforward proposal, which is an FAQ issued by the regulators; not even a new rule or clarification, just a frequently asked 

question and the answer to such a question. And I think he puts 

his finger in his written testimony, which I have only looked at 

quickly, on the key issue, which is the banks can make loans, that 

is what banks do, but they can’t take an equity interest in certain 

investments to the degree they used to. So that is what—in his 

written testimony Mr. Ganz is differentiating that quite carefully. 

And I think, again, these are sensible ideas that you can absolutely 

work on with the regulators. 

Ms. WATERS. Mr. Funk, in terms of compliance, do you believe 

that we can work with you to reduce costs to the community banks 

for compliance efforts? 

Mr. FUNK. Absolutely. 

And I will say, just to give you an example with regard to the 

Volcker Rule, I represent a community bank and I didn’t pay much 

attention to the Volcker Rule until about December 10th. It was 

then when I found out that we were going to have to take a million-dollar charge. And that is why we are so appreciative for both 

sides of the aisle taking a stand on this, because we had to have 

this resolved. We have left our books open. Normally, we close our 

books on the 3rd or 4th day of the month. We had to leave them 

20 

open, but were finally able to close them today because of the announcement from the regulators. So, thank you so much for your 

help on that. 

Ms. WATERS. You are so welcome. 

Mr. Bentsen, you have worked in this House, and you have seen 

efforts for cooperation from both sides of the aisle, and you have 

seen times when we have not cooperated. And so, given what you 

are looking at now, based on the work that both sides of the aisle 

did recently, don’t you think that we can resolve some of these concerns, these unintended consequences, without going at destroying 

the Volcker Rule? 

Mr. BENTSEN. Congresswoman, absolutely. I think what happened with the trust preferreds was very positive, but I think it is 

indicative of problems in the underlying rule itself. It is very complex. The CLO issue has arisen. There are going to be others that 

are coming going to come up. The coordination issue is huge, and 

Congress absolutely has a role to play. 

The law belongs to Congress. It is the regulator’s job to implement it, but Congress has a role to oversee the law and make sure 

it is done appropriately. 

Chairman HENSARLING. The time of the gentlelady— 

Ms. WATERS. I yield back. 

Chairman HENSARLING. —has expired. 

The Chair now recognizes the gentleman from New Jersey, the 

Chair of our Capital Markets Subcommittee, Mr. Garrett, for 5 

minutes. 

Mr. GARRETT. And, again, I thank the chairman. 

I will start down at this end of the panel. 

Congressman Bentsen, good morning. As you may know, SEC 

Commissioner Mike Piwowar has stated that, ‘‘rulemaking agencies 

failed both at the proposing and adopting stages to prepare an economic or other regulatory analysis of the Volcker Rule. As a result, 

we do not know what the rule’s economic impact will be or whether 

other alternatives might have accomplished the goals of the rulemaking at a lower cost with less disruption of the capital markets.’’ 

So my first question is, do you agree with his statement that 

they failed to abide by the law, by the Administrative Procedures 

Act (APA), and to do a robust economic analysis and find out if 

there are other alternatives out there? 

Mr. BENTSEN. Congressman, I won’t opine with respect to the 

APA, but I will say that—first of all, we called for a robust economic analysis in our comment letter. We thought that was entirely appropriate. As you know— 

Mr. GARRETT. You did? 

Mr. BENTSEN. —the APA applies— 

Mr. GARRETT. You did call for that? 

Mr. BENTSEN. Yes. 

As you know, the APA applies differently to different agencies. 

And, in particular, the prudential regulators do not have the same 

burden that the independent agencies—and certainly they don’t 

have the same burden that other Executive Branch agencies have. 

So, that is actually a role that Congress should probably take a 

look at going forward. 

21 

Mr. GARRETT. So, regardless of what the APA may say, it is your 

opinion, I guess is what you are saying, that an economic analysis, 

and a robust one, should have been done in this situation. 

Mr. BENTSEN. We believe so, yes. 

Mr. GARRETT. Okay. Great. Thanks. 

Running down to Professor Johnson, I was reading through your 

testimony last night and watching the Senate hearing of your testimony last week. In both cases, you repeatedly stated, as you did 

this morning, that the impacts of the rules are overstated. Specifically, you state, ‘‘Financial markets are typically forward-looking— 

you just said that this morning—so the expected future effects of 

any such rule are likely to be felt in advance of full implementation, yet none of these negative consequences has actually transpired.’’ And you just said that this morning. 

But if I go down to the end of the table to Mr. Robertson, you 

said in your testimony, in written testimony and what you said just 

now, ‘‘Because of the 18-month conformance period, it is not possible to understand the full impact of the Volcker Rule, particularly 

on Main Street businesses, until the rule is completely implemented and operational at the financial institutions.’’ 

And you also said—and I thought it was an astute point—both 

in your written testimony and right now, that the QE, quantitative 

easing, and the extraordinary impact that has had on the bond 

market is also significant. 

So I will bring it back to Professor Johnson. I am sure you are 

familiar, being an academic, with the portfolio balance channel theory—and this is something that Ben Bernanke has talked about in 

the past—which basically says, as you do QE, what does that do? 

It affects the price—it affects the price going up; the yields are 

going down. And what does that do to the marketplace? People 

have to go into the marketplace to try to find similarly situated 

risk that they could have had but for the fact of QE. And that essentially means that bond investors would have to go further out 

on the credit-risk curve to buy corporate bonds. 

That is what the effect has been in the corporate bond market 

because of QE, right? And I see Mr. Robertson nodding to that. 

So aren’t you missing the mark when you say that we can look 

to current activity in the marketplace if we fail to consider what 

the effect is of QE today, and if we fail to consider the fact that 

tapering will occur in the future and the combined effect of those 

on the bond market? 

Mr. JOHNSON. No, Congressman, I don’t— 

Mr. GARRETT. Why not? 

Mr. JOHNSON. —believe I am missing the point. If you look at the 

testimony that was provided at the previous hearing before this 

committee—for example— 

Mr. GARRETT. I did. 

Mr. JOHNSON. —I testified before the CFTC hearing, and one of 

Mr. Robertson’s colleagues was there. There was plenty of talk 

about immediate consequences, for example, on sovereign yields in 

Europe and on risk spreads. And it is not clear that QE would affect all the risk spreads in the way that you are indicating. 

Now, it is true we have a particular set of monetary policies right 

now in this country. It is also true the Federal Reserve has exerted 

22 

a lot of control over dimensions of the credit conditions, and they 

may well continue to want to do that going forward. I agree that 

those things are interacting. 

But my point is, in terms of the predicted consequences, in terms 

of the concrete, actual things that have changed, not Mr. Robertson’s conjectures about what might change in the future, what 

have we actually seen change in a negative way? And that is my 

point, Congressman. 

Mr. GARRETT. That is my point, that you are looking at what is 

happening today, but you cannot push that to the future because 

in the future we will not have the QE. The QE, under this theory 

and under—I think most people agree that it has had an effect on 

price and yield and has pushed the market out into this area. So 

you can’t say that what is going to occur today is going to be in 

the future. 

My time is almost up, and, gosh, I was going to give Mr. Robertson the last word, but I see the chairman is quick with the gavel, 

as always. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, Ms. Velazquez, for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Mr. Robertson, you mentioned that U.S. companies will need to raise an additional $1 trillion to comply with the Volcker Rule, yet 

hedging for ordinary business operations is exempt. I just would 

like to know how you calculated this figure? 

Mr. ROBERTSON. First of all, I wouldn’t claim that they would have to raise $1 trillion. What I was trying to distinguish was the 

level of cash that U.S. businesses hold on their balance sheets to 

support the economy and contrast that with the U.K. and the European Union, which have less robust capital markets. 

What we have done is we have compared the cash holdings published by the Federal Reserve to GDP to those published by the 

Bank of England, and the European Central Bank, and noted the 

lower level of cash proportional to the economy that U.S. corporations hold. 

And so our concern is, we know from our experience in working 

with corporate treasurers that one of the reasons why they don’t 

have to hold that much cash is the efficiency of the system, the reliability of access to capital. We are not stating it will be $1 trillion, 

but our concern is that anything which reduces that efficiency 

could force U.S. businesses to hold more cash. 

Ms. VELAZQUEZ. Professor Johnson, would you like to comment? 

Mr. JOHNSON. It is a fascinating calculation Mr. Robertson is 

presenting, but I don’t see that it has any basis in fact whatsoever, 

in the sense of what is the impact on the efficiency of the financial 

market, of the Volcker Rule. I am sorry that Mr. Garrett has left 

the room, but this is exactly the point. 

If there were a disruption to the financial markets, if it were becoming harder to access credit, if corporate treasurers were fearing 

their access to short-term financing, those would be legitimate concerns, but we would see them now. The markets would already be 

disrupted. 

And that is what previous fellow witnesses have testified to; they 

said the effects are coming now, right away, immediately, because 

23 

the financial markets are forward-looking. Where do we see this 

disruption concretely for corporate treasurers? 

Ms. VELAZQUEZ. Professor Johnson, is there any Volcker Rule 

comparison in Europe at this point? 

Mr. JOHNSON. There is plenty of discussion in Europe about finding ways to separate commercial banking, the utility-type commercial banking, from relatively risk-taking investment banking. 

The very latest moves—but I would caution that the Europeans 

go back and forth on this—is to move towards more of a Volckertype approach, limits on proprietary trading, away from the socalled ring-fencing or the separation of activities. 

But the European policy is not completely settled. And I would 

certainly not wait for the Europeans to sort out their banking system, which is an enormous mess, supported by massive government 

subsidies. You really do not want to go to what the Europeans 

have. 

Ms. VELAZQUEZ. So, Professor, there is no rule in Europe at this 

point that is costing $1 trillion to Europeans? 

Mr. JOHNSON. There isn’t a—they are not holding more cash because of some impact of an equivalent to the Volcker Rule, that is 

correct. 

Ms. VELAZQUEZ. Professor, Dodd-Frank provided the financial industry with a number of exemptions to the Volcker Rule, understanding that most trading was for legitimate business purposes 

such as helping small businesses hedge risk. And yet, some industry participants continue to argue that the Volcker Rule will negatively impact access to capital for small businesses. 

Have you seen any report, any evidence, any statistics, any report to that matter? 

Mr. JOHNSON. No, Congresswoman, I haven’t. I have not seen 

credible independent analysis to that point. 

I think it is a very important point, but remember, the Volcker 

Rule is targeted at the largest six or eight bank holding companies. 

We have big, liquid, deep markets. Mr. Robertson is absolutely correct on that. Those markets have not been disrupted by what we 

have seen so far. And given the trajectory which is implied by the 

latest rule clarification, including yesterday’s, I don’t think we are 

going to see that disruption. 

Ms. VELAZQUEZ. Thank you. 

Mr. Funk, there has been a lot of discussion recently about the 

treatment of TruPS CDOs under the Volcker Rule. However, the 

fact remains that these are risky assets which could undermine the 

safety and security of the small pool of banks that hold them. 

If not 2 years, as drafted, what is a reasonable amount of time 

to divest these assets, given the demonstrated poor performance of 

these TruPS CDOs? 

Mr. FUNK. These were debt securities when we bought them, not 

equity securities. And when we bought them, they were investment-grade, they were not what we would consider in our bank to 

be a risky asset. 

We have written them down. We bought $9.7 million. We wrote 

them down to about $1.7 million. We, in 2008, charged off $8 million, so our holding value is $1.7 million. 

24 

I think the key thing, Congresswoman, is on this particular 

point, if we hold these for another 10 or 12 years, we are almost 

certain we will recover more than our book value. We have plenty 

of capital in our bank, we are able to hold them, but the rule as 

it was proposed would have required us to take a hit right now— 

Ms. VELAZQUEZ. So what is a reasonable time? 

Chairman HENSARLING. The time— 

Ms. VELAZQUEZ. That is my question. 

Chairman HENSARLING. —of the gentlelady has expired. 

The Chair now recognizes the gentlelady from West Virginia, the 

Chair of our Financial Institutions Subcommittee, Mrs. Capito, for 

5 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I would like to follow up, Mr. Funk, where you left off. You have 

already written down—let’s start, when you first purchased these 

securities, they were not considered risky investments and were 

really—the reason they took such a dive was as a part of the recession, the financial crisis. Is that correct? 

Mr. FUNK. That is correct. 

And what I will tell you is in our bank in Iowa City, when we 

bought these in 2005 or 2006, there was a lot of discussion. We decided to limit it to $10 million. We wound up with $9.7 million. As 

I recall, they were all rated either A or A1 by Moody’s, and they 

were investment-grade. They survived bank examinations, and 

they were not considered a risky asset. But, like many things, they 

were a casualty of the recession. 

Mrs. CAPITO. Right. And you are still receiving revenue from 

this. This was part of the reason that you purchased these, correct? 

Mr. FUNK. They are not—we will receive revenue. We are not 

right now. But the way the pools work is that as the banks continue to pay, eventually you get revenue. Our particular class that 

we hold is not getting cash right now. 

Mrs. CAPITO. It is not a revenue— 

Mr. FUNK. But we are very confident that in the next 10, 12, 15 

years, we will recover all of our book value and then some, perhaps. 

Mrs. CAPITO. Okay. 

I would like to ask a question on two things, quickly. I have been 

working with Mr. Meeks on some legislation to say, if we are going 

to move new regulations forward, understanding that regulations 

have to move with the time and the instruments and what is moving on, I get that, but what are we going to do about the old, existing, antiquated, no-longer-useful-but-still-must-be-complied-with 

regulations? 

And we are working on a scenario where we would say to the 

regulators, before you move forward with something that is complicated, like the Volcker Rule, you have to look at where the existing regulations are right now, and are they useful, are they compatible, or would it be better to move in the new while you are taking out the old? 

Does anybody have a sense that kind of exercise took place during the enactment of this rule? 

I will start with you, Mr. Funk, then anybody else. 

25 

Mr. FUNK. That I don’t know. What I do know, and I think it has 

been said elsewhere, and is something that really concerns me, is 

that our particular bank is subject to the regulation of three entities: the SEC; the Federal Reserve for our holding company; and 

the FDIC for our bank. And the way the Volcker Rule is written, 

they can all enforce the Volcker Rule differently, and I think that 

creates a lot of confusion. So we do need more uniformity. But I 

certainly agree with the intent of your question. 

Mrs. CAPITO. Mr. Bentsen? 

Mr. BENTSEN. Congresswoman, first of all, I think that is an outstanding idea, and I don’t think it is limited to the Volcker Rule 

or limited to— 

Mrs. CAPITO. Right. 

