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THE COSTS OF IMPLEMENTING THE 

DODD-FRANK ACT: BUDGETARY AND ECONOMIC 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

OVERSIGHT AND INVESTIGATIONS 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

FIRST SESSION 

MARCH 30, 2011 

Printed for the use of the Committee on Financial Services 

Serial No. 112–21 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

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 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

LARRY C. LAVENDER, Chief of Staff 

(III) 

SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS

RANDY NEUGEBAUER, Texas, Chairman 

MICHAEL G. FITZPATRICK, Pennsylvania, 

Vice Chairman 

PETER T. KING, New York 

MICHELE BACHMANN, Minnesota 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

MICHAEL E. CAPUANO, Massachusetts, 

Ranking Member 

STEPHEN F. LYNCH, Massachusetts 

MAXINE WATERS, California 

JOE BACA, California 

BRAD MILLER, North Carolina 

KEITH ELLISON, Minnesota 

JAMES A. HIMES, Connecticut 

JOHN C. CARNEY, JR., Delaware 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

March 30, 2011 ................................................................................................. 1 

Appendix: 

March 30, 2011 ................................................................................................. 43 

WITNESSES 

WEDNESDAY, MARCH 30, 2011 

Angel, James J., Assistant Professor of Finance, McDonough School of Business, Georgetown University ............................................................................... 23 

Elmendorf, Douglas W., Director, Congressional Budget Office (CBO) .............. 9 

Holtz-Eakin, Douglas, President, American Action Forum .................................. 21 

Lacker, Jeffrey M., President, Federal Reserve Bank of Richmond .................... 11 

Min, David K., Associate Director for Financial Markets Policy, Center for 

American Progress Action Fund ......................................................................... 26 

Overdahl, James A., Vice President, National Economic Research Associates 

(NERA) .................................................................................................................. 24 

Sommers, Hon. Jill E., Commissioner, Commodity Futures Trading Commission (CFTC) ........................................................................................................... 8 

APPENDIX 

Prepared statements: 

Angel, James J. ................................................................................................. 44 

Elmendorf, Douglas W. .................................................................................... 58 

Holtz-Eakin, Douglas ....................................................................................... 75 

Lacker, Jeffrey M. ............................................................................................. 81 

Min, David K. ................................................................................................... 102 

Overdahl, James A. .......................................................................................... 111 

Sommers, Hon. Jill E. ...................................................................................... 117 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Grimm, Hon. Michael G.: 

CBO estimates for Dodd-Frank ....................................................................... 121 

Written response to questions submitted to Dr. Douglas Holtz-Eakin ........ 124 

Written response to questions submitted to Dr. James Overdahl ................ 126 

Himes, Hon. James A.: 

Written statement of the Financial Planning Coalition ................................ 127 

(1) 

THE COSTS OF IMPLEMENTING 

THE DODD-FRANK ACT: 

BUDGETARY AND ECONOMIC 

Wednesday, March 30, 2011 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON OVERSIGHT

AND INVESTIGATIONS, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:11 p.m., in room 

2128, Rayburn House Office Building, Hon. Randy Neugebauer 

[chairman of the subcommittee] presiding. 

Members present: Representatives Neugebauer, Fitzpatrick, 

Posey, Hayworth, Renacci, Canseco; Capuano, Baca, Himes, and 

Carney. 

Ex officio present: Representative Bachus. 

Also present: Representative Green of Texas. 

Chairman NEUGEBAUER. The subcommittee will come to order. 

Thank you for coming today. 

I wanted to announce, before we get too far in the hearing, that 

we are going to have a little bit of a change in schedule here. We 

are going to commence with the hearing. We are going to do opening statements from members. 

Then, as you know—some of you may know—there is a classified 

briefing for our Members of Congress that starts at 2:30. We expect 

that to go for about an hour, and so we are going to—in agreement 

with the ranking member—recess from 2:30 to 3:30 and then we 

will come back and resume the hearing at that time. 

There is a potential that we will have a vote somewhere in this 

process. That is yet to be determined. 

But it is the intention for us to continue with this hearing today. 

It is unfortunate that we had to have this little interruption here 

but I think it is important for Members of Congress to go and hear 

from the Secretary what is going on. 

So with that, we will begin. And I will begin with my opening 

statement. 

To kind of give you a visual of how large a piece of legislation 

that this Dodd-Frank legislation is, if we were to stack the Securities and Exchange Act of 1933, the Securities and Exchange Act of 

1934, Gramm-Leach-Bliley, Sarbanes-Oxley, and all the amendments that were tacked onto those Acts, we would have to add 600 

pages to that stack to equal the amount of legislation that is in the 

Dodd-Frank bill. 

2 

And so this is no small piece of legislation; it has far-reaching 

impacts on our markets and on the cost of doing business and on 

the cost of capital. And so a lot of what this hearing is about today 

is about analyzing those, and particularly analyzing the cost-benefit of this piece of legislation. 

One of the things that I think we should have done before we 

passed Dodd-Frank was to really go through the crash or the downturn of our financial markets and ascertain where the fallacies and 

where the holes in the existing system were before we threw this 

large blanket over those markets. But we didn’t do that. 

But more importantly, what we also should have done was to, as 

we were beginning to put this piece of legislation together, begin 

to look at the cost-benefit analysis of what we were trying to accomplish, making sure we had—clearly defining what the goals 

were, what the cost of that was, both in implementation but also 

the cost in the economy, and I think we are going to hear from a 

number of witnesses today who have taken an opportunity to look 

at that. 

We are not talking about any small numbers here. We are talk- ing about the potential of taking $27 billion out of the economy. 

And what we know is when we take money out of the economy, we 

take away the capital needed to create jobs in this country. 

So as we look at the implications and some of the consequences 

of this legislation, not only is it costing money but it also has the 

potential to cost jobs. And particularly at the time in our country 

right now where jobs are an important commodity to the American 

people, I think this deserves our closest attention. 

This is a great panel that we have today and I look forward to 

their testimony, and I think that we are going to have a very productive hearing because I think this is a process that Congress in 

the future must give more attention to; that it is easy sometimes 

to pass legislation. But sometimes I am not sure we give these 

votes the attention that we need to, and we aren’t making decisions 

with all of the information. Particularly, I think, as these agencies 

are promulgating these rules, it is important that some kind of 

standardization tool would be available to them so that we will 

know truly what the cost and the benefit analysis of these transactions are. 

With that, I will yield to my good friend, Mr. Capuano, the ranking member of the subcommittee. 

Mr. CAPUANO. Thanks, Mr. Chairman. 

First of all, I want to thank the witnesses for being with us and 

bearing with us today. You are all familiar with congressional 

timetables, and I apologize, but I also know that you understand. 

I welcome this hearing as well, and I think that this committee 

has done too little oversight over the last—well, since I have been 

here, to be perfectly honest. I think oversight is an appropriate and 

a good role. 

As far as this particular piece of legislation, I never measure 

anything by its length or by its shortness; that is really secondary 

to me. It is whether it works or whether it doesn’t work. 

And I think everyone who is in this room knows how legislation 

is passed. You start off with an idea and you keep adding things 

because you have to satisfy somebody somewhere along the line to 

3 

get their vote, and you end up with a piece of legislation that no 

individual would pass in and of itself as a whole. 

There are things in the bill that I don’t like. There are things in 

the bill that I think could have been stronger, could have been 

clearer. But overall, the legislation was a very good piece of legislation that will move this country forward and maintain a stable 

economy moving forward. 

That doesn’t mean it will be done without bumps. There will certainly be bumps. 

There is a lot of need for oversight and continuing refinement as 

we go forward and working with the regulators, and I think that 

is why these hearings are very important. I look forward to the testimonies; I have read the testimonies and the other material related to this hearing. 

I think I agree with most of the things that are said in these testimonies, and I think that there is going to be a lot of ground for 

common understanding. And I look forward to that as well. 

So with that, Mr. Chairman, I yield back. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now the chairman of the full committee, Mr. Bachus, for 2 

minutes. 

Chairman BACHUS. Thank you, Mr. Chairman. Let me say that 

much of what I am going to say is not criticism of anything you 

have done; it is criticism of Dodd-Frank and some problems I have 

with that. And I will associate myself with the remarks that you 

have made in your written testimony. 

When the House voted to approve Dodd-Frank, I asked the simple question on the Floor of the House, ‘‘What does it cost?’’ The 

bill’s proponents did not have an answer to that question, because 

during committee consideration of the bills which would eventually 

be incorporated into the Dodd-Frank Act, Members never had a 

real opportunity to debate its costs or to weight those costs against 

the legislation’s purported benefits. 

As Commissioner Sommers says, the derivative rules are tremendously complex and almost immediately after passage we heard 

that some of those requirements could take $1 trillion or more out 

of our economy and cost really hundreds of thousands of jobs, according to the Chamber. And those are costs of regulation. 

But then there is the cost to the taxpayers of actually the regulation itself, of enforcing the regulation. And I think yesterday we 

learned from the Government Accountability Office that it is going 

to cost about $3 billion to implement the bill over the next 5 years, 

and I think that is probably a low number. It normally is a low 

number. 

The Federal Government workforce will increase by 2,600 new 

full-time employees, and I think about 1,200 of those will be at the 

Consumer Financial Protection Bureau. One question I have about 

that is, we are going to have—prudential regulators are going to 

come in and if they are doing what they are doing today, they are 

going to ask, ‘‘Why didn’t you require a higher downpayment?’’ or 

‘‘Why didn’t you charge more of an interest rate?’’ or ‘‘Why did you 

make this loan?’’ 

And then they may be followed the next day by someone from a 

consumer financial protection agency who is going to ask, ‘‘Why did 

4 

you set such a high interest rate? Why didn’t you make this loan?’’ 

or ‘‘Why aren’t you making these loans?’’ or ‘‘Why didn’t you give 

a better interest rate?’’ And you are going to be getting two different government agencies with sometimes diametrically opposed 

advice to our community banks, which really were the collateral 

victims, in most cases, in what happened in 2004. 

The Federal budget and businesses of all sizes will have to contend with the cost of implementing and with complying DoddFrank for years to come. One matter of great concern to me is that 

Congress will not be able to rein in some of the more substantial 

costs imposed by the Act. 

And Governor Lacker, one of those costs is to the Federal Reserve, right out of the budget. You have as much as $500 million 

that can be given to the Consumer Financial Protection Bureau 

and then you have the Office of Financial Research, and I am not 

sure that I have found a figure there. It just says that they—there 

is no limit on its budgetary authority and it just asked the Federal 

Reserve to provide as much funding as needed for that office. So I don’t know how you function with the $700 million hole and 

your increased duties under Dodd-Frank. That is going to be interesting. 

Commissioner Sommers, you mentioned the cost-benefit analysis. 

I think we are going to have to closely scrutinize the Dodd-Frank 

rulemaking process and the adequacy and accuracy of the cost-benefit analysis that will be submitted under these rules, or in some 

cases won’t be submitted. We won’t have them. 

And former and current SEC and CFTC Commissioners, academics, and business leaders have all gone on record to point out 

a lot of deficiencies in the agency’s rulemaking processes and the 

inaccuracies of the agency’s cost-benefit analyses. And some of this 

is just the speed. How could you possibly do a credible job in the 

little time you have? 

Because we all agree this is a tremendous, major reform, and we 

are doing it in lightning speed. It took 21⁄2 years to do SarbanesOxley, which had 16 rules. We are going to try to do this in a 

fourth of the time, with 300 rules. It just staggers the imagination. 

And I am afraid, just like on the highway, speed is going to kill. 

It is going to kill the economy; it is going to kill deployment of capital; and then it will—because capital is not there, the workforce 

won’t be there. 

Let me close by saying, Governor Lacker, you point out something a lot of us ask about—what happens when one of these significantly important firms gets in trouble and they are—what you 

said about the Fed, the Treasury can invoke orderly resolution for 

the firm, but use of funds to limit loss to some creditors by the 

FDIC and, what, are they going to loan them money? Are they 

going to—and is there going to be that expectation? 

So I appreciated your comments on that, and I think we are all 

wondering if they get in trouble what is it going to cost the taxpayers? And it is going to cause them to get in trouble because they 

are under this safety net. 

Thank you. 

Chairman NEUGEBAUER. I thank the chairman. 

Mr. Baca? 

5 

Mr. BACA. Thank you very much. I want to begin by first thanking you, Chairman Neugebauer, and Ranking Member Capuano for 

calling this hearing. The hearing is titled, ‘‘The Cost of Implementing the Dodd-Frank Act.’’ We should call it, ‘‘The Cost of Not 

Implementing the Dodd-Frank Act.’’ 

Why? Because before the Frank-Dodd bank cost the American people 8 million jobs—I state 8 million jobs—and $17 trillion in retirement savings and net worth. Do we want that to happen again? 

The answer is no. 

I want to, again, by sharing some of the unemployment situations from March 2011, which is scheduled to be released on April 

1, 2011. Americans, here is some good news: All in all, Americans 

just need more opportunities to work. Americans want jobs. 

Today’s hearing is not moving us one step closer to increasing 

jobs. Yesterday’s vote on the House Floor killed the HAMP. Not 

only does it do away with life-life, many Americans need to stay 

in their homes. The vote did not move us one step closer to increasing jobs. 

The recent CBS News poll found that 63 percent of Americans 

are saying creating jobs should be the priority now compared to 26 

percent who said cutting spending. Now, there is a difference between those who said cutting spending and those who want jobs. 

Why? Because families are hungry. Families are homeless. Families need jobs. 

The challenge we face now is how to build businesses and investor confidence. Does today’s hearing topic build business and investor confidence? I say no. 