Mr. BENTSEN. —the potential regulators. I would argue you could 

add FINRA to that and what is going on with the consolidated 

audit trail and the Order Audit Trail System (OATS) that exists 

today. 

So we don’t want to build redundant regulation or redundant 

systems. And we have seen—and I think this is an example in 

Volcker, dealing with the trust preferred issue, where you basically 

had legal definitions conflicting with the accounting rules, where 

apparently no one was talking to one another to figure out what 

was going on. And we are going to find more of that. This is too 

big of a rule that we won’t. 

Mrs. CAPITO. Right. 

Mr. BENTSEN. And I think we will see that in the capital standards, as well, where we are laying Basel III on top of Basel 2.5 on 

top of Basel II. And, again, we know that there will be conflicts in 

there. 

Mrs. CAPITO. Yes, Professor? 

Mr. JOHNSON. Congresswoman, I think you are making a very 

good point. But part of the point of the comment procedures and 

process was exactly to let the industry speak to any kind of issue, 

including problematic legacy issues. 

Now, the TruPS CDOs didn’t come up, and that was unfortunate— 

Mrs. CAPITO. It wasn’t in the rule. 

Mr. JOHNSON. No, I understand. And as I said, that was unfortunate, and has been addressed in, I would suggest, record time by 

the regulators, because you all agreed this was a problem. 

I think that the right way to do this is exactly to have a long 

period of time—we have had 31⁄2 years of comments and back-andforth with the industry. If you can find additional legacy, leftover 

problematic issues, absolutely, you should go after them with Mr. 

Meeks— 

Mrs. CAPITO. Right. 

Mr. JOHNSON. —but there has been a very detailed process already. 

Mrs. CAPITO. Thank you. 

And I guess my question concerns the next step. Does anybody 

on the panel have a sense that it actually occurred? 

Mr. Robertson? 

Mr. ROBERTSON. I don’t have a sense it occurred. I know there 

was a mandate for the regulators to coordinate. But just given the 

26 

scope of the effort and the amount of time that took place, as you 

point out, there was no re-proposal. And I think there needs to be 

much closer working around these regulations with the various 

constituencies to surface these issues. It is great to address unintended consequences after the fact, but, at that point, there is a lot 

of disruption already created. 

Mrs. CAPITO. Right. 

The other issue—I will just make a comment, because I don’t 

have time for another question, really—is what you are all talking 

about, the complexity of what we are dealing with here. And I 

think that is not just a burden in terms of trying to figure it out, 

but it has a financial burden that is attached to it, too, that does 

translate to Main Street. 

And so I say good luck to all of us for figuring out the complexity 

of this rule and seeing the ramifications as we move through this. 

Thank you so much. 

Chairman HENSARLING. The Chair now recognizes the gentlelady 

from New York, the ranking member of our Capital Markets Subcommittee, Mrs. Maloney, for 5 minutes. 

Mrs. MALONEY. I want to thank the chairman for recognizing me, 

and thank the ranking member, and thank all of you for your important testimony and for being here today. 

We all know that the problem of the crisis, the financial crisis, 

was not caused by community banks or regional banks or credit 

unions. And many of us on this panel are working very hard to 

shield them from unnecessary regulation. 

But we know from many books and from the GAO report that I 

have with me that proprietary trading was a cause, and, in fact, 

in this report they call it a leading cause, of the financial crisis. We 

know it was the CDOs; we know that it was certain bad lending 

practices. And this Volcker Rule takes care of this problem. So we 

need to put it behind us and go forward. 

Now, if there is something that needs to be adjusted, such as the 

trust-preferred CDOs—which, according to testimony, the rule that 

came out from the regulators, the adjustment, takes care of the 

challenge. Is that correct? 

Mr. FUNK. As far as I know, it takes care of the vast, vast, vast 

majority of banks in America. 

Mrs. MALONEY. Then, if there are unforeseen consequences, let’s 

take care of them, but let’s go forward. The Volcker Rule is here. 

It is going to stay. It is now part of the fabric of our country. 

But one area that was raised in your comment letter, Mr. Bentsen, you said that the proposed rule—and this may be an adjustment that needs to take place. Your organization raised serious 

concerns with the definition of a banking entity, which you argued 

was far too broad. Does the final rule address your organization’s 

concerns on this issue? 

And if it doesn’t, how would you propose fixing this problem? Is 

it possible that the final rule will sweep in purely nonfinancial operating companies because of this broad definition? 

That was in your comment letter. 

Mr. BENTSEN. Sure. 

As we have been going through it, it does appear that the regulators did narrow the definition of ‘‘banking entity’’ and they narVerDate Nov 24 2008 10:56 Sep 17, 2014 Jkt 088521 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\88521.TXT TERRI
27 

rowed the definition of ‘‘covered funds.’’ However, I will give you 

one example that is causing a great deal of concern. 

In ‘‘covered funds,’’ registered investment companies, what we 

would think of as mutual funds, retail mutual funds were explicitly 

exempted where they had not been in the proposed rule. However, 

they are not exempted under the definition of ‘‘banking entity.’’ So, 

in effect, you already have a conflict now where, on the one hand, 

mutual funds are not treated as covered funds under the funds section, but they are captured by way of being defined as a banking 

entity if they are affiliated with a bank, which many mutual funds 

are. 

So, again— 

Mrs. MALONEY. It just seems like it could be an issue which 

could be handled by the regulators. And if a nonfinancial subsidiary doesn’t do any proprietary trading or investing, why should 

anyone have to worry about it? 

Mr. BENTSEN. I think what it is indicative of—a couple of points 

of what it is indicative of, is the broadness and complexity of this 

rule and the fact that today it is trust preferreds, tomorrow it is 

CLOs, the next day it is 1940 Act registered funds, that we are 

going to find these things going through. And it is going to take 

a lot of work, hence the reason for Congress to continue to play a 

very active role in this process. 

The second point—and I want to respond to Professor Johnson— 

is that regardless of what everyone thinks the intent was or wasn’t, 

this rule, by practice and by the way it is written, has an extremely 

broad impact. It doesn’t just affect the top five largest institutions; 

it affects any banking institution that has—anybody who is affiliated with a banking institution. So it has a very broad impact. And 

the rule is written as such to indicate that it has that broad reach. 

Mrs. MALONEY. If an affiliate isn’t doing proprietary trading, 

then it wouldn’t affect them. 

Mr. BENTSEN. But, Congresswoman, with all due respect— 

Mrs. MALONEY. I would say that this panel—certainly many of 

my colleagues and I, if there is any adjustment that needs to take 

place, we will be a strong voice in helping that adjustment and certainly shielding community banks and regional banks and credit 

unions that did not cause the crisis. 

I have one other question. Mr. Volcker, in his written statements—and I would like to put his statement in the record. I 

thought it was excellent. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mrs. MALONEY. He said that the rule will change—and I am 

quoting from his statement—the tone at the top, because it requires CEOs to certify that they have adequate compliance procedures in place. 

And I would like to ask anyone to comment. Do you think that— 

okay, Mr. Ganz, would you comment on if you think that will be— 

and Mr. Robertson? 

Mr. Ganz and Mr. Robertson and Mr. Johnson, you all had your 

hands up. 

Chairman HENSARLING. Very quickly, because the time of the 

gentlelady has expired. 

28 

Mr. ROBERTSON. I think that is a basic fiduciary duty of any 

bank CEO, to fully comply with all the regulations and also to appropriately manage risk. 

Chairman HENSARLING. The time of the gentlelady has— 

Mr. BACHUS. Mr. Bentsen was also trying to respond to her question about whether community banks will be affected. 

Chairman HENSARLING. I understand that, but the time of the 

gentlelady has expired. 

And the chairman emeritus happens to be next in the queue, so 

the Chair now recognizes the gentleman from Alabama, our chairman emeritus, for 5 minutes. 

Mr. BACHUS. I will answer like Mr. Bentsen would say. The community banks are affected. 

Mr. BENTSEN. Congressman, I would just say, and in response to 

Congresswoman Maloney, the point is that all of these banks are 

captured, and it is not a question of whether they are doing something that is prohibited. It is the fact that they are subject to the 

compliance requirement on what they are allowed to do as Congress intended in the statute, but they have to go through all of 

these hoops of this new compliance regime to do what Congress 

said they could do under the statute. 

Mr. BACHUS. Thank you. 

And could I get that put back on my time? That was in response 

to her question. But it needed to be said. 

Chairman HENSARLING. I am afraid not. 

Mr. BACHUS. Thank you. 

In Mrs. Maloney’s opening statement, she again talked about 

how proprietary trading was central to the financial crisis. Professor Johnson, I think you sort of agreed with that. She quoted a 

GAO report that she says claims that it was central, but if you 

read it, it says it wasn’t central, it says it wasn’t a cause of the 

financial crisis. So, I am going to introduce that. 

This whole Volcker Rule is a response to the financial crisis, because people keep saying that it was caused by proprietary trading. 

Professor Johnson, you talked about mortgage-backed securities, 

and you said that was proprietary trading. But, it is not. The regulators encouraged the banks to hold mortgage-backed securities 

long-term. That wasn’t proprietary trading. 

None of the five banks—really, the banks didn’t fail because of 

proprietary trading. Even Paul Volcker said—and I will quote him, 

‘‘Proprietary trading in commercial banks was not central to the 

crisis.’’ Secretary Geithner said, ‘‘If you look at the financial crisis, 

it did not come from proprietary trading activities.’’ Even Raj Date 

of the Consumer Financial Protection Bureau—he was the deputy—was for Dodd-Frank. He said, similar to what Mr. Bentsen 

said, ‘‘The Volcker Rule is a solution to a non-problem.’’ 

Professor Johnson, you are the Democratic witness. I think what 

you are responding to is too-big-to-fail. I think that is why you 

want the Volcker Rule. Am I correct? 

Mr. JOHNSON. Too-big-to-fail is a very important and persistent 

problem, Congressman, but irrespective of the approach that you 

prefer to tackle it, I would still recommend some version of the 

Volcker Rule. 

29 

Mr. BACHUS. Why? If a bank—if they trade and lose money, 

should the government prohibit that if there is no taxpayer interest? 

Mr. JOHNSON. If a small trading house takes speculative proprietary bets and loses and goes out of business, I think that should 

hopefully be of no concern to any of us. But it does interact with 

size, scale, complexity, and systemic consequences, some of which 

we can anticipate and some of which catch us unawares every time. 

So it is that systemic impact that creates the implicit government 

support, including the support from this and previous Congresses. 

Mr. BACHUS. I think that is what you are afraid of. I think you 

are afraid that they are still too-big-to-fail, even though the Administration—you and I agree that Dodd-Frank didn’t end too-big-tofail. You can still have systemic risk. 

But I think what you really want to do, and tell me if I am 

wrong, is you want to break up these big megabanks. Am I correct? 

Mr. JOHNSON. Congressman, if you were willing to make them 

small enough and simple enough so they could all fail, and go 

through bankruptcy without causing any systemic consequences, 

then, yes, I would say, let them get on and run their businesses— 

Mr. BACHUS. And I believe that is your motivation, is you want 

to break these banks up. 

And let me say this. I have 20 seconds. The problem I see with 

that is we are in a global economy and they are global megabanks, 

aren’t they? 

Mr. JOHNSON. There are some highly subsidized socialized banks 

coming from other countries. That doesn’t mean we should emulate— 

Mr. BACHUS. But, they are global. 

Mr. JOHNSON. There are some global banks— 

Mr. BACHUS. And they can move their proprietary trading somewhere else, and we can’t prevent that. 

Mr. JOHNSON. If they move it outside of where it causes problems 

for our economy, perhaps we shouldn’t be concerned. But if it is a 

bank like JPMorgan Chase, it is going to lose— 

Mr. BACHUS. But no other country has adopted the Volcker Rule. 

Mr. JOHNSON. If they are going to lose big in London, Congressman, and that is going to affect the bank holding company in the 

United States, then we have to worry about— 

Chairman HENSARLING. The time— 

Mr. BACHUS. You are a British American. Britain has not passed 

a Volcker Rule, nor any other country, and they are not going to. 

Chairman HENSARLING. —of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Capuano, for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

I want to thank the panel for their testimony. 

I have to be honest. This stuff, for me, I kind of always feel like 

I am up to my nose in it, because it is tough stuff. It might be easy 

for all you guys; you are all a lot smarter than I am. I have spent 

most of the week trying to figure out how many points I can get 

out of Ed Perlmutter for the Patriots-Broncos game. That is about 

as complex as I can get. 

30 

And it is kind of interesting, when I hear the complaints about 

a complex rule, it presumes that CBOs and CLOs and CDO TruPS 

and CDO squares are simple. They are some of the most complicated financial instruments in the history of mankind, and you 

expect simple rules to kind of keep them in check. I don’t get it. 

You have a complicated, difficult, always advancing, always changing financial services market. You are going have to have complex 

rules to try to catch up—never get ahead, but just to catch up. 

And, honestly, it would help me a lot if anybody ever came to 

talk to me about a complex rule who didn’t always come to me to 

complain about any rule. I would love to be here at a panel with 

people subject to regulations, who told me, ‘‘That is a fair and reasonable regulation.’’ I have never heard that in the 14 years I have 

been here. 

So I will, kind of, start off with difficult stuff to comprehend. 

Mr. Robertson, your $1 trillion number, it is a big number, a 

scary number, but I have some other numbers. GAO says that the 

financial crisis wiped out $9 trillion of assets. GAO says that it reduced economic output by $12 trillion. The TARP that we passed 

was just short of a trillion dollars. The Federal Reserve increased 

its balance sheet by a trillion and a half. All total, that is $23.2 

trillion that were either lost or put on the line because we didn’t 

have sufficient regulations at the time. 

Now, I don’t know about anybody else, but my concern is that we 

have adequate regulations going forward. I totally agree, and I 

have been saying from day one, this regulation, all regulation—I 

know that the other side likes to pretend that we are all for overregulation. That is my platform: I am here to kill business because 

I hate jobs. That is ridiculous. 

We are looking for balanced regulation, and not for the normal 

players but to try to somehow cow the outliers. Now, whether this 

particular regulation hits the mark or not will tell over time, and 

if it doesn’t, we will amend it, like it has already been amended 

even before it is implemented. 

Mr. Bentsen, you pointed out some very interesting comments 

that might be of concern to me as I check them out. And if they 

work out, if I agree with them, which I tend to on their face, I will 

try to help you address those. Those are fair points. 