I voted in support of Dodd-Frank to help restore common sense— 

and I state common sense—to Wall Street, to end taxpayers’ bailout of big banks, create consumer financial protection bureaus that 

protect consumers first. Working families in California and across 

the country have lost their homes—and I state, have lost their 

homes. 

You have to put yourself in their situation—those individuals 

who lost their home or lost their job. Put yourselves in that situation if you were the one who lost a job, and your retirement savings 

as a result of Wall Street’s recklessness and greed that led to it. 

My friends on the other side of the aisle and the Bush Administration looked the other way as big banks made bucks at the expense of the average American. The Dodd-Frank provides the 

American people with an oversight—and I state, it provides us with 

an oversight necessary to prevent another collapse of our financial 

market. It protects consumers from predatory practice and holds— 

I state holds accountable those institutions which actions led to the 

greatest economic downturn since the Great Depression. 

Wall Street may be bouncing back but we all know from experience that they are not going to be policing themselves, and they 

haven’t. CBO says that Frank-Dodd has the net effect of reducing 

the deficit by $100 billion over 5 years and has said a net effect 

of reducing the deficit—and I state, reducing the deficit by $3.2 billion over 10 years. 

As I stated earlier—I may take as much time as the other gentleman did, if you don’t mind—as I stated earlier before, the DoddFrank bank cost the American people 8 billion jobs and $17 trillion 

6 

in retirement savings net worth. Families are forced into foreclosure with job loss. 

In my district in California, the 43rd district, we have had double-digit unemployment for a long time and the foreclosure rate is 

around fourth in the Nation. My question to the panel today will 

be basic: Were you forced into foreclosure? Did you lose your jobs 

because of the meltdown? 

Because if you have, then you can speak to the American people 

in your testimonies. Then, you can talk about the costs of implementing Dodd-Frank. Because I have heard of the crises of hundreds of Americans who know and have felt the heartbreaking 

costs of not having something like Dodd-Frank. 

Again, I thank the chairman and the ranking member for their 

leadership, and I look forward to a productive discussion on this 

issue. And I yield back the balance of my time. 

Chairman NEUGEBAUER. I now yield 2 minutes to the gentleman 

from Pennsylvania, Mr. Fitzpatrick. 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

I believe this entire committee is in agreement that the DoddFrank Wall Street Reform Act was the most ambitious overhaul of 

our financial institutions in 75 years. However, responding to Mr. 

Baca of California, I believe also that the problem with these massive comprehensive bills is that they are often fraught with unforeseen consequences and costs. And add to that the intended results 

of the bill, the massive new regulations of our financial system and 

the effects on our economy will be extensive. 

Certainly, the financial industry deserves serious scrutiny after 

the meltdown of 2008 exposed serious flaws in our regulatory system. But by overreacting and overreaching, we are absolutely going 

to continue to slow the economy. 

I am very concerned about the $27 billion clawed out of the economy, as outlined by the chairman in his remarks, and its impact 

upon job creation back home in Pennsylvania. So I thank the chairman for calling this important hearing. 

Chairman NEUGEBAUER. I thank the gentleman. 

And now to the gentleman from Texas, Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman, and thank you for allowing me to be a part of this hearing. I thank the ranking member 

as well. 

Mr. Chairman, I am concerned about unintended consequences 

and I am also concerned about intended consequences. There were 

some intended consequences associated with Dodd-Frank that were 

important to the American people. 

The American people wanted and intended that we pass legislation to deal with ‘‘too-big-to-fail’’ 3/27s, 2/28s. The American people 

were concerned about prepayment penalties that coincided with 

teaser rates. The American people were concerned about the whole 

notion that consumers were not being protected. 

So the intended consequences of Dodd-Frank have to also be 

measured, and as we move forward, I look forward to hearing from 

the witnesses so that if there are things that we need to change, 

I think we should change them. I think that we can reach a consensus about some things that have to be changed. 

7 

But I don’t think that we are at a point now where we can conclude without empirical evidence—and I haven’t seen any to support this position—that Dodd-Frank is costing us too much to implement. I just have not seen empirical evidence to support this. 

All major legislation costs something. The CBO seems to be indicating, based on my latest intelligence, that Dodd-Frank is not 

going to be cost-prohibitive. They may not use that type of terminology. 

But I look forward to hearing from the witnesses, and I thank 

you again for the opportunity. I yield back. 

Chairman NEUGEBAUER. And I thank the gentleman. 

And the gentleman from Texas, Mr. Canseco? 

Mr. CANSECO. Thank you, Mr. Chairman. 

And thank you for coming here, witnesses. I look forward to 

hearing your testimony. 

The passage of the Dodd-Frank bill was more about making history than it was about making our economy stronger and more 

competitive. The previous Congress must have believed their primary responsibility was to draft as large a bill as possible without 

any regard to the economy or the U.S. taxpayer. 

A few days ago, the National Journal noted that as a result of 

Dodd-Frank, ‘‘The U.S. Government may have become the guarantor of last resort for even larger global banks over which it has 

even less control and oversight than before.’’ The CBO has stated 

that Dodd-Frank will extract $27 billion from the economy over the 

next decade. 

This is capital that cannot be used to lend in order to grow our 

economy and create jobs. Therein lies the legacy of Dodd-Frank: a 

piece of legislation that will have enormous costs both to the economy and to the taxpayer. 

Today, I am eager to hear from our witnesses an estimate of just 

how much this legislation is expected to cost our economy, taxpayers, and future generations. 

I thank you, Mr. Chairman, for having this hearing. I yield back. 

Chairman NEUGEBAUER. Thank you. 

I want to remind all members that all of your opening statements can be made a part of the record if you desire to do that. 

As we mentioned before, now we are going to recess until 3:30, and 

we will reconvene back here in this room. 

And I again appreciate the witnesses’ tolerance in this issue. 

Thank you. 

[recess] 

Chairman NEUGEBAUER. And so thanks again for your patience. 

We will probably have some more members join us here shortly, 

but we want to go ahead and start with the testimony from our 

witnesses. 

It is my pleasure to introduce the Honorable Jill Sommers, Commissioner of the Commodity Futures Trading Commission. 

Commissioner, I am glad to have you here, and thanks for coming. 

8 

STATEMENT OF THE HONORABLE JILL E. SOMMERS, COMMISSIONER, COMMODITY FUTURES TRADING COMMISSION 

(CFTC) 

Ms. SOMMERS. Good afternoon, Chairman Neugebauer, Ranking 

Member Capuano, and members of the subcommittee. Thank you 

for inviting me today to testify in this hearing on the cost of implementing Dodd-Frank. 

My name is Jill Sommers, and I have worked in the derivatives 

industry for over 15 years, and I have been a Commissioner at the 

Commodity Futures Trading Commission since August of 2007. The 

views I present here today are my own and not those of the Commission. 

The Dodd-Frank Act is the most far-reaching financial reform effort we have seen since the 1930s. Its scope and complexity are unparalleled. 

Over the past 8 months, the CFTC has been busy. We have held 

8 public roundtables, 12 open Commission meetings, and have 

issued more than 50 proposed rules, notices, or other requests seeking public comment on Dodd-Frank-related issues. 

This pace and level of transparency is a first for the Commission 

and it has been challenging for us and for the public. I constantly 

hear from interested parties that they do not have a meaningful 

opportunity to comment on the proposal. Their view is that with so 

many comment periods open at the same time for proposals from 

multiple regulatory agencies, they do not have the opportunity to 

provide meaningful comment on how various rules taken together 

will impact the market and market participants. 

I am sympathetic to that view for three reasons: first, this is a 

tremendous amount of complex materials to digest in a very short 

period of time; second, I take all comments very seriously and I 

want the commenters to provide me and the Commission with the 

highest-quality analysis for us to consider before we vote on final 

rules; and third, the Commission has not released proposed rules 

in a logical order. For instance, as we sit here today, we have proposed nearly 50 rules, yet we still haven’t proposed a rule that defines what a swap is. 

Adding to our regulatory challenges, the Dodd-Frank Act requires us to promulgate final rules within 1 year, and in some 

cases earlier. It is our job to make the best decisions possible as 

we craft a regulatory regime that advances the public interest and 

protects these vital markets. 

Achieving these reforms will take time, and comprehensively 

changing the regulatory landscape in such a short period of time 

will not be easy. To help us evaluate our decisions, the Commodity 

Exchange Act requires the Commission to consider the costs and 

benefits associated with each of our regulations and orders. 

Section 15(a) of the Commodity Exchange Act requires that before promulgating a regulation or issuing an order, the Commission 

shall consider the costs and benefits of the action of the Commission. However, when promulgating regulation, the Commission 

typically does not perform a robust cost-benefit analysis at either 

the proposed rule stage or the final rule stage. 

We do not quantify in detail what the costs of complying with the 

rule may be. Instead, proposals usually contain a statement that 

9 

the Commission is only required to consider the costs and not required to quantify them or determine whether the benefits outweigh the costs. 

While we do ask for comment from the public on the costs and 

benefits at the proposal stage, we rarely, if ever, attempt to quantify the costs before finalizing a rule. As we add layer upon layer 

of rules, regulations, restrictions, and new duties, my preference is 

that the Commission include in each proposed rule a thorough costbenefit analysis that attempts to quantify the costs associated with 

compliance. 

This would give the public an opportunity to comment on our 

analysis. To me, that is good government. If we wait until we issue 

a final rule to conduct a thorough cost-benefit analysis, the public 

is deprived of the opportunity to comment on our analysis because 

there is no comment period associated with a final rule. 

Before I finish, I would like to say that I wholeheartedly agree 

with the President’s Executive Order on improving regulation and 

regulatory review. In that Executive Order, the President called 

upon agencies to, among other things: use the best, most innovative, and least burdensome tools for achieving regulatory ends; propose or adopt regulations only upon a reasoned determination that 

its benefits justify its costs; take into account benefits and costs, 

both qualitative and quantitative; and specify performance objectives rather than a particular manner of compliance. 

Although as an independent agency, the CFTC is not bound by 

the President’s Executive Order, I am hopeful that we will undertake this type of analysis before we get to the stage of finalizing 

rules in order to provide stakeholders with a meaningful opportunity to review and comment on the requirements. 

I recognize that it is imperative that we get this right. It is our 

goal as regulators to provide smart regulation. We can do damage 

to these vital markets without that goal, and I fully intend to do 

everything I can to make sure that we don’t get it wrong. 

Thank you, and I am grateful for this opportunity to speak about 

these important issues and I am happy to answer any questions. 

[The prepared statement of Commissioner Sommers can be found 

on page 117 of the appendix.] 

Chairman NEUGEBAUER. Thank you, Commissioner. 

And now, it is my pleasure to introduce Mr. Douglas Elmendorf, 

Director of the Congressional Budget Office. 

STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, 

CONGRESSIONAL BUDGET OFFICE (CBO) 

Mr. ELMENDORF. Thank you, Chairman Neugebauer, and Congressman Capuano. I appreciate the opportunity to talk about 

CBO’s cost estimate for the Dodd-Frank Wall Street Reform and 

Consumer Protection Act. 

My statement summarizes CBO’s estimate for the legislation, as 

enacted last July. I will offer an even briefer summary now. 

As you know, the Dodd-Frank Act made significant changes to 

the regulatory environment for banking and thrift institutions as 

well as for financial markets and their participants. The Act expanded existing regulatory powers, granted new ones, and reallocated regulatory authority among several Federal agencies with the 

10 

aim of reducing the likelihood and severity of future financial crises. 

Figure 1 summarizes CBO’s estimate of the budgetary effects of 

the legislation during the 2010 to 2020 period. Certain provisions 

of the Act were estimated by us to increase direct or mandatory 

spending by $37.8 billion over that period. Most of those costs— 

$26.3 billion—would result from a new program created to resolve 

insolvent or soon-to-be insolvent financial entities, which would be 

financed through an Orderly Liquidation Fund, or OLF. Other provisions would increase spending by an additional $11.5 billion, we 

expected. 

At the same time, different provisions of the Act were estimated to reduce direct spending by $27.6 billion during the coming decade. The biggest share of those savings, $16.5 billion, would result 

from changes to Federal Deposit Insurance programs. The remainder of the saving, or $11 billion, would arise from the decrease in 

authority for the Troubled Asset Relief Program, or TARP. 

In addition, we estimated that the legislation would increase rev- enues during the 2010 to 2020 period by $13.4 billion. The extra 

revenues would stem primarily from fees assessed on various financial institutions and market participants. 

On net, CBO estimated that the changes in direct spending and revenues would reduce deficits by $3.2 billion between 2010 and 

2020. 

A different way to tote up these same figures is provided in the 

table, which groups budgetary effects by the aspects of the legislation that generate them. First, the Dodd-Frank Act created several 

new Federal organizations to regulate financial matters. We estimate the cost of the new organizations would widen deficits by $6.3 

billion over the 2010 to 2020 period. 

Next, the legislation restructured the authority of existing financial regulators. Together, those provisions were estimated to add 

$0.1 billion to deficits on net through changes in direct spending 

and revenues over the period. 

Separately, the legislation provided additional funding for existing programs that provide mortgage relief, neighborhood revitalization, and grants. Those provisions were estimated to have a cost of 

$1.5 billion. 

The Act also modified Federal Deposit Insurance Programs, including increasing the maximum amount of deposits in an individual account that can be insured and directing the FDIC to increase the size of its insurance fund by 2020. Those changes would 

reduce deficits by $16.6 billion during the 2010 to 2020 period. 

Still other provisions of the law created the Orderly Liquidation 

Fund and authorized the FDIC to resolve systemically important financial firms under certain conditions. Our estimate of the cost of 

those provisions, about $20 billion over the period, represents the 

difference between the expected values of the net cost to resolve insolvent firms and the additional assessments collected to cover 

those costs. Those expected values represent weighted averages of 

the outcomes of various scenarios regarding the frequency and 

magnitude of systemic financial problems. 

Additionally, as I have noted, the legislation reduced the spending authority of the TARP, saving $11 billion, and made a number 

11 

of other changes to current law that would have a net reduction 

deficit of $3.8 billion with the same overall effect, of course, as the 

summary I offered a moment ago of a reduction in deficits of $3.2 

billion. 

In addition to those changes in direct spending and revenue, we 

estimate that the Act will lead to an increase in discretionary 

spending of about $2.5 billion over the 5-year period ending in Fiscal Year 2015, assuming the Congress provides necessary appropriations in the future. 

Let me make two final points. First, once legislation is enacted 

the agency’s involvement with that legislation is quite limited. New 

statutes join the body of existing law to form the basis for our baseline projection. 

We don’t usually identify the effects of individual statutes at that 

point. In any event, we have learned nothing so far about the implementation of this Act that would cause us to significantly 

change the cost estimate we provided last year. 

And second and finally, depending on the effectiveness of the 

new regulatory initiatives and new authorities to resolve and support a broad variety of financial institutions, implementing the 

Dodd-Frank Act could change the timing, severity, and Federal cost 

of averting and resolving future financial crises. However, CBO has 

neither analyzed the regulatory impact of the legislation nor have 

we attempted to determine whether the estimated costs under this 

act would be smaller or larger than the costs of alternative approaches to addressing such crises. 

Thank you. 

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

58 of the appendix.] 

Chairman NEUGEBAUER. Thank you, Mr. Elmendorf. 

And now, it is my pleasure to introduce Mr. Jeffrey Lacker, 

President of the Federal Reserve Bank of Richmond. 

Mr. Lacker, we are glad to have you here. 

STATEMENT OF JEFFREY M. LACKER, PRESIDENT, FEDERAL 

RESERVE BANK OF RICHMOND 

Mr. LACKER. It is an honor to speak to the subcommittee about 

the Federal Government’s financial safety net and how the DoddFrank Wall Street Reform and Consumer Protection Act seeks to 

address it. 

To start, I should note that within the Federal Reserve System, 

the Board of Governors has sole authority to write rules implementing the requirements of the Dodd-Frank Act and Reserve 

Banks supervise financial institutions under authority delegated to 

them by the Board of Governors. And in keeping with Board of 

Governors guidance to us, I will not address the specifics of any 

current or potential Federal Reserve rulemaking. 

My views have been informed both by my leadership at the Federal Reserve Bank of Richmond over the last 7 years and my experience as a research economist, having studied banking policy for 

the prior 25 years. I should note that my comments today are my 

own views and do not necessarily reflect those of the Board of Governors of the Federal Reserve or my colleagues at other Federal Reserve banks. 

12 

The Dodd-Frank Act was a response to the most dramatic financial turmoil in our country’s experience in generations. In my view, 

this crisis resulted from a mismatch between the regulatory structure designed for the explicit safety net consisting mainly of deposit 

insurance and the extent of moral hazard induced by the much 

broader implicit safety net. Given precedents dating back to Continental Illinois in the 1980s and beyond that, market participants 

made inferences about what government protection might be forthcoming in future instances of financial distress—that is to say, 

which institutions were likely to be viewed by authorities as ‘‘toobig-to-fail.’’ 

This lack of clarity about the safety net grew in decades leading 

up to the crisis and came about because policymakers hoped that 

constructive ambiguity would dampen the markets’ expectations of 

bailouts but preserve their option to intervene if necessary. Other 

factors contributed to the crisis, but I believe that ambiguity of 

safety net policy was the major driver. 

Researchers at the Federal Reserve Bank of Richmond have estimated, based on conservative assumptions, that the implicit safety 

net covered as much as 40 percent of all financial sector liabilities 

by the end of 2009. When combined with the explicit protection in 

place for depository institutions and other firms, the broad Federal 

financial safety net now covers 62 percent of the financial sector, 

compared to about 45 percent a decade earlier. For additional information, I would refer you to the table at the end of the written 

statement that I have submitted to the committee. 

Dodd-Frank contains provisions that will help close the gap between the scope of prudential regulation and the scope of the implicit safety net. It allows the Financial Stability Oversight Council 

to designate large non-bank financial firms as ‘‘systemically important,’’ and subjects those firms to more rigorous constraints on risktaking. The Act also seeks to limit the implicit safety net by empowering the FDIC to liquidate troubled non-bank firms and placing new constraints on the Fed’s lending powers. 

But the FDIC retains considerable discretion in the use of funds 

to limit losses to some creditors, and the Treasury can invoke orderly resolution for firms that have not been subject to enhanced 

regulation under the systemically important designation. The Fed 

also retains some discretionary powers to lend to non-bank entities. 

This creates continued uncertainty about possible rescues as well 

as impediments to our ability to provide clear, credible constraints 

on the safety net. 

In the near term, I believe regulators have a firm grasp on the 

industry and are taking strong steps to tighten risk management 

at regulated firms, but there are significant risks in the long term 

because firms seen as enjoying broad safety net protection will 

have strong incentives to take on excessive risks and firms will 

have an incentive to bypass regulation if they can still enjoy some 

degree of implicit protection. This desire to operate just outside the 

perimeter of regulation but within the implicit safety net will 

present ongoing supervisory and regulatory challenges and may 

make it difficult to prevent or limit the magnitude of future crises. 

Continued ambiguity would thus pose risks to financial stability 

and the economy, including risks of new costs to taxpayers. But I 

13 

believe the risks to the effectiveness of our financial system are 

even more significant. Over time, the devotion of resources to bypassing regulation can create new sources of financial instability 

and can divert resources from the pursuit of financial innovations 

that are genuinely beneficial to consumers. In the long run, economic growth and job creation would likely suffer. 

Creating clear and credible safety net constraints is likely to be 

a difficult task. One approach is to tightly limit discretion, including the discretionary use of public funds to shield creditors. The 

Act takes important steps in that direction, yet as I said, substantial discretion remains around the preferential treatment for certain creditors. 

A far more challenging course is for regulators to retain discretion but establish a credible commitment on their own to following 

clear, pre-announced rules in times of crisis. For example, limiting 

FDIC resolution authority to firms that are regulated as systemically important, designated so by the FSOC, would help block regulatory bypass. The credibility of such a commitment, however, 

would require policymakers to allow significant creditor losses in 

cases in which they otherwise might have provided support. 

Some believe that without intervention, the economy is too vulnerable to spillover damage from the financial system. I have argued that such spillovers are, in large part, the consequence of ambiguous government rescue policy. If we can establish clear expectations about the Federal financial safety net and live up to our 

commitment to limit rescues then we can have more confidence, I 

think, that the financial system will contribute positively to economic growth. 

Thank you, and I would be pleased to take your questions. 

[The prepared statement of Mr. Lacker can be found on page 81 

of the appendix.] 

Chairman NEUGEBAUER. Thank you. 

And without objection, your written statements will be made a 

part of the record as well. 

Commissioner Sommers, I want to start off with you because you 

alluded to the President’s recent Executive Order about—where the 

President said we should propose or adopt regulations only upon a 

reasoned determination that its benefits justify its costs and take 

into account the benefits and the costs both quantitative to and 

qualitatively. And I heard you say a couple of things. One is that 

you don’t think that the CFTC is really quantifying that. 

And when you think about some of the provisions that the CFTC 

is supposed to make rules on, it can have a tremendous impact on 

our capital markets moving forward. What is the appropriate posture and process that the CFTC should be going through now, with 

particularly the importance and the number of rules that are coming out of that agency? 

Ms. SOMMERS. Thank you, Mr. Chairman. I think that I will address that by saying that the President’s Executive Order, I think, 

gives regulatory agencies an appropriate blueprint to—and some of 

the most important things we should be looking at before proposing 

regulations. 

A cost-benefit analysis—a thorough and meaningful cost-benefit 

analysis—is not an argument for or against a specific regulation; 

14 

it just gives us a good basis to be able to justify the regulations and 

the benefits that those regulations can be weighed against the 

costs. It is my view that before we finalize any of our rules that 

we have proposed, we allow the public to have an opportunity to 

comment on both a qualitative and quantitative cost-benefit analysis in a meaningful way. 

In the proposals that we have put out so far, we have asked for 

comment from the public, and I am hopeful that we will get real 

cost estimates from the public with regard to our proposals, but we 

haven’t given them any substantive analysis to comment on. We 

are looking for the public to give that back to us. 

Chairman NEUGEBAUER. So in your opinion, is the Commission 

not in compliance with 15(a)? 

Ms. SOMMERS. I think that we are complying with 15(a). However, 15(a) does not prevent us from going further than just considering costs or benefits; 15(a) gives us the flexibility to decide if a 

thorough and meaningful cost-benefit analysis is appropriate, and 

I believe that in many of the rules that we have proposed under 

Dodd-Frank, it is incumbent upon us to provide that kind of information for the public. 

Chairman NEUGEBAUER. And recently—I also sit on the House 

Agriculture Committee, and so it is kind of hard to get away from 

these financial issues, but Mr. Gensler said that he believes that 

you all are doing suitable quantitative and qualitative analysis. Do 

you agree with that statement? 

Ms. SOMMERS. It is not something that we have included in our 

proposal so far, and I believe that that is where we are lacking— 

giving the public the ability to comment on any kind of analysis 

that we may have done or that we intend to do for the final rule 

stage, we should put out and allow the public to comment on that. 

Chairman NEUGEBAUER. And in fact, I have heard those very 

statements, that in many cases what we are finding is some of the 

people are finding it hard to respond to some of the rules because 

they understand exactly the logic or the benefit that is going to be 

derived. And so I think that is a problem. 

Before my time is up, Mr. Lacker, I want to go to something 

that—it was in your testimony in both written and oral, and that 

is this issue of FSOC and whether—we said there wasn’t going to 

be a list when we were putting together Dodd-Frank. How do you 

have an operation of determining which of these entities are going 

to be systemically risky without having a list and treating them 

differently than you are treating people who ‘‘aren’t on the list?’’ 

Mr. LACKER. I think it is really hard for there to be clarity about 

what safety net policy is without some designation of what firms 

are going to benefit from the type of support that is available in 

the orderly liquidation authority and what firms are not. And I 

think it is most natural to pair that set of firms—the ones who 

could benefit from the orderly liquidation authority—with the set 

of firms that are subject to more rigorous scrutiny. And that goes 

back to the problem of mismatch that really drove this crisis, 

where the safety net was broader than our regulatory reach. 

Chairman NEUGEBAUER. I think the other is is it is going to be 

hard to determine—and I think you used the terminology of bypass—it is going to be interesting to see if it is good to be inside 

15 

the box or outside the box and what are the consequences of each. 

Because if you are outside the box, you may not be subject to the 

same regulatory scrutiny as those people inside the box, but there 

also may be continued—and I agree with you, that there continues 

to be somewhat of an implicit thought there that we—these are 

systemically risky entities and that there is, in fact—we just heard 

Mr. Elmendorf said he budgeted for the taxpayers to get involved 

in that. 

Mr. LACKER. I think that is a definite issue. I think that there 

is going to be a clear tension. I think firms are going to want to 

be benefiting from the lower short-term funding costs that would 

come from being perceived as eligible for the orderly liquidation authority but I think they are going to want to escape the FSOC designation if they can do that. 

Chairman NEUGEBAUER. Thank you. 

Mr. Capuano? 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Again, I want to thank the panelists for being so understanding 

of today’s limitations and timeframes. 

Mr. Elmendorf, I just have a very simple question. I want to 

make sure that I am reading your documents correctly. As I read 

your document, I think the words are pretty clear, but I need to 

hear the words underlined and bold. 

When everything is said and done, the Dodd-Frank Act will actually reduce the deficit by $3.2 billion. Am I reading this correctly? 

Mr. ELMENDORF. That is our estimate of the effects of the 

changes in direct spending and revenues on the deficit—$3.2 billion 

over the 2010 to 2020 period. 

Mr. CAPUANO. So the 20 million pages of bill actually reduces the 

deficit by $3.2 billion? 

Mr. ELMENDORF. You are reading the table correctly, Congressman. 

Mr. CAPUANO. And ‘‘billion’’ has 12 zeros? 

Mr. ELMENDORF. Quite a few, Congressman, yes. 

Mr. CAPUANO. That is what I thought. I just wanted to make 

sure I was reading correctly, that is all. Because I have heard lots 

of different things and some of the opening statements have made 

me believe that maybe it was ruining the country. 

Ms. Sommers, honestly, I just—I don’t disagree with anything 

that is in your testimony but I want to be clear: I am not terribly 

familiar with the CFTC—a little bit, but not too much because it 

is not in the purview, directly, of this committee. Is there anything 

in the law that prohibits or prevents the Commission from doing 

the things you suggest? 

Ms. SOMMERS. No, sir. 

Mr. CAPUANO. So that you could do in your own—so have you or 

anybody else made those suggestions as part of the procedure or 

the rules of the Commission? 

Ms. SOMMERS. Absolutely. 

Mr. CAPUANO. Okay. Because I think that is important. I don’t 

know enough about the Commission to know whether you are right 

or wrong and I would be happy to listen to others. It certainly 

sounds right to me—a cost-benefit analysis is pretty normal; we do 

it all the time. 

16 

I know we can get into a debate of what is a cost and what is 

a benefit. That is another argument for another day. But the concept is 100 percent correct and I look forward to hearing from some 

of the other Commissioners to see what they think. 