But for me, it is really only about one thing. As I see it, the 

whole crisis was caused because we had the financial institutions, 

the biggest ones, taking risk that they had insufficient capital reserves to cover. That is the bottom line. I don’t care that somebody 

is gambling their own money, and if they lose it—but when they 

do it in a way that then puts my mother’s pension at risk, that is 

a problem, and we have to do something about it. 

So, yes, is it any surprise, is it wrong that we are asking some 

of the people who were making some of the riskiest bets to increase 

their capital reserve? Now, whether $1 trillion is the right number, 

that is a fair question. 

Mr. Robertson, do you think that we should actually ask anyone 

to have any capital reserve ever? 

Mr. ROBERTSON. Absolutely. 

Mr. CAPUANO. So now the question is, how much? 

Mr. ROBERTSON. Exactly. 

31 

Mr. CAPUANO. And that is a fair question. Is $1 trillion too much? Maybe. What is the right number? Half a trillion? $700 million? I don’t know. But that is what we are here for, to try to get 

it right. 

The one thing I know without question, without doubt, without 

debate is that it was insufficient in 2008. Does anyone disagree 

with that? Do you think that we had sufficient capital requirements in 2008? Because if you do, please raise your hands, because 

I would like to hear more. 

So we all agree that they were insufficient and we have to increase them. How much? Anybody here have the answer? Because 

if you do, I want to hear it. I am not sure. 

Mr. JOHNSON. Congressman, I think they should be increased by 

much more than currently proposed. 

Andrew Haldane of the Bank of England recently said that the 

way to think about capital on a global basis in the largest financial 

institutions is that they were—capital requirements on a leveraged 

basis were between 1 and 2 percent. So you could be 98 percent leveraged, 98 percent debt or more. Now, under this Basel III agreement as applied in the United States, we will get slightly over 3 

percent capital requirement, so you can be nearly 97 percent debt. 

I don’t think that is enough to withstand the kinds of risks that 

you are identifying. 

Mr. CAPUANO. So I should continue being nervous, which I guess 

I am. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, the Chair 

of our Housing and Insurance Subcommittee, Mr. Neugebauer, for 

5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. And I appreciate 

the panel being here. 

I think my biggest concern, whether it is the Volcker Rule or all 

of these regulations is, one, the lack of cost-benefit analysis that 

has been done. Because ultimately, who is going to pay for these 

increased costs are the people who are at the bottom of the chain 

here, and that is the customers of, for example, Mr. Funk’s bank. 

Mr. Funk, how long have you been in banking? 

Mr. FUNK. Excuse me? 

Mr. NEUGEBAUER. How long have you been in banking? 

Mr. FUNK. This is my 34th year. 

Mr. NEUGEBAUER. Yes. It has changed a little bit in 34 years, 

hasn’t it? 

Mr. FUNK. That is a fair statement. 

Mr. NEUGEBAUER. Yes. I have been a banker, and I have been 

a borrower, and over the years, how I did financial transactions 

changed a lot. 

And one of the things that I was concerned about is that as your 

bank has grown, you have had customers grow, as well. And, at 

some point in time, those customers grow to the point where you 

are maybe not able to handle all of their financial needs. 

And so, then, if you are doing your job, and I am sure you are, 

your job is to create ways to—free up ways to continue to lend to 

them or make sure that your customers’ credit needs are fulfilled. 

Is that correct? 

32 

Mr. FUNK. That is correct. And what we usually try to do in 

those instances is bring other community banks into the group and 

satisfy them, and these customers still remain our customers. 

Mr. NEUGEBAUER. And, in some cases, you can free up capital in 

your bank by taking advantage of some of the products, for example, that Mr. Ganz has been talking about, where securitizing, say, 

auto loans or packaging some commercial loans, whether you are 

doing it by bank participation or by securitizing those. Is that correct? 

Mr. FUNK. That is correct. 

Mr. NEUGEBAUER. Yes. I think the question that I have is, based 

on your initial blush of looking at how all of the capital markets 

are—because the direct lending from banks to businesses is actually declining. So how do you see the Volcker Rule impacting your 

ability in the future to be able to be creative with some of your customers? 

Mr. FUNK. I think that is a great question. And I think, to go 

back to the point that before December 10th I didn’t pay much attention to the Volcker Rule because I was told it didn’t affect community banks, we understand the Volcker Rule is the law. We understand that it was designed to reduce or eliminate proprietary 

trading for systemically important banks. There is no way you 

could make an argument that MidWestOne Bank in Iowa City is 

systemically important, and yet we have seen the effects over the 

last 30 days, and it wasn’t been too pleasant for some of our people 

and our board as we have tried to grapple with the new rule. 

And, again, we thank you for all the support in getting that 

changed. It is fair to say that things usually don’t get changed that 

quickly. So the fact that you were willing to weigh in is very good, 

but what happens the next time if we can’t get a decision that 

quickly and we have to recognize those losses? So it is the unknown, Congressman. 

Mr. NEUGEBAUER. Thank you. 

Mr. Bentsen, one of the things that allows financial institutions 

to do some of the kinds of lending that they do today is being able 

to hedge some of those risks and to balance the risks that they are 

taking as a financial institution. 

And I think you kind of alluded to the fact that this Volcker Rule 

could impact the banks’ ability to really actually effectively manage 

their risk, which is kind of counterproductive to what, hopefully, 

regulation is about. Regulation is about stabilizing the ability of a 

financial institution to manage their risk so that they are not systemically risky. 

But in many cases, if we are going to limit their ability, won’t 

that have an impact on them? 

Mr. BENTSEN. That is a good point, Congressman. Time will tell. 

And, I think some time ago there were five or six regulators sitting 

at this table who were talking about the importance of hedging as 

a risk-mitigating regulatory tool. And I think the regulators certainly had that in mind when they were trying to write this rule. 

And to Professor Johnson’s point, the proposed rule that we dealt 

with was one thing, and we had to look at that as to what that 

might be as a final rule. We now have a new rule with 900-plus 

pages and then we try to interpret that. 

33 

So time will tell as the conformance period ends, firms begin to 

implement, and they understand what the compliance rules are, 

their compliance and enforcement liability. Then I think we will 

see the impact as it relates to hedging, market-making, and other 

permitted activities. 

Mr. NEUGEBAUER. But I think we can all agree that because of 

this new rule, pricing will have to be put in place for the regulatory 

risk of whether you are in compliance are not and all of the steps— 

Mr. BENTSEN. It won’t be free, you are right. 

Mr. NEUGEBAUER. Yes. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Massachusetts, 

Mr. Lynch, for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to again thank the panelists for your help with doing our 

work. 

And I do agree, the specifics of this rule are complex, but I think 

at its core is a very simple idea, that banks of any size should not 

be allowed to use taxpayer-backed support to make risky or reckless bets for their own profit. That is the basic idea underlying the 

Volcker Rule. 

And, to that end, the Volcker Rule prohibits banks with FDICinsured deposits or access to the Fed’s discount window from engaging in risky proprietary trading. We just believe that is not 

something that the United States Government needs to be subsidizing. That is the simple idea behind the Volcker Rule. 

Now, this should be something we can all agree on, but unfortunately, I think this commonsense reform has been fought toothand-nail by Wall Street banks and their allies. And I understand 

why. We all understand that proprietary trading is incredibly profitable for Wall Street banks. But just because something makes 

Wall Street a lot of money doesn’t mean it is a good thing for the 

American people. 

And let me take a moment just to address one statement that 

has been made repeatedly, including today—I heard repeatedly 

that proprietary trading did not cause the financial crisis. And 

there are all kinds of people cited as saying that. But let’s go back 

to the facts here. 

The investment bank Bear Stearns, for starters, started its nosedive when it was forced to bail out two of its hedge funds that had 

made highly leveraged proprietary trades in subprime mortgage securities. That is when Bear Stearns went in the toilet. Less than 

a year later, Bear Stearns was sold for pennies on the dollar to 

JPMorgan to avoid bankruptcy. That is example one. 

Citigroup was forced to bring 7 investment funds it sponsored 

with big proprietary bets in the subprime mortgage market onto its 

balance sheet, assuming $58 billion in debt. And less than a year 

later, Citi received multiple bailouts, including the TARP bailout 

from the Federal Government—which I voted against—without 

which it would not have survived. 

Finally, Lehman Brothers, remember them? They made a huge, 

risky proprietary bet in the same subprime mortgage market based 

on their analysis that the bets that they made would be profitable 

for the bank—for the bank, not for its customers, but for the bank. 

34 

In September of 2008, when those bets went south and Lehman 

could no longer get funding for its day-to-day operation, it was 

forced to file for bankruptcy. 

These massive proprietary bets made in the subprime mortgage 

market sent shock waves through the market and drove our economy to the brink of collapse. Those are just the facts. Proprietary 

trading and sponsorship of exotic investment funds that enabled 

proprietary trading by banks were absolutely a leading cause of the 

financial crisis. And I applaud the regulators for putting a strong 

Volcker Rule in place to try to prevent this type of risk-taking 

going forward. 

Now, I heard from the panelists, and I can’t remember who, I 

think it might have been Mr. Robertson who complained that there 

wasn’t enough comment period on this rule. But just for the record, 

there were 18,000 comment letters which were submitted to the 

regulators in coming up with this rule. We had 111 stakeholder 

conferences. We began the discussion of Section 619 in July 2010. 

It took 31⁄2 years to talk about it. We talked this thing to death. 

So, I just bristle at the idea that we did not spend enough time 

on this and that the financial industry did not have enough input. 

There was, from the outset, an effort to either kill it or delay it 

until it died a slow death. 

So, look, we know why folks want to kill the Volcker Rule, but, 

in all honesty, I think it is a good step. Can we tweak it a little 

bit, and like we did with the trust preferred securities (TruPS), can 

we make sure that the unintended consequences, if any, are mitigated? Sure, we can do that. But make no mistake: We need this. 

And if we are talking about job creation, and we are—the title 

of this hearing is about how the Volcker Rule might hurt job creation—let me go back over the effect on job creation of not having 

the Volcker Rule. 

Let’s go back to September of 2008, when this started in earnest. 

We lost 435,000 jobs that month; the next month, 472,000 jobs; the 

next month, November, 775,000 jobs were lost; December, 705,000 

jobs were lost; the next month—there is nothing there that dipped 

below a loss of 700,000 jobs for the next 6 months. So that is the 

impact on job creation of not having the Volcker Rule. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from North Carolina, 

the Chair of our Oversight and Investigations Subcommittee, Mr. 

McHenry, for 5 minutes. 

Mr. MCHENRY. I want to thank my colleague on the other side 

of the aisle for bringing up those issues. It sounds like it is not 

really Volcker that he is talking about, because Bear and Lehman 

didn’t have a single deposit; they are not depository institutions. 

So the concerns that he raises are genuine ones and concerns 

that we have raised in a series of hearings on too-big-to-fail in the 

Oversight Subcommittee that the chairman has directed. And the 

concerns we— 

Mr. LYNCH. Will the gentleman yield? 

Mr. MCHENRY. —raise as a question of this is the scheme that 

Dodd-Frank puts in place that does not end too-big-to-fail. 

Mr. Johnson, would you agree with that concern we have, that 

Dodd-Frank does not end too-big-to-fail? 

35 

Mr. JOHNSON. Too-big-to-fail is still with us, Congressman. But, 

unfortunately, all of what we have previously known as investment 

banks have now converted to become bank holding companies. 

Mr. MCHENRY. Exactly. And we have talked about that. 

Mr. JOHNSON. And that is an important part of the issue. That 

is why I agree with Mr. Lynch that these things are bundled together on a forward-looking basis. Whatever you think happened in 

the crisis— 

Mr. MCHENRY. Right. 

Mr. JOHNSON. —it is all bank holding companies now. 

Mr. MCHENRY. But Volcker actually doesn’t end up protecting 

the taxpayer, which is a genuine concern I have, that institutions, 

private-sector institutions, when they fail, the taxpayers are on the 

hook for it. 

And, look, we have had good conversations about this, as well. 

But the question I have for the panel today is: Can you put a dollar 

amount on the cost, the economic consequence of Volcker as is now 

set in stone by the regulators? 

Mr. Bentsen, do you have a dollar amount? 

Mr. BENTSEN. No, sir, we can’t, because we are— 

Mr. MCHENRY. Okay. 

Mr. Funk, do you have a dollar amount? 

Mr. FUNK. No, sir. 

Mr. MCHENRY. All right. 

Professor Johnson? 

Mr. JOHNSON. Yes, Congressman. I thinks it is part of what is 

being displayed on the wall here. According to the Congressional 

Budget Office, the effect of the financial crisis is to increase our 

debt over the cycle— 

Mr. MCHENRY. Sure. 

Mr. JOHNSON. —by about 50 percent— 

Mr. MCHENRY. No, no. I am asking— 

Mr. JOHNSON. —five-zero percent of GDP, half of GDP, call that $8 trillion, because of the financial crisis and the depth of the recession that created. 

Mr. MCHENRY. So Volcker— 

Mr. JOHNSON. The Volcker Rule addresses precisely the way in 

which these largest bank holding companies, as they are now, can 

take risk, can disrupt the economy. Their ability to do this— 

Mr. MCHENRY. I understand. I have limited time, and the chairman is using the gavel today, actually, very well. I am glad I got 

to ask a question before noon. 

But to your point, Professor Johnson, for me as a policymaker, 

I can’t simply say, well, Volcker just saved us $8 trillion. 

Mr. Ganz, do you have a dollar amount? 

Mr. GANZ. The dollar amount I have is $7 billion if the market 

moves 10 percent. It could be greater than that. But that is the 

amount that it would impact the CLO market unless there is some 

remedy very, very quickly. 

Mr. MCHENRY. Okay. 

Mr. Robertson? 

Mr. ROBERTSON. There is absolutely no way to put a dollar figure 

on it. 

Mr. MCHENRY. Okay. 

36 

So part of the concern is this: We have as a matter of the Securities and Exchange Commission written policy that they will have 

a cost-benefit analysis before they codify rules. We have had a lot 

of good ideas across the whole panel here today on ways to improve 

the Volcker Rule as it is written, if it is going to be there. There 

are some genuine concerns that we can mitigate the downside on 

this. And yet, at the same time, if we had an interim final rule, 

we could resolve these things without—in realtime market consequences in the way that, in the rush of these five regulators to 

get things done, they have done. 

And the rush was to get the rule done, codified, and rolling, and 

then try to tweak it in realtime. The TruPS issue is a great example of this. 

So I have an additional question. Mr. Bentsen, who is the primary enforcer of Volcker? 

Mr. BENTSEN. There is not a primary enforcer, in our view. There 

are five enforcers, and maybe six if you add FINRA to the mix, 

which I think ultimately the SEC will look to FINRA to do. 

Mr. MCHENRY. Mr. Funk, as a bank, you have plenty of regulators, right? 

Mr. FUNK. We are a publicly traded bank, so, for us, we have 

three: the SEC; the FDIC; and the Federal Reserve. 

Mr. MCHENRY. Okay. 

So, Professor Johnson, in this final moment I have, as we said, 

too-big-to-fail is still with us. You have been an advocate of simplicity—simple institutions, simple regulations, what is happening 

in Great Britain and what Andy Haldane has done in terms of this 

discussion on simplicity. 

This is a complex rule. Do you think that there is a better approach to this? What you said is this provides a ‘‘good chance’’ that 

it will reduce risk. You are really not willing to go on the line and 

say this absolutely will reduce risk. You are saying it has a good 

chance. 

Chairman HENSARLING. Briefly. 

Mr. JOHNSON. I think it depends on the implementation. I worry 

a lot about this number up here. And I don’t understand, Congressman, why you, with your justified concerns about this number, cannot draw the link, the very obvious link, between the depth of financial crisis in the future and the— 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Georgia, Mr. 

Scott, for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman. I appreciate it. 

The one concern I have about the Volcker Rule—first of all, let 

me say the Volcker Rule is needed. We should not be using proprietary trading. It could form a very unstablizing impact. 

But there may be an unintended consequence here, and I want 

to examine that. And that is in the international arena and how 

we are placing our economic system in a weakened position if we 

do not look very carefully at the competitive situation that we place 

our banking—and not just our banking. Our banking is just one 

part of it. We have companies and businesses. Ours is not a oneeconomy-of-the-United-States economy. So it is very important that 

37 

our banking system not be put in an uncompetitive edge when it 

comes to dealing in the world markets. 

Now, here is what I am talking about. I am a member of the 

NATO Parliamentary Assembly. I serve on the Economic Security 

Committee. That is an extraordinary committee. Two or three 

times a year, we meet over in Europe, and we deal with—75 percent of the discussion is on what is happening in the United States. 

So, let me just start with that for a moment. 

Mr. Bentsen, we have a situation here where there is an exemption for foreign banks and their affiliates from the Volcker Rule as 

long as they are doing business outside the United States and are 

not in any way controlled by a U.S. bank. But that is over in Europe. Meanwhile, we have the European Union and we have Great 

Britain who are forming their own Volcker Rule. 

So, in the midst of this, we are placing our economic system and 

our banking system to operate in this environment. So my point is, 

is there an area here where there is any unforeseen danger to our 

impact, our position as the leader in the economic activity of the 

world? I am very concerned about that. And I have, sort of, a viewpoint, because I have to deal with these other nations. 

And not only that, the European Union is just one, and within 

that are 28, 30 other nations, all with their own. And on top of 

that, we have McDonald’s, we have Google, we have Coca-Cola, we 

have Delta, we have Deere tractor, Caterpillar. We have huge companies that do business all around the world. 

So I think it is very important to get an answer to this question: 

One, is there something within this Volcker Rule, within the environment and the reaction to it that I just articulated about Europe 

and about Great Britain, is there something with the exemptions 

that we are giving them here and the complexity of all of that could 

put the United States economy in a more vulnerable position? 

Mr. Bentsen, will you take a crack at that first? 

Mr. BENTSEN. Congressman, yes, that is a very good question. 

First of all, the Europeans, either through the EU with the 

Liikanen study and potential proposals coming after that, the Vickers report, which is now being implemented in the U.K. banking 

law, activities in Belgium, Germany, and France, are all very different than the Volcker Rule. None of them ban proprietary trading, for starters. They look a lot like the Gramm-Leach-Bliley construct that we have had the United States. 

Second of all, you make a very good point, because while the 

rules as they relate to foreign banking entities that are captured 

by Volcker in the United States—and we represent many of those 

in our membership—the rules are murky as to what they can do 

outside the United States, we believe the biggest concern to the 

United States is the impact on the depth and liquidity of U.S. capital markets. 

While we still are dominant in that field, we don’t have the vast 

majority that we once did. And we expect to see other markets 

grow. But we know the Asians aren’t going in this direction, because they are trying to develop capital markets to sustain their 

growing economy and move away from a pure bank financing operation. The Europeans are trying to look at their universal bank 

model and, again, how they get away from just a pure bank balVerDate Nov 24 2008 10:56 Sep 17, 2014 Jkt 088521 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 K:\DOCS\88521.TXT TERRI
38 

ance sheet, or not a pure, but a heavily bank-balance-sheet-dependent, and have more capital markets. Whereas, in the United States, 

we run the risk of either pushing people out of the capital markets 

or reducing the depth and liquidity in our markets. And that really 

affects the people who use it, and those are the issuers and the investors. 

Mr. SCOTT. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Campbell, Chair of our Monetary Policy and Trade Subcommittee, 

for 5 minutes. 

Mr. CAMPBELL. Thank you, Mr. Chairman. 

There has been a lot of discussion so far about what is in the 

Volcker Rule. I want to talk about something that is not in the 

Volcker Rule which seems to be inconsistent to me. 

My understanding is that, whereas the Volcker Rule prohibits 

proprietary trading in private the bonds—so for the private entities. It does not do so for sovereign debt and for public debt, sovereign debt of other countries and for public debt in the United 

States. 

Now, I am from California, and where I sit, it would seem to me 

that it would be less risky to have proprietary trading in AAArated corporate bonds than in the municipal bonds of any number 

of cities in California or of any number of sovereign debt from any 

number of countries in Europe. 

Is this an inconsistency? Do any of you see that it is okay to do 

all the trading you want in what are clearly some very risky U.S. 

Government and non-U.S. sovereign debt? 

And Mr. Robertson is, like, champing at the bit on this. 

Mr. ROBERTSON. Yes, I do find it somewhat interesting that the 

municipal debt has been excluded. And if you think about it, it is 

really the public sector standing up and saying, we think if you 

allow technically market-making but not trading, that is going to 

reduce our access to credit. 

So it is curious to me that we have decided that proprietary trading has no social good or value in creating liquidity and creating 

markets, but, with their own actions, the municipalities have 

shown they don’t believe that to be true. 

Mr. CAMPBELL. All right. So it is a complete inconsistency, in 

your view. 

Other thoughts or comments on that? 

Professor Johnson? 

Mr. JOHNSON. My understanding, Congressman, is that foreign 

debt denominated in a foreign currency is not treated the same 

way as U.S. Treasury debt. The foreign governments wanted that, 

they requested it, and they said and some private-sector people 

said there will be dire consequences if they didn’t get it. But the 

treatment—they did not get—Greek bonds are not being treated 

the same way as U.S. Treasuries under the Volcker Rule. 

Mr. CAMPBELL. No, but I think through a foreign subsidiary they 

can, though. 

Mr. BENTSEN. Congressman— 

Mr. CAMPBELL. Yes? 

39 

Mr. BENTSEN. Yes, if you are a foreign bank operation in a home 

country—so a Barclays, who is a U.K. bank, can be proprietary 

trading gilts through the— 

Chairman HENSARLING. Mr. Bentsen, if you could talk a little 

closer to the microphone there? 

Mr. BENTSEN. Yes. Sorry. 

There is somewhat of an exemption that was expanded as it relates to foreign banking operations. However, importantly, a number of U.S.-domiciled institutions are also primary dealers in foreign sovereigns like gilts, like JGBs, and others, and they are not 

afforded that treatment. 

Mr. CAMPBELL. Mr. Johnson? 

Mr. JOHNSON. I think you should worry, Congressman, precisely 

about where there is either a residual responsibility to the U.S. 

taxpayer, hence the debt number, or an impact on the U.S. economy from some sort of investment, speculative or otherwise, in exactly sovereign bonds, foreign sovereign bonds. Because those are 

much more risky than commonly perceived. 

So, to the extent that this exemption becomes what you might 

call a loophole which poses risk to the U.S. economy, I would worry 

about it. But we also can’t take upon ourselves, unfortunately or 

fortunately, the role of regulating all of the world’s banks. 

Mr. CAMPBELL. Does anyone disagree with the view, on this 

panel, that regardless of where you are on the Volcker Rule, on the 

proprietary trading in general, that the treatment of corporate debt 

and of municipal or government debt, be it in this country or— 

should be aligned? 

Okay. There is no—Mr. Bentsen? 

Mr. BENTSEN. Congressman, it is a very interesting question. It 

is a conundrum, no question. I believe policymakers, at the time 

that they put in the restriction on proprietary trading, obviously 

had concerns that restriction could have negative consequences for 

the U.S. Government debt market, for the— 

Mr. CAMPBELL. To say somehow it will have consequences on municipal but it won’t have consequences on corporate, that makes no 

sense. Clearly it does, and clearly it was intended that government 

is virtuous, and therefore their debt, albeit bad, is virtuous, and so 

it is okay to do proprietary trading there. It just seems wrong to 

me. 

Mr. Johnson? 

Mr. JOHNSON. Congressman, you are obviously right. Historically 

and forward-looking, there are risks in both municipal debt and in 

corporate debt, and sometimes the risks occur in one sector and 

sometimes in the other sector, and sometimes they affect the economy. 

I would separate out U.S. Treasury debt. I would treat U.S. 

Treasury debt separately because that has different risk characteristics. But I think to the extent that you are concerned about there 

being risks and corporate risks in municipal debt, that is obviously 

what we have seen in the past and what we will see in the future. 

Mr. CAMPBELL. Thank you all very much. I yield back the balance of my time. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from California, Mr. Sherman, for 5 minutes. 

40 

Mr. SHERMAN. I am wondering a bit why the Volcker Rule applies to debt instruments such as bonds at all. If a bank makes a 

loan to a business, that is what they are supposed to do. If I understand the Volcker Rule correctly, if they buy corporate bonds of a 

similar business, that is restricted. The disadvantage of bonds is 

that your profits and loss are readily apparent to the world every 

day, whereas if you make a loan to a business, you assume the 

same risks, but you can keep them hidden. Nobody knows what 

that loan is worth this day or that day. 

I wonder, Mr. Ganz or others, do you have a comment on whether the Volcker Rule should apply to debt instruments? 

Mr. GANZ. Sure. The idea behind the section that is on ownership 

interest was to take what looks like or is called a debt instrument, 

but really has indicia of ownership like an equity. So, it has some 

upside. It gets part of the profits. But for— 

Mr. SHERMAN. You are talking about convertible debt? 

Mr. GANZ. No, I am talking—it is not specific. It just, for example, has the right under the terms of the interest to receive a share 

of the income, gains or profits of the covered funds. 

Mr. SHERMAN. So, participating debt. 

Mr. GANZ. Right. 

Mr. SHERMAN. So the Volcker Rule applies only to debts that participate in profit, not straight debt instruments. 

Mr. GANZ. Exactly. 

Chairman HENSARLING. Mr. Ganz, could you bring your microphone a little closer, please. 

Mr. GANZ. I’m sorry. The problem for TruPS and the problem for 

CLOs is that one of the seven indicia of ownership is really not an 

ownership indicia, it is a debt protection. And that is what is 

going— 

Mr. SHERMAN. What is that one out of seven? 

Mr. GANZ. It is the ability to remove or replace a manager for 

cause. So if the manager gets arrested or does something in violation of the indenture, that is a protective characteristic of a lot of 

debt instruments. 

Mr. SHERMAN. Let me move on. But that seems to be trivial, and 

I would think they can modify that. 

What about the ‘‘Hotel California’’ rule, that if you are covered 

by the Volcker Rule, and then you are no longer a commercial bank 

or own a commercial bank, you are still covered by it? Does anybody see a need to let people out of the hotel a few years rather 

than forever? 

Mr. JOHNSON. Congressman, the problem is, of course, that once 

you extend this protection of the bank holding company status to 

the investment banks, which was done in the fall of 2008, Goldman 

Sachs and Morgan Stanley became bank holding companies, that 

has come historically with a lot of restrictions. We will see what 

happens going forward. 

Certainly Goldman, and I think also Morgan Stanley, said at 

some point subsequent to that, if you are going to impose the full 

restrictions of bank holding company status on us, then we don’t 

want to be a bank holding company anymore, we will go back to 

being an investment bank. In other words, they want full access to 

the Fed when they need it, but not when they feel it— 

41 

Mr. SHERMAN. There is little assurance that we would give it to 

them again. But if we apply the Volcker Rule to any corporation 

that has been ever a bank holding company, we could also apply 

it to any corporation that might in the future become a bank holding company. Yes, Goldman went out and acquired a bank and became a bank holding company. So could Apple Computer tomorrow. 

Mr. JOHNSON. Congressman, no. You should worry about— 

Mr. SHERMAN. So could many others. 

Let me move on to one other issue, and that is we saw with AIG 

that you can have a highly risky parent owning subsidiary corporations. As long as the subsidiaries are properly regulated, they survive fine. Do we need to apply the Volcker Rule to bank holding 

companies, or do we just need rules to protect the banks themselves? What risk is there to the U.S. taxpayer as long as the bank 

subsidiary is safe? 

Mr. FUNK. It is my understanding, Congressman, that it does 

apply to bank holding companies because the Federal Reserve is 

one of our regulators, and they— 

Mr. SHERMAN. Yes, I am asking whether from a public policy 

standpoint that is necessary. 

Mr. JOHNSON. But, Congressman, remember, it was AIG Financial Products. It was a subsidiary of the holding company in London that had the very big losses. So this wasn’t a bank holding 

company situation. 

But to take your analogy— 

Mr. SHERMAN. But the regulated subsidiaries did fine. The unregulated entities that did not face that level of U.S. insurance— 

Mr. JOHNSON. There were huge losses to the group, and it was 

an impairment to the credit of everyone in that group because of 

what had happened in this one unregulated subsidiary. So I think 

going at the bank holding company level makes a lot of sense. 

Mr. SHERMAN. Mr. Bentsen? 

Mr. BENTSEN. I would just say, Congressman, regardless of 

Volcker, AIG is now captured under the systemic designation, and 

so they are regulated at the holding company level, across which 

they wouldn’t have been before. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from California, Mr. 

Royce, the Chair of the House Foreign Affairs Committee, for 5 

minutes. 