Governor Lacker, honestly, it is my problem with the Fed. I love 

you guys, but I have a hard time reading or figuring out exactly 

what any of you are saying at any given moment. So I just want 

to understand. 

I read some things here and I heard you say some things that 

actually sounded like you like the concept of Dodd-Frank; not the 

specifics, but the concept of what the Dodd-Frank bill is trying to 

do. Is that a fair read or an unfair read of what you were saying? 

Mr. LACKER. The Dodd-Frank bill does a lot. Some of what it 

does is try and address the mismatch between the scope of regulation and the scope of the implicit safety net. So to the extent that 

it addresses that, and it has in some areas, I think that is good. 

It also limits Fed lending power—discretionary Fed lending 

power—and I think those measures are good. I think it could have 

gone farther and I think it is—what I was highlighting in my testimony was the extent to which there is a residual amount of discretion that is going to make life hard for us going forward, I think. 

Mr. CAPUANO. I actually agree. I think clarity is critically important as best you can. I would—a little bit that there has to be some 

degree of ambiguity in any more regulation because you never 

know what is going to happen tomorrow that you can’t foresee, so 

it has to be some degree. But as much clarity as you can provide 

on any law or regulation, I generally agree with that concept. So 

I tend to agree with your comments today. 

I guess I also want to be clear: It is my belief that no matter— 

even if you are as clear as you think you can be on any given item, 

there will always be somebody who tries to get around whatever 

that might be. We existed for 40, 50 years with, I think, relatively 

clear banking rules, and what that ended up in was non-bank 

banks—ended up in the creation of hedge funds; it ended up in the 

creation of mortgage brokers and everybody who could find any 

way they could—Goldman Sachs was created to get around regulation. 

And so therefore, my expectation always is, whatever regulation 

we create, or laws followed by regulation, there will always be 

somebody there ready to find a way around it, and that is why it 

is an ongoing, living process. So I don’t disagree at all. I actually 

agree with your concept. 

I would also ask, do you believe that the Fed and other regulators are sufficiently empowered under the Dodd-Frank Act and 

other current laws? I actually think that a lot of the Dodd-Frank 

Act probably wasn’t necessary. I think a lot of it we are just kind 

of making you do this stuff that you already had the power to do. 

I would argue that the Fed currently has the power if they 

choose to do it—not just the Fed, but others as well—to be a lot 

more clear than the law is. And I think that is the way regulation 

generally works. Do you think that is a fair read of the law? It may 

not be able to fill every gap, but conceptually the law is a little bit 

broad-brushed, but the idea being that the regulators are then the 

17 

ones who kind of fill in more gaps, therefore tightening everything 

up? Is that a fair— 

Mr. LACKER. It is a fair reading. So I distinguish between the 

regulatory side and the orderly liquidation authority. Liquidation 

authority, Congress provided flexibility for the FDIC to use if they 

so chose in writing rules. And the way they have written the rules, 

they have reserved a substantial amount of that discretion to themselves going forward, that flexibility. But that flexibility, the flip 

side of that is ambiguity about just where they are going to draw 

the line in a crisis and going into the next crisis, which firms will 

benefit from support— 

Mr. CAPUANO. So your concern is less with the specifics of the 

law than the way the FDIC has interpreted it and submitted regulations pursuant to it. Is that a fair— 

Mr. LACKER. As I said, there are two approaches to achieving 

that clarity. One is to tie regulators’ hands; the other is to give 

them a free rein but hope that they can achieve clarity on their 

own. 

Mr. CAPUANO. Thank you very much. 

Chairman NEUGEBAUER. Quick followup: Mr. Elmendorf, if you 

had taken out the TARP offset, what would the impact have been 

on your calculation? 

Mr. ELMENDORF. The TARP offset, as I said, was $11 billion. If 

that $11 billion had not been there, then you can just take the $3.2 

billion reduction that we estimated and put the $11 billion back in 

and we will end up with an increase in deficit of $7.8 billion. 

Chairman NEUGEBAUER. Thank you. 

Mr. CAPUANO. Mr. Chairman, would you yield for 1 second? I 

would like to ask Mr. Elmendorf another question. 

Mr. Elmendorf, if monkeys could fly, what do you think would be 

the relevance to that? The law is the law, is it not? 

Mr. ELMENDORF. I don’t think the monkeys flying would be relevant, Congressman. 

Mr. CAPUANO. I didn’t think so either. 

Chairman NEUGEBAUER. Mr. Fitzpatrick? 

Oh, he is not here. Okay. 

Mr. Posey is not here. Okay. 

Mr. Renacci? Sorry. 

Mr. RENACCI. Thank you, Mr. Chairman. 

It is interesting because I was going to ask that question, too, on 

the budget deficit, because it is—sometimes down here in Washington we add and subtract, but ultimately you have given us a 

cost of—what was it again, to the budget deficit? 

Mr. ELMENDORF. So from the changes in direct or mandatory 

spending and revenues we estimate a $3.2 billion reduction in deficit over the 2010 to 2020 period. 

Mr. RENACCI. But if you did not have the TARP offset— 

Mr. ELMENDORF. Yes. Then you would have a net increase in the 

budget deficit. 

Mr. RENACCI. Exactly. 

Mr. ELMENDORF. But as the testimonies show and as you discussed in terms of the complexity of the bill, there are an awful lot 

of moving parts— 

Mr. RENACCI. I understand. 

18 

Mr. ELMENDORF. —and we try to put them all together for you, 

but you can envision particular pieces of them as you would like. 

Mr. RENACCI. Thank you. 

And again, thank you all for testifying. I am a CPA so I do understand that sometimes you can present things certain ways and 

that is why I re-asked the question again, because there is a cost 

to Dodd-Frank, no question, and that is one of my concerns. 

I do want to go to—President Lacker, you said in your testimony, 

‘‘Creating clear and credible safety net constraints is likely to be 

difficult.’’ Do you see the implementation of Dodd-Frank—and you 

had some percentages there and I just want to make sure I understand them. You went from 42 percent to 62 percent. Was this in 

comparison to adding Dodd-Frank or just—go ahead and answer 

that. 

Mr. LACKER. The explicit part of the safety net includes deposit 

insurance, and the changes that Dodd-Frank made were taken into 

account; they are raising the deposits permanently. On the implicit 

safety net side our estimates are based on official statements and 

action, and there the main driver are two things. One is the GSEs, 

which, you know, back in 1999 when we did that estimate, were 

included in the implicit safety net because they were widely regarded as likely to benefit from government support should they 

fail. And then the other part is in the new estimate—they are in 

the new estimate, too, the 2009 estimate. 

In the 2009 estimate, it includes all the holding company liabilities of the 19 banks that were part of the so-called SCAP stress 

test in 2009 because the government announced that should any of 

them be deemed to be holding insufficient capital it would be supplied by the government through a capital injection and we interpreted that as an implicit promise of government support for those 

institutions to support the creditors. So that precedent having been 

set, we count the 19 largest holding companies as part of the implicit safety net even though their liabilities don’t benefit from explicit government support of insurance. 

Mr. RENACCI. Okay. 

We have all talked about the cost of Dodd-Frank, and I know you 

have indicated some of that from the CBO’s standpoint, but can all 

three of you kind of give me your thoughts on the indirect costs of 

Dodd-Frank, if you have some thoughts on that—the cost of jobs, 

the cost for these financial institutions, whatever they are, to ramp 

up? What are your thoughts on—because we know there is a cost. 

Any time you add legislation of this mass there is going to be a 

cost. What are some of your thoughts on the costs when it comes 

to jobs, jobs creation, and the opportunity for some financial institutions to do those things? If any one of you would like to comment. 

Ms. SOMMERS. Congressman, I can’t comment directly on an impact to jobs. What I can say is the proposals that we put out we 

get comments back from market participants that we regulate and 

they give us estimates with regard to what it would cost them to 

comply with the regulations. 

There are assumptions that you can build into that that if those 

market participants are paying an increasing amount of money to 

comply with the regulations, there is a chance they will pass that 

on to either their customers— 

19 

Mr. RENACCI. So you are getting that feedback. Because I am, 

too, from the banks and many institutions, the number of dollars 

it is costing them to ramp up. 

Ms. SOMMERS. We are getting feedback from commenters in their 

comment letters to our proposals. It is just that we haven’t provided them with an estimate that we have personally done at the 

CFTC. 

Mr. ELMENDORF. So Congressman, I am sorry, we have not tried 

to evaluate the broader economic effects of the legislation. You are 

raising very important questions but we just haven’t had the resources to go beyond the budget cost to the Federal Government in 

the cost estimates that I have talked about already. 

Mr. LACKER. I am very worried about the distortions to economic 

activity that will—that could result from implementation of DoddFrank. As Doug Elmendorf said, there are a lot of moving parts 

here. 

The safety net, which is what was the focus of my remarks, has 

the potential—not necessarily that it is going to happen, but the 

potential to distort credit flows and give rise to things analogous 

to the housing boom and bust, which arguably just had devastating 

costs and consequences for the American economy. 

Mr. RENACCI. Thank you. 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

Now the gentleman from Texas, Mr. Canseco? 

Mr. CANSECO. Thank you, Mr. Chairman. 

I want to follow up, Commissioner Sommers, on the jobs issue, 

but I want to come at it from a different angle. The GAO has estimated that about 2,600 new Federal jobs will be needed in order 

to implement Dodd-Frank. How many staff has the CFTC had to 

hire in order to implement the new rules? 

Ms. SOMMERS. Sir, as you know, we are currently operating 

under our 2010 budget of $168.8 million. We currently have a staff 

of approximately 675 full-time employees, but that is not with the 

additions that were included in the President’s request for either 

Fiscal Year 2011 or for Fiscal Year 2012, of course, that included 

additional FTE to implement Dodd-Frank. 

Mr. CANSECO. And before the end of the year, 2011, how many 

more of those positions are you going to have to fill? 

Ms. SOMMERS. We currently are under a hiring freeze, so— 

Mr. CANSECO. Okay. 

Ms. SOMMERS. —we are not filling any. 

Mr. CANSECO. What type of positions are being filled or created 

at CFTC with— 

Ms. SOMMERS. I think typically we hire attorneys and economists 

at the CFTC to surveil the markets and to implement the law. 

Mr. CANSECO. Okay. 

Let me switch subjects on you right now, Commissioner, while I 

have you here. Sarbanes-Oxley resulted in a dramatic decrease of 

public offerings in the United States. Companies that would have 

listed or raised capital in the United States began to do so in other 

countries because regulation became too burdensome here. 

Do you have an opinion whether or not Title 7 of Dodd-Frank 

will have a similar effect on derivative markets? 

20 

Ms. SOMMERS. I think, Congressman, it is a very important issue 

for us to make sure that what we are implementing in the United 

States is on a consistent level with what the rest of the world is 

implementing. These markets are global markets. The derivatives 

markets are—the same markets trade all over the world. 

And because the G-20 countries made the same commitment to 

mandatory clearing and trade execution of over-the-counter derivatives we are working very closely with our global counterparts to 

make sure that there is not going to be regulatory arbitrage. But 

we are currently in the middle of that at this point. 

Mr. CANSECO. Do you think that the American businesses will 

find the derivatives tradings and hedges—and hedging in the 

United States overly burdensome and therefore begin trading in 

places like Europe or Singapore? 

Ms. SOMMERS. I hope not. 

Mr. CANSECO. Let me call your attention to something that came 

out yesterday in the Financial Times. It is an op-ed piece written 

by Alan Greenspan, published yesterday, March 29, 2011, and it is 

titled, ‘‘Dodd-Frank Fails to Meet Test of Our Times.’’ 

I am not going to read the whole article, but in some portions 

here he says more recently concerns are growing that without immediate exemption from Dodd-Frank a significant portion of the 

foreign exchange derivatives market would leave the United States. 

The U.S. Treasury is pondering an exemption but some bank regulators insist the statute be implemented as is. 

And then he concludes that the Act may create the largest regulatory induced market distortion since America’s ill-fated imposition of wage and price controls in 1971, and concludes by saying, 

and pressing forward the regulators are being entrusted with forecasting and presumably preventing all undesirable repercussions 

that might happen to a market when its regulatory conditions are 

importantly altered. No one has such skills. 

Now, do you agree or disagree, in general, with what Alan 

Greenspan says in that op-ed— 

Ms. SOMMERS. I think taking it in two parts, the first part with 

regard to the Treasury Department’s decision that they are making, that is a concern for a lot of market participants, and I agree 

that is an important decision that people would like to have certainty with regard to how those products will be regulated. I think 

on the second part of the question, for regulators it is important 

for us to understand that overregulation can lead to unintended 

consequences, so we have to be very careful when we are crafting 

the regulation that helps us achieve the goals that were in DoddFrank, and that is to increase transparency and reduce systemic 

risk. So we have to keep those goals in mind every time we are 

looking at a proposal. 

Mr. CANSECO. One more question: Do you believe that a rule requiring so-called end users to post collateral and derivatives transactions would result in job losses for those employed by end users? 

Ms. SOMMERS. I think that if the Commission were to impose 

capital and margin on end users it could have a devastating effect, 

but I am under the impression that is not where the Commission 

will head. 

Mr. CANSECO. Thank you very much. 

21 

Thank you, Mr. Chairman. 

Chairman NEUGEBAUER. I thank the gentleman. 

I want to thank this panel. What I would like to do, with your 

indulgence, is since we kind of had to do this in—convoluted afternoon here, and with that, I will—about 5 minutes away from missing that vote, so we are going to run over there, have these votes, 

and when we return we will start with the second panel. 

Mr. ELMENDORF. Thank you, Mr. Chairman. 