Mr. ROYCE. Thank you very much, Mr. Chairman. I was going 

to start with Mr. Bentsen with a question based on your testimony, 

your opening statement. You mentioned the need for the regulators, the five rule writers, along with the National Futures Association and FINRA to, in your words, coordinate: to be consistent 

in their interpretation, in their examination, supervision and enforcement of the final regulations. 

Is there enough clarity here for the industry on this point? Because what happens if the OCC says certain conduct is acceptable, 

and then the SEC says no? Or, let us say FINRA has a different 

viewpoint. How is that handled? 

This is one of the concerns we have always had about, when we 

did have the financial implosion, there was a lot of discussion 

about trying to set up a world-class regulator that could call the 

42 

shots and make the decisions. You would have a primary regulator 

that could do all of this. This is a very different environment. Let 

me hear your thoughts on that. 

Mr. BENTSEN. Thank you, Mr. Chairman, for that question. 

The rule in no way states how the regulators are going to coordinate. In fact, it acknowledges that there is not a method or protocol 

for doing that, and acknowledges that there is overlap in jurisdiction. So we think it is very lacking in that respect. 

We actually in our comment letter suggested that perhaps the 

Federal Reserve should act as the lead regulator since Congress 

gave them the ability to extend the conformance period since you 

were amending the Bank Holding Company Act. But there is no 

mechanism, no protocol, and as a result of that, our view is based 

upon the underlying statute that it really should be the role of the 

FSOC now to step in as they have under their mandate to act as 

the coordinating body to put that in place. 

Mr. ROYCE. Any other views by other members on the panel on 

this? 

Mr. FUNK. Mr. Chairman, I would say from the ABA’s point of 

view that we recognize there will be times when there are different 

sets of rules, and we would welcome some way for clarity to come 

to this process where they all apply rules the same way, and if that 

has to come from Congress, we think that is a good solution. But 

we don’t think you can have five sheets of music, because some of 

our members are regulated by all five, and if the rules are interpreted differently, I think that is a real problem. 

Mr. ROYCE. Let me ask Professor Johnson. 

Mr. JOHNSON. Sir, I think, Mr. Royce, you raised a very good 

issue. The Financial Stability Oversight Council was created specifically to try and bring better coordination across these disparate 

agencies, and the Chair of that is the Secretary of the Treasury. 

And I think the Secretary of the Treasury should have a responsibility for making sure that they are all on the same—using the 

same sheet of music. That is a very reasonable request. 

Mr. ROYCE. Rather than the Fed taking the lead on it? Or 

what— 

Mr. JOHNSON. That is a great question you could debate for a 

long time. The Chair of the FSOC, eventually that job went to the 

Secretary of the Treasury, so that is the logical place to ask for better coordination on specifically this kind of issue. 

Mr. ROYCE. Mr. Ganz? 

Mr. GANZ. We agree. The issue that we are dealing with now is 

a perfect example. We are asking for an FAQ, something really, 

really simple. We have to go to—we apparently have to go to five 

agencies, one of which has really nothing to do with the product— 

loan product at all, the CFTC. So that is incredibly cumbersome, 

and a streamlined process would be very helpful. 

Mr. ROYCE. And lastly, Mr. Robertson, your commentary. 

Mr. ROBERTSON. I think there is the need to better coordinate 

regulation, and we are even seeing regulation coming down the 

pike that is conflicting with other regulations. So it is creating a 

lot of complexity for all constituents in the financial system. 

Mr. ROYCE. And then I am sure this issue has been asked, but 

I saw that CalPERS out in California raised the concerns, the same 

43 

issue really about regulation: How do you make sure it is consistent? But they are making the point of global regulation on this 

issue. Just a quick commentary on that. 

Mr. BENTSEN. Mr. Chairman, as I stated earlier, while other jurisdictions in Europe are talking about changes in bank structure, 

going from looking at the universal bank model that you know that 

they have in Europe, Liikanen and Vickers are really more in line 

with what I would call the Gramm-Leach-Bliley construct than a 

ban on proprietary trading, the more ring fencing or separate operating subsidiaries or affiliates. And in Asia, frankly, they are trying 

to develop their capital markets out there, and so they are not 

moving in this direction at all. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Texas, Mr. Green, 

for 5 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I thank the witnesses for 

appearing, and, if I may, I would like to single out my friend, the 

Honorable Ken Bentsen, who was a U.S. Representative from the 

State of Texas, in fact for some of the area that I currently represent. Thank you for appearing today. Also, I would like to congratulate you. I think the last time you were here you did not hold 

the title of president and CEO. I think you have been promoted 

since we last saw you. So, congratulations. And by the way, I am 

not going to say congratulations and then say, now let’s get on with 

it. I do want to talk with Mr. Johnson for just a moment. 

Mr. Johnson, should there be some limitation imposed upon 

banks in terms of proprietary trading, in your opinion? 

Mr. JOHNSON. Yes. 

Mr. GREEN. Should they be allowed to use taxpayer dollars? 

Should there be some limitation on tax dollars that are—consumer 

dollars that are in banks which are backed by the Federal Government? Should there be some limitation? 

Mr. JOHNSON. Yes, Congressman, there should be some limitation on the proprietary trading activities of the largest bank holding companies in this country. 

Mr. GREEN. Is it true that this is what the Volcker Rule seeks 

to do? 

Mr. JOHNSON. That is absolutely the intention originally of 

Chairman Volcker, and of the legislation from Congress, and what 

the regulators worked on for nearly 4 years. 

Mr. GREEN. Now, do this for me. We have talked a lot about proprietary trading, but we haven’t taken just a moment to let the 

public know what proprietary trading really is. Would you please 

give us a definition of ‘‘proprietary trading?’’ 

Mr. JOHNSON. Congressman, the term ‘‘proprietary trading’’ in 

this context means an investment made by a bank holding company for the purposes of betting, for the purposes of getting some 

capital appreciation. They are not buying a security in order to sell 

the security as part of market making— 

Mr. GREEN. Who is to benefit from it? Who is to benefit from that 

trade you that just called to my attention? 

Mr. JOHNSON. The people making the trade within the bank, and 

executives of the bank, and perhaps the shareholders of the bank. 

44 

Mr. GREEN. Will the customer who has a deposit, will that person benefit from the proprietary trading, directly benefit from it? 

Mr. JOHNSON. Assuming that there is no direct positive impact 

on the customer, and, as has been flagged already in the hearing, 

there may be conflicts of interest. There are certainly documented 

cases where it has arisen that the bank has been trading in its own 

interests on a proprietary basis, and that has been a conflict of interest with business they are doing for the customer. 

Mr. GREEN. So what we have is this: We have a bank that takes 

some of its customers’ dollars, and it uses those dollars to engage 

in this thing called proprietary trading, which is using the dollars 

to benefit shareholders in the bank, the bank itself perhaps, but 

not those customers. Is that correct? 

Mr. JOHNSON. That is correct. That was the structure, for example, of JPMorgan’s so-called London Whale proprietary trading. 

Mr. GREEN. And do you think it is unreasonable to want to curtail the amount of dollars that are proprietary, that are traded in 

this fashion so that customers don’t end up at some point suffering? We don’t know that it will happen, but it could happen. Are 

we trying to protect the customers of the bank? 

Mr. JOHNSON. We are trying to protect the customers, but we are 

also trying to protect the taxpayer. Remember, Congressman, many 

times these bets don’t work out very well. They turn out not to be 

profitable. The expectation is they will make a profit, but they are 

very risky. So sometimes they get the negative downside on those 

bets. They lose. Who is on the hook for the losses? If it is a big 

bang holding company, one of the largest, there is a government 

backstop through the Fed and other ways, and that is the taxpayer 

ultimately. 

Mr. GREEN. Does the Volcker Rule prevent banks from using 

other capital to engage in proprietary trading? 

Mr. JOHNSON. The Volcker Rule as designed restricts the amount 

of proprietary trading that banks can do, both using customer 

funds and, for example, going out and borrowing additional money 

with which to speculate. 

Mr. GREEN. Exactly. But are there other funds that they can 

use? 

Mr. JOHNSON. Again, in principle there are restrictions on their 

ability to make these speculative investments and therefore to fund 

investments with funding sources of any kind. 

Mr. GREEN. Is it the opinion of any one of you, dear friends, that 

the Volcker Rule should be completely eliminated? If so, would you 

kindly raise your hand? I have heard your testimony, but I just 

want to make sure I understand. Is there anyone who thinks it 

should be completely eliminated? If so, raise your hand. 

Let the record reflect that no one has indicated that it should be 

completely eliminated. 

Mr. BENTSEN. Congressman Green— 

Mr. GREEN. Let me do this. I only have 12 seconds, and I will 

come back to you in about 3 seconds. But quickly now, tell me this: 

Do you think that we can tweak it, we can mend it rather than end 

it, and it can be a benefit to us? If so, would you kindly extend your 

hand? This time, I want affirmative action. 

45 

All right. I see three persons. So should I conclude we have other 

persons who don’t— 

Chairman HENSARLING. The Chair has concluded that the time 

of the gentleman from Texas has expired. 

Mr. GREEN. Thank you. And, Mr. Chairman, I would now ask 

that my friend be allowed to respond. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Wisconsin, Mr. Duffy, for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. 

I want to follow up on a question that Mr. McHenry had been 

asking, and it goes to the cost looking forward of Volcker. And I 

guess I would ask you, Mr. Johnson, looking forward, I know you 

pointed to the debt screen, but looking at its impact on our economy, impact on our capital markets, do you know the cost of that? 

Do you have an assessment of that cost? 

Mr. JOHNSON. So the cost that we see now, Congressman—and 

I am looking at the testimony that has been provided to this committee and from other industry experts where they predicted certain outcomes, and I am looking to see whether these have actually 

transpired. The cost to the economy, which is the way you framed 

it, the right way to frame it, is very, very small. Now, there are 

adjustments still to be made, and that is what we are talking about 

today. But in terms of lost economic output, in terms of lost debt 

for the capital markets, in terms of any of the other concrete, specific costs that have been floated or suggested hypothetically, I am 

afraid I don’t see them. I have not seen independent analysis that 

really quantifies those. 

Mr. DUFFY. And I would agree with you. I haven’t seen that 

analysis either, because the writers of the rule didn’t do a cost-benefit analysis, which is one of our concerns. Just like the CFTC and 

the SEC do, so, too, should the rule writers so we could actually 

take a look in a little more in-depth way on the cost of this. And 

I am sure those who are involved in the CLO market space will 

think the consequence of the rule is pretty profound. 

Does the rest of the panel think that a cost-benefit analysis could 

have helped hone the rule and left us with a better product? Mr. 

Bentsen? 

Mr. BENTSEN. Absolutely. 

Mr. DUFFY. Mr. Funk? 

Mr. FUNK. Yes. 

Mr. DUFFY. Mr. Ganz? 

Mr. JOHNSON. Congressman, you would also have to include the 

benefits. So it is not the cost, it is the cost and the benefits that 

you need to include, including the reduction in systemic risk and 

what that does for the economy. 

Mr. DUFFY. Thank you. 

Mr. Ganz? 

Mr. GANZ. Yes, absolutely. 

Mr. DUFFY. Mr. Robertson? 

Mr. ROBERTSON. I would say yes, and I think there are two costs 

and potential benefits. But the costs are not only what would this 

do to the economic activity, but there are also costs that are going 

to increase the financial costs of running different entities that will 

be passed on to consumers and corporations. 

46 

Mr. DUFFY. Yes. 

Is it fair to say that the securitization markets were explicitly excluded from Volcker and Dodd-Frank? 

Mr. BENTSEN. Congressman, no, they were not. Securitization in 

some form was excluded, but securitization is captured in others, 

as Mr. Ganz has raised and others have raised. And then, of 

course, there is a whole section of Dodd-Frank that deals almost 

explicitly with securitization, starting with QM to QRM to risk retention. And so— 

Mr. DUFFY. But with regards to Volcker, Mr. Ganz, were you surprised to see CLOs included in the Volcker Rule? 

Mr. GANZ. In the original proposal we were very surprised, especially since there was a rule of construction that was meant to 

carve out securitizations, particularly of loans. I think the legislative history reflects that this was targeted towards private equity 

and hedge funds. Asset-backed securities are neither of those. So, 

yes, we were surprised to see that. 

Mr. FUNK. If I could add, I saw a letter yesterday written by the management team of a $20 billion community bank, a large community bank, in the Northeast, and that $20 billion bank has a 

$360 million CLO portfolio that they will have to divest. And that 

is part of their core operating business, and that is $360 million 

that someone is going to have to borrow someplace else. And I don’t 

think—getting to the Volcker Rule, that bank is not systemically 

important, and the CLOs are not systemically risky. 

Mr. DUFFY. Because CLOs didn’t have—they weren’t the cause or 

a big part of or a little part of the financial crisis, were they? 

Mr. FUNK. Not with this bank, no. 

Mr. DUFFY. If you will look at our global marketplace, what other 

countries have implemented a Volcker-like rule that we can look at 

and analyze its impact on its capital markets? 

Mr. BENTSEN. I would say none. 

Mr. DUFFY. Do you guys all agree? There is none, right? We are 

the first ones. 

Mr. JOHNSON. Is that a bug or a feature, Mr. Duffy? Are we supposed to wait for the Europeans to sort out their financial system, 

which is a complete disaster, or to follow one of these Asian routes 

with a lot of State subsidies, or to try to back away from the taxpayer support— 

Mr. DUFFY. Maybe if we had we done a cost-benefit analysis and 

gone through the appropriate steps to look at the impact on our 

capital markets, we might feel a little more comfortable. 

Mr. Bentsen, is it going to affect America’s ability to remain competitive, whether it is in our banking space or in our small business, medium business, large business space? 

Mr. BENTSEN. Our biggest concern is if the regulation, the compliance burden of the regulation is so onerous, and we don’t know 

yet as we are going through this, that it causes firms to pull back 

from commitment of capital to market-making activities, that will 

affect the debt liquidity of U.S. markets to the detriment of the 

issuers and investors who rely on it. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison, for 5 minutes. 

47 

Mr. ELLISON. Thank you, Mr. Chairman, and Ranking Member 

Waters. I appreciate the time. Also, I want to thank all of the witnesses today for helping us to understand things. 

I might just ask generally, this may be—the Volcker Rule may 

be unique to the United States, but I would imagine there are a 

lot of other rules that other countries have that you may not want, 

and I doubt you would ask us to follow them. Like, for example, 

how many of you are in favor of financial transactions tax? 

Okay. So I guess being first is not always a bad thing. 

Let me ask you a few questions, Mr. Bentsen. Again, thank you 

for your work. Thank you for helping us understand the issues 

today. 

In my district, the Fifth District of Minnesota, we are still reeling from the financial crisis. It hit us really hard. We had about 

35,000 foreclosures in Hennepin County between 2007 and 2014. 

Home prices fell 16 percent. Our rental housing market is the 

tightest in the Nation. And I served on this committee when we 

passed the Dodd-Frank bill, and the creation of the CFPB, regulation of swaps market, implementation of the Volcker Rule are all 

critical reforms that we tried to put in place to prevent that calamity from which average Americans are still reeling. We still have 

7 percent unemployment. 

So I have been a little bit worried about certain elements, not all, 

I don’t want to paint with a broad brush, but some players in the 

financial services industry, again not all, who appeared to be resisting reform at every turn. In fact, there is an article about it that 

I would like to have entered into the record. It is a March-April 

2013 Washington Monthly article entitled, ‘‘He Who Makes the 

Rules.’’ This article describes, again, certain players in the financial 

services industry and their litigiousness and their just straight-up 

resistance and obstinance to commonsense regulation. 

I notice that SIFMA has filed a lot of lawsuits, including against 

the CFTC, saying it lacked the authority to establish position limits despite Congress’ clear requirement that it do so. SIFMA also 

sued Richmond, California, for thinking about eminent domain to 

address their underwater mortgage situation. And also since the financial crisis, I guess I am curious, how many lawsuits have you 

guys filed since the financial crisis? 

Mr. BENTSEN. First of all, SIFMA did not sue in the case of Richmond, California. 

Second of all, in the case involving position limits— 

Mr. ELLISON. I don’t want to go through the cases. I just want 

to know how many lawsuits you filed. 

Mr. BENTSEN. I just want to say that actually— 

Mr. ELLISON. Excuse me, Mr. Bentsen. I certainly want to hear 

what you have to say, sir, but as you know, time is very limited. 

You and I could have a more extensive conversation offline, but 

right here, right now, I need you to answer my question. How 

many lawsuits have you guys filed on financial regulation? 

Mr. BENTSEN. SIFMA has been a party to two lawsuits related 

to financial regulation. 

Mr. ELLISON. I appreciate that. 

Do you guys plan to sue over the Volcker Rule? 

Mr. BENTSEN. We have no plans to sue over the Volcker Rule. 

48 

Mr. ELLISON. Okay. Let me ask you this. I read your testimony, 

and I thought it was very interesting. And I guess the basic tenor 

of your message is that the Volcker Rule is just too complicated to 

implement. Now, I want to ask you, is this a matter about how 

complex and complicated it is, or do you disagree with the Volcker 

Rule in principle? 

Mr. BENTSEN. We disagree with the Volcker Rule in principle. 

We state that up front. But we did not say—and if you interpreted 

that, then we didn’t write it correctly. We did not say that it is too 

complicated to implement. We said it is extremely complicated, and 

how it is implemented is very important. 

Mr. ELLISON. So when Mr. Green asked everyone to raise their 

hand, notwithstanding your suggestions about what we may or 

may not do to make it better, who would repeal it, who would not 

repeal it, you kind of lifted your hand up. Everybody else said that 

they would be willing to try to work with it in some form or fashion. But you really are just against it, and I appreciate your candor. 

Mr. BENTSEN. Congressman, if I may, the point I was going to 

make to my dear colleague and friend from Houston, my fellow 

Houstonian had raised is that we were very clear from the very beginning that we did not believe that the Volcker Rule was part and 

parcel to the financial crisis. We have a disagreement. We agree 

with Secretary Geithner’s comments and Mr. Volcker’s comments 

with respect to that, and we made that clear. But it is the law of 

the land, and our members are moving forward to comply with it. 

Mr. ELLISON. Let me ask you this: Do you think that it is good 

practice for a financial institution to use taxpayer-subsidized 

money to engage in proprietary trading? I am sure you have a 

bunch of—you don’t think we should have a rule, but do you think 

it is good practice or not? 

He should be able to answer, Mr. Chairman. 

Mr. MULVANEY [presiding]. I am going to cut him off there. The 

gentleman’s time has expired. The gentleman’s item will be accepted into the record. Without objection, it is so ordered. 

If the gentleman from Virginia would like to allow the gentleman 

to answer, that is fine. 

The Chair now recognizes the gentleman from Virginia, Mr. 

Hurt, for 5 minutes. 

Mr. HURT. Thank you, Mr. Chairman. 

I want to thank you all for appearing before us today on this 

very important issue. 

My congressional district is in rural Virginia. I represent everything from North Carolina all the way up to Fauquier County. We 

have 22 counties and cities. We have many, many Main Streets all 

across Virginia’s Fifth District, so we don’t represent big Wall 

Street firms. My district is, like I said, rural. We have a great interest in consumer protection. 

And I know that in the aftermath of the economic crisis, there 

was a lot of concern about consumer protection, what do we do to 

protect the consumer, but when I look at some of the unintended 

consequences of Dodd-Frank, some unintended, some intended, although I would admit certainly all with best intentions, good intentions, I think that what we have seen is that consumers aren’t proVerDate Nov 24 2008 10:56 Sep 17, 2014 Jkt 088521 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 K:\DOCS\88521.TXT TERRI
49 

tected, but in many instances consumers are ultimately harmed because of the weight of many of these regulations that result in reduced choices and increased costs. 

I think that you can see that when you look in the broad picture, 

the accumulation of these regulations as it relates to community 

banks, for instance. If you look, I think in the last 30 years, we 

have reduced the number of community banks that we have in this 

country by half. We have gone from 16,000 to 7,000. And I think 

that is a reflection—you can’t blame that all, obviously, on DoddFrank, but I do think it is a reflection of, again, the accumulation 

of the regulatory structure. 

I guess my question is—and I would love to have Professor Johnson and then Mr. Bentsen and Mr. Funk answer this question in 

that order—is there a concern and are you aware of any analysis 

that has been performed on the potential impact on access to capital for nonfinancial small and midsized businesses with the confluence of the Volcker Rule, the implementation of the Basel III 

standards, new derivative regulations, and the SEC’s impending 

money market regulations? Are we concerned about the aggregate, 

and do we know, do we have any idea what the effect of those 

would be? 

And I wonder also this: Isn’t it incumbent upon the individual 

agency that promulgates these rules to be concerned about where 

their rules fit in the panoply of rules that are obviously increasing 

the weight for these businesses? 

Mr. Johnson? 

Mr. JOHNSON. The agencies certainly should be concerned, Congressman, with all of those issues, and the questions you raised are 

very good questions. What is the impact of this big change in the 

way we oversee the financial system, both nationally and internationally. 

Mr. HURT. Do you think the agencies should conduct a cost-benefit analysis on each rule? 

Mr. JOHNSON. Congressman, there are very specific legal requirements for agencies. I am not an expert on those. Let me speak from 

the economic point of view. 

The reason we have this long and large comment period was precisely so that many different stakeholders, both from within the industry and from elsewhere, could articulate precisely what you are 

concerned about and tell the agencies what the costs will be, some 

of which they may be able to imagine, and some of which they 

haven’t fully anticipated. That is a very good process we have in 

this country. Many other countries, most other countries do not 

have such a public comment process. 

I don’t promise you that we get to one definitive number. It is 

a very complex world in which we live. But, yes, we have narrowed 

down the possibilities, and we have converged on a set of rules that 

are unlikely to have— 

Mr. HURT. Thank you. Let me get to Mr. Bentsen, just so he will 

have time to answer. 

Mr. BENTSEN. Congressman, first of all, let us say from the capital standards, we agree that capital standards needed to go up, 

and they have gone up about 400 or 500 percent since the crisis, 

but it is also a fact that capital is not free, and it has—and the 

50 

price of capital has an impact on the price of credit and capital to 

the end user. So, there is no question about that. 

Second of all, enhanced compliance burden will also have an effect on price, and it could have an effect on liquidity and availability. 

So these will have an effect. We don’t know yet, but they will 

have an effect. 

Mr. HURT. Thank you. 

Mr. Funk? 

Mr. FUNK. I think your question was about the cumulative effect 

of regulation, and in the time I have, I would like to tell you, the 

footprint of our bank would fit well in your district. We are in 

North English, Iowa, the only banking office in town. We are in 

Melbourne, Iowa, the only banking office in town. We are in 

Sigourney, Iowa. There are only two banks in Sigourney, Iowa. 

Our company’s employment 2 years ago—3 years ago was about 

380 people. It is still about 380 people, but we have added between 

6 and 8 positions just to deal with compliance, which means that 

is 6 to 8 fewer people out in the community serving our customers. 

And I think that is the answer I have on compliance. 

Mr. HURT. Thank you, Mr. Funk. 

I think my time has expired. Thank you, Mr. Chairman. 

Chairman HENSARLING. The Chair now recognizes the gentleman 

from Colorado, Mr. Perlmutter, for 5 minutes. 

Mr. PERLMUTTER. Good afternoon, gentleman. Thank you for 

your testimony. And thanks for staying here so long. 

I do want to ask unanimous consent that the Bloomberg Report 

of January 13, 2014, be introduced into the record. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. PERLMUTTER. This is what it says, the beginning sentence: 

‘‘The U.S. posted a record December budget surplus as higher payroll taxes, payments from Fannie Mae and Freddie Mac, and a declining unemployment rate helped improve the government’s finances. Revenue exceeded spending by $53.2 billion last month 

compared with a $1.19 billion deficit in December 2012.’’ 

So now, I kind of want to do a little history lesson, because as 

I see you, Mr. Bentsen, and you, Mr. Funk, sitting next to each 

other, there is the old saying that politics makes for strange bedfellows, but so does finance. 

So in 1929, we had a crash. In 1933, the first act of the Roosevelt 

Administration was Glass-Steagall, separating commercial banks 

from investment banks and insurance companies, and also creating 

the FDIC and establishing unitary banking. 

Fast-forward to 1999. We have Gramm-Leach-Bliley, which Mr. 

Bentsen referred to, which more or less eliminated the separation 

between insurance companies, investment banking institutions, 

and commercial banks. 

Go forward to the summer of 2008. The stock market is at 

13,000, okay? Then we have tremendous tumult in every market, 

both the commercial banking, the investment banking, pretty much 

everything, so that by March 9, 2009, that stock market had 

dropped from 13,000 to about 6,500. And it is $1.3 billion per point, 

so $7-point-something trillion in 6 months lost just in the stock 

market. Forget about jobs, forget about housing. 

51 

So in the course of putting TARP together, the Recovery Act, the 

Dodd-Frank bill, and in the last 5 years, we have seen ourselves 

gain 8 million jobs, the stock market today just hit 16,501. It has 

gained 10,000 points since that low mark 5 years ago. So that is 

$13 trillion. So we put in $700 billion to save the system through 

TARP. That has been paid back with interest, a substantial 

amount. That is where we are today. 

I offered—and Mr. Bentsen, you may remember this—two 

amendments when we went through Dodd-Frank. One was to, in 

effect, repeal Gramm-Leach-Bliley and reinstitute the separation of 

investment bankers from commercial bankers like Mr. Funk. That 

didn’t pass. I did an amendment, too, that was—and I would offer 

it into the record, too, the amendment that did pass, which was 

two pages long. 

Chairman HENSARLING. Without objection, it is so ordered. 

Mr. PERLMUTTER. This amendment said, no proprietary trading. 

Banks, commercial banks, couldn’t trade for their own account, 

which, Mr. Funk, my guess is your bank doesn’t trade stocks or 

commodities for its own account. 

Mr. FUNK. We do not. 

Mr. PERLMUTTER. Okay. So but that then was amended in the 

Senate to become what is the precursor and now the Volcker Rule. 

So, gentlemen, and I will start with you two, in trying as Congress dealing with the reality of the financial markets where we 

have major institutions that do investment banking, that do commercial banking—and it isn’t just Goldman Sachs and it isn’t just 

Morgan Stanley, but it is others. Would you have us go back to separating completely commercial banking from investment banking 

and insurance? 

Mr. Funk, I will start with you. 

Mr. FUNK. I would not, but I think you have to have restrictions 

in place. I am here speaking on behalf of our industry, and I think 

you have to have sensible regulation that monitors and that regulates. 

I would also say that when you talk about regulation—I speak 

for the industry, and most of the bankers I know are not opposed 

to regulation. But it is the regulation that doesn’t seem to make 

sense and that hurts consumers—not doesn’t help consumers, but 

hurts consumers—is what we really have a problem with. 

Mr. PERLMUTTER. And I would respond to you, when we have 

points of contention like the trust indenture, you have to come to 

us so we can correct those things. And I would offer up my services 

to help you or Mr. Bentsen or anybody else at the table. But we 

can’t have the same kinds of losses that we suffered in 2008. At 

least not in my lifetime, I don’t want to see them again. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Ohio, Mr. Stivers, 

for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman. I appreciate you calling 

this hearing. 

I want to follow up on some questions and points that Mr. Duffy, 

the gentleman from Wisconsin, made earlier. All of you agreed that 

the rule would have benefited from a cost-benefit analysis. Can you 

raise your hand if you agree with that? 

52 

So I thought you all agreed. Did you not agree, sir? 

Mr. JOHNSON. I think— 

Mr. STIVERS. I said a cost-benefit analysis. 

Mr. JOHNSON. I think they did an analysis of the costs and the 

benefits. Perhaps you have a specific other legal standard in mind. 

But they looked to the cost in the analysis. That is cost-benefit 

analysis. 

Mr. STIVERS. They did not do a cost-benefit analysis as required. 

Do all of you agree that the rule would be clearer if there was 

better regulatory coordination, or, again, does the gentleman in the 

middle disagree? Do most of you agree? Raise your hand if you 

agree. 

Okay. We have one dissenter again. 

On competitiveness, I have a question for Mr. Bentsen and Mr. 

Robertson. The Financial Times said that the Dodd-Frank rules, 

especially the Volcker Rule, could ultimately hamper the way that 

the corporate bond market now works. Do you believe the Volcker 

Rule will dry up liquidity in the corporate bond market? Be as brief 

as possible. 

Mr. BENTSEN. Look, it could. As we see how these rules are put 

into practice and how the compliance regime works, it could cause 

firms to have to pull back from market-making activity that they 

do in the corporate bond market and other markets, and that 

would pull liquidity and could affect U.S. markets. 

Mr. STIVERS. Mr. Robertson, do you agree with that? 

Mr. ROBERTSON. I would agree as well. We have significant concerns that, depending on how it is implemented, it could reduce liquidity for underwriting and also for even warehousing debt. 