[recess] 

Chairman NEUGEBAUER. We will reconvene the hearing. I want 

to say to our second panel, thank you very much for being very patient and fluid here. One of the things I learned when I got to Congress is that it is hard to plan up here. Even the best plans sometimes go awry. 

But we are glad to have you here, and I have had a chance to 

read your testimony and I am excited about hearing your oral testimony. I want you to know that your full text of your written testimony will be, without objection, made a part of the record. 

And so with that, we will start with our panel, and Dr. Douglas 

Holtz-Eakin, president of American Action Forum, you are recognized for 5 minutes. 

STATEMENT OF DOUGLAS HOLTZ-EAKIN, PRESIDENT, 

AMERICAN ACTION FORUM 

Mr. HOLTZ-EAKIN. Thank you, Mr. Chairman, and Mr. Capuano. 

I appreciate the chance to be here today. You have my written 

statement. 

In discussing the costs, there are really three kinds of costs that 

have come up today. One is budget costs, which, while very important, I think for the Dodd-Frank bill will end up being the least 

central aspect of discussion. 

The second would be compliance costs visited on the private sector, where there are really a couple of points that I wanted to 

make. The first is that in some cases the flip side of budgetary impacts are the compliance costs—fees paid by firms and the like. 

The second is that those compliance costs end up being transmitted, in large part, to customers outside the financial sector, and 

thus are the impetus for a lot of the larger economic costs that I 

want to focus on. 

The third is that these are often the costs that are the hardest 

to project. And the example I used in my written statement was 

the cost of compliance under Sarbanes-Oxley, where they were 

radically underestimated, and where my concern is that the same 

could happen with the Dodd-Frank legislation. 

And then the last is then those are the costs that are going to 

be most affected by the ongoing rulemaking process and where I 

believe this committee has the greatest opportunity to make sure 

that the costs don’t become excessive, given the goals of the legislation. So I am encouraged to have this hearing. 

And then the last, which I tried to scope out in the written testimony, is the larger economic implications of a piece of legislation 

as large as Dodd-Frank. You are going to have substantial budgetary and compliance costs, but you also have significant economic 

costs. 

22 

And the way I tried to get a handle on those was to recognize 

that the financial services industry that will bear the direct impacts acts as an intermediary between savers, investors, and those 

wishing for hedging operations and provides these services. And 

then ultimately I think the economics are, these costs will be transmitted to those activities in the economy, whether they be saving, 

investing, hedging, whatever. 

I used some estimates from Standard & Poor’s for the larger of 

the bank holding companies that suggested that the direct impacts 

would lower their rate of return by 18 percent, and that is not 

going to survive in competitive markets so they will be forced to 

pass those costs along. A rough estimate is they will have to pass 

along a 20-odd percent increase in, if it is a loan, interest rates, if 

it is an operation like a hedge, of—fees. But broadly, they are going 

to have to push forward their costs. 

If it is all interest rates, which means a 4 percent interest rate 

turns into a 4.9 percent, and so forth. And then I used some estimates done by Macroeconomic Advisers about what happens if you 

have an exogenous—an increase in interest rates that comes from 

a non-economic source, not just from a recovery or tightening of 

credit, but from a policy move. That suggested economic growth 

slows in very substantial ways, especially early, and that this 

translates, if you believe the Congressional Budget Office estimates 

of growth and the links to jobs, into something that looks like 

900,000 jobs over the near term. 

And so that gives you the ballpark win. Given the slow recovery 

and the millions of people out of work, I think this is worth careful 

attention. The economic costs can be substantial. 

Now, that estimate will be both too high in some ways and too 

low in others. It will be too high because I think the large banks 

will get the least of the impacts because they are viewed as ‘‘toobig-to-fail’’ and can borrow on preferential terms. I am not sure 

that is a good thing but they are not going to be the most affected. 

And it is going to be too large in some cases because—or too 

small in some cases because we will have differential impacts 

which are actually in and of themselves not beneficial to the economy. The fact that we have differential regulatory impacts means 

we are moving activities strictly on the basis of policy, not on the 

basis of economic merit. That is, in any other circumstance, an economic bad and a cost that ought to be counted toward the legislation. 

So given the late hour, I see no point in a long-winded economics 

tutorial, but I would stress to the committee that this merits closer 

investigation. These are potentially significant costs. They are costs 

at a time that matters in our economic history, and that if we can 

hone this legislation to have minimal economic drag that would be 

much more desirable than to hone it in the other direction. 

I thank you for the chance to be here and look forward to your 

questions. 

[The prepared statement of Dr. Holtz-Eakin can be found on 

page 75 of the appendix.] 

Chairman NEUGEBAUER. Thank you very much. 

Dr. Angel, it is good to have you back again. 

23 

STATEMENT OF JAMES J. ANGEL, ASSISTANT PROFESSOR OF 

FINANCE, MCDONOUGH SCHOOL OF BUSINESS, GEORGETOWN UNIVERSITY 

Mr. ANGEL. Thank you very much. It is an honor to be here, and 

I am very grateful that your committee is looking at these very important issues because they have huge ramifications for our economy. 

As you well know, the Dodd-Frank bill is a very complex piece 

of legislation, and unfortunately, our regulators do not have a perfect track record in implementing complex pieces of legislation. And 

we have hundreds of rulemakings coming down the line, and the 

possibility for a misfire is pretty large. 

I think the history of Sarbanes-Oxley Section 404 is a classic example. It seemed like a good idea at the time. Tell us how good 

your controls are. 

The SEC at the time didn’t think it was a big deal, and yet it 

turned into an inordinately expensive mandate that has really 

raised the burden of being a public company. This and a number 

of other factors in our economy really raised the burden of being 

a public company, and the result is we have far fewer U.S. public 

companies. 

There is a graph in my testimony, which, if you look on the monitor, shows you the number of exchange-listed companies on—that 

are U.S. companies, not foreign companies—listed on our exchanges over the last 15 years, and you can see there has been a 

steady decline. We have gone from nearly 8,000 public companies 

down to approximately 4,000 exchange-listed U.S. companies. 

This is a crisis in capital formation. We are losing our public capital markets, and these provide important capital to young and 

growing companies. It provides important exit strategies for the 

venture capitalist who helped support the growth of our technologically-innovative company. And if we don’t do something about 

this, we are in serious trouble. 

The Dodd-Frank bill has many features which could turn into another Sarbanes-Oxley 404, and a lot of them sound like good ideas 

but if they are implemented badly, they could turn into a disaster. 

For example, the pay-it-back provision—who could argue with the 

idea that somebody should be able to pay back their mortgage? But 

if the regulators set the standards too high, even people with good 

credit who can pay it back won’t be able to qualify for a mortgage. 

Things like the over-the-counter derivatives—again, if the regulations are too burdensome, businesses—good, operating businesses—will be deprived of the risk management tool they need to 

reduce their risk. The risk retention features in the—with regard 

to securitization sound like a great idea, but if implemented badly 

could actually increase systemic risk in our economy. 

I could go on for a long time about that. And, I am somewhat 

pessimistic that our regulators have the human resources they 

need to really implement this law in an intelligent manner. They 

just don’t have enough people who really understand markets. 

They have plenty of lawyers, but very few chartered financial analysts and other people with the kind of industry experience and 

know-how to really understand the impact of what their proposed 

rules are going to do. 

24 

So what can you do about it? First of all, you are starting right 

now by doing the right thing. This requires a lot of congressional 

oversight. 

Regulation is not a set it and forget it kind of deal, and I think 

that was the big mistake in Sarbanes-Oxley. Many Congressmen 

expressed the attitude, ‘‘Well, we passed the law; we will see how 

it works,’’ and as the Section 404 debacle was unrolling, there was 

a lack of oversight to sort of stop the train wreck before it was too 

late. 

So you really do need to be watching carefully because I can’t 

predict which of the 2,300 pages will be the Section 404, but there 

are so many of those moving parts at least one of them will be, and 

prompt congressional action will be necessary. 

Another thing you can do is realize that our regulatory structure 

has to evolve with the markets, and the markets are evolving rapidly. Even if we came up with the absolutely perfect structure this 

year, in a few years it will be obsolete. 

So we should have 5-year reauthorizations not only for the CFTC 

but also the SEC and the new CFPB to come back, look at the 

agencies, say what is going right and what is going wrong, and 

then fix it. 

And I have plenty of other ideas, which I will be happy to share 

with you and your staff at any time. And once again, I want to 

thank you for the opportunity. 

[The prepared statement of Dr. Angel can be found on page 44 

of the appendix.] 

Chairman NEUGEBAUER. Dr. Overdahl, thank you for being here, 

and you are recognized for 5 minutes. 

STATEMENT OF JAMES A. OVERDAHL, VICE PRESIDENT, 

NATIONAL ECONOMIC RESEARCH ASSOCIATES (NERA) 

Mr. OVERDAHL. Thank you. And thank you to the committee for 

the invitation to appear here today. 

I am going to speak in more general terms about the rulemaking 

process at the SEC and the CFTC. These two agencies combined 

will be implementing approximately 150 rules under Dodd-Frank, 

and so I think that process is important to understand. And I will 

be doing this based on my experience as a former chief economist 

of these two agencies and describe some of the obstacles that are 

limiting the effective application of economic analysis to the rulemaking process and offer some suggestions on how this process 

might be improved. 

It is important to note that neither the SEC nor the CFTC has 

a formal requirement for including economic analysis in their rulemaking procedures aside from the cost-benefit requirements of the 

Paperwork Reduction Act. However, the outcome of recent court decisions have turned on the adequacy of economic analysis that is 

considered by the SEC when adopting new rules, and this has 

forced the Commission to pay more attention to how it conducts 

this analysis. 

The message from the courts is that the SEC’s economic arguments need to be adequately supported and that vigorous assertion 

is not a substitute for rigorous economic analysis. And even though 

the court cases have dealt with the SEC, I think the same reaVerDate Nov 24 2008 13:56 Jul 13, 2011 Jkt 065680 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\65680.TXT TERRIE
25 

soning would apply to any regulatory agencies subject to the Administrative Procedure Act, including the CFTC. 

Economic analysis can be used for more than satisfying procedural and court requirements; it can help improve regulatory decision-making. I have found that Commissioners at both the SEC 

and the CFTC welcome rigorous, data-driven economic analysis. 

Such analysis enhances the ability of Commissioners to ask better 

questions, better understand the tradeoffs and consequences associated with the proposed rule, and make more informed decisions. 

In my view, economic analysis encompasses more than what is 

typically called cost-benefit analysis. Under my interpretation, economic analysis goes beyond what is readily quantifiable, such as 

out-of-pocket compliance costs, and includes consideration of tradeoffs, potential effects, and unintended consequences of regulatory 

actions, including identifying potential changes in behavior by market participants. It can be helpful at the very earliest stages of the 

rulemaking process by helping frame the problem that is being addressed by a proposed regulatory action. 

Although there are currently no formal requirements for including economic analysis, there have been many attempts in the past 

to formalize such requirements. These attempts have foundered because they have been up to the preferences of individuals chairmen, and when these chairmen have left these requirements were 

discontinued or forgotten. 

I believe that one obstacle to effectively applying economic analysis to the rulemaking process has been the lack of relevant data. 

The SEC and the CFTC have often relied on public comments to 

supply the data analysis, and although public comments can be extremely valuable for providing some types of information they rarely include the type of data and analysis that can serve as substitute for the Commission conducting its own analysis. 

And I will note that the quality of information supplied through 

the public comment has improved in response to recent court decisions. I have found that parties affected by proposed rules now regard the notice and comment period as if it were a legal proceeding. 

Affected parties are placing on the public record factual information about likely compliance costs and offering studies and analysis 

to help inform regulators. They are doing this because of the potential for litigation and directing their comments not only to the 

members of the regulatory Commission involved but also to judges 

who may be reviewing the public record if these rules are challenged in court. 

In closing, I would like to offer just a few suggestions about how 

economic analysis can be better utilized by the SEC and the CFTC. 

First, I believe that some type of formal requirement is necessary 

to institutionalize economic analysis at these two agencies. Experience has shown that good intentions alone are not sufficient to sustain a consistent role for economic analysis. 

Second, economic analysis needs to be included in the rulemaking process at an early stage, and I believe it would be useful 

to include some type of high-level economic review of both the rule 

and the problem that the rule is aimed at addressing. This is important for allowing the economic staff to gear up to gauge the 

26 

complexity of the problem and to begin gathering data that would 

be helpful in analyzing the proposed rule. 

Third, the collection of data for analyzing proposed rules must be 

improved. One way to do this would be to streamline the process 

by which regulators can survey firms for information about potential compliance costs. 

Fourth, I believe that it would be helpful for some type of regulatory guidance along the lines of what, for instance, the FSA has, 

and what I referred to in my written testimony. 

Finally, I think that economic analysis needs to become a higher 

priority at both the SEC and the CFTC. Economic analysis at these 

two agencies is necessary because it enhances the ability of these 

Commissions to make informed decisions, and an added benefit is 

that it will also help the overall transparency and accountability of 

the rulemaking process. 

Thank you, and I look forward to your questions. 

[The prepared statement of Dr. Overdahl can be found on page 

111 of the appendix.] 

Chairman NEUGEBAUER. Thank you, Dr. Overdahl. 

And now, Mr. David Min, associate director of financial markets 

policy for the Center for American Progress Action Fund. 

Mr. Min, welcome. 

STATEMENT OF DAVID K. MIN, ASSOCIATE DIRECTOR OF FINANCIAL MARKETS POLICY, CENTER FOR AMERICAN 

PROGRESS ACTION FUND 

Mr. MIN. Thank you, Chairman Neugebauer, Ranking Member 

Capuano, and members of the subcommittee. As you mentioned, I 

am with the Center for American Progress Action Fund, and I appreciate the opportunity to testify today on the important topic of 

the costs of Dodd-Frank implementation. 

I think it goes without saying that in analyzing costs, we also 

need to look at the benefits. In this case, I think we need to note 

that the Dodd-Frank Act was, itself, intended to address some fairly large costs associated with financial instability and systemic 

risk. 

In case we have forgotten, I will just recount a few of these costs: 

over $10 trillion in household wealth destruction; nearly 10 million 

lost jobs; 12 million expected foreclosures and the associated costs 

of those on families and communities; and the opportunity costs, of 

course, of providing trillions of dollars in TARP and Federal Reserve support to restore and maintain liquidity in the financial 

markets. 

It is also important to recognize that if we do not implement 

Dodd-Frank or something analogous, we can expect to incur these 

types of costs on a regular basis going forward. As experts across 

the ideological spectrum have noted, leaving a status quo in place 

will almost certainly lead to regular recurrences of this type of financial crisis. That factor must be considered in any legitimate 

analysis of Dodd-Frank implementation. 

Indeed, prior to the New Deal, when we did not have meaningful 

regulation of financial markets, we experienced such crises every 

decade or so. The regulatory costs during this period were de miniVerDate Nov 24 2008 13:56 Jul 13, 2011 Jkt 065680 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\65680.TXT TERRIE
27 

mis, but in fact the associated costs of the resulting volatility were 

exceedingly high. 

The last of these crises, of course, was the one that preceded or 

triggered the Great Depression. And in response to that, your New 

Deal Era predecessors established a system of strong regulatory 

oversight for banking and capital markets that essentially established the modern U.S. financial system that we take for granted. 

At the time, many of these reforms were heavily criticized for 

being too costly, creating too large a Federal bureaucracy, and potentially stunting capital formation. Critics warned that these 

types of reforms would deter financial investment and stunt economic growth. And in fact, what the United States actually experienced was an unprecedented period of financial stability and prosperity, which lasted for roughly 50 years. 

This Golden Age or Quiet Period of banking, as it was known, 

was marked by extraordinarily high economic growth—in fact, the 

greatest in our Nation’s history—and the notable absence of any 

major financial crisis. As David Moss, a professor at Harvard Business School, has noted, this was also a period of significant financial innovation, with U.S. financial institutions quickly becoming 

the envy of the world. 

This, in fact, was true in the SEC capital markets as well as investor confidence reached unprecedented heights due to regulatory 

uncertainty and the knowledge that there would not be fraud in 

U.S. capital markets. Unfortunately, as time passed we forgot the 

lessons of our past and allowed large areas of unregulated financial 

activity to develop through a combination of deregulation and regulatory inaction. 

Unsurprisingly, this led, over time, to a major bubble-bust cycle 

and the financial crisis of 2008. Obviously, it was in this context 

that Dodd-Frank was passed through Congress. 

Without going into all the details of this very comprehensive bill, 

I would essentially describe it, as I think it was done on the earlier 

panel, as an attempt to extend meaningful prudential regulation to 

all parts of the financial system and increase financial transparency. While there has obviously been considerable debate as to 

whether Dodd-Frank is a silver bullet that solves all of the problems revealed by the financial crisis, there should be no question 

that by significantly reducing leverage and increasing transparency, it will meaningfully reduce systemic risk, provided that it 

is fully and effectively implemented. 

So returning to the question posed by this hearing, what are the 

costs of implementing Dodd-Frank and how do they compare to the 

costs of not implementing Dodd-Frank, I believe our Nation’s economic history provides a very clear lesson—one that I would urge 

the members of this subcommittee to heed: The costs of good financial regulation are far outweighed by the benefits of financial stability. Or to put this in a modern context, an ounce of regulation 

is worth a pound of bailout. 

This is even more true when we recognize that the various agencies created by or given new mandates by Dodd-Frank can easily 

be self-financed with extremely small assessments on the many 

trillions of dollars that flow through the financial system. For example, the CFTC’s entire proposed budget of $312 billion amounts 

28 

to approximately one one-hundred-thousandth of the notional 

amount of credit default swaps alone, which is obviously just one 

part of the broad mandates the CFTC has. To put that in context, 

for a household making $50,000 a year, that is the price of a cup 

of coffee, and not at Starbucks but at the local store. 

In fact, I think that Dr. Angel makes a good point about the 

CFTC and the SEC not having enough resources. I think that this 

would be one easy way to adapt that. 

In this light, I think that Dodd-Frank appears extraordinarily 

cost-efficient. The most pessimistic cost estimates for implementing 

Dodd-Frank constitute just a small fraction of a percentage of the 

probable benefits in financial stability. 

Even if one does not believe that Dodd-Frank solves all of our financial market issues, it is clear that by reducing systemic risk 

and thus the likelihood of financial crises, Dodd-Frank pays for 

itself many times over. 

In closing, I would like to commend the chairman and the other 

members of this subcommittee for holding this hearing. I think today’s discussion should clearly demonstrate the excellent return on 

investment that we as taxpayers receive from the relatively few 

dollars we spend on financial regulation. 

I hope that the facts generated out of this subcommittee today 

encourage Americans to avoid taking a penny-wise, pound-foolish 

approach to financial regulation and support the full funding and 

effective implementation of Dodd-Frank. 

Thank you. 

[The prepared statement of Mr. Min can be found on page 102 

of the appendix.] 

Chairman NEUGEBAUER. Thank you, Mr. Min. 

I now recognize myself for 5 minutes. 

I think one of the things, when we talk about Dodd-Frank, that 

I think even Mr. Min acknowledged, is we are not sure whether 

this is going to prevent any future financial crises from happening 

again. And what we don’t know either is if we had Dodd-Frank in 

place, whether we would have foregone the downturn that we just 

experienced in this country. 

And I think one of the things that seems to be an overriding 

theme, we had Ms. Sommers here, and Dr. Overdahl, she is a Commissioner, and you are a former chief economist for the agencies for 

which she is a Commissioner, and she said she could make better 

decisions as a Commissioner if she had better economic analysis of 

what is at stake and what the consequences are. 

I was thinking about this as I have been listening to this testimony today, and I was thinking how interesting it is that when we 

want to introduce a new drug in this country, we require an extreme amount of analysis because we want to make sure that if we 

issue or we approve that drug, if we put that drug on the market, 

it is going to do what it says it is going to do with the least amount 

of consequences to the people. 

Yet, we have thrown out a huge piece of legislation that has farreaching consequences with really very little, if any, analysis from 

a legislative standpoint, and now we are seeing that same scene 

play out at the regulatory level. And I think this is probably something—and I don’t want to speak on behalf of my colleagues—but 

29 

I think this is something that there should be bipartisan support 

in that we may disagree on the policy, but what we have to have 

is well-documented data to make these decisions on and not whims 

of people, thoughts of ‘‘This might be a good idea.’’ There are a lot 

of good ideas out there, but what we need to do is make sure that 

we road-test, or at least analyze some of these ideas. 

Dr. Holtz-Eakin, I wanted to ask you a question. When I think 

about all of the parameters and the consequences of Dodd-Frank 

and the implementation and the fact that we have not done analysis and some people think that this could hurt job creation, raise 

the cost of capital, as has been mentioned, do you think there is 

a potential here that the Dodd-Frank bill will hamper the economic 

recovery in the next few years? 

Mr. HOLTZ-EAKIN. That is my deep concern. Mr. Min framed the 

decision-making correctly. In the benefit-cost analysis, there are 

benefits to better financial regulation, but there are costs. And my 

deep concern is that this has the potential to hamper the recovery 

in a way that the costs exceed what we gain in the way of prudential financial regulation. 

Chairman NEUGEBAUER. Dr. Angel, do you agree with that? 

Mr. ANGEL. I agree with that. It is not a question of regulation 

versus no regulation; it is a question of more intelligent regulation. 

Many of the good-sounding ideas in Dodd-Frank have some merit, 

but if they are not implemented well, it could be a disaster. 

Chairman NEUGEBAUER. Dr. Overdahl? 

Mr. OVERDAHL. I think to your point about getting data, many 

times you will find that the data simply are not there at that moment, which I know in other instances where it is appropriate, you 

can sometimes do pilot programs to try to generate that data and 

then evaluate whether it is worth proceeding on a more permanent 

basis. That may be one way to get at the problem. 

Chairman NEUGEBAUER. The other issue about some of these 

rules and rulemaking processes, and the cost-benefit analysis—and 

as the President said, we need to make sure they make sense, basically was—to paraphrase his—is I worry about the scalability for 

some of these regulations and the ability of smaller—and when I 

think about Sarbanes-Oxley, that was one of the things and we 

look at those charts and we see that a lot of very—small number 

of small companies now can afford to go public, and so we have 

kind of frozen them out of the market. 

What I worry about is scalability of compliance with a lot of 

these issues and what that does to the smaller capital providers 

versus the larger ones, and as you pointed out, the model of replacing that income. 

And I think what the little secret here that nobody ever really 

says is ultimately the consumer of financial products pay for whatever things that we do. And when we look at—we had the CBO 

folks in here earlier and what they don’t tell you is that we are 

taking $27 billion out of the economy. Yes, it is revenue-neutral, 

but we are using some Washington gimmicks to get to that point. 

But the bottom line is we took—we are going to take $27 billion 

out of the economy, and that is capital that we could create jobs 

with. 

Thank you. 

30 

Ranking Member Capuano? 

Mr. CAPUANO. Thank you, Mr. Chairman. Mr. Chairman, I actually agree with many of the things you said. No one wants to run 

willy-nilly into important things like this. I agree with you. 

But there is also a balance. It has been 21⁄2 years since the fiscal 

collapse, and in 21⁄2 years, we have all thought about this a lot. 

And now whether what we are about to do or not is a fair question. 

I have concerns like everybody else does. But concern doesn’t mean 

the fear of trying something new. 

There is no question that what we had did not work. It is a fair 

question about whatever we do whether it will work, and if it 

doesn’t work, hopefully we will change it again. And I have always 

agreed that all regulation, all laws should be reviewed on a regular 

basis because the world changes. I think all those things are very 

fine. 

Mr. Holtz-Eakin, on compliance costs, I totally agree with you. 

There are absolutely compliance costs to everything, including 

when I drive my automobile, there is a compliance cost to meet 

safety standards. There is a compliance cost to the SEC. There is 

a compliance cost to the FDIC. 

So the concept of compliance cost in and of itself, I presume you 

were not suggesting that the fact that there is a compliance cost 

means we should never do anything. That is not— 

Mr. HOLTZ-EAKIN. Not at all. 

Mr. CAPUANO. I didn’t think so, but I wanted to be clear on that. 

It means it is a factor to be considered and I think a fair factor 

to be considered. 

Mr. Angel, I just want to point out a couple of things. I actually 

appreciate, and I think somebody from the other panel said it too, 

the fact that we are doing oversight. As I said earlier, I think this 

committee didn’t do enough oversight, and I want to be very clear: 

This committee did not have a Subcommittee on Oversight until 

Chairman Frank took over, so this is a new subcommittee in the 

last 4 years, I think it is. I think it is long overdue and I think 

so far the chairman is doing a great job getting us started in this 

new session. 

There is something in your testimony that I wanted to ask: You 

made a comment that the SEC—and I would actually say this 

about all agencies—you want capable, thoughtful, professional people in those jobs. Yet, are you familiar that the continuing 

esolution that was passed for the remainder of Fiscal Year 2011 

would have—if adopted by the Senate and signed by the President—cut the SEC’s budget by almost $50 million? 

Mr. ANGEL. I haven’t been following the exact details but I understand that yes, that those are some of the proposals coming 

forth. 

Mr. CAPUANO. Do you think that is a wise move? 

Mr. ANGEL. I think we need to be very—the SEC needs more resources but we need to make sure they are spent properly. 

Mr. CAPUANO. That is a fair point. 

Mr. ANGEL. So if all they do is hire lawyers fresh out of law 

school, that would be a waste. If they hire people with market experience who know what they are doing, they are badly needed. 

31 

Mr. CAPUANO. So do you think the—if I were to make you the 

SEC czar tomorrow—though I know ‘‘czar’’ gets all my Republican 

friends worked up—if I were to make you the SEC czar tomorrow 

and said to you what would be your budget, would it be the same 

budget as you have now or to be able to hire whomever you 

thought was the appropriate person to hire? 

Mr. ANGEL. What I would try to do is to hire more people with 

market experience, more people who have MBAs— 

Mr. CAPUANO. Do you think you could get them at the salaries 

we currently pay SEC employees? 

Mr. ANGEL. I would look carefully at the budget and work very 

hard also, since in the civil service environment, it is very hard to 

lay people off, what I would do— 

Mr. CAPUANO. The SEC is not subject to civil service. So are you 

telling me that— 

Mr. ANGEL. In a government environment, what I would try to 

do is to upgrade the skill level of the people that we have. 

Mr. CAPUANO. And I agree. If you upgrade the skill level, you 

think you can get them for the same salary as somebody less 

skilled? 

Mr. ANGEL. We are going to have—we have been penny-wise and 

pound-foolish— 

Mr. CAPUANO. So basically, you are telling me I should call the 

SEC Chairman tomorrow and have her call you and offer you the 

same $50,000 a year that we are paying most people who work 

there, and you will take that job? 

You are a good man, Mr. Angel. 

Mr. ANGEL. My students at Georgetown would miss me. 

Mr. CAPUANO. I appreciate that. 

I totally agree with the concept, but in order to get those people—I am fortunate enough to represent a lot of people who would 

be qualified in your criteria, and they would require a significant 

change in salary. And I appreciate that. 