Mr. STIVERS. So if there is less liquidity in the corporate bond 

market, will that change investors’ willingness to buy corporate 

debt, Mr. Robertson? 

Mr. ROBERTSON. Absolutely. And I think there is an issue even 

of just getting the inventory to market in a timely manner. And 

moreover, if there is not adequate access to hedges, that is also 

going to limit financial transactions and activity. 

Mr. STIVERS. Tell me what that means to jobs in this country. 

Mr. ROBERTSON. For example, at the CFTC hearing we had a 

CFO of an energy company which is heavily reliant on derivatives 

to undertake massive capital expenditures, hundreds of millions of 

dollars, to go out and explore for oil because they need to have that 

future price locked in. That is just thousands, tens of thousands, 

hundreds of thousands of jobs across the economy that are reliant 

upon risk-mitigation tools. 

So depending on how this is deployed, if it has any impact on restricting access to derivatives that are used for legitimate hedging, 

that could have a very massive impact on the economy and jobs. 

Mr. STIVERS. Thank you. 

And there was previous testimony, I don’t have time to get into 

it, that also talked about the competitiveness of America versus 

Europe and Asia with regard to America being the only country 

thus far that has banned proprietary trading, and that also would 

affect jobs. 

My next question is for Mr. Funk. Earlier in your testimony, you said your bank is about $1 billion? 

53 

Mr. FUNK. $1.7 billion. 

Mr. STIVERS. Okay, I am sorry to short you there; $1.7 billion. 

But your bank relies on trust-preferred securities, I assume, as 

part of your operations? 

Mr. FUNK. They were bought in 2005–2006— 

Mr. STIVERS. But they are on your books? 

Mr. FUNK. Yes, $9.7 million when we bought them, a very minor 

part of our investment portfolio. 

Mr. STIVERS. Sure. But let us say there is a bank, so in yesterday’s interim final rule authorizing it, it allows banks under $15 

billion to keep them. 

I want to echo some remarks of Democratic Senator Sherrod 

Brown yesterday. Can you tell me, you are a banker, your bank has 

about $2 billion in assets. Does that differ from a bank that, say, 

has $50 billion or $60 billion in assets? Like in my community 

Huntington Bank is $52 billion, but they use trust-preferred securities, they are in the same exact business you are in. If those investments are not risky for you, why should they be considered risky 

under this requirement for somebody over $50 billion? 

Mr. FUNK. I think, Congressman, the ruling yesterday applied to 

everyone. So I think that most banks in America are going to be 

very happy with what was issued yesterday. It was without regard 

to size. 

Mr. STIVERS. So they did lift the $15 billion yesterday. Okay. 

Mr. BENTSEN. I think the size issue is related to the issuer of the 

trust-preferred, not to the buyer of the trust-preferred. 

Mr. STIVERS. Not to the buyer of the trust-preferred. So that does 

help. But the point is it doesn’t matter your size as the buyer; it 

doesn’t change of the risk of the investment, the size of the buyer, 

does it? 

Mr. FUNK. I agree 100 percent with that statement. 

Mr. GANZ. Congressman, that would be extremely important in 

the CLO context. A resolution that would cut it off based on the 

size of the bank holding would not work, not for the larger banks 

and not for the smaller banks. 

Mr. STIVERS. Thank you. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from South Carolina, 

Mr. Mulvaney, for 5 minutes. 

Mr. MULVANEY. Thank you, Mr. Chairman. 

Despite my reputation, I would like to focus for a few minutes 

on some things that we might be able to agree on. I recognize, in 

fact, my colleague Mr. Green asked if anybody wanted to completely get rid of the bill, and I think we would be kidding ourselves if we think that everybody agrees that things are perfect and 

we shouldn’t change anything. It may be that some want to change 

it dramatically, and some want to change it only slightly. But let 

us see if we can at least figure out that some of the concerns raised 

here today are things that everybody can agree on might need 

some work in the future. 

So, Professor Johnson, I am going to spend some time with you 

because you are the Democratic witness, and I am going to read 

off some of the things that Mr. Bentsen spoke about in his opening 

54 

statement and just see if we can’t get some agreement on what the 

regulators should do going forward. 

You said in order to lessen the potential negative market impacts, regulators should consider as issues arise giving particular 

markets or products additional time to comply. Is that a fair consideration? 

Mr. JOHNSON. I’m sorry, Congressman, you are speaking a little 

fast. Additional time to comply? 

Mr. MULVANEY. I am a Southerner. Usually, I get accused of 

speaking slowly. Yes. 

It says that as new information becomes available, regulators 

should consider as issues arise giving particular markets or products additional time to comply. 

Mr. JOHNSON. I think given what we know now, there is sufficient time to comply. There is a long phase-in of this. If additional 

issues come up, like the TruPS preferred, of course they have to be 

dealt with. That is sensible. 

Mr. MULVANEY. And it says—and, again, I don’t expect noes to 

a lot of these. I am not trying to bait you or trick you, I am just 

trying to establish that there might be some things going forward, 

and I believe you yourself at the beginning of the testimony said 

that as we deal with unintended consequences, they should deserve 

our attention. 

He also said that just as the five regulators ultimately coordinated to write one rule, they must now coordinate and be consistent in the interpretation, examination, supervision, and enforcement. That makes sense, doesn’t it? 

Mr. JOHNSON. I already said, Congressman, I think it is a very 

good idea, and I think that you should look to the FSOC and the 

Secretary of the Treasury to ensure that coordination takes place. 

That is their job under the legislation. 

Mr. MULVANEY. He went on to say that it was true that we did 

not task any one agency or the agencies collectively with interpretation and examination. That is something we need to be focused 

on moving forward, correct? 

Mr. JOHNSON. Absolutely. Personally, Congressman, I would prefer having a single banking regulator in the United States. Mr. 

Funk already has to deal with two banking regulators and the 

SEC. It is very—three banking regulators, my apologies, and the 

SEC. That is way too complicated already, but that is a centuryold problem in the United States. 

Mr. MULVANEY. And that goes on to another point he raises, 

which is what happens if the SEC gives one rule and the OCC 

gives another, or the FDIC gives one rule, or the Federal Reserve 

gives another. That is something that needs to be fixed, or at least 

needs to be watched as we go forward. 

Mr. JOHNSON. Absolutely. That is the responsibility of the FSOC 

and the Secretary of the Treasury. 

Mr. MULVANEY. I understand. He says it is completely unclear 

how the agencies plan to coordinate their efforts and avoid duplicative actions and undue costs and burdens on virtually every banking organization in the country. Another legitimate concern, correct? 

55 

Mr. JOHNSON. They certainly haven’t told me how they plan to 

deal with it, but I would turn to the FSOC. That is their job, and 

I am sure they will come and testify before you at every opportunity. 

Mr. MULVANEY. And finally, without beating a dead horse too 

much, he said that the top near-term goal should be for the agencies to articulate a transparent and consistent roadmap for coordination on both near-term interpretive guidance and long-term examination and supervisory framework. A valid concern, correct? 

Mr. JOHNSON. It is a concern not just for the Volcker Rule: all 

of regulation and supervision should be subject to the same high 

standard. And I think the FDIC sets world-class standards for 

many or most of its activities in this regard. 

Mr. MULVANEY. And very briefly, before I move on to Mr. Funk, 

I want to ask you one question about your testimony where you 

spoke to—for the line, you said over the last 20 years and since the 

onset of the financial crisis, the financial system has become dramatically—excuse me, ‘‘dramatically’’ is not in there—has become 

more concentrated. 

I take it from the tenor and how it appears in your text that you 

consider that to be a bad thing or a potentially bad thing; is that 

correct, Professor Johnson? 

Mr. JOHNSON. I’m sorry. Say the question again? 

Mr. MULVANEY. This is your testimony. Over the past 20 years 

and since the onset of the financial crisis in 2007, the financial system has become more concentrated. I take it you perceive that as 

being a potential negative impact? 

Mr. JOHNSON. Unfortunately, the increasing concentration has 

come with some very big negative consequences, including the one 

currently spread on the board. 

Mr. MULVANEY. Is it fair to say then that if we see as an unintended consequence of the Volcker Rule even more consolidation, 

or, more broadly, if Dodd-Frank drives more consolidation, that is 

something that is potentially dangerous to the market, and we 

should look at that from a regulatory standpoint? 

Mr. JOHNSON. I would be concerned about increased consolidation and concentration irrespective of the cause, including from any 

kind of legislation. Yes, Congressman. 

Mr. MULVANEY. Thank you, Professor Johnson. 

Finally, Mr. Funk, you said something today that I just want to 

clarify, because I live in a district similar to Mr. Hurt where community banks make up a large portion of our financial markets. 

And what you told me was, yes, you are technically not covered by 

this, but you really are, because in 2 years from now, you are going 

to have to prove that what you are doing doesn’t fall under the 

Volcker Rule, is that correct? So in essence you are required to 

meet some of the same compliance regulations, even though DoddFrank specifically says Volcker is not supposed to apply to you? 

Mr. FUNK. I think there are a lot of questions in our investment 

portfolio that we don’t have answers for right now, and I am speaking for all banks right now. And the answer is, we don’t know. 

Mr. MULVANEY. And even going forward, though, if you are going 

to make a trade or investment, you are going to have to establish 

for somebody that it doesn’t fall under Volcker. 

56 

Mr. FUNK. It depends if it is considered proprietary trading or 

not, and we don’t engage in proprietary trading, nor do most banks. 

Mr. MULVANEY. Thank you, sir. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Illinois, Mr. 

Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you, Mr. Chairman. Thank you so much 

for holding this hearing and the second one to follow up. And thank 

you all for being here. 

This is obviously a very important topic, one that I have heard 

so much about in the last few weeks, especially from my community banks back in my district. There is a great amount of fear, a 

great amount of concern, and a lot of uncertainty. It is very complex. So I have to apologize even with my questions that they are 

very diverse, because this rule is very diverse and very complex. 

Mr. Bentsen, I wanted to address this first to you. Regarding the 

tender option bond market, the regulators clearly share the concern 

and stated in the preamble that disruption of the tender option 

bonds market could increase financing costs to municipalities. Does 

it seem possible that TOB’s market may continue functioning fluidly with some adjustments to comply with the Volcker Rule? I 

wonder if you can talk about this process and how SIFMA and industry are thinking through this challenge. 

Mr. BENTSEN. Congressman, thank you for that question. We are 

quite concerned with the rules—final rules treatment for tender option bonds or the lack of an exclusion for tender option bonds. They 

are an important tool for the municipal financing market, and we 

think, absent some solution, it will have a negative impact on municipal issuers ultimately. 

The industry is looking at the rule and seeing if there is a way 

to work through it that would meet regulators’ concerns. We don’t 

have an answer yet, but it is something that is a top priority for 

us. 

Mr. HULTGREN. Quickly, I wonder, how would you compare—Mr. 

Bentsen as well—these tender option bonds to municipal securities 

and trades involving repurchase agreements? 

Mr. BENTSEN. We view them as, frankly, similar to a repurchase 

agreement. They are like a securities financing transaction. They 

provide liquidity to the muni bond market. They provide inventory 

financing. That passes through to the pricing of the muni bond 

market to the benefit of the muni issuer. 

Mr. HULTGREN. Mr. Funk, I want to address this to you, if I may. 

First, one of my great frustrations—I talk about it often in this 

committee—is that under the guise of consumer protection, many 

new rules have come out which actually end up costing consumers. 

I wonder briefly, you have mentioned how people have been shifted 

around. Your head count has stayed the same, but you are doing 

probably less outreach and customer service, and more compliance. 

I wonder what you think maybe the biggest impact would be for 

your customers from the Volcker Rule or from some of these other 

rules that have significant costs more than benefit. 

Mr. FUNK. Just with the Volcker Rule, that is hard to say, because there is so much we don’t know. I was prepared, had the 

TruPS issue not been answered, to talk about that. But beyond 

57 

that, the effect on community banks, I think we just are waiting 

to find out. And there are many things that we don’t know yet that 

probably in the next 30 to 60 days we will find out. 

Mr. HULTGREN. Mr. Funk, I want to follow up on that. Many 

banks are not waiting until July 2015 to divest themselves of 

Volcker-prohibited securities. For example, BankUnited in Florida, 

prompted by the rule, has already sold off their CLO and reREMIC portfolios. But in the case of re-REMICs, the status of 

these securities under the rules seem unclear, as many other areas 

are unclear as well. Am I correct in saying that there is some confusion in the marketplace regarding re-REMICS as well as some of 

these other areas? 

Mr. FUNK. I am not an expert on re-Remics. We can certainly get 

back for the record, but I am not an expert on re-Remics. 

Mr. HULTGREN. Anybody else have a comment quickly? Mr. Bentsen? 

Mr. BENTSEN. We would be happy to get back to you for the 

record. 

Mr. HULTGREN. Okay. Thanks. We will follow up with you. 

The last question, and I would open this up, Mr. Funk, Mr. Bentsen, Mr. Robertson, and if any of you have any thoughts, on a 

broader note, when banks are forced to sell certain investments 

like TruPS, CDOs, re-REMIC securities, won’t this create a buyer’s 

market? These institutions forced to comply with the Volcker Rule 

will have to sell prohibited investments and potentially take a significant loss. This will be exaggerated in less liquid markets where 

we may see greater volatility. Isn’t that true? 

And I wonder, since the regulators did not perform any significant economic analysis on the final rule, are there any estimates 

from the bank supervisors as to what the impact of conformance 

may be on our community banks financially, their bottom lines, 

and how this will affect the market for individual securities 

deemed covered funds? 

So in the last minute or so, I would love to hear if any of you 

have any thoughts on that. My thought is, if big banks, if the larger institutions are impacted, the whole market will feel the ripple 

effects from it. So, Mr. Bentsen, Mr. Funk, Mr. Robertson, I wonder 

if you have any thoughts on that? 

Mr. BENTSEN. Congressman, I would just say that any time you 

create a fire sale situation, having to dump assets onto the market 

and depress the price, that is going to ripple through the whole 

system. 

Mr. FUNK. And I think we had established it was a net of $600 

million on the TruPS issue, but fortunately we have taken care of 

that. We haven’t resolved the CLO issue or any of the other issues 

that we don’t think are systemically risky investments that banks 

may be forced to mark to market and ultimately sell. 

Mr. HULTGREN. The last 10 seconds, any way—again, we care 

about you, we want you to do well, but we really want your customers to do well. So the more you can tell us of real impact on 

your customers in the next weeks and months, the better. 

With that, I yield back. 

Chairman HENSARLING. The gentleman yields back. 