Mr. Overdahl, again, your concept—there is nothing in the current law that prohibits the things you suggest because all the 

things you suggest to me, early analyzing, more detailed—there is 

nothing there that prohibits either the SEC or the CFTC from 

doing that now is there? 

Mr. OVERDAHL. No, there isn’t. And in the past, there have been 

attempts to do this. It is just that it hasn’t been sustained. 

Mr. CAPUANO. Because I read your testimony and I agreed with 

pretty much everything you said. They all made sense and I would 

agree with you. 

Mr. Min, I guess I just want to be clear: You are not going to 

sit there and tell me you are 100 percent satisfied with everything 

in Dodd-Frank or everything that has been discussed or potential 

from it at the moment are you? 

Mr. MIN. No. I agree with many of the comments of my fellow 

panelists. I think we could have gone further. There are certainly 

parts of it that could have been done differently. 

As I think you mentioned earlier, with a bill like this, there is 

obviously a lot of compromise in place. I think the general principle 

was sound, though, and it is extending prudential regulation to 

parts of the market that didn’t have it and including transparency. 

32 

Mr. CAPUANO. I guess I would also ask the panelists—because I 

have actually made this point myself—Mr. Min made the point the 

period, give or take, from 1940 to give or take 1990, that 50 years, 

did you see a problem with the American financial system then? A 

serious systemic problem such that we had to throw the whole 

thing out and start from scratch because it was terrible and somebody was eating our lunch? 

Mr. ANGEL. We experienced the beginning of the great inflation 

and we had the savings and loan crisis, which— 

Mr. CAPUANO. I know there were problems, but did you think 

that we had such serious problems that we had to adopt the Japanese model? Because it is my impression that during that 50-year 

period, the entire world was trying to copy us and get ahead of us, 

as opposed to us copying them and trying to get ahead of them. 

And during that period we had—that was kind of—most of that 

period, as I understand the history, and I will be happy to be corrected—in general, most of the financial institutions that were big 

players were relatively regulated and there weren’t hedge funds of 

any significant nature. There weren’t sovereign wealth funds of significant natures. There weren’t non-bank banks. 

They were there, but they just weren’t significant players. They 

didn’t become significant players until after that period of time, 

and therefore—and that is what got to the systemic risk. That is, 

again, my general read. I am just—a matter of history, and I am 

just wondering, do you see the history any differently than I do? 

Mr. HOLTZ-EAKIN. I would see the history slightly differently. I 

think if you look back at that period, the macroeconomy—the real 

economy—experienced several recessions, some of them quite 

sharp, and that was real distress, many of them attributed to what 

you used to call disintermediation, the failure of capital markets at 

different points in time. We had Regulation Q, which was viewed 

as a real impediment to getting funds flowing in the correct way. 

So it is easy to look back and say, ‘‘Gee, we didn’t have a great 

disaster. It was perfect.’’ But I think if you look back in time, we 

had lots of problems with exposures to Latin America and our large 

money secure banks. We had lots of problems with the real economy and lots of problems that are less, I think, benign than looking 

back seems to suggest. 

Mr. CAPUANO. Do you think those problems would have been better addressed with less regulation than we had at the time? 

Mr. HOLTZ-EAKIN. I think it is, again, it is not a matter of more 

or less regulation. I was on the Financial Crisis Commission and 

we tried very clearly, in at least what I wrote, to talk about, it is 

not a more or less regulation question. It is about the appropriate 

nature of the regulation, and I think we really made some mistakes 

then and I believe we are also making some mistakes now. 

Mr. CAPUANO. So it is not an all-or-nothing thing. It is trying to 

get it right. 

Mr. HOLTZ-EAKIN. It is more complicated than that. 

Mr. CAPUANO. I agree with that. 

Thank you very much. 

Mr. RENACCI. Thank you, Mr. Chairman. 

Thank you, gentlemen, for your testimony. It is kind of interesting from a business perspective, which is where I was the last 

33 

30 years—we have to do with the dollars we have. And it seems 

like down here in Washington, whenever we have a problem we 

add dollars, thinking that if we throw a bigger blanket over it, we 

are going to fix things. 

The problem is, when I hear some of the testimony or I hear 

some of my colleagues speaking they always—there always seems 

to be an indication that, ‘‘Well, if we just threw more people and 

more dollars at it we would fix it,’’ but some of the things I am 

hearing from you is that it is not about the dollars, sometimes it 

is about how the dollars are spent. Is that correct? Right. 

Mr. ANGEL. Correct. 

Mr. RENACCI. Mr. Min, you said something at the end of your 

testimony, or maybe it was in an answer to my colleague, that we 

could have gone further. And I am a little concerned because we 

haven’t even gone—we haven’t gone anywhere yet and all of a sudden you are talking about how we could have gone further. 

Can you explain that a little bit? Because one of the problems we 

have is we are trying to justify what we are doing and the cost return and all of a sudden I am hearing, ‘‘We could have gone further.’’ 

Mr. MIN. What I meant by that is I think there is a general concern about large, systemically important financial institutions, and 

I think there are some people, including myself, who believe the 

Dodd-Frank bill could have gone further as far as penalizing being 

large and systemically important. 

I believe that those firms enjoy a subsidy of cost advantage as 

a result of their size and systemic importance, and I think we could 

have, through heightened capital requirements, perhaps breaking 

them up, or other measures, tried to address that problem more aggressively. I also believe that we could have had a resolution fund 

to help allow these funds to fund this—prefund something that I 

believe already exists, which is the promise that if they are on the 

verge of failure the government will bail them out regardless of 

who is in charge. 

Mr. RENACCI. You also made the comment, a penny-wise, poundfoolish approach, and I agree with that. The question is—and I 

don’t know if anybody on this panel could answer this—if we are 

spending a penny to get a pound or are we spending a dollar to get 

a pound? Because the interesting thing is that is one of the things 

that is concerning of me. I am having banks, financial institutions 

coming to me saying that we are gearing up—we are putting 

$200,000, $300,000 in new people and personnel to try and gear up 

for all these regulations. 

How much is the right amount for the financial institutions to 

spend to be prepared? I don’t expect you to answer that question, 

but it is the debate that we keep going back and forth on, and it 

is a concern for banks in my district, financial institutions in my 

district—the concern is if the dollars are being spent, then let’s 

spend the penny, let’s not spend the dollar. 

Mr. MIN. In response to that, I would simply note that I think 

from the period of the 1940s to the 1980s, financial services made 

up a small percentage of GDP and of corporate profits. I think that 

was an efficient model of directing capital to productive investVerDate Nov 24 2008 13:56 Jul 13, 2011 Jkt 065680 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 K:\DOCS\65680.TXT TERRIE
34 

ment. Currently, I think it makes up 40 to 60 percent in any given 

year of corporate profits. 

I think the question is, should finance be the primary source of 

job creation or should the capital that it directs to productive investment be the primary source of job creation? I tend to favor the 

latter approach. 

I think that if we simply focus on jobs in the financial sector and 

profits in the financial sector, we are ignoring the point of finance. 

We accept a certain level of systemic risk in finance because we 

want it to direct capital to places where it can be used efficiently. 

Mr. RENACCI. But you would admit capital out of the financial 

markets is a necessity to job creation? 

Mr. MIN. I think that a well-regulated financial market serves 

the purposes that it is intended to efficiently, and I think that is 

what was missing in the last 2 decades. 

Mr. RENACCI. Dr. Angel, you had a chart here on SarbanesOxley, and I had the opportunity to deal with many clients as a 

CPA with Sarbanes-Oxley. Do you think the chart will look like 

this when it comes to the opportunity for business growth in the 

country when it comes to being able to get financing with all the 

restrictions? Do you think there will be a chart someday that will 

look, based on the costs and the expenses or providing capital, that 

will have less ability to finance and create jobs? 

Mr. ANGEL. I hope not, but if we do what we have always done, 

we will get what we have always gotten. And if we continue to load 

disproportionate costs on public companies, we are going to have 

fewer public companies. 

Mr. RENACCI. It is an interesting concept because public companies were in—over the last 25 years for me were the driver of job 

creators, and when I see a chart like this it is very concerning that 

we are losing the ability for IPOs, public companies, and it sounds 

like you would testify that Dodd-Frank will also lead to some of 

this less growth, less public companies, it will add to the SarbanesOxley problem. 

Mr. ANGEL. Correct. For example, if you look at the conflict minerals section—now, what is going on in the Congo is a horrific 

abuse of human rights and I am glad Congress was concerned 

about this. But we have put a potentially costly disclosure on public companies but not on the private companies doing deals in the 

dark. 

Now, it sounds innocuous, just like Sarbanes-Oxley 404 did, ‘‘Oh, 

give us a report that tells us what kind of conflict minerals you use 

from the Democratic Republic of the Congo.’’ It sounds like another 

little boring report. But things like copper and cobalt are in virtually every electronic device. 

If badly implemented, this could turn into another SarbanesOxley 404. There needs to be some common sense to say that, for 

95 percent of public companies, their use of conflict minerals is de 

minimis, and there needs to be some intelligence among the regulators to say, ‘‘Okay, we need to make sure that this can be implemented in a cost-effective manner.’’ 

Mr. RENACCI. Thank you. 

Thank you, gentlemen. 

I yield back. 

35 

Chairman NEUGEBAUER. I thank the gentleman for his questions. 

Now the gentleman from Texas, Mr. Canseco? 

Mr. CANSECO. Thank you, Mr. Chairman. 

And thank you, gentlemen, for participating in this panel for our 

subcommittee. I just have some follow-up questions that have already been brought up. 

Beginning with you, Dr. Angel, in your testimony you bring up 

something very interesting and point out some fundamental flaws 

in the SEC. The agency is staffed primarily by lawyers, not financial experts, and in recent years has been less than excellent in 

regulating our Nation’s securities market. 

The SEC also does not have a great track record in considering 

economic costs when drafting rules. For example, when the SEC 

went about implementing Section 404 of Sarbanes-Oxley, they did 

not understand at the time the tremendous impact the rule would 

have on small companies. 

From your viewpoint, Doctor, has there been any significant 

change in the way the SEC considers economic costs in the rules 

it is writing for Dodd-Frank versus the rules it wrote for SarbanesOxley? 

Mr. ANGEL. I actually have a high opinion of many of the current 

people at the SEC. I think they have a number of intelligent, hardworking, honest people. But I don’t think they have enough of the 

right people to do the job. 

So my fear is that with the hundreds of rules they are dealing 

with, one or more of those rules will turn into another Section 404. 

Mr. CANSECO. And who would those right people be, in your opinion? 

Mr. ANGEL. You need people who understand markets, who understand technology, who understand economics. And rookies fresh 

out of law school don’t necessarily fit that bill. 

Mr. CANSECO. Dr. Holtz-Eakin, one of the main concerns about 

overregulation in the financial market is that market participants 

will choose to do business in countries that do not have stringent 

rules. As a result of Dodd-Frank, do you see other nations going 

a different route than the United States in order to attract business and capital to their economy? 

Mr. HOLTZ-EAKIN. I think it is a real concern. I think the basic 

structure of the intent was to build a more extensive but safer financial system, and the end users are going to try to avoid that 

expense if they can. They will go elsewhere. 

And one of, I think, the big mistakes in the diagnosis of the crisis 

was to forget that it was global in its scope and the kinds of failures we saw in the United States, whether they were large financial institutions or housing bubbles, occurred elsewhere under very 

different regulatory regimes. And so it is not obvious that it was 

the regulatory regime that caused the problem. 

So I would expect us to see capital flow to Canada. I would expect us to see some of these transactions move offshore quite quickly to those other regimes. And I think it is a misdiagnosis of what 

caused the problem. 

Mr. CANSECO. Is there a way that we can measure the costs of 

business lost in the United States due to all of this overregulation? 

36 

Mr. HOLTZ-EAKIN. It is one of the hardest things to measure because it is the thing you don’t see. My concern about these cost 

issues are the budget costs are going to be trivial here, compliance 

costs can be measured—you can count what a business spent. But 

sometimes it is the things you don’t do and you can never measure 

that are actually the greatest costs. 

My preferred diet is Diet Coke and Twizzlers. I believe I could 

live on that forever. But if they had a regulation that said I could 

only eat the ones that were individually wrapped, I am too lazy to 

open them, and I would go eat something else. 

I wouldn’t incur any measurable cost because I wouldn’t actually 

be buying the thing, but I would be—my life would be diminished. 

That is what we are going to do. We are going to regulate things; 

we won’t see the costs, they won’t be measured, but we will have 

foregone some hedging, some growth, some investment, and that is 

the concern I have about the regulatory structure. 

Mr. CANSECO. Thank you, sir. 

Mr. Overdahl, you note in your testimony that in the past, the 

SEC has attempted to include economic analysis in an early-stage 

term-sheet review. However, this type of review was never institutionalized. In your opinion, why was it never institutionalized? 

Mr. OVERDAHL. It really was the preference of individual chairmen who always will control the resources of the Commission and 

direct them, and to institutionalize it would—in the first instance, 

I think having a policy statement would go a long ways toward it 

and it could always be changed. But perhaps even at some stage 

a more formal requirement that—right now the requirements on 

independent agencies are not there; it is really up to the individual 

agency and the individual Commissioners at that time on what 

they do. 

Mr. CANSECO. And just a follow-up question, what can be done 

to make the SEC more conscious of the economic costs of the rules 

of rights? 

Mr. OVERDAHL. I think one thing that has happened in the last 

few years has been some of the challenges in court that have made 

them more conscious of the economic impact of their regulatory activities. If you have looked at some of the decisions, there have 

been now—I cite them in my written testimony—I think five different rules that have been sent back to the Commission on the 

grounds that they have not adequately considered economic analysis. That has gone a long way to getting their attention. 

Mr. CANSECO. Thank you very much. My time has expired. 

And Mr. Min, I am sorry I couldn’t have a question for you. 

Thank you. 

Chairman NEUGEBAUER. I thank the gentleman. 

I think we are going to do just kind of a little lightning round 

here for some follow up and then we will let you go. And by the 

way, when we get through here go ahead and take the rest of the 

day off. You have earned it. 

[laughter] 

But a couple of things—I think one of the things that was 

brought up when we see the number of companies that are going— 

that aren’t going public that—and the listings going down and we 

look at the—for example, the Facebook example here just the other 

37 

day, and where we had companies—and I hear this a lot, and I 

think it is one of the reasons we have seen a lot of growth in private equity companies is because people are just finding it less 

competitive, or more friendly to go private than to go public. 

Dr. Angel, do you want to comment on that just a little bit? 

Mr. ANGEL. Yes. We have made the public market so unattractive for raising capital that small growing companies have no alternative but to go to private equity shops, but private equity is a lot 

more expensive than public capital should be. If you look at almost 

any valuation text they will say the big discount for illiquidity, so 

when entrepreneurs go to sell their companies they get a lot less 

for them. When they try to raise capital they get a lot—they get 

it on much more expensive terms, and so this is a major loss for 

our economy. 

Chairman NEUGEBAUER. And I want to go back to something 

that Mr. Min said, and I wasn’t sure I agreed with it. I wanted to 

get the panel’s—but he suggested there was too much money in the 

financial sector, and our—if I understood you, that all of the investment in the financial sector was draining money from other sectors 

of the economy. 

Mr. Holtz-Eakin, what is your response to that? 

Mr. HOLTZ-EAKIN. I have no idea what the right amount of 

money in any sector of the economy is. In an efficient, functioning 

market economy we see that shift over time. So I have no idea how 

to make that judgment. 

I am concerned that in the end we will produce a financial sector 

that doesn’t meet what we really want, which is the finance—the 

risk management and investment needs of the underlying economy. 

Its scale is less important than that. 

Chairman NEUGEBAUER. That is my— 

Mr. MIN. —I actually did not mean too much money in the system. That is obviously just an amount of stored wealth because 

that needs to be invested. 

But if you look at the percentage of corporate profits, that obviously indicates how much the intermediaries are taking as their 

take. How much are they taking for doing credit default swaps or 

private-label securitization, etc.? 

When you have that much money what is existing is inefficient 

markets and perhaps the growth of the shadow banking system. 

And so, yes, I don’t think the financial sector, when we look at it, 

should be the source of jobs but I think an efficient financial sector 

would be directing capital to other industries, such as construction, 

or housing, etc., in a way that doesn’t create bubble-bust cycles. 

Chairman NEUGEBAUER. Dr. Angel? 

Mr. ANGEL. Yes. I would like to add that in the late 20th Century, we had a technological revolution in financial services, and 

just as we had a technological revolution in information technology 

so now we are spending a lot more money on IT because there are 

more things to spend money on. We developed a number of very 

useful risk management tools. Now you can say, ‘‘Oh, they don’t do 

anything,’’ but when real companies can reduce their risk they are 

likely to produce more. 

When a farmer sees the price fluctuating of crops and says it is 

too risky, but if they can lay off the risk with a forward contract 

38 

then they can lock in the price they know they are going to get, 

they know they will cover their cost of production, and they can 

plant that wheat or that corn. Or that oil company can drill that 

well because they know what they are going to get paid for it. 

So yes, we have put a lot more resources into finance in recent 

years, but we have a lot more financial tools to deal with and many 

of these tools are extremely useful to the economy. 

Chairman NEUGEBAUER. Yes, and haven’t we—because we have 

had such a robust financial system, haven’t we been an importer 

of capital because people have been attracted to our markets? I 

think one of the things that I get concerned about here is something that has been a major economic engine for our country. We 

are trying to kind of throw a little water on that fire in the sense 

that it is going to dampen the competitiveness in a very global, 

fluid financial marketplace. 

With that, I am going to yield back my time so we can—does the 

ranking member want to take a follow up? 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Angel, I just want to clarify—your testimony and everything 

you said except for one thing is your concern about what could happen—all very on point. But at one point you said something 

about—I don’t remember exactly what you said, but the DoddFrank bill will result—you say—is your testimony today that the 

Dodd-Frank bill as it is should not have been passed? 

Mr. ANGEL. I would have preferred to have seen it passed in a— 

Mr. CAPUANO. No, no. Excuse me. That is not my question. I 

would have preferred different things too. 

Mr. ANGEL. Yes. 

Mr. CAPUANO. The bill that we had is the bill that we had. 

Should we have passed that bill or should we have done nothing? 

Should that bill have voted yes or no as it was, knowing that if you 

voted no, it would be nothing else? 

Mr. ANGEL. Sometimes, you have to go back to the drawing 

board. There are some— 

Mr. CAPUANO. So you would have voted no and let nothing go on, 

which is fine. It is a fair answer. 

Mr. ANGEL. Yes. Correct. I would have voted no because if you 

look at what we did in the New Deal, or I should say our parents’ 

generation— 

Mr. CAPUANO. No, no, no, Mr. Angel, you don’t get it— 

Mr. ANGEL. —they did it year after year— 

Mr. CAPUANO. I am not asking you—I didn’t make you the emperor. Believe me. Maybe I wouldn’t mind— 

Mr. ANGEL. That is good for this planet. 

Mr. CAPUANO. It may not be. I wouldn’t mind being emperor. I 

would have a different bill as well. But that is not the world I live 

in. I live in the world where you have an imperfect bill— 

Mr. ANGEL. I would have kept working on it to get it right. 

Mr. CAPUANO. I would have, too, if I could have passed something. But the option of doing something versus nothing, you 

choose nothing? 

Mr. ANGEL. No. I would have continued to work on it because if 

it hadn’t passed in July— 

Mr. CAPUANO. Maybe you should pay a little more attention— 

39 

Mr. ANGEL. —it could have been passed in August or September. 

Mr. CAPUANO. —we don’t get that choice. The choice is something 

or nothing. That has been my choice for 12 years and 1,000 different bills. 

Sometimes I choose something; sometimes I choose nothing. In 

this case I chose something, and I understand if you would have 

chose nothing. That is fine. But you would have nothing today. 

So the past regulations would currently be in place, and that is 

why I— 

Mr. Holtz-Eakin, the only thing that you said that I want to be 

clear on, there are some things we forego with regulation. That is 

what we are trying to do. There are certain things we don’t want 

to happen. 

In this case, for me it was excessive systemic risk. No, I don’t 

want that here. Yes, excessive systemic risk also brings some rewards, but I think it is not worth it. 

So yes, that is a judgment call and there are certain activities 

that I do not want, and that is what regulation is always about. 

So I don’t think—I am not that far off in the concept of it of foregoing something. The question is, what are we foregoing? 

I guess I do want to ask—maybe I am wrong, but I am under 

the impression that the European markets are heading in similar 

directions that we are. Not exact; we are never in lockstep. 

But they are doing things that are quite similar to what we are 

doing. I am not going to get into details. Everybody at that panel 

knows more about the details than I do. 

But am I reading this wrong that the European markets are 

similarly trying to tighten things up, trying to move things around, 

trying to limit excessive systemic risk? Is that a wrong read, or do 

you read the European markets differently? Does anybody? 

Mr. MIN. I don’t. In fact, I think Europe learned the same lesson 

that we learned, that if there was excessive risk, you need to regulate more. That is what Basel 3 is about. Some countries are obviously going further than Basel 3. 

One note I would make on Dr. Angel’s testimony, I think that 

London in particular attracted more stock market IPOs. One lesson 

they are learning was that the race to the bottom in regulation is 

not a good idea. 

They are trying to aggressively regulate. They view the United 

States and Dodd-Frank perhaps as being too weak. I think that is 

a lesson that is learned in other countries as well. 

Mr. ANGEL. And my point is not more or less regulation, it is the 

fact that, let’s face it—Dodd-Frank is the law. Chances are it won’t 

be overturned. So now we have to make it work; we have to fix the 

parts that are broken— 

Mr. CAPUANO. I totally agree. 

Mr. ANGEL. —and we have to make sure the regulators have the 

right kind of people to make it work. 

Mr. CAPUANO. I agree with everything you have said on those 

issues. And the concerns you have expressed? I have similar concerns. 

Even though I voted for the bill, you don’t think I am concerned 

with certain aspects of it or how it is going to be implemented? 

There are lots of concerns I have. But again, my choice was someVerDate Nov 24 2008 13:56 Jul 13, 2011 Jkt 065680 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\65680.TXT TERRIE
40 

thing or nothing. That is always my choice and something was better than nothing, in my opinion. 

I guess the last point I want to make, we heard it a couple of 

times tonight—this afternoon—maybe tonight, whatever—the term 

overregulation, I want to be really clear: I am not afraid of regulation. I am not in favor of overregulation. 

However, I am also not in favor of underregulation. I agree with 

you, Mr. Angel. The right amount of regulation is the goal. 

And it is a moving target because things change and people can 

disagree, and you try to do something and it doesn’t work and you 

change the law. But is there anybody here who thinks that underregulation is a good thing? 

So we all agree that some regulation is desirable. 

Mr. HOLTZ-EAKIN. Sometimes your regulation—but underregulation would be even less than that, so it is a hard question to answer, sir. 

Mr. CAPUANO. Fair point. 

Do you think that the financial markets should be totally unregulated, the Federal Government should just walk away, turn its 

back on the financial markets and let everybody do whatever they 

want to do? 

Mr. ANGEL. No. The first thing I teach on the first day of Finance 

1 is that financial markets are creations of our legal system. You 

cannot have an unregulated financial market because it is the law 

and the regulation that actually defines what our financial products are. 

Mr. CAPUANO. So is it a fair statement to say that we are all sitting here trying to find the right balance for a thoughtful regulated 

system that will help all of us continue to have this country be a 

lead and maintain stability in the market? I am under the presumption that—maybe I am making a false presumption—that a 

stable market—a relatively stable market is a good thing and a desirable thing. Is that a fair generalized statement? 

Mr. OVERDAHL. Yes. 

Mr. ANGEL. Yes. 

Mr. HOLTZ-EAKIN. I guess I am the only one who disagrees. I 

don’t care if financial markets are stable and if Wall Street loses 

their hair every day as long as the real economy serves the American public well. 

Mr. CAPUANO. I don’t care what Wall Street—but Wall Street, 

unfortunately, impacted my life in the last couple of years, and 

that is when I—I don’t want to regulate it just for the fun of it. 

I want to regulate it because they have found a way to interfere 

in my life even though I don’t play there. 

Mr. HOLTZ-EAKIN. If prices and volumes don’t change, which 

looks like instability, financial markets aren’t doing their job. 

Worry a lot about the basic mentality that says instability is bad. 

Mr. CAPUANO. Fair point. I don’t think we are that far off. 

This is a great hearing because I have agreed with 99 percent 

of everything that has been said. Good job. 

Chairman NEUGEBAUER. I appreciate that. 

Oh, by the way, just for the record, we did have an Oversight 

Subcommittee before Mr. Frank— 

We will go back to it. 

41 

We will go to the gentleman from Texas again, Mr. Canseco? 

Mr. CANSECO. Thank you, Mr. Chairman. I just have one very 

brief question. 

Dr. Holtz-Eakin, you say that Dodd-Frank imposes a set of taxes 

on the economy? 

Mr. HOLTZ-EAKIN. Yes. 

Mr. CANSECO. Who ultimately pays these taxes? 

Mr. HOLTZ-EAKIN. Consumers. 

Mr. CANSECO. In your estimation, how big will the tax burden 

get under Dodd-Frank? 

Mr. HOLTZ-EAKIN. This, I think, is the crucial question, and it is 

not one that I can easily answer. I tried to, in my testimony, show 

the growth and jobs impact, because that is the measure that matters. 

It is not compliance costs. It is not any of the things that are easily measured. It is the overall economic impact. 

It is the notion that we now have financial innovations in recent 

years that allow us to do risk management that was unheard of a 

decade ago, and if we lose the next generation, that is the real cost 

and that is the tax on the economy. And because we may never see 

it, it is very difficult to measure, but I worry it is substantial and 

I think it deserves careful scrutiny. 

Mr. CANSECO. Thank you very much. 

And I yield back my time. 

Chairman NEUGEBAUER. And I thank the gentleman. 

I think this has been a very good hearing, and again, I wanted 

to say to the witnesses, we appreciate you accommodating us today 

because we were—we didn’t want to cancel this hearing because 

you have gone to a lot of work and done a good job on your testimony. 

I would make a couple of observations here with the ranking 

member, is, I think what we have heard overriding today is that 

evidently within the institutions there is either not the will or always the desire to have the kind of analysis and study going on 

inside the rulemaking process. And possibly, as much as I hate to 

talk about putting any more legislation out there, but possibly 

there are some things that Congress can do to encourage that kind 

of behavior, because it becomes a check to us because in many 

cases people either vote for or against a piece of legislation and 

they believe if they vote for it they believe that they are doing the 

right thing, and if—as the ranking member said, if it is not implemented properly, then we have defeated the purpose. 

And so I think we may want to look at some things down the 

road that possibly encourage—there are ways to encourage that 

kind of behavior that Congress can use and we may want to do 

that. 

The Chair notes that some members may have additional questions for the panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for members to submit written questions to these witnesses and to 

place their responses in the record. 

If there is not any other business to be brought before the committee, this hearing is adjourned. 

[Whereupon, at 6:10 p.m., the hearing was adjourned.] 

(43) 

A P P E N D I X 

March 30, 2011 

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