58 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner. 

Mrs. WAGNER. Thank you, Mr. Chairman, for this hearing. 

Mr. Funk, as the Congresswoman from St. Louis, Missouri, I 

must tell you I have a great love of Midwestern banking institutions. 

So I was looking at your testimony and was quite interested 

here, especially the section that talked about—and Mr. Hultgren 

spoke of it, too, a little bit—a trade-off between resources devoted 

to compliance management and customer engagement; of course, 

the reduction of resources for that kind of fine engagement, given 

the fact that you are spending so much money on compliance 

issues, and the impact that this has on growing your business, and 

obviously costs and access for your customers and clients. 

So I have a couple of very elementary and quick questions here. 

Can you have a prosperous community without prosperous financial institutions? 

Mr. FUNK. When I was the chairman of the Iowa Bankers Association in 2010 and 2011, and I would go around our State and I 

would give various talks, there was always one statement in every 

talk I made, and that was that we have a great State, but in every 

what you would call strong community, there is at least one, if not 

two or three, strong community banks. So I think it is almost impossible to have a strong community without strong community 

banks. 

Mrs. WAGNER. Absolutely. And who helps create more jobs, profitable banks or unprofitable banks? 

Mr. FUNK. Is that a question? 

Mrs. WAGNER. Yes, sir. 

Mr. FUNK. If the unprofitable banks still have capital, and they 

are still in operation, then they still help create jobs. 

Mrs. WAGNER. Thank you for your input and answers. 

Mr. Bentsen, I am sure that you are aware, sir, that SEC Commissioner Dan Gallagher is very critical of the entire process that 

went forward here, particularly with regard to the SEC taking 

what he called a back seat, frankly, to the banking regulators, who 

do not have expertise in securities trading. In his dissenting statement, Commissioner Gallagher at the time noted that, ‘‘this kind 

of interference is the product of an idealistic and ideological book 

club mindset unburdened by the knowledge of how complicated it 

is to establish and oversee regulatory programs.’’ 

Mr. Bentsen, in your opinion, was it a good idea for the banking 

regulators to take the lead role in drafting the Volcker Rule? 

Mr. BENTSEN. That is a good question and a difficult question. 

I think Commissioner Gallagher is absolutely correct as it relates 

to the SEC’s role as the market regulator. It underscores the problem really in the legislative text itself of what Volcker was trying 

to accomplish, and that is why in my statement I said, basically on 

its face it looks relatively simple, but in practice it is exceedingly 

complex. And that is proven out in the final rule itself. It cuts 

across so many different markets. 

Our concern has always been that you can’t have five or six or 

seven, if you add the National Futures Association, as Chairman 

Royce did. You have to have somebody in charge. 

59 

Mrs. WAGNER. Further to that, though, because I am concerned 

about the banking regulators taking the lead here, and one area 

where I think the SEC could have provided expertise is on articulating the differences between market-making and proprietary 

trading. Do you believe the banking regulators have, in fact, a deep 

understanding of the differences between these two activities? 

Mr. BENTSEN. I think we hope through this process that the regulators went through to get to the final rule that the SEC’s experience in market regulation came through. But I think it is going to 

be and should be an iterative process as we go through the implementation that we see how it is really going to work out, how the 

metrics are going to work, how the metrics are going to be used, 

how each agency is going to look at them. Hopefully, there is a uniform application of them. That is going to be important, and the 

SEC is going to have to play a major role. 

Mrs. WAGNER. I have limited time, but I will say this: The major 

role of the SEC is important. And let me just ask you this: Should 

the SEC have, in fact, been more involved in the drafting of 

Volcker, do you believe? 

Mr. BENTSEN. Congresswoman, I, frankly, don’t know what went 

on behind the scenes among the regulators. We weren’t invited to 

those meetings. But we certainly engaged with the SEC, as we did 

with all the regulators, as is our right and responsibility. 

Mrs. WAGNER. And you talked about it a little bit, the five different mandates, five different regulators, Mr. Bentsen. In your 

opinion, is there any way for the regulators to apply one consistent 

method of enforcing Volcker when they each have a different mandate and a different approach to regulating? 

Mr. BENTSEN. Oh, I certainly think that they could. I certainly 

think that they could get together and figure out how to come up 

with a uniform examination process, a uniform use of metrics, compliance and enforcement regime. 

Mrs. WAGNER. I believe my time has run out, Mr. Chairman. 

Chairman HENSARLING. The time of the gentlelady has expired. 

Speaking of time, there appear to be two more Members to ask 

questions. I thank the panel again in advance for their patience 

and endurance. 

The Chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Thank you, Mr. Chairman. 

And I will probably be pretty brief, but it is interesting, as we 

sit here and talk about the Volcker Rule, and I think history will 

reflect that probably the most significant part of the Volcker Rule 

in terms of its import on the markets has been the anticipation of 

its implementation. 

Because leading up to the rule actually being released and now 

as we debate its implementation, we have seen, as some of my colleagues have pointed out, the divestiture of Volcker-like trading, 

proprietary trading. But now we are on the cusp of seeing what 

happens from a theoretical perspective of trying to eliminate proprietary trading to the practical application of the rule. 

And, Mr. Bentsen, you have explained some of this in your opening statement and you have raised this and some of my colleagues 

have talked about it, in terms of when you have conflicts between 

any one of the regulators. 

60 

And my question, first question to Mr. Bentsen is, have the regulators given you any clarity as to how they are going to resolve conflicts and opinions as to the application of the Volcker Rule? 

Mr. BENTSEN. No. 

Mr. ROSS. None whatsoever. 

Mr. BENTSEN. Not yet, no. 

Mr. ROSS. Would that not be somewhat significant at this juncture as someone in your position as to what to anticipate? 

Mr. BENTSEN. I think that really should be their next step. I 

think they need to—and I think trust preferreds is a good example. 

I think Mr. Ganz raised it about having to go see five regulators. 

Mr. ROSS. And, Mr. Ganz, I appreciate your background in this, 

and I wonder if you could speak to the difficulty of complexities of 

the legal complications of having the conflicts in rulings between 

regulators and whether there is any recourse or due process for 

those who are affected by it. 

Mr. GANZ. It has been very difficult to deal with the interagency 

issue. We have been focusing mostly on the Volcker Rule and on 

risk retention. And, in each case, it is either five or six agencies, 

and there is no real roadmap. 

Mr. ROSS. And there is no due process. If a trader needs to appeal a ruling that is adverse to their position, but yet another regulator has sided with them, you are damned if you do and you are 

damned if you don’t. Quite frankly, that is a very unusual situation 

to be in. 

Mr. GANZ. It is not easy. 

Mr. ROSS. Okay. I appreciate that. 

Back to market-making, I think there is an ambiguous area 

where I think we are going to have probably more hard times trying to wrestle with as time goes on. Because I think you have to 

look at trend analysis, but it gives such a great deal of discretion 

to the regulators to determine whether there has been an investment based on market-making or, rather, just for self-serving proprietary trading. 

In fact, Jones Day in their initial reaction to the rule stated that, 

‘‘troublesome questions include the effects and consequences of a 

change, sudden or otherwise, in these reasonably expected nearterm demands or in market cycles in times when market-making 

can be suspended.’’ 

Back to you, Mr. Bentsen. Have the regulators given any guidance as to what will constitute market-making? 

Mr. BENTSEN. Congressman, in the final rule itself, they certainly lay out the compliance framework and systems that they expect the firms to use, including the metrics, and what they will rely 

upon. 

What is not clear is whether they will rely upon them uniformly 

or across five different jurisdictions. And it is not clear how these 

will work. Obviously, we will have to go through that process. 

Mr. ROSS. And as a litigator, I can only say that this is a wonderful thing for my profession, because it will be a relief act for those 

out there trying to help interpret what the application will be 

among several agencies. 

Finally, I want to talk briefly about the investment in sovereign 

debt. I think when these regulations are being decided upon, there 

61 

must be a consensus that there is infinite capital out there. And 

I think we can all agree that there is a finite amount of capital and 

that capital will seek the path of least resistance and the highest 

rate of return. 

And now that we have allowed for the investment in sovereign 

debt, what I foresee—and, Professor Johnson, I want to get your 

opinion on this—is that capital will leave the domestic market and 

go to foreign investments, because there is no need to prove that 

you are innocent before guilty by way of the Volcker Rule, and instead you can invest in sovereign debt and not have to worry about 

investing in domestic trades. 

What is your opinion about that? 

Mr. JOHNSON. No, I don’t think that is correct, Congressman. Obviously, investors are looking at risk, they are looking at returns, 

they are looking at a strong, rebounding U.S. corporate sector. 

There are a lot of concerns, legitimate concerns, about sovereign 

debt around the world. And those are the primary drivers of market attention to trends. 

Mr. ROSS. I agree with you, market trends can be analyzed over 

time, and they can be forecast based on that. But the one element 

that I think happens to be hardest to manage is the impact of regulatory involvement. And I think that is what we are going to see 

with the Volcker Rule when I, as a banker, now have to prove that 

I am innocent until proven guilty. And instead of going through 

that compliance, instead of going through that regulatory morass 

of having to prove my innocence, I would rather invest my assets 

on behalf of those whom I have a fiduciary duty to into foreign 

debt. And I think that is what we are going to see happen. 

And I realize my time is up, and I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

And I thank the panel for your patience in putting up with us 

today. I think I am the last one. 

During this hearing, someone referred to a GAO study on proprietary trading. On page 22, the GAO stated that, ‘‘staff at the financial regulators and the financial institutions we interviewed also 

noted that losses associated with lending and other risky activities 

during the recent financial crisis were greater than losses associated with standalone proprietary trading. For example, one of the 

firms reported increasing the reserves it maintains to cover loan 

losses by more than $14 billion in 2008, and another of the firms 

increased its loan loss reserves by almost $22 billion in 2009. Further, FDIC staff, whose organization oversees bank failures, said 

they were not aware of any bank failures that had resulted from 

standalone proprietary trading.’’ 

Mr. Funk, do you agree with the GAO that proprietary trading 

was not the cause of the financial crisis? 

Mr. FUNK. I would say proprietary trading might be a small part 

of the financial crisis, but I would agree, I think it is not the sole 

cause by any stretch of the imagination. 

Mr. ROTHFUS. And the GAO states that other activities like 

mortgage lending were associated with greater losses to the banks. 

62 

Wasn’t the financial crisis really brought on by government-mandated policies that paved the way for the loosening of lending 

standards? 

Mr. FUNK. That might be a part of it, but I think it is a long list 

that caused our financial crisis. 

Mr. ROTHFUS. Mr. Robertson, as we become better educated 

about the Volcker Rule and the American people become better 

educated about the Volcker Rule, did the Volcker Rule leave in 

place the ability for banks to hold for their account any securities? 

Mr. ROBERTSON. They can certainly hold securities as investments for sale—or, excuse me, to hold as investments. It does not 

allow them to have a trading portfolio in instruments. 

Mr. ROTHFUS. So, educate me on a proprietary trade. Can they 

buy a Treasury? 

Mr. ROBERTSON. They can hold a Treasury. 

Mr. ROTHFUS. Could they buy a paper issued by Fannie Mae or 

Freddie Mac? 

Mr. ROBERTSON. They could buy paper from Fannie Mae and 

Freddie Mac. 

Mr. ROTHFUS. The same Fannie and Freddie Mac that had hundreds of billions of dollars of taxpayer—that we bailed out. 

Mr. ROBERTSON. Exactly. And, to your earlier point, if you look 

at the anatomy of the financial crisis, it was a mortgage-driven crisis. 

Mr. ROTHFUS. So we have banks that are able to hold Treasuries. 

Now, we have gone through this quantitative easing for a considerable amount of time. Has that suppressed interest rates, the quantitative easing? 

Mr. ROBERTSON. Oh, absolutely. 

Mr. ROTHFUS. And what happens when we unwind the quantitative easing? Would you expect to see interest rates go up? 

Mr. ROBERTSON. Absolutely, and hopefully alongside continued 

economic recovery. 

Mr. ROTHFUS. And when the interest rates go up, all these banks 

are holding the Treasuries, what happens to the principal value of 

Treasuries? 

Mr. ROBERTSON. Obviously, if they are in extended maturity, 

they will decline. 

Mr. ROTHFUS. Okay. 

So we have established that banks are able to hold some securities—Treasuries, Fannie and Freddie paper, securities like that. 

Are we concentrating the types of securities, then, that banks can 

hold? 

Mr. ROBERTSON. We are definitely putting restrictions around 

how they can manage those portfolios. So if we have a bank making a loan to a private middle-market company, that is a financial 

instrument on its balance sheet with risks. And banks take on all 

kinds of risk on behalf of corporate clients. To the extent that they 

manage those prudently, they make money, and the system is fine. 

To the extent that we impose constraints that are not constructive 

on how they manage those financial risks, we actually impair the 

ability for risk to be managed. 

Mr. ROTHFUS. This is for Mr. Bentsen and Mr. Robertson. The 

regulators have backtracked on the TruPS issue with what we saw 

63 

just yesterday. Does this support the conclusion that the regulators 

erred in not promulgating a second proposed rule or an interim 

final rule? 

Mr. BENTSEN. We believe that they should have done a reproposal, because the initial proposal was very much like a concept release. It had 1,300 questions in it. Clearly, the regulators were 

struggling to figure out how to write a very complex rule off of the 

legislative text, and a reproposal would have been beneficial to the 

process. They chose not to do that, they chose not to do an interim. 

So we are left with the final, so we have to work with that. 

Mr. FUNK. Could I add to that? 

Mr. ROTHFUS. Yes. 

Mr. FUNK. If I could add to that, there has been a lot of discussion today about, you had 18,000 comments, you had 3 years to 

make comments. We always make comments on issues we know 

about, and the TruPS issue was something that was completely unforeseen. 

And the regulatory agencies, in our opinion, need to signal what 

they are going to regulate a little bit more, because this whole 

thing with the TruPS never would have happened had it been part 

of the comment period. I am confident it would have been worked 

out. 

Mr. ROTHFUS. I thank the chairman. I yield back. 

Chairman HENSARLING. The time of the gentleman has expired. 

Again, I wish to thank our witnesses for their testimony, their 

patience, and their endurance. 

Without objection, I would like to enter into the record letters 

from the Independent Community Bankers of America, and the 

American Association of Bank Directors. Without objection, it is so 

ordered. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing stands adjourned. 

[Whereupon, at 1:15 p.m., the hearing was adjourned.] 

(65) 

A P P E N D I X 

January 15, 2014 

